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HomeMy WebLinkAboutOrdinance - 2005-O0097 - Relating To $46,525,000 Tax And Waterworks System Surplus Revenue Certificates - 08/25/2005WB2oon JOOJ Dallas 988799J.DOC ORDINANCE relating to $46,525,000 CrrY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 Dated~ August 15, 2005 Adopted: August 25, 2005 Section 1.1 Section 1.2 Section 1.3 Section 1.4 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND OTHER PRELIMINARY MATTERS Definitions ............................................................................................................... 1 Findings ................................................................................................................... 4 Table of Contents, Titles, and Headings ................................................................. 4 Interpretation ........................................................................................................... 4 ARTICLE II SECURITY FOR THE CERTIFICATES; INTEREST AND SINKING FUND; PRIOR LIEN OBLIGATIONS Section 2.1 Paytnent of the Certificates ...................................................................................... 4 Section 2.2 Interest and Sinking Fund ....................................................................................... 6 Section 3.1 Section 3.2 Section 3.3 Section 3.4 Section 3.5 Section 3.6 Section 3.7 Section 3.8 Section 3.9 Section 3.10 Section 3.11 Section 3.12 Section4.1 Section 4.2 Section 4.3 Section4.4 Section4.5 UJB200171003 ARTICLE III AUTHORIZATION; GENERAL TERMS AND PROVISIONS REGARDING THE CERTIFICATES Authorization ........................................................................................................... 6 Date, Denomination, Maturities, and Interest ......................................................... 6 Medium, Method, and Place of Paytnent ................................................................ 7 Execution and Registration of Certificates .............................................................. 8 Ownership ............................................................................................................... 9 Registration, Transfer, and Exchange ..................................................................... 9 Cancellation ........................................................................................................... 10 Teinporary Certificates .......................................................................................... 1 0 Replacement Certificates ....................................................................................... 11 Book-Entry-Only Systetn ...................................................................................... 12 Successor Securities Depository; Transfer Outside Book-Entry-Only System .... 13 Payments to Cede & Co ........................................................................................ 13 ARTICLE IV REDEMPTION OF CERTIFICATES BEFORE MATURITY Redeitlption ........................................................................................................... 13 Optional Redem.ption ............................................................................................ 13 Mandatory Sinking Fund Redemption .................................................................. 14 Partial Redem.ption ................................................................................................ 14 Notice ofRedeDlption to Owners .......................................................................... 15 DaDas 988799....3.DOC (i) Section 4.6 Payment Upon Redemption ............................................................. : .................... 15 Section 4. 7 Effect of Redetnption ............................................................................................ 15 Section 4.8 Lapse of Payment .................................................................................................. 16 Section 5.1 Section 5.2 Section 5.3 Section 5.4 Section 5.5 Section 5.6 Section 5.7 Section 6.1 Section6.2 Section 6.3 Section 6.4 Section 6.5 ARTICLEV PAYING AGENT/REGISTRAR Appointment of Initial Paying Agent/Registrar .................................................... 16 Qualifications ........................................................................................................ 16 Maintaining Paying Agent/Registrar ..................................................................... 16 Tennination ........................................................................................................... l6 Notice of Change to Owners ................................................................................. 16 Agreement to Perform Duties and Functions ........................................................ 17 Delivery of Records to Successor ......................................................................... 17 ARTICLE VI FORM OF THE CERTIFICATES Fonn Generally ..................................................................................................... 17 Fonn ofthe Certificates ......................................................................................... 17 CUSIP Registration ............................................................................................... 24 Legal Opinion ........................................................................................................ 24 Bond Insurance ...................................................................................................... 24 ARTICLE VII SALE AND DELIVERY OF CERTIFICATES; DEPOSIT OF PROCEEDS Section 7.1 Section 7.2 Section 7.3 Section 8.1 Section 8.2 Section 9.1 Section 9.2 Section 9.3 UJB200nl003 Sale of Certificates; Official Statement ................................................................. 24 Control and Delivery of Certificates ..................................................................... 25 Deposit ofProceeds ............................................................................................... 25 ARTICLE VIII INVESTMENTS Investments ............................................................................................................ 26 Investment Income ................................................................................................ 26 ARTICLE IX PARTICULAR REPRESENTATIONS AND COVENANTS Payment of the Certificates ................................................................................... 26 Other Representations and Covenants ................................................................... 26 Provisions Concerning Federal Income Tax Exclusion ........................................ 27 Dallas 988799_3.DOC (ii) Section 9.4 Section 9.5 Section 9.6 Section 9.7 Section 9.8 Section 9.9 Section 9 .I 0 No Private Use or Payment and No Private Loan Financing ................................ 27 No Federal Guaranty ............................................................................................. 27 Certificates Are Not Hedge Bonds ........................................................................ 27 No-Arbitrage Covenant ......................................................................................... 28 Arbitrage Rebate ................................................................................................... 28 lnfonnation Reporting ........................................................................................... 28 Continuing Obligation ........................................................................................... 29 ARTICLE X DEFAULT AND REMEDIES Section 10.1 Events of Default ................................................................................................... 29 Section 10.2 Remedies for Default ............................................................................................. 29 Section 10.3 Remedies Not Exclusive ....................................................................................... 29 ARTICLE XI DISCHARGE Section 11.1 Discharge ............................................................................................................... 30 ARTICLE XII CONTINUING DISCLOSURE UNDERTAKING Section 12.1 Annual Reports ...................................................................................................... 30 Section 12.2 Material Event Notices .......................................................................................... 30 Section 12.3 Limitations, Disclaimers and Amendments .......................................................... 31 ARTICLE XIII AMENDMENTS; ATIORNEY GENERAL MODIFICATION Section 13.1 Amend.Jnents .......................................................................................................... 32 Section 13.2 Attorney General Modification ............................................................................. 33 Exhibit A-Description of Annual Disclosure ofFinan~ial Information .................................... A-I LUB200nJ003 Dallas 988799..J.DOC (iii) AN ORDINANCE PROVIDING FOR THE ISSUANCE OF CITY OF LUBBOCK, TEXAS, TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005, IN THE AGGREGATE PRINCIPAL AMOUNT OF $46,525,000; LEVYING A TAX AND PLEDGING SURPLUS WATERWORKS SYSTEM REVENUES IN PAYMENT THEREOF; APPROVING THE OFFICIAL STATEMENT; APPROVING EXECUTION OF A PURCHASE CONTRACT; ENACTING OTHER PROVISIONS RELATING THERETO WHEREAS, under the provisions of Subchapter C, Chapter 271, Texas Local Government Code, as amended, the City of Lubbock, Texas (the "City"), after giving proper notice, is authorized to issue and sell for cash its certificates of obligation (herein defined as the "Certificates") that are secured by and payable from the ad valorem taxes and other revenues specified in Article II of this Ordinance, and that are issued in the amount, for the purposes, and with the provisions set forth in Section 3.1 of this Ordinance; WHEREAS, pursuant to a resolution heretofore passed by the City Council, notice of intention to issue the Certificates was published in a newspaper of general circulation in the City in accordance with applicable law; WHEREAS, no petition has been filed with the City Secretary, any member of the City Council or any other official of the City, protesting the issuance of the Certificates; WHEREAS, the City Council is now authorized and empowered to proceed with the issuance and sale of the Certificates, and has found and detennined that it is necessary and in the best interests of the City and its citizens that it issue the Certificates in accordance with the tenns and provisions of this Ordinance; and WHEREAS, the meeting at which this Ordinance is considered is open to the public as required by law, and public notice of the time, place, and purpose of said meeting was given as required by Chapter 551, Texas Government Code, as amended; therefore, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK: ARTICLE I DEFINITIONS AND OTHER PRELIMINARY MA TIERS Section 1.1 Definitions. Unless otherwise expressly provided or unless the context clearly requires otherwise in this Ordinance, the following tenns shall have the meanings specified below: "Certificate, means any of the Certificates. "Certificate Date, means the date designated as the initial date of the Certificates by Section 3.2(a) of this Ordinance. LUB2oontoo3 Dallas 988799_3.DOC "Certificates" means the certificates of obligation authorized to be issued by Section 3 .1 of this Ordinance and designated as "City of Lubbock, Texas, Tax and Waterworks System Smplus Revenue Certificates of Obligation, Series 2005." "City" means the City of Lubbock, Texas. "Closing Date" means the date of the initial delivery of and payment for the Certificates. "Code'' means the Internal Revenue Code of 1986, as amended, including applicable regulations, published rulings, and court decisions. "Designated Payment!fransfer Office" means (i) with respect to the initial Paying Agent/Registrar named in this Ordinance, the Designated Payment!fransfer Office as designated in the Paying Agent/Registrar Agreement, or at such other location designated by the Paying Agent/Registrar and (ii) with respect to any successor Paying Agent/Registrar, the office of such successor designated and located as may be agreed upon by the District and such successor. "DTC" means The Depository Trust Company of New York, New York, or any successor securities depository. "DTC Participant" shall mean 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. "Event of Default" means any event of default as defined in Section I 0.1 of this Ordinance. "Fiscal Year'' means such fiscal year as shall from time to time be set by the City Council. ~'Gross Revenues" means, with respect to any period, all income, revenues and receipts received from the operation and ownership of the System. "Initial Certificate" means the initial certificate authorized by Section 3.4 of this Ordinance. "Interest and Sinking Fund" means the interest and sinking fund established by Section 2.2 of this Ordinance. "Interest Payment Date" means the date or dates upon which interest on the Certificates is scheduled to be paid until their respective dates of maturity or prior redemption, such dates being February 1 S and August 15 of each year, commencing February 1 S, 2006. ''MSRB" means the Municipal Securities Rulemaking Board. '~SIR" means each person whom the SEC or its staff has detennined to be a nationally recognized municipal securities infonnation repository within the meaning of the Rule from time to time. LUB20MI003 o.nu 988799_3.DOC -2- ''Net Revenues" means the Gross Revenues of the System, with respect to any period, after deducting the System's Operating and Maintenance Expenses during such period. "Operating and Maintenance Expenses" means all reasonable and necessary expenses directly related and attributable to the operation and maintenance of the System, including, but not limited to, the costs of insurance, the purchase and carrying of stores, materials, and supplies, the payment of salaries and labor, and other expends reasonably and properly charged, under generally accepted accounting principles, to the operation and maintenance of the System or by statute deemed to be a first lien against the Gross Revenues. Depreciation charges on equipment, machinery, plants and other facilities comprising the System and expenditures classed under generally accepted accounting principles as capital expenditures shall not be considered as "Operating and Maintenance Expenses" for purposes of determining "Net Revenues." "Owner" means the person who is the registered owner of a Certificate or Certificates, as shown in the Register. "Paying Agent/Registrar" means initially JPMorgan Chase Bank, National Association, or any successor thereto as provided in this Ordinance. "Prior Lien Obligations" means all bonds or other similar obligations of the City presently outstanding or that may be hereafter issued, payable in whole or in part from and secured by a first lien on and pledge of the Net ·Revenues of the System or by a lien on and pledge of the Net Revenues subordinate to a first lien on and pledge of the Net Revenues but superior to the lien on and pledge of the Surplus Rev~ues made for the Certificates. "Project" means the purposes for which the Certificates are issued as set forth in Section 3.1. "Record Date" means the last business day of the month next preceding an Interest Payment Date. "Register'' means the Register specified in Section 3.6(a) of this Ordinance. "Representations Letter'' means the Blanket Letter of Representations between the City andDTC. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. "SIDn means any person designated by the State of Texas or an authorized department, office or agency thereof, as and determined by the SEC or its staff to be a state information depository within the meaning of the Rule from time to time. "SUiplus Revenues" means the Net Revenues of the System in an amount not to exceed $500 remaining after payment of all debt service, reserve and other requirements in connection with the City's Prior Lien Obligations. LUB200f71003 Dallas 988799J.DOC -3- "System" means the City's Waterworks System being all properties, facilities and plants currently owned, operated and maintained by the City for the supply, treatment, transmission and distribution of treated, potable water, together with all future extensions, improvements, replacements and additions thereto. "Term Certificates" means the Certificates maturing in 2020 and 2022. "Unclaimed Payments" means money deposited with the Paying Agent/Registrar for the payment of principal of or interest on the Certificates as the same come due and payable or money set aside for the payment of Certificates duly called for redemption prior to maturity. "Underwriters'' means A.G. Edwards & Sons, Inc., RBC Dain Rauscher Inc. and M.E. Allison & Co., Inc. Section 1.2 Findings. The declarations, detenninations, and findings declared, made, and found in the preamble to this Ordinance are hereby adopted, restated, and made a part of the operative provisions hereof Section 1.3 Table of Contents. Titles. and Headings. ~e table of contents, titles, and headings of the Articles and Sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof and shall never be considered or given any effect in construing this Ordinance or any provision hereof or in ascertaining intent, if any question of intent should arise. Section 1.4 lntetpretation. (a) Unless the context requires otherwise, words of the masculine gender shall be construed to include correlative words of the feminine and neuter genders and vice versa, and words of the singular number shall be construed to include correlative words of the plural number and vice versa.· (b) This Ordinance and all tile terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein. ARTICLE II SECURfiY FOR TilE CERTIFICATES; INTEREST AND SINKING FUND; PRIOR LIEN OBLIGATIONS Section 2.1 Pavment of the Certificates. (a) Pursuant to the authority granted by the Texas Constitution and laws of the State of Texas, there shall be levied and there is hereby levied for the current year and for each succeeding year thereafter while any of the Certificates or any interest thereon is outstanding and LUB200nt003 Dallas 988799_3.DOC -4- unpaid, an ad valorem tax on each one hundred dollars va1uation of taxable property within the City, at a rate sufficient, within the limit prescribed by law, to pay the debt service requirements of the Certificates, being (i) the interest on the Certificates, and (ii) a sinking fund for their redemption at maturity or a sinking fund of two percent per annum (whichever amount is the greater), when due and payable, full allowance being made for delinquencies and costs of collection. (b) The ad valorem tax thus levied shall be assessed and coHected each year against all property appearing on the tax rolls of the City most recently approved in accordance with law, and the money thus collected shall be deposited as collected to the Interest and Sinking Fund. (c) Said ad valorem tax, the collections therefrom, and all amounts on deposit in or required hereby to be deposited to the Interest and Sinking Fund are hereby pledged and committed irrevocably to the payment of the principal of and interest on the Certificates when and as due and payable in accordance with their tenns and this Ordinance. (d) The City hereby covenants and agrees that the SUiplus Revenues are hereby irrevocably pledged equally and ratably to the payment of the principal of and interest on the Certificates. The City reserves the right to issue Prior Lien Obligations for any lawful purpose, at any time, in one or more installments. (e) The amount of taxes to be assessed annually for the payment of debt service on the Certificates shall be determined in the following manner: (i) The City's annual budget shall reflect (A) the amount of debt service requirements to become due on the Certificates in the next ensuing Fiscal Year and (B) the amount on deposit in the Interest and Sinking Fund on the date such budget is approved. (ii) The amount required to be provided in the next succeeding Fiscal Year from ad valorem taxes shall be the amount, if any, that the debt service requirements on the Certificates to be paid during the next Fiscal Year exceeds the amount then on deposit in the Interest and Sinking Fund. (iii) Following approval of the City's annual budget, the City Council shall, by ordinance, establish a tax rate that is sufficient to produce taxes in an amount which, when added to the amount then on deposit in the Interest and Sinking Fund, will be sufficient to pay debt service on the Certificates when due during the next Fiscal Year. (f) If the liens and provisions of this Ordinance shall be released in a manner permitted by Article XI hereof, then the collection of such ad valorem tax may be suspended or appropriately reduced, as the facts may pennit, and further deposits to the Interest and Sinking Fund may be suspended or appropriately reduced, as the facts may permit. In determining the aggregate principa1 amount of outstanding Certificates, there shall be subtracted the amount of any Certificates that have been duly called for redemption and for which money has been deposited with the Paying Agent/Registrar for such redemption. LUB2ooni003 o.Ilas 988799 _3.DOC -5- Section 2.2 Interest and Sinking Fund. (a) The City hereby establishes a special fund or account to be designated the "City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005, Interest and Sinking Fund" (the "Interest and Sinking Fund"), said fund to be maintained at an official depository bank of the City separate and apart from all other funds and accounts of the City. (b) Money on deposit in or required by this Ordinance to be deposited to the Interest and Sinking Fund shall be used solely for the purpose of paying the interest on and principal of the Certificates when and as due and payable in accordance with their terms and this Ordinance. ARTICLE III AUTHORIZATION; GENERAL TERMS AND PROVISIONS REGARDING THE CERTIFICATES Section 3.1 Authorization. The City's certificates of obligation to be designated "City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005" (the "Certificates"), are hereby authorized to be issued and delivered in accordance with the Constitution and laws of the State ofTexas, specifically Subchapter C, Chapter 271, Texas Local Government Code, as amended, and Article VIII of the City's Home-Rule Charter. The Certificates shall be issued in the aggregate principal amount of $46,525,000 for the purpose of paying contractual obligations to be inCWTed for the following purposes, to wit: (i) improvements and extensions to the City's Sewer System, including relocation of existing sewer lines; (ii) engineering and other professional services for developing a water resources plan to determine the most efficient and effective use of treated effluent; (iii) improvements and extensions to the City's Waterworks System, including relocation of existing water lines; (iv) water, sewer, electric, drainage, park and street improvements and extensions, including utility relocations, sidewalks, street lighting and landscaping, all located within the City's North Overton Tax Increment Financing Zone; (v) park improvements, including construction of athletic fields; (vi) improvements and extensions to City streets including sidewalks, street lighting, landscaping and utility improvements, extensions and relocations; (vii) improvements to Lubbock Preston Smith International Airport, including construction of a parking lot; (viii) improvements and extensions to the City's Electric Light and Power System (collectively with items (i)-(vii), the "Project") and (ix) payment of professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. Section 3.2 Date. Denomination. Maturities. and Interest. (a) The Certificates shall be dated August 15, 2005. The Certificates shall be in fully registered fonn, without coupons, in the denomination of $5,000 or any integral multiple thereof and shall be numbered separately from one upward, except the Initial Certificate, which shall be numbered T -1 . LUB200nl003 Dallas 988799_3.DOC -6- (b) The Certificates shaH mature on February 15 in the years and in the principal amounts set forth in the following schedule: Serial Certificates Principal Interest Principal Interest Year Amount Rate Year Amount Rate 2006 $1,575,000 3.000% 2013 $1,080,000 3.5000/o 2007 1,600,000 3.000% 2013 900,000 5.000% 2008 650,000 3.000% 2014 2,070,000 5.000% 2008 1,000,000 3.250% 2015 2,155,000 3.750% 2009 705,000 3.100% 2016 2,260,000 5.000% 2009 1,000,000 3.375% 2017 2,370,000 5.000% 2010 1,770,000 3.500% 2018 2,475,000 4.000% 2011 1,005,000 3.350% 2023 3,160,000 5.125% 2011 820,000 3.625% 2024 3,335,000 5.125% 2012 1,900,000 3.750% 2025 3,505,000 4.375% Term Certificates Principal Year Amount Interest Rate 2020 $5,315,000 5.000% 2022 5,875,000 5.000% (c) Interest shall accrue and be paid on each Certificate respectively until its maturity or prior redemption from the later of the Certificate Date or the most recent Interest Payment Date to which interest has been paid or provided for at the rates per annum for each respective maturity specified in the schedule contained in subsection (b) above. Such interest shall be payable semiannually on February 15 and August 15 of each year, commencing on February 15, 2006, computed on the basis of a 360-day year of twelve 30-day months. Section 3.3 Mediwn, Method and Place ofPavment. (a) The principal of and interest on the Certificates shall be paid in lawful money of the United States of America. (b) Interest on the Certificates shall be payable to the Owners as shown in the Register at the close ofbusiness on the Record Date. (c) Interest shall be paid by ch~ dated as of the Interest Payment Date, and sent United States mail, first class postage prepai~ by the Paying Agent/Registrar to each Owner, at the address thereof as it appears in the Register, or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the Owner; provided, however, that the Owner shall bear all risk and expense of such alternative banking arrangement. At the option of an LUB200ni003 Dallas 988799.J.DOC -7- ) Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. (d) The principal of each Certificate shall be paid to the Owner thereof on the due date, whether at the maturity date or the date of prior redemption thereof, upon presentation and surrender of such Certificate at the Designated Paymentffransfer Office of the Paying Agent/Registrar. (e) If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Paymentffransfer Office of the Paying Agent/Registrar is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day that is not a Saturday, Sunday, legal holiday, or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the due date thereof as specified in Section 3.2 of this Ordinance. (f) Unclaimed Payments shall be segregated in a special escrow account and held in trust, uninvested by the Paying Agent/Registrar, for the account of the Owners of the Certificates to which the Unclaimed Payments pertain. Subject to Title 6 of the Texas Property Code, Unclaimed Payments remaining unclaimed by the Owners entitled thereto for three years after the applicable payment or redemption date shall be applied to the next payment on the Certificates thereafter coming due; to the extent any such moneys remain three years after the retirement of all outstanding Certificates, such moneys shall be paid to the City to be used for any lawful purpose. Thereafter, neither the City, the Paying Agent/Registrar, nor any other person shall be liable or responsible to any Owners of such Certificates for any further payment of such unclaimed moneys or on account of any such Certificates, subject to Title 6 of the Texas Property Code. Section 3.4 Execution and Registration of Certificates. (a) The Certificates shall be executed on behalf of the City by the Mayor and the City Secretary, by their manual or facsimile signatures, and the official seal of the City shall be impressed or placed in facsimile thereon. Such facsimile signatures on the Certificates shall have the same effect as if each of the Certificates had been signed manually and in person by each of said officers, and such facsimile seal on the Certificates shall have the same effect as if the official seal of the City had been manually impressed upon each of the Certificates. (b) In the event that any officer of the City whose manual or facsimile signature appears on the Certificates ceases to be such officer before the authentication of such Certificates or before the delivery thereof, such manual or facsimile signature nevertheless shall be valid and sufficient for all purposes as if such officer had remained in such office. (c) Except as provided below, no Certificate shall be valid or obligatory for any pmpose or be entitled to any security or benefit of this Ordinance unless and Wltil there appears thereon the Certificate of Paying Agent/Registrar substantially in the fonn provided herein, duly authenticated by manual execution by an officer or duly authorized signatory of the Paying WB2oon1oo3 Dallas 988799 _.3.DOC Agent/Registrar. It shall not be required that the same officer or authorized signatory of the Paying Agent/Registrar sign the Certificate of Paying Agent/Registrar on all of the Certificates. In lieu of the executed Certificate of Paying Agent/Registrar described above, the Initial Certificate delivered at the Closing Date shall have attached thereto the Comptroller's Registration Certificate substantially in the form provided herein, manually executed by the Comptroller of Public Accounts of the State of Texas, or by his duly authorized agent, which Certificate shall be evidence that the Certificate has been duly approved by the Attorney General of the State of Texas, that it is a valid and binding obligation of the City, and that it has been registered by the Comptroller of Public Accounts of the State of Texas. (d) On the Closing Date, one initial Certificate representing the entire principal amount of all Certificates, payable in stated installments to the initial purchaser, or its designee, executed by the Mayor and City Secretary of the City, approved by the Attorney General, and registered and manually signed by the Comptroller of Public Accounts, will be delivered to the initial purchaser or its designee. Upon payment for the Initial Certificate, the Paying Agent/Registrar shall cancel the Initial Certificate and deliver a single registered, definitive Certificate for each maturity, in the aggregate principal amount thereof, to DTC on behalf of the purchaser. Section 3 .5 Ownership. (a) The City, the Paying Agent/Registrar, and any other person may treat the person in whose name any Certificate is registered as the absolute owner of such Certificate for the purpose of making and receiving payment as herein provided (except interest shall be paid to the person in whose name such Certificate is registered on the Record Date), and for all other purposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. (b) All payments made to the Owner of a Certificate shall be valid and effectual and shall discharge the liability of the City and the Paying Agent/Registrar upon such Certificate to the extent of the sums paid. Section 3.6 Registration, Transfer. and Exchange. {a) So long as any Certificates remain outstanding, the City shall cause the Paying Agent/Registrar to keep at the Designated Payment/Transfer Office a register (the "Register'') in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of Certificates in accordance with this Ordinance. (b) The ownership of a Certificate may be transferred only upon the presentation and surrender of the Certificate at the Designated Payment/Transfer Office of the Paying Agent/Registrar with such endorsement or other evidence of transfer as is acceptable to the Paying Agent/Registrar. No transfer of any Certificate shall be effective until entered in the Register. (c) The Certificates shall be exchangeable upon the presentation and surrender thereof at the Designated Paymentrrransfer Office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in a denomination or WB20017J003 Dallas 988799.J.JXX: -9- ) ) denominations of any integral multiple of $5,000, and in an aggregate principal amount equal to the unpaid principal amount of the Certificates presented for exchange. The Paying Agent/Registrar is hereby authorized to authenticate and deliver Certificates exchanged for other Certificates in accordance with this Section. (d) Each exchange Certificate delivered by the Paying Agent/Registrar in accordance with this Section shall constitute an originaJ contractual obligation of the City and shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such exchange Certificate is delivered. (e) No service charge shall be made to the Owner for the initial registration, subsequent transfer, or exchange for a different denomination of any of the Certificates. The Paying Agent/Registrar, however, may require the Owner to pay a sum sufficient to cover any tax or other governmental charge that is authorized to be imposed in connection with the registration, transfer, or exchange of a Certificate. (f) Neither the City nor the Paying Agent/Registrar shall be required to issue, transfer, or exchange any Certificate called for redemption, in whole or in part, where such redemption is scheduled to occur within forty-five (45) calendar days after the transfer or exchange date; provided, however, such limitation shall not be applicable to an exchange by the Owner of the uncalled principal balance of a Certificate. Section 3. 7 Cancellation. All Certificates paid or redeemed before scheduled maturity in accordance with this Ordinance, and all Certificates in lieu of which exchange Certificates or replacement Certificates are authenticated and delivered in accordance with this Ordinance, shall be cancelled and proper records made regarding such payment, redemption, exchange, or replacement. The Paying Agent/Registrar shall then return such cancelled Certificates to the City or may in accordance with law destroy such cancelled Certificates and periodically furnish the City with certificates of destruction of such Certificates. Section 3.8 Temporary Certificates. (a) Following the delivery and registration of the Initial Certificate and pending the preparation of definitive Certificates, the City may execute and, upon the City's request, the Paying Agent/Registrar shall authenticate and deliver, one or more temporary Certificates that are printed, lithographed, typewritten, mimeographed, or otherwise produced, in any denomination, substantially of the tenor of the definitive Certificates in lieu of which they are delivered, without coupons, and with such appropriate insertions. omissions, substitutions, and other variations as the officers of the City executing such temporary Certificates may determine, as evidenced by their signing of such temporary Certificates. (b) Until exchanged for Certificates in definitive form, such Certificates in temporary form shall be entitled to the benefit and security of this Ordinance. {c) The City, without unreasonable delay, shall prepare, execute and deliver to the Paying Agent/Registrar; thereupon, upon the presentation and surrender of the Certificate or W8200f71003 Dallas 9S8799.J.DOC -10- Certificates in temporary form to the Paying Agent/Registrar, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a Certificate or Certificates of the same maturity and series, in definitive form, in the authorized denomination, and in the same aggregate principal amount, as the Certificate or Certificates in temporary form surrendered. Such exchange shall be made without the mak:ing of any charge therefor to any Owner. Section 3.9 Rq>lacement Certificates. (a) Upon the presentation and surrender to the Paying Agent/Registrar of a mutilated Certificate, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Certificate of like tenor and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Owner of such Certificate to pay a sum sufficient to cover any tax or other governmental charge that is authorized to be imposed in connection therewith and any other expenses connected therewith. (b) In the event that any Certificate is lost, apparently destroyed or wrongfully taken, the Paying Agent/Registrar, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such Certificate has been acquired by a bona fide purchaser, shall authenticate and deliver a replacement Certificate of like tenor and principal amount, bearing a number not contemporaneously outstanding, provided that the Owner first complies with the following requirements: (i) furnishes to the Paying Agent/Registrar satisfactory evidence of his or her ownership of and the circumstances of the loss, destruction, or theft of such Certificate; (ii) furnishes such security or indemnity as may be required by the Paying Agent/Registrar to save it and the City hannless; (iii) pays all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Paying Agent/Registrar, and any tax or other governmental charge that is authorized to be imposed; and (iv) satisfies any other reasonable requirements imposed by the City and the Paying Agent/Registrar. (c) If, after the delivery of such replacement Certificate, a bona fide purchaser of the original Certificate in lieu of which such replacement Certificate was issued presents for payment such original Certificate, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Certificate from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost, or expense incmred by the City or the Paying Agent/Registrar in connection therewith. (d) In the event that any such mutilated, lost, apparently destroyed, or wrongfully taken Certificate has become or is about to become due and payable, the Paying Agent/Registrar, in its discretion, instead of issuing a replacement Certificate, may pay such Certificate when it becomes due and payable. WB200nl003 Dallas 988799J.DOC -11- (e) Each replacement Certificate delivered in accordance with this Section shall constitute an original additional contractual obligation of the City and shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such replacement Certificate is delivered. Section 3 .1 0 Book-Entry-Only System. (a) Notwithstanding any other provision hereof, upon initial issuance of the Certificates, the Certificates shall be registered in the name of Cede & Co., as nominee of DTC. The definitive Certificates shall be initially issued in the fonn of a single separate certificate for each of the maturities thereof (b) With respect to Certificates registered in the name of Cede & Co., as nominee of DTC, the City and the Paying Agent/Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such a DTC Participant holds an interest in the Certificates. Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Certificates, (ii) the delivery to any DTC Participant or any other person, other than an Owner, as shown on the Register, of any notice with respect to the Certificates, including any notice of redemption, or (iii) the payment to any DTC Participant or any other person, other than an Owner, as shown in the Register of any amount with respect to principal of or interest on the Certificates. Notwithstanding any other provision of this Ordinance to the contrary, the City and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Certificate is registered in the Register as the absolute owner of such Certificate for the purpose of payment of principal of and interest on Certificates, for the purpose of giving notices of redemption and other matters with respect to such Certificate, for the purpose of registering transfer with respect to such Certificate, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of and interest on the Certificates only to or upon the order of the respective Owners as shown in the Register, as provided in this Ordinance, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payment of interest on the Certificates to the extent of the sum or sums so paid. No person other than an Owner, as shown in the Register, shall receive a certificate evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., the word ''Cede & Co." in this Ordinance shall refer to such new nominee ofDTC. (c) The Representations Letter previously executed and delivered by the City, and applicable to the City's obligations delivered in book-entry-only fonn to DTC as securities depository, is hereby ratified and approved for the Certificates. WB200f71003· Dallas 98~799 _3.00C -12- Section 3.11 Successor Securities Depository; Transfer Outside Book-Entry-Only System. In the event that the City determines that it is in the best interest of the City and the beneficial owners of the Certificates that they be able to obtain certificated Certificates, or in the event DTC discontinues the services described herein, the City shall (i) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC and DTC Participants of the appointment of such successor securities depository and transfer one or more separate Certificates to such successor securities depository; or (ii) notify DTC and DTC Participants of the availability through DTC of certificated Certificates and cause the Paying Agent/Registrar to transfer one or more separate registered Certificates to DTC Participants h~ving Certificates credited to their DTC accounts. In such event, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede & Co., as nominee ofDTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names Owners transferring or exchanging Certificates shall designate, in accordance with the provisions of this Ordinance. Section 3.12 Pavments to Cede & Co. Notwithstanding any other provision of this Ordinance to the contrary, so long as the Certificates are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of and interest on such Certificates, and all notices with respect to such Certificates shall be made and given, respectively, in the manner provided in the Representations Letter of the City to DTC. ARTICLE IV REDEMPTION OF CERTIFICATES BEFORE MATURTIY Section 4.1 Redemption. The Certificates are subject to redemption before their scheduled maturity only as provided in this Article IV. Section 4.2 Optional Redemption. (a) The City reserves the option to redeem Certificates maturing on and after February 15, 2016 in whole or any part, before their respective scheduled maturity dates, on February 15, 2015 or on any date thereafter, such redemption date or dates to be fixed by the City, at a price equal to the principal amount of the Certificates called for redemption plus accrued interest to the date fixed for redemption. (b) If less than all of the Certificates are to be redeemed pursuant to an optional redemption, the City shall determine the maturity or maturities and the amounts thereof to be redeemed and shall direct the Paying Agent/Registrar to call by lot the Certificates, or portions thereof, within such maturity or maturities and in such principal amounts for redemption. UJB20MI003 Dallas 988799__3.DOC -13- (c) The City, at least 45 days before the redemption date, unless a shorter period shall be satisfactory to the Paying Agent/Registrar, shall notify the Paying Agent/Registrar of such redemption date and of the principal amount of Certificates to be redeemed. Section 4.3 Mandatory Sinking Fund Redemption. (a) The Term Certificates are subject to scheduled mandatory redemption and will be redeemed by the City, in part at a price equal to the principal amount thereof, without premium, plus accrued interest to the redemption date, out of moneys available for such purpose in the Interest and Sinking Fund, on the dates and in the respective principal amounts as set forth in the following schedule: Tepn Certificates Maturing February 15, 2020 Redemption Date February 15,2019 February 15, 2020 (maturity) Principal Amount $2,590,000 2,725,000 Term Certificates Maturing February 15. 2022 Redemption Date February 15,2021 February 1 S, 2022 (maturity) Principal Amount $2,865,000 3,010,000 (b) At least forty-five (45) days prior to each scheduled mandatory redemption date, the Paying Agent/Registrar shall select for redemption by lot, or by any other customary method that results in a random selection, a principal amount of Term Certificates equal to the aggregate principal amount of such Term Certificates to be redeemed, shall call such Term Certificates for redemption on such scheduled mandatory redemption date, and shall give notice of such redemption, as provided in Section 4.5. (c) The principal amount of the Term Certificates required to be redeemed on any redemption date pursuant to subparagraph (a) of this Section 4.3 shall be reduced, at the option of the City, by the principal amount of any Term Certificates which, at least 45 days prior to the mandatory sinking fund redemption date (i) shall have been acquired by the City at a price not exceeding the principal amount of such Tenn Certificates plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, or (ii) shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to a mandatory sinking fund redemption. Section 4.4 Partial Redemption. (a) A portion of a single Certificate of a denomination greater than $5,000 may be redeemed, but only in a principal amount equal to $5,000 or any integral multiple thereof. If such a Certificate is to be partially redeemed, the Paying Agent/Registrar shall treat each $5,000 portion of the Certificate as though it were a single Certificate for purposes of selection for redemption. WB200171003 Dallas 988799_3.DOC -14- (b) Upon surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with Section 3.6 of this Ordinance, shall authenticate and deliver an exchange Certificate or Certificates in an aggregate principal amount equal to the unredeemed portion of the Certificate so sWTendered, such exchange being without charge. (c) The Paying Agent/Registrar shall promptly notify the City in writing of the principal amount to be redeemed of any Certificate as to which only a portion thereof is to be redeemed. Section 4.5 Notice of Redemption to Owners. (a) The Paying Agent/Registrar shall give notice of any redemption of Certificates by sending notice by United States mail, first class postage prepaid, not less than 30 days before the date fixed for redemption, to the Owner of each Certificate (or part thereof) to be redeemed, at the address shown on the Register at the close of business on the Business Day next preceding the date of mailing such notice. (b) The notice shall state the redemption date, the redemption price, the place at which the Certificates are to be surrendered for payment, and, if less than all the Certificates outstanding are to be redeemed, an identification of the Certificates or portions thereof to be redeemed. (c) Any notice given as provided in this Section shall be conclusively presumed to have been duly given, whether or not the Owner receives such notice. Section 4.6 Pavment Uoon Redemption. (a) Before or on each redemption date, the City shall deposit with the Paying Agent/Registrar money sufficient to pay all amounts due on the redemption date and the Paying Agent/Registrar shall make provision for the payment of the Certificates to be redeemed on such date by setting aside and holding in trust such amounts as are received by the Paying Agent/Registrar from the City and shall use such funds solely for the purpose of paying the principal of and accrued interest on the Certificates being redeemed. (b) Upon presentation and surrender of any Certificate called for redemption at the Designated Paymentffransfer Office on or after the date fixed for redemption, the Paying Agent/Registrar shall pay the principal of and accrued interest on such Certificate to the date of redemption from the money set aside for such purpose. Section 4.7 Effect of Redemption. (a) Notice of redemption having been given as provided in Section 4.5 of this Ordinance, the Certificates or portions thereof called for redemption shall become due and payable on the date fixed for redemption and, unless the City defaults in its obligation to make provision for the payment of the principal thereof or accrued interest thereon, such Certificates or portions thereof shall cease to bear interest from and after the date fixed for redemption, whether or not such Certificates are presented and surrendered for payment on such date. WB2oon1oo3 Dallas 988799_3.DOC -15- (b) If the City shall fail to make provision for payment of all swns due on a redemption date, then any Certificate or portion thereof called for redemption shall continue to bear interest at the rate stated on the Certificate until due provision is made for the payment of same by the City. Section 4.8 Lapse of Payment. Money set aside for the redemption of Certificates and remaining unclaimed by the Owners of such Certificates shall be subject to the provisions of Section 3.3(f) hereof ARTICLEV PAYING AGENT/REGISTRAR Section 5.1 Apoointment of Initial Paying Agent/Registrar. JPMorgan Chase Bank, National Association, is hereby appointed as the initial Paying Agent/Registrar for the Certificates. Section 5.2 Qualifications. Each Paying Agent/Registrar shall be a commercial bank, a trust company organized under the laws of the State of Texas, or other entity duly qualified and legally authorized to serve as and perform the duties and services of paying agent and registrar for the Certificates. Section 5.3 Maintaining Paying Agent/Registrar. (a) At all times while any of the Certificates are outstanding, the City will maintain a Paying Agent/Registrar that is qualified under Section 5.2 of this Ordinance. The Mayor is hereby authorized and directed to execute an agreement with the Paying Agent/Registrar specifying the duties and responsibilities of the City and the Paying Agent/Registrar in substantially the form presented at this meeting. such fonn of agreement being hereby approved. The signature of the Mayor shall be attested by the City Secretary of the City. (b) If the Paying Agent/Registrar resigns or otherwise ceases to serve as such, the City will promptly appoint a replacement. Section 5.4 Termination. The City, upon not less than sixty (60) days notice, reserves the right to terminate the appointment of any Paying Agent'Registrar by delivering to the entity whose appointment is to be tenninated written notice of such termination. Section 5.5 Notice of Change to Owners. Promptly upon each change in the entity serving as Paying Agent/Registrar, the City will cause notice of the change to be sent to each Owner by United States mail, first class postage LUB20MI003 Dallas 988799_3.DOC -16- prepaid, at the address thereof in the Register, stating the effective date of the change and the name and mailing address of the replacement Paying Agent/Registrar. Section 5.6 Agreement to Perfonn Duties and Functions. By accepting the appointment as Paying Agent/Registrar and executing the Paying Agent/Registrar Agreement, the Paying Agent/Registrar is deemed to have agreed to the provisions of this Ordinance and that it will perfonn the duties and functions of Paying Agent/Registrar prescribed thereby. Section 5.7 Delivery of Records to Successor. If a Paying Agent/Registrar is replaced, such Paying Agent, promptly upon the appointment of the successor, will deliver the Register (or a copy thereof) and all other pertinent books and records relating to the Certificates to the successor Paying Agent/Registrar. ARTICLE VI FORM OF THE CERTIFICATES Section 6.1 Form Generally. (a) The Certificates, including the Registration Certificate of the Comptroller of Public Accounts of the State of Texas, the Certificate of the Paying Agent/Registrar, and the Assignment fonn to appear on each of the Certificates, (i) shall be substantially in the form set forth in this Article, with such appropriate insertions, omissions, substitutions, and other variations as are permitted or required by this Ordinance, and (ii) may have such letters, numbers, or other marks of identification (including identifying numbers and letters of the Committee on Uniform Securities Identification Procedures of the American Bankers Association) and such legends and endorsements (including any reproduction of an opinion of counsel) thereon as, consistently herewith, may be determined by the City or by the officers executing such Certificates, as evidenced by their execution thereof. (b) Any portion of the text of any Certificates may be set forth on the reverse side thereof, with an appropriate reference thereto on the face of the Certificates. (c) The definitive Certificates, if any, shall be typewritten, photocopied, printed, lithographed, or engraved, and may be produced by any combination of these methods or produced in any other similar manner, all as determined by the officers executing such Certificates, as evidenced by their execution thereof. (d) The Initial Certificate submitted to the Attorney General of the State of Texas may be typewritten and photocopied or otherwise reproduced. Section 6.2 Form of the Certificates. The form of the Certificates, including the fonn of the Registration Certificate of the Comptroller of Public Accounts of the State of Texas, the form of Certificate of the Paying WB200n1oo3 Dallas 988799_3.DOC -17- Agent/Registrar and the form of Assignment appearing on the Certificates, shall be substantially as follows: (a) Fonn of Certificate. REGISTERED No. __ United States of America State ofTexas County of Lubbock CITY OF LUBBOCK, TEXAS . TAXANDWATERWORKSSYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $'------- INTEREST RATE: MA TUR11Y DATE: CERTIFICATE DATE: CUSIP NUMBER: __ % August 15, 2005 The City of Lubbock (the "City"), in the County of Lubbock, State of Texas, for value received, hereby promises to pay to or registered assigns, on the Maturity Date specified above, the sum of _______________ DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest bas been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Paymentffransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Paymentlfransfer Office of such successor. Interest on this Certificate is payable by check dated as of the int~est payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by LUB200niOOJ Dallas 988799..J.DOC -18- wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. If the date for the payment of the principal of or interest on this Certificate shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Paymentlfransfer Office of the Paying Agent/Registrar is located are required or authorized by law or executive order to close, the date for such payment shall be the next succeeding day that is not a Saturday, Sunday, legal holiday, or day on which banldng institutions are required or authorized to close, and payment on such date shall have the same force and effect as if made on the original date payment was due. This Certificate is one of a series of fully registered certificates specified in the title hereof issued in the aggregate principal amoWit of $46,525,000 (herein referred to as the "Certificates"), issued pursuant to a certain ordinance of the City (the "Ordinance") for the purpose of paying contractual obligations to be incurred for authorized public improvements (collectively, the "Project"), as described in the Ordinance, and to pay the contractual obligations for professional services of attorneys, financial advisors and other professionals in cormection ~th the Project and the issuance of the Certificates. The City has reserved the option to redeem the Certificates maturing on or after February 15, 2016, in whole or in part, before their respective scheduled maturity dates, on February 15,2015, or on any date thereafter, at a price equal to the principal amount of the Certificates so called for redemption plus accrued interest to the date fixed for redemption. If less than all of the Certificates are to be redeemed, the City shall detennine the maturity or maturities and the amounts thereof to be redeemed and shall direct the Paying Agent/Registrar to call by lot or other customary method that results in a random selection the Certificates, or portions thereof, within such maturity and in such principal amounts, for redemption. Certificates maturing on February 15 in each of the years 2020 and 2022 (the ''Term Certificates'') are subject to mandatory sinking fund redemption prior to their scheduled maturity, and will be redeemed by the City, in part at a redemption price equal to the principal amount thereof, without premiwn, plus interest accrued to the redemption date, on the dates and in the principal amounts shown in the following schedule: LUB20Gnl003 Dallas 988799J.DOC Tenn Certificates Maturing Febrwuy 15.2020 Redemption Date February 15, 2019 February 15, 2020 (maturity) Principal Amount $2,590,000 2,725,000 Tenn Certificates Maturing February 15. 2022 Redemotion Date February 15, 2021 February 15, 2022 (maturity) -19- Principal Amount $2,865,000 3,010,000 The Paying Agent/Registrar will select by lot or by any other customary method that results in a random selection the specific Certificates (or with respect to Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory sinking fund redemption provisions hereof shall be reduced, at the option of the City, by the principal amount of any Certificates which, at least 45 days prior to the mandatory sinking fund redemption date (i) shall have been acquired by the City at a price not exceeding the principal amount of such Certificates plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, or (ii) shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to a mandatory sinking fund redemption. Notice of such redemption or redemptions shall be given by first class mail, postage prepaid, not less than 30 days before the date fixed for redemption, to the registered owner of each of the Certificates to be redeemed in whole or in part. Notice having been so given, the Certificates or portions thereof designated for redemption shall become due and payable on the redemption date specified in such notice; from and after such date, notwithstanding that any of the Certificates or portions thereof so called for redemption shall not have been surrendered for payment, interest on such Certificates or portions thereof shall cease to accrue. As provided in the Ordinance, and subject to certain limitations therein set fo~ this Certificate is transferable upon surrender of this Certificate for transfer at the designated office of the Paying Agent/Registrar with such endorsement or other evidence of transfer as is acceptable to the Paying Agent/Registrar; thereupon, one or more new fully registered Certificates of the same stated maturity, of authorized denominations, bearing the same rate of interest, and for the same aggregate principal amount will be issued to the designated transferee or transferees. The City, the Paying Agent/Registrar, and any other person may treat the person in whose name this Certificate is registered as the owner hereof for the purpose of receiving payment as herein provided (except interest shall be paid to the person in whose name this Certificate is registered on the Record Date) and for all other purposes, whether or not this Certificate be overdue, and neither the City nor the Paying Agent/Registrar shall be affected by notice to the contrary. IT IS HEREBY CERTIFIED AND RECITED that the issuance of this Certificate and the series of which it is a part is duly authorized by law; that all acts, conditions, and things to be done precedent to and in the issuance of the Certificates have been properly done and performed and have happened in regular and due time, form, and manner as required by law; that ad valorem taxes upon all taxable property in the City have been levied for and pledged to the payment of the debt service requirements of the Certificates within the limit prescribed by law; that, in addition to said taxes, further provisions have been made for the payment of the debt service requirements of the Certificates by pledging to such purpose Surplus Revenues, as defined in the Ordinance, derived by the City from the operation of the Waterworks System in an amount limited to $500; that when so collected, such taxes and Surplus Revenues shall be UJB2Cionl003 Dallas 988799_3.DOC -20- appropriated to such purposes; and that the total indebtedness of the City, including the Certificates, does not exceed any constitutional or statutocy limitation. IN WITNESS WHEREOF~ the City has caused this Certificate to be executed by the manual or facsimile signature of the Mayor of the City and countersigned by the manual or facsimile signature of the City Secretary, and the official seal of the City has been duly impressed or placed in facsimile on this Certificate. Mayor, City of Lubbock, Texas City Secretacy, City of Lubbock, Texas [SEAL] LUB200nt003 OaUas 988799J.OOC -21- (b) Form of Comptroller's Registration Certificate. The following Comptroller's Registration Certificate may be deleted from the definitive Certificates if such certificate on the Initial Certificate is fully executed. OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS § § § REGISTER NO. __ _ I hereby certify that there is on file and of record in my office a certificate of the Attorney General of the State of Texas to the effect that this Certificate has been examined by him as required by law, that he finds that it has been issued in conformity with the Constitution and laws of the State of Texas, and that it is a valid and binding obligation of the City of Lubbock, Texas; and that this Certificate has this day been registered by me. Witness my band and seal of office at Austin, Texas,-------- [SEAL] Comptroller of Public Accounts of the State of Texas (c) Form of Certificate of Paying Agent/Registrar. The following Certificate of Paying Agent/Registrar may be deleted from the Initial Certificate if the Comptroller's Registration Certificate appears thereon. CERTIFICATE OF PAYING AGENT/REGISTRAR The records of the Paying Agent/Registrar show that the Initial Certificate of this series of Certificates was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas, and that this is one of the Certificates referred to in the within-mentioned Ordinance. Dated: WB2oonJ003 DaJw 9ssm_:u:x>c JPMorgan Chase Bank, National Association as Paying Agent/Registrar By: Authorized Signatory -22- (d) Fonn of Assigrunent. ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto (print or typewrite name, address and Zip Code of transferee): -------------- (Social Security or other identifying number: the within Certificate and all rights hereunder and hereby irrevocably constitutes and appoints --------attorney to transfer the within Certificate on the books kept for registration hereof, with full power of substitution in the premises. Dated: NOTICE: The signature on this Assignment must correspond with the name of the registered owner as it appears on the face of the within Certificate in every particular and must be guaranteed in a manner acceptable to the Paying Agent/Registrar. Signature Guaranteed By: Authorized Signatory (e) The Initial Certificate shall be in the form set forth in paragraphs (a), (b) and (d) of this Section, except for the following alterations: (i) immediately under the name of the Certificate the headings "INTEREST RATE" and "MA TIJRTIY DATE., shall both be completed with the expression "As shown below"; and (ii) in the first paragraph of the Certificate, the words "on the maturity date specified above" shall be deleted and the following will be inserted: "on February lS in each of the years, in the principal instalhnents and bearing interest at the per annum rates set forth in the following schedule: · wszoon1oo3 Dallas 988799_3.DOC -23- Principal Installments Interest Rate (Information to be inserted from schedule in Section 3.2 of the Ordinance) Section 6.3 CUSIP Registration. The City may secure identification numbers through the CUSIP Service Bureau Division of Standard & Poor's, A Division of the McGraw-Hill Companies, New York, New York, and may authorize the printing of such numbers on the face of the Certificates. It is expressly provided, however, that the presence or absence of CUSIP numbers on the Certificates shall be of no significance or effect in regard to the legality thereof and neither the City nor the attorneys approving said Certificates as to legality are to be held responsible for CUSIP numbers incorrectly printed on the Certificates. Section 6.4 Legal Opinion. The approving legal opinion of Vinson & Elkins L.L.P ., Bond Counsel, may be attached to or printed on the reverse side of each Certificate over the certification of the City Secretary of the City, which may be executed in facsimile. Section 6.5 Bond lnsurance. Information pertaining to bond insurance, if any, may be printed on each Certificate. ARTICLE VII SALE AND DELIVERY OF CERTIFICATES; DEPOSIT OF PROCEEDS Section 7.1 Sale of Certificates: Official Statement. (a) The Certificates are hereby officially sold and awarded and shall be delivered to the Underwriters in accordance with the terms and provisions of that certain purchase contract (the "Purchase Contract'') relating to the Certificates between the City and the Undenmters and dated the date of the passage of this Ordinance. The form and content of such Purchase Contract are hereby approved, and the Mayor is hereby authorized and directed to execute and deliver such Purchase Contract. It is hereby officially found, detennined and declared that the terms of this sale are· the most advantageous reasonably obtainable. The Certificates shall initially be registered in the name of A. G. Edwards & Sons, Inc., as representative for the Underwriters, or their designee. (b) The form and substance of the Preliminary Official Statement, dated August 22, 2005, and any addenda, supplement or amendment thereto, are hereby in all respects approved and adopted and is hereby deemed final as of its date within the meaning and for the purposes of paragraph (b)(l) of Rule 15c2-12 under the Securities Exchange Act of 1934, as amended. The final Official Statement (the "Official Statement") presented to and considered at this meeting is hereby in all respects approved and adopted and the Mayor and the City Secretary W8200ni003 Dallas 988799_,3.DOC of the City are hereby authorized and directed to execute the same and deliver appropriate numbers of executed copies thereof to the Underwriters. The Official Statement as thus approved, executed and delivered, with such appropriate variations as shall be approved by the Mayor, City Manager, Deputy City Manager, any Assistant City Manager, Chief Financial Officer, Cash and Debt Manager or City Secretary of the City and the Underwriters, may be used by the Underwriters in the public offering and sale thereof. The City Secretary is hereby authorized and directed to include and maintain a copy of the Official Statement and any addenda, supplement or amendment thereto thus approved among the pennanent records of this meeting. The use and distribution of the Preliminary Official Statement, and the preliminary public offering of the Certificates by the Underwriters, is hereby ratified, approved and confirmed. (c) All officers of the City are authorized to execute such documents, certificates and receipts as they may deem appropriate in order to consummate the delivery of the Certificates in accordance with the tenns of sale therefor including, without limitation, the Purchase Contract. (d) The obligation of the Underwriters identified in subsection (a) of this Section to accept delivery of the Certificates is subject to such purchaser being furnished with the final, approving opinion of Vinson & Elkins L.L.P ., bond counsel for the City, which opinion shall be dated and delivered the Closing Date. Section 7.2 Control and Delivery of Certificates. (a) The Mayor of the City is hereby authorized to have control of the Initial Certificate and all necessary records and proceedings pertaining thereto pending investigation, examination, and approval of the Attorney General of the State of Texas, registration by the Comptroller of Public Accounts of the State of Texas and registration with, and initial exchange or transfer by, the Paying Agent/Registrar. (b) After registration by the Comptroller of Public Accounts, delivery of the Certificates shall be made to the initial purchasers thereof under and subject to the general supervision and direction of the Mayor, against receipt by the City of all amounts due to the City under the tenns of sale. Section 7.3 Deposit of Proceeds. (a) First: All amounts received on the Closing Date as accrued interest on the Certificates from the Certificate Date to the Closing Date shall be deposited to the Interest and Sinking Fund. (b) Second: The remaining balance received on the Closing Date shall be deposited to a special account of the City, such moneys to be dedicated and used solely for the remaining purposes for which the Certificates are being issued as herein provided. LUB200171003 Dallas 988799...).00C -25- ARTICLE VIII INVESTMENTS Section 8.1 Investments. (a) Money in the Interest and Sinking Fund created by this Ordinance, at the option of the City, may be invested in such securities or obligations as permitted under applicable law. (b) Any securities or obligations in which such money is so invested shall be kept and held in trust for the benefit of the Owners and shall be sold and the proceeds of sale shall be timely applied to the making of all payments required to be made from the fund from which the investment was made. Section 8.2 Investment Income. (a) Interest and income derived from investment of the Interest and Sinking Fund shall be credited to such fund. (b) Interest and income derived from investment of the funds to be deposited pursuant to Section 7.3(b) hereof shall be credited to the account where deposited until the acquisition or construction of said projects is completed and thereafter, to the extent such interest and income are present, such interest and income shall be deposited to the Interest and Sinking Fund. ARTICLE IX PARTICULAR REPRESENTATIONS AND COVENANTS Section 9.1 Pavment of the Certificates. On or before each Interest Payment Date while any of the Certificates are outstanding and unpaid, there shall be made available to the Paying Agent/Registrar, out of the Interest and Sinking Fund, money sufficient to pay such interest on and principal of and interest on the Certificates as will accrue or mature on the applicable Interest Payment Date or date of prior redemption. Section 9.2 Other Reoresentations and Covenants. (a) The City will faithfully perfonn, at all times, any and all covenants, undertakings, stipulations, and provisions contained in this Ordinance; the City will promptly pay or cause to be paid the principal of and interest on each Certificate on the dates and at the places and manner prescribed in such Certificate; and the City will, at the times and in the manner prescribed by this Ordinance, deposit or cause to be deposited the amounts of money specified by this Ordinance. (b) The City is duly authorized under the laws of the State of Texas to issue the Certificates; all action on its part for the creation and issuance of the Certificates has been duly and effectively taken; and the Certificates in the hands of the Owners thereof are and will be valid and enforceable obligations of the City in accordance with their terms. LUB200171003 Dallas 988799_,3.DOC -26- Section 9.3 Provisions Concerning Federal Income Tax Exclusion. The City intends that the interest on the Certificates shall be excludable from gross income for purposes of federal income taxation pursuant to sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the "CodeH), and the applicable regulations promulgated thereunder (the "Regulations'l The City covenants and agrees not to take any action, or knowingly omit to take any action within its control, that if taken or omitted, respectively, would cause the interest on the Certificates to be includable in the gross income, as defined in section 61 of the Code, of the holders thereof for purposes of federal income taxation. In particular, the City covenants and agrees to comply with each requirement of Sections 9.3 through 9.9 of this Article IX; provided, however, that the City shall not be required to comply with any particular requirement of Sections 9.3 through 9.9 of this Article IX if the City has received an opinion of nationally recognized bond coWlSel ("CoWlSel's Opinion") that such noncompliance will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Certificates or if the City has received a Counsel's Opinion to the effect that compliance with some other requirement set forth in Sections 9.3 through 9.9 of this Article IX will satisfy the applicable requirements of the Code, in which case compliance with such other requirement specified in such Counsel's Opinion shall constitute compliance with the corresponding requirement specified in Sections 9.3 through 9.9 of this Article IX. Section 9.4 No Private Use or Payment and No Private Loan Financing. The City shall certify, through an authorized officer, employee or agent, that, based upon all facts and estimates known or reasonably expected to be in existence on the date the Certificates are delivered, the proceeds of the Certificates will not be used in a manner that would cause the Certificates to be "private activity bondsu within the meaning of section 141 of the Code and the Regulations. The City covenants and agrees that it will make such use of the proceeds of the Certificates, including interest or other investment income derived from Certificate proceeds, regulate the use of property financedt directly or indirectly, with such proceeds, and take such other and further action as may be required so that the Certificates will not be ''private activity bonds" within the meaning of section 141 of the Code and the Regulations. Section 9.5 No Federal Guaranty. The City covenants and agrees not to take any action, or knowingly omit to take any action within its control, that, if taken or omitted, respectively, would cause the Certificates to be "federally guaranteedu within the meaning of section 149(b) of the Code and the Regulations, except as permitted by section 149(bX3) of the Code and the Regulations. Section 9.6 Certificates Are Not Hedge Bonds. The City covenants and agrees not to take any action, or knowingly omit to take any action, and has not knowingly omitted and will not knowingly omit to take any action, within its control, that, if taken or omitted, respectively, would cause the Certificates to be "hedge bonds" within the meaning of section 149(g) of the Code and the Regulations. UJB200nHl03 Dallas 988799_3.DOC -27- Section 9.7 No~Arbitrage Covenant. The City shall certify, through an authorized officer, employee or agent, that, based upon all facts and estimates known or reasonably expected to be in existence on the date the Certificates are delivered, the City will reasonably expect that the proceeds of the Certificates will not be used in a manner that would cause the Certificates to be "arbitrage bonds" within the meaning of section 148(a) of the Code and the Regulations. Moreover, the City covenants and agrees that it will make such use of the proceeds of the Certificates including interest or other investment income derived from Certificate proceeds, regulate investments of proceeds of the Certificates, and take such other and further action as may be required so that the Certificates will not be "arbitrage bonds" within the meaning of section l48(a) of the Code and the Regulations. Section 9.8 Arbitrage Rebate. If the City does not qualify for an exception to the requirements of Section 148( f) of the Code, the City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the "gross proceeds" of the Certificates (within the meaning of section 148(f)(6)(B) of the Code), be rebated to the federal government. Specifically, the City will (i) maintain records regarding the investment of the gross proceeds of the Certificates as may be required to calculate the amount earned on the investment of the gross proceeds of the Certificates separately from records of amounts on deposit in the funds and accounts of the City allocable to other bond issues of the City or moneys which do not represent gross proceeds of any Certificates of the City, (ii) calculate at such times as are required by the Regulations, the amount earned from the investment of the gross proceeds of the Certificates which is required to be rebated to the federal government, and (iii} pay, not less often than every fifth anniversary date of the delivery of the Certificates or on such other dates as may be permitted under the Regulations, all amounts required to be rebated to the federal government. Further, the City will not indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Certificates that might result in a reduction in the amount required to be paid to the federal government because such arrangement results in a smaller profit or a larger loss than would have resulted if the arrangement had been at arm's length and had the yield on the issue not been relevant to either party. Section 9. 9 Information Re.porting. The City covenants and agrees to file or cause to be filed with the Secretary of the Treasury, not later than the 15th day of the second calendar month after the close of the calendar quarter in which the Certificates are issued, an information statement concerning the Certificates, all under and in accordance with section 149(e) of the Code and the Regulations. LUB200ni003 Dallas 983799_3.00C -28- ) Section 9 .I 0 Continuing Obligation. Notwithstanding any other provision of this Ordinance, the City's obligations under the covenants and provisions of Sections 9.3 through 9.9 of this Article IX shall survive the defeasance and discharge of the Certificates. ARTICLE X DEFAULT AND REMEDIES Section I 0.1 Events of Default. Each of the following occurrences or events for the purpose of this Ordinance is hereby declared to be an Event of Default: (i) the failure to make payment of the principal of or interest on any of the Certificates when the same becomes due and payable; or (ii) default in the perfonnance or observance of any other covenant, agreement, or obligation of the City, which default materially and adversely affects the rights of the Owners, including but not limited to their prospect or ability to be repaid in accordance with this Ordinance, and the continuation thereof for a period of sixty (60) days after notice of such default is given by any Owner to the City. Section 10.2 Remedies for Default. (a) Upon the happening of any Event of Default, then any Owner or an authorized representative thereof, including but not limited to a trustee or trustees therefor, may proceed against the City for the purpose of protecting and enforcing the rights of the Owners under this Ordinance by mandamus or other suit, action or special proceeding in equity or at law in any court of competent jurisdiction for any relief pennitted by law, including the specific performance of any covenant or agreement contained here~ or thereby to enjoin any act or thing that may be unlawful or in violation of any right of the Owners hereunder or any combination of such remedies. (b) It is provided that all such proceedings shall be instituted and maintained for the equal benefit of all Owners of Certificates then outstanding. Section 10.3 Remedies Not Exclusive. (a) No remedy herein conferred or reserved is intended to be exclusive of any other available remedy, but each and every such remedy shall be cmnulative and shall be in addition to every other remedy given hereunder or under the Certificates or now or hereafter existing at law or in equity; provided, however, that notwithstanding any other provision of this Ordinance, the right to accelerate the debt evidenced by the Certificates shall not be available as a remedy under this Ordinance. LUB200n1003 Dallas 988799 _3.DOC -29- (b) The exercise of any remedy herein conferred or reserved shaU not be deemed a waiver of any other available remedy. ARTICLE XI DISCHARGE Section 11.1 Discharge. The Certificates may be defeased, discharged or refunded in any manner permitted by applicable law. ARTICLE XII CONTINUING DISCLOSURE UNDERTAKING Section 12.1 Annual Re.ports. (a) The City shall provide annually to each NRMSIR and to any SID, within six (6) months after the end of each fiscal year, financial infonnation and operating data with respect to the City of the general type included in the final Official Statement, being the information described in Exhibit A hereto. Any financial statements so to be provided shall be (i) prepared in accordance with the accounting principles described in Exhibit A hereto, and (ii) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the City shall provide notice that audited financial statements are not available and shall provide unaudited financial statements for the applicable fiscal year to each NRMSIR and any SID. The City shall provide audited financial statements for the applicable fiscal year to each NRMSIR and to any SID when and if audited financial statements become available. (b) If the City changes its fiscal year, it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. (c) The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific referenced to any docwnent (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. Section 12.2 Material Event Notices. (a) The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Certificates, if such event is material within the meaning of the federal securities laws: · (i) principal and interest payment delinquencies; ws2oontooJ Dallas 988799_3.DOC -30- (ii) nonpayment related defaults; (iii) unscheduled draws on debt service reserves reflecting financial difficulties; (iv) unscheduled draws on credit enhancements reflecting financial difficulties; (v) substitution of credit or liquidity providers, or their failure to perform; (vi) adverse tax opinions or events affecting the tax-exempt status of the Certificates; (vii) modifications to rights of Owners; (viii) redemption calls; (ix) defeasances; (x) release, substitution, or sale of property securing repayment of the Certificates; and (xi) rating changes. (b) The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with Section 12.1 of this Ordinance by the time required by such Section. Section 12.3 Limitations. Disclaimers and Amendments. (a) The City shall be obligated to observe and perfonn the covenants specified in this Article for so long as, but only for so long as, the City remains an "obligated person" with respect to the Certificates within the meaning of the Rule, except that the City in any event will give notice of any redemption calls and any defeasances that cause the City to be no longer an "obligated person." (b) The provisions of this Article are for the sole benefit of the Owners and beneficial owners of the Certificates, and nothing in this Article, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Article and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the City's financial results) condition, or prospects or hereby undertake to update any infonnation provided in accordance with this Article or othetWise, except as expressly provided herein. The City does not make any representation or warranty concerning such infonnation or its usefulness to a decision to invest in or sell Certificates at any future date. UJB200nl003 Dallas 988799J.DOC -31- ) UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE OWNER OR BENEFICIAL OWNER OF ANY CERTIFICATE OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS ARTICLE, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMU~ OR SPECIFIC PERFORMANCE. (c) No default by the City in observing or performing its obligations under this • Article shall constitute a breach of or default under the Ordinance for purposes of any other provisions of this Ordinance. (d) Nothing in this Article is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. (e) The provisions of this Article may be amended by the City from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in.the identity, nature, status, or type of operations of the City, but only if (i) the provisions of this Article, as so amended, would have permitted an underwriter to purchase or sell Certificates in the primary offering of the Certificates 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 circwnstances, and (ii) either (A) the Owners of a majority in aggregate principal amount (or any greater amount required by any other provisions of this Ordinance that authorizes such an amendment) of the outstanding Certificates consent to such amendment or (B) an entity or individual person that is unaffiliated with the City (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interests of the Owners and beneficial owners of the Certificates. If the City so amends the provisions of this Article, it shall include with any amended financial infonnation or operating data next provided in accordance with Section 12.1 an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in type of financial information or operating data so provided. (f) Any filing required to be made pursuant to this Article XII may be made through the facilities of DisclosureUSA or such other central post office as may be approved in writing by the SEC for such pwpose. Any such filing made through such central post office will be deemed to have been filed with each NRMSIR and SID or MSRB as if such filing had been made directly to such entity. ARTICLE XIII AMENDMENTS; ATTORNEY GENERAL MODIFICATION Section 13.1 Amendments. This Ordinance shall constitute a contract with the Owners, be binding on the City. and shall not be amended or repealed by the City so long as any Certificate remains outstanding wmooniOOJ Dlllla$ 988799.J.OOC -32- 'I except as permitted in this Section. The City may, without consent of or notice to any Owners, from time to time and at any time, amend this Ordinance 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 City may, with the written consent of the Owners of the Certificates holding a majority in aggregate principal amount of the Certificates then outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided tha4 without the consent of all Owners of outstanding Certificates, no such amendmen4 addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates, 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 Certificates, (ii) give any preference to any Certificate over any other Certificate, or (iii) reduce the aggregate principal amount of Certificates required to be held by Owners for consent to any such amendment, addition, or rescission. Section 13.2 Attorney General Modification. In order to obtain the approval of the Certificates by the Attorney General of the State of Texas, any provision of this Ordinance may be modified, altered or amended after the date of its adoption if required by the Attorney General in connection with the Attorney General's examination as to the legality of the Certificates and approval thereof in accordance with the applicable law. Such changes, if any, shall be provided to the City Secretary and the City Secretary shall insert such changes into this Ordinance as if approved on the date hereof. WB200J71003 Dallas 988799.J.DOC -33- ' } PRESENTED, FINALLY PASSED AND APPROVED, AND EFFECTIVE on the 25th day of August, 2005, at a regular meeting of the City Council of the City of Lubbock, Texas. ·1 ATTEST: ) [SEAL] APPROVED AS TO CONTENT: By: By: CHISON, Bond Counsel LUB200nt003 Dallas Ordinance • lubbock CO 200S _2 -34- ) EXHIBIT A DESCRIPTION OF ANNUAL DISCLOSURE OF FINANCIAL INFORMATION The following information is referred to in Article XII of this Ordinance. Annual Financial Statements and Operating Data The financial information and operating data with respect to the City to be provided annually in accordance with such Section are as specified (and included in the Appendix or other headings of the Official Statement referred to) below: 1. The portions of the financial statements of the City appended to the Official Statement as Appendix B, but for the most recently concluded fiscal year. 2. . Statistical and financial data set forth in Tables 1-6 and SA-15 of the Official Statement. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the financial statements referred to in Paragraph l above. LUB2oonJ003 Dallas 988799_3.DOC A-1 ) ) LUB2oonl003 Dallas I 008704_1.DOC TRANSCRIPT OF PROCEEDINGS pertaining to $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES2005 Dated: August 15,2005 Delivered: September 29, 2005 Vinson &£lkins ATTORNEYS AT LAW VINSON It EU<IHS LLP, 3700 TRAMMELL CAOW CEHTEA 2001 ROSS AVENUE DAlLAS, TEXAS 75201-2975 TB.EPHONE (214) ~7700 VOICe MAll (214) 2»'7999 FAX (214) 22~7716 ' ) ) ) DOCUMENT $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES200S TABLE OF DOCUMENTS I. BOND DOCUMENTS 1.1 Certified Resolution and Amending Resolution Authorizing Publication ofNotice oflntent TAB NO. 1 1.2 Affidavit of Publication 2 1.3 Certified Ordinance Providing for the Issuance of the Certificates 3 1.4 Paying Agent/Registrar Agreement 4 1.5 Preliminary Official Statement 5 1.6 Official Statement 6 1. 7 Bond Purchase Contract 1.8 Specimen Bonds 1.9 Insurance Commitment 1.10 Insurance Policy II. CERTIFICATES. LEITERS AND RECEIPTS 2.1 General and No-Litigation Certificate 2.2 Instruction Letter to Paying Agent 2.3 Attorney General/Comptroller Instruction Letter 2.4 Federal Tax Certificate 2.5 Form 8038-G and Evidence of Transmittal 2.6 Receipt and Delivery Certificate of Paying Agent/Registrar 2. 7 Certificate of Insurer LUB200nl003 Dallas 1006922 .. J .OOC 7 8 9 10 11 12 13 14 15 16 17 > ) ) ) ) DOCUMENT 2.8 Rating Letters 2.9 Certificate Pursuant to Bond Purchase Contract Ill. OPINIONS 3.1 Approving Opinion of Bond Counsel 3.2 Supplemental Opinion of Bond Counsel 3.3 Opinion of Underwriter's Counsel 3.4 Opinion of Attorney General and Comptroller's Registration Certificate 3.5 Opinion of Insurer's Counsel 3.6 Reliance Letter to Insurer 3. 7 Opinion of City Attorney LUB200n1003 1006922J.DOC -2- TAB NO. 18 19 20 21 22 23 24 25 26 MINUTES AND CERTIFICATION PERTAINING TO PASSAGE OF A RESOLUTION STATE OF TEXAS § COUNTY OF LUBBOCK § CITY OF LUBBOCK § On the 23rd day of June, 2005, the City Council of the City of Lubbock, Texas, convened in a regular meeting at the regular meeting place thereof: the meeting being open to the public and notice of said meeting, giving the date, place and subject thereof: having been posted as prescribed by Chapter 551, Texas Govenunent Code, as amended; and the roll was called of the duly constituted officers and members of the City Council, which officers and members are as follows: Marc McDougal, Mayor Tom Martin, Mayor Pro Tern Linda DeLeon Floyd Price Gary 0. Boren Phyllis S. Jones Jim Gilbreath ) ) ) ) ) Members of the Council and all of said persons were present, thus constituting a quorum. Whereupon, among other business, a written Resolution bearing the following caption was introduced: A RESOLUTION AUTHORIZING REIMBURSEMENT OF PRELIMINARY EXPENDITURES FROM THE PROCEEDS OF GENERAL OBLIGATION BONDS-AND TAX AND WATERWORKS SYSTEM REVENUE CERTIFICATES OF OBLIGATION AND AUTHORIZING PUBLICATION OF NOTICES OF INTENTION TO ISSUE AND SELL SUCH BONDS AND CERTIFICATES OF OBLIGATION The Resolution, a full, true and correct copy of which is attached hereto, was read and reviewed by the City Council. Thereupon, it was duly moved and seconded in four sub-motions and votes that the Resolution be passed and adopted. The Presiding Officer put each sub-motion to a vote of the members of the City Council, and the Resolution was passed and adopted by four sub-votes as follows: Sub-vote relating to Certificates of Obligation project (iv): North Overton TIF hnprovements AYES: 6 NOES: 0 ABSTENTIONS: 1 LUB200171003 Dallas 1007163_J.DOC Sub-vote relating to Certificates of Obligation projects (i) -(iii) and (vi): water, sewer and street improvements AYES: 7 NOES: 0 ABSTENTIONS: 0 Sub-vote relating to General Obligation Bonds portion of Resolution: AYES: 7 NOES: 0 ABSTENTIONS: 0 Sub-vote relating to Certificates of Obligation projects (v), (vii) and (viii) and any portion of Resolution relating to Certificates of Obligation not previously adopted AYES: 7 NOES: 0 ABSTENTIONS: 0 LUB200n!003 Dallas 1007163J.DOC -2- MINUTES APPROVED AND CERTIFIED TO BE TRUE AND CORRECT) and to correctly reflect the duly constituted officers and members of the City Council of said City) and the attached and following copy of said Resolution is hereby certified to be a true and correct copy of an official copy thereof on file among the official records of the City) all on this the 25th day of August: ~ 2005. citY;cretary ~ City of Lubbock, Texas [SEAL) LUB200171003 Dallas 1007163_1.DOC -2- A RESOLUTION AUTHORIZING REIMBURSEMENT OF PRELIMINARY EXPENDITURES FROM THE PROCEEDS OF GENERAL OBLIGATION BONDS AND TAX AND WATERWORKS SYSTEM REVENUE CERTIFICATES OF OBLIGATION AND AUTHORIZING PUBLICATION OF NOTICES OF INTENTION TO ISSUE AND SELL SUCH BONDS AND CERTIFICATES OF OBLIGATION WHEREAS, the City of Lubbock, Texas (the "City"), pursuant to Subchapter C, Chapter 271 , Texas Local Government Code, as amended, is authorized to issue its certificates of obligation (the "Certificates") for the purpose of paying contractual obligations to be incurred for the purposes set forth in Exhibit A hereto; WHEREAS, the City Council of the City has found and detennined that a notice of intention to issue certificates of obligation should be published in accordance with the requirements of applicable law; WHEREAS, the City desires to reimburse itself for the costs associated with the projects listed on Exhibit A hereto (the "Certificate Projects") from the proceeds of the Certificates to be issued subsequent to the date hereof; WHEREAS, in addition to the Certificates, the City intends to issue its general obligation bonds (the "Bonds") for the purposes of (i) constructing street improvements including drainage, curbs, gutters, landscaping, sidewalks, curb ramps, utility line relocation and traffic signalization and the acquisition of land and rights-of-way therefor and (ii) acquiring and improving land for park purposes (collectively with item (i}, the "Bond Projects"); WHEREAS, the City desires to reimburse itself for the costs associated with the Bond Projects from the proceeds of the Bonds issued subsequent to the date hereof; and WHEREAS, the City Council has found and determined that a notice of intention to issue general obligation bonds should be published in accordance with the provisions of the City Charter; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK, TEXAS, THAT: Section 1. The findings and determinations set forth in the preambles hereto are hereby incorporated by reference for all purposes. Section 2. The City Secretary of the City is hereby authorized and directed to issue a notice of intention to issue the Certificates in substantially the form set forth in Exhibit A hereto incorporated herein by reference for all purposes. The notice as set forth in Exhibit A shall be published once a week for two consecutive weeks, the date of the first publication being not less than the fourteenth (14th) day prior to the date set forth in the notice for passage of the ordinance authorizing the Certificates. Such notice shall be published in a newspaper of general circulation in the area of the City of Lubbock, Texas. LUB20011 Dallas 972990_2.DOC Section 3. The City Secretary of the City is hereby authorized and directed to issue a notice of intention to sell general obligation bonds in substantially the fonn set forth in Exhibit B hereto incorporated herein by reference for all purposes. The notice as set forth in Exhibit B shall be published once a week for a period of thirty (30) days prior to the date set forth in the notice for passage of the ordinance authorizing the Bonds. Such notice shall be published in a newspaper of general circulation in the area of the City of Lubbock, Texas. Section 4. The City reasonably expects to reimburse itself for all costs that have been or will be paid subsequent to the date that is 60 days prior to the date hereof and (i) that are to be paid in connection with the Certificate Projects, from proceeds of the Certificates and (ii) that are to be paid in connection with the Bond Projects, from proceeds of the Bonds. Section 5. The City reasonably expects that the maximum principal amount of the Certificates issued to reimburse the City for the costs associated with the Certificate Projects will not exceed $37,500,000 and the maximum principal amount of the Bonds issued to reimburse the City for the costs associated with the Bond Projects will not exceed $7,000,000. Section 6. This resolution shall take effect from and after the date of its passage. FINALLY PASSED, APPROVED AND EFFECTIVE this 23rd day of June, 2005. CITY OF LUBBOCK, TEXAS LUB200fl Dallas 972990_2.00C -2- Exhibit A NOTICE OF INTENTION LUBBOCK, TEXAS TAX SYSTEM REVENUE OBLIGATION, SERIES 2005 TO ISSUE CITY OF AND WATERWORKS CERTIFICATES OF NOTICE IS HEREBY GIVEN that on July 28, 2005, the City Council of the City of Lubbock, Texas, at 9:00 a.m. at a regular meeting of the City Council to be held in the City Council Chambers at the Municipal Complex, 1625 13th Street, Lubbock, Texas, the regular meeting place of the City Council, intends to pass an ordinance authorizing the issuance of not to exceed $37,500,000 principal amount of certificates of obligation for the purpose of paying contractual obligations to be incurred for the following purposes, to wit: (i) improvements and extensions to the City's Sewer System, including relocation of existing sewer lines~ (ii) engineering and other professional services for developing a water resources plan to determine the most efficient and effective use of treated effluent; (iii) improvements and extensions to the City's Waterworks System, including relocation of existing water lines; (iv) water, sewer, electric, drainage, park and street improvements and extensions, including utility relocations, sidewalks, street lighting and landscaping, all located within the City's North Overton Tax Increment Financing Zone; (v) improvements and extensions to City streets including sidewalks, street lighting, landscaping and utility improvements, extensions and relocations (collectively with items (i)-(iv), the "Project") and (vi) payment of professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. The Certificates shall bear interest at a rate not to exceed fifteen percent (15%) per annum and shall have a maximum maturity date of not later than forty (40) years after their date. Said Certificates shall be payable from the levy of a direct and continuing ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City sufficient to pay the interest on this series of Certificates as due and to provide for the payment of the principal thereof as the same matures, as authorized by Subchapter C, Chapter 271, Texas Local Government Code, as amended, and from all or a part of the surplus net revenues of the City's Waterworks System, such pledge of surplus net revenues being limited to $500. THIS NOTICE is given in accordance with law and as directed by the City Council of the City of Lubbock, Texas. GIVEN THIS June 23,2005. LUB200/1 Dallas 972990_.2.DOC A-I lsi Rebecca Garza City Secretary City of Lubbock, Texas Exhibit B NOTICE OF SALE OF CITY OF LUBBOCK, TEXAS GENERAL OBLIGATION BONDS, SERIES 2005 On the 28th day of July, 2005, the City Council of the City of Lubbock, Texas, plans to sell the above-referenced general obligation bonds in the maximum amount not to exceed $7,000,000 during its regular meeting scheduled to begin at 9:00 a.m. to be held in the City Council Chambers at the Municipal Complex, 1625 13th Street, Lubbock, Texas. A complete description of the bonds being authorized and sold may be obtained from the Division of Finance, City of Lubbock, P.O. Box 2000, Lubbock, Texas 79457; or from First Southwest Company, 1001 Main Street, Suite 802, Lubbock, Texas 79401, Financial Advisors to the City. LU8200/l Dallas 972990_2.DOC B-1 lsi Rebecca Garza City Secretary City of Lubbock, Texas No Text MINUTES AND CERTIFICATION PERTAINING TO PASSAGE OF A RESOLUTION STATEOFTEXAS § COUNTY OF LUBBOCK § CITY OF LUBBOCK § On the 28th day of July, 2005, the City Council of the City of Lubbock, Texas, convened in a regular meeting at the regular meeting place thereof, me meeting being open to the public and notice of said meeting, giving the date, place and subject thereof) having been posted as prescribed by Chapter 551, Texas Govenunent Code, as amended; and the roll was called of the duly constituted officers and members of the City Council, which officers and members are as follows: Marc McDougal, Mayor Tom Martin, Mayor Pro Tern Linda DeLeon Floyd Price Gary 0. Boren Phyllis S. Jones Jim Gilbreath ) ) ) ) ) Members of the Cowtcil and all of said persons were present) thus constituting a quorum. Whereupon, among other business, a written Resolution bearing the following caption was introduced: A RESOLUTION AMENDING THE RESOLUTION AUTHORIZING REIMBURSEMENT OF PRELIMINARY EXPENDITURES FROM THE PROCEEDS OF TAX AND WATERWORKS SYSTEM REVENUE CERTIFICATES OF OBLIGATION AND AUTHORIZING PUBLICATION OF NOTICE OF INTENTION TO ISSUE AND SELL SUCH CERTIFICATES OF OBLIGATION The Resolution, a full, true and correct copy of which is attached hereto, was read and reviewed by the City Council. Thereupon, it was duly moved and seconded that the Resolution be passed and adopted. The Presiding Officer put the motion to a vote of the members of the City Council, and the Resolution was passed and adopted by the following vote: AYES: 6 NOES: 0 ABSTENTIONS: 1 UJB200nt 002 Dallas 996692_1.DOC MINUTES APPROVED AND CERTIFIED TO BE TRUE AND CORRECT, and to correctly reflect the duly constituted officers and members of the City Council of said City, and the attached and following copy of said Resolution is hereby certified to be a true and correct copy of an official copy thereof on file among the official records of the City, all on this the 25th day of August , 2005. City Secretary City of Lubbock, Texas [SEAL] LUB200nt003 Dallas 1007163_l.DOC -2- A RESOLUTION AMENDING THE RESOLUTION AUTHORIZING REIMBURSEMENT OF PRELIMINARY EXPENDITURES FROM THE PROCEEDS OF TAX AND WATERWORKS SYSTEM REVENUE CERTIFICATES OF OBLIGATION AND AUTHORIZrNG PUBLICATION OF NOTICE OF lNTENTION TO ISSUE AND SELL SUCH CERTIFICATES OF OBLIGATION WHEREAS, on June 23, 2005, the City Council (the "City Council") of the City of Lubbock, Texas (the "City''), adopted a resolution (the "Prior Resolution") determining that a notice of intention to issue certificates of obligation (the "Certificates") should be published in accordance with the requirements of applicable law; WHEREAS, the City Council now desires to amend the notice (the "Prior Notice") previously authorized to revise the description of the projects to be paid for with the proceeds of the Certificates and to change the date of sale of the Certificates; WHEREAS, the City Council desires that the notice attached as Exhibit A hereto be published in accordance with applicable law in lieu of the Prior Notice; and WHEREAS, the City desires to reimburse itself for the costs associated with the projects listed on Exhibit A hereto (the "Certificate Projects") from the proceeds of the Certificates to be issued subsequent to the date hereof; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK, TEXAS, THAT: Section 1. The findings and determinations set forth in the preambles hereto are hereby incorporated by reference for all purposes. Section 2. The Prior Resolution is hereby amended to provide that the City Secretary of the City is hereby authorized and directed to issue a notice of intention to issue the Certificates in substantially the fonn set forth in Exhibit A hereto incorporated herein by reference for all purposes. The notice as set forth in Exhibit A shall be published once a week for two consecutive weeks, the date of the first publication being not less than the fourteenth (14th) day prior to the date set forth in the notice for passage of the ordinance authorizing the Certificates. Such notice shall be published in a newspaper of general circulation in the area of the City of Lubbock, Texas. Section 3. The City reasonably expects to reimburse itself for all costs that have been or will be paid subsequent to the date that is 60 days prior to the date hereof and that are to be paid in connection with the Certificate Projects, from proceeds of the Certificates. Section 4. The City reasonably expects that the maximwn principal amount of the Certificates issued to reimburse the City for the costs associated with the Certificate Projects will not exceed $49,000,000. Section 5. This resolution shall take effect from and after the date of its passage. LUB200nl003 Dallas 991297_1.DOC Exhibit A NOTICE OF INTENTION TO ISSUE CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 NOTICE IS HEREBY GIVEN that on August 25, 2005, the City Council of the City of Lubbock, Texas, at 9:00 a.m. at a regular meeting of the City Council to be held in the City Council Chambers at the Municipal Complex, 1625 13th Street, Lubbock, Texas, the regular meeting place of the City Council, intends to pass an ordinance authorizing the issuance of not to exceed $49,000,000 principal amount of certificates of obligation for the purpose of paying contractual obligations to be incurred for the following pwposes, to wit: (i) improvements and extensions to the City's Sewer System, including relocation of existing sewer lines; (ii) engineering and other professional services for developing a water resources plan to determine the most efficient and effective use of treated effluent; (iii) improvements and extensions to the City's Waterworks System, including relocation of existing water lines; (iv) water, sewer, electric, drainage, park and street improvements and extensions, including utility relocations, sidewalks, street lighting and landscaping, all located within the City's North Overton Tax Increment Financing Zone; (v) park improvements, including construction of athletic fields; (vi) improvements and extensions to City streets including sidewalks, street lighting, landscaping and utility improvements, extensions and relocations; (vii) improvements to Lubbock Preston Smith International Airport, including construction of a parking lot; (viii) improvements and extensions to the City's Electric Light and Power System (collectively with items (i)-(vii), the "Project") and (ix) payment of professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. The Certificates shall bear interest at a rate not to exceed fifteen percent (15%) per annum and shall have a maximum maturity date of not later than forty ( 40) years after their date. Said Certificates shall be payable from the levy of a direct and continuing ad valorem tax, levied within the limits prescribed by law, against all taxable property within the City sufficient to pay the interest on this series of Certificates as due and to provide for the payment of the principal thereof as the same matures, as authorized by Subchapter C, Chapter 271, Texas Local Government Code, as amended, and from all or a part of the surplus net revenues of the City's Waterworks System, such pledge of surplus net revenues being limited to $500. THIS NOTICE is given in accordance with law and as directed by the City Council of the City of Lubbock, Texas. GIVEN THIS July 28, 2005. LUB2oon J003 Dallas 991297_1.DOC A-I lsi Rebecca Garza City Secretary City of Lubbock, Texas THE STATE OF TEXAS COUNTY OF LUBBOCK Donna M. Bates Before me Notary Public in and for Lubbock day personally appeared Tameishtt p 6well of the SouthVI Corporation, publishers of the Lubbock Avalanche-Journal -Morning, and Sunday, who beir did depose and say that said newspaper has been published continuously for more than fift the first insertion of this. ____ Le__;;g;_a_I_N_o_ti_ce __________________ _ __________ No .. _____________ .at Lubbock County, Tex printed copy of the Legal Netiee is a trye copy of the original and was pr Avalanche-Journal on the following dates: '1j31 _05 a..n.d_ ~/'1{ OS I ) ~·l " , <6? :J.. lJJ..(U.d..IJ ~ ~~~ ~.MM&fh NOTARY PUBLIC in and for tl My Commission Expires~ Inside Classified Sales Manager LUBBOCK AVALANCHE-JOURNAL Morris Communication Corporation FORM 58·10 MINUTES AND CERTIFICATION PERTAINING TO PASSAGE OF AN ORDINANCE STATE OF TEXAS § COUNTY OF LUBBOCK § CITY OF LUBBOCK § On the 25th day of August, 2005, the City Council of the City of Lubbock, Texas, convened in a regular meeting at the regular meeting place thereof, the meeting being open to the public and notice of said meeting, giving the date, place and subject thereof, having been posted as prescribed by Chapter 551, Texas Government Code, as amended; and the roll was called of the duly constituted officers and members of the City Council, which officers and members are as follows: Marc McDougal, Mayor Tom Martin, Mayor Pro Tern Linda DeLeon Floyd Price Gary 0 . Boren Phyllis S. Jones Jim Gilbreath ) ) } ) ) Members of the Council and all of said persons were present, thus constituting a quorum. Whereupon, among other business, a written Ordinance bearing the following caption was introduced: AN ORDINANCE PROVIDING FOR THE ISSUANCE OF CITY OF LUBBOCK, TEXAS, TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005, IN THE AGGREGATE PRINCIPAL AMOUNT OF $46,525,000; LEVYING A TAX AND PLEDGING SURPLUS WATERWORKS SYSTEM SURPLUS REVENUES IN PAYMENT THEREOF; APPROVING THE OFFICIAL STATEMENT; APPROVING EXECUTION OF A PURCHASE CONTRACT; ENACTING OTHER PROVISIONS RELATING THERETO The Ordinance, a full, true and correct copy of which is attached hereto, was read and reviewed by the City Council. Thereupon, it was duly moved and seconded that the Ordinance be passed and adopted. · The Presiding Officer put the motion to a vote of the members of the City Council, and the Ordinance was passed and adopted by the following vote: AYES: 6 NOES: 0 ABSTENTIONS: 1 LUB200ni003 Dallas l007043_1.DOC MINUTES APPROVED AND CERTIFIED TO BE TRUE AND CORRECT, and to correctly reflect the duly constituted officers and members of the City Council of said City, and the attached and following copy of said Ordinance is hereby certified to be a true and correct copy of an official copy thereof on file among the official records of the City, all on this the 25th day of August, 2005. City of Lubbock, Texas [SEAL] LUB20MI003 Dallas 1007043_l.DOC -2- LUB200nt003 Dallas 988799_3.00C ORDINANCE relating to $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 Dated: August 15, 2005 Adopted: August 25, 2005 Section 1.1 Section 1.2 Section 1.3 Section 1.4 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND OTHER PRELIMINARY MATTERS Definitions ............................................................................................................... 1 Findings .................................................................................................. : ................ 4 Table of Contents, Titles, and Headings ................................................................. 4 Interpretation ........................................................................................................... 4 ARTICLE II SECURITY FOR THE CERTIFICATES; INTEREST AND SINKING FUND; PRIOR LIEN OBLIGATIONS Section 2.1 Payment of the Certificates ..................................................................................... 4 Section 2.2 Interest and Sinking Fund ....................................................................................... 6 Section 3.1 Section 3.2 Section 3.3 Section 3.4 Section 3.5 Section 3.6 Section 3.7 Section 3.8 Section 3.9 Section 3.10 ·Section 3.11 Section 3.12 Section4.1 Section 4.2 Section4.3 Section 4.4 Section 4.5 LUB2oon1oo3 ARTICLE III AUTHORIZATION; GENERAL TERMS AND PROVISIONS REGARDING THE CERTIFICATES Authorization ........................................................................................................... 6 Date, Denomination, Maturities, and Interest ......................................................... 6 Medium, Method, and Place of Payment ................................................................ 7 Execution and Registration of Certificates .............................................................. 8 Ownership ............................................................................................................... 9 Registration, Transfer, and Exchange ..................................................................... 9 Cancellation ........................................................................................................... 1 0 Temporary Certificates .......................................................................................... 10 Replacement Certificates ....................................................................................... 11 Book-Entry-Only System ...................................................................................... 12 Successor Securities Depository; Transfer Outside Book-Entry-Only System .... 13 Payments to Cede & Co ........................................................................................ 13 ARTICLE IV REDEMPTION OF CERTIFICATES BEFORE MATURITY Redentption ........................................................................................................... 13 Optional Reden1ption ............................................................................................ 13 Mandatory Sinking Fund Redemption .................................................................. 14 Partial Redentption ................................................................................................ l4 Notice ofRedentption to Owners .......................................................................... l5 Dallas 988799_.3.DOC (i) Section 4.6 Payment Upon Redemption ............................................................. : .................... 15 Section 4. 7 Effect of Redemption ............................................................................................ 15 Section 4.8 Lapse of Payment .................................................................................................. 16 Section 5.1 Section 5.2 Section 5.3 Section 5.4 Section 5.5 Section 5.6 Section 5.7 Section 6.1 Section 6.2 Section 6.3 Section 6.4 Section 6.5 ARTICLEV PAYING AGENT/REGISTRAR Appointment of Initial Paying Agent/Registrar .................................................... 16 Qualifications ........................................................................................................ 16 Maintaining Paying Agent/Registrar ..................................................................... 16 Termination ........................................................................................................... 16 Notice of Change to Owners ................................................................................. 16 Agreement to Perform Duties and Functions ........................................................ 17 Delivery ofRecords to Successor ......................................................................... 17 ARTICLE VI FORM OF THE CERTIFICATES Form Generally ..................................................................................................... 17 Form of the Certificates ......................................................................................... 17 CUSIP Registration ............................................................................................... 24 Legal Opinion ........................................................................................................ 24 Bond Insurance ...................................................................................................... 24 ARTICLE VII SALE AND DELIVERY OF CERTIFICATES; DEPOSIT OF PROCEEDS Section 7.1 Section 7.2 Section 7.3 Sale of Certificates; Official Statement ................................................................. 24 Control and Delivery of Certificates ..................................................................... 25 Deposit of Proceeds ............................................................................................... 25 ARTICLE VIII INVESTMENTS Section 8.1 Investinents ............................................................................................................ 26 Section 8.2 Investment Income ................................................................................................ 26 Section 9.1 Section 9.2 Section 9.3 WB200n1003 ARTICLE IX PARTICULAR REPRESENTATIONS AND COVENANTS Payntent of the Certificates ................................................................................... 26 Other Representations and Covenants ................................................................... 26 Provisions Concerning Federal Income Tax Exclusion ........................................ 27 Dallas 988799_3.DOC (ii) Section 9.4 Section 9.5 Section 9.6 Section 9.7 Section 9.8 Section 9.9 Section 9.1 0 No Private Use or Payment and No Private Loan Financing ................................ 27 No Federal Guaranty ............................................................................................. 27 Certificates Are Not Hedge Bonds ........................................................................ 27 No-Arbitrage Covenant ......................................................................................... 28 Arbitrage Rebate ................................................................................................... 28 Information Reporting ........................................................................................... 28 Continuing Obligation ........................................................................................... 29 ARTICLE X DEFAULT AND REMEDIES Section 10.1 Events ofDefault. .................................................................................................. 29 Section 10.2 Remedies for Default ............................................................................................. 29 Section 10.3 Remedies Not Exclusive ....................................................................................... 29 ARTICLE XI DISCHARGE Section 11.1 Discharge ............................................................................................................... 30 ARTICLE XII CONTINUING DISCLOSURE UNDERTAKING Section 12.1 Armual Reports ...................................................................................................... 30 Section 12.2 Material Event Notices .......................................................................................... 30 Section 12.3 Limitations) Disclaimers and Amendments .......................................................... 31 ARTICLE XIII AMENDMENTS; ATTORNEY GENERAL MODIFICATION Section 13.1 Amendments .......................................................................................................... 32 Section 13.2 Attorney General Modification ............................................................................. 33 Exhibit A-Description of Annual Disclosure ofFinancial Information .................................... A-I lU8200171003 Dallas 988799_3.DOC (iii) AN ORDINANCE PROVIDING FOR THE ISSUANCE OF CITY OF LUBBOCK, TEXAS, TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005, IN THE AGGREGATE PRINCIPAL AMOUNT OF $46,525,000; LEVYING A TAX AND PLEDGING SURPLUS WATERWORKS SYSTEM REVENUES IN PAYMENT THEREOF; APPROVING THE OFFICIAL STATEMENT; APPROVING EXECUTION OF A PURCHASE CONTRACT; ENACTING OTHER PROVISIONS RELATING THERETO WHEREAS, under the provisions of Subchapter C, Chapter 271, Texas Local Govenunent Code, as amended, the City of Lubbock, Texas (the "City"), after giving proper notice, is authorized to issue and sell for cash its certificates of obligation (herein defined as the "Certificates") that are secured by and payable from the ad valorem taxes and other revenues specified in Article II of this Ordinance, and that are issued in the amount, for the purposes, and with the provisions set forth in Section 3.1 of this Ordinance; WHEREAS, pursuant to a resolution heretofore passed by the City Council, notice of intention to issue the Certificates was published in a newspaper of general circulation in the City in accordance with applicable law; WHEREAS, no petition has been filed with the City Secretary, any member of the City Council or any other official of the City, protesting the issuance of the Certificates; WHEREAS, the City Council is now authorized and empowered to proceed with the issuance and sale of the Certificates, and has found and detennined that it is necessary and in the best interests of the City and its citizens that it issue the Certificates in accordance with the tenns and provisions of this Ordinance; and WHEREAS, the meeting at which this Ordinance is considered is open to the public as required by law, and public notice of the time, place, and purpose of said meeting was given as required by Chapter 551, Texas Goverrunent Code, as amended; therefore, BE IT ORDAINED BY TilE CITY COUNCIL OF THE CITY OF LUBBOCK: ARTICLE I DEFINITIONS AND OTHER PRELIMINARY MATIERS Section 1.1 Definitions. Unless otherwise expressly provided or unless the context clearly requires otherwise in this Ordinance, the following terms shall have the meanings specified below: "Certificate" means any of the Certificates. "Certificate Date" means the date designated as the initial date of the Certificates by Section 3.2(a) of this Ordinance. LUB200nl003 Dallas 988799_3.DOC "Certificates" means the certificates of obligation authorized to be issued by Section 3.1 of this Ordinance and designated as "City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005." "City" means the City of Lubbock, Texas. "Closing Date" means the date of the initial delivery of and payment for the Certificates. "Code" means the Internal Revenue Code of 1986, as amended, including applicable regulations, published rulings, and court decisions. "Designated Paymentlfransfer Office" means (i) with respect to the initial Paying Agent/Registrar named in this Ordinance, the Designated Paymentlfransfer Office as designated in the Paying Agent/Registrar Agreement, or at such other location designated by the Paying Agent/Registrar and (ii) with respect to any successor Paying Agent/Registrar, the office of such successor designated and located as may be agreed upon by the District and such successor. "DTC" means The Depository Trust Company of New York, New York, or any successor securities depository. "DTC Participant" shall mean 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. "Event of Default" means any event of default as defined in Section 10.1 of this Ordinance. "Fiscal Year'' means such fiscal year as shall from time to time be set by the City Council. "Gross Revenues" means, with respect to any period, all income, revenues and receipts received from the operation and ownership of the System. "Initial Certificate" means the initial certificate authorized by Section 3.4 of this Ordinance. "Interest and Sinking Fund" means the interest and sinking fund established by Section 2.2 of this Ordinance. "Interest Payment Date" means the date or dates upon which interest on the Certificates is scheduled to be paid wttil their respective dates of maturity or prior redemption, such dates being February 15 and August 15 of each year, conunencing February 15,2006. "MSRB" means the Municipal Securities Rulemaking Board. ''NRMSIR" means each person whom the SEC or its staff has detennined to be a nationally recognized municipal securities information repository within the meaning of the Rule from time to time. LUB200nl003 Dallas 988799_3.DOC -2- "Net Revenues" means the Gross Revenues of the System, with respect to any period, after deducting the System's Operating and Maintenance Expenses during such period. "Operating and Maintenance Expenses" means all reasonable and necessary expenses directly related and attributable to the operation and maintenance of the System, including, but not limited to, the costs of insurance, the purchase and carrying of stores, materials, and supplies, the payment of salaries and labor, and other expends reasonably and properly charged, under generally accepted accounting principles, to the operation and maintenance of the System or by statute deemed to be a first lien against the Gross Revenues. Depreciation charges on equipment, machinery, plants and other facilities comprising the System and expenditures classed under generally accepted accowtting principles as capital expenditures shall not be considered as "Operating and Maintenance Expenses" for purposes of determining "Net Revenues." "Owner" means the person who is the registered owner of a Certificate or Certificates, as shown in the Register. "Paying Agent/Registrar" means initially JPMorgan Chase Bank, National Association, or any successor thereto as provided in this Ordinance. "Prior Lien Obligations" means all bonds or other similar obligations of the City presently outstanding or that may be hereafter issued, payable in whole or in part from and secured by a first lien on and pledge of the Net ·Revenues of the System or by a lien on and pledge of the Net Revenues subordinate to a first lien on and pledge of the Net Revenues but superior to the lien on and pledge of the Surplus Rev~ues made for the Certificates. · "Project" means the purposes for which the Certificates are issued as set forth in Section 3.1. "Record Date" means the last business day of the month next preceding an Interest Payment Date. "Register" means the Register specified in Section 3.6(a) of this Ordinance. "Representations Letter" means the Blanket Letter of Representations between the City andDTC. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Conunission. "SID" means any person designated by the State of Texas or an authorized department, office or agency thereof, as and determined by the SEC or its staff to be a state information depository within the meaning of the Rule from time to time. "Surplus Revenues" means the Net Revenues of the System in an amount not to exceed $500 remaining after payment of all debt service, reserve and other requirements in cOimection with the City's Prior Lien Obligations. · LUB200nt003 Dallas 9887993.00C -3- "System" means the City's Watervvorks System being all properties, facilities and plants currently owned, operated and maintained by the City for the supply, treatment, transmission and distribution of treated, potable water, together with all future extensions, improvements, replacements and additions thereto. "Term Certificates" means the Certificates maturing in 2020 and 2022. "Unclaimed Payments" means money deposited with the Paying Agent/Registrar for the payment of principal of or interest on the Certificates as the same come due and payable or money set aside for the payment of Certificates duly called for redemption prior to maturity. "Underwriters'' means A.G. Edwards & Sons, Inc., RBC Dain Rauscher Inc. and M.E. Allison & Co., Inc. Section 1.2 Findings. The declarations, determinations, and findings declared, made, and found in the preamble to this Ordinance are hereby adopted, restated, and made a part of the operative provisions hereof Section 1.3 Table of Contents, Titles, and Headings. The table of contents, titles, and headings of the Articles and Sections of this Ordinance have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof and shall never be considered or given any effect in construing this Ordinance or any provision hereof or in ascertaining intent, if any question of intent should arise. Section 1.4 lntemretation. (a) Unless the context requires otherwise, words of the masculine gender shall be construed to include correlative words of the feminine and neuter genders and vice versa, and words of the singular number shall be construed to include correlative words of the plural number and vice versa. · (b) This Ordinance and all the terms and provisions hereof shall be liberally construed to effectuate the purposes set forth herein. ARTICLE II SECURITY FOR THE CERTIFICATES; INTEREST AND SINKING FUND; PRIOR LIEN OBLIGATIONS Section 2.1 Payment of the Certificates. (a) Pursuant to the authority granted by the Texas Constitution and laws of the State of Texas, there shall be levied and there is hereby levied for the current year and for each succeeding year thereafter while any of the Certificates or any interest thereon is outstanding and LUB200nt003 Dallas 988799_3.DOC -4- unpaid) an ad valorem tax on each one hundred dollars valuation of taxable property within the Cityt at a rate sufficient, within the limit prescribed by law, to pay the debt service requirements of the Certificates, being (i) the interest on the Certificates, and (ii) a sinking fund for their redemption at maturity or a sinking fund of two percent per annum (whichever amount is the greater), when due and payable, full allowance being made for delinquencies and costs of collection. (b) The ad valorem tax thus levied shall be assessed and collected each year against all property appearing on the tax rolls of the City most recently approved in accordance with law, and the money thus collected shall be deposited as collected to the Interest and Sinking Fund. (c) Said ad valorem tax) the collections therefrom, and all amounts on deposit in or required hereby to be deposited to the Interest and Sinking Fund are hereby pledged and committed irrevocably to the payment of the principal of and interest on the Certificates when and as due and payable in accordance with their tenns and this Ordinance. (d) The City hereby covenants and agrees that the Surplus Revenues are hereby irrevocably pledged equally and ratably to the payment of the principal of and interest on the Certificates. The City reserves the right to issue Prior Lien Obligations for any lawful purpose, at any time, in one or more installments. (e) The amount of taxes to be assessed annually for the payment of debt service on the Certificates shall be detennined in the following manner: (i) The City's annual budget shall reflect (A) the amount of debt service requirements to become due on the Certificates in the next ensuing Fiscal Year and (B) the amount on deposit in the Interest and Sinking Fund on the date such budget is approved. (ii) The amount required to be provided in the next succeeding Fiscal Year from ad valorem taxes shall be the amoun4 if any, that the debt service requirements on the Certificates to be paid during the next Fiscal Year exceeds the amount then on deposit in the Interest and Sinking Fund. (iii) Following approval of the City's annual budget, the City Council shall, by ordinance, establish a tax rate that is sufficient to produce taxes in an amount which, when added to the amount then on deposit in the Interest and Sinking Fund, will be sufficient to pay debt service on the Certificates when due during the next Fiscal Year. (f) If the liens and provisions of this Ordinance shall be released in a manner pennitted by Article XI hereof, then the collection of such ad valorem tax may be suspended or appropriately reduced, as the facts may pennit, and further deposits to the Interest and Sinking Fund may be suspended or appropriately reduced, as the facts may permit. In detennining the aggregate principal amount of outstanding Certificates, there shall be subtracted the amount of any Certificates that have been duly called for redemption and for which money has been deposited with the Paying Agent/Registrar for such redemption. LUB200nt003 Dallas 988799_3.DOC -5- Section 2.2 Interest and Sinking Fund. (a) The City hereby establishes a special fund or account to be designated the "City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005, Interest and Sinking Fund" (the "Interest and Sinking Fund"), said fund to be maintained at an official depository bank of the City separate and apart from all other funds and accounts of the City. (b) Money on deposit in or required by this Ordinance to be deposited to the Interest and Sinking Fund shall be used solely for the purpose of paying the interest on and principal of the Certificates when and as due and payable in accordance with their tenns and this Ordinance. ARTICLE III AUTHORIZATION; GENERAL TERMS AND PROVISIONS REGARDING THE CERTIFICATES Section 3.1 Authorization. The City's certificates of obligation to be designated "City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005" {the "Certificates"), are hereby authorized to be issued and delivered in accordance with the Constitution and laws of the State ofTexas, specifically Subchapter C, Chapter 271, Texas Local Government Code, as amended, and Article VIII of the City's Home-Rule Charter. The Certificates shall be issued in the aggregate principal amowtt of $46,525,000 for the purpose of paying contractual obligations to be incurred for the following purposes, to wit: (i) improvements and extensions to the City's Sewer System, including relocation of existing sewer lines; (ii) engineering and other professional services for developing a water resources plan to detennine the most efficient and effective use of treated effluent; (iii) improvements and extensions to the City's Waterworks System, including relocation of existing water lines; (iv) water, sewer, electric, drainage, park and street improvements and extensions, including utility relocations, sidewalks, street lighting and landscaping, all located within the Citt s North Overton Tax Increment Financing Zone; {v) park improvements, including construction of athletic fields; (vi) improvements and extensions to City streets including sidewalks, street lighting, landscaping and utility improvements, extensions and relocations; (vii) improvements to Lubbock Preston Smith International Airport, including construction of a parking lot; (viii) improvements and extensions to the City's Electric Light and Power System (collectively with items (i)-(vii), the "ProjectH) and (ix) payment of professional services of attorneys, financial advisors and other professionals in connection with the Project and the issuance of the Certificates. Section 3.2 Date. Denomination. Maturities, and Interest. (a) The Certificates shall be dated August 15, 2005. The Certificates shall be in fully registered form, without coupons, in the denomination of$5,000 or any integral multiple thereof and shall be numbered separately from one upward, except the Initial Certificate, which shall be numbered T -1. LUB200nl003 Dallas 988799_3.DOC -6- ) ) ' 1 (b) The Certificates shall mature on February 15 in the years and in the principal amounts set forth in the following schedule: Serial Certificates Principal Interest Principal Interest Year Amount Rate Year Amount Rate 2006 $1,575,000 3.000% 2013 $1,080,000 3.500% 2007 1,600,000 3.000% 2013 900,000 5.000% 2008 650,000 3.000% 2014 2,070,000 5.000% 2008 1,000,000 3.250% 2015 2,155,000 3.750% 2009 705,000 3.100% 2016 2,260,000 5.000% 2009 1,000,000 3.375% 2017 2,370,000 5.000% 2010 1,770,000 3.500% 2018 2,475,000 4.000% 2011 1,005,000 3.350% 2023 3,160,000 5.125% 2011 820,000 3.625% 2024 3,335,000 5.125% 2012 1,900,000 3.750% 2025 3,505,000 4.375% Term Certificates Principal Year Amount Interest Rate 2020 $5,315,000 5.000% 2022 5,875,000 5.000% (c) Interest shall accrue and be paid on each Certificate respectively until its maturity or prior redemption from the later of the Certificate Date or the most recent Interest Payment Date to which interest has been paid or provided for at the rates per annum for each respective maturity specified in the schedule contained in subsection (b) above. Such interest shall be payable semiannually on February 15 and August 15 of each year, commencing on February 15, 2006, computed on the basis of a 360-day year of twelve 30-day months. Section 3.3 Medium, Method, and Place of Payment. (a) The principal of and interest on the Certificates shall be paid in lawful money of the United States of America. (b) Interest on the Certificates shall be payable to the Owners as shown in the Register at the close of business on the Record Date. (c) Interest shall be paid by check, dated as of the Interest Payment Date, and sent United States mail, first class postage prepaid, by the Paying Agent/Registrar to each Owner, at the address thereof as it appears in the Register, or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the Owner; provided, however, that the Owner shall bear all risk and expense of such alternative banking arrangement. At the option of an LUB200n1003 Dallas 988799_3.00C ·7- Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. (d) The principal of each Certificate shall be paid to the Owner thereof on the due date, whether at the maturity date or the date of prior redemption thereof, upon presentation and surrender of such Certificate at the Designated Paymentffransfer Office of the Paying Agent/Registrar. ( e} If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Paymentffransfer Office of the Paying Agent/Registrar is located are required or authorized by law or executive order to close, then the date for such payment shall be the next succeeding day that is not a Saturday, Sunday, legal holiday, or day on which banking institutions are required or authorized to close, and payment on such date shall for all purposes be deemed to have been made on the due date thereof as specified in Section 3.2 of this Ordinance. (f) Unclaimed Payments shall be segregated in a special escrow account and held in trust, uninvested by the Paying Agent/Registrar, for the account of the Owners of the Certificates to which the Unclaimed Payments pertain. Subject to Title 6 of the Texas Property Code, Unclaimed Payments remaining unclaimed by the Owners entitled thereto for three years after the applicable payment or redemption date shall be applied to the next payment on the Certificates thereafter coming due; to the extent any such moneys remain three years after the retirement of all outstanding Certificates, such moneys shall be paid to the City to be used for any lawful purpose. Thereafter, neither the City, the Paying Agent/Registrar, nor any other person shall be liable or responsible to any Owners of such Certificates for any further payment of such unclaimed moneys or on account of any such Certificates, subject to Title 6 of the Texas Property Code. Section 3.4 Execution and Registration of Certificates. (a) The Certificates shall be executed on behalf of the City by the Mayor and the City Secretary, by their manual or facsimile signatures, and the official seal of the City shall be impressed or placed in facsimile thereon. Such facsimile signatures on the Certificates shall have the same effect as if each of the Certificates had been signed manually and in person by each of said officers, and such facsimile seal on the Certificates shall have the same effect as if the official seal of the City had been manually impressed upon each of the Certificates. (b) In the event that any officer of the City whose manual or facsimile signature appears on the Certificates ceases to be such officer before the authentication of such Certificates or before the delivery thereof, such manual or facsimile signature nevertheless shall be valid and sufficient for all purposes as if such officer had remained in such office. (c) Except as provided below, no Certificate shall be valid or obligatory for any purpose or be entitled to any security or benefit of this Ordinance unless and until there appears thereon the Certificate of Paying Agent/Registrar substantially in the form provided herein, duly authenticated by manual execution by an officer or duly authorized signatory of the Paying LUB200nt003 Dallas 988799_.3.00C -8- Agent/Registrar. It shall not be required that the same officer or authorized signatory of the Paying Agent/Registrar sign the Certificate of Paying Agent/Registrar on all of the Certificates. In lieu of the executed Certificate of Paying Agent/Registrar described above, the Initial Certificate delivered at the Closing Date shall have attached thereto the Comptroller's Registration Certificate substantially in the form provided herein, manually executed by the Comptroller of Public Accounts of the State of Texas, or by his duly authorized agent, which Certificate shall be evidence that the Certificate has been duly approved by the Attorney General of the State of Texas, that it is a valid and binding obligation of the City, and that it has been registered by the Comptroller of Public Accounts of the State of Texas. (d) On the Closing Date, one initial Certificate representing the entire principal amount of all Certificates, payable in stated installments to the initial purchaser, or its designee, executed by the Mayor and City Secretary of the City, approved by the Attorney General, and registered and manually signed by the Comptroller of Public Accounts, will be delivered to the initial purchaser or its designee. Upon payment for the Initial Certificate, the Paying Agent/Registrar shall cancel the Initial Certificate and deliver a single registered, definitive Certificate for each maturity, in the aggregate principal amount thereof, to DTC on behalf of the purchaser. Section 3.5 Ownership. (a) The City, the Paying Agent/Registrar, and any other person may treat the person in whose name any Certificate is· registered as the absolute owner of such Certificate for the purpose of making and receiving payment as herein provided (except interest shall be paid to the person in whose name such Certificate is registered on the Record Date), and for all other pwposes, whether or not such Certificate is overdue, and neither the City nor the Paying Agent/Registrar shall be bound by any notice or knowledge to the contrary. (b) All payments made to the Owner of a Certificate shall be valid and effectual and shall discharge the liability of the City and the Paying Agent/Registrar upon such Certificate to the extent of the sums paid. Section 3.6 Registration. Transfer, and Exchange. {a) So long as any Certificates remain outstanding, the City shall cause the Paying Agent/Registrar to keep at the Designated Payment/Transfer Office a register (the "Register") in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shall provide for the registration and transfer of Certificates in accordance with this Ordinance. (b) The ownership of a Certificate may be transferred only upon the presentation and surrender of the Certificate at the Designated Paymentffransfer Office of the Paying Agent/Registrar with such endorsement or other evidence of transfer as is acceptable to the Paying Agent/Registrar. No transfer of any Certificate shall be effective until entered in the Register. (c) The Certificates shall be exchangeable upon the presentation and surrender thereof at the Designated Payment/Transfer Office of the Paying Agent/Registrar for a Certificate or Certificates of the same maturity and interest rate and in a denomination or WB200nt003 Dallas 988799_3.00C -9- denominations of any integral multiple of $5,000, and in an aggregate principal amount equal to the unpaid principal amount of the Certificates presented for exchange. The Paying Agent/Registrar is hereby authorized to authenticate and deliver Certificates exchanged for other Certificates in accordance with this Section. (d) Each exchange Certificate delivered by the Paying Agent/Registrar in accordance with this Section shall constitute an original contractual obligation of the City and shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such exchange Certificate is delivered. (e) No service charge shall be made to the Owner for the initial registration, subsequent transfer, or exchange for a different denomination of any of the Certificates. The Paying Agent/Registrar, however, may require the Owner to pay a sum sufficient to cover any tax or other governmental charge that is authorized to be imposed in connection with the registration, transfer, or exchange of a Certificate. (f) Neither the City nor the Paying Agent/Registrar shall be required to issue, transfer, or exchange any Certificate called for redemption, in whole or in part, where such redemption is scheduled to occur within forty-five (45) calendar days after the transfer or exchange date; provided, however, such limitation shall not be applicable to an exchange by the Owner of the uncalled principal balance of a Certificate. Section 3. 7 Cancellation. All Certificates paid or redeemed before scheduled maturity in accordance with this Ordinance, and all Certificates in lieu of which exchange Certificates or replacement Certificates are authenticated and delivered in accordance with this Ordinance, shall be cancelled and proper records made regarding such payment, redemption, exchange, or replacement. The Paying Agent/Registrar shall then return such cancelled Certificates to the City or may in accordance with law destroy such cancelled Certificates and periodically furnish the City with certificates of destruction of such Certificates. Section 3.8 Temporary Certificates. (a) Following the delivery and registration of the Initial Certificate and pending the preparation of definitive Certificates, the City may execute and, upon the City's request, the Paying Agent/Registrar shall authenticate and deliver, one or more temporary Certificates that are printed, lithographed, typewritten, mimeographed, or otherwise produced, in any denomination, substantially of the tenor of the definitive Certificates in lieu of which they are delivered, without coupons, and with such appropriate insertions, omissions, substitutions, and other variations as the officers of the City executing such temporary Certificates may determine, as evidenced by their signing of such temporary Certificates. (b) Until exchanged for Certificates in definitive fonn, such Certificates in temporary form shall be entitled to the benefit and security of this Ordinance. (c) The City, without unreasonable delay, shall prepare, execute and deliver to the Paying Agent/Registrar; thereupon, upon the presentation and surrender of the Certificate or LUB20Gnl003 Dallas 988799_3.DOC Certificates in temporary form to the Paying Agent/Registrar, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a Certificate or Certificates of the same maturity and series, in definitive form, in the authorized denomination, and in the same aggregate principal amount, as the Certificate or Certificates in temporary form surrendered. Such exchange shall be made without the making of any charge therefor to any Owner. Section 3.9 Replacement Certificates. (a) Upon the presentation and surrender to the Paying Agent/Registrar of a mutilated Certificate, the Paying Agent/Registrar shall authenticate and deliver in exchange therefor a replacement Certificate of like tenor and principal amount, bearing a number not contemporaneously outstanding. The City or the Paying Agent/Registrar may require the Owner of such Certificate to pay a swn sufficient to cover any tax or other governmental charge that is authorized to be imposed in connection therewith and any other expenses connected therewith. (b) In the event that any Certificate is lost, apparently destroyed or wrongfully taken, the Paying Agent/Registrar, pursuant to the applicable laws of the State of Texas and in the absence of notice or knowledge that such Certificate has been acquired by a bona fide purchaser, shall authenticate and deliver a replacement Certificate of like tenor and principal amount, bearing a nwnber not contemporaneously outstanding, provided that the Owner first complies with the following requirements: (i) furnishes to the Paying Agent/Registrar satisfactory evidence of his or her ownership of and the circumstances of the loss, destruction, or theft of such Certificate; (ii} furnishes such security or indemnity as may be required by the Paying Agent/Registrar to save it and the City harmless; (iii) pays all expenses and charges in connection therewith, including, but not limited to, printing costs, legal fees, fees of the Paying Agent/Registrar, and any tax or other governmental charge that is authorized to be imposed; and (iv) satisfies any other reasonable requirements imposed by the City and the Paying Agent/Registrar. (c) If, after the delivery of such replacement Certificate, a bona fide purchaser of the original Certificate in lieu of which such replacement Certificate was issued presents for payment such original Certificate, the City and the Paying Agent/Registrar shall be entitled to recover such replacement Certificate from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost, or expense incurred by the City or the Paying Agent/Registrar in connection therewith. (d) In the event that any such mutilated, lost, apparently destroyed, or wrongfully taken Certificate has become or is about to become due and payable, the Paying Agent/Registrar, in its discretion, instead of issuing a replacement Certificate, may pay such Certificate when it becomes due and payable. LUB20017l003 Dallas 988799..).DOC -11- (e) Each replacement Certificate delivered in accordance with this Section shall constitute an original additional contractual obligation of the City and shall be entitled to the benefits and security of this Ordinance to the same extent as the Certificate or Certificates in lieu of which such replacement Certificate is delivered. Section 3.10 Book-Entry-Only Svstem. (a) Notwithstanding any other provision hereof, upon initial issuance of the Certificates, the Certificates shall be registered in the name of Cede & Co., as nominee of DTC. The definitive Certificates shan be initially issued in the form of a single separate certificate for each of the maturities thereof. (b) With respect to Certificates registered in the name of Cede & Co., as nominee of DTC, the City and the Paying Agent/Registrar shall have no responsibility or obligation to any DTC Participant or to any person on behalf of whom such a DTC Participant holds an interest in the Certificates. Without limiting the immediately preceding sentence, the City and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Certificates, (ii) the delivery to any DTC Participant or any other person, other than an Owner, as shown on the Register, of any notice with respect to the Certificates, including any notice of redemption, or (iii) the payment to any DTC Participant or any other person, other than an Owner, as shown in the Register of any amount with respect to principal of or interest on the Certificates. Notwithstanding any other provision of this Ordinance to the contrary, the City and the Paying AgenURegistrar shall be entitled to treat and consider the person in whose name each Certificate is registered in the Register as the absolute owner of such Certificate for the purpose of payment of principal of and interest on Certificates, for the purpose of giving notices of redemption and other matters with respect to such Certificate, for the purpose of registering transfer with respect to such Certificate, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of and interest on the Certificates only to or upon the order of the respective Owners as shown in the Register, as provided in this Ordinance, or their respective attorneys duiy authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the City's obligations with respect to payment of interest on the Certificates to the extent of the sum or sums so paid. No person other than an Owner, as shown in the Register, shall receive a certificate evidencing the obligation of the City to make payments of amounts due pursuant to this Ordinance. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., the word "Cede & Co." in this Ordinance shall refer to such new nominee of DTC. (c) The Representations Letter previously executed and delivered by the City, and applicable to the City's obligations delivered in book-entry-only form to DTC as securities depository, is hereby ratified and approved for the Certificates. LUB200nt003 Dallas 988799....3.00C -12- Section 3.11 Successor Securities Depositozy; Transfer Outside Book·Entzy-Only System. In the event that the City determines that it is in the best interest of the City and the beneficial owners of the Certificates that they be able to obtain certificated Certificates, or in the event DTC discontinues the services described herein, the City shall (i) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC and DTC Participants of the appointment of such successor securities depository and transfer one or more separate Certificates to such successor securities depository; or (ii) notify DTC and DTC Participants of the availability through DTC of certificated Certificates and cause the Paying Agent/Registrar to transfer one or more separate registered Certificates to DTC Participants having Certificates credited to their DTC accounts. In such event, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names Owners transferring or exchanging Certificates shall designate, in accordance with the provisions of this Ordinance. Section 3.12 Payments to Cede & Co. Notwithstanding any other provision of this Ordinance to the contrary, so long as the Certificates are registered in the name of Cede & Co., as nominee of DTC, all payments with respect to principal of and interest on such Certificates, and all notices with respect to such Certificates shall be made and given, respectively, in the manner provided in the Representations Letter of the City to DTC. ARTICLE IV REDEMPTION OF CERTIFICATES BEFORE MATURITY Section 4.1 Redemption. The Certificates are subject to redemption before their scheduled maturity only as provided in this Article IV. Section 4.2 Optional Redemption. (a) The City reserves the option to redeem Certificates maturing on and after February 15, 2016 in whole or any part, before their respective scheduled maturity dates, on February 15, 2015 or on any date thereafter, such redemption date or dates to be fixed by the City, at a price equal to the principal amount of the Certificates called for redemption plus accrued interest to the date fixed for redemption. (b) If less than all of the Certificates are to be redeemed pursuant to an optional redemption, the City shall determine the maturity or maturities and the amoWtts thereof to be redeemed and shall direct the Paying Agent/Registrar to call by lot the Certificates, or portions thereof, within such maturity or maturities and in such principal amounts for redemption. LUB200nJ003 Dallas 988799_3.00C -13- (c) The City, at least 45 days before the redemption date, unless a shorter period shall be satisfactory to the Paying Agent/Registrar, shall notify the Paying Agent/Registrar of such redemption date and of the principal amount of Certificates to be redeemed. Section 4.3 Mandatory Sinking fund Redemption. (a) The Term Certificates are subject to scheduled mandatory redemption and will be redeemed by the City, in part at a price equal to the principal amount thereof, without premium, plus accrued interest to the redemption date, out of moneys available for such purpose in the Interest and Sinking Fund, on the dates and in the respective principal amounts as set forth in the following schedule: Term Certificates Maturing February 15. 2020 Redemption Date February 15,2019 February 15, 2020 (maturity) Principal Amount $2,590,000 2,725,000 Term Certificates Maturing February 15.2022 Redemption Date February 15, 2021 February 15,2022 (maturity) Principal Amount $2,865,000 3,010,000 (b) At least forty-five (45) days prior to each scheduled mandatory redemption date, the Paying Agent/Registrar shall select for redemption by lot, or by any other customary method that results in a random selection, a principal amount of Term Certificates equal to the aggregate principal amount of such Term Certificates to be redeemed, shall call such Term Certificates for redemption on such scheduled mandatory redemption date, and shall give notice of such redemption, as provided in Section 4.5. (c) The principal amount of the Term Certificates required to be redeemed on any redemption date pursuant to subparagraph (a) of this Section 4.3 shall be reduced, at the option of the City, by the principal amount of any Term Certificates which, at least 45 days prior to the mandatory sinking fund redemption date (i) shall have been acquired by the City at a price not exceeding the principal amount of such Term Certificates plus accrued interest to the date of purchase thereof: and delivered to the Paying Agent/Registrar for cancellation, or (ii) shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to a mandatory sinking fund redemption. Section 4.4 Partial Redemption. (a) A portion of a single Certificate of a denomination greater than $5,000 may be redeemed, but only in a principal amount equal to $5,000 or any integral multiple thereof. If such a Certificate is to be partially redeemed, the Paying Agent/Registrar shall treat each $5,000 portion of the Certificate as though it were a single Certificate for purposes of selection for redemption. LUB200n1003 Dallas 988799_3.DOC -14- (b) Upon surrender of any Certificate for redemption in part, the Paying Agent/Registrar, in accordance with Section 3.6 of this Ordinance, shall authenticate and deliver an exchange Certificate or Certificates in an aggregate principal amotmt equal to the unredeemed portion of the Certificate so surrendered, such exchange being without charge. (c) The Paying Agent/Registrar shall promptly notify the City in writing of the principal amount to be redeemed of any Certificate as to which only a portion thereof is to be redeemed. Section 4.5 Notice of Redemption to Owners. (a) The Paying Agent/Registrar shall give notice of any redemption of Certificates by sending notice by United States mail, first class postage prepaid, not less than 30 days before the date fixed for redemption, to the Owner of each Certificate (or part thereof) to be redeemed, at the address shown on the Register at the close of business on the Business Day next preceding the date of mailing such notice. (b) The notice shall state the redemption date, the redemption price, the place at which the Certificates are to be surrendered for payment, and, if less than all the Certificates outstanding are to be redeemed, an identification of the Certificates or portions thereof to be redeemed. (c) Any notice given as provided in this Section shall be conclusively presumed to have been duly given, whether or not the Owner receives such notice. Section 4.6 Payment Upon Redemption. (a) Before or on each redemption date, the City shall deposit with the Paying Agent/Registrar money sufficient to pay all amounts due on the redemption date and the Paying Agent/Registrar shall make provision for the payment of the Certificates to be redeemed on such date by setting aside and holding in trust such amounts as are received by the Paying Agent/Registrar from the City and shall use such funds solely for the purpose of paying the principal of and accrued interest on the Certificates being redeemed. (b) Upon presentation and surrender of any Certificate called for redemption at the Designated Payment!fransfer Office on or after the date fixed for redemption, the Paying Agent/Registrar shall pay the principal of and accrued interest on such Certificate to the date of redemption from the money set aside for such purpose. Section 4.7 Effect ofRedemption. (a) Notice of redemption having been given as provided in Section 4.5 of this Ordinance, the Certificates or portions thereof called for redemption shall become due and payable on the date fixed for redemption and, unless the City defaults in its obligation to make provision for the payment of the principal thereof or accrued interest thereon, such Certificates or portions thereof shall cease to bear interest from and after the date fixed for redemption, whether or not such Certificates are presented and surrendered for payment on such date. LUB2<Jonl003 Dallas 988799_.3.DOC -15- ) (b) If the City shall fail to make provision for payment of all sums due on a redemption date, then any Certificate or portion thereof called for redemption shall continue to bear interest at the rate stated on the Certificate until due provision is made for the payment of same by the City. Section 4.8 Lapse of Payment. Money set aside for the redemption of Certificates and remaining unclaimed by the Owners of such Certificates shall be subject to the provisions of Section 3.3(t) hereof ARTICLE V PAYING AGENT/REGISTRAR Section 5.1 Appointment of Initial Paying Agent/Registrar. JPMorgan Chase Bank, National Association, is hereby appointed as the initial Paying Agent/Registrar for the Certificates. Section 5.2 Qualifications. Each Paying Agent/Registrar shall be a commercial bank, a trust company organized under the laws of. the State of Texas, or other entity duly qualified and legally authorized to serve as and perform the duties and services of paying agent and registrar for the Certificates. Section 5.3 Maintaining Paying Agent/Registrar. (a) At all times while any of the Certificates are outstanding, the City will maintain a Paying Agent/Registrar that is qualified under Section 5.2 of this Ordinance. The Mayor is hereby authorized and directed to execute an agreement with the Paying Agent/Registrar specifying the duties and responsibilities of the City and the Paying Agent/Registrar in substantially the form presented at this meeting, such form of agreement being hereby approved. The signature of the Mayor shall be attested by the City Secretary of the City. (b) If the Paying Agent/Registrar resigns or otherwise ceases to serve as such, the City will promptly appoint a replacement. Section 5.4 Termination. The City, upon not less than sixty (60) days notice, reserves the right to terminate the appointment of any Paying Agent/Registrar by delivering to the entity whose appointment is to be terminated written notice of such termination. Section 5.5 Notice of Change to Owners. Promptly upon each change in the entity serving as Paying Agent/Registrar, the City will cause notice of the change to be sent to each Owner by United States mail, fi.rst class postage LUB200nl003 Dallas 988799_3.DOC -16- prepaid) at the address thereof in the Register, stating the effective date of the change and the name and mailing address of the replacement Paying Agent/Registrar. Section 5.6 Agreement to Perform Duties and Functions. By accepting the appointment as Paying Agent/Registrar and executing the Paying Agent/Registrar Agreement, the Paying Agent/Registrar is deemed to have agreed to the provisions of this Ordinance and that it will perform the duties and functions of Paying Agent/Registrar prescribed thereby. Section 5. 7 Delivery of Records to Successor. If a Paying Agent/Registrar is replaced, such Paying Agent, promptly upon the appointment of the successor) will deliver the Register (or a copy thereof) and all other pertinent books and records relating to the Certificates to the successor Paying Agent/Registrar. ARTICLE VI FORM OF THE CERTIFICATES Section 6.1 Form Generally. (a) The Certificates, including the Registration Certificate of the Comptroller of Public Accounts of the State of Texas, the Certificate of the Paying Agent/Registrar, and the Assigrunent form to appear on each of the Certificates, (i) shall be substantially in the form set forth in this Article) with such appropriate insertions, omissions, substitutions, and other variations as are permitted or required by this Ordinance, and (ii) may have such letters, numbers, or other marks of identification (including identifying numbers and letters of the Committee on Uniform Securities Identification Procedures of the American Bankers Association) and such legends and endorsements (including any reproduction of an opinion of counsel) thereon as, consistently herewith, may be determined by the City or by the officers executing such Certificates, as evidenced by their execution thereof. (b) Any portion of the text of any Certificates may be set forth on the reverse side thereof, with an appropriate reference thereto on the face of the Certificates. (c) The definitive Certificates, if any, shall be typewritten, photocopied, printed, lithographed, or engraved) and may be produced by any combination of these methods or produced in any other similar manner, all as determined by the officers executing such Certificates) as evidenced by their execution thereof. (d) The Initial Certificate submitted to the Attorney General of the State of Texas may be typewritten and photocopied or otherwise reproduced. Section 6.2 Form of the Certificates. The form of the Certificates, including the form of the Registration Certificate of the Comptroller of Public Accounts of the State of Texas, the form of Certificate of the Paying LUB200nl003 Dallas 988799_3.00C ·17- Agent/Registrar and the form of Assignment appearing on the Certificates, shall be substantially as follows: (a} Form of Certificate. REGISTERED No. __ United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $ ___ _ INTEREST RATE: MA TIJRITY DATE: CERTIFICATE DATE: CUSIP NUMBER: __ % August 15, 2005 The City of Lubbock (the "City',), in the County of Lubbock, State of Texas, for value received, hereby promises to pay to or registered assigns, on the Maturity Date specified above, the sum of ________________ DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, conunencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment!fransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment!fransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by LUB200n1003 Dallas 988799_3.DOC ) wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. If the date for the payment of the principal of or interest on this Certificate shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Paymentrrransfer Office of the Paying Agent/Registrar is located are required or authorized by law or executive order to close, the date for such payment shall be the next succeeding day that is not a Saturday, Sunday, legal holiday, or day on which banking institutions are required or authorized to close, and payment on such date shall have the same force and effect as if made on the original date payment was due. This Certificate is one of a series of fully registered certificates specified in the title hereof issued in the aggregate principal amount of $46,525,000 (herein referred to as the "Certificates"), issued pursuant to a certain ordinance of the City (the "Ordinance") for the purpose of paying contractual obligations to be incurred for authorized public improvements (collectively, the "Project"), as described in the Ordinance, and to pay the contractual obligations for professional services of attorneys, financial advisors and other professionals in connection ~th the Project and the issuance of the Certificates. The City has reserved the option to redeem the Certificates maturing on or after February 15,2016, in whole or in part, before their respective scheduled maturity dates, on February 15, 2015, or on any date thereafter, at a price equal to the principal amount of the Certificates so called for redemption plus accrued interest to the date fixed for redemption. If less than all of the Certificates are to be redeemed, the City shall determine the maturity or matmities and the amounts thereof to be redeemed and shall direct the Paying Agent/Registrar to call by lot or other customary method that results in a random selection the Certificates, or portions thereof, within such maturity and in such principal amounts, for redemption. Certificates maturing on February 15 in each of the years 2020 and 2022 (the "Term Certificates") are subject to mandatory sinking fund redemption prior to their scheduled maturity, and will be redeemed by the City, in part at a redemption price equal to the principal amount thereof, without premium, plus interest accrued to the redemption date, on the dates and in the principal amounts shown in the following schedule: LUB200ni003 Dallas 988799_3.DOC Term Certificates Maturing February 15, 2020 Redemption Date February 15,2019 February 15, 2020 (maturity) Principal Amount $2,590,000 2,725,000 Term Certificates Maturing February 15.2022 Redemption Date February 15, 2021 February 15, 2022 (maturity) -19- Principal Amount $2,865,000 3,010,000 The Paying Agent/Registrar will select by lot or by any other customary method that results in a random selection the specific Certificates {or with respect to Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Certificates required to be redeemed on any redemption date pursuant to the foregoing mandatory sinking fund redemption provisions hereof shall be reduced, at the option of the City, by the principal amount of any Certificates which, at least 45 days prior to the mandatory sinking fund redemption date (i) shall have been acquired by the City at a price not exceeding the principal amount of such Certificates plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, or (ii) shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to a mandatory sinking fund redemption. Notice of such redemption or redemptions shall be given by first class mail, postage prepaid, not less than 30 days before the date fixed for redemption, to the registered owner of each of the Certificates to be redeemed in whole or in part. Notice having been so given, the Certificates or portions thereof designated for redemption shall become due and payable on the redemption date specified in such notice; from and after such date, notwithstanding that any of the Certificates or portions thereof so called for redemption shall not have been surrendered for payment, interest on such Certificates or portions thereof shall cease to accrue. As provided in the Ordinance, and subject to certain limitations therein set forth, this Certificate is transferable upon surrender of this Certificate for transfer at the designated office of the Paying Agent/Registrar with such endorsement or other evidence of transfer as is acceptable to the Paying Agent/Registrar; thereupon, one or more new fully registered Certificates of the same stated maturity, of authorized denominations, bearing the same rate of interest, and for the same aggregate principal amount will be issued to the designated transferee or transferees. The City, the Paying Agent/Registrar, and any other person may treat the person in whose name this Certificate is registered as the owner hereof for the purpose of receiving payment as herein provided (except interest shall be paid to the person in whose name this Certificate is registered on the Record Date) and for all other purposes, whether or not this Certificate be overdue, and neither the City nor the Paying Agent/Registrar shall be affected by notice to the contrary. IT IS HEREBY CERTIFIED AND RECITED that the issuance of this Certificate and the series of which it is a part is duly authorized by law; that all acts, conditions, and things to be done precedent to and in the issuance of the Certificates have been properly done and performed and have happened in regular and due time, fonn, and manner as required by law; that ad valorem taxes upon all taxable property in the City have been levied for and pledged to the payment of the debt service requirements of the Certificates within the limit prescribed by law; that, in addition to said taxes, further provisions have been made for the payment of the debt service requirements of the Certificates by pledging to such purpose Surplus Revenues, as defined in the Ordinance, derived by the City from the operation of the Waterworks System in an amount limited to $500; that when so collected, such taxes and Surplus Revenues shall be LUB200n!OC)3 Dallas 988799_3.00C -20- appropriated to such purposes; and that the total indebtedness of the City, including the Certificates, does not exceed any constitutional or statutory limitation. IN WITNESS WHEREOF, the City has caused this Certificate to be executed by the manual or facsimile signature of the Mayor of the City and countersigned by the manual or facsimile signature of the City Secretary, and the official seal of the City has been duly impressed or placed in facsimile on this Certificate. Mayor, City of Lubbock, Texas City Secretary, City of Lubbock, Texas [SEAL] LUB200niOC>3 Dallas 988799_3.DOC -21- ) (b) Fonn of Comptroller's Registration Certificate. The following Comptroller's Registration Certificate may be deleted from the definitive Certificates if such certificate on the Initial Certificate is fully executed. OFFICE OF THE COMPTROLLER OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS § § § REGISTER NO. __ _ I hereby certify that there is on file and of record in my office a certificate of the Attorney General of the State of Texas to the effect that this Certificate has been examined by him as required by law, that he finds that it has been issued in conformity with the Constitution and laws of the State ofTexas, and that it is a valid and binding obligation of the City of Lubbock, Texas; and that this Certificate has this day been registered by me. Witness my hand and seal of office at Austin, Texas, -------' [SEAL] Comptroller of Public Accmmts of the State of Texas (c) Form of Certificate of Paying Agent/Registrar. The following Certificate of Paying Agent/Registrar may be deleted from the Initial Certificate if the Comptroller's Registration Certificate appears thereon. CERTIFICATE OF PAYING AGENT/REGISTRAR The records of the Paying Agent/Registrar show that the Initial Certificate of this series of Certificates was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas, and that this is one of the Certificates referred to in the within-mentioned Ordinance. Dated: wa2oon Hm Dallas 988799_3.DOC JPMorgan Chase Bank, National Association as Paying Agent/Registrar By: Authorized Signatory -22- ) (d) Fonn of Assignment. ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto (print or typewrite name, address and Zip Code of transferee): -------------- (Social Security or other identifying number: the within Certificate and all rights hereunder and hereby irrevocably constitutes and appoints --------attorney to transfer the within Certificate on the books kept for registration hereof, with full power of substitution in the premises. Dated: NOTICE: The signature on this Assigmnent must correspond with the name of the registered owner as it appears on the face of the within Certificate in every particular and must be guaranteed in a manner acceptable to the Paying Agent/Registrar. Signature Guaranteed By: Authorized Signatory (e) The Initial Certificate shall be in the form set forth in paragraphs (a), (b) and (d) of this Section, except for the following alterations: (i) immediately under the name of the Certificate the headings "INTEREST RATE" and "MATURITY DATE" shall both be completed with the expression "As shown below"; and (ii) in the first paragraph of the Certificate, the words "on the maturity date specified above" shall be deleted and the following will be inserted: "on February 15 in each of the years, in the principal installments and bearing interest at the per annum rates set forth in the following schedule: LUB200nt003 Dallas 938799_3.DOC -23- ) Principal Installments Interest Rate (Information to be inserted from schedule in Section 3.2 of the Ordinance) Section 6.3 CUSIP Registration. The City may secure identification numbers through the CUSIP Service Bureau Division of Standard & Poor's, A Division of the McGraw-Hill Companies, New York, New York; and may authorize the printing of such numbers on the face of the Certificates. It is expressly provided, however, that the presence or absence of CUSIP numbers on the Certificates shall be of no significance or effect in regard to the legality thereof and neither the City nor the attorneys approving said Certificates as to legality are to be held responsible for CUSIP numbers incorrectly printed on the Certificates. Section 6.4 Legal Opinion. The approving legal opinion of Vinson & Elkins L.L.P., Bond Counsel, may be attached to or printed on the reverse side of each Certificate over the certification of the City Secretary of the City, which may be executed in facsimile. Section 6.5 Bond Insurance. Information pertaining to bond insurance, if any, may be printed on each Certificate. ARTICLE VII SALE AND DELIVERY OF CERTIFICATES; DEPOSIT OF PROCEEDS Section 7.1 Sale of Certificates; Official Statement. (a) The Certificates are hereby officially sold and awarded and shall be delivered to the Underwriters in accordance with the tenns and provisions of that certain purchase contract (the "Purchase Contract") relating to the Certificates between the City and the Underwriters and dated the date of the passage of this Ordinance. The form and content of such Purchase Contract are hereby approved, and the Mayor is hereby authorized and directed to execute and deliver such Purchase Contract. It is hereby officially found, determined and declared that the terms of this sale are the most advantageous reasonably obtainable. The Certificates shall initially be registered in the name of A. G. Edwards & Sons, Inc., as representative for the Underwriters, or their designee. (b) The form and substance of the Preliminary Official Statement, dated August 22, 2005, and any addenda, supplement or amendment thereto, are hereby in all respects approved and adopted and is hereby deemed final as of its date within the meaning and for the purposes of paragraph (b)(l) of Rule 15c2-12 under the Securities Exchange Act of 1934, as amended. The final Official Statement (the "Official Statement") presented to and considered at this meeting is hereby in all respects approved and adopted and the Mayor and the City Secretary WB200nl003 DaUas 988799_J.OOC -24- ) ) ) ) of the City are hereby authorized and directed to execute the same and deliver appropriate numbers of executed copies thereof to the Underwriters. The Official Statement as thus approved, executed and delivered, with such appropriate variations as shall be approved by the Mayor, City Manager, Deputy City Manager, any Assistant City Manager, Chief Financial Officer, Cash and Debt Manager or City Secretary of the City and the Underwriters, may be used by the Underwriters in the public offering and sale thereof. The City Secretary is hereby authorized and directed to include and maintain a copy of the Official Statement and any addenda, supplement or amendment thereto thus approved among the permanent records of this meeting. The use and distribution of the Preliminary Official Statement, and the preliminary public offering of the Certificates by the Underwriters, is hereby ratified, approved and confirmed. (c) All officers of the City are authorized to execute such documents, certificates and receipts as they may deem appropriate in order to consummate the delivery of the Certificates in accordance with the tenns of sale therefor including. without limitation, the Purchase Contract. (d) The obligation of the Underwriters identified in subsection (a) of this Section to accept delivery of the Certificates is subject to such purchaser being furnished with the final, approving opinion of Vinson & Elkins L.L.P ., bond cowtSel for the City, which opinion shall be dated and delivered the Closing Date. Section 7.2 Control and Delivery of Certificates. (a) The Mayor of the City is hereby authorized to have control of the Initial Certificate and all necessary records and proceedings pertaining thereto pending investigation, examination, and approval of the Attorney General of the State of Texas, registration by the Comptroller of Public Accounts of the State of Texas and registration with, and initial exchange or transfer by, the Paying Agent/Registrar. (b) After registration by the Comptroller of Public Accounts, delivery of the Certificates shall be made to the initial purchasers thereof under and subject to the general supervision and direction of the Mayor, against receipt by the City of all amounts due to the City under the terms of sale. Section 7.3 Deposit of Proceeds. (a) First: All amoWlts received on the Closing Date as accrued interest on the Certificates from the Certificate Date to the Closing Date shall be deposited to the Interest and Sinking Fund. (b) Second: The remaining balance received on the Closing Date shall be deposited to a special account of the City, such moneys to be dedicated and used solely for the remaining purposes for which the Certificates are being issued as herein provided. LUB200171003 Dallas 988799_3.DOC -25- ) ARTICLE VIII ) INVESTMENTS ) ) Section 8.1 Investments. (a) Money in the Interest and Sinking Fund created by this Ordinance, at the option of the City, may be invested in such securities or obligations as pennitted under applicable law. (b) Any securities or obligations in which such money is so invested shall be kept and held in trust for the benefit of the Owners and shall be sold and the proceeds of sale shall be timely applied to the making of all payments required to be made from the fund from which the investment was made. Section 8.2 Investment Income. (a) Interest and income derived from investment of the Interest and Sinking Fund shall be credited to such fund. (b) Interest and income derived from investment of the funds to be deposited pursuant to Section 7.3(b) hereof shall be credited to the account where deposited until the acquisition or construction of said projects is completed and thereafter, to the extent such interest and income are present, such interest and income shall be deposited to the Interest and Sinking Fund. ARTICLE IX PARTICULAR REPRESENTATIONS AND COVENANTS Section 9.1 Payment of the Certificates. On or before each Interest Payment Date while any of the Certificates are outstanding and unpaid, there shall be made available to the Paying Agent/Registrar, out of the Interest and Sinking Fund, money sufficient to pay such interest on and principal of and interest on the Certificates as will accrue or mature on the applicable Interest Payment Date or date of prior redemption. Section 9.2 Other Representations and Covenants. (a) The City will faithfully perform, at all times, any and all covenants, undertakings, stipulations, and provisions contained in this Ordinance; the City will promptly pay or cause to be paid the principal of and interest on each Certificate on the dates and at the places and manner prescribed in such Certificate; and the City will, at the times and in the manner prescribed by this Ordinance, deposit or cause to be deposited the amounts of money specified by this Ordinance. (b) The City is duly authorized under the laws of the State of Texas to issue the Certificates; all action on its part for the creation and issuance of the Certificates has been duly and effectively taken; and the Certificates in the hands of the Owners thereof are and will be valid and enforceable obligations of the City in accordance with their terms. LUB200ni003 Dallas 988799_3.0C:X: -26- ) ) J ) Section 9.3 Provisions Concerning Federal Income Tax Exclusion. The City intends that the interest on the Certificates shall be excludable from gross income for purposes of federal income taxation pursuant to sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the "Code"), and the applicable regulations promulgated thereunder (the "Regulations}'). The City covenants and agrees not to take any action, or knowingly omit to take any action within its control, that if taken or omitted, respectively, would cause the interest on the Certificates to be includable in the gross income, as defined in section 61 of the Code, of the holders thereof for purposes of federal income taxation. In particular, the City covenants and agrees to comply with each requirement of Sections 9.3 through 9.9 of this Article IX; provided, however, that the City shall not be required to comply with any particular requirement of Sections 9.3 through 9.9 of this Article IX if the City has received an opinion of nationally recognized bond counsel {"Counsel's Opinion.,) that such noncompliance will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Certificates or if the City has received a Counsel's Opinion to the effect that compliance with some other requirement set forth in Sections 9.3 through 9.9 of this Article IX will satisfy the applicable requirements of the Code, in which case compliance with such other requirement specified in such Counsel's Opinion shall constitute compliance with the corresponding requirement specified in Sections 9.3 through 9.9 of this Article IX. Section 9.4 No Private Use or Payment and No Private Loan Financing. The City shall certify, through an authorized officer, employee or agent, that, based upon all facts and estimates known or reasonably expected to be in existence on the date the Certificates are delivered, the proceeds of the Certificates will not be used in a manner that would cause the Certificates to be "private activity bonds., within the meaning of section 141 of the Code and the Regulations. The City covenants and agrees that it will make such use of the proceeds of the Certificates, including interest or other investment income derived from Certificate proceeds, regulate the use of property financed, directly or indirectly, with such proceeds, and take such other and further action as may be required so that the Certificates will not be "private activity bonds" within the meaning of section 141 of the Code and the Regulations. Section 9.5 No Federal Guaranty. The City covenants and agrees not to take any action, or knowingly omit to take any action within its control, that, if taken or omitted, respectively, would cause the Certificates to be "federally guaranteed" within the meaning of section 149(b) of the Code and the Regulations, except as permitted by section 149(b)(3) of the Code and the Regulations. Section 9.6 Certificates Are Not Hedge Bonds. The City covenants and agrees not to take any action, or knowingly omit to take any action, and has not knowingly omitted and will not knowingly omit to take any action, within its control, that, if taken or omitted, respectively, would cause the Certificates to be "hedge bonds" within the meaning of section 149(g) of the Code and the Regulations. WB200nt003 Dallas 9S8799_3.DOC -27- ) ) ) Section 9. 7 No-Arbitrage Covenant. The City shall certify, through an authorized officer, employee or agent, that, based upon all facts and estimates known or reasonably expected to be in existence on the date the Certificates are delivered, the City will reasonably expect that the proceeds of the Certificates will not be used in a marmer that would cause the Certificates to be "arbitrage bonds" within the meaning of section 148(a) of the Code and the Regulations. Moreover, the City covenants and agrees that it will make such use of the proceeds of the Certificates including interest or other investment income derived from Certificate proceeds, regulate investments of proceeds of the Certificates, and take such other and further action as may be required so that the Certificates will not be "arbitrage bonds" within the meaning of section 148(a) of the Code and the Regulations. Section 9.8 Arbitrage Rebate. If the City does not qualify for an exception to the requirements of Section 148(f) of the Code, the City will take all necessary steps to comply with the requirement that certain amounts earned by the City on the investment of the "gross proceeds" of the Certificates (within the . meaning of section 148(f)(6)(B) of the Code), be rebated to the federal government. Specifically, the City will (i) maintain records regarding the investment of the gross proceeds of the Certificates as may be required to calculate Ute amount earned on the investment of the gross proceeds of the Certificates separately from records of amounts on deposit in the funds and accounts of the City allocable to other bond issues of the City or moneys which do not represent gross proceeds of any Certificates of the City, (ii) calculate at such times as are required by the Regulations, the amount earned from the investment of the gross proceeds of the Certificates which is required to be rebated to the federal government, and (iii) pay, not less often than every fifth anniversary date of the delivery of the Certificates or on such other dates as may be permitted under the Regulations, all amounts required to be rebated to the federal government. Further, the City will not indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the gross proceeds of the Certificates that might result in a reduction in the amount required to be paid to the federal govenunent because such arrangement results in a smaller profit or a larger loss than would have resulted if the arrangement had been at arm's length and had the yield on the issue not been relevant to either party. Section 9.9 Information Re,porting. The City covenants and agrees to file or cause to be filed with the Secretary of the Treasury, not later than the 15th day of the second calendar month after the close of the calendar quarter in which the Certificates are issued, an information statement concerning the Certificates, all under and in accordance with section 149(e) of the Code and the Regulations. LUB200nt003 DaUas 988799_.3.DOC -28- ) J ) ) Section 9.10 Continuing Obligation. Notwithstanding any other provision of this Ordinance, the City's obligations under the covenants and provisions of Sections 9.3 through 9.9 of this Article IX shall survive the defeasance and discharge of the Certificates. ARTICLE X DEFAULT AND REMEDIES Section 10.1 Events of Default. Each of the following occurrences or events for the purpose of this Ordinance is hereby declared to be an Event of Default: (i) the failure to make payment of the principal of or interest on any of the Certificates when the same becomes due and payable; or (ii) default in the performance or observance of any other covenant, agreement, or obligation of the City, which default materially and adversely affects the rights of the Owners, including but not limited to their prospect or ability to be repaid in accordance with this Ordinance, and the continuation thereof for a period of sixty (60) days after notice of such default is given by any Owner to the City. Section 10.2 Remedies for Default. (a) Upon the happening of any Event of Default, then any Owner or an authorized representative thereof, including but not limited to a trustee or trustees therefor, may proceed against the City for the purpose of protecting and enforcing the rights of the Owners under this Ordinance by mandamus or other suit, action or special proceeding in equity or at law in any court of competent jurisdiction for any relief permitted by law, including the specific performance of any covenant or agreement contained herein, or thereby to enjoin any act or thing that may be wtlawful or in violation of any right of the Owners hereunder or any combination of such remedies. (b) It is provided that all such proceedings shall be instituted and maintained for the equal benefit of all Owners of Certificates then outstanding. Section 10.3 Remedies Not Exclusive. (a) No remedy herein conferred or reserved is intended to be exclusive of any other available remedy, but each and every such remedy shall be cwnulative and shall be in addition to every other remedy given hereunder or under the Certificates or now or hereafter existing at law or in equity; provided, however, that notwithstanding any other provision of this Ordinance, the right to accelerate the debt evidenced by the Certificates shall not be available as a remedy under this Ordinance. LUB200171003 Dallas 988799_3.00C ) ) ... } '\ ) ) ) (b) The exercise of any remedy herein conferred or reserved shall not be deemed a waiver of any other available remedy. ARTICLE XI DISCHARGE Section 11.1 Discharge . The Certificates may be defeased, discharged or refunded in any manner permitted by applicable law. ARTICLE XII CONTINUING DISCLOSURE UNDERTAKING Section 12.1 Annual Reports. (a) The City shall provide annually to each NRMSIR and to any SID, within six (6) months after the end of each fiscal year, financial information and operating data with respect to the City of the general type included in the final Official Statement, being the information described in Exhibit A hereto. Any financial statements so to be provided shall be (i) prepared in accordance with the accounting principles described in Exhibit A hereto, and (ii) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the City shall provide notice that audited financial statements are not available and shall provide unaudited financial statements for the applicable fiscal year to each NRMSIR and any SID. The City shall provide audited financial statements for the applicable fiscal year to each NRMSIR and to any SID when and if audited financial statements become available. (b) If the City changes its fiscal year, it will notify each NRMSIR and any SID of the change (and of the date of the new fiscal year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. (c) The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific referenced to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to each NRMSIR and any SID or filed with the SEC. Section 12.2 Material Event Notices. (a) The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any of the following events with respect to the Certificates, if such event is material within the meaning of the federal securities laws: (i) principal and interest payment delinquencies; LUB200nt003 Dallas 988799_3.DOC -30- ) J ) ) ) (ii) nonpayment related defaults; (iii) unscheduled draws on debt service reserves reflecting financial difficulties; (iv) unscheduled draws on credit enhancements reflecting financial difficulties; (v) perform; substitution of credit or liquidity providers, or their failure to (vi) adverse tax opinions or events affecting the tax-exempt status of the Certificates; (vii) modifications to rights of Owners; (viii) redemption calls; (ix) defeasances; {x) release, substitutio~ or sale of property securing repayment of the Certificates; and (xi) rating changes. (b) The City shall notify any SID and either each NRMSIR or the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with Section 12.1 of this Ordinance by the time required by such Section. Section 12.3 Limitations, Disclaimers and Amendments. (a) The City shall be obligated to observe and perform the covenants specified in this Article for so long as, but only for so long as, the City remains an "obligated person•• with respect to the Certificates within the meaning of the Rule, except that the City in any event will give notice of any redemption calls and any defeasances that cause the City to be no longer an "obligated person." (b) The provisions of this Article are for the sole benefit of the Owners and beneficial owners of the Certificates, and nothing in this Article, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Article and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the City's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Article or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such infonnation or its usefulness to a, decision to invest in or sell Certificates at any future date. WB20onl003 Dallas 988799_.3.DOC -31- ) "") ) ) ) UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE OWNER OR BENEFICIAL OWNER OF ANY CERTIFICATE OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS ARTICLE, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. (c) No default by the City in observing or performing its obligations under this • Article shall constitute a breach of or default under the Ordinance for purposes of any other provisions of this Ordinance. (d) Nothing in this Article is intended or shall act to disclaim, waive, or othenvise limit the duties of the City under federal and state securities laws. (e) The provisions of this Article may be amended by the City from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in.the identity, nature, status~ or type of operations of the City, but only if (i) the provisions of this Article, as so amended, would have permitted an underwriter to purchase or sell Certificates in the primary offering of the Certificates 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 Owners of a majority in aggregate principal amount (or any greater amount required by any other provisions of this Ordinance that authorizes such an amendment) of the outstanding Certificates consent to such amendment or (B) an entity or individual person that is unaffiliated with the City (such as nationally recognized bond counsel) detennines that such amendment will not materially impair the interests of the Owners and beneficial owners of the Certificates. If the City so amends the provisions of this Article, it shall include with any amended financial infonnation or operating data next provided in accordance with Section 12.1 an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in type of financial information or operating data so provided. (t) Any filing required to be made pursuant to this Article XII may be made through the facilities of DisclosureUSA or such other central post office as may be approved in writing by the SEC for such purpose. Any such filing made through such central post office will be deemed to have been filed with each NRMSIR and SID or MSRB as if such filing had been made directly to such entity. ARTICLE XIII AMENDMENTS; ATTORNEY GENERAL MODIFICATION Section 13.1 Amendments. This Ordinance shall constitute a contract with the Owners, be binding on the City, and shall not be amended or repealed by the City so long as any Certificate remains outstanding LUB200ni003 Dallas 988799_3.DOC -32- ) ) ) except as permitted in this Section. The City may, without consent of or notice to any Owners, from time to time and at any time, amend this Ordinance 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 City may, with the written consent of the Owners of the Certificates holding a majority in aggregate principal amount of the Certificates then outstanding, amend, add to, or rescind any of the provisions of this Ordinance; provided that, without the consent of all Owners of outstanding Certificates, no such amendment, addition, or rescission shall (i) extend the time or times of payment of the principal of and interest on the Certificates, 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 Certificates, (ii) give any preference to any Certificate over any other Certificate, or (iii) reduce the aggregate principal amount of Certificates required to be held by Owners for consent to any such amendment, addition, or rescission. Section 13.2 Attorney General Modification. In order to obtain the approval of the Certificates by the Attorney General of the State of Texas, any provision of this Ordinance may be modified, altered or amended after the date of its adoption if required by the Attorney General in connection with the Attorney General's examination as to the legality of the Certificates and approval thereof in accordance with the applicable law. Such changes, if any, shall be provided to the City Secretary and the City Secretary shall insert such changes into this Ordinance as if approved on the date hereof. LUB200nt003 Dallas 988799_.3.DOC -33- ) J ) ) ) PRESENTED, FINALLY PASSED AND APPROVED, AND EFFECTIVE on the 25th day of August, 2005, at a regular meeting of the City Cm.mcil of the City of Lubbock, Texas. ATIEST: ~.J:!o~~ <.. h -= B!CCA GARZA, City Secre~ [SEAL] APPROVED AS TO CONTENT: By: By: CHISON, Bond Counsel LUB200nt003 Dallas Ordinance -Lubbock CO 2005 _2 -34- ) EXHIBIT A DESCRIPTION OF ANNUAL DISCLOSURE OF FINANCIAL INFORMATION The following information is referred to in Article XII of this Ordinance. Annual Financial Statements and Operating Data The financial information and operating data with respect to the City to be provided annually in accordance with such Section are as specified (and included in the Appendix or other headings of the Official Statement referred to) below: 1. The portions of the financial statements of the City appended to the Official Statement as Appendix B) but for the most recently concluded fiscal year. 2. . Statistical and financial data set forth in Tables 1-6 and 8A-15 of the Official Statement. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the financial statements referred to in Paragraph l above. LUB200nl003 Dallas 988799_3.DOC A-1 0 LUB200ni003 PAYING AGENT/REGISTRAR AGREEMENT between CI1Y OF LUBBOCK, TEXAS and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION Pertaining to City of Lubbock, Texas Tax and Waterworks System Surplus Revenue Certificates of Obligation Series 2005 Dated as of August 15,2005 Dallas 100693S_l.DOC TABLE OF CONTENTS Page Recitals ........................................................................................................................................ l ARTICLE I APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.0 1. Appointment. ................................................................................................... 1 Section 1.02. Compensation .................................................................................................. 1 ARTICLE II DEFINITIONS Section 2.01. Definitions ....................................................................................................... 2 ARTICLE III PAYING AGENT Section 3. 01. Duties of Paying Agent. .................................................................................. 3 Section 3.02. Payntent Dates ................................................................................................. 3 Section 4.01. Section 4.02. Section 4.03. Section 4.04. Section 4.05. Section 4.06. Section 4.07. Section 5.01. Section 5.02. Section 5.03. Section 5.04. Section 5.05. Section 5.06. Section 5.07. ARTICLE IV REGISTRAR Transfer and Exchange .................................................................................... 4 The Certificates ............................................................................................... 4 Form ofRegister .............................................................................................. 4 List of Owne:r-s .................................................................................................... 5 Cancellation of Certificates ............................................................................. 5 Mutilated, Destroyed, Lost, or Stolen Certificates .......................................... 5 Transaction Information to Issuer ................................................................... 6 ARTICLEV THE BANK Duties of Bank ................................................................................................. 6 Reliance on Documents, Etc ........................................................................... 6 Recitals of Issuer ............................................................................................. 7 May Hold Certificates ..................................................................................... 7 Money Held by Bank ...................................................................................... 7 lndenurification ............................................................................................... 8 lntetplea.dei" ........................................................................................................ 8 ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.0 1. Amendment ..................................................................................................... 8 LUB200ni003 Dallas 100693S_l.DOC (i) Section 6.02. Assignment ...................................................................................................... 8 Section 6.03. Notices ............................................................................................................. 8 Section 6.04. Effect of Headings ........................................................................................... 9 Section 6.05. Successors and Assigns ................................................................................... 9 Section 6.06. Separability ...................................................................................................... 9 Section 6.07. Benefits of Agreement .................................................................................... 9 Section 6.08. Entire Agreement ............................................................................................ 9 Section 6.09. Counterparts .................................................................................................... 9 Section 6.1 0. Termination ..................................................................................................... 9 Section 6.11. Governing Law .............................................................................................. 10 EXECUTION .............................................................................................................................. 1 Annex A-Schedule of Fees for Service as Paying Agent/Registrar LUB200nl003 Dallas 100693S_l.DOC (ii) PAYING AGENT/REGISTRAR AGREEMENT THIS PAYING AGENT/REGISTRAR AGREEMENT {the or this "Agreement''), dated as of August 15, 2005, is by and between CITY OF LUBBOCK, TEXAS (the "Issuer"), and JPMorgan Chase Bank, National Association (the "BankH), a New York state banking corporation duly organized and existing under the laws of the United States of America. WHEREAS, the Issuer has duly authorized and provided for the issuance of its Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates"), dated August 15, 2005, to be issued as registered securities without coupons; and WHEREAS, all things necessary to make the Certificates the valid obligations of the Issuer, in accordance with their terms, will be taken upon the issuance and delivery thereof; and WHEREAS, the Issuer is desirous that the Bank act as the Paying Agent of the Issuer in paying the principal, redemption premium, if any, and interest on the Certificates, in accordance with the terms thereof, and that the Bank act as Registrar for the Certificates; and WHEREAS, the Issuer has duly authorized the execution and delivery of this Agreement, and all things necessary to make this Agreement the valid agreement of the Issuer, in accordance with its terms, have been done; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE I APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR Section 1.01. Ap,pointment. (a) The Issuer hereby appoints the Bank to act as Paying Agent with respect to the Certificates in paying to the Owners of the Certificates the principal, redemption premium, if any, and interest on all or any·ofthe Certificates. (b) The Issuer hereby appoints the Bank as Registrar with respect to the Certificates. (c) The Bank hereby accepts its appointment, and agrees to act as, the Paying Agent and Registrar. Section 1.02. Compensation. (a) As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Annex A hereto for the first year of this Agreement, or such part thereof as this Agreement shall be in effect, and thereafter while this Agreement is in effect, the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying Agent/Registrar for municipalities, which shall be supplied to. the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. LUB200nt003 Dallas 100693S_l.DOC (b) In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof, including the reasonable compensation and the expenses and disbursements of its agents and counseL ARTICLE II DEFINITIONS Section 2.01. Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms have the following meanings when used in this Agreement: "Bank" means JPMorgan Chase Bank, National Association. "Bank Office" means the Bank's office in Dallas, Texas. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Certificate" or "Certificates" means any or all of the Issuer's Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005, dated August 15,2005. "Certificate Ordinance" means the ordinance of the City Council of the Issuer authorizing the issuance and delivery of the Certificates. "Fiscal Year" means the 12 month period ending September 30th of each year. "Issuer" means the City of Lubbock, Texas. "Issuer Request" and "Issuer Order" means a written request or order signed in the name of the Issuer by the Mayor of the Issuer, or any other authorized representative of the Issuer and delivered to the Bank. "Legal Holiday, means a day on which the Bank is required or authorized by applicable law to be closed. "Owner'' means the Person in whose name a Certificate is registered in the Register. "Paying Agent" means the Bank when it is perfonning the functions associated with the terms in this Agreement. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, or government or any agency or political subdivision of a government. "Predecessor Certificates'' of any pCliiicular Certificate means every previous Certificate evidencing all or a portion of the same obligation as that evidenced by such particular Certificate (and, for the purposes of this definition, any Certificate registered and delivered under Section 4.06 in lieu of a mutilated, lost, destroyed or stolen Certificate shall be deemed to evidence the same obligation as the mutilated, lost, destroyed or stolen Certificate). LUB200n1003 Dallas 100693S_I.DOC 2 "Record Date" means the last Business Day of the month next preceding an interest payment date established by the Certificate Ordinance. "Register" means a register in which the Issuer shall provide for the registration and transfer of Certificates. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice Chairman of the Board of Directors, the Chairman or Vice Chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Stated Maturity'' means the date or dates specified in the Certificate Ordinance as the fixed date on which the principal of the Certificates is due and payable or the date fixed in accordance with the terms of the Certificate Ordinance for redemption of the Certificates, or any portion thereof, prior to the fixed maturity date. ARTICLE III PAYING AGENT Section 3.01. Duties of Paying Agent. (a) The Bank, as Paying Agent and on behalf of the Issuer, shall pay to the Owner, at the Stated Maturity and upon the surrender of the Certificate or Certificates so maturing at the Bank Office, the principal amount of the Certificate or Certificates then maturing, and redemption premium, if any, provided that the Bank shall have been provided by or on behalf of the Issuer adequate funds to make such payment. (b) The Bank, as Paying Agent and on behalf of the Issuer, shall pay interest when due on the Certificates to each Owner of the Certificates (or their Predecessor Certificates) as shown in the Register at the close of business on the Record Date, provided that the Bank shall have been provided by or on behalf of the Issuer adequate funds to make such payments; such payments shall be made by computing the amount of interest to be paid each Owner, preparing the checks, and mailing the checks on each interest payment date addressed to each Owner's address as it appears in the Register on the Record Date. Section 3.02. Payment Dates. The Issuer hereby instructs the Bank to pay the principal of, redemption premiwn, if any, and interest on the Certificates at the dates specified in the Certificate Ordinance. LUB200/71003 Dallas 100693S_l.DOC 3 ARTICLE IV REGISTRAR Section 4.01. Transfer and Exchange. (a) The Issuer shall keep the Register at the Bank Office, and subject to such reasonable written regulations as the Issuer may prescribe, which regulations shall be furnished to the Bank herewith or subsequent hereto by Issuer Order, the Issuer shall provide for the registration and transfer of the Certificates. The Bank is hereby appointed "Registrar" for the purpose of registering and transferring the Certificates as herein provided. The Bank agrees to maintain the Register while it is Registrar. The Bank agrees to at all times maintain a copy of the Register at its office located in the State of Texas. (b) The Bank as Registrar hereby agrees that at any time while any Certificate is outstanding, the Owner may deliver such Certificate to the Registrar for transfer or exchange, accompanied by instructions from the Owner, or the duly authorized designee of the Owner, designating the persons, the maturities, and the principal amounts to and in which such Certificate is to be transferred and the addresses of such persons; the Registrar shall thereupon, within not more than three (3) business days, register and deliver such Certificate or Certificates as provided in such instructions. The provisions of the Certificate Ordinance shall control the procedures for transfer or exchange set forth herein to the extent such procedures are in conflict with the provisions of the Certificate Ordinance. (c) Every Certificate surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed in a manner satisfactory to the Bank, duly executed by the Owner thereof or his attorney duly authorized in writing. (d) The Bank may request any supporting documentation it feels necessary to effect a re-registration. Section 4.02. The Certificates. The Issuer shall provide an adequate inventory of unregistered Certificates to facilitate transfers. The Bank covenants that it will maintain the unregistered Certificates in safekeeping and will use reasonable care in maintaining such unregistered Certificates in safekeeping, which shall be not less than the care it maintains for debt securities of other govenunents or corporations for which it serves as registrar, or which it maintains for its own securities. Section 4.03. Form of Register. (a} The Bank as Registrar will maintain the records of the Register in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Register in any form other than a form which the Bank has currently available and currently utilizes at the time. (b) The Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. LUB2oon 1003 Dallas 1006935_1.IX>C 4 Section 4.04. List of Owners. (a) The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the cost, if any, of reproduction, a copy of the information contained in the Register. The Issuer may also inspect the information in the Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. (b) The Bank will not release or disclose the content of the Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a subpoena or court order or as otherwise required by law. Upon receipt of a subpoena or court order the Bank will notify the Issuer so that the Issuer may contest the subpoena or court order. Section 4.05. Cancellation of Certificates. All Certificates surrendered for payment, redemption, transfer, exchange, or replacement, if surrendered to the Bank, shall be promptly cancelled by it and, if surrendered to the Issuer, shall be delivered to the Bank and, if not already cancelled, shall be promptly cancelled by the Bank. The Issuer may at any time deliver to. the Bank for cancellation any Certificates previously certified or registered and delivered which the Issuer may have acquired in any manner whatsoever, and all Certificates so delivered shall be promptly cancelled by the Bank. All cancelled Certificates held by the Bank shall be disposed of pursuant to the Securities Exchange Act of 1934. Section 4.06. Mutilated. Destroyed. Lost. or Stolen Certificates. (a) Subject to the provisions of this Section 4.06, the Issuer hereby instructs the Bank to deliver fully registered Certificates in exchange for or in lieu of mutilated, destroyed, lost, or stolen Certificates as long as the same does not result in an overissuance. (b) If (i) any mutilated Certificate is surrendered to the Bank, or the Issuer and the Bank receives evidence to their satisfaction of the destruction, loss, or theft of any Certificate, and (ii) there is delivered to the Issuer and the Bank such security or indemnity as may be required by the Bank to save and hold each of them harmless, then in the absence of notice to the Issuer or the Bank that such Certificate has been acquired by a bona fide purchaser, the Issuer shall execute, and upon its request the Bank shall register and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost, or stolen Certificate, a new Certificate of the same stated maturity and of like tenor and principal amount bearing a number not contemporaneously outstanding. (c) Every new Certificate issued pursuant to this Section in lieu of any mutilated, destroyed, lost, or stolen Certificate shall constitute a replacement of the prior obligation of the Issuer, whether or not the mutilated, destroyed, lost, or stolen Certificate shall be at any time enforceable by anyone, and shall be entitled to all the benefits of the Certificate Ordinance equally and ratably with all other outstanding Certificates. (d) Upon the satisfaction of the Bank and the Issuer that a Certificate has been mutilated, destroyed, lost, or stolen, and upon receipt by the Bank and the Issuer of such indemnity or security as they may require, the Bank shall cancel the Certificate number on the LUB200/71003 Dallas 100693S_I.DOC 5 Certificate registered with a notation in the Register that said Certificate has been mutilated, destroyed, lost, or stolen; and a new Certificate shall be issued of the same series and of like tenor and principal amount bearing a number, according to the Register, not contemporaneously outstanding. (e) The Bank may charge the Owner the Bank's fees and expenses in connection with issuing a new Certificate in lieu of or exchange for a mutilated, destroyed, lost, or stolen Certificate. (f) The Issuer hereby accepts the Bank's current blanket bond for lost, stolen, or destroyed Certificates and any future substitute blanket bond for lost, stolen, or destroyed Certificates that the Bank may arrange, and agrees that the coverage under any such blanket bond is acc~table to it and meets the Issuer's requirements as to security or indemnity. The Bank need not notify the Issuer of any changes in the security or other company giving such bond or the terms of any such bond, provided that the amount of such bond is not reduced below the amount of the bond on the date of execution of this Agreement The blanket bond then utilized by the Bank for lost, stolen, or destroyed Certificates by the Bank is available for inspection by the Issuer on request. Section 4.07. Transaction Information to Issuer. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Certificates it has paid pursuant to Section 3.01; Certificates it has delivered upon the transfer or exchange of any Certificates pursuant to Section 4.01; and Certificates it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Certificates pursuant to Section 4. 06 of this Agreement. ARTICLEV THE BANK Section 5.01. Qy.ties of Bank. The Bank undertakes to perform the duties set forth herein and in accordance with the Certificate Ordinance and agrees to use reasonable care in the performance thereof. The Bank hereby agrees to use the funds deposited with it for payment of the principal of, redemption premium, if any, and interest on the Certificates to pay the Certificates as the same shall become due and further agrees to establish and maintain all accounts and funds as may be required for the Bank to function as Paying Agent. Section 5.02. Reliance on Documents. Etc. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or LUB200nt003 Dallas 1006935_l.DOC 6 in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any ordinance, resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, certificate, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Certificates, but is protected in acting upon receipt of Certificates containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Owner or an attorney-in-fact of the Owner. The Bank shall not be bound to make any investigation into the facts or matters stated in an ordinance, resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, certificate, note, security, or other paper or document supplied by Issuer. (e) The Bank may consult with counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. Section 5.03. Recitals of Issuer. (a) The recitals contained herein and in the Certificates shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. (b) The Bank shall in no event be liable to the Issuer, any Owner or Owners, or any other Person for any amount due on any Certificate except as otherwise expressly provided herein with respect to the liability of the Bank for its duties under this Agreement. Section 5.04. May Hold Certificates. The Bank, in its individual or any other capacity, may become the Owner or pledgee of Certificates and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. Section 5.05. Money Held by Bank (a) Money held by the Bank hereunder need not be segregated from any other funds provided appropriate accounts are maintained. (b) The Bank shall be under no liability for interest on any money received by it hereunder. (c) Subject to the provisions of Title 6, Texas Property Code, any money deposited with the Bank for the payment of the principal, redemption premium, if any, or interest on any Certificate and remaining unclaimed for three years after final maturity of the Certificate has become due and payable will be paid by the Bank to the Issuer, and the Owner of such UJB200nl003 Dallas 100693S_I.IXX: 7 Certificate shall thereafter look only to the Issuer for payment thereof, and all liability of the Bank with respect to such monies shall thereupon cease. (d) The Bank will comply with the reporting requirements of Chapter 74 of the Texas Property Code. (e) The Bank shall deposit any moneys received from the Issuer into a trust account to be held in a paying agent capacity for the payment of the Certificates, with such moneys in the account that exceed the deposit insurance, available to the Issuer, provided by the Federal Deposit Insurance Corporation to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas and to the extent practicable under the laws of the United States of America to secure and be pledged as collateral for trust accounts until the principal and interest on the Certificates have been presented for payment and paid to the owner thereof. Payments made from such trust account shall be made by check drawn on such trust account Wlless the owner of such Certificates shall, at its own expense and risk, request such other medium of payment. Section 5.06. Indemnification. To the extent permitted by law, the Issuer agrees to indemnify the Bank, its officers, directors, employees, and agents for, and hold them hannless against, any loss, liability, or expense incurred without negligence or bad faith on their part arising out of or in cormection with its acceptance or administration of the Bank's duties hereunder, and under Article V of the Certificate Ordinance, including the cost and expense (including its counsel fees) of defending itself against any claim or liability in cormection with the exercise or perfonnance of any of its powers or duties under this Agreement. Section 5.07. lntemleader. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demands or controversy over its persons as well as funds on deposit in a court of competent jurisdiction within the State of Texas; waive personal service of any process; and agree that service of process by certified or registered mail, return receipt requeste~ to the address set forth in this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction within the State of Texas to determine the rights of any person claiming any interest herein. · ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.01. Amendment. This Agreement may be amended only by an agreement in writing signed by both of the parties hereof. Section 6.02. Assigrunent. This Agreement may not be assigned by either party without the prior written consent of the other. Section 6.03. Notices. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or pennitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Baill4 respectively, at the addresses shown below: LUB200ni003 Dallas 100693S_l.DOC 8 (a) (b) (c) if to the Issuer: if to the Bank: City of Lubbock, Texas 1625 13th Street Lubbock, Texas 79457 Attention: Cash and Debt Manager JPMorgan Chase Bank, National Association 2001 Bryan Street, 8th Floor Dallas, Texas 75201 Attention: Corporate Trust Department Section 6.04. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. · Section 6.05. Successors and Assigns. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed or not. Section 6.06. Se.parability. If any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 6.07. Benefits of Agreement. Nothing herein, express or implied, shall give to any Person., other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. Section 6.08. Entire Agreement. This Agreement and the Certificate Ordinance constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar, and if any conflict exists between this Agreement and the Certificate Ordinance, the Certificate Ordinance shall govern. Section 6.09. Countexparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. Section 6.1 0. Termination. (a) This Agreement will terminate on the date of final payment by the Bank issuing its checks for the final payment of principal, redemption premium, if any, and interest of the Certificates. (b) This Agreement may be earlier tenninated upon sixty ( 60) days written notice by either party; provided, that, no termination shall be effective until a successor has been appointed by the Issuer and has accepted the duties imposed by this Agreement. A resigning Paying Agent/Registrar may petition any court of competent jurisdiction for the appointment of a successor Paying Agent/Registrar if an instrument of acceptance by a successor Paying Agent/Registrar has not been delivered to the resigning Paying Agent/Registrar within sixty (60) days after the giving of notice of resignation. LUB200n 1003 Dallas l00693S_I.DOC 9 (c) The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. Section 6.11. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. LUB200n1003 Dallas 100693S_l.OOC 10 rN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. s ATTEST: ~~ ~--c= Becky Garza, City Secretary JPMORGAN CHASE BA~ NATIONAL ASSOCIATION By: Title: ANNEX"A" SCHEDULE OF FEES FOR SERVICE AS PAYING AGENT/REGISTRAR Proposal and Schedule of Fees for Services as Paying Agent and Registrar in connection with City of Lubbock Tax and Waterworks System Revene Certifreates of Obligation, Series 2005 Based upon our current understanding of your proposed transaction, our fee proposal is as follows: Notes: Pricing for Paying Agent and Registrar The Paying Agent and Registrar Fee covers the maintenance of records as registrar, processing of transfers, and payment of interest/principal funds for Debt Service. Option No.1 Acceptance Fee ArulUal Fee (payable annually in advance) Option No.2 One Time Fee (payable at closing) Option No.3 Acceptance Fee Annual Fee $0.00 $300.00 $2,500.00 $0.00 $0.00* *Open a New Money Custody Account and the traditional paying agent functWns are included as part of the custody arrangement at no extra fee -for the life of the issue. This account is designed to han41e project funds on new money transactions. More information will be provided upon request Please note that our willingness to act in the capacities specified above and the fees designated in this proposal are indicative and based upon our understanding of the transaction. We reserve the right to revise this proposal should any material aspect of the transaction differ from our understanding. Also, our acceptance of the above contracts and duties is subject to our usual internal review, document review and the receipt of appropriate immunities and indemnities. JPMorgan's Trust Accounting Reporting (TAR) website gives corporate and municipal issuers 2417 Internet access to information on their cash and asset transactions/positions free of charge. TAR also electronically posts and archives trust and escrow account statements so you can access them online, easily at your convenience. With functionality allowing the user to customize reporting, choose format, drill down for detail, and download for convenience, Trust Accounting Reporting on the Web is a powerful decision-making and account management tool. To further facilitate your TAR online experience, intra-day updates are provided for more timely and accurate reporting. This capability gives J.P. Morgan Trust Company, N. A. • Institutional Trust Services • 201 Main Street-1st Floor, Fort Worth, TX 76102 Telephone: (817) 878-7505 • Facsimile: (817) 878-7540 jeffrey.c.salavarria @jpmorgan.com ) ~ ... ,.,JPMorgan JPMorgan Fee Proposal July 21, 2005 you the option of viewing asset details as of intra-day, close-of-business or to review prior month-end reports. Please visit us at www .jpmorgan.com/tar for more details or contact your JPMorgan Relationship Manager or Sales Representative. Annual fees include one standard audit confumation per year without charge. Standard audit confirmations include the final maturity date, principle paid, principal outstanding, interest cycle, interest rate, interest paid, cash and asset infonnation. interest rate, and asset statement information. Non- standard audit confirmation requests may be assessed an additional fee. Performance of any extraordinary service or incurring extraordinary expenses, such as those in connection with any default, account resignation. or outside legal counsel charges, will be billed in addition to the stated per annum fees. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record infonnation that identifies each person who opens an account. When you open an account, we will ask for information that will allow us to identify you. Dated August 22, 2005 NEW ISSUE -Book-Entry-Only Ratings: Moody's: Applled For S&P: Applied For Fitch: Applied For (See "Other lofonnation - RAtings" aod "Bond Insurance" herein) In the opinion of Bond Counsel, interest on the Certificates is exeludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "Tax Matters -Tax Exemption" herein for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations. THE CERTIFICATES WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITIJTIQNS $48,635,000• CITY OF LUBBOCK. TEXAS (Lubbock County) TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Dated Date: August 15, 2005 Due: February 15, as shown oa inside cover PAYMENT TERMS ... Interest on the $48,635,000• City of lubbock. Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates") will ae<:rue from August IS, 2005 (the "Dated Date") and will be payable February 15,2006, and on each August IS and February IS thereafter until maturity or prior redemption. Interest on the Certificates will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee nfThe Depository Trust Company ("DTC") pursuant to the Book·Entry-Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $~,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the owners thereof. Principal of, premium, if any, and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See "The Certificates -Book-Entry-Only System" herein. The initial Paying Agent/Registrar is JPMorgan Chase Bank. National Association, Dallas, Texas (see "The Certificates-Paying Agent/Registrar"). AUTHORITY fOR IssUANCE ... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas (the "State"), particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and constitute direct obligations of the City of Lubbock, Texas (the "City"), payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property within the City, and (ii) a pledge of surplus net revenues of the City's Waterworks System, not to exceed $500, as provided in the ordinance authorizing the Certificates (the "Ordinance") (see "The Certificates -Authority for Issuance"). PURPOSE .•. PrO<:eeds from the sale of the Certificates will be used for the purpose of (i) construction and acquisition of public improvements, including streets, parks, drainage, water and sewer and electrical improvements, a water resouroes plan and an airport parking lot and (ii) paying the costs associated with the issuance of the Certificates. BONO INSURANCE . • • The City has made application to municipal bond insurance companies to have the payment of the principal of and interest on the Certificates insured by a municipal bond guaranty policy. CUSIP PREFIX: 549187 SEE MATURITY SCHEDULE, 9 Digit CUSIP AND REDEMPTION PROVISIONS ON THE REVERSE OF THIS PAGE LEGAUTY ... The Certificates are offered for delivery when, as and if issued and received by Underwriters and subject to the approving opinion of the Attorney General of Texas and the opinion of Vinson & Elkins L.L.P., Bond Counse~ Dallas, Texas (see Appendix C, "'Form of Bond Counsel's Opinion"). Certain legal matters will be passed upon for the Underwriters by McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Counsel for the Underwriters. DELIVERY •.. lt is expe-cted that the Certificates will be available for delivery through DTC on September 29, 20()5. • Preliminary, subject to change. A.G. EDWARDS & SONS, INC. M.E. ALLISON & Co., INC. RBC DAIN RAUSCHER INc. MATURITY SCHEDULE* CUSIP Prefix: 549187 ttl Principal Maturity Interest Initial CUSIP Principal Maturity Interest lrlitial CUSIP Amount (February I 5) Rate Yield Suffix <n Amount (Febnwy 15) Rate Yield Suffix<•> s 1,495,000 2006 % % T6(9) s 2,400,000 2016 % % U8(3) 1,580,000 2007 T7 (7) 2,510,000 2017 U9(1) 1,655,000 2008 T8 (5) 2.635,000 2018 V2(S) 1,740,000 2009 T9(3) 2,165,000 2019 V3 (3) 1,825,000 2010 U2{6) 2,895,000 2020 V4(1) 1,900.000 2011 U3(4) 3,030,000 2021 V5 (8) 1,995,000 2012 U4(2) 3,180,000 2022 V6{6) 2,085,000 2013 us (9) 3,325,000 2023 V7 (4) 2,\85,000 2014 U6(7) 3,480,000 2024 V8(2) 2,300,000 2015 U7(5) 3,655,000 2025 V9(0) (Accrued Interest from August 15, 2005 to be added) • Preliminary, subject to change. (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, A Division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the City nor the Underwriters shall be responsible for the selection or correctness of the CUSIP numbers shown on the inside cover page. OPTIONAL REDEMPTION .•• The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15,2016, in whole or in part in principal amounts of$5,000 or any integral multiple thereof, on February IS, 2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Certificates -Optional Redemption"). 2 ) \ , ) For ponpost of compliance "'''h Rule 15e2-12 of the United Statu Securtltn and ~chanv Ct>mMIUlOII. thts document as tlte same may be wpplemnrted or et>rrected /f'()fll Jrme-lo-ttmt. may be treated 111 a Pnlrmtnt:lry Officraf Statement of rite Cuy wult rtspeC1 ro the Cerrtficatu .Urcnbed ltttYifl, wlttclt has been "drtmed finar by tht Ctty as of the dllte h<TYof (or of arry such suppltmtnl or corrw:toon) UC<pl for rhe omrs.,on of no more titan the urfonmmon provrded by Subswron (b){l) ofl/ule 15c2-12 This OffictDI Statemtnt. which includes rite covor page. tnside covet page and the Appendices herero. dots not COfi$11/Utt"" offer ra nil or tlte saltcttotron of an offer ra buy many JUrisdJction to any person 10 whom it is unlawful to make si/Ch offer, saltcitallon or sole. No dealer, broker. salespen<on or other person has bun authoriud to g•ve •nformarian or to mak4 any representation other rhan rhos• et>ntorned in this Of/lclol Statement, and. if given or made. such otltrr informmron or repre-sentations must not be rtfled upon The informanon set fnrth here111 Ita.< been flbra/Mdjrom 1110 City and other source.< btllflvtd to bt reltablt. but such ittjonnam>n rs 11()1 guarantud as to accuroey or completeness and ts not to be carutrued as the promise or guarantee of rht Fonanclal Advt$Or. Thrs Official Statement conrorn.r, 111 part. tstim4tes and IIJ(Jtllr> of oponio" which ore not tnUndtd "-' 3ttne,rnrs Qj facr. ond no representation Is made as 10 tM cornctnua of sllclt tsli11Jatu and opmlons. or that IItty will be realtztd. 11tt mformatt<m and uprust()IU of opinion conlllirttd herein ttrt svbjecr ro cJrongt wirhour nolice. and neither tht delivery of rhl1 OffiCial SKllt-nl nor ttrry ~ale madt !tereunder shall, undu any clrt:¥1ftStOnctl. create any implication rhor t!ttrt has been no clrttnge in tlw llffaln of tlte Ciry "' oth•r mauen dtrcn'hed hrrern IIKCt the dart hereof. Set "Other Information -C01JtiKUi1!g Dlsclosurt of fnjormatioK "for o description of the City' I rmthrtaA:i11g 10 pl'()v/de certain information on o conrmuing bam. THE CERTIFICATES AilE EXEMPT FIIOM 1/EGISTRAT/ON WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN R£GISTEI/ED THEREWITH. THE REGISTRATION. QUAUFICA110N. OR EXEMPTION OF THE CERTIFICATES IN ACCORDANCE WITH APPUCABLE SECURITIES UW PROIIJSIONS OF THE JURISDICTION IN WHICH THESE SECURITIES HAVE BEEN 1/EG/ST£1/ED OR EXEMPTED SHOULD NOT BE REGARDED AS A 1/ECOMM/iNDAT!ON THEIIEOF. NEITHER THE CiTY NOR THE UNOERW/UTF..R.S MAKE ANY 1/EPRESE/'ffATION OR WARRANTY WITH RESPECT ro THE INF'OIIMATION CO!{'l'A/NED IN THIS OFFICIAL STATEMEJVT 1/EGAR.DING THE DEPOSITORY TRUST COMPANY OR ITS BOOK·EI'ffRY-ONLY SYSTEM. AS SUCH INFORMATION HAS BEEN FUIINISHED BY THE DEPOSJWRY TRUST COMPANY IN CONNECTION ll'rrH THE OFFERiNG OF THE CERTIFICATES. THE UNDERWRiTERS MAY OVER-ALWT OR EFFECT TRANSACTIONS THAT STABIUZE OR MAINTAiN THE MAM£T PRICES OF THE CERTIFICATES AT A LE/IEJ. ABOVE THAT WHICH MJGNT OTHERWISE PFIEVAJL IN THE OPEN MAI/XET. SUCH STABIUZJNG, IF COMMENCED. MAY BE DISCONTINUED AT ANT TIME. TIN Un~Urwritus have pl'fJIIIdtd the followi~g ttnltnct for <11ciusion m tM Officio/ Slllltmenl. The Underwrite,. hov4 ~oftwed rite lnformolian in this Official Sltlttmtnt in aecordanct with, and as pal'l of their responsibilities to mw:llors untkr the fout'Diltcuritie.r laws as applied to tlte facrs and c/I'Cflmslonr;u af this tmn..action, but the UndeNritus do trOT phrDnltt the accul'llcy cr complettflus of such lnjormo11an. TABLE OF CONTENTS OFFfCIAL STATEMENT SUMMARY-···-····· ...................... 4 CITY OFFICIALS, STAFF AND CONSULT ANTS -········· .... 6 ELECTED 0Fl'ICIALS .............................................................. 6 SELECTED ADMINISTIV.TIVE STAfF ...................................... 6 CONSULTANTS AND ADVISORS ............................................. 6 INTRODUCI'lON ···-···········-····~·····~········-····--·······-·-····-·· 7 1liE CERTIFlCATES -------··--·-··--·-·-.. ··-.. -····--··· .. ••••· 7 BOND INSURANCE. .......... -... ·-··-···-···· .. -................. _ .... 12 DISCUSSION OF RECENT FINANCfAL AND MANAGEMENT EVENTS.-·"·-·------------·---·-··--13 TAX INFORMATION ........... -................. ,_ .•••.. _ ..... -27 TABLE I -VALUATION, EXEMmONS ANO GENERAL 0BUOATION DElrr .................................................... 31 TABLE 2 -TAXABLE ASSESSED VALUATIONS BY CATEGO«.Y .............................................. -............... 33 TABLE3A • VAWATIONANOGENEJW.0BUOATlON0EBT HISTO~Y .................................................................... 34 TABLE 38 • OEIUVATION OF GENERAL I"URPPSE fUNDED TAXDeBT ................................................................. 34 TABL£4-TAXRATE,LEVYANOCOLLECnONHIST'ORY .34 TABLE 5-TENLAJtGesTTAXPAY1!RS ............................... 35 TABLE6-TAXADEQUAd11 ............................................. 35 TABLE 7 -EsTIMATED OV'J!JU.AJ'PINO DEBT ...................... 36 DEBT INFORMATION ........... -... ····--·-·-.. • .. --···-... 37 TABL£8A-PRo-FORMA0ENERAL0BLIGATION0E8T SEll VICE R.EQUIR.I!MENTS .......................................... 3 7 TABLE 88 -DIVISION Of DEBT SERVICE RI!QUIREMI!mS. 38 TABLE 9 -INTE.R.EST AND SINKING FUND BUDGET PROJEcnON .............................................................. 39 TABLE 10 • CoMPUTATIONOPSW..Stm'OR11N006BT .. .40 3 TABLE II • AUIHORJZED BUT UNISSUED GENERAL OBLIGATION BONOS ................................................. 4 1 TABLE 12 -OTHER OBUOATIONS ....................................... 4 I FINANCIAL INFORMATION····-··---·······--·---------·-···-43 TABL£ 13 -CHANGES IN NET A.ssEr.i ............................... 43 TABLE 13-A -GENEML FUN!> Rl!vENUES AND EXI'ENDmJR£ HISTORY ............................................ 44 TABLE 14 • MUNIOPAL SALES TAX HISTORY ................... 45 TABLE IS-CUJtRENT INVESTMENn ................................... 49 TAX MA ITERS -· .. -····"····----.. ---····-······---·" ........ -... ·-·50 OTHER INFORMATION -....... _"·-----···-·· ... -..... -.... 52 RATING'S .............................................................................. 52 LmGATION .......................................................................... 52 REGISTRATION AND QUAUFICATION 01' CERTIFICATES FOR SALE ......................................................................... 53 LEGAL INVESTMeNTS AND EuOIBIUTV TO SecUR£ PuBLIC fUNDS IN TExAs ....................................................... 53 LEGAL OPINIONS ................................................................. 53 CONTIN1.JING DISCLOSUllE OP INI'OJtMATION ..................... 53 FINANCIAl. ADVISOR ........................................................... 55 UNDERWIUTING ................................................................... 55 FORW~LooKING STATEMENTS DISCLAIMER ................ 55 Mlsceu..Amous ................................................................. 56 APPENOICF.S GfiN'BilAL INFORMATION REoAJtDINO THE Crrv ................. A ExCeJUrrs FROM THB ANNuAL FINANCJAL REPORT.......... B FOR.M OF BONo COUNSEL'S OPINION ................................. C The cover page hereof. this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Sbllement. OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete infonnation and definitions contained or incorporated in this Official Statement The offering of the Certificates to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE CITY ..................................... The City of Lubbock, Texas (the "City") is a political subdivision and municipal corporation of the State, located in Lubbock County, Texas. The City covers approximately liS square miles and has an estimated 2005 population of209,120 (see "Introduction-Description of the City"). THE C£RTIFtCA n;s ..................... The Certificates are issued as $48,635,000" Tax and Waterworks System Surplus Revenue Certificates of Obliga.tion. Series 2005. The Certificates are issued as serial certificates maturing February 15 in each of the years 2006 through 2025 (see "The Certificates - Description of the Certificates"). PAYMENT OF INTEREST .............. Interest on the Certificates accrues from August 15, 2005 and is payable February 15, 2006 and each August 15 and February t5 thereafter until maturity or prior redemption (see "The Certificates-Description of the Certificates" and "The Certificates· Optional Redemption"). AUTJIORITV FOR ISSUANCE.......... The Certificates are issued pursuant to the general laws of the Stale, particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and an Ordinance passed by the City Council of the City (see "The Certificates - Authority for Issuance"). St:CORJT'V FOR THE CERTIFICA TBS .................. ............ The Certificates constitute direct obligations of the City, payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property within the City, and (ii) a pledge of surplus net revenues, not to exceed $500, of the City's Waterworks System (see "The Certificates • Security and Source of Payment"). REDEMPTION............................... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2016, in whole or in part in principal amounts of$5,000 or any integral multiple thereof, on February 15, 2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see "The Certificates • Optional Redemption"). TAX ExEMPTION ............................ In the opinion of Bond Counse~ the interest on the Certificates will be excludable from gTOSs inoome for federal inoome tax purposes under existing law and the Certificates are not private activity bonds. See ''Tax Matters -Tax Exemption" for a discussion of the opinion of Bond Counsel, including a description of the alternative minimum tax consequences for corporations. UsE or PROCttDS ....................... Proceeds from the sale of the Certificates will be used for the purpose of (i) construction and acquisition of public improvements including streets, parks, drainage, water and sewer and electrical improvements, a water resources plan and an airport parking lot and (ii) paying the costs associated with the issuance of the Certificates. RATINGS ...................................... The presently outstanding tax supported debt of the City is rated "A I" by Moody's Investors Service, Inc. ("Moody's"), "AA·" by Standard & Poor's Ratings Services, A Division of The McGraw~Hill Companies, Inc. ("S&P") and "AA·" by Fitch Ratings ("Fitch"). The City also has issues outstanding which aze rated "Aaa" by Moody's, "AAA" by S&P and "AAA" by Fitch through insurance by various commercial insurance companies. Applications for contract ratings on the <Mtificates have been made to Moody's, S&P and Fitch (see "Other Information· Ratings"). BooK-ENTRY-ONLY SYSTEM ...................................... The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book-EntJy·Only System described herein. Beneficial ownership of the Certificates may be aC<luired in denominations of SS,OOO or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereat: Principal of, premium, if any, and interest on the Certificates will be payable by die Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to die participating members ofDTC for subsequent payment to the beneficial owners of the Certificates (see "The Certificates-Book-EntJy-Only System"). PAYMENT RECORD ........ ...... ....... The City has never defaulted in payment of its general obligation tax debL • Preliminary, subject to change. 4 SELECTED FINANCIAL lNFORMATlON Ratio Gene raJ Purpose Per Capita Funded Fiscal Per Capita General General Tax Debt Year Taxable Taxable Purpose Purpose to Taxable Ended Estimated Assessed Assessed Funded Funded Assessed 9/30 Po£ulation Ill Valuation Valuation Tax Debt (2) Tax Debt (l) Valuation 2001 201,097 $ 6,638,911,093 $ 33,013 $ 58, 122,809 $ 289 0.88% 2002 202,000 6,909,309,707 34,205 63,115,346 312 0.91% 2003 204,737 7,342,344,867 35,862 70,188,204 343 0.96% 2004 206,290 7,921,590,380 38,400 70,161,218 340 0.89% 2005 209,120 8,664,190,909 41,432 96,123,286 (J) 460 ()) 1.11% (1) Source: The City of Lubbock. Texas. (2) Does not include self-supporting debt. (3) Projected, includes the Certificates. (_.) Partial collections through July 31,2005. GENERAL FUND CONSOLIDATED STATEMENT SUMMARY Fiscal Year Ended S!:£tember 30, 2004 2003 2002 2001 Fund Balance at Beginning of Year $ 9,417,346 $ 16,598,252 (I) $ 16,716,042 $ 16,620,652 Total Revenues and Transfers 97,437,436 91,753,809 92,490,374 90,463,799 Total Expendirures and Transfers 94,160,257 98,934,715 90,594,059 90,368,409 Fund Balance at End of Year $ 12,694,525 $ 9,417.346 $ 18,612,357 $ 16,716,042 (l) ()) Less: Resf:rves and Designations !1,903,690~ ~2.361,860~ Undesignated Fund Balance $ 12.694,525 $ 9,417,346 s 16,708,667 $ 14.354,182 %of Total Tax Collections 99.29% 99.41% 98.78% 99.69% 96.48% {4) 2000 $ 17,248,025 85,518, 1(}2 86,1451475 $ 16,620,652 (21857.096} $ 13,763,556 (1) The "Fund Balance at Beginning of Year" was restated. See "Discussion of Recent Financial and Management Events-FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues" for a funher explanation of the restatements. For additional information regarding the City, please contact: Ms. Lee Ann Dumbauld Mr. Vince Viaille Mr. Jason Hughes CFO/ACM First Southwest Company First Southwest Company City of Lubbock or I 001 Main Street or 325 North St. Paul Street P.O. Box 2000 Suite 802 Suite800 Lubboc~ Texas 79457 Lubbock. Texas 79401 Dallas, Texas 75201 Phone (806) 775-2016 Phone (806) 749-3792 Phone (214) 943-4000 Fax (806) 775-2051 Fax (806) 749-3793 Fax (214) 953-4050 5 ) Cm' OFFICIALS, STAFF AND CONSULT ANTS ELECT EO OFFICIALS City Council Marc McDougal• Mayor LindaDe~on Councilmember, District I Floyd Price Council member, District 2 Gary Boren Councilmember, District 3 Phyllis Jones Councilmember, District 4 Tom Martin Councilmember, District 5 Jim Gilbreath Council member, District 6 Date of I nsta!lat ion to 0 ffice May, 2002 May, 2004 June,2004 May, 2002 May, 2004 May, 2002 May, 2003 • Mr. McDougal has served on the Council since May, 1998. SELECTED ADMINISTRATIVE STAFF Term Expires Occupation May, 2006 Business Owner, Real Estate May, 2006 Business Owner May,2008 Retired May, 2006 Business Owner, Personnel Services May, 2008 Self-Employed May,2006 Retired Law Enforcement May,2008 Business Owner Date of Employment Date of Employment Total Government Name Position in Current Position with Ci!i: of Lubbock Service Lou Fox City Manager February, 2004 February, 2004 24 Years Tom Adams Deputy City Manager August, 2004 August. 2004 22 Years Lee Ann Dumbauld Chief financial Officer/ July,2004 July, 2004 20+ Years Assistant City Manager Quincy White Assistant City Manager September, 2000 September, 2000 13 Years Anita Burgess City Attorney December, 1995 December, 1995 9 Years Rebecca Garza City Secretary January, 2001 August, 1996 8 Years Andy Burcham Cash & Debt Manager November, 1998 November, 1998 6 Years CONSULTANTS AND ADVISORS Auditors .......................................................................................................................................................................... KPMG LLP Dallas. Texas Bond Counsel ................................................................................................................................................ Vinson & Elkins L.L.P. Dallas, Texas Financial Advisor ... ·-··········· ....................... ····················-························ ............... m .............................. First Southwest Company Lubbock and Dallas, Texas 6 ) PRELIMINARY OFFICIAL STATEMENT RELATING TO S48,63S,OOO• CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFlCATES OF OBLIGATION, SERIES 2005 INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $48,635,000* City of Lubbock. Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005. Capitalized terms used in this Official Statement bave the same meanings assigned to such terms in the Ordinance to be adopted on the date of sale of the Ce.rtificates which will authorize the issuance of the Certificates, e)tcept as otherwise indicated herein. There follows in this Official Statement descriptions of the Certificates and certain information regarding the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in !heir entirety by reference to each such document. Copies of such documents may be obtained from the Dallas, Texas office of the City's Financial Advisor, First Southwest Company. DESCRIPTION OF TH£ CITY .•. The City is a political subdivision and municipal corporation of the State., duly organized and existing under the laws of lhe State, including the City's Home Rule Charter. The City was incorporated in 1909, and first adopted its Home Rule Charter in 1917. The City operates under a Council/Manager fonn of government with a City Council oomprised of the Mayor and six Councilmembers. The Mayor is elected at-large for a two-year tenn ending in an even- numbered year. Each of the six members of tbe City Council is elected from a single-member district for a four-year term of office. The terms ef three members of the City Council expire in each even-numbered year. The City Manager is the chief administrative officer for the City. Some of the services that lhe City provides are: public safety (police and fire protection), highways and streets, electric, water and sanitary sewer utilities, airport, sanitation and solid waste disposal, health and social services, culture-recreation, public transportation, public improvements, planning and zoning, and general administrative services. The 2000 Census population for the City was 199,564; the estimated 2005 population is 209,120. The City covers approximately 115 square miles. FINANCIAL AND MANAGEMENT CHALLENGES .. .In the past three fiscal years, the City has experienced a variety of financial and management challenges, and certain investigations and reports conducted or prepared by the City or its consultants have found weaknesses in the City's general management and financial practices, both with the City in general and the City's electric utility system, blown as Lubbock Power & Light ("LP&L "), in particular. The City is of the view that it bas substantially addressed many of these conditions. Reference is made to "Discussion of Recent financial and Management Events" for a discussion of these events and a description of how the City has responded to these events. THE CERTlFICA TES DESCRIPTION OF THE CERTIFlCATES ... The Certificates are dated August 15, 2005, and mature on February 15 in each ofUle 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. Interest will be payable on February 15, 2006 and on each August 15 and February 15 thereafter until maturity or prior redemption. The definitive Certificates will be issued only in fully registered fonn in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. No physical delivery or the Certificates will be made to the owners thereof. Principal of, premiwn, if any, and interest on the Certificates will be payable by the Paying Agent!Registtar to Cede &. Co., which will make distribution of the amounts so paid to the participating members ofDTC for subsequent payment to the beneficial owners of the Certificates. See "lne Certificates • Book-Entry-Only Systemft herein. AUTHORITY FOR ISSUANCE ••• The Certificates are being issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Govenunent Code (the Certificate of Obligation Act of 1971), as amended, and an ordinance passed by lhe City Council (the "Ordinance"). S£CUJUTY AND SoURCE OF PAYMENT ... All taxable property within the City is subject to a continuing direct annual ad valorem tax levied by the City sufficient to provide for the payment of principal of and interest on all obligations payable in whole or in part from ad valorem taxes, which tax must be levied within limits prescribed by law. Additionally, the Certificates are payable from and secured by a limited pledge (not to exceed $500) of surplus net revenues of the City's Waterworks System, as provided in the Ordinance authorizing the Certificates. TAX RAn LIMITATION ... All taxable property within the City is subject to the levy, assessment and collection by the City of a continuing. direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax 7 debt within the limits prescribed by law. Arti<:~ XI, Section 5. of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City adopts the constitutionally authorized maximum tax rate of$2.50 per $100 Taxable Assessed Valuation. OPTIONAL REOtMPTION ... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2016, in whole or in part in principal amoWtts of$5,000 or any integral multiple thereof, on February 15,2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Certificates are to be redeemed, the City may select the maturities of Certificates to be redeemed. If less than all the Certificates of any maturity are to be redeemed. the Paying Agent/Registrar (or DTC while the Certificates are in Book-Entry-Only form) shall determine by lot the Certificates. or portions thereof, within such maturity to be redeemed. If a Certificate (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Certificate (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the rede.mption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption dale. NOTICE OF REDEMPTION ... Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAY ABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY CERTIFICATE OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH CERTIFICATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. AMEN1)!1fENTS ... The City may amend the Ordinance without the consent of or notice to any registered owners in any manner not detrimental to the interests of the registered owners, including the curing of any ambiguity, inconsistency, formal defect or omission therein. In addition, the City may, with the written consent of the holders of a majority in aggregate principal amount of the Certificates then outstanding, amend, add to, or rescind any of the provisions of the Ordinance, except that, without the consent of the registered owners of all of the Certificates no such amendment, addition or rescission may (i) change the date specified as the date on which the principal on any installment of interest is due payable, reduce the principal amount or the rate of interest, or in any other way modifY the terms of their payment, (ii) give any preference to any Certificate over any other Certificate or (iii) reduce the aggregate principal amount required to be held by owners for consent to any amendment, addition or waiver. DEFEASANCE ... The Ordinance provides that the City may discharge its obligations to the registered owners of any or all oftbe Certificates to pay principal, interest and redemption price thereon in any matter permitted by law. Under current Texas law, such discharge may be acoomplished by either (i) depositing with the Comptroller of Public Accounts of the State of Texas a sum of money equal to principal, premium, if any and all interest to acerue on the Certificates to maturity or redemption and/or (ii) by depositing with a paying agent or other authorized escrow agent amounts sufficient to provide for the payment and/or redemption of the Certificates; provided that such deposits may be invested and reinvested only in (a) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to Investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (c) noncallable obligations of a state or an agency or a county, mWlicipality, or other political subdivision of a state that have been refunded. and that are rated as to investment quality by a nationaOy recognized investment rating firm not less than AAA or its equivalent. Under current TeKas law, upon the making of a deposit as described above, such Certificates shall no longer be regarded to be outstanding or unpaid. After firm banking and fmancia! ammgements for the dischatge and final payment or redemption of the Certificates have been made as described above, all rights of the City to initiate proceedings to call lhe Certificates for redemption or to take any other action amending the terms of the Certificates are extinguished; provided however, the right to call the Certificates for redemption is not extinguished if the City: (i) in the proceedings providing for the finn banking and financial am.ngements, expressly reserves the right to call the Certificates for redemption; (ii) gives notioe of the reservation of that right to the owners of the Certificates immediately following the making of the fum banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. BooK-ENTR'II-ONLY SYSTEM ••. This section describes how owrurrship of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid ro and credited by The Depository Trust Company ("DTC'J, New York. New York. while the Certificates are registered in its nomin£e name. The informaJion in this section concerning DTC and the Book-EnJry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. Thl City believes the source of such information to be reliable, but tak.ts no responsibility for tire accuracy or completeness thereof 8 ' I ) The City cannot and does not give any assurance that {1) DTC will distribute payments of debt service on the Certifirutes, or redemption or other notices, to DTC Participants. f4l DTC Participants or others will distribute debt service payments paid to DTC or Its nominee (as the registered owner of the Certificates), or redempJion or other notices, to the Beneficial Owners, or that they will do so on a timely basis. or ~ DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file wilh the Securities and Exchange Commission, and the current procedures of DTC to be followed in chafing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorize4 representative of DTC. One fully-registered Certificate will be issued for each maturity of the Certificates, in the aggregate principal amount of each such maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S equily issues, corporate and municipal debt issues, and money market instruments from over 85 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 bet\veen 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, cleating corporations, and certain other organizations. DTC is a wholly-owned subsidiary or The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries ofDTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. 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 Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with th~ Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in tum to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Certificate representing their ownership interests in Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To £acilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC are registered in the name ofDTC's ,partnership nominee, Cede & Co., or such other name as may be requested by an authorized representa1ive ofDTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any starutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the Certificate documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit bas 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 of the Certificates within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates Wlless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede&. Co.'s consenting or voting rights to those Direct Participants to whose accounts Ce11ificates ate credited on the record date (identified in a listing attached to the Omnibus Proxy). 9 ) ) Principal and interest payments on the Certificates will be made to Cede & Co .. or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar. or the City, subject to any statutory or regulatory requirements as may be in e!Tect from time to time. Payment of principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor d.epository is not obtained. Certificates are required to be printed and delivered. Subject to DTC's policies and guidelines, the City may discontinue use of the system of book-entry transfers lhrough DTC (or a successor securities depository}. In that event, Certificates will be printed and delivered. Use of Certain Terms io Otber Sections oftbis Officillll Statement In reading this Official Statement it should be understood that while the Certificates are in the Book-Enn-y-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownership must be exercised through DTC and the Book·Enn-y-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC. Infonnation concerning DTC and the Book·Entty-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City or the Underwriters. Effect or Termination of Book-Eotry-Ooly System In the event that the Book-Entty-Only System is discontinued, printed Certificates will be issued to the holders and the Certificates will be subject to transfer, exchange and registration provisions as set forth in the Ordinance and summarized under ''The Certificates -Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR ... The initial Paying Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas. In the Ordinance, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Certificates are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve as and perfonn the duties and services of Paying Agent/Registrar for the Certificates. Upo n any change in the Paying Agent/Registrar for the Certificates, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Certificates by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Interest on the Certificates shall be paid to the registered owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (hereinafter defined), and such interest shall be paid (i) by check sent United States mail, first class, postage prepaid, to the address of the registered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar requested by, and at the risk and expense ot: the registered owner. Principal of the Certificates will be paid to the registered owner at the stated maturity or earlier redemption upon presentation to the designated payment/transfer office of the Paying Agent/Registrar. If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated payment/transfer office of the Paying Agent/Registrar is located are authorized to close, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. TRANSFER, EXCHANGE AND REGISTRATION ... In the event the Book·Entry·Ooly System should be discontinued, the Certificates may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and swrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Certificates may be assigned by the execution of an assignment form on the respective Certificates or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Certificates will be delivered by the Paying Agent/Registrar, in lieu of the Certificates being transferred or exchanged, at the designated office of the Paying Agent/Registrar. or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Certificates issued in an exchange or transfer of Certificates will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Certificates to be cance led, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in fonn satisfactory to tbe Paying Agent/RegiStrar. New Certificates registered and delivered in an exchange or transfer shall be in any 10 ) ) ) integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Certificates surrendered for exchange or transfer. See "The Certificates -Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Certificates. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Certificate called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Certificate. RECORD DAT£ FOR INTEREST PAYMENT .•. The record date ("Record Date") for the interest payable on the Certificates on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Certificate appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. CERTIFICATEKOLDERS• R£MEOIES ••• The Ordinance establishes as "events of default" (i) the failure to make payment of principal of or interest on any of the Certificates when due and payable; or (ii) default in the performance or observance of any other covenant, agreement or obligation of the City, which default materially and adversely affects the rights of the Owners, including, but not limited to, their prospect or ability to be repaid in accordance with the Ordinance, and the continuation thereof for a period of sixty days after notice of such default is given by any Owner to the City. Under State law there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. Although a registered owner of Certificates could presumably obtain a judgment against the City if a default occurred in the payment of principal of or interest on any such Certificates, such judgment could not be satisfied by execution against any property of the City. Such registered owner's only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as it becomes due. The enforcement of any such remedy may be difficult and time wnsuming and a registered owner could be required to enforce such remedy on a periodic basis. In addition, recent Texas lower court decisions have questioned whether statutory language authorizing political subdivisions to "sue and be sued" is sufficient to waive a municipality's sovereign immunity to suit. Whilt: these decisions could affect the ability of an Owner to seek specific performance of a covenant made by the City in the Ordinance or other bond document or to seek recovery of damages from the City, the remedy of mandamus has nofbeen at issue in these cases. These decisions are currently under review by the Texas Supreme Court. The Ordinance does not provide for the appointment of a trustee to represent the interests of the certificateholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition. Furthennore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Cede. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or certificateholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors. SOURCES AND USES OF CERTIFICATE PROCEEDS ... Proceeds from the sale of the Certificates are expected to be expended as follows: SOURCES OF FUNDS: Principal Amount of the Certificates Reoffering Premium Accrued Interest Total Sources of Funds USES OF FUNDS: Deposit to Construction Fund Original Issue Discount (OlD} Debt Service Fund Deposit (includes accrued interest and rounding amount) Underwriter's Discount Costs of Issuance (includes Bond Insurance Premium) Total Uses of Funds 11 s $ $ $ ) } BOND INSURANCE The City has made application to municipal bond insurance companies to have the payment ofthe principal of and interest on the Certificates insured by a municipal bond guaranty policy. 12 DISCUSSION OF RECENT FINANCIAL AND MANAGEMENT EVENTS In the past three listal years (a listal year is referred to herein as "FY," with the year designation being the year in which the fiscal year ends; each City fiscal year begins on October I and ends on September 30), the City has experienced a variety of financial and management challenges. In response to the events and circumstances that have created such challenges, the City or consultants retained by it have conducted a series of audits and reviews of City government. Certain of the reports, including those described below, revealed weaknesses in the City's general management and financial practices. The City is of the view that progress has been made in correcting many of these conditions (see "Discussion of Recent Financial and Management Events· City's Responses to Recent Financial and Management Events"). although further work will be required before the City is capable of meeting its financial policies, particularly those associated with fund operating and rate stabilization reserves (see "Financiallnfonnation • Financial Policies"'). The following discussion includes an analysis of the events that have occurred in the last two fiscal years, in particular, a summary of the measures taken in response to the challenges that have arisen, and a current description of the City's financial and management position. Caution Regarding Forward· Looking Statements This Official Statement, and in particular the information under the heading "Discussion of Recent Financial and Management Events," contains forward-looking statements. Although the City believes such forward-looking statements are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the considerations described below, among others, that could cause the actual ftnancial results of the City to differ materially from those contemplated in such forward· looking statements. The City cannot fully predict what effects factors of the nature described below may have on the operations of the City and financial condition of the general fund of the City (the "General Fund") or its business-type activities, including its electric enterprise fund, which operates as Lubbock Light & Power (referred to herein as "LP&L" or the .. electric fund"), but the effects could be significant The discussion of such factors herein does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof. With respect to LP&L, extensive information on the electric utility industry is, and will be, available from the legislative and regulatory bodies and other sources in the public domain, and potential purchasers of the securities of the City should obtain and review such information. Among the factors that could affect the operations and financial condition of the City in general, and its electric utility in particular, are the following: > Significant changes in governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission, the United States Environmental Protection Agency (the "EPA"), the United States Department of Homeland Security, the United States Department of the Treaswy, the Texas Commission on Envirorunental Quality ("TCEQ"'), the Public Utility Commission of Texas (the "PUC') and the Southwest Power Pool, Inc., with respect to: • changes in and compliance with environmental and safety laws and policies effecting the City's water, sewer, stonnwater and solid waste funds; • changes in and compliance with national and state homeland security Jaws and policies effecting the City's water, sewer, solid waste and airport funds; • electric transmission cost rate structure; -purchased power and recovery of investments in electric system assets; • acquisitions and disposal of assets and facilities; and . • present or prospective wholesale and retail competition in the electric industry; > Unanticipated population growth or decline, and changes in market demand, demographic patterns and the development of technology affecting the City's service area, its general government and public safety expenditures and City revenue from: • investor owned utility franchise fees, • City utility and service fees -sales tax revenues; and -ad valorem tax revenues; > With respect to LP&L: ·the implementation of or adjustments made to new business strategies by LP&L; • competition for retail and wholesale customers by LP&L, particularly competition with Xcel (as defined below) and its subsidiaries; • access to adequate electric transmission facilities to meet cumnt and future demand for energy; • pricing and transportation of coal, natural gas and other commodities that may affect the <:Ost of energy purchased by LP&L; • inability of various contractual counterparties to meet their obligations to the City, and with LP&L in particular with respect to LP&L's fuel and power purchase arrangements 13 ) > With respect to tlle City's financial perfonnance in general: -legal and administrative proceedings and settJe,meots; and -significant changes in critical accounting policies. FY 2003 Financial Concerns and Mid-Year Budget Amendments Going into FY 2003, the City Council adopted General Fund and Enterprise Fund budgets that were balanced. However, during the preparation of the budget it was apparent that the transfers to ilie General Fund from the City's electric fund would need to be reduced as compared to tTan.Sfers included in prior years' budgets. This situation arose as a result of the cumulative effect of net losses to LP&L after transfers to ilie City's General Fund. During FY 2003, interfund loans were made to LP&L from the water fund and the General Fund. A number of factors contributed to the LP&L losses (see "Discussion of Recent Financial and Management Events -Past Events Relating to LP&L and West Texas Municipal Power Agency"); a significant factor was thai LP&L, unlike most other municipal electric utilities in Texas. competes directly with Southwestern Public Service Company (''SPS'1, a subsidiary of a large investor owned energy company, Xcel Energy, Inc. Xcel Energy, Inc., and its subsidiaries with which the City has contracted for energy and other services-principally SPS • and with which it competes, are hereinafter referred to collectively as "Xcel." Xcel is based in Minneapolis, MiMesota. and is the fourth-largest combination eleetricity and natural gas energy company in the U.S. In addition to the service area that has dual certification with Xcel, a small part of the City is also served by South Plains Electric Cooperative ("SPEC"). The City, through LP&L, has competed for both wholesale and retail electric customers against investor owned utilities for over 80 years. This competition has existed despite the fact that the City is not within the transmission system governed by the Electric Reliability Council of Texas ("ERCOT"). ERCOT was opened to retail electric competition through the adoption of State deregulation legislation that went into effect on January I, 2002. The competitive environment has made it difficult for LP&L to fully recover its fuel costs, particularly during periods of volatile and historically high nalural gas prices. Prior to calendar year 2000, narurnl gas prices genernlly ranged from $2.00 to $3.00 per thousand cubic foot. Since 2000, gas prices have held within a general range of $5.00 to $6.00 per thousand cubic fool, and reached as high as $25 per thousand cubic foot in February 2003. Despite the increases in gas prices that began in calendar year 2000, LP&L produced positive net operating income in each year until FY 2003. All LP&L electric generating units, which provided approximately 35% of its energy requirements in recent years preceding FY 2004 (the remaining energy was acquired through power purchase agreements), operale with natural gas as the primary generation fuel. Moreover, a majority of the units are older and significantly less fuel efficient than more modem units. Prior to FY 2004. the City operated LP&L in a manner that was designed to recover administrative or indirect costs provided by the General Fund for LP&L (such as legal and financial services) as well as certain other general transfers. Such transfers included a payment in lieu of ad valorem caxes, an allocation for indirect costs such as legal and financial services, and a cost of business IJan.Sfer (which approximates a payment in lieu offranchi.se caxes, and was based on 3% ofthe gross operating revenues of LP&L) (colleetively, the "Cost Recovery Payments"). In addition to the Cost Recovery Payments, prior to FY 2003 LP&L was required to annually transfer to the General Fund amounts to support economic development incentives in the City, a payment designated for infrastructure use, a "gas tax" transfer, and a reimbursement of the street lighting expense incurred by the City (collectively, the "Other Transfer Amounts;. Over the ten year period from 1993 to 2002, the average annual operating income of LP&L before transfers was $8 million, and during that period. LP&L transfers to the General Fund for payments in lieu of taxes and recovery of costs of business avernged $8 million per year. During the preparation of the FY 2003 City budgets, it was evident that the amount of money transferred from LP&L to the GeneraJ Fund would need to be reduced given the financial condition of LP&L. Consequently, the FY 2003 budget trimmed $4.8 million from LP&L transfers included in prior year budgets. In Febnwy 2003, during a period of extraordinarily high natural gas prices, City finance staff projected tllat, in the absence of corrective measures, the electric entefl)rise fund would have an operating loss of $24 million for FY 2003. During the then current practice of undertaking a mid-year budget assessment, in the Spring of 2003 the City Council amended the LP&L and General Fund budgets to eliminate $7.7 million in transfers from LP&L to the General Fund. City management then undertook a comprehensive review of the General Fund and oilier enterprise funds for ilie purpose of identifying budget cuts throughout City government that would offset ilie reduced LP&L transfers. Ultimately, the City Council adopted budget amendments during the Spring 2003 mid-year review that totaled $9.7 million for the General Fund (hereinafter referred to as the "2003 Budget Adjustments"), which represented approximately 10.5% of the original FY 2003 General Fund budgel In addition to the $7.7 million budget adjustment made to address the LP&L transfer reduction, the City Council detennined. to write off$2 million owed to the General Fund from the golf course enterprise fund. A number of other budget adjustments were made including (i) the eliminalion of $2.5 million of capital expenditure items; (ii) a reorganization of the structure of City government was implemented that consolidated a number of positions; (iii) tlle implementation of a general hiring free2e throughout all City departments, and the elimination of 100 positions in both the General Fund and the electric fund (approximately 40 positions were eliminated at LP&L, a majority of which were in ilie energy production area); and (iv) a 1% increase of the transfers-in- lieu-of-franchise-payments was made for the ~r and solid waste funds, wh ich increased the transfer for those funds from 3% to 4% of their respective gross revenues. 14 ) ) Other measures that were laken after the 2003 Budget Amendments to address the projected LP&L operating loss included an increase in the fuel cost adjustment ("FCA") for residential and small commercial customers of LP&L by $0.01 per lcWh effective May I, 2003 and, effective June I, 2003, the City increased the FCA for its two largest customers, which include Texas Tech University ("Texas Tech"), and which account for approximately 10"/o of the energy sales of LP&L. At the time of the May 1, 2003 FCA increase for residential and small commercial customers, the total electric cost energy for that class ofLP&L's customers was approximately 30% above those of X eel. In addition, in August 2003, the City issued two series of tax-supported debt to refund $8.5 million of LP&L revenue bonds and to provide $13 million for LP&L capital expenditures. The City anticipates that such debt will be self-supporting from LP&L revenues, although as discussed below, LP&L failed to generate sufficient revenues to pay all of its outstanding bonds for FY 2003; nevertheless, the issuance oftax-supported debt for LP&L reduced the cost of borrowing for, and outstanding debt attributed directly to, LP&L. Past Events Relating to LP&L and West Texas Municipal Power Agency The City is a member of WTMPA, a municipal power ~ency that was formed by concurrent ordinances adopted by the goveming bodies of the cities of Brownfield, Floydada, Lubbock and Tulia, Texas (the "Member Cities'') in 1983. The original purpose of WTMPA was to eng~e in the generation, transmission, sale and exchange of electric energy to the Member Cities. As described below, under the heading "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events-Recent Measures taken to Address Financial and Management Concerns at LP&L," the scope of WTMP A's activities has changed as a result of a series of related agreements reached among WTMP A and the Member Cities in December 2003 (the "WTMPA Settlements"). WTMPA is a separate political subdivision under the laws of the State. In June 1998, WTMPA issued S2S,910,000 of its Revenue Bonds. Series 1998 (the "WTMPA Bonds"), to finance the construction and acquisition of a 62 MW electric co-generation project (the "WTMPA Project"). The WTMPA Project consists of a 40 MW combustion turbine generator (the "Massengale Unit 8 turbine") and the rc-powering of an existing 22 MW generation unit, each located at the City's J.R. Massengale Plant The Massengale Unit 8 turbine was originally scheduled to go online in the Spring of 1999, but during the course of the run test, the turbine experienced a catastrophic failure. In May 2001, the City and WTMPA tiled a lawsuit against the manufacturer of the Massengale Unit 8 turbine and the gas company that supplied fuel for the Unit. in connection with the failure of the turbine. During September 2002, the City engaged in mediation with the turbine manufacturer and the gas company with respect to the settlement of the litigation. During the course of the mediation, the director of LP&L and a City Council member who served on the Board ofWTMPA and as· chairman ofWTMPA made statements to the effect that WTMPA had retained the sum of $1.6 million, representing proceeds of the WTMPA Bonds, from the turbine manufacturer until the litigation could be resolved. Subsequent investigations revealed that such amount had been retained, but the money had eventually been applied, in February 2002, to pay debt service on the WTMPA Bonds. In addition, as a result of the delayed completion of the Unit, costs associated with replacement energy were incurred by WTMP A, and the amount of that expense and the responsibility for the expense, subsequently became a disputed claim of the City ~inst WTMP A (see "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events -Recent Measures talceo to Address Financial and Management Concerns at LP&L"). As a result of the confusion over the existence of the retained amount, the City embarked upon a series of internal financial and man~ement audits of the relationship between LP&L and WTMPA, as well as an analysis of the internal controls of the City With respect to LP&L. Such audits (collectively, the "LP&UWTMPA Management Audit") are available on the City's website at www.ci.lubbock.tx.us under the heading "West Texas Municipal Power Agency Audit., None of these reviews uncovered any malfeasance with respect to the administration of LP&L or WTMPA funds. However, the reviews concluded that the prevailing view that ·~ided the administration of WTMPA affairs by the management of LP&L, was that WlMPA was indistinguishable from LP&L. This view stemmed from the facts that LP&L was contractually committed on a joint and several basis to pay the WTMPA Bonds, the WTMPA Project was operated by LP&L and, as a practical matter, LP&L was taking all the energy from the WTMPA Project (the other Member Cities received lower-cost energy purchased under WTMPA and City power purchase contracts with SPS). According to the audits, tllis management perspective had resulted in a consistent failure to follow the terms of the various WTMP A organizational, operational and power purchase agreements. In addition to poor contract administration by the management ofLP&L, there we.re findings in the LP&.UWTM.PA Man~ement Audit to the effect dtat LP&L was acting without proper oversight from the City Council and the City Manager's office. For a discussion of the measures taken to address the criticisms made in the audits, see "Discussion of Recent Financial and Management Events-City's Responses to Recent Financial and Management Events-General FW1d and General Govenunent Actions" below. In April2003, the WTMPA Member Cities (including the City) engaged Ernst & Young LLP ("E&Y") to conduct an audit of the records of WTMP A and LP&L. The final report of E& Y was delivered in May 2003, and included findings of misallocation of costs among the Member Cities. The report noted that no evidence of misappropriation of assets or intentional omissions of fmancial infonnation was discovered. Tbe E&Y report found that the misallocations, adding an interest factor for such allocations, and an unbilled 5% management allocation that LP&L was entitled to under the power agreements, would result in a total amount owing to the City of $5,590,746, of which the City owed itself, as a Member City of WTMP A, approximately 90"1.. of the total amounl IS ' ) ) In March 2005, the City delivered its Combination Tax and Elect.ric light and Power System Surplus Revenue Certificates of Obligation, Series 2005, in the aggregate principal amount of $23,0SS,OOO. A portion of the proceeds of this issue were used by the City to acquire the WTMPA Project. WTMPA used the proceeds received from the City to defease all of the outstanding WTMPA Bonds. Financial Staff and City Management Turnover Following the publication of the LP&LIWTMPA Management Audit and the E&Y audit, several key City officers and LP&L management personnel resigned. Among the officials and management of the City who resigned was a member of the City Council with almost II years of service, the City Manager, who had served 27 years with the City (the last ten of which as City Manager), the Deputy City Manager, who had almost 8 years of service to the City, the Assistant City Manager for Public Works, who had over live years of service to the City, and the Chief Executive Officer ofLP&L, who had served in thai capacity since 1998. Also, in la.te summer of 2002, the City's Chief Accountant died during the implementation of Governmental Accounting Standards Board Statement 34 ("GASB 34"). Between the beginning ofFY 2002 and the close ofFY 2003, some 29 persons who held senior management positions with the City left the City's employment, some on their own accord and others as a result of a reorganization of City government. For a discussion of the City's responses to these events, see "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events" below. September 30, ZOOJ Financial Results The General Fund ... As hereafter described in "Discussion of Recent Financial and Management Events -FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues", the financial position of the City in FY 2003 was impacted by significant changes in the reporti11g entity and p.rior period a(ljustments and reclassifications of the City's FY 2002 financial statements. With respect to the General Fund, the begiMing fund balance/net assets was restated from $18.6 million to $16.6 million. The restatement was attributable to the write off of a receivable in the General Fund from the City's golf fund. In addition, the General Fund experienced a $7.2 million reduction in fund balance/net assets in FY 2003, the most significant drawdown of the General Fund reserves in over ten years. The decrease in fund balance occurred because of the $9.3 million transfer to LP&L to ensure the ongoing operation ofLP&L and the payment of the senior lien revenue bonds issued by the City for LP&L. In addition, the General Fund reduction in fund balance was a result of the forgiveness of originally budgeted payments in lieu of taxes, franchise fees and indirect costs of $4.8 million from the electric fund to the General Fund. l1le ·aggregate result of restatement of the beginning fund balance and the FY 2003 use of fund balance was a General Fund ending balance of$9.4 million. Coming in to FY 2003, the City had a fund balance (adjusted) of$18.6 million. The City has adopted a policy (the "General Fund Balance Policy") to maintain an unreserved General fund balance equal to two months operating expenditures. At September 30, 2002 the General Fund balance exceeded the General Fund Balance Policy by $4.5 million. At September 30, 2003, the General Fund Balance Policy required a fund balance of $14.2 million. As a result of the FY 2003 events described above, the City was $4.8 million under the fund balance required under its policy at the close ofFY 2003. The decline in General Fund balance limits the City's ability to mitigate future risks of revenue shortfalls and \ln311tieipated expenditures. Reference is made to the information hereafter presented under the headings "Discussion of Recent Financial and Management Events· FY 2004 Budget and Year-End Financial Results" and"-FY 2005 Budget," for a discussion ofFY 2004 results for the General Fund and a summary of the City's planning for FY 2005. The Electric Fund ... With respect to the City's electric fund (LP&L), the measures taken by the City Council during the FY 2003 mid·year budget review yielded substantial results as measured by tfle projected operating loss of$24 million in February 2003. LP&L ended PY 2003 with a $6.3 million operating loss. Before taking into account transfers from other funds, the electric fund reported a $9 million loss, the first such loss in over ten years. As a consequence of the operating loss, LP&L failed to meet its revenue bond rate covenant under which the City has agreed to set rates for the electric system sufficient to produce net revenues equal to 100% of its senior lien bonded indebtedness. In FY 2003, LP&L produced $0.704 million that was available for the payment of debt service, which represents a 0.3 times coverage of average annual debt service and a 0.2 times coverage of maximum annual debt service, in each case after taking into account the issuance of City general obligation debt for LP&L that occurred in August 2003 (see "Discussion of Re«nt Financial and Management Events -PY 2003 Financial Concerns and Mid-Year Budget Amendments" for a description of such debt). Under the terms of its bond ordinances, the failure to meet the rate covenant, while significant, did not result in the acc:eleration ofLP&L's debt Moreover, the failure did not materially affect LP&L's operations, as LP&L was able to make its debt payments after receiving a $9.3 million contribution from the General Fund, and LP&L has never defaulted in the payment of its bonded indebtedness. In making its debt payments, LP&L has not used any moneys set aside as a debt service reserve fund under its senior lien revenue bond ordinances. The elect.ric fund added $0.587 million to total net assets for the year after factoring in the $9.6 million contribution from the General Fund. Cash and cash equivalents for LP&L were $0.330 million at September 30, 2003. As described above under "Discussion of Recent Financial and Management Events -FY 2003 ·financial Concerns and Mid-Year Budget Amendments," in May 2003, the City Council implemented an increase in the FCA of LP&L, by SO.Ol per kWh whicb resulted in LP&L's rates for residential and commercial customers being approximately 30% above those of Xcel. As a result, from May l, 2003 to September 30, 2003 LP&L lost approximately S.6% of its customas. Despite the increase in the FCA, operating revenues for LP&L declined from $97.4 million in FY 2002 to $91.7 million in FY 2003, while operating expenses increased from $88.3 16 ) million in FY 2002 to $98 million in FY 2003, which refletts a $10.7 million increase in cost of purchased fuel and power during the year. For FY 2003, LP&L's average fuel cost was approximately 61% above the cost in FY 2002. LP&L was able to reduce its fuel payments as a result of negotiating a third purchased power contract with SPS in July 2003 to minimize the use of its generation assets. Despite the relatively small operating income that resulted after taking into account the General Fund contribution to LP&L, total net assets of the electric fund decreased by $3.9 million during the year, to $88.S million, as a result of a restatement of the beginning fund balance. The restatement reflected the write off of a $4.48 million receivable recorded from WTMPA in FY 2002, although the obligation was disputed by the other Member Cities of WTMPA. As described below under "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events-Recent Measures taken to Address Financial and Management Concerns at LP&L,~ the WTMPA Settlements have resolved the disputed receivable. Other Major Entemrise Funds: Water, Sewer. Solid Waste and Stormwater .. .In addition to the electric fund, for which FY 2003 financial results are discussed above, the City's other major enterprise fonds, consisting of the water, sewer, solid waste and stormwater funds, produced total operating revenues of$71.6 million in FY 2003, as compared to $73.6 million for FY 2002. In FY 2003, operating expenses for those funds were $57.7 million, as compared with $51.6 million fur FY 2002. Net operating transfers for the other major enterprise funds totaled $12.8 million in FY 2003 as compared to $6.S million in FY 2002. The increase in net transfers out was due primarily to an increase of $5.2 million in net transfers from the solid waste fund that was attributable to the write off of an interfund loan made to the community investment fund in connection with an economic development grant agreement (see "Discussion of Recent Financial and Management Events -FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues -Audit Restatements"). In addition, operating expenses of the solid waste fund increased $5.8 million over FY 2002, which was the result of a change in accounting estimate related to depreciation expense for the City's landfills. FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues As was the case with other municipalities in the State and U.S., the implementation of GASB 34 by the City in FY 2002 effected a substantial change in the presentation of the City's financial statements. Prior to the implementation of GASB 34, governmental accounting standards did not require the use of a government-wide perspective in the presentation of financial information; instead, fund accounting was generally used to present financial data. Under GASB 34, fund aoooonting has been supplemented by government-wide statements and ce11ain aspects relating to the presentation of the fund level statements have been modified, as well, particularly with respect to the presentation of restricted and unrestricted net assets within each fund. For additional information regarding accounting policies that are applicable to the City, see Note I. "Summary of Significant Accounting Policies" in the financial statements of the City attached as Appendix B. The FY 2002 financial statements, and the City's financial statements dating to FYI993, were audited by Robinson Burdette Martin Seright & Burrows, L.L.P. (the "Former External Auditor"). In keeping with the overall reassessment of its financial and management affairs undertaken by the City following the occurrence of the events swnmarized under "Discussion of Recent Financial and Management Events-Past Events Relating to LP&L and West Texas Municipal Power Agency FY 2003, .. in the Summer of 2003, the City conducted a request for qualifications for its external auditor and selected KPMG L.L.P. ("KPMG.,) to audit its FY 2003 financial statements. Consequently, the Former External Auditor guided the City through the initial year implementation of GASB 34, while in the second year of GASB 34 financial reporting, the City's financial statements were audited by KPMG. Audit Restatements ... During the preparation of the FY 2003 CA.FR, some seven restatements to beginning fund balance/net assets were made to various fund level statements of the City. The restatements totaled $36.7 million. These restatements represented an aggregate increase in net assets of the City ofS2.S6 million, as some affected funds had their beginning balances restated to a higher figure, while other funds were restated to decrease their beginning fund balance. As described above under "Discussion of Recent Financial and Management Events -FY 2003 Financial Concerns and Mid- Year Budget Amendments," the General Fund was restated from a fund balance of$18.6 million to $16.6 million to reflect a write off for an account re«ivable, which as of September 30,2002 had ceased to be collectible. Also, as described above onder "'Discussion of Recent Financial and Management Events -September 30, 2003 Financial Results • The Electric Fund,"' the electric fund's beginning fund balance was restated downward by $4.48 million to reflect a Te(eivable from WTMPA that was uncollectible .. Other enterprise fund restatements include an $0.867 million increase in the water fund beginning balance and a $0.722 million increase in the sewer fund beginning balance, each of which were made to reflect a change in accounting treatment pertaining to the appropriate party that is responsible for reimbursement of fees collected by the City for new water and sewer connections. With respect to the impact on a particular fund asset, the most significant restatement in beginning fund balance oc.curred in the City's community investment fund, a fund used in prior years to accotmt fur economic development initiatives, which was restated from a beginning balance of $46.8 million to $36.8 million. The change was associated with an economic development grant made by that fund in FY 2002 that was originally reflected on the aooounting statements of the City as a loan. In preparing the 2003 CAFR, it was determined that such transaction should be treated as a grant, not a loan, although Market Lubbock, Inc., a component unit of the City that administers the grant agreement, retains certain recourse actions in the 17 ) J ) ) ) ) ) event that the grant recipient fails to satisfY its economic development initiative agreement. As a result, the receivable in the community investment fund for the $10 million amount was deleted as an asset of the fund ($6 million of the $10 million grant had originally been funded through an interfund loan to the community investment fund from the water and solid waste funds). In addition to these five restatements of existing fund balances. in preparing the 2003 CAFR, new assessments were made with respect to two entities with which the City has long-standing contractual relationships: a corporate entity that does business under contract with the City as "Citibus", and WTMPA, a legally separate municipal COJT)Oration. In prior fiscal years, the follller entity had been accounted for by the City as a discretely presented component unit of the City, while the City's relationship with WTMPA had been described in the footnotes to City financial statements as a contingent liability of the City, because the City had contractually agreed to provide a debt service guarantee for the debt of the agency. In the 2003 CAfR, the accounting treatment of these entities was reconsidered. and each was added to the City's financial statements as an enterprise fund. The result of the addition of each of these funds was an increase in net assets, in the amount of$12.3 million for the new transit fund, and $3.2 million for the new WTMPA fund. Audit Reclassifications ... In addition to the restatements summarized above, other reclassifications of net assets were made in connection with the preparation of the FY 2003 CAFR. Except for the restatements that were made to the financial statements, as described above, the reclassifications did not affect the "bottom line" statement of net assets for a particular fund, and did not reflect the discovery of missing funds or uncollectible amounts from the prior fiscal period. Instead, the reclassifications pertain to the portion of a fund's net assets that are shown as invested in plant, restricted for future claims or that are unrestricted and available to support d1e operations of the entity, and as such, the incorrect information shown in the portions of the FY '2002 financial statements that required corrections. or reclassifications, could have provided a reader of the financial statements with misleading infonnation regarding the liquidity of such funds. In the preparation of the fY 2003 CAFR., it was discovered that the portion of net assets shown in certain of the financial statements, particularly with respect to the enterprise funds (or business-type activities), had been mathematically incorrectly calculated in the fY 2002 CAFR. While the government-wide statement of net assets of the City included in the FY 2002 CAFR showed $37.9 million unrestricted net assets for business-type activities of the City, the fund financial statements showed an aggregate amount of unrestricted net assets of the ente!J>rise funds that totaled $195.2 million of unrestricted net assets. The FY 2003 CAFR reports in the government-wide statement of net assets of the City $32.9 million of unrestricted net assets for business-type activities of the City and the fund financial statements in the FY 2003 CAFR report an aggregate amount of unrestricted net assets for the enterprise funds that total $30.2 million (certain reconciliations are required to balance government-wide and fund level reports, thus small differences should appear between the two presentations). Internal Controls Issues .. .In accordance with accounting guidelines, the external auditor customarily provides the governmental entity with a "management letter" that includes a discussion of any material weaknesses in the audited government's internal control structure. In its FY 2003 Management Letter (the "2003 Management Letter"), KPMG noted several weakness in the City's internal controls, including an overall internal control weakness in the City dwing FY 2003. The 2003 Management Letter noted that the City operated dwing FY 2003 with an interim City Manager, an interim Chief financial Officer and a vacant Internal Auditor, and that a high turnover of staff within the City Managefs office dating to late 2002 had a significant effect on the City's internal control structure. See "Discussion of R«:ent Financial and Management Events-Financial Staff and City Management Turnover" above. In addition, the 2003 Management Letter noted deficiencies in the year end GAAP financial reporting cycle, citing as examples the significant restatement of beginning net assets/fund balances and the reclassifications described above, as well as numerous adjustments that were required to be posted after the initial closing of the City's books for FY 2003. The failure to timely obtain financial statements from component units, including WTMP A, was also noted KPMG recommended that the City review the personnel within the City's accounting department and the accounting staff within LP&L to detelllline whether sufficient qualified personnel were in place to provide accurate and timely closing ofthe City's books and preparation of annual flllancial statements. Other material weaknesses noted include the failure of the City to properly reconcile its cash balanoes, the failure of LP&L to meet its bond rate covenant (as described above under "Discussion of Recent financial and Management Events • September 30, 2003 Financial Results -The Electric Fund"), a lack of oversight or monitoring of contracts with other entities (for example, WTMPA), and the failure of the City to abide by its General Fund Balance Policy (as described above under "Discussion of Recent financial and Management Events-September 30,2003 Financial Results-The General Fund"). FY 2004 Budget and Year-End Financial Results General Fund •.. The City Council adopted the FY 2004 budget on September 18, 2003. In adopting the FY 2004 budget, the City Council restricted the transfers out of the electric fund to a transfer to the General Fund to an amount equal to the indirect cost recovery amount, or SI.I million, which represented an approximately $6.6 million reduction in transfers from LP&L from the original FY 2003 budget In addition, the· City Council instructed the interim City Manager to prepare the budget using the principle that taxes would not increase as a result of the increase in taxable value from reappraisals of existing properties, which has represented a substantial portion of tax base growth in previous years. As a result, the tax rate was reduced from $0.5700 per $100 of taxable valuation in FY 2002 to $0.5457 in FY 2003, the equivalent of$1.9 million in revenue, although the tax rate was projected to generate additional revenues of $1.1 million due to new construction in the City. Other revenue enhancements included in the FY 2004 budget were increases in the franchise fees assessed to the gas franchisee and to Xcel, each of which increased from 3% of gross revenues to :5% effective December I, 2003. In addition, the transfers from the water and solid waste 18 ) ) funds for the cost of business transfer (which approximates a payment in lieu of franchise taxes) was increased from 3% to 6% of gross revenues. On the ex.penditure side, seven employment positions were eliminated from the General Fund budget, while an additional five police officers and nine firefighters were funded in the budget. Total revenues and expenditures budgeted for the General Fund were balanced, at $94.2 million. Based on the audited records for FY 2004, total revenues were $86,713,545 and total expenditures were $89,947,342. After other financing sources and uses.. including transfers in and out, the General Fund balance grew by $3,277,179 at year-end, to $12,694,525. Of this amount, $12,127,969 was unreserved. The increase in fund balance was primarily a result of strong growth in new construction and better than anticipated sales CllX revenues, coupled with a concentrated effort by City management to contain expenditures. Excerpts from the City's Comprehensive Annual Financial Report of the fiscal year ended September 30, 2004 (the "FY 2004 CAFR"), including the audited financial swements and the management discussion and analysis (the "MD&A") are attached as Appendix B. Reference is made to Appendix B for a more complete presentation ofFY 2004 financial results (the complete FY 2004 CAFR is available from the City upon request and may be downloaded from the City's web site: http://www.ci.lubbock.tx.us). Enternrise Funds ... With respect to the major enterprise funds ofthe City, in FY 2003, the City adopted rate ordinances for the water and sewer enterprise funds that included a series of four 3% increases in water rates and a series of four 5% increases in sewer rates. FY 2004 was the second year of such increases (but see "Discussion of Recent Financial and Management Events - FY 200S Budget" for a discussion of possible additional rate increases in the water, sewer and storrnwater funds in FY 2005 below). Other key budgetary measures included the decrease in transfers from the electric fund to the General Fund and dte increase in the cost of business transfer for the water and solid waste funds, each described above, and a planned use of fund balance in the stormwater fund to pay increased debt service on tax-supported debt issued by the City for drainage projects. Based on the audited records for year ended FY 2004, the income (loss) before contributions and transfers was $1,236,448 for Electric, $4,599,487 for Water, $1,456,762 for Sewer, ($3,795,957) for WTMPA, $955,418 for Storrnwater, and ($8,962,587) for other non-major enterprise funds. After capital contributions, transfers in, and transfers, the change in net assets for FY 2004 was $1,713,871 for Electric_ $2,962,028 for Water, $2,863,166 for Sewer, (S3,439,035) for WTMPA, $644,156 for Stormwater, and ($9,730,558) for other non-major enterprise funds. The unrestricted net assets of the proprietaJy funds at the end of September 30, 2004 was $7,006,197 for Electric, $14,078,334 for Water, $6,342,909 for Sewer, $1,743,263 for WTMPA, $1,304,513 for Storm water, and $6,158,385 for other non major enterprise funds. City's Responses to Recent Financial and Management Events As described above, the City has encountered in recent years criticism of its management practices in various reports and audits prepared by the City and outside consultants. At the same time, the City has experienced financial downtums, particularly in the General Fund and at LP&L. Moreover, through reorganizations of government designed to address these shortcomings., and in response to political pressures by the City Council to provide a more accountable City government while reducing the growth of the cost of City government. a significant number of senior management staff of the City have departed. In FY 2004, the City implemented a number of significant steps to address both its management needs and financial challenges. Certain of the measures taken by the City to sttengthen City government in genenl, and to address its fmancial challenges, are described below. General Fund and General Government Actions > General Fund Budgetary Actions ... As discussed above under "Discussion of Recent Financial and Management Events • FY 2003 Financial Concerns and Mid-Year Budget Amendments" in adopting the 2003 Budget Amendments, as well as the FY 2004 budget and the FY 2005 budget, the City has demonstrated the ability after FY 2003 to meet General Fund obligations with balanced operating results. This has been achieved through various budget cuts and other austerity measures, including eliminating approximately 100 positions City·wide. The City will need to restore its General Fund balance over a period of years. For FY 2004, General Fund balance ended with a surplus of$12,127,969. While no assurances can be given as to future financial results, based on historic expenditure trends an increase in General Fund balance of an additional S 1 million to $2 million is expected for FY 2005 year end. City management also has implemented monthly assessments oftbe budget. >City Management Changes ... ln February, 2004, the City completed its search for a new City Manager with tbe employment of Lou Fox. In late June 2004, City Manager Fox announced a new slate of senior managers for the City, including the hiring of a new Deputy City Manager, a new Chief Financial Officer/Assistant City Manager and a new Director of Internal Audit (which position was created by the City Council in FY 2003, but was vacant until filled in June 2004). Each of the positions were fiUed by individuals from outside of the City, and each of the new City officers has extensive government service (see "City Officials, Staff and Consultants -Selected Administrative Staff"). Collectively, the new management team represents over 80 years of government service experience. The City is of the view that lt!ese moves reflect a return to management stability, and that they will assist the City in addressing the general internal control weakness cited by KPMG in the 2003 Management Letter. > Establishment of Audit Committee ... Through the adoption of a resolution in June 2003, the City Council established an independent Audit Committee composed of five members. The City believes it is one of only a few municipalities nationwide that has crea1ed an audit committee, taking its design in large part from the provisions of Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act. The Audit Committee is charged with maintaining an open avenue of 19 ) ) ) communitation between the City Council City Manager, internal auditor and independent external auditor to assist the City in fulfilling its fiduciary responsibility to its citizens. The committee has the power to conduct or authori:z.e investigations into the city's financial perfonnances, internal fiscal controls, exposure and risk assessment. It reportS to the City Council. The establishment of the Audit Committee is designed to serve as an additional check on the preparation of the City's financial statements and to avoid weaknesses in the City's internal controls, including the status and adequacy of infonnation systems and security. The chairperson is appointed by the Mayor and the other positions are filled by a vote of the City Council. At least two members of the Audit Committee are required to have a background in financial reporting, acrounting or auditing, and at least one member is required to be a certified public accounlllllt. The current membership of the committee consists of Mike Epps, an Executive Vice President at American State Bank in Lubbock, Jim Brunjes, Senior Vice Chancellor and Chief Financial Officer for the Texas Tech University System; Dan Benson, a professor at the Texas Tech University School of Law with expertise in federal criminal law and appellate procedure: R.J. Givens, a real estate agent in the City; and Kim Tumer, the Director of lntemal Audit at Texas Tech. Mr. Brunjes is the chair of the Audit Committee. Recent Measures taken to Address financial and Management Concerns at LP&L >New Chief Executive Officer for LP&L .. .fn March 2003, R. Carroll McDonald contracted with the City to perfonn the duties of Director of Electric Utilities for the City. Mr. McDonald had previously been employed by LP&L, most recently in 1994, when he retired as CEO of LP&L. Mr. McDonald has over 40 years experience in the electric utility business in Lubbock and the surrounding area, having also served in various positions with Southwestern Public Service Company (now Xcel) for over 25 years. Mr. McDonald's conll1lct is scheduled to expire in May 2006. Under the management of Mr. McDonald, the City and LP&L have implemented a variety of measures designed to improve the accountability of LP&L to the City and to better position the utility for future profitability. Certain of those measures are described in the paragraphs that follow. The Electric Board (hereinafter defined) has commenced the process of hiring a successor to Mr. McDonald and expects to have completed this process by December 2005. The City believes it is Mr. McDonald's intent to assist any successor as needed until his contract expires. > Increase in Fuel Cost Adjustment ... As described under "Discussion of Recent Financial and Management Events -Past Events Relating to LP&L and West Texas Municipal Power Agency" in May 2003, the City Council approved an increase in the FCA portion of the residential and small commercial customers rate class by $0.01 per kWh, an average increase of 12.5% for both residential and commercial customers, which resulted in LP&L being approximately 30% higher in oost for those rate classifications than Xcel. The increase was approved in order to pass through fuel costs that had been incurred by LP&L but not recovered through its rate base. LP&L adjusts its FCA each month, and may do so under the existing methodology without further action of the City Council, to reflect current energy prices plus an additional measure to recover a poJtion of the rolling eighteen month average for uncollected fuel expense; provided, however, that no such adjustment is typically made unless the overall oost of energy after the FCA adjustment permits LP&L to remain competitive with Xcel. If the adjustments will not permit LP&L to remain competitive and are not passed through, they become an unrecovered fuel expense. As a result of the increase, from May I, 2003 to September 30, 2003 LP&L lost approximately 5,6% of its customers. After losing almost 4,000 metered customers following the May 1, 2003 FCA increase, LP&L began to increase its customer count in May 2004. Since May 2004, LP&L has had an average increase of approximately 259 customers per month. The City has undertaken periodic adjustments to its fuel cost to remain competitive with Xcel. In May 2005, the City FCA was increased by S0.0095 per kWh, an increase that was in line with a rate increase imposed by Xcel. > Establislunent of New Electric Utilities Board ... In ~mber 2003, the City Council appointed the Lubbock Electric Utility Governance Commission to review and evaluate various issues relating to the govemance of LP&L. In February 2004, that Commission presented its findings to the City Council (the "Electric Utility Governance Report"), and on February S, 2004, the City Council adopted an ordinance (the "LP&L Governance Ordinance") (I) creating a new Electric Utilities Board (the "Electric Board") for LP&L (the new board replaces a former board that was advisory only), (2) reserving certain duties and responsibilities with respect to LP&L to the City Council (i.e., the powers to approve LP&L's annual budget; set LP&L's rates; issue debt for LP&L; exercise the power of eminent domain for LP&L; and require the payment of an annual fee to the City), and (3) mandating the creation of certain reserve accounts by LP&L and restricting the transfer of revenues from LP&L to any other fund of the City, including, particularly, the General Fund, until such reserves have been funded. The Electric Board was appointed in February 2004. In June 2004, the City initiated a solicitation to the holders of LP&L's senior revenue debt seeking approval to amend each LP&L bond ordinance to provide for the governance of LP&L by the Electric Board. In acrordance with the provisions of the bond ordinances, the City was obligated to obtain the consent of at least 51% of the LP&L bondholders, and in August 2004 the City received the requisite consents. The City amended the bond ordinances to provide for the governance of LP&L by the Electric Board in January 2005. On November 2, 2004, the voters of the City approved a referendum amending the City Charter to require the establishment of the Electric Board. The purpose of the charter amendment was to ensure the permanent establishment of the Electric Board, as the action of the City Council in adopting the LP&L Govemance Ordinance was subject to repeal by subsequent City Councils. The charter amendment requires the City Council to adopt an ordinance (the "New LP&.L Governance Ordinance") by no later than January I, 2005 setting forth other duties and responsibilities of the Electric Board not specifically set forth in the proposed charter amendment. The City Council, utilizing the LP&L Governance Ordinance as a model, adopted the New LP&L 20 ... , ) Governance Ordinance on December 16, 2004. Each of the New LP&.L Governance Ordinance. the bond ordinance amendment and the charter amendment contain similar provisions regarding the powers of the Electric Board, although as noted above, and as further described below, the New LP&L Governance Ordinance includes additional provisions that pertain to the establishment of financial reserves and restrictions on transfer of funds from LP&L. In addition, the charter amendment stipulates that the Electric Board shall determine the transfer and disbursement of all net revenues of the City's electric uti lily. The New LP&L Governance Ordinance provides that the Electric Board oonsiSt of nine members appointed by the City Council, and that the Cily Council oonsider extensive business and/or financial experience as the primary qualification for serving on the Electric Board. Electric Board members serve without compensation. Under the New LP&L Governance Ordinance, the Board is given the authoril)', duties and responsibility to (I) approve an annual budget and electric rate schedule for submission to the City Council for approval and, from time to time, submit to the City Council amendments to the budget and/or the electric rate schedule; (2) oversee the audit of the electric fund, and engage an acoounting fmn for that purpose; and (3) subject to applicable law, including the City Charter and Code of Ordinances. govern, manage, administer and operate the Cily's electric system, including oontracting for legal and other services separate and apart from those provided by the City. In addition, the City Manager is required to oonsult with, and seek approval of, the Electric Board prior to appointing and/or removing the director of LP&L. In acoordance with the New LP&L Governance Ordinance, the director ofLP&L reportli to the Board. The adoption of the LP&L Governance Ordinance, the charter amendment election, and the 5ubsequent adoption of the New LP&L Governance Ordinance reflects a decision by the City Council to provide a measure of independent management and financial self-determination for LP&L. In accordance with the findings presented to the City Council in the Electric Utility Governance Report, the primary puf1>0se of the New LP&L Governance Ordinance is to permit LP&L to rebuild, and then better oontrol, its financial reserves with substantially less input in the process from the City Council than in the past. The adoption of the New LP&L Governance Ordinance follow5 in the wake of the oonclusions reached in the LP&LIWTMPA Management Audit to the effect that th.ere had been a history of poor contract administration by the man.agement of LP&L relative to WTMPA. and that LP&L had acted without proper oversight from the City Council and the City Manager's office. While the City Council retains substantial powers over the electric system. an additional goal of the City in establishing the Electric Board is to develop local eltpertise in a pool of individuals who can provide a sharper focus by the City on the operation ofLP&L than has occurred in the recent past. > Establisbment of Reserve Funds for LP&L; Restriction on Transfers from LP&L ... As noted above, the LP&L Governance Ordinance jncludes a provision that requires LP&L to establish reserve funds. Such funds consist of (I) an operations reserve fund to be equal to three months' gross retail electric revenue as determined by LP&.L's previous fiscal year; (2) a rate stabilization reserve to be funded to an amount equal to two months' gross retail electric revenue as determined by LP&L's previous fiscal year; and (3) an electric utility development reserve to be funded to a level equal to one months' gross retail electric revenue as determined by LP&L's previous fiscal year and to be used solely to meet any rapid or unforeseen increase in development in the City. Under the LP&L Governance Ordinance, the City may not require that LP&L transfer any fee equivalent to a franchise fee, a payment in lieu of taxes or other disbursement of the net revenues of LP&L until (a) all bond debt service requirements have been funded (which obligation is senior in right to the obligation to fund the reserves) and (b) the reserves have been fully funded. As noted above, the charter amendment provides that the Electric Board shall determine the transfer and disbursement of all net revenues. Consequently. subject to (i) provisions of State laws that govern municipal utilities, and which stipulate that a frrst use of the utility's gross revenues be used to pay operating expenses, and (ii) the obligations of the City with respect to LP&L's bonded indebtedness, it is possible that the Electric Board oould devise a flow of funds for LP&L that is subStantially different from that set forth in the LP&L Governance Ordinance. To date, the Electric Board has not deviated from the flow offunds oontemplated under the LP&L Governance Ordinance. At present, LP&L bas not funded any of the reserves established under the LP&L Governance Ordinance, as net revenues have been inadequate for that purpose. Moreover, the mere establishment of the funds does not imply that such reserves will be funded within any particular time frame, if ever. However, in adopting the LP&L Governance Ordinance and calling tbe special charter election, the City Council has evidenced its oommitment that LP&L be given the opportunity to regain financial stability without being obligated to malcc transfers, other than its indirect oost of business transfer, to the General Fund or any other fund of the C'rty. > New Contractual Arrangements Affecting LP&L Operations and Revenues ... In late 2003 and extending into the Summer of 2004, City Management, including LP&L Staff in particular, negotiated a series of new agreements tbll will change the long- term operating plan of LP&L. These agreements, which are summarized below, stemmed from a series of events and circumstances relating to LP&L that are described herein under "Discussion of Recent Financial and Management Events-Past Events Relating to LP&L and West Texas Municipal Power Agency," including an ongoing dispute with WTMPA relating to the responsibility for costs incurred by the City during the delayed completion of the WTMPA Project In addition. as a result of oontinued high (by hiStoric levels) natural gas prices, following the negotiation of an additional wholesale power purchase agreement between the City and SPS in July 2003, the City ooncluded that, given the then prevailing gas prices, it was more economical to purchase wholesale energy from SPS than to operate its gas generation units, a significant portion of which are older and, in light of current gas prices, obsolete. In recent years., the City bas explored several alternatives to the use of its gas genenuion units, including the possible acquisition of new generation, perhaps through a joint venture for a coal generation facility, and the possibility of purchasing energy on a wholesale basis from entities other than Xcel or its subsidiaries. The Cil)' is in a severely electric transmission-oonstrained area. The lack of sufficient transmission for delivery of energy to the City and 21 ) ) the absence of other energy providers in the vicinity of the City with excess energy for sale were factors that contributed to the failure of the Ciry to negotiate a wholesale energy purchase agreement with an entily other than Xcel or its subsidiaries. Consequently, ro reduce fuel and production expenses, in the Summer of Z004 the City began raking greater amounts of energy from the Xcel contracts, and restricted the generation of energy primarily to that produced at che WTMPA Project, and only then during periods of high energy demand. As described below under "Wholesale Energy Agreement with Texas Tech'\ these events led to a contract dispute between the Cily and Texas Tech, the largest LP&L customer. >The WIMPA Settlement Agreement ... In December 2003, the City, WTMPA and the other Member Cities of WTMPA entered into a series of agreements styled the "Comprehensive Settlement Agreement." Such agreements were negotiated for the purposes of (I) reallocating among the Member Cities of WIMP A, the right to WTMPA power resources and the costs associated with such power resources, which oonsist of the WTMPA Project and certain power purchase agreementS between WIMP A and SPS; (2) resolving disputes regarding the composition and voting power of the WTMPA board; and (3) settling the outstanding, disputed claims for costs incurred by the City on behalf of WIMPA. Tbe WIMP A Settlements include the following agreements; (a) all of the capacily and energy in the WTMPA Project was allocated to the City or itS assignee (under lhe 1998 WTMPA Project agreements, the Ciry had an 85% allocation of the energy from the WIMP A Project, although it had historically taken substantially all of the energy and dispatched purchased energy to the other Member Cities to meet their needs); (b) the City assumed responsibilily for the cost of operation and maintenance of the WIMP A Project; (c) the Ciry agreed to annually pay WIMP A 100% of the debt service due on the WIMP A Bonds (under the basic agreement of WTMPA. the agency's Power Sale CQntract, each of the other Member Cities has joint and several liability for the WTMPA Bonds and will remain contingently liable in that capacily in the event the City should fail to make a bond payment obligation); (d) provision was made for title to the WTMPA Project to transfer to the City upon the retirement of the WTMPA Bonds (which occurred upon the defeasance of the WTMPA Bonds); and (e) the Ciry released all of its claims associated with costs that it bad asserted was owed in connection with the energy costs incurred by the City for the Member Cities during the period when the WTMPA Project was delayed in coming online. In addition. the WTMP A Settlements include a purchased power allocation under wbieh the City has agreed to allocate to the other Member Cities energy requirements nominated by the other Member Cities from other agency purchased power agreements, and the City agreed to schedule such power for the other Member Cities. The WTMPA Senlements repealed certain power sales agreements and operating agreements entered into by the parties in connection with the issuance of the WTMPA Bonds that were associated with the operation of the WIMP A Project. The WIMP A Settlements eliminated the position ofWTMPA chairman, but the relative voting powers of the Member Cities were not modified. Under the WTMPA rules and regulations, each Member City appoincs two member.; to the WTMPA Board, each of which has an equal vote (certain actions of the WTMPA Board require a six vote "super majority"), but, in addition to the affirmative votes of the board members, the rules and regulations provide, in effect, a veto right over WTMPA Board actions based upon the amount of net energy consumed by each Member City. As LP&L rakes substantially all ofthe energy from WTMPA resources, it has a veto over certain of the actions of the WIMP A Board, including adoption of a budget, certain energy sales and the amendment of the agency's bylaws. The City believes the comprehensive settlement agreement modifies the principal WTMPA agreements in a manner that better reflects the historical manner in which the Member Cities have engaged in energy activities. In addition, while LP&.L will continue to schedule power deliveries for all Member Cities, the contract administration of WTMPA agreements has been simplified by the acquisition by the City of the WTMPA Project and the defeasance of the WTMPA Bonds. As noted under .. Discussion of Recent Financial and Management Events-FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues," for FY 2003 and subsequent years, WTMPA has been classified as an enterprise fund of the City, which reflects the extensive associations between WIMP A and the City. >New Full Requirements Eoergy Agreement ... In June 2004, WTMPA entered into a 15 year full requirements wholesale power agreement (the "New Power Agreement") with SPS. The New Power Agreement is effective July 1, 2004, and replaces a series of existing agreements between WTMPA and SPS and the City and SPS, which had expiration dates in 2004 and 2005. Under the New Power Agreement, SPS or its permitted assigns is obligated to provide aU energy requirements for each of the Member Cities ofWTMPA, including the City, during the term of the agreement, which terminates on June 30, 2019. As in past WTMPA agreements, and in accordance with the WTMPA Settlements, LP&L will schedule energy purchased under the agreement for each of the other WTMPA Member Cities. 11le New Power Agreement includes a fixed demand charge and energy oomponents, with a pass through of SPS's fuel cost, which is billed in accordance with SPS's FERC approved fuel cost adjustment schedule. Under the tenns of the New Power Agreement, the fixed demand charge will increase incrementally, in most years annually, during the term of the agreement based upon a predetermined schedule set forth in the New Power Agreement. SPS may terminate lhe agreement upon the occurrence of an adverse regulatory action under which SPS is required to sell generation assets, and WIMP A may tenninate the agreement upon notice and during the final four years of the scheduled tennination date if WTMPA .acquires an interest in replacement, coal-fired generation. Each party may require adequate assurances of performance whenever there is a reasonable basis therefor. The New Power Agreement represents a significant departure for LP&L, in that it reflects a long-term commitment to rake all of its energy from SPS. The contract reflects a decision of the Cily to abandon the role of power generator, although, as described below, in connection witb the consummation of the New Power Agreement the City has entered into two unit contingency agreements (the «Unit Contingency Agreements") with SPS that will require LP&L to maintain its ge.neration units for dispatch by SPS. Among the implications for LP&L of the New Power Agreement are that LP&.L has resolved its long·tenn power 22 'I supply issues, and lessened its exposure to fuel price volatility, although SPS will pass through its fuel charges to LP&L on a monthly billing basis. SPS, in tum, may not pass its fuel costs through to its retail customers in the City more frequently than once every six months under current State law that requires SPS to seek a rate order from the PUC before increasing retail fuel cost charges. As a result, the New Power Agreement provides the possibility of both advantages and disadvantages to the City with respect to cash flow, particularly if the City deteiTnines to match its FCA to changes in SPS's fuel adjustment, as it has generally done in the past. According to information filed with various regulatory agencies, the City believes that over 60% of the energy that it purchases from SPS is from coal generation. This fuel mix was a significant factor in the City's deteiTnination to approve the New Power Agreement by WTMPA. In the event that gas prices should decline over the teiTO of the Agreement, the City believes that SPS has the (lexibility to switch a larger portion of its generation to gas, including through the use of the City's generation units in accordance with the Unit Contingency Agreements. With respect to the competitive posture of the City in light of the long-term commitment of the New Power Agreement, the City notes that under current market conditions, and taking into account the secondary benefits of the agreement, including future savings associated with reduced personnel and maintenance costs as a result of the shift from being an active electric generator to being a passive generator (for SPS under the terms of the Unit Contingency Agreements), the wholesale price of the purchased energy, together with the other financial benefits of the Unit Contingency Agreements and the possible receipt of revenues under the new WlMP A gas agreement described below, peiTnits the City to compete favorably with SPS. An additional benefit of the New Power Agreement is that it will peiTnit the City to increase its efforts in developing LP&L's distribution business. In light of recent rate structure changes implemented by both the City and SPS that require new developments in the City to fund electric infrastructure through a development charge paid when the development is platted, new principals in developments are choosing to install only one electric distribution infrastructure. Since this new development charge was implemented in FY 2003, all major new developments in the City have selected LP&L as the electric distributor, which positions the City as a distributor of energy to those developments in the future, even though the retail provider of such energy could be a utility other that LP&L and other electric providers could choose to build their own distribution infrastructure to serve the developments. Perhaps the greatest risk to LP&L from the New Power Agreement is that given the teiTO of the agreement and the dynamic nature of electric competition, over time the wholesale price of the purchased energy will not peiTnit the City to obtain the favorable margins that are currently being achieved by the City. While the City does not believe that the area served by LP&L will be opened in the short-teiTn to retail deregulation, as is the case in other parts of the State, that could occur during the term of the New Power Agreement. While there are significant uncertainties as to how such deregulation, if it occurs, would be administered, it is possible that new retail energy providers could enter the market during the teiTO of the New Power Agreement In addition, by tying its energy requirements solely to SPS, and though the other new agreements discussed in this section. the City has significantly increased its dependence on SPS as a counterparty to vital agreements relating to the operation and financial condition of LP&L. Counterpatty risk is risk associated with the counterpatty's financial condition, credit ratings, changes in business strategies and other quantitative and qualitative measures that could affect the ability of the counterpatty to perfoiTn its obligations to the City. Both the long-term Unit Contingency Agreement and the New Power Agreement provides the City the right to demand certain credit assurances from its counterparty if it has reasonable grounds for insecurity regarding the performance of any contract obligation. The City was relatively unrestrained by existing gas purchase and ttansportation agreements in making the move from a generation utility, to a full requirements energy purchase business strategy, as only one contract, for gas delivery, was in place that required the City to pay a fixed price component for gas transportation irrespective of whether the City purchases gas. That contract, between the City and ConocoPhillips, expires in February 2008. In connection with the ·Unit Contingency Agreements, the City has in place standby gas purchase agreements that can be used to supply LP&.L with gas to the extent that SPS calls upon the units, and the City will receive an offset against its minimum gas transportation requirements from ConoooPhillips for any gas purchased by SPS under the new WTMP A gas contract, if any, described below. While such offset will be subject to the same risks described below with respect to the new gas contract, the City does not anticipate that it will incur substantial costs in connection with prior contractual commitments relating to the purchase and transportation of natural gas as a result of the new LP&L business strategy. > Other New Energy Related Agreements ... As noted above, in connection with the negotiation of the New Power Agreement, the City negotiated the Unit Contingency Agreements, which consist of two agreements that dedicate the <:;ity's generation capacity solely to SPS, which, subject to certain customary conditions, including reasonable notice and run times, has the right to call upon one or more of the generation units owned or controlled by LP&L, from time to time to meet energy requirements of SPS. Including the WTMPA Project, all of the capacity of which, in accordance with the WTMPA Settlements, is dedicated to LP&L, the City bas dedicated generation capacity of 219 megawatts ("MW") to SPS under the Unit Contingency Agreements. The most fuel efficient units within that capacity are the 39 MW capacity of Massengale Unit 8 and the 21 MW capacity of the Brandon Unit I ("Brandon Station"), which is located on the campus of Texas Tech (the "New Units"). The remaining capacity is in twelve older units (the "Older Units"). With respect to the New Units, SPS may dispatch those units for a three year term ending June 30, 2007; the term of the Unit Contingency Agreement for the Older Units is fifteen years, matching the term of the Power Purchase Agreement, with an expiration date of June 30, 2019. Aside from the differences in units covered, the term of the agreements and certain termination provisions in the Older Unit agreement, each Unit Contingency Agreement is 23 ., ' substantially identical. The Unit Contingency Agreements include a demand charge, which must be paid irrespecti-ve ofwflether SPS chooses to take energy from the City's units, and an energy charge that is based upon tile output of any of the City's units that is dispaxched for SPS. While the amount of the energy charge will depend upon the energy taken by SPS from the City's generation units, if any, the Unit Contingency Agreements provide an annual minimum payment by SPS to the City of $6.3 million. >Natural Gas Sale Agreement ... Subsequent to its execution of the New Power Agreement, WTMPA and other parties entered into a series of agreements (collectively, the "New WTMP A Gas Agreements") under which WTMPA may acquire natural gas and effectively exchange it for electric power to realize a cost savings. Under the New WTMPA Gas Agreements, WTMP A may purchase natural gas from Texas Municipal Gas Corporation ("TMGC/ at below-market prices and sell the gas to SPS in return for a market·priced credit (reduced by nominal administrative and incentive fees) against payments due from WTMPA under the New Power Agreemenl The net saviQgs, if any, will be applied proportionately to reduce the power charges of WTMPA's Member Cities, including the City. TMGC is a Texas public facility corporation created for the purpose of acquiring producing natural gas reserves and selling its production to municipal entities such as WTMPA and LP&L. The City's standby gas purchase agreement, mentioned above in connection with the Unit Contingency Agreements, is also with TMGC. Under the terms of the New WTMPA Gas Agreements. SPS is not obligated to purchase gas from WTMPA unless natural gas producers, dealers, or other suppliers execute contracts to sell gas to TMGC's upstream gas provider, those suppliers offer to sell such gas on terms that SPS considers at least as advantageous as those available from other producers and dealers, and the aggregate quantities sold do not exceed either SPS's Texas gas requirements or the quantities available to WTMPA from TMGC at a discount from the offered prices or tile quantities needed to generate WTMPA's electric requirements. WTMPA's marlret- price credit is based on the prices offered by the qualified suppliers, and its supply of gas is dependent on sales by the qualified suppliers at those prices. TMGC has secured contracts with five suppliers (Conoco Philips, Coral Energy, NGTS, Concorde Energy, and Tenaska). There can be no assurance that sufficie.nt qualified suppliers will contract to sell gas, or that they will offer to do so on sufficiently advantageous tenns, to supply all or any portion of WTMPA's gas requirements under the New WTMPA Gas Agreements. In addition, the discount now offered by TMGC may be reduced as necessary to enable it to comply with financial covenants, although the discount has remained essentially constant for three years. Moreover, TMGC's reserves are not expected to be able to meet WTMPA's gas requirements for discount gas beyond 2006, although TMGC has agreed to use reasonable efforts to acquire additional reserves to do so. For these and other reasons, there can be no assurance that WTMPA will be able to realize savings in any amount or for any term for the benefit of its members under the New WTMPA Gas Agreements. Nevertheless, the City believes that the New WTMPA Gas Agreements contain sufficient economic incentives to induce S.PS to qualifY sufficient suppliers and to accept gas under the agreements up to the permitted quantities, and that the TMGC discount will continue to bold. Accordingly, the City has included $4.1 million in gas rebate income in the electric system's FY 2005 operating budget That amount assumes that the maximum quantities of gas will be acquired and credited by SPS under the New WTMPA Gas Agreements in FY 2005; City management is of the view, that it is possible the rebate budgeted will be achieved. > Wholesa1e Energy Agreement with Texas Tech ... As noted above, Texas Tech, a four year State institution of higher education with a student enrollment of almost 29,000, is the largest customer ofLP&L in terms of both energy sold and revenues generated. In 1990, the City constructed Brandon Station on the campus of Texas Tech. The Brandon Station is a cogeneration plant and waste heat is used to produce steam wbicb in the past has been sold to the University. In addition, the City owns the electric distribution system on the campus of Texas Tech. Since 1998, the City has sold energy to Texas Tech under the terms of a power sale agreement (the "'ld Texas Tech Agreement") that included pricing terms for the sale of steam and penalties in the event that the City was unable to produce steam in accordance with the agreement As described above, beginning in tile Summer of 2003, as a result of high gas prices. the City generally discontinued the production of energy from its generation units, including Brandon Station, therefor requiring Texas Tech to use its boilers for the generation of steam, as a result of which Texas Tech incurred increased costs for natural gas for its boilers. In the Spring of 2004, Texas Tech presented the City with a claim for stipulated damages under the terms of the Old Texas Tech Agreemenl The parties agreed to mediate the claim. Following that mediation, the City and Texas Tech commenced new negotiations for an energy sales agreement (the "New Texas Tech Agreement''). The negotiations have been concluded and the contract was executed by the parties on April 28. 2005. In general terms, Texas Tech has agreed to continue to purchase energy from the City at a price that will provide tbe City with a small rate of return, and is paying for energy usage at the rates provided in the New Texas Tech Ag~ent. The City has agreed that steam produced at Brandon Station, if any, will be delivered to Texas Tech at no charge. The City has also agreed with Texas Tech that it may terminate the agreement upon reasonable notice to the City, in which event tile City will wheel energy to Texas Tech in accordance with an energy delivery charge. The City is of the view that the New Texas Tech Agreement has resolved the dispute with its largest customer on terms that are mutually beneficial for the parties. FY 2005 Budget General Fund ... The City Council adopted the FY 2005 budget on September 28, 2004. The City's F'Y 2005 budget for the General Fund is balanced with $98 million in total revenues and expenses. The budget projects that sales tax revenues will produce 52% of total tax revenues (tax revenues represent 86% of the GeneraJ Fund's total operating revenues), while ad valorem tax revenue is budgeted to produce 39% of total tax revenues. The FY 2004 budget included a 41% to 46% mix of sales tax revenues to ad valorem tax revenues. The higher proportion of sales tax revenue to ad valorem tax revenue for FY 2005 versus 24 ' J ) FY 2004 is attributable to the one quarter cent sales tax for ad valorem tax reduction that was approved by the voters of the City on November 4, 2004. The City began to receive revenues from that sales tax in October 2004. This shift in General Fund revenue sources represents a greater dependence upon sales tax receipts, which is generally a more volatile revenue source than ad valorem taxes. However, the City's sales tax receipts have not demonstrated the volatility that has been experienced in other parts of the State, especially following the events of September II, 2001. As shown in Table 14 "Municipal Sales Tax History," the City's sales tax receipts have increased each year over the past six years. In FY 2005, the City's total tax rate will decline from $0.5457 per $100 taxable assessed valuation in FY 2004 to $0.4597. The largest decline in the tax rate is in the portion of the tax levied for the General Fund (see "Table 4 -Tax Rate, Levy and Collection History"). The City's tax roll increased $683 million, or 8.6o/o. from FY 2004 to FY 2005. In keeping with current City Council policy that taxes not increase solely as a result of the increase in taxable value from tax reappraisals of existing properties, a portion of the $402 million of the growth attributable to reappraisals was discounted for purposes of determining the tax rate for FY 2005. Other factors used to determine the tax rate are revenues from the new quarter cent sales tax and a 2.7% cost of living adjustment. as measured by the consumer price index. The increase in sales tax revenues is intended to offset reduced franchise fee income and ad valorem tax income for the General Fund during FY 2005. Total transfers to the General Fund from enterprise and internal service funds are budgeted to increase only marginally, by $1 million, while transfers out increase by $1.7 million. On the expenditure side, administrative services, street lighting, financial services. fire, police, general government, human resources and planning and transportation budgets are comparable with FY 2004 budget amounts, with total General Fund operating expenditures increasing by $1.65 million over the FY 2004 budget. Enternrise Funds ... During the Summer of2004 the City made significant changes to City management. The new management is presently assessing available resources for capital expenditures in the City's enterprise funds, and it is reevaluating the City's utility rate structure and its existing capital expenditure plans. It is possible that the FY 2005 budget summarized below will be amended during the year to reflect this evaluation, and that the FY 2005 budget could be amended in a manner that increases or decreases planned spending for enterprise fund capital improvements, the use or contribution to reserves and the rate structure for various enterprise funds. The FY 2005 budget for the solid waste fund is balanced with $15.5 million of revenues and expenditures, including an increased transfer to the General Fund of $1.1 million. The FY 2005 budget reflects $22.5 million in sewer fund revenues and expenditures, with $0.45 million eannarked as a contribution for sewer fund capital expenditure and an increase of $0.6S million in the transfer to the General Fund. The sewer budget includes a planned use of $2.3 million of fund reserves. The sewer budget reflects the third year of a planned overall four year rate increase, with rates increasing by 5% each year. The water fund budget for FY 2005 is balanced at $39.8 million of revenues and expenditures, which reflects a 17% increase in the water fund b.udget, including a planned use of S4.2 million of fund reserves. Operating expenses increase by Sl.S million, spending for water system improvements increase by $0.9 million, debt and other expenditures of the water fund increase by $2.8 million. The increase in the water budget reflects the third year of a planned four year rate increase, with rates increasing by 3% each year. Water transfers to the General Fund are comparable to FY 2004 and the water budget reflects a $0.3 million net increase in reserves. With respect to the electric fund, the revenues and expenditures increase by $92 million and $82 million, respectively over the prior year mainly as a result of gas sale revenues and expenditures under the new gas contract between TMGC and WTMPA. The FY 2005 budget for the stormwater fund is balanoed at $7.3 million of revenues and expenditures, including a planned use of$0.2 million of fund reserves. 25 Proposed FY 2005-2006 Budget The 2005-2006 proposed operating budget was proposed on July 28. 2005, and was prepared in accordance with guidelines provided by the Cicy Council. The proposed budget includes a tax rate of$0.4472 per $100 assessed valuarion, which is above ) the effective tax rate of $0.00713 but below the nominal rate of $0.0125. The following is a summary of the proposed 2005- 2006 General Fund Budget. Beginning Balance, October 1, 2004 (Budget Basis) $ 15,554,483 Symmaa of Bud&eteg General Fund Resource~ Revenue: General Properly Taxes $ 33,042.,484 City Sales Tax 39,900,000 Other Taxes 945,626 Gross Receipts/Franchise Fees 6,886,000 Other Fees, Permits, and Revenues 12,616,623 Total Revenue s 93,390,733 ) Transfers In: From Electric Fund 879,810 From Water Fund 4,649,264 From Sewer Fund 2,623,397 From Solid Waste Fund 1,728,777 From Airport Fund 1,099,077 From Storm water Fund 907,310 Other Transfers 484 208 Total Transfers In s 12,371,843 Total General Fund Resources $ 1051762!576 Summg_y: of Bugge~ ~jlDe(11 Fund Reguirem!ln~ Departmental Appropriations: Administrative Services $ 11,059,376 Community Services 2,255,005 Cultural and Recreation Services 14,213,397 Public Works 8,484,875 Public Safety Health Services Police 39,342.,092 Fire 24,065,511 Health 3,572,085 Municipal Court 11382,324 Total Departmental Appropriations s 104,374,665 Transfers Out: Transit s 8491200 Total Transfers Out s 849,200 Other Requirements s 538,711 Total General Fund Requirements $ 105,762,576 Use of Beginning Balance 0 Ending Balance $ 1515541483 26 ) TAX INFORMATION AD VAL.OREM TAX LAW ... The appraisal of property within the City is the responsibility of the Lubbock County Central Appraisal District (the "Appraisal District"). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal District is required under the Property Tax Code (defmed below) to appraise all property within the Appraisal . District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining lllll.lket value of property, different methods of appraisal may be used, including the rost method of appraisal. the income method of appraisal and market data comparison method of appmisal, and the method ronsidered most appropriate by the chief appmiser is to be used. State law further limitS the appraised value of a residence homestead for a tax yt:ar to an amount not to exceed the lesser of(l) the marl<et value of the property, or (2) the sum of(a) I0"-4ofthe appn~ised value of the property for the last year in which the property was appraised for taxation times the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of all new improvements to the property. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting oftfttee members appointed by the Bean! of Directors of the Appraisal District. The Appraisal District is required to review the value of propeny within the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to Title I of the Texas Tax Code (the "Propeny Tax Code"), for identification of property subject to taxation; property exempt or which may be exempted from taxation. if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable 10 the levy and collection of ad valorem taxes. Article VIII of the State Constitution ("Article VIII") and State law provide for certain exemptions &om property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Section 1-b, Article VIII, and State law, the goveming body of a political subdivision, at itS option, may grant: (I) An exemption of not less than S3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled trom all ad valorem taxes thereafter levied by the political subdivision; (2) An exemption of up 10 20"..1. of the market value of residence homesteads. The minimum exemption under this provision is $5,000. In tbe case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article vm, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging &om SS,OOO to a maximwn ofS 12,000. Effective January 1, 2004, under Article Vill and State law, the governing body of a county, municipality or junior college district, may provide tbal the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older will not be increased above the amount of taxes imposed in the year such residence qualified for such limitation. Also, upon receipt of a petition signed by five peroent of the registered voters of the county, municipality or junior college district, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads o( persons 65 years of age or older or who are disabled. Upon providing for such exemption, sucl! freeze on ad valorem taxes is transferable to a different residence homestead within the taxing unit and to a surviving spouse living in such homestead who is disabled or is at least 55 yeiu-s of age. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then cum:nt tax rate, and the total amount of taxes imposed is increased to reflect the new improvementS with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may oot be repealed or rescinded. The City has established such a limitation on ad valorem taxes. Article V1D provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-l), including open-space land de:.-oted to fium or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article vm, Section 1-j, provides for "freeport property" to be exempted from ad valorem taxalion. Freeport propeny is deftned as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. The City may aeate one or more tax increment financing zones, under which the tax values on property in the zone are "frozen" at the value of the property Ill the time of creation of the zone. Other overlapping taxing units may agree 10 contribute all or part of 27 ) future ad valorem taxes levied and collected against the value of property in the zone in excess of the "frozen value" to pay or finance the costs of certain public improvements in the zone. Taxes levied by the City against the values of real property in the zone in excess of the "frozen value" are not available for general city use but are restricted to paying or financing "project costs" within the zone. The City also may enter into tax abatement agreements to encourage economic development Under the agreements, a property owner agrees to construct certain improvements on its property. The City in tum agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement The abatement agreement could last for a period of up to I 0 years. EFFECTIVE TAX RAT£ AND ROLLBACK TAX RATE ... By each September I or as soon thereafter as practicable, the City Council adopts a tax rate per S!OO taxable value for the current year. The City Council is required to adopt the annual tax rate for the City before the later of September 30 or the 60111 day after the date the certified appraisal roll is received by the City. If the City Council does not adopt a tax rate by such required date the tax rate for that tax year is the lower of the .. effective tax rate" calculated for that tax year or the tax rate adopted by the City for the preceding tax year. The tax rate consists of two components: (I) a rate for funding of maintenance and operation expenditures and (2) a rate for debt service. Under the Property Tax Code, the City must annually calculate and publicize its "effective tax rate" and ''rollback tax rate". A tax race cannot be adopted by the City Council that exceeds the lower of the rollback tax rate or the effective tax rate until two public hearings are held on the proposed tax rate following a notice of such public hearings (including the requirement that notice be posted on the City's website if the City owns, operates or controls an internet website and public notice be given by television if the City has free access to a television channel) and the City Council has otherwise complied with the legal requirements for the adoption of such tax rate. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. "Effective tax rate" means the rate that will produce last year's total tax levy (adjusted) from this year's total taxable values (adjusted). "Adjusted" means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. "Rollback tax rate" means the rate that will produce last year's maintenance and operation tax levy (adjusted) from this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this year's debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY AsSESSMENT AND TAX PAYMENT ... Property within the City is generally assessed as of January I of each year. Business inventory may, at the option of the taxpayer, be assessed as of September. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October ·1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February I of each year and the final installment due on August I. PENALTIES AND INTEREST ... Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March 7 2 9 April 8 3 II May 9 4 13 June 10 s IS July 12 6 18 After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 15% attorney's collection fee is added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 6S years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against 28 ) > an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the tiling of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. CITY APPLICATION OF TAX Coo£ ... The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of$16,600; the disabled are also granted an exemption of$10,000. The City has not granted any pare of the additional exemption of up to 200/o of the market value of residence homesteads; the minimum exemption that may be granted under this provision being $5,000. The City bas established the tax freeze on residence homesteads of disabled persons and persons 65 and over. See Table I for a listing of the amounts of the exemptions described above. Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; and the Appraisal District collects taxes for the City. The City does not permit split payments of taxes, and discounts for early payment of taxes are not allowed by the City, although permitted on a local-option basis by the Property Tax Code. In the past, the City has taxed freeport property, although beginning with the 1999 tax year the City has exempted freeport property from taxation. The City collects an additional one-eighth cent sales tax for reduction of ad valorem taxes. The City held an election on November 4, 2003 to increase this tax by one quarter cent. for a total of three eighths of a cent The rate increase became effective on October l, 2004. The City has adopted tax abatement policies. as described below. 1 AX ABATEMENT POLICIES •.• The City has established a tax abatement program to encourage economic development. In order to be considered for tax abatement, a project must be located in a reinvestment zone or enterprise zone (a commercial project must be in an enterprise zone) and must meet several criteria pertaining to job creation and property value enhancement. The City has established three enterprise zones, the north zone, of approximately 18.6 square miles. the south zone, of approximately 15.1 square miles, and the international airport zone, of approximately 10.3 square miles. At present, there are 20 active enterprise projects and tax abatements, principally in the northeast and southeast sections of the City. In accordance with State law, the City has adopted policies for granting tax abatements, which provide guidelines for tax abatements for both industrial and commercial projects. The guidelines for industrial and commercial projects are similar, except that qualifying industrial projects may receive a ten year abatement, while qualifying commercial projects are limited to five year tax abatements. Although older abatements made by the City were given full (100%) tax abatement, since 1997 the City has negotiated abatements on a declining percentage basis, with a portion of the tax value being added to the City's tax roll each year during the life of the abatement. The City's policies provide a variety of criteria that affect the terms of the abatement. including the projected life of the project, the type of business seeking the abatement, with certain businesses targeted for abatement, the amount of real or personal property to be added to the tax roll, the number of jobs to be created or retained, among other factors. The policies disallow abatements for certain categories of property, including real property, inventories, tools, vehicles, aircraft, and housing. Each abatement policy provides for a recapture of the abated taxes if the business is discontinued during the tenn of the agreement, except for discontinuances caused by natural disaster or other factors beyond the reasonable control of the applicant. For a description of the amount of property in the City that has been abated for City taxation purposes, see "Table 1 - Valuations, Exemptions, and General Obligation Debt." TAX INCREMENT FINANCING ZoNES ••• Chapter 311, Texas Tax Code, provides that the City and other taxing entities may designate a continuous geographic area in its jurisdiction as a TlF if the area constitutes an economic or social liability in its present condition and use. Other overlapping taxing units may agree to contribute all or a portion of their taxes collected against the "Incremental Value" in the TIF to pay for TIF projects. Any ad valorem taxes relating to growth of the tax base in a TIF above the frozen base may be used only to finance improvements within the TIF and are not available for the payment of other tax supported debt of the City and other participating taxing units. Together with other taxing units, the City participates in two TIFs, the Central Business District Reinvestment Zone (the "Downtown TIP') and the North Overton Tax Increment Financing Reinvestment Zone (the "North Overton TIF'). 29 ) The Downtown TIF covers an approximately 0.71 square-mile area which includes part of the central business district and abuts the North Overton TIF. The base taxable values of the Downtown TIF are frozen at the level of taxable values for 2001, the year of creation at $101,376,054. ln FY 2005, the Downtown TIF has a taxable value of$117.046,263 before taking into acoount tax abatements and exemptions. After tax abatements and exemptions, the tax value in the Downtown TIF is $114,147,891. In addition to the City, the County, County Hospital District and the High Plains Underground Water Conservation District {collectively, the "Taxing Units") participate in the Downtown TIF. Given the relative tax rates of the participants, it is anticipated that the City will be the largest contributor to the tax increment fund if there is growth from the frozen base. The Downtown TIF was created pursuant to City ordinance and official action of the other participating taxing entities and is to expire in 2021. In addition to the Downtown TIF, the City enacted an ordinance in 2001 establishing the North Overton Tlf. Each of the other Taxing Units in the Downtown TIF also participate in the North Overton TIF. As is the case with the Downtown TIF, the taxes levied by the City in the FY 2005 represent approximately 54.80/o of all taxes levied by all participating Taxing Units. The City ordinance establishing the North Overton TIF provides that the North Overton TIF will tenninate on December 31, 2031 or at an earlier time designated by subsequent ordinance of the City Council. The North Overton TIF consists of approximately 325 acres near the Central Business District of the City. The frozen tax base for the North Overton TIF was established as of January J, 2002 at $26,940,604. During the first year of its existence, there was no tax increment in the zone, due to the demolition of existing structures as land was being acquired and prepared for future development Given the relative tax rates of the participants, it is anticipated that lhe City will be the largest oontributor to the tax increment fund if there is growth from the frozen base. In FY 2005, the North Overton TIF has a taxable value of$47,072,971. The Remainder of this Page Intentionally Left Blank. 30 ' I ) TABLE I • V ALUATlON, EXEMPTIONS AND G£N£RAL 0BUCA TlON DEBT 2004 Market Valuation Established by Lubbock Central Appraisal District Less Exemptions/Reductions at 100% Market Value: Residential Homestead Exemptions Homestead Cap Adjustment Disabled Veterans Agricultural/Open-Space Land Use Reductions Pollution Exemptions Solar and Wind-powered Exemptions Freepon Exemptions $ 202,962,443 97,892,885 13,497,140 53,151,755 2,706,800 80,992 62,093,896 63,387,926 $ 9,160,109,105 Tax Abatement Reductions 1'' Historical Exemption 144,359 495,918,196 2004 Taxable Assessed Valuation City Funded Debt Payable from Ad Valorem Taxes General Obligation Debt (as of 8-1 5·05) m The Certificates Total Funded Debt Payable from Ad Valorem Taxes Less: SelfSupponing Debt {as of8·15..0S) <•l Waterworks System General Obligation Debt Sewer System General Obligation Debt Solid Waste Disposal System General Obligation Debt Drainage Utility System General Obligation Debt Tax Increment Financing General Obligation Debt Electric Light and Power System General Obligation Debt General Purpose Funded Debt Payable from Ad Valorem Taxes <Sl General Obligation Interest and Sinking Fund as of7-31-05 Ratio Total Funded Debt to Taxable Assessed Valuation Ratio General Pwpose Funded Debt to Taxable Assessed Valuation 2005 Estimated Population -209,120 Per Capita Taxable Assessed Valuation • $41,432 $ 342,070,000 48,635,000 (J) $ 106,801,413 47,718,274 8,052,027 72,485,000 13,385,000 46,140,000 Per Capita Total Funded Debt Payable from Ad Valorem Taxes· $1,868 Per Capita General Pwpose Funded Debt Payable from Ad Valorem Taxes-$460 (1) See above, "Tax Information-Tax Abatement Policies". $ 8,664,190,909 $ 390,705,000 ()} 294,581,714 s 96,123,286 $ 1,551,24! 4.51% 1.11% (2) The statement of indebtedness does not include outstanding $24,840,000 Electric Light and Power System Revenue Bonds, as these Bonds are payable solely from the Net Revenues of the City's Electric Light and Power System. Includes the Tax and Waterworks System Surplus Revenue Refunding Bonds, Series 2005 delivered on August 15, 2005 and the General Obligation Refunding Bonds, Series 2005 delivered on July 28, 2005. Includes $7,265,000 of the City's General Obligation Bonds, Series 2005, scheduled to be delivered September I, 2005 .. (3) Preliminary, subject to change. (4) As a matter of policy, the City provides debt service on general obligation debt issued to fund improvements to its Waterworks System, Sewer System, Solid Waste System and Drainage System from surplus revenues of these Systems (see "Table SA-Pro·Fonna General Obligation Debt Service Requirements", "Table 8B-Division of Debt Service Requirements", "Table 9-Interest and Sinking Fund Budget Projection" and "Table 10-Computation ofSelf-Supporting Debt''). "Waterwortcs System General Obligation Debt" includes $106,801,413 principal amount of outstanding general obligation bonds, <:ertificates of obligation and Tax and Waterwortcs System Surplus Revenue Refunding Bonds, Series 2005, delivered on August 15, 2005 that were issued to finance or refinance Waterwortcs System improvements, and that are being paid. or are expected to be paid, from Waterworks System revenues. The City has no outstanding Waterworks System Revenue Bonds but has obligated revenues of the Waterworks System under water supply contracts. 31 ) "Sewer System General Obligation Debt" includes $47,718,274 principal amount of general obligation bonds and certificates of obligation that were issued to finance Sewer System improvements, and that are being paid, or are expected to be paid, from Sewer System revenues. The City has no outstanding Sewer System Revenue Bonds. "Solid Waste Disposal System General Obligation Debt" includes $8,052,027 principal amount of general obligation debt that was issued for Solid Waste System improvements, and that is being paid, or is expected to be paid, from revenues derived from Solid Waste service fees. The City has no outstanding Solid Waste Disposal System Revenue Bonds. "Drainage Utility System General Obligation Debt" includes $72,485,000 principal amount of general obligation debt that was issued for Drainage System improvements, and that is being paid, or that is expected to be paid, from revenues derived from Drainage Utility System fees. The City has no outstanding Drainage Utility System Revenue Bonds. ••Tax Increment Finan.cing General Obligation Debt" represents $13,38.5,000 principal amount of general obligation Tax Increment Certificates of Obligation issued for construction of improvements in the North Overton TIF, and is being paid, or is expected to be paid, from revenues derived from the Pledged Tax Increment Revenues. The City has no outstanding Tax Increment Financing Revenue Bonds. However, for FY 2004 the City projects that the incremental tax revenue available to cover debt service on the existing Tax Increment Certificates of Obligation will cover approximately 300A. of such debt, and that for FY 2005 (based upon the January I, 2004 tax roll), the incremental tax revenue available to cover debt service on the existing Tax Increment Certificates of Obligation will cover approximately 600A. of such debt In FY 2006, based upon development projections that the City believes to be reasonable, but which are dependent in part on future economic conditions and other factors that the City can not conttol and as to which it can give no assurances, the City anticipates that tax increment revenues will be adequate to cover debt requirements on the existing Tax Increment Certificates of Obligation. In the interim, the City intends to make an interfund loan to cover the debt service, and if the projected development in the North Overton TIF proceeds as expected, the City would repay such loan from revenues received in future years. The North Overton master plan projects additional debt to be issued by the City for infrastructure improvements in the TIF. If that occurs, there would likely be years in which the TlF would not produce revenues in amounts sufficient to cover all debt issued for it, at least until the TlF has reached full build-<Jut status. "Electric Light and Power System General Obligation Debt" includes $46,140,000 principal amount of general obligation bonds and refunding bonds that were issued to finance Electric Light and Power System improvements and to refund certain Electtic Light and Power System Revenue Bonds. (5) "General Purpose FWtded Debt Payable from Ad Valorem Taxes" includes $95,242,036 of general obligation debt and $881,250 principal amount of outstanding Tax and Airport Swplus Revenue Bonds of Obligation on which debt service is provided from Passenger Facility Charge ("PFC"') revenues (see Footnote (2), "Table 9 • Interest and Sinlcing FWld Budget Projection"). Source: City ofLubbo<:k., Texas. 32 '\ .. J ) TABLE 2 • TAXABLE ASSESSED VALUATIONS BYCAT£CORY Taxable Apf!!!sed Value I« Flsul Yctr Ended S~tembcr 30, 2005 2004 2003 %o( %of %of Cares~ Amount Total Amouot Te~al Amount Total Real, Residential, Single-Family s 5,156,169.834 56.29"1. s 4,690,158,161 SUO% s ~.282,214.635 56.18,. Real, Reside21tial, Multi-Family 614,631.057 6.71% 561.569,483 6.64% 455,993,262 605% Real. V •tantl..olsiTncts 135.464.357 1.48% 101,625.9~ 1.29% 93,473,144 1.24% Real, Acreage (Land Only) 64.528.231 0.70% 6S,8B0,4JO 0.78% 59.644,977 0.79"/o Real. Famo and Ranch Improvements 10,391,139 0.1 "'• 10,83S,OIB 0.13% 11.391,782 0.1S% Real, Commercial and lnduslrial 1.701.145.839 18.5?% 1,6)8.846,765 19.39% 1,370,730,397 18.18% Real, Oil, Gas and Other Mineral Reserves 11.298.200 0.12% 8,923,810 0.11% 7,909,460 0.10% Real and Tanaible Personal, Utilities 173,908,469 1.90% 185,761,346 2.20% 19l,l38,423 2.55% Tanaiblc Pusonal, Commencial and lnclu.snial 1,19&,078,620 13.08% 1,090,862,579 12.91% 974,534,729 12.92% Tangible Pel'l()lgl, Other 15,219.192 0.17% 16,287,022 0.19% 15,336,364 0.20% R.-.1 Property, Inventory 10,987,935 O.llo/o 4,774,287 0.06% 11.087,603 0.15% Special Inventory 68,226.1&1 0.74% 68,663,514 0,81% 67,339,159 0.89% Total Applllised Valu.e &fort. Exemptions $ 9.160.109.105 100.00% s &.4",18&,42.4 100.00% $ 7 .S41, 793,935 100.00% Less: ToiAI Sxemprions/ReductiOfls (495,918.196! ~529,598,044) (199,449,068) Taxablo .Useueci Value s 8,664,190,909 $ 7,921,590.3&0 $ 7,342,344,&67 Taxable Appqised Value for fiscal Year Ended ~tcmbes 30, 2002 2001 %of %of Category Amount Total Amount Total Real, Residential, Single-Family s 3,935,486,660 53.~9% $ 3,771,725,980 53.71% Real. Residenriol. Multi-Family 466,771,473 6.36% 453.863.141 6.46% Real. V ac.nt Lot.SIT r..:ts 96.407,484 1.31% SS,I08,S41 l.lS% Real, A=qe (Land Only) 60.171..S06 0.82% 60,125,617 0.16% Real, f amo aod Ft.odllmprovcmml$ 12.003,318 0.16% 11,000,161 0.16% Real, Comme~ial ancl Jncluslrial l,44S,748,160 19.69% 1.348,046,123 19.20% Real, Oil, Gas and Other Mineral Re...ves 8,S49,390 0.12o/o 7,000,000 0.10% Real and T11ft8iblc Penonal. Utilities 185,581,935 2.53% 181,228,303 2.S8% T11ft8iblc Personal. Commercial and lndusaia1 J ,039.121.384 14.16% 1,072,713,960 15.18% Tangible Pe!SOnal, Other 15,296,446 0.21% 14,716,889 0.21% Special Inventory 10.279,056 0.14% \3,320.JJ6 0.19% Real Property, Inventory 67,429,634 0.92% 0.00% Total Appraised Value Before Exemptions s 7,343,557,446 100.00% s 7,021,918.&SI 100.00010 Less: ToiAI Exempcioos/Reduccioos (434,247,739) (3&3,00':'58! Taxable ~'"sed Value $ 6,909.309. 707 s 6,638,9111093 NOTE; Valuations shown are certified taxable assessed values reported by the Lubbock Central Appraisal District to the City for purposes of establishing and levying the City's annual ad valorem tax rate and to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. 33 TABU 3A -VAUJATION AND GENERAL OBLIGATION DEBT HISTORY General Purpose Ratio Fiscal Taxable Funded Tax Debt Tax Debt Funded Year Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 9/30 Po~ulation <H Valuation 121 PerCa(!ita of Year()) Valuation111 CapitaOl 2001 201,097 $ 6,638,911,093 s 33,013 s 58,122,809 0.88% $ 289 2002 202,000 6, 909.309,707 34,205 63,115,346 0.91% 312 2003 204,737 7,342,344,867 35,862 70,188,204 0.96% 343 2004 206,290 7,921,59il,380 38,400 70,161,218 0.89% 340 2005 209,120 8,664,190,909 41,432 96,123,286 141 1.11% (4) 460 141 (I) Source; The City of Lubbock, Texas (2) As reported by the Lubbock Central Appraisal District on City's annual State Property Tax Board Reports: subject to change during the ensuing year. (3) Does not include self-supporting debt (see Table 38 and footnote 3 to Table 1). (4) Includes the Certificates. Includes the General Obligation Bonds, Series 2005 expected to be delivered September 1, 2005. Preliminary, subject to change. TABU 38 -DERIVATION OF GENERAL. PURPOSE FUNDED T AJ< DEBT The following table sets forth certain infonnation with respect to the City's general purpose and self-supporting general obligation debt. The City is revising its capital improvement plan, but the City expeas to issue additional self-supporting general obligation debt within the three to five year time frame. See "Debt lnfonnacion-Capital Improvement Program and Anticipated Issuance of General Obligation Debt." Fiscal Year Ended 9/30 2001 2002 2003 2004 2005 Funded Tax Debt Outstanding at End of Year s 175,408,321 217,269,682 295,935,000 285,885,000 390,705,000 (II Less: Self-Supporting Funded Tax Debt s 117,285,512 154, I 54,335 225,746,796 215,723,783 294,581,714 (I) General Purpose Funded Tax Debt Outstanding at End ofYear $ 58,122,809 63,115,346 70,188,204 70,161,217 96,123,286 (I) (1) Includes the Certificates. Includes the Geneml Obligation Bonds, Series 2005 delivery expected on September I, 2005. Preliminary, subject to change. TABLE 4 - T AJ< RATE, LEVY AND COLUCTlON HISTORY FiScal %of Current o/• ofTotal Year Distribution Tax Tax Ended Tax General Economic Interest and Collections Colleccions 9130 Rate Fund Develoement SinkinS Fund Tax Levy to Tax Levy toTaxLe~ 2001 $ 0.5700 $ 0.42718 s 0.03000 $ 0.11282 $ 37,841,145 97.58% 99.29% 2002 0.5700 0.42844 0.03000 0.11156 39,351.225 91.60% 99.41% 2003 0.5700 0.43204 0.03000 0.10796 42,286,967 97.25% 98.78% 2004 0.5451 0.41504 0.03000 0.10066 43,659,111 97.02% 99.69% 2005 (l) 0.4597 0.33474 0.03000 0.09496 39,786,978 96.99% (I) 99.3G-A, (I) (I) Collections for part year only, through July 31,2005. (2) For a discussion of the factors affecting the decline in the 2005 General Fund tax rate, see "Discussion of Recent financial and Management Events -FY 2005 Budget" 34 \ ,. > ) TABLES· TENLARGESTTAXPAYERS 2004/0S %of Total Taxable Taxable Assessed Assessed Name ofTax2a.z:er Nature of Pro~~ Valuation Valuation Macerich lubbock LTD Partnership Regional Shopping Mall $ 111,433,954 1.290.4. Southwestern Bell Telephone Co. Telephone Utility 59,427,700 0.69% Southwestern Public Service Electric Utility 53,466,701 0.62% United Supem1arkets Distribution Center Retail Grocery 48,241,512 0.56% Grinnell Corp-Flow Control Division Manufacturing/Fire Sprinklers 45,933,080 0.53% Pyoo Industries Cottonseed Oil Mill 43,349,210 0.50% McLane Food Services Food Wholesale 37,823,550 0.44% Walmart Supercenter Retail 34,779,467 0.40% X Fab Texas, Inc. Electronic Manufacturing 29,152,174 0.34% Lubbock SMSA Ltd. Partnership Telephone Utility 27,671,690 0.32% s 491,279,038 5.67% GENERAL OBLIGATlON DEBT LIMITATION ... No general obligation debt limitation is imposed on the City under current State law or the City's Home Rule Charter (see "Tax Rate Limitation"). TABLE 6 -TAX ADEQUACY( I) Maximum Principal and Interest Re<juirements, All General Obligation Debt, 200~1 ........................................................................................................................ $ 38,279,263 $0.4509 Tax Rate at 98%Collection Produces ................................................................................................................. $ 38,285,500 Maximum Principal and Interest Requirements, General Purpose General Obligation Debt, 200@J> .................................................................................................. $ 9,985,729 $0.1177 Tax Rate at 98%Collection Produces ................................................................................................................. S 9,993,798 (I) Based on 2004· 2005 taxable assessed valuation. Preliminary, subject to change. (2) See Table SA. (3) See Table 8B. 35 ) ' ) ) ) ) TABLE 7-EsTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ("Tax Debt'1 was developed from information contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City bas not independently verified the accuracy or completeness of such information, and no person should rely upon such infonnation as being accurate or complete. Furthermore, oertain of the entities listed may have issued additional Tax Debt since the date hereof, and such entities may have programs requiring the issuance of subStantial amounts of additional Tax Debt, the amount of which caMot be detennined. The following table reflects the estimated share of overlapping Tax Debt of the City. 2004105 TO(al funded City's Authori:ted Tauble Deb! Eslima!ed Overlapping Bul Unissued ASSessed Tax As Of ~. G.O.Debt Debt As Of Taxing Jurisdi«ion v~lue R.a!e 8-IS..OS A!!eli.,.bte Asof8-IS..05 a-Js.os City of Lubb<M;k $ 8.605,424,748 s 0.45970 s 391.190.000 (1) 100.00% s 391,190,000 $ 31,717,000 Lubbock Independent School District 6.303.339,726 1.60560 103.675,060 93.91% I 02,S4S,002 52,248,593 lubbO<:k County t0.198.9S9.098 0.25581 76.610.000 &2.94% 63,S40.334 505,341 LubbO<:k County Hospital District 10.194,687,811 0.10742 82.94% High Plains Underground Water Conservation District No. I 10.194,687.81 I 0.00830 82.94% FrCilsbip Independent School District 1,290.505.343 1.68060 41,960,026 64.44% 27,039,041 Idalou lndepmdcnt School District I 28.5 S I ,070 1.50000 195.000 1.10% 8.745 Lubboc:k.COOCieC Independent School Oistric:t 613.192,253 1.51760 13,li9,S55 IS.30% 2,022,592 New Deal Independent School District 124,288.1 s s 1.50000 0.03% ToCal Di=t and Overlapping G.O. Deb! s 586~5.713 Ratio of Di~ and Overiapping G.O. Debt to Taxable Assessed Valuation .......•.•.•.........•....•...•............•... 6.81% Per Capita Oi=t and Overlapping 0 .0. Debt. ...................................•.....•............•.•...•••....•...•...... S 2.842 (I) Includes the Certificates. Includes the General Obligation Bonds, Series 2005, expected to be delivered September 1, 2005. Preliminary, subject to change. 36 ...., '-' . ....,. '-" DEBT INFORMATION TABLE 8A • PRo-FORMA GENERAL OBLIGATION DEBT S!RVICE REQUIREMENTS Fiscal Year Total %of Ended Outstanding Debt 111 The Certificates121 Combined Principal 9/30 Princi2al Interest Total Princi2at Interest Total Reguirements Retired 2005 $ 16,005,000 s 11,899,223 $ 27,904,223 $ . s . $ . $ 27,904,223 2006 18,785,000 15,772,494 34,557,494 1,495,000 2,226,769 3,721,769 38,279,263 2007 19,975,000 14,556,311 34,531,311 1,580,000 2,155,275 3,735,275 38,266,586 2008 19,600,000 13,752,577 33,352,577 1,655,000 2,080,061 3,735,061 37,087,638 2009 19,460,000 12,939,418 32,399,418 1,740,(}00 2,001,128 3,741,128 36,140,546 24.66% 2010 19,250,(}00 12,121,091 31,371,091 1,825,000 1,918,241 3,743,241 35,114,332 2011 19,690,000 11,268,664 30,958,664 1,900,000 1,831,635 3,731,635 34,690,299 2012 18,930,000 10,407,440 29,337,440 1,995,000 1,741,076 3,736,076 33,073,516 2013 19,380,000 9,549,947 28,929,947 2,085,000 1,646,216 3,731,216 32,661,163 2014 19,895,000 8,650,933 28,545,933 2,185,000 1,546,939 3,731,939 32,277,871 51.00% 2015 17,390,000 7,814,549 25,204,549 2,300,000 1,442,663 3,742,663 28,947,211 2016 17,020,000 7,020,160 24,040,160 2,400,000 1,333,388 3,733,388 27,773,548 2017 16,825,000 6,204,126 23,029,126 2,510,000 1,219,230 3,729,230 26,758,356 2018 17,505,000 5,371,289 22,876,289 2,635,000 1,099,609 3,734,609 26,610,898 2019 16,245,000 4,507,100 20,752,100 2,765,000 974,059 3,739,059 24,491,159 75.00% 2020 13,820,000 3,777,606 17,597,606 2,895,000 842,464 3,737,464 21,335,070 2021 11,935,000 3,151,463 15,086,463 3,030,000 704,708 3,734,708 18,82 I ,170 2022 8,925,000 2,644,440 11,569,440 3,180,000 560,325 3,740,325 15,309,765 2023 7,675,000 2,244,245 9,919,245 3,325,000 409,084 3,734,084 13,653,329 2024 5,450,000 1,887,289 7,337,289 3,480,000 250,868 3,730,868 11,068,156 90.66% 2025 4,010,000 1,656,189 5,666,189 3,655,000 84,979 3,739,979 9,406,168 2026 3,395,000 1,463,114 4,858,114 4,858,114 2027 3,575,000 1,283,950 4,858,950 4,858,950 2028 3,755,000 1,095,068 4,850,068 4,850,068 2029 3,955,000 896,385 4,851,385 4,851,385 96.16% 2030 4,170,000 686,998 4,856,998 4,856,998 2031 4,390,000 466,390 4,856,390 4,856,390 2032 2,240,000 297,250 2,537,250 2,537,250 2033 2,350,000 182,500 2,532,500 2,532,500 2034 2,475,000 61,875 2,5361875 2!536,875 100.00% $ 358,075,000 $ 173,630,081 $ 531,705,081 $ 48,635,000 $ 26,068,714 s 74,703,714 $ 606,408,795 -===-(I) "Outstanding Debt" does not include lease/purchase obligations. Includes the General Obligation Bonds, Series 2005, expected to be delivered September I, 2005. (2) Average life of the issue is I 1.527 years. Preliminary, subject to change. 37 .., ...., ....., '-' '-J ,/ TABU 88 ~ DlVISION OF DEBT SERVICE IUQUUUMiNni Less: Less: Less: Less: Less: Less: Solid Waste Drainage Tax Ele<:trie Waterworlcs Sewer Disposal Utility Increment light and General Fiscal System Symm System System Financing Power System Purpose Year General General General General General General General Ended Combined Requirementi'1 Obligation Obligation Obligation Obligation Obligation Obligation Obligation 9/30 Princij!!l Interest Total Requirements11 )(ll Requirements1'1 Reguirements Re9uirements Requirements111 Requirements<'' Requirements< I) 2005 s 16,005,000 $ 11,899,223 s 27,904,223 $ 6.544,773 $ 5,834,616 $ 789,006 s 4,671,744 $ 286,725 $ 1,682,411 $ 8,094,947 2006 20,280,000 17,999,263 38,279,263 11,042,234 5,982,485 796,411 4,840,465 1,030.140 4,602.131 9,985,397 2007 21,SSS,OOO 16,711,586 38,266,586 10,933,833 6,158,664 783,365 4,841,912 1,034,341 4,528,741 9,985,129 2008 21,255,000 15,832,638 37,087,638 10,522,\01 5,827,299 773,284 4,843,899 1,032,470 4,461,940 9,626.645 2009 21,200,000 14,940,546 36,140.546 10,368,014 5,539,721 758,285 4,841,240 1,030,376 4,386,469 9,216,440 2010 21,075,000 \4,039,332 35,114,332 10,190,998 5,248,570 743,402 4,843,1\5 1,037,869 4,308.146 8,742,233 2011 21,590,000 13,100,299 34,690,299 10,102,885 5,082,577 722,710 4,842,660 1,034,248 4,242,654 8,662.566 2012 20,925,000 12,148,516 33,073,516 9,227,916 4,844,315 711,200 4,837,830 1,034,613 4,159,973 8,257,669 2013 21,465,000 11,196,163 32,661,163 9,179,627 4,655,224 699,174 4,840,404 1,028,964 4.090,309 8,167,461 2014 22,080,000 10,197,871 32,277,871 9,145,601 4,489.838 681,755 4,838,253 1,032,201 4,011,640 8,078,583 2015 19,690,000 9,257.211 28,947,211 9,025,600 2,622, I 16 664,681 4,842,053 I ,033,917 3,939,508 6,819.277 2016 19,420,000 8,353,548 27,713,548 8,990,892 1,839,584 647,661 4,841,828 I ,034,163 3,858,604 6,560,816 2017 19,335,000 7,423,356 26,758,356 8.958,239 1,802,406 625,225 4,837,078 I ,032,878 3,719,850 5,722,681 2018 20,140,000 6,470,898 26,610,898 8,911,782 1,712,958 612,346 4,841,953 I ,029,965 3,706,909 5,7)4,985 2019 19,010,000 5,481 ,I 59 24.491,159 8,564,079 1,736,199 418,175 4,836,203 1,030,296 2,169,814 5,736,393 2020 16,715,000 4,620,070 21,335,070 6,156,485 979,114 411,863 4,839,578 I ,038,639 2,171,101 5,738,291 2021 14,965,000 3,856,170 IS,S21,170 4,258,464 985,041 404,813 4,836,703 1,034,835 2,166,809 5,134,506 2022 12,105,000 3,204,765 I 5,309,765 1,580,305 979,029 270,400 4,852,254 1,034,130 2,17l,S89 4,422.059 2023 I 1,000,000 2,653,329 13,653,329 1,038,021 654,476 273,644 4,850,863 1,036,436 2,166,845 3,633,044 2024 8,930,000 2,133,156 I 1,068,156 1,031,979 651,643 271,294 4,851,845 1,031,754 487,278 2,742,365 2025 7,665,000 1,741,168 9,406,168 296,743 603,718 4,852,714 746,973 491,808 2,414,214 2026 3,395,000 1,463,114 4,858,114 4,858,114 2027 3,575,000 1,283,950 4,858,950 4,858,950 2028 3,755,000 1,095,068 4,850,068 . 4,850,068 2029 3,9SS,OOO 896,38S 4,851,385 4,851,385 2030 4,170,000 686,998 4,856,998 . 4,856,998 2031 4,390,000 466,390 4,856,390 4,856,390 2032 2,240,000 297,250 2,537,250 2,537,250 2033 2,350,000 182,500 2,532,500 . 2,S32,500 2034 2,475,000 61,875 2,536,875 2,S36,87S $ 406,710,000 = s \99,698,795 s 606,408,795 s I 56,070,573 s 68,289,593 s 12,058,693 $ 138.263,1 I 8 $ 20.665 99! 1 67,584.526 s 143,476,300 (I) Includes the Certificates. Includes the General Obligation Bonds, Series 2005, expected to be delivered September I, 2005. Preliminary, subject to change. (2) Includes the Tax and Waterworks System Surplus Revenue Bonds, Series 2005 to be delivered August 15, 2005. 38 ) ) ) ) TABU: 9 • INTEREST AND SINKJNC fliND BUDGET PROJECTION General Obligation Debt Servia: Requirements (Pro-Forma), Fiscal Year Ending 9-30-05 Fiscal Agent, Tax Collection and Other Uses Total Requirements Sources of Funds Interest and Sinking Fund, 9-30-04 Budgeted Ad Valorem Tax Receipts Budgeted Transfers From: -I".-... ' Water Fund <II Sewer Fund 111 Solid Waste Fund (It Drainage Utility Fund Ill Electric Fund01 TIF Fund Airport Fund-from Passenger Facility Charges ("PFCs")121 Budgeted Interest Earned Total Sources of Funds Projected Balance, 9-30-05 (I) See "Table 10 -Computation of Self-Supporting Debt". $ s $ s $ 27,904,223 15,000 27,919,223 2,852,843 7,954,344 7,085,088 5,940,796 813,084 4,852,706 1,682,4 I 1 286,725 195,630 189,405 31,853,032 3,933,809 (2) Passenger Facility Charges ("PFCs") are authorized by the Federal Aviation Administration ("FAA"). PFC revenues must be used for allowable costs of FAA approved airport projects, including debt service on airport obligations issued for approved airport projects. The City has issued several series of debt for municipal airport improvements ("Airport Debt"), including tax and airport surplus revenue certificates of obligation in 1993 and 1998, and general obligation refunding bonds in 1985 and 1997, which refunded prior issues of Airport Debt. A portion of the refunding bonds have been allocated to the airport in proportion to the principal amount of Airport Debt that was refunded. PFC revenues collected for fiscal year ending 9-30-04 were $1,402,033, and, $195,650 of PFC revenues have been budgeted for payment of Airport Debt in 2004-05, which equates to self-supporting Airport Debt with a principal balance of$1,368,750. For 2004..05, the portion of Airport Debt that is being funded from general fund contributions (ad valorem taxes) equates to a principal balance of $2,366,250. 39 ... ) ) TABLE 10 • COMPUTATIONOFSELF·SUPJ>ORTING DEBT THE WATERWORKS SYSTEM (I) Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ended 9·30-05 Balance Available for Other Purposes Requirements for System General Obligation Debt, Fiscal Year Ending 9-30·05 Percentage of System General Obligation Debt Self-Supporting $16,142,912 -0· $16,142,912 s 6,544,773 \00.00% (I) Each Fiscal Year the City transfers Net Revenues of the Waterworks Enterprise Fund to the General Obligation Interest and Sinking Fund in an amowtt equal to debt service requirements on Waterworks System general obligation debt. THE SEWER SYSTEM (I) Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending 9-30-05 Balance Available for Other Purposes Requirements for System General Obligation Debt, Fiscal Year Ending 9-30·05 Percentage of System General Obligation Debt Self-Supporting $ 8, 720,503 -0· $ 8,720,503 $ 5,834,616 100.00% (I) Each Fiscal Year the City transfers Net Revenues of the Sewer Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Sewer System general obligation debt. THE SOUD WAST£ DlSPOSAI.. SYST~M (tl Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending 9-30-05 Balance Available for Other Purposes Requirements for System General Obligation Debt, Fiscal Year Ending 9-30-05 Percentage of System General Obligation Debt Self-Supporting s 2,538,565 ·0· $ 2,538,565 $ 789,006 100.00% (I) Each Fiscal Year the City transfers Net Revenues of the Solid Waste Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Solid Waste System general obligation debt. THE DRAINAGE SYST£M (I) Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending 9·30-05 Balance Available for Other Purposes Requirements for System General Obligation Debt, Fiscal Year Ending 9-30·05 Percentage of System General Obligation Debt Self-Supporting $ 5,167,840 -0- $ 5,167,84() $ 4,671,744 100.00% (I) Each Fiscal Year the City tranSfers Net Revenues of the Drainage Entelprise Fund to the General Obligarion Interest and Sinking Fund in an amount equal to debt service requirements on Drainage System general obligation debt THE ELECTRIC LIGHT AND POWitlt SYSTEM (I) Net Electric Light and Power System Revenue Available, Fiscal Year Ended 9·30·04 Less: Requirements for Revenue Bonds, Fiscal Year Ending 9-30-05 Balance Available for Other Purposes Requirements for Electric System General Obligation Debt, Fiscal Year Ending 9-30-05 Percentage of Electric System General Obligation Debt Self-Supporting s 10,269,560 4,276,703 $ 5,992,857 $ 1,682,411 100.00% (I) The City transfers Net Revenues of the Electric Light and Power Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Electric Light and Power System general obligation debt 40 ) ) ) T ABl£ J I -AUTHORIZED BUT UNISSUED GENERAL 0BUCATION BoNDS Amount Date Amount Previously Unissued Pu~se Authoriud Authoriud Issued"' Balance Watel'\vorks System 10/17/37 $ 2,810,000 $ 200,000 s 2,610,000 Sewer System 5121n1 3,303,000 2,175,000 1.128,000 Streel Improvements 5/1193 I 0,1 70,000 10.166,000 4.000 Street Improvements 5/15104 9,210,000 3.055,000 6,155,000 Civic Center/AuditoriUm Renovations and Improvements 5115104 6,450,000 6,450,000 Parle Improvements 5115104 6,395,000 4,670,000 1,725,000 Police/Municipal Court Facilities 5115/04 3,350,000 3,350,000 Library Improvements 5/IS/04 2,145,000 2,145,000 Fire Stations S/15/04 1,405,000 1,405,000 Animal Shelter Renovations and Improvements 5115104 1,045,000 !60,000 885,000 s 46,283,000 $ 21,831,000 $ 24,452,000 (I) The City's $7,265,000 General Obligation Bonds, Series 2005, sold to finance the purposes shown. are expected to be delivered September I. 2005. ANTICIPATED ISSUANCt OF GENERAL OBLIGATION DEBT ... The City Council adopted a resolution during the 1984·85 budget process establishing capital maintenance funds for capital proje<:ts. A capital improvement plan is made for planning purposes and may identify projects that will be deferred or omitted entirely in future years. In addition, as conditions change, new projects may be added that are not currently identified. Under current City policy, for a project to be funded as a capital project it must have a cost of $25,000 or more and a life of seven or more years. For FY 2004. the City Council approved S I 0.4 million in total expenditures for capital projects for all general purpose projects, as well as projects for the electric fund, water fund, sewer fund, solid waste fund, stormwater fund and airport fund (down from $57.9 million in FY 2003). The Capital Proje<:ts Fund budget for FY 2004 also included an additional Sl51.9 million in future improvements for all City departments over the four succeeding fiscal years. The improvements included in the City's capital improvement plan are generally funded from a blend of bond proceeds, reserves or current year revenue sources. As shown in Table ll, after the issuance of the General Obligation Bonds, Series 2005 the City has $20.71 million of authorized but unissued bonds from the May 15, 2004 bond election. When that election was held, the City anticipated that the bonds would be issued over the 2004 through 2008 time ftame. The City typically issues voted bonds for general purpose City projects, such as streets, parks, libraries, civic centers and public safety improvements. However, the City has incurred substantial unvoted tax supported debt to fund portions of the capital budget of the electric fund, water fund, sewer fund, solid waste fund, stonnwater fund and airport fund. As described elsewhere in this Official Statement, such enterprise fund indebtedness is generally anticipated to be self-supporting from enterprise fund revenues. TABLE 12-0THER08LIGATIONS At December 31, 2004, the City had capital lease obligations for leased equipment in the following amounts: Fiscal Governmental Busioess-ty pe Total Year Capital Lease Capital Lease Capital Lease Ended Minimum Minimum Minimum 9130 Payment Payment Payment 2005 $ 854,159 $ 643,732 s 1,497,891 2006 545,380 418,741 964,121 2007 353,694 353,694 Less: Interest (38,582) (65,572) (104,154) $ 1,360,957 s 1,350,595 $ 2,711,552 41 ) ) ) PENSION FOND ..• TEXAS MUNICIPAL RETIREMENT SYSTEM (1)(21 ..• All permanent, full-time City employees who are not firefighters are covered by the Texas Municipal Retirement System ("TMRS"). TMRS is an agent, multiple-employer, public· employee retirement system which is covered by a State statute and is administered by six trustees appointed by the Governor of Texas. TMRS operates independently of its member cities. The City joined TMRS in 1950 to supplement Social Security. All City employees except firefighters are covered by Social Security. Options offered under TMRS, and adopted by the City, include current, prior and antecedent service credits, five year vesting, updated service credit. occupational disability benefits and survivor benefits for the spouse of a vested employee. An employee who retires receives an annuity based on the amount of the employees contributions over-matched two for one by the City. Since October II, 1997, the employee contribution rate has been 7% of gross salary. The City's contribution rate is calculated each year using actuarial techniques applied to experience. The 2004 contribution rate is 14.54%. Enabling statutes prohibit any member city from adopting options which impose liabilities that cannot be amortized over 25 years within a specified statutory rate. On December 31, 2004, the actuarial value of assets held by TMRS (not including those of the Supplemental Disability Fund, which is "pooled"), for the City were $186,398,545. Unfunded actuarial accrued liabilities on December 31, 2004 were $62,034,262, which is being amortized over a 25·year period beginning January, 1997. Total contributions by the City to TMRS for Calendar Year 2004 were $9,174,744. FIREMEN'S RELIEF AND RETIREMENT FUND Ill .•• City of lubbock firefighters are members of the locally administered Lubbock Firemen's Relief and Retirement Fond (the "Fund"), operating under an act passed in 1937 by the State Legislature and adopted by City firefighters, by vote of the department, in 1941. Firefighters are not covered by Social Security. The Fund is governed by seven trustees, three firefighters, two outside trustees (appointed by the other trustees), the Mayor or the representative thereof and the chief financial officer or the representative thereof. Execution of the act is monitored by the Firemen's Pension Commissioner, who is appointed by the Governor. Benefits of retired firemen are determined on a "formula" or a "final salary" plan. Actuarial reviews are performed every two years, and the fund is audited annually. Firefighters contribute a percentage of full salary into the fund. The firefighters' contribution rate for 2005 is 12.43%. The Cit)~ must contribute a like amount; however, the city contributes on a basis of the percentage of salary which is a ratio adjusted annually that bears the same relationship to the firefighter's contribution rate that the City's rate paid into the TMRS and FICA bears to the rate other employees pay into the TMRS and FICA. The City's contribution rate for 200S is 19.94%. As of December 31, 2003, unfunded pension benefit obligations were $16,588,639 which is being amortized over a 13 year period beginning January I, 1997. (I) For historical information concerning the retirement plans, see Appendix B, "Excerpts from the City's Annual Financial Report"-Note #Ill, Subsection E. "Retirement Plans".) (2) Source: Texas Municipal Retirement System, Comprehensive Annual Financial Report for Year Ended December 31, 2ll3. "CityofLubbock. Texas". 42 ) FINANCIAL INFORMATION ) TABLE 13 -CIIANCES IN NET ASSET'Sill Fiscal Year Ended S!:;£tember 30, 2004 2003 2002 Governmental Governmental Governmental Activities Activities Activities REYENIJES· (in OOO's! ~in OOO's) ~in OOO's) ) Program Revenues: Charges for services $ 12,713 $ 13,888 $ 9,369 Operating grants and contributions 9,643 12,137 7,007 General Revenues: Property Taxes 44,497 42,303 40,408 Sales Taxes 30,555 29,092 28,903 Other Taxes 3,793 3,712 3.681 Franchise Taxes 9,654 6,613 6,998 Grant/contributions not restricted to specific programs (25) Other 4,274 3,834 6,221 Total Revenues $ 115,129 $ 111,579 $ 102,568 EXPENSES· Adrninistralive/Conununity Services $ 22,313 $ 21,793 $ 32,483 ) Electric 2,471 2,373 2,585 Financial Services 2,387 1,965 1,908 Fire 21,998 20,207 18,664 General Government 20,562 21,009 23,436 Human Resources 777 786 883 Police 33,249 31,429 29,715 Streets 10,789 9,827 5,940 Public Works 3,078 9,856 4,322 Interest on t,.. T Debt 4,593 3,346 3,382 Total Expenses $ 122,217 $ 122,591 $ 123,318 Change in net assets before special items & transfers (7,088) (11,012) (20,750) Special items (687) Transfers 9,745 2,554 15,668 Change in net assets $ 2,657 $ (8,458) s (5,769) Net assets • beginning of year, as restated $ 101,684 $ 110,142 $ 115,911 Net assets-end of year $ 104,341 $ 101,684 $ 110,142 (I) Data shown in Table 13 reflects general governmental activities reported in accordance with GASB Statement No. 34. The FY 2003 financial statements include a management discussion and analysis of the operating results of such fiscal year, including restatements to beginning fund balances and net assets. As of the date of this Official Statement, a copy of the FY 2003 financial statement can be accessed through the City's website, http://www.ci.lubbock.tx.us. 43 ) ' ) TABLE 13-A -GENERAL FUND RI:VENUI!S AND EXPENDITlJRt: HISTORY Fiscal Year Ended September 30."1 Revenues 2004 2003 2002 2001 2000 Ad Valorem Taxes s 33,233,274 s 32,194,087 $ 29,885,252 $ 28,604,141 s 26,595,709 Sales Tax.es 30,554,632 29.092,032 28,902.,649 28,183,746 27,121,078 Franchise Fees 9,654,447 6,612,822 6,998,085 7,684,683 6,619,755 Miscellaneous Taxes 939,456 848,816 820,507 714.587 743,771 Licenses and Penni IS 1,982,281 1,875,118 1,475,451 1,202,794 1,138,924 Intergovernmental 428,459 348,787 35 1,878 333,171 365,671 Charges for Services 4,467,733 4,945,591 4,472,094 4,299,958 4,210,334 Fines 3,675,856 3,672,509 3,069,362 3,051,055 2,834,208 Miscellaneous Taxes 1,442,677 1,532,346 1,058.237 995,494 1,143,226 Interest 3.34,730 285,156 433,393 1,058,096 1,108,662 Operating Transfers {ll 10,723,891 10,345,945 15,023,466 14,276,074 13,636,764 Total Revenues and Transfers $ 97,437,436 $ 91,753,809 s 92,490,374 s 90,463,799 S 8S,Sl8,102 Expj:o djtures General Govenunent s 5,633,469 s 5,717,151 s 5,596,868 $ 5,772,031 s 5,255,236 Financial Services 2,333,469 1,969,413 1,958,051 1,833,933 1,919,299 Non-departmental 214,562 175,499 1,497,485 1,716,167 606,843 Admin/Communicy Services 18,156.455 17,837,076 17,997,152 18,314,255 17,293,247 Police 32,400,371 30,321,182 28,905,651 28,139,047 25,561,261 Fire 20,613,077 19,511,797 18,632,109 17,903,118 17,183,526 Streets 7,180,843 6,610,394 6,510,394 7,443,017 8,004,402 Electric Utilities 2,185,286 2,078,277 2,168,620 2,146,212 1,923,584 Human Resources 754,225 780,529 895,311 913,.250 871,596 Capital Outlay 475,585 378,059 480,749 Operating Transfers 4,212,915 13,555,338 51951,669 6,187.379 7,526,481 Total Expenditures s 94,160,257 s 98,934,715 $ 90,594,059 $ 90,368.409 $ 86,145,475 Excess (Deficiency) of Revenues and Transfers Over Expenditures $ 3,277,179 $ (7,180,906) s 1,896,315 s 95,390 s (627,373) Fund Balance at Begilllling of Year 9,417,346 16,598,252 141 16,716,042 16,620,652 17~48,025 Fund Balance at End of Year $ 12,694,525 s 9,417,346 $ 18.612,357 $ 16,716,042 s 16,620,652 Less: Reserves and Designations (l> (1,903,690) (2,361 ,860) (2,857,096) Undesignated Fund Balance $ 12,694,525 $ 9,417,346 $ 16,708.667 s 14,354,182 $ 13.7631556 (I) Prior years have been restated to reflect current organization. (2) For fiscal year 2003/04, the water, solid waste and waste water funds transferred an amount sufficient to oover the pro rata share of the City's general and administrative expenses and an amount representing a payment in lieu of ad valorem taxes. The water and solid waste funds transferred an amount representing a franchise payment equal to 4% of gross receipts. The waste water fund transferred an amount representing a franchise payment equal to 6% of gross receipts. The Electric System was not required to make transfers to the General Fund for any oflhe foregoing purposes during the fiscal year. (3) The City's fmancial policies target a General Fund undesignaced balance of al least two months of General Fund expenditures. The undesignated fund balance is at 81%ofthe target established by the City's financial policies. (4) The "Fund Balance at Beginning of Year" was restated. 44 ) TABLE 14-MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act. Chapter 321 Texas Tax Code, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Certificates or other debt of the City. In addition, in January, 1995, the voters of the City approved the imposition of an additional sales and use tax of one-eighth of a cent as authorized by Chapter 32 I Texas Tax Code, as amended. Collection for the additional tax commenced in October, 1995 with the proceeds from the one-eighth cent sales tax designated for the use and benefit of the City to replace properly tax revenues lost as a result of the adoption of the tax. At an election held in the City on November 4, 2003, voters approved an additional one-quarter cent sales and use tax, with the proceeds to be dedicated to the reduction of ad valorem taxation, and an additional one-eighth cent sales and use tax under Section 4A of the Texas Development Corporation Act, to be used for economic development in the City. The City began to receive proceeds of these taxes in October 2004. Collections and enforcements of the City's sales tax are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, to the City monthly, after deduction of a 2% service fee. Historical collections of the City's 1.125% local Sales and Use Tax are shown below: Fiscal Year %of Equivalent of Ended Total Ad Valorem Ad Valorem 9/30 Collectel'1 Tax Le!:'l:: 2001 s 28,183,746 74.48% $ 2002 28,902,648 73.37o/o 2003 29,092,032 73.85% 2004 30,554,632 70.67% 2005 26,839,889 (l) 67.46% (I) Excludes bingo tax receipts. (2) Based on population estimates of the City. (3) Partial collections October I, 2004 through July 31, 2005. Effective October I, 2004 the sales tax breakdown for the City is as follows: City: City Sales & Use Tax City Sales & Use Tax for Properly Tax Relief City Sales & Use Tax for Economic Development County Sales & Use Tax State Sales & Use Tax Total FlNANClAL POLICIES Tax Rate 0.4245 0.4183 0.3962 0.3857 0.3098 1.000¢ 0.375¢ 0.125¢ O.SOO¢ 6.250¢ 8.250¢ Per Capita121 $ 140.15 143.08 142.09 148.11 128.35 Basis of Accounting ... The accounting policies of dte City conform to generally accepted accounting principles of the Governmental Accounting Standards Board and program standards adopte4 by the Government Finance Officer's Association of the-United States and Canada ("GFOA"). The GFOA has awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for each of the fiscal years ended September 30, 1984 through September 30, 2002. The City will submit the City's 2004 report to GFOA to determine its eligibility for another certificate. Cqmwehensive Anl'fUQl Financial Reoort (CAFR.l-.. Beginning with the year ended September 30, 2002, the City's CAFR has been presented under the Governmental Accounting Standard Board ("GASBj Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis -for State and Lbcal Gover~nt.s, GASB Statement No. 37, Basic Financial Statements-and Management's Discussion and Analysis -for StOle and Local Governments: Omnibus, and GASB Statement No. 38, Certain Fina11Cial Note Disclosures. For additional information regarding accounting policies that are applicable to the City, See Note I. "Summary of Significant Accounting Policies" in the financial statements of the City attached as Appendix B. (jenera[ Fund Ba/anc~ ... The City's objective is to maintain an unreservedlundesigrusted fund balance at a minimum of an amount equal to two months budge.Jed operating expenditures to meet unanticipated oontingencies and fluctuations in revenue. The City's General Fund currently has an unreserved/undesignated fund balance that is at 80.9% of the targeted worlcing capital reserve amount Entemrise Fund Balan~e ... rt is the policy of the City to maintain Unrestricted Net Assets equal to three months operating expense and debt requirements in each of the Electric, Water, Solid Waste and Sewer funds for unforeseen contingencies 45 ) ) ) ) ) (although the Electric System has not funded any operating reserves under this policy). The City's financial policy provides that such Net Assets shall be accumulated over a ten year period. which commenced in 1996. For a variety of reasons, including increased transfers from the water, sewer and solid waste funds to the General fund following the cessation of transfers to the General Fund from the electric fund in FY 2003, the City is not presently in compliance with its fund balance policies for all its enterprise funds. See "Discussion of Recent Financial and Management Events • September 30, 2003 Financial Results." According to audited numbers for FY 2004, the current requirements for operating and rate stabilization reserves for each enterprise fund and current unrestricted net assets for each enterprise fund are as follows: Enterprise Fund Current Reserve Actu11l Required Unrestricted Net Assets Electric S28.S million $7.0 million Water $6.S million $14 million ~wer $4.2 million $6.3 million Storm W11ter $.S million $1.3 million Solid Waste $4.7 million $6.0 million Airport <11 S 1.97 million $-1 million (I) The Airport Fund has not recovered from the events of September II, 2001. Enterprise Fund Revenues ... It is the policy of the City that each of the Electric, Water, Solid Waste and Sewer funds be operated in a manner that results in self sufficiency, without the need for additional monetary transfers from other funds (although the Electric System received transfers from the General Fund during the FY 2003). Such self sufficiency is to be obtained through the rates., fees and chacges of each of these enterprise funds. For pwposes of determining self sufficieney, cost recovery for each enterprise fund includes direct operating and maintenance expense, as well as indirect cost recovery, in-lieu of transfers to the General Fund for property and franchise tax payments, capital expenditures and debt service payments, where appropriate. Debt Service FWIIi Balance ... A reasonable debt service fund balance is maintained in order to compensate for unexpected contingencies. Budrretarv Procedures ... The City follows these procedures in establishing operating budgets: I) Prior to August I, the City Manager submits to the City Council a proposed operating budget for the fJSCal year commencing the following October I. The operating budget includes proposed expenditures and the means of financing them. 2) Public hearings are conducted to obtain taxpayer comments. 3) Prior to October I the budget is legally enacted through passage of an ordinance. 4) The City Manager is authorized to transfer budgeted amountS between accounts below the department level. Any transfer of funds between departments or higher level are presented to the City Council for approval by ordinance before the funds are transferred or expended. Expenditures may oot legally exoeed budgeted appropriations at the fund level. 5) Fonnal budgetary integration is employed as a management control device during the year for the Convention and Tourism, Criminal Investigation, and Capital Projects Ftmds. Budgets are adopted on an annual basis. Formal budgetary integration is not employed for Debt Service funds because effective budgetaJy control is alternatively achieved through general obligation bond indenture and other contract provisions. 6) The Budget for the General Fund is adopted on a basis consistent with generally accepted accounting principles. 7) Appropriations for the General Fund lapse at year-end. Unencumbered balances for the Capital Projects Funds continue as authority for subsequent period expenditures. 46 ) ) ) 8) Budgetary comparison is presented for the General Fund in the combined financial statement section of the Comprehensive Annual Financial Repor1. The City has received the Distinguished Budget Presentation Award from the GFOA for the following budget years beginning October I, 1983-88 and 1990-04. The City will submit the FY 2005 budget to the GFOA to detennine its eligibility for another award. Insurance and Risk Management ... The City is self-insured for public entity liability and health benefits coverage. Risk management purchases a $\0,000,000 excess insurance policy for liability claims in excess of $250,000, per occurrence. Airport liability insurance and workers' compensation is insured under guaranteed cost policies. The Health Benefits are covered a fully insured program with a $10,765,643 cap and a S\50,000 individual cap. The City maintains insurance policies with large deductibles for fire and extended property coverage and boiler and machinery coverage. An Insurance Fund has been established in the lntemal Service Fund co account for insurance programs and budgeted transfers are made to this fund based upon estimated payments for claim losses. At September 30. 2004 the total Net Assets of these insurance funds were as follows: Self-insurance -health Self-insurance -risk management $ 4,375,796 $ 5,727,822 The City obtains an actuarial study of its risk management fund (the "Risk Fund") every year. In fJSCal year 2004, an actuarial study was conducted that considered the types of insurance prote<:cion obtained by the City, the loss exposure and loss history, and claims being paid or reserved that are not covered by insurance. The 2004 actuarial review recommended that the liabilities of the Risk Fund be in~ to $6,437,000 from $4,824,000 to the minimum expected confidence level of the Government Accounting Standard Board Statement Number I 0 (~GASB I 0"}, which requires maintenance of risk. management assets at a level representing at least a 50% confidence level that all liabilities, if presented for payment immediately, could be paid. The Risk Fund has net assets restricted for insurance claims of $5,715,000 over the recommended funding level. Given the risk net assets balance, the City exceeds the minimum GASB 10 requirement. INVESTMENTS The City invests its investable funds in investments authorized by Texas law in accordance with inveslment policies approved by the City Council of the City. Both state Jaw and the City's investment policies are subject to change. LEGAL INVESTMENTS ••• Under Texas law, the City is authorized to invest in (I) obligations, including letters of credit, of the United States or its agencies and instrwnentalities, (2) direct obligations of the State of Texas or its agencies and instrwnentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and intelest on which are unconditionally guaranteed or insured by, or backed by the full faith and cmlit of, the State of Texas or the United States or their respective agencies and inslrUmentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment raling fum not less than A or its equivalent, (6) certificates of deposit that are guaranteed or insured by the Federal Deposit Insurance Corporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amotmt provided by law for City deposits, (7) certificates of deposit meeting the requirements of the Texas Public Funds Investment Act (Cbapfer 2256, Texas Govenunent Code) that are issued by or through an institution that either has its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obliptions described in the clauses (1) through (5) and clause (12) or in any other mannet and amount provided by law for City deposits, (8) fully collateralized repurchase agreements that have a defmed termination date, are fuUy secured by obligations descn'bed in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in 1he State of Texas, (9) bankers' acceptances with the remaining tenn of270 days or less, if the short-tenn obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper that is rated at least A-1 or P-1 or the equivalent by either (a) twO nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (11) no- load money marlcet mutual funds regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintmance of a stable net asset value of$1 for each share, (12) no-load mutual funds registered with the Securities and Exchange Commission that: have an average weighted maturity ofless than two years; invests exclusively in obligations described in the preceding clauses; and are continuously rated as to investment quality by at least one nationally recognized investment rating fum of not less Chan AAA or its equivalent, (13) bonds issued, assumed, or guaranteed by the State of Israel, and (14) guaranteed investment contracts secured by obligations of the United States of America or its agencies and instrumentalities, other than the prohibited obligations described in the next succeeding paragraph. 47 ) ) 'I ) ) ) The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are raled no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (\) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow fTom the underlying mortgag~backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturily of greater than 10 years; and (4) collateralized mortgage obligations· the interest ra~e of which is determined by an index that lldjusts opposite to the changes in a market index. Effective September I, 2003, governmental bodies in the State are authorized to implement securities lending programs if (i) the securities loaned under the program are collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (I) through (6) of the first paragraph under this subcaption, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally rewgnized investment rating firm not less than "A" or its equivalent, or (c) cash invested in obligations that are described in clauses (I) through (5) and (10) through (13) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the governmental body, held in the name of the governmental body and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primacy government securities dealer or a financial institution doing business in the State of Texas: and (iv) the agreement to lend securities has a term of one year or less. INv'ESTMENT PouctES ... Under Texas law, the Cily is required tO invest its funds under written investment policies that primarily emphasize safely of principal and liquidily; that address investment diversification, yield, maturily, and the quality and capabilily of investment management; and that includes a list of authorized investments for Cily funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted "Investment Strategy Statemenf' that specifically addresses each funds' investment Each Investment Strategy Statement will describe its objectives concerning: (I) suitabilily of investment type, (2) preservation and safely of principal, (3) liquidily, (4) masicetability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, City investments must be made "with judgment and care, under prevailing circumsances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safely of capital and the probable income to be derived." At least quarterly the investment officers of the Cily shall submit an investment report detailing: (1) the Investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes tO market value and the ending value of each pooled fund group, ( 4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which eat:h individual investment was acquired, and (7) the compliance of the investment portfolio as it relates tO: (a) adopted investment strategy statements and (b) state law. No person may invest Cily funds without express written authority from the City Council. ADDmONAt. PRoVlSJONS ... Under Texas taw the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers' with personal business relationships or relatives with firms seeking tO sell securities 10 the entily tO disclo!le the relationship and file a statement with the Texas Ethics Commission and the City Council; (3) require the registered principal of fums seeking to sell securities to the City tO: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedw-es have beerl implemented tO preclude imprudent investment ~~Gtivities, and (c) deliver a written statement attesting to these requirements; (4) perfurm an arutual audit of the management controls on investments and adherence 10 the City's investment policy; (S) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds 10 no greater than the term of the reverse mpwcllase agreement; (7) restrict its investment in mutual funds in the aggregate to no more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, and to invest no portion of bond proceeds, reserves and funds held for debt setvice, in mutual funds; and (8) require local government investment pools to conform tO the new disclosure, rating, De( asset value, yield calculation, and advisory board requirements. 48 ) ) TABLE 15 ·CURRENT INVESTMENTS As of July 31, 2005, the City's investable funds were invested in the following categories: Estimlled Fair Book Value Market Value<'> Weighted %ofTotal %ofTotal Avenge Type Par Value Value Book Value Value Market Value Maturi!.}: (Days) United Swes Agency Obligations I 27,000,000 26,998,189 15.18 s 26,709,7U) 15.05 3?0 d>ys fntenst Bearing Bank Oeposittz• 96.981,8!9 96,91!1,819 54.54 96,981,819 54.63 I d•y Mouey Marlcet Mutual F unds11' 3,106.350 3,106,350 1.75 3,t06,35() 1.75 I day Loe&J government inveslmcnl pools1'1 50,727,536 50,727.536 28.53 50,727,536 28.57 ! d .. y ITI,81S,705 177,813 •. 894 100.00 1TI,S2S,425 100.00 sa d..ys (I) Market prices are obtained through infonnation provided by Wells Fargo Brokerage Services, LLC. As of such date, the market value of such investments was approximately I 00.00% of their book value. No funds of the City are invested in mortgage-backed securities. The City holds all investments to maturity which minimizes the risk of market price volatility. (2) Deposits are held at Wells Fargo Bank, N.A. in fully collateralized interest earning savings accounts. (3) Money Market Murual Funds (MMMF's), used by the City, have investment objectives that include achieving a stable net asset value of$1.00 per share. ( 4) Lccal government investment pools consist of entities with investment objectives that include achieving a stable net asset value of $1.00 per share. The investment pools used by the City include TexPool and TexSTAR. TexSTAR is a local govenunent investment pool for whom First Southwest Asset Management, Inc., an affiliate of First Southwest Company, provides customer servi<:e and marketing for the pool. TexSTAR currently maintains a "AAA" rating ftom Standard & Poor's and has an investment objective of achieving and maintaining a stable net asset value of $1.00 per share. Daily investments or redemptions of funds is allowed by the participants. First Southwest Company is the Financial Advisor for the City in connection with the issuance of City debt. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK) 49 ) ) "I J ) TAX MATTERS TAX EXEMPTION ... In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on Certificates is excludable from gross income for federal income tax purposes under existing law and (ii) interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. Tile Internal Revenue Code of 1986, as amended (the "Code"), imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Certificates. to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds and the source of repayment of certificates, limitations on the investment of bond proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of bond proceeds be paid periodically to the United States and a requirement that the issuer file an information report with the Internal Revenue Service. The City has covenanted in the Ordinance that it will comply with these requirements. Bond Counsel's opinion will assume continuing compliance with the covenants of the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes and, in addition, will rely on representations by the City, the City's Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the Ci!y, the Ci!y's Financial Advisor and the Underwriters, respectively, which Bond Counsel has not independently verified. If the City should fail to comply with the covenants in the Ordinance or if the foregoing representations or report should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless ofthe date on which the event causing such taxability occurs. The Code also imposes a 20% alternative minimum tax on the "alternative minimum taxable income" of a corporation if the amount of such alternative minimum tax is greater than the amount of the corporation's regular income tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation, regulated investment company, REIT, REMIC or FASIT), includes 75% of the amount by which its "adjusted current earnings" exceeds its other "alternative minimum taxable income." Because interest on tax exempt obligations. such as the Certificates, is included in a corporation's "adjusted current earnings," ownership of the Certificates could subject a corporation to alternative minimum tax consequences. Except as stated above, Bond Counsel will express no opinion as to any federal , state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition o( the Certificates. Bond Counsel's opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel's knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel's attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel's opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent Bond Counsel's legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local bbligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit regardless of the ultimate outcome of the audit. ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS CoLLATERAL TAX CONSEQUENCES ••• Prospective pun:basers of the Certificates should be aware that the ownership of tax exempt obligations may result in collateral federal income tax consequences to financial institutions. life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Securi!y or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax exempt obligations. taxpayers owning an interest in a F ASIT that holds tax-exempt obligations and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business In the United States may be subject to the "branch profits tax" on their effectively connected earnings and profits, including tax exempt interest such as interest on the Certificates. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Certificates should also be aware that, under the Code, taxpayers are required to report on their returns the amoW\t of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. TAX AccoUNTING Tlu:ATMENT or OtuGINAL ISSUE PREMIUM ••• The issue price of all or a portion of the Certificates may exceed the stated redemption price payable at maturity of such Certificates. Such Certificates (the "Premium Certificates") are considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis of a Premium Certificate in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Certificate in determining gain or loss for federal income tax purposes. This reduction in basis 50 ) ) ) ) ) will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax purposes on the sale or other taxable disposition of a Premium Certificate by the initial owner. No corresponding deduction is allowed for federal income tax pwposes for the reduction in basis resulting &om amortizable bond premiwn. The amount of bond premium on a Premium Certificate that is amortizable each year (or shorter period in the event of a sale or disposition ora Premium Certificate) is detennined using the yield to maturity on the Premium Certificate based on the initial offering price of such Certificate. The federal income tax consequences of the purchase. ownership and redemption., sale or other disposition of Premium Certificates that are not purchased in the initial offering at the initial offering price may be detennined according to rules that differ &om those described above. All owners of Premium Certificates should consult their own tax advisors with respect to the detennination for federal, state, and local income tax purposes of amortized bond premium upon the redemption., sale or other disposition of a Premium Certificate and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Certificates. TAX ACCOUNTING TaEATM!NT OF ORIGINAL (SStJ£ DISCOUNT CERTIFICATES ..• The issue price of all or a portion of the Certificates may be less than the stated redemption price payable at maturity of such Certificates (the "Original Issue Discount Certificates"). In such case, the difference between (i) the amount payable at the maturity of each Original Issue Discount Certificate, and (ii) the initial offering price to the public of such Original Issue Discount Certificate constitutes original issue discount with respect to such Original Issue Discount Certificate in the hands of any owner who has purchased such Original Issue Discount Certificate in the initial public offering of the Certificates. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Certificate equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Certificate continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the Certificates under the caption "Collate.ral Tax Consequences" above generally applies, and should be considered in connection with the discussion in this portion of the Official Statement. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Certificate prior to stated maturity, however, the amount realized by such owner in excess of the basis of suoh Original Issue Discount Certificate in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Certificate was held by such initial owner) is includable in gross income. The foregoing discussion assumes that (a) the Underwriter has purchased the Certificates for contemporaneous sale to the public and (b) all or the Original Issue Discount Certificates have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm's-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof stated on the cover page of this Official Statement Neither the City nor Bond Counsel has made any investigation or otTers any oomfort that the Original Issue Discount Certificates will be offered · and sold in accordance with such assumptions. Under existing law, the original issue discount on each Original Issue Discount Certificate is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Certificates and ratably within each such six-month period) and the accrued amowtt is added to an initial owner's basis for such Original Issue Discount Certificate for purposes of detennining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the swn of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Certificate. The federal income tax consequences of the purchase, ownership, and redemption., sale or ~ disposition of Original Issue Discount Certificates which are not purchased in the initial offering at the initial offering price may be detennined according to rules which differ from those described above. All owners of Original Issue Disco~mt Certificates should consult their own tax advisors with respect to the detennination for federal. state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Certificates and with respect to the federal, state, local and foreign tax consequences of I he purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Certificates. 51 ' .I '\ ) OTHER INFORMATION RATINGS The presently outstanding tax supported debt of the City is rated ~AI" by Moody's, "AA·" by S&P and "AA·" by Fitch. The City also bas issues outstanding which are rated "Aaa" by Moody's, "AAA" by S&P and "AAAM by Fitch through insurance by various commercial insurance companies. Applications for contract ratings on this issue have been made to Moody's, S&P and Fitch. An explanation ofthe significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance thac 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 may have an adverse effect on the market price of the Certificates. LITIG.ATION The City is involved in various legal proceedings related to alleged personal and property damages, breach of contract and civil rights cases, some of which involve claims against the City that exceed $500,000. State law limits municipal liability for personal injury at $250,000/$500,000 and property damage at $100,000 per claim. The following represents the significant litigation against the City at this time. There is one claim pending against the City, which is in a preliminary stage, that the City Attorney believes could be brought under Section 1983 of the post-Civil War Civil Rights Act ("Section 1983"). If a claim should be made under that law and damages are ulti.mately assessed against the City, the City would not be subject to limitations on damages. Insurance should cover all but the self-insured retention. The City is also involved in a lawsuit with the City's firefighters regarding pay issues. The firefighters obtained a $688,000 judgment against the City for damages that accrued through July 2002. Damages have continued to accrue since July 2002. The City appealed this judgment, and the Court of Appeals overturned the judgment The plaintiffs have filed an appeal to the Texas Supreme Court. The Supreme Court bas not made a decision on whether to hear the appeal. While any liability would not be covered by an insurance policy, the City Attorney only assesses the potential that the firefighters will obtain relief from the Texas Supreme Court as possible. The City is also involved in a suit filed by the general contractor for a large drainage project in the City. In the suit, the contractor asserted damages in excess of$2.3 million under a breach of contract claim. The City obtained a summary judgment in this case against the contractor. The contractor has appealed the decision to the Fifth Circuit Court of Appeals. While this liability is not covered by any insurance policy, the City Attorney only assesses the likelihood of recovery by the contractor as possible. The City has also been sued by a another contractor who was not awarded the bid on a different portion of the storm water drainage project. The contractor has alleged violations of the state bid statute and a violation of Section 1983. The plaintiffs took a nonsuit in state court andre-filed the case in federal oourt. The federal court has dismissed the contractor's Section I983 claims, and the contractor has tiled a Notice of AppeaL The City Attorney assesses the likelihood of liability as possible. Potential damages are unknown. The City Attorney believes there is insurance coverage for the Section 1983 claim, although there is a dispute with the carrier regarding coverage. The City has been sued by six plaintiffs who allege that the City and or Lubbock County failed to properly record information in its cemetery records that would show where their relatives were buried. The Plaintiffs' attorney indicates that be has about eighty other clients with similar claims. The City will assert a defense under statutes of limitations, that the City was not the owner of the property during portions of the time in question, and that the allegations fail to state a claim upon which relief can be granted The City Attorney assesses the potential for liability as possible. There is no insurance coverage for these claims. The City intends to vigorously defend itself on all claims, although no assurance can be given that the City will prevail in all cases. However, the City Attorney and City management is of the view that its available sources for payment of any such claims, which include insuran~ policies and City reserves for self insured claims, are adequate to pay any presently foreseeable damages (see "Financial Policies · Insurance and Risk Management''). On the date of delivery of the Certificates to the Underwriters, the City will execute and deliver to the Underwriters a certificate to the effect that, except as disclosed herein, no I itigation of any nature has been filed or is pending, as of that date, to restrain or enjoin the issuance or delivery of the Certificates or which would affect the provisions made for their payment or security or in any manner question the validity of the Certificates. 52 ) REGISTRATION AND QUALIIIICATION OF CERTIFICATES FOR SALE The sale of the Certificates has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Certificates have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Certificates are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized inveslments for insurance companies, fiduciaries, and tnLstees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Certificates by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code. requires that the Certificates be assigned a rating of "A" or its equivalent as to investment quality by a national rating agency. See "Other lnfonnation • Ratings" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Certificates are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Certificates are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisi.ons, and are legal se<:urity for those deposits to the elttent of their market value. No review by the City has been made of the laws in other states to determine whether the Certificates are legal investments for various institutions in those states. LEGAL OPINIONS The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Certificates, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Certificate and to the effect that the Certificates are valid and legally binding obligations of the City, and based upon examination of such transcript of proceed.ings, the approving legal opinion of Bond Counsel. to like effect and to the effect that the interest on the Certificates will be excludable from gross income for federal income tax purposes under Section IOJ(a) of the Code, subject to the matters described under "Tax Matters" herein, including the alternative minimum tax on corporations. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently co verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the information under the captions "The Certificates" (exclusive of the subcaption "Book-Entry-Only System"), and "Tax Matters" and the subcaptions "Legal Opinions" and "Legal lnveslments and Eligibility co Secure Public Funds in Texas" and "Continuing Disclosure of Information" under the caption "Otfler Information" in the Official Statement and such firm is of the opinion that the information relating to the Certificates and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Certificates, such information conforms co the Ordinance. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of the Certificates is contingent on the sale and delivery of the Certificates. The legal opinion will accompany the Certificates deposited with DTC or will be printed on the Certificates in the event of the discontinuance of the Book·Entty..Only System. Certain legal matters will be passed upon for the Underwriters by McCall, Parkhurst&. Horton L.L.P., Dallas, Texas, Counsel to the Underwriters. The legal opinions to be delivered concurrently with the delivery of the Certificates express the professional judgment of the attorneys rendering the opinions as to the legal issues expressly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment. of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise from the transaction. CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificaaes. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement. the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. 53 ... ) ) "\ .I ) ANNUAL REPORTS ... The City will provide certain updated financial information and operating data to certain infonnation vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the City ofthe general type included in this Official Statement under Tables numbered I through 6 and SA through IS, and in Appendix B. The City will updale and provide this information within six months after the end of each fiscal year ending in or after 2005. The City will provide the updated information to each nationally recognized municipal securities information repository ("NRMSIR") approved by the staff of the United States Securities and Exchange Commission ("SEC") and to any state information depository ("SID") that is designated and approved by the State of Texas and by the SEC staff. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2·12. The updated information will include audited financial statements, if the City oommissions an audit and it is completed by the required time. If audited financial statements arc not available by the required time, the City will provide unaudited financial information and operating data which is customarily prepared by the City 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 City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify each NRMSIR and the SID of the change . The Municipal Advisory Council of Texas (the "MAC") has been designated by the State of Texas and approved by the SEC staff as a qualified SID. The address of the MAC is 600 West 8th Street, P. 0. Box 2177, Austin, Texas 78768·2177, and its telephone number is 5121476-6947. The MAC has also received Securities and Exchange Commission approval to operate, and has begun to operate, a "central post office" for information filings made by municipal issues, such as the City. A municipal issuer may submit its information filings with the central post office, which then transmits such infonnation to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.DisclosureUSA.com ("DisclosureUSA "). The City may utilize DisclosureUSA for the filing of information relating to the Certificates. MATERIAL EVENT NOTICES ... The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates: (I) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhanCements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Certificates; (7) modifications to rights of holders of the Certificates; (8) Certificate calls; (9) defeasanoes; (10) release, substitution. or sale of property securing repayment of the Certificates; and (II) rating changes. In addition, the City will provide timely notice of any failure by the City to provide infonnation, data, or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to tfle SID and to either each NRMSIR or the Municipal Securities Rulemaking Board ("MSRB"). AVAILABILITY OF INFORMATlON FROM NRMSIRs AND SID ... The City has agreed to provide the foregoing information only to NRMSIRs (or the MSRB in the case of Material Events Notices) and the SID. The infonnation will be available to holders of Certificates only if the holders comply with the procedures and pay the chuges established by such information vendors or obtain the information through securities brokers who do so. AMENDMENTS ... The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if·(i) the agreement, as amended, would have pennitted an underwriter to purchase or sell Certificates in the offering described herein in compliance with the Rule, taking into acoount 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 Certificates consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal tlle provisions oftbis continuing disclosure agreement ifthe SEC amends or repeals the applicable provisions of the SEC Rule 1 Sc2·12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 1Sc2-12 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 Certificates in the primary offering of the Certificates. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in a<X:Otdance witll 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. 54 j COMPLIANCE WITH PRIOR UNDERTAIONCS .•• The City became ob ligated to file annual reports and financial statements with the state infonnation depository ("SID") and each nationally recognized municipal securities information repository ("NRMSIR") in an offering that took place in 1997. All of the City's General Obligation debt reports and financial statements were timely filed with both the SID and each NRMSIR~ however, due to an administrative oversight, the City filed its fiS<:al year end 1999, 2000, and 2001 Electric and Power Revenue debt reports late to the SID and each NRMSIR. The financial information has since been filed. as well as a notice of late filing. The City has implemented procedures to ensure timely filing of all future financial information. Under previous continuing disclosure agreements made in cormection with LP&L revenue bonds, the City committed to make prompt filings with the SID and either each NRMSIR or the MSRB upon the occurrence of any .. non-payment related defaults." The City's FY 2003 audited financial statements were not available until mid-September 2004. The.refore, when the City made its annual disclosure filing with the SID and NRMSIRs in March 2004, it filed unaudited financial statements in accordance with its undertaking. Several references in that filing, including in the unaudited MD&A, in notes to those statemenrs and in the statistical tables, repotted that for FY 2003 LP&L had failed to meet its rate covenant (see "'Discussion of Recent Financial and Management Events -September 30, 2003 Financial Results -The Electric Fund"). Be<:ause there was an uncertainty as to an amount by which the rate covenant would fail to be met, which was oot finally determined until the audited financials were released in September 2004 (although the City had a reasonable belief prior to that time that the rate covenant had not been met), the City waited until September 2004 to make its event filing of non-compliance with its LP&L rate covenant. FINANCIAL ADVISOR Firat Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisor's fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. First Southwest Company, in its capacity as Financial Advisor does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Cenificates, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor to the City has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. UNDERWIUTlNC The Underwriters have agreed, subject to certain oonditions. to purchase the Certificates from the City, at an underwriting discount of S . The Underwriters will be obligated to purchase aJI of the Certificates if any Certificates are purchased The Certificates to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Certificates into investment trusts) at prices lower than the public offering prioes of such Certificates, and such public offering prices may be changed, from time to time, by the Underwriters. FORWARD-LOOKING STATEMENTS DISCLAIMER The statements oontained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forwllJ'd-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, marlcet, 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 judgements with respect to, among other things, future economic, competitive, and llUU'ket conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of sucb assumptions could be inaccurate and, therefore, there can be no assurance that the forwacd·looking statements included in this Official Statement will prove to be acauate. 55 MlSC!LLANEOUS The financia.l data and other information contained herein have been obtained from the City's records, audited fmancial 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 an: made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The Ordinance authorizing the issuance of the Certificates will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its fW'ther use in the reoffering of the Certificates by the Underwriters. ATTEST: Is/ REBECCA GARZA City Secretary 56 Is/ MARC McDOUGAL Mayor City ofLubbock, Texas ) ) ) APPENDIX A GENERAL INFORMATION REGARDING THE CITY ., ) ) ) J ) THECITV LOCATION The City of Lubbock, which is the County Seat of Lubbock County, Texas. is located on the South Plains of West Texas. Lubbock is the economic, educational, cultural and medical services center of the area. POPULATION Lubbock is the ninth largest City in Texas: 1910Census 1920Census 1930Census 1940Census 1950Census 1960Census 1970Census 1980Census 1990Census 2000Census 2005 (Estimated) (II City of Lubbock <Corporate Limits) 1,938 4,051 20,520 31,853 71,747 128,691 149,701 173,979 186,206 199,564 209,120 Metrooolitw Statistical A,rna ("MSA") <Lubbock Countyl 1970 Census 179,295 1980 Census 211,651 1990 Census 222,636 2000 Census 242,628 (1) Source: City of Lubbock. Texas ACRICVLTUR.£; BUSI'NESS AND INDtJSTRV Lubbock is the center of a highly mechanized agricultural area with a majority of the crops irrigated with water from underground sources. Principal crops are cotton and grain sorghums with livestock a major additional source of agricultural income. In 2003, approximately 2.2 million bales of cotton were produced in Lubbock and the 25-counties surrounding Lubbock. This was less than the 3.2 million bales produced in 2002 and is 27% below the l() ... year average of2.80 million bales. Projections for the 2004 cotton crop are 3.89 million bales, depending on the growing conditions and the weather during the 2004 production season.C11 Two major vegetable oil plants located in Lubbock have a combined weekly capacity between 50,000 and 70,000 tons of cottonseed oil and soybean oil. Several major seed companies are headquartered in Lubbock. Over 200 manufacturing plants in Lubbock produce such products as semiconductors, vegetable oils,. irrigation equipment and pipe, plastics products, farm equipment, paperboard boxes, custom millwork/shutters, foodstuffs, ~fabricated homes, poultry and livestock feeds, boilers and pressure vessels, automatic sprinkler system heads, and structural steel fabrication. (I) Source: Plains Cotton Growers, Inc., Lubbock, Texas. LUBBOCK MSA LABOR FORCE Esl'IMATES (ll Civilian Labor Force Total Employment U nernp loy ment Percent Unemployment March 2005(l) 139,181 133,308 5,873 4.20% (I) Source: Texas Workforce Commission. (2) Subject to revision. 2004 138,516 132,o65 6,451 4.70% A-1 Annual Ave~ 2003 2002 2001 2000 130,645 128,lll 127,293 124,756 125,969 124,228 !24,046 121,482 4,676 3,903 3,247 3,274 3.60% 3.00% 2.60% 2.60% J ) ) Estimated non-agricultural wage and salaried jot>s in various categol'les as of December, 2004 Wl!re: <•l Ma.nufacruring Construction Trade, Transponation &. Public Utilities finance,lnsUI'llllCe and Real Estate Education&. Health Services lnfonnatioo 5,400 5,300 25,500 16,700 11,900 5,800 19,700 28,500 124.800 Leisure &Hospitality&. Other Government Total (I) Source: Texas Workforce Commission MAJOR EMPLOYERS(300 EMPLOYEES OR MOR£) Company Texas Tech Omvers1ty Covenant Health System Lubbock Independent School District University Medical Center United Supermarkets City ofLubbock Texas Tech Health Sciences Center Cingular Convergys Corporation Lubbock County Lubbock State School Texas Dept. of Criminal Justice Psychiatric Hospital Frenship ISO Tyoo Fire Protection G Boren Services, Inc. SBC!Southwestem Bell Walmart Supercenter U.S. Postal Service State National Bank of West Texas Texas Department ofTransportation Gene Messer Ford Inc. Lubbock-Cooper lSD Lubbock ReG}onal M HM R Center Operator Service Company Sonic Drive In ChaseCom/Staffmark Wells Fargo Phone Bank Lubbock Christian University Plains Capital Bank NTS Communications, Inc. American State Bank Dillards Department Stores Cox Cable of Lubbock, Inc. McLane Higb Plains Sodexho School Services A RAM ARK Lubboclc Heart Hospital Interim Healthcare of West Texas (1) Source: Market Lubbock. (2) Full and part time. Type of Business State Omvers1ty Hospital Public Schools Hospital Supennarkets City Government Medical and Allied Health School Wireless Communications Call Center County Government School for Mentally Retarded Psychiatric Hospital Public Schools M anufacturini}'Fire Sp rinlclers StaffmWfiR Consulting Telephone Utility Discount Retailer ,. Post Office Bank State Higll.way and Street Maintenance Automobile Dealership Public Schools Social Services Customer Service Restaurants Call Center Bank Phone Center College/University /Professional School Bank Telephone Utility Bank Department Store Cable Utility Wholesale Food Distribution Facilities Management Managed Food Services Heart Hospital Home Health Care Estimated Employees July, 20041'1 9,919 (2} 4,310 3,504 2,310 2,156 2,109 2,010 1,750 1,450 950-1200 850 155 Ol 639 525 516 500-999 500-999 500-999 500 474 449 444 427 427 42S 400 392 384 371 367 355 341 339 330 316 316 308 300 (3) See Texas Department of Criminal Justice (''TDCJ") Prison Psychiatric Hospital following for more detailed infonnation. A-2 EDUCATION-TEXAS TECH UNIVERSITY Established in Lubbock in 1923, Texas Tech University is the fifth largest State-owned University in Texas and had a Spring, 2005, ervollment of 28,549. Accredited by the Southern Association of Colleges and Schools, the University is a co-educational, Stare- supported institution offering a bachelor's degree in 158 major fields, the master's degree in 107 major fields, the doctorate degree in 64 major fields. and a professional degree in 2 major fields (law and medicine). The University proper is situated on 451 acres of the I ,829 acre campus, and has over 160 pennanent buildings with additional construction in progress. Spring, 2004, total employment was 9,919 full time and part time employees. The medical school had an ervollment of 2,100 for Spring, 2005, not including residents; there were 77 graduate students. The School of Nursing bad a Spring, 2005, enrollment of 443. The Allied Heallh School had a Spring, 2005, enrollment of731. Source: Texas Tech University. OTHER EDUCATION INFORMATION The Lubbock Independent School District, with an area of 87.5 square miles, includes over 90% of the City of Lubbock. There are approximately 3,504 total employees. The District operates four senior high schools, nine junior high schools, 39 elemenwy schools and other educational programs. Scholastic Membership Historv (ll School Year 2000-01 2001-02 2002-03 2003-04 2004-05 Average Daily Attendance 27,046 27,019 27,094 26,800 28,474 (l) (I) Source: Superintendent's Office.. Lubbock Independent School District. (2) Estimated. lubbock Christian University, a privately owned, co-educational senior college located in Lubbock, had an ervollment of 1,819 for the Spring Semester, 2005. The State of Texas School for the Mentally Retarded, located on a 226-acre site in Lubbock, consists of 40 buildings 'With bed- capacity for 436 students; 400 students were in residence. 1nere are approximately 850 professional and other employees. Wayland Baptist College, Plainview Texas, operates a Lubbock Campus which had a Spring, 2005, enrollment of650 students. TRANSPORTATION Scheduled airline transportation at Lubbock Preston Smith International Airport is furnished by Southwest Airlines, Continental Airlines and American Eagle; non-stop service is provided to Dallas-Fort Worth International Airport, Dallas Love Field, Bush Intercontinental Airport (Houston}, Houston Hobby, El Paso, Las Vegas, Austin, and Albuquerque. Passenger boardings for 2001 536,670, for 2002 513,096 for 2003 S 14,250 and 541,549 for 2004. Extensive private aviation services are located at the airport. Rail transportation is furnished by the BurlingtOn Northern Santa Fe Railroad with through service to Dallas, Houston, Kansas City, Chicago, Los Angeles and San Francisco. Short-haul rail service is also furnished by the Seagraves, Whiteface and Lubbock Railroad. Texas, New Mexico and Oklahoma Bus Lines, a subsidiary of Greyhound Corporation, provides bus service. Several motor freight common carriers provide service. Lubbock bas a well-developed highway network including Interstate 27 (Lubbock·Amarillo), four U.S. Highways, one State Highway, a controlled-access outer loop and a county-wide system of paved farm-to-market roads. A-3 ' ' GOVERNMENT AND MILITARY (ll The former air base, now known as Reese Technology Center (the "Center") is a 2500-acre campus with over I million square feet of space. The Center is the 5th largest Research Park in the United States and is considered by Department of Defense as "one of the most rapid and successfully redeveloped closed military bases in the country.... The Center is currently 80% oceupied with II commercial tenants employing over 670 people (created over the last three years). Anchor tenants include Texas Tech Research and the 4,200-student campus of South Plains College, a two-year community college. Reese Center is the home of the prized Institute of Environmental and Human Health (TIEHH). TfEHH is a joint venture between Texas Tech University and Texas Tech University Health Sciences Center and researches the exposure and effects toxic chemicals have on human health and the environment. TIEHH has assisted in stimulating the Lubbock economy with over $50 miUion in grants. TIEHH's location as the anchor tenant at the Reese Tecllnology Center bas assisted the facility in being transformed into a research, industrial and commercial center. Current areas of specialty at the Center include Biotechnology, Environmental Sciences, Food Technology and Work Force Development. Reese Center recently received an EDA grant for $1.7 million dollars to install an OC-192 fiber optic network and wireless system for the entire campus making it a leader in high tech communications. Otfter research facilities that have been relocated to Reese Technology Center are lhe Texas Tech University Wind Engineering and Advanced Vehicle Engineering Research Centers. Total economic impact of the Reese Technology Center has been $26.8 million dollars over the last three years. Stare o{Texas ... More than 25 State of Texas boards, departments, agencies and commissions have offices in Lubbock; severaJ of these offices have multiple units or offices. Federq/ Gowament ... Several Federal departments and various olher administrations and agencies have offices in Lubbock; a Federal District Court is located in the City. {I) Source: City of Lubbock. Texas. TEXAS DEPARTMENT OF CRIMINAL JUSTICE ( .. TDCJ") PRISON PSYCHIATRIC HOSPITAL TOCJ operates a 550-bed Prison Psychiatric Hospital and a 48-bed regional prison hospital on a 1,303 acre site in southeast Lubbock. An adjacent 400-bed capacity "trusty" facility houses prison trusties some of whom work at the hospital. Employment for all facilities is approximately 870 with an annual estimated payroll of$17 million and an estimated remaining annual operating budget of$27 miJlion. HOSPITALS AND MEDICAL CARE There are four hospitals in the City with over 1,500 beds. Covenant Medical Center is the largest and also operates an accredited nursing scflool. Lubbock County Hospital District, with bowtdaries contiguous with Lubbock County, owns the University Medical Center which it operates as a teaching hospital for the Texas Tech Health Sciences Center. There are 102 clinics and over 700 practicing· physicians, surgeons. and dentists. Lubbock's Health Care Sector employs over 17,000 people with a total payroll of $543.3 million and draws patients from 77 counties in West Texas and Eastern New Mexioo. A radiology center for the treatment of malignant diseases is located in the City. RECREATION AND ENTERTAINMENT Lubbock's Mackenzie Regional Park and over 115 City parks and playgrounds provide recreation centers, shelter buildings, a garden and art center, swimming pools, a golf course, tennis and volley ball courts, baseball diamonds and picnic areas, including lhe Yellowhouse Canyon Lakes system of six lakes and 750 llCTe$ of adjacent parkland extending from northwest to southeast Lubbock along the Yellowhouse Canyon. There are several privately-owned public swimming ~Is, golf courses, and country clubs. The City of Lubbock has developed a 36 square block area of approximately I 00 acres adjacent to downtown Lubbock under the Lubbock Memorial Civic Center program. Approximately SO acres contain the 300,000 square foot Lubbock Memorial Civic Center, the main Ci1y lilmuy building and State Department of Public Safety offices; a 50-acre peripheral area has been redeveloped privately with office buildings, hotels and motels, a hospital, and other facilities. Available to residents are Texas Tech University programs and events, Texas Tech University Musewn, Planetarium and Ranching Heritage Center exhibits and programs, United Spirit Arena and its events, Lubbock Memorial Civic Center and its events, Lubbock Symphony Orchestra programs, Lubbock Theatre Center, Lubbock Civic Ballet, Municipal Auditorium and colisewn programs and events, the library and its branches, the annual Panhandle-South Plains Fair. college and high school football, basketball and other sporting events, as well as modem movie theaters. A-4 .. I J CHURCHES Lubbock. has approximately 300 churches representing more than 25 denominations . UTILITY SERVICES Water and Sewer-City of Lubbock. Gas -Atmos Energy Company. Electric-City of Lubbock (Lubbock Power & Light) and X eel Energy; and, in a small area, South Plains Electric Co-operative. ECONOMIC INDICES (I) Utility Connections Building Electtic Year Permits Water Gas (LP&L Onlypl 2000 $ 200,427,650 70,111 65,000 58,724 2001 294,064,200 70,756 65,332 59,431 2002 314,077,929 72,615 67,308 62,713 2003 417,252,162 72,505 69,954 62.203 2004 408,726,402 74,026 70,196 63,076 (I) All data as of 12-31, except where noted; Source: City of Lubbock. (2) Electric connections are those of City of Lubbock owned Lubbock Power and Light {''LP&L'') and do not include those of Xcel Energy or South Plains Electric Cooperative. LP&L provides service to approximately 70% of the electric cuStomers in the City. BUILDING PERMITS BY CLASSIFICATION (Il Residential Permits Single Family Multi-Family Total Residential Commercial, No. No. Public Total Calendar No. Dwetr Dwelling and Other Building Year Units Value Units ':1 Value Units (Z) Value Pemtits Permits 2000 819 $87,501,009 281 $11,548,809 1,100 $ 99,049,818 $101,377,832 $200,427,650 2001 941 108,589,812 853 37,242,260 1,794 145,936,072 148,128,128 294,064,200 2002 1,281 148,190,769 549 31,700,960 1,830 178,891,729 134,186,200 314,077,929 2003 1,288 172,679,238 1,595 101,540,351 2,883 274,219,589 143,032,573 417,252,162 2004 1,204 169,075,633 2,382 114,339,697 3,586 283,415,330 125,311,072 408,726,402 2005 (J) S46 84,646,181 140 9,717,000 686 94,363,181 78,560,300 172,923,481 (I) Source: CityofLubbock, Texas. (2) Data shown under "No. Dwelling Units" is for each individual dwelling unit, and is not for separate buildings; includes duplex, triplex, quadruplex and apartment pennits. (3) Through May 31,2005. A-5 ' ) APPENDIXB EXCERPTS FROM THE CITY OF LUBBOCK, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2004 The infonnation contained in this Appendix consists of excerpts from the City of Lubbock, Texas Annual Financial Report for the Year Ended September 30,2004, and is not intended to be a complete statement of the City's fU181lcial condition. Reference is made to the complete Report for further infonnation. ) ' " KPMG LLP Suite 3100 717 NoM Harwood Street Oauas. TX 75201·8585 Independent Auditors' Report The Honorable Mayor and Members of the City Council City of Lubbock. Texas: We have audited the accompanying financial statements of the govenunental activities, the business-type activities. the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Lubbock, Texas, as of and for the year ended September 30, 2004, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City of Lubbock's management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Market Lubbock Economic Development Corporc~.tion and Civic Lubbock, Inc. which comprise the aggregate discretely presented component units. In addition, we did not audit the West Texas Municipal Power Agency, which is both a major fund and represents 4 percent, 1 percent, and 22 percent of the assets, net assets, and revenues of the business-type activities, respectively. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate ro the amounts included for the Market Lubbock Economic Development Corporation, Civic Lubbock, Inc .. and the West Texas Municipal Power Agency are based on the reports of the other auditors. We conducted our audit in accordance witb 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 Uniled States. Those standards require that we plan and perfonn the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The fmancial statements of Market Lubbock Economic Development Corporation, Civic Lubbock, Inc. and the West Texas Municipal Power Agency Fund were not audited in accordance with Government Auditing Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, based on our audit and the reportS of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Lubbock, Texas, as of September 30, 2004, and the respective changes in financial pos1tion and cash flows, where applicable, thereof and the budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Govemment Auditing Standards, we have also issued a report dated March 28, 2005 on our consideration of the City of Lubbock's internal control over financial reporting and our tests of its compliance with certain provisions oflaws. regulations, contracts, and grant agreements and other matters. I(Pio!G UP a U.S. liMe~ ll&boli:y f>111r\""~'P· ir the US ~ rm d. l(pMG lnl'llt\Uion&l, a S~s cooper;UMt 17 . The purpose of that report is to descdbe 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 the internal control over fmancial reporting or on compliance. That report is an integral part of an audit perfonned in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The management's discussion and analysis and schedules of funding progress on pages 19 through 34 and 73 and 77, respectively, are not a required part of the basic financial statements but are supplementary infonnation required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures. which consisted pdncipally of inquides of management regarding the methods of measurement and presentation of the required supplementary information. However. we did not audit the information and express no opinion on it. Our audit was conducted for the purpose of fonning opinions on the financial statements that collectively comprise the City of Lubbock's basic financial statements. The introductory section. combining fund statements and schedules. and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining fund statements and schedules have been subjected to the auditing procedures applied by us and the other auditors in the audit of the basic financial statements and, in ow-opinion, based on our audit and the reports of other auditors, are fairly stared in all matedal respects in relation to the basic fmancial statements taken as a whole. March 28, 2005 18 ) City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 As management of the City of Lubbock, Texas (City), we offer readers this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30,2004. We encourage readers of these financial statements to consider the infonnation included in the transmittal letter and in the other sections of the Comprehensive Annual Financial Report (CAFR) e.g., combining statements and the statistical section in conjunction with this discussion and analysis. Financial Highlights These financial highlights summarize the City's financial position and operations as presented in more detail in the Basic Financial Statements (BFS), as listed in the accompanying Table of Contents. • The assets of the City exceeded its liabilities at September 30, 2004 by $546 million (net assets). Of this amount, $51 million (unrestricted net assets) may be used to meet the City's ongoing obligations to citizens and creditors. • The City's total net assets decreased by nearly $2.7 million as a result of operations during the fiscal year. • The ending unreserved fund balance for the General Fund was $12.1 million or approximately 13.5% of total General Fund expenditures, or 14.0% of total General Fund revenues. • All of the City's governmental funds reported combined ending fund balances of $47.7 million. Of this total amount, $13.8 million is available for spending at the City's discretion • All of the City's business-type activities reported combined ending net assets of $442.4 million. Of this total amount, $41.2 million is available for spending at the City's discretion. • The City's proprietary funds net assets decreased by nearly $5.0 million from $437.1 million to $432.1 million. The Electric Fund {Lubbock Power & Light or LP&L} ended the year with operating income of nearly $3.3 million erasing a $6.3 million operating loss experienced in the prior year. • Near the end of the fiscal year, the City issued $22.6 million of bonds to refund $23.2 million in outstanding bonds. As a result of this transaction, the City will experience an economic gain of $0.8 million and an accounting loss of $1.0 million, with 4.2% in present value savings. 19 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Overview of tbe Financial Statements Basic Financial Statements. Management's Discussion and Analysis (MD&A) is intended to serve as an introduction to the City's BFS. The BFS are comprised of three components: 1) Government-Wide Financial Statements (GWFS), 2) Fund Financial Statements (FFS), and 3) Notes to Basic Financial Statements (Notes). This CAFR also contains other supplementary information in addition to the BFS. Government-Wide Financial Statements. The GWFS, shown on pages 35-37 of this report, contain the statement of net assets and the statement of activities, described below: The statement of net assets presents information on all of the City's assets and liabilities (including capital assets and short-and long-tenn liabilities), with the difference between the two reported as net assets using the accrual basis. Over time, increases or decreases in net assets serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents a comparison between direct expenses and program revenues for each of the City's functions or programs (referred to as "activities"). Direct expenses are those that are specifically associated with an activity and are therefore clearly identifiable with that activity. Program revenues include charges paid by the recipient of the goods or services offered by the program, in addition to grants and contributions that are restricted to meeting the operational or capital requirements of a particular activity. Revenues that are not directly related to a specific activity are presented as general revenues. The comparison of direct expenses with revenues from activities identifies the extent to which each activity is self~financing, or alternatively, draws from any City generated general revenues. The governmental activities (activities that are principally supported by taxes and intergovernmental revenues) of the City include administration of community services, electric (street lighting), financial services, fire, general government, human resources, police, streets, and public works. The business-type activities (activities intended to recover all of their costs through user fees and charges) of the City include Electric (LP&L), Water, Sewer, Solid Waste, Stormwater, Transit, and Airport. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs (accrual basis), regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods, such as uncollected taxes and earned but unused vacation leave. 20 ) City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Component Units. The GWFS include not only the City itself (the "primary government"), but also two legally separate entities (the "component units): Market Lubbock Economic Development Corporation, d/b/a Market Lubbock, Inc. and Civic Lubbock, Inc., for which the City is financially accountable. These entities provide economic development services and arts and cultural activities for the City. Financial information for these component units is reported separately in the GWFS in order to differentiate them from the City's financial information. Neither of these component units are considered major component units. Fund Financial Statements. Ajund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The principal role of funds in the new financial reporting model is to demonstrate fiscal accountability. The City, as with other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The focus of the FFS is on major funds. Major funds are those that meet minimum criteria (a percentage of assets, liabilities, revenue, or expenditures/expenses of fund category and of the governmental and enterprise funds combined), or those that the City chooses to report as major funds given their qualitative significance. Nonmajor funds are aggregated and shown in a single column in the appropriate financial statements. Combining schedules of nonmajor funds are included in the CAFR following the BFS. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental FFS. Governmental funds are used to account for essentially the same functions reported as governmental activities in the GWFS. However, unlike the GWFS, governmental FFS focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the City's fiscal year. Such information is useful in evaluating the City's near-term financing requirements. Because the focus of governmental funds is narrower than that of the GWFS (modified accrual versus accrual basis of accounting, and current financial resources versus economic resources), it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the GWFS. By doing so, readers may better understand the long-term impact of the near-term financing decisions. Reconciliations are provided for both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances to facilitate the comparison between governmental funds and governmental activities. 21 ) City of Lubbock, Texas Management's Discussion and Ana1ysis For the Year Ended September 30, 2004 The City maintains 24 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund only. The General Fund is considered to be a major fund. Data from the other governmental funds are combined into a single aggregated presentation. The City adopts a budget annuaUy for the General Fund and all other funds. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget. It is presented in the FFS following the statement of changes in revenues, expenditures, and changes in fund balances. The governmental FFS can be found on pages 39-43 of this report. Proprietary FFS. The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the GWFS. Enterprise FFS provide the same type of information as the GWFS, only in more detail. The City uses enterprise funds to account for its Electric (LP&L), Water, Sewer, West Texas Municipal Power Agency (W1MPA), Stormwater, Transit, SoJid Waste, and Airport activities, of which the first five activities are considered to be major funds by the City and are presented separately. The latter three activities are considered nonmajor funds by the City and are combined into a single aggregated presentation. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses internal service funds to account for its fleet of vehicles, management information systems, risk management, print shop, and central warehouse activities among others. The services provided by the internal service funds benefit both governmental and business-type activities, and accordingly, they have been included within governmental activities and business- type activities, as appropriate, in the GWFS. All internal service funds are combined into a single aggregated presentation in the proprietary FFS. Reconciliations are provided for both the proprietary fund statement of net assets and the proprietary fund statement of ·revenues, expenses, and changes in fund net assets to facilitate the comparison between enterprise funds and business-type activities. The proprietary FFS can be found on pages 44-55 of this report. Fiduciary FFS. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the GWFS because the resources of those funds are not available to support the City's own programs. The City presents an agency fund as its only fiduciary fund in the FFS. The fiduciary FFS can be found on page 56 of this report. Notes to Basic Financial Statements. The Notes provide additional information that is essential to a full understanding of the data provided in the GWFS and FFS. The Notes can be found on pages 57~90 of this report. 22 ) ) City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Required Supplementary Information Other Than MD&A. The City has presented required supplementary information relating to its progress in funding its obligation to provide pension benefits to its employees in the Notes to the BFS. Government-Wide Financial Analysis As noted earlier, net assets serve as a useful indicator of the City's fmancial position. For the City, assets exceeded liabilities by $546 million (net assets) at the close of the fiscal year. This compared to assets exceeding liabilities by $549 million (net assets) at the end of the prior fiscal year. As a result of operations, total net assets decreased by $2.7 million during the period. By far the largest portion of the City's net assets, 78.7o/o, reflect its investment in capital assets, e.g., land, buildings, infrastructure, machinery, and equipment, less any related debt used to acquire those assets that is still outstanding at the close of the fiscal year. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. City of Lubbock Net Assets September 3) (iu <XX>s) Governmental Business-Type Activitie3 Activities Total aD4 am aD4 am aD4 am Current and other assets s 100,489 78,784 177,959 188,077 278,448 266,861 Capital assets 129!014 121!735 611,703 617,465 740,717 739,200 Total assets 229,503 2001519 789,662 805,542 1!0191165 1,006,061 Current liabilities 48,739 25,697 44,156 37,774 92,895 63,471 Noncurrent liabilities 76,423 73!138 303,173 320,024 379,596 393,162 Total liabilities 125!162 98,835 347,329 357,798 472,491 456,633 Net assets: Invested in capital assets, net ofrelaled debt 74,433 78,475 355,816 371,427 430,249 449,902 Restricted 20,339 4,391 45,417 43,389 65,756 47,780 Unrestricted 9,569 181818 41,190 32,928 50,159 51,746 Total net assets $ 104,341 101,684 442,423 447,744 546,764 549,428 An additional portion of the City's net assets, 12%, represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets of $50.7 million may be used to meet the City's ongoing obligations to citizens and creditors. 23 ) > City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 The City also reports positive balances in all three categories of net assets for the City as a whole, as well as for its separate governmental activities, and business-type activities. The City's governmental activities experienced an increase in net assets of $2.7 mmion, while net assets decreased by $8.5 million during the prior fiscal year. This increase is primarily a result of strong growth in new construction and better than anticipated sales tax revenues coupled with a concentrated effort by City management to contain expenditures. This is the second year in a row that the City Council has been able to cut property tax rates while streamlining City operations. The City's business-type activities experienced a decrease in net assets of $5.3 million during the current fiscal year as compared to an increase of $3.6 million during the prior fiscaJ year. This decrease in net assets resulted from a change in accounting estimate on the life of the City's landfill. This change in accounting estimate resulted in the nearly doubled depreciation in the Solid Waste Fund. 24 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Changes in Net Assets Details of the following summarized infonnation can be found on pages 36-37 of this report. aty of Lubbock Cbaoges io Net A!se15 For tbe Year Eoded September 3l (in aDs) Business- Governmental Type Activities Adivities Totals Revenues: Am ~llj Am aw 4.I.JI' AW Prognun Revenues: Owges for services $ 12,713 13,888 181,411 178.536 194,124 192,424 OpemtiDg grants aod concributions 9,643 12,137 6,739 5,219 16,382 17,356 Capital grants and contributions 9,269 7,909 9,269 7,909 General Revenues: Property 1axeS 44,497 42,303 44,497 42,303 Sales taxes 30,555 29,092 30,555 29,092 OCher 1liXes 3,793 3,712 3,793 3,712 Fmncbise fees 9,654 6,613 9,654 6,613 Grants/contributions not restrictlld to specifiC programs 259 259 Other 4,274 3,834 ;b932 ?:,.737 7,206 6,571 Total revenues 115,129 111!579 200!351 1941660 315,480 3061239 Espeuses: .Admi.nistrativeiConmunity Services 22,313 21,793 22,313 21,793 Electric 2,471 2,373 2,471 2,373 Fmancial Services 2,387 1,965 2,387 1,965 F~re 21,998 20,207 21,998 20,207 General Government 20,562 21,009 20,562 21,009 HUUWl Resources 1n 786 777 786 Police 33,249 31,429 33,249 31,429 Planning aod Transportation 10,789 9,827 10,789 9,827 Public Wodcs 3,078 9,856 3,078 9,856 IDiel'est on loog-term debt 4,593 3,346 4,593 3,346 Electric 110,591 105,216 110,591 105,216 Water 27,879 27,461 27,879 27,461 Sewer 17,020 17,248 17,020 17,248 Solid Waste 17,662 19,559 17,662 19,559 ·Storrmwter 5,357 3,315 5,357 3,315 Tnmsit 10,565 9,163 10,565 9,163 Ailpor1 6,853 6.479 6,853 6,479 Golf 21 21 Total &penses 122,217 122,591 1951927 1881462 318.144 3111053 Olange iD net assets before special items and ttansfers (7,088) (11,012) 4,424 6,198 (2.664) (4,814) Special itelm Transfers 91745 2,554 (9,745} {2,554l Chmge in oct assets 2,657 (8.458) (5,321) 3,644 (2,664) (4,814) Net assets -beginning of year 101,684 110,142 4471744 444,100 549,428 554,242 Net assets-end of year s 104'.341 1011~ 44~423 447,744 m;'i)ji 5491428 25 ) ) ';;' ~ ;; .. 0 a .-e City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30> 2004 Governmental activities. Governmental activities increased the City's net assets by $2.7 million. Key elements of the increase follow: • Transfers to/from business-type activities during the fiscal year increased govenunental activities net assets by $9.7 million. During the prior fiscal year these transfers increased governmental activities net assets by approximately $2.7 million. This is a net increase of $7 .I million in resources to governmental activities, which is the primary factor for the increase in net assets. Transfers from the business-type activities included payments in lieu of taxes, franchise fees, and indirect costs of operations for centralized services such as payroll and purchasing. • Total expenses decreased by nearly $.4 million from the prior year due primarily to a payment made in the prior year of $5.5 million for the City's share of the Marsha Sharp Freeway Project. This project will be owned and maintained by the State of Texas. However, the governmental activities did increase planning and transportation spending of $1.0 million for the City's streets and had an increase in public safety spending, police and fire of$3.6 million--a result of the City Council's commitment to public safety. • Revenues increased by approximately $3.6 million. The key factors impacting this increase include increases in property taxes of $2.1 million due to the additional property being added to the tax rolls, increases in franchise fees of $3.0 million due to changes in the fee structures, and increases in sales taxes of nearly $1.5 million. Also, charges for services and operating grants and contributions decreased by $1.1 million and 2.5 million, respectively. This graph depicts the expenses and program revenues generated through the City's various governmental activities. Expenses and Program Revenues -Governmelltal Activities $35,000 $30,000 $15,000 SlO,OOO $15,000 $10,000 $5,000 $0 ) ) City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 The following graph reflects the source of the revenue and the percentage each source represents ofthe total. Revenues by Source -Governmental Activities Charges for Services 11°.-4 Operating grants & Contributions 8% Franchise Fees &;. Other Ta:r.es Jlt/o Miscellaneous 4% Sales Taxes 1Jo!. Property Tans ~lo Business-type activities. Business-type activities decreased the City's net assets by $5.3 million as a result of operations. Key elements of this increase follow: • Charges for services for business-type activities increased by $2.9 miJlion. 1b.is is mainly due to increased sales in the Electric Fund (LP&L) with revenues up nearly $10.8 million over the prior year. Sales for the water fund were $.9 million less than the prior fiscal year in spite of an increase in rates, because 2004 was the second wettest year in recorded history for the City. WTMPA revenues were impacted because of the capital )ease of the co-generation power plant JRM8 to the Electric Fund. The plant was not utilized due to the continued high natural gas prices. 27 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 • Capital grants and contributions continue to be a significant revenue source for the Electric (LP&L), Airport, Water, and Sewer Funds during the current fiscal year, producing nearly $9.3 million in revenue. This is comparable to the prior fiscal year's support of $7.9 million. These contributions primarily came from federal grants and from water and sewer lines and taps that were funded by property owners. • Expenses increased in total by $7.5 million over the prior fiscal year. This is mainly due to the increased cost of operations for electric activity, which increased nearly $5.4 million over the prior year. The stonnwater activity experienced a $2.0 million increase in expenses due primarily to scheduled interest payments on debt. The transit activity expenses increased by $1.4 million over the prior year due to the increased cost of personal services and other services. The following graph reflects the revenue sources generated by the business-type activities. As noted earlier, these activities include Electric (LP&L), Water, Sewer, Solid Waste, Transit, WTMP A, Airport, and Storm water Drainage. Cbarges for Services 91% Revenues by Source -Business-type Activities 28 Captial Grants & Contributions SOlo Operating Grants & Coatributions 3% \ City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Financial Analysis of the City's Funds Governmental funds. The focus of the City's governmentalfunds is to provide infonnation on near-tenn inflows, outflows, and balances of spendable resources. Such infonnation is useful in assessing the City's financing requirements. In particular, unreserved fund balance serves as a useful measure of the City's resources available for spending at the end of the fiscal year. At the end of the fiscal year the City's governmental funds reported combined ending fund balances of $47.7 million. This compared to $50.3 million at the end of the prior fiscal year. A significant portion of this decrease resulted from the planned spend-down of fund balance in the Capital Projects Fund. This resulted in a reduction of net assets of$5.7 million. This reduction was partially offset by the results of operations of the General Fund that ended the year adding $3.3 million to net assets. Of the ending governmental fund balance, $13.8 million or 28.9% constituted unreserved fund balance, which is available for spending at the City's discretion. This compared to $10.6 million or 21.1% at the end of the prior fiscal year. The remainder of the fund balance is reserved to indicate it has already been committed to, 1) pay debt service, 2) use in construction of approved capital projects, or 3) for other restricted purposes. The General Fund is the chief operating fund of the City. At the end of the fiscal year, unreserved fund balance in the General Fund was approximately $12.1 million compared to $8.4 million in the previous fiscal year, representing an increase of $3.7 million. Total fund balance (reserved and unreserved) approximated $12.7 million at the end of the fiscal year compared to $9.4 million at the end of the prior fiscal year. As a measure of the General Fund's liquidity, it is useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represented 13.4% of total General Fund expenditures compared to 9.8% of total General Fund expenditures in the prior year. Total fund balance represented 14.1% oftotal General Fund expenditures compared to 11.0% in the prior year. The increase in fund balance is primarily a result of strong growth in new construction and better than anticipated sales tax revenues, coupled with a concentrated effort by City management to contain expenditures. Proprietary funds. The City's proprietary funds provide essentially the same type of infonnation found in the GWFS, but in more detail. 29 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Unrestricted net assets of the major proprietary funds at the end of September 30 are shown next with amounts presented in OOOs: aD4 2003 Electric Fund $ 7,006 2,367 Water Fund 14,078 15,551 Sewer Fund 6,343 4,286 WTMPA 1,743 2,155 Storm water 1,305 869 $ 30,475 25,228 The Electric Fund (LP&L) increased unrestricted net assets by $4.6 million as opposed to a decrease of $.4 million during the prior year. This is mainly due to the results of operations; a capital contribution from the Water, Sewer, Stormwater, and Solid Waste Funds of $1.8 million for prior years costs of the utility billing system and a decision by City Council not to charge for payments in lieu of taxes and franchise fees until adequate cash reserves are established. The Water Fund reflected a current year decrease in unrestricted net assets of nearly $1.5 million compared to an increase of $3.6 million during the prior year. This is due to decreases in consumption. Despite a raise of approximately 3% in water rates, revenues were down with record rainfall. The Sewer Fund reflected a current year increase in unrestricted net assets of approximately $2.1 million compared to a $1.9 million decrease during the prior year. This is primarily due to sewer rates increases to all customers. The WTMP A Fund reflected a decrease in unrestricted net assets of $.4 million primarily as a result of operations. The prior fiscal year's change was an increase in unrestricted net assets of $2.5 million. The Stormwater Fund experienced an increase in unrestricted net assets of $.4 million during the fiscal year compared to a $1.6 million increase in the prior fiscal year. The increase continues to be due to an increase in stormwater rates of nearly 200%. This increase was necessitated to provide long-term funding for system improvements, maintenance, and flood prevention. 30 ) ) ) ) City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 General Fund Budgetary Highlights Differences between the original budget and the final amended budget were minimal. This is a result of the truth-in-budgeting initiative championed by the City Council. This resulted in fewer amendments as City management also made a concentrated effort to reduce spending and streamline operations. This also resulted in a planned increase in the General Fund's fund balance. Adjustments were made to expenditures to lessen the impact of the net reductions in transfers from LP&L. The General Fund ended the fiscal year with expenditures more than $1.3 million less than budgeted. As noted earlier, the City chose to issue $22.6 million in bonds to refund $23.2 million in outstanding debt. This resulted in present value savings of $836,312, decreasing total debt service requirements by $874,031. The transaction resulted in an accounting loss of $1,019,912. Due to stronger than anticipated growth in new construction and better than expected sales tax revenue, actual revenues were nearly $3.3 million more than budgeted for the fiscal year. Capital Assets and Debt Administration Capital assets. The City's investment in capital assets for its governmental and business- type activities at September 30, 2004 amounted to $741 million, net of accwnulated depreciation. This was a $1.5 mitlion increase over the prior fiscal year's balance of $739 million, net of accumulated depreciation. 1bis investment in capital assets includes land, buildings and improvements, equipment, construction in progress, and infrastructure. Major capital asset events during the fiscal year included the following: • Work continued in the Water Fund with another $3.3 million expended on the construction of water lines ahead of the Marsha Sharp Freeway. Total expenditures on the project to date are $4.3 million. • $1.7 million was expended on Cell II construction at the landfill. Total expenditures on the project to date total $3.9 million. • $1.3 million was expended on the construction of the MacKenzie Park Amphitheater. Expenditures to date on the project total $1.7 million. • Scheduled improvements to LP&L's distribution infrastructure amount to $4 million. In addition, the Electric Fund spent an additional $3.2 million on a new substation to provide service to South and Southeast Lubbock. Total expenditures for this project to date total $3.7 million. 31 ) ) City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30> 2004 • The City continues work on a flood relief project linking South Lubbock's chain of playa lakes with an underground drainage system spending $3.2 million during the fiscal year. Expenditures to date on the project total $4.8 million. At the end ofthe fiscal year> the City has construction commitments of$113 million. Land Buildings Improvements other City of Lubbock Capital Assets (Net of Accumulated Depreciation) September 30 (in <XX>'s) Governmental Activities $ 8,608 7,996 23,794 25,602 37,183 15,957 43,472 37,100 14,881 36,156 Business- Type Activities 2004 2003 31,676 31,676 68,302 71.525 330,842 66,922 113,961 329,618 79,957 104,689 Totals 40,284 92,096 368,025 82,879 157,433 39,672 97,127 366,718 94,838 140,845 than buildings Machinery and equipment Construction in progress Total s 129,014 121,735 611,703 617,465 740,717 739,200 Additional information about the City's capital assets can be found on pages 70-72 of this report. Long-term debt. A summary of the City's total outstanding debt follows: General obligation bonds Revenue bonds Total City of Lubbock Outstanding Debt General Obligation aod Revenue Bonds September~ Goveromental Activities (in <XX>'s) $ 70,221 69,808 $ 70,221 69,808 Business- Type Activities 215,664 226.127 94,605 101,295 310,269 327,422 Totals 285,885 295,935 "94,605 101,295 380,490 397,230 There is no direct debt limitation in the City Charter or under State law. The City operates under a Home Rule Charter that limits the maximum tax rate for all City purposes to $2.50 per $100 of assessed valuation. The Attorney General of the State of Texas pennits an allocation of $1.50 of the $2.50 maximum tax rate for general obligation bonds debt service. 32 ) ' City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 The current interest and sinking fund tax rate per $100 of assessed valuation is $0.09496, which is significantly below the maximum allowable tax rate. Over the fiscal year, the City's total outstanding debt decreased by $16.74 million, or 4.2%. This is compared to an increase of $62.5 million, or 18. 8%, during the prior fiscal year. The decrease in outstanding debt is attributed to the payment of scheduled debt service totaling $21.28 miJlion and a reduction in outstanding debt of $.585 million as a resuh of the refunding. The reductions in outstanding debt were offset by the issuance of $5.125 million in debt to fund streets projects and the capital improvements plan. During the fiscal year, the City issued $2.025 million of General Obligation Bonds, Series 2004. This issuance was the first installment of the $30 million capital improvement debt issuance approved by voters in 2004 to fund the current capital improvements plan. The City also issued $3.1 million in Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2004. This issuance funded streets projects that included right~of-way costs on the Marsha Sharp Freeway project, environmental study costs for future thoroughfares, and for citywide traffic signals and streetlights. The City also issued $22.62 million of General Obligation Refunding Bonds, Series 2004 to defease $23.205 million in outstanding bonds. All bonds issued during the fiscal year were insured to provide a lower cost of interest expense for the City's taxpayers. It is the City's policy to evaluate each bond issue to determine whether it is economicaJly feasible to purchase bond insurance. The City of Lubbock maintains an "AA-" rating from Standard & Poor's and Fitch Ratings, Inc. and an "AI" rating from Moody's Investors Service for general obligation debt The revenue bonds of LP&L and WTMPA have been rated "BBB~" by Standard & Poor's, "BBB+" by Fitch Ratings, Inc., and ''A3" by Moody's Investors Service. Additional information about the City's long-term debt can be found on pages 80~84 of this report. Economic Factors and the Next Fiscal Year's Budget and Rates • At the end of the City's fiscal year the unemployment rate for the Lubbock area was 2.9 percent. This is a decrease from a rate of 3.1 percent one year earlier. This compares favorably to the state's average unemployment rate of 5.5 percent and the national average of 5.1 percent on December 30, 2004. • Total retail sales reflected a 2.4 percent increase over the prior year. 33 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 • Building permits for new construction decreased from 3,125 during 2003 to 2,644 in 2004, or about a 15% decrease. This compares to a 25% decrease during the prior period. Conversely, building permit values for new construction decreased from $370.6 million in 2003 to $357.2 million in 2004, or about a 3.6% decrease. • Total occupancy in local hotels and motels remained constant and the occupancy tax totaled nearly $2.9 million, nearly identical to the amount received during the prior fiscal year. • City Council again decided to support the operations of the Electric Fund by forgoing transfers for payments in lieu of taxes, and franchise fees for the upcoming fiscal year. The City Council intends to continue this support until such time as the Electric Fund has adequate monetary reserves. All of these factors were considered in preparing the City of Lubbock's budget for the 2004- 2005 fiscal year. During the just ended fiscal year, unreserved fund balance in the General Fund increased by nearly $3.7 million to $12.1 million compared to $8.4 million at the end of the prior fiscal year. It is intended that the unreserved undesignated fund balance be equal to 15% of operating expenditures, which equates to approximately $13.5 million. The City ended the year nearly $1.4 million under this target. City Management anticipates meeting this goal within the next few years. The Electric Fund increased rates in May 2004 twelve and one half percent for the larger commercial consumers as a result of higher than anticipated cost of power. Residential and small commercial consumers rates remained relatively unchanged due to the rate increases implemented in the prior fiscal year. Both the Water and Sewer Funds rates were increased for the 2003-2004 fascal year. The water rates were increased by an average of 3 percent and the sewer rates were increased by an average of 5 percent for all customers. Currently, the City is in the process of having a rate study completed for both the water and sewer rates. The results of this study will impact future water rates. The water and sewer rates affected both residential and commercial consumers by approximately the same percentage. These rate increases were necessary to cover increased operating costs due to inflationary pressures. Requests for luformatioD This financial report is designed to provide a general overview of the City of Lubbock's finances. Questions concerning any of the information provided in the report or requests for additional financial infonnation should be addressed to the Chief Financial Officer, P.O. Box 2000, Lubbock, Texas, 79457. 34 . 1 ----~ . ----·-· -----------. --· -----.. . --·-··- CITY OF LUBBOCK, TEXAS &sic FINANCIAL SATEMENTS CITY OF LUBBOCK, TEXAS STATEMENT OF NET ASSETS SEPTEMBER 30, 2004 Prima!l: Government Governmental Business-Type Component Activities Activities Total Units ASSETS Pooled cash and cash equivalents $ 30.797,510 25,309,543 56,107,053 1,519,062 Investments 7,503,969 6,077,077 13,581,046 494,689 Receivables. net 16,363.864 29,611,958 46,195,622 158,612 Internal balances (555,465) 555,465 Due from other governments 1,308,277 1,308,277 Due from others 1,470,831 1 '119, 160 2,589,991 Inventories 190,034 2,114,453 2,304,487 87,425 Investment in property 218,503 218,503 Prepaid expenses 897,648 897,648 25,229 Restricted assets: Cash and cash equivalents 2,152.275 44.656,899 46,811,174 100,000 Incentives advances 9,164,684 Investments 6,723.257 63,543,690 70,266,947 Accounts receivable 1,013,813 1,013,813 Bond proceeds receivable 27,745,000 27,745,000 Mortgage receivables 5,653.444 5,653,444 Capital assets: Non-depreciable 52,080,271 145,637,526 197,7 17,797 366,332 Depreciable 76,933,607 466,065,118 542,998,725 881,214 Deferred charges 3,751 ,695 3,751,695 Other assets 4,071 4,071 Total Assets 229,503,025 789,662,468 1,019,165,493 12,797,267 LIABILITIES Accounts payable 5,758,795 17,892,025 23,650,820 462,805 Due to others 35,195 35,195 547,519 Due to other governments 80,937 Accrued expenses 3,204,277 2,310,777 5,515,054 156,108 Accrued interest payable 387,855 1.611,164 1,999,019 Payable to escrow agent 22,620,000 22.620.000 Customer deposits 1,000,526 1,000,526 Deferred revenue 3,120,823 29,353 3,150,176 9,029,783 Noncurrent liabilities: Due within one year: Bonds payable 4.955.949 17,271,718 22,227,667 Compensated absences 5.475.861 2,143,563 7,619.424 Accrued insurance claims 2,354,536 1,184,210 3,538,746 Capital leases payable 826,018 622,442 1,448,460 2,085;606 Due in more than one year: Bonds payable 65,265,268 292,082,188 357,347,456 Deferred premium on bonds 1,179,722 1,179,722 Compensated absences 9,442,647 2,016,571 11,459,218 Accrued insurance claims 5,252,644 5,252,644 Landfill closure and postdosure care 3,051 '116 3,051,116 Capital leases payable 534,939 770.765 1,305,704 1,455,515 Total liabilities 125,161,885 347,239:062 472,400,947 13,818,273 NET ASSETS Invested in capital assets, net of related debt 74.433,159 355.816,406 430,249,565 1,247,546 Restricted for: Capital projects 7,869,506 38,650,935 46,520,441 Debt service 2.223,003 1,050,347 3,273,350 Other purposes 10.246,203 5,715,380 15,961,583 100,000 Unrestricted (deficit) 9,569,269 41,190,338 50,759,607 (2,368,552) Total Net Assets $ 104,341,140 442.423,406 546,764,546 ~1,021,0061 See accompanying Notes to Basic Financial Statements. 35 Functions/Prosrams Primary Government Governmental Activities: Administration/Community Services Street Ughting Financial Services Fire General Government Human Resources Police Planning and Transportation Public WOf1ts Interest on long-Term Debt Total Governmental Activities Business-Type Activities: Electric Water Sewer Solid Waste Stormwater Transit Airport Total Business· Type Activities Total Primary Government Component Units: Civic Lubbock, Inc. Market lubbock, Inc. Total Component Units CITY OF LUBBOCK, TEXAS STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2004 Program Revenues Operating Charges for Grants and Ex~enses Services Conbibutions $ 22,313,139 2,912,165 6,041,287 2,471,382 2,387,188 21,998,241 10,600 20,563,083 3,516,980 1,972,229 777,035 33,248.228 5.424,232 1,629,923 10,788,596 3,078,122 849,147 4,593,150 122,218,164 12,713,124 9,643,439 110,591,149 105,433,133 27,879,343 31,907,893 17,020,092 18,889,095 17,661,438 11,641,316 5,356,649 6,019,490 10,565,159 2,893,507 5,336,794 6,852!874 4,626,270 1,402,003 195,926,704 181,410,704 6,738,797 318,144,868 194,123,828 16,382,236 1,609,630 1,731,625 5,721,854 127,826 6,707,783 $ 7,331,484 1,859,451 6!707,783 General revenues: Taxes: Property Sales Occupancy Other Franchise fees Investment earnings Miscellaneous Transfers, net Total general revenues and transfers Change in net assets Net assets -beginning of year Net assets • end of year See accompanying Notes to Basic Financial Statements. 36 Capital Grants and Conbibutions 1,849,662 2,642,778 3,203,482 1,573,384 9,269,306 91269,306 $ $ Net (Expense) Revenue and Changes In Net Assets Governmental Activities (13,359,687) (2,471,382) (2,387, 188) (21 ,987,641) (15,073,874) (777,035) (26,194,073) (1 o. 788,596) (2,228,975) (4,593,150) (99,861,601) (99,861,601) 44,496,973 . 30,554,632 2,853,205 939,456 9,654,447 1,151,620 3,123,572 9l45,250 102,519,155 2,657,554 101,683,586 1041341.140 Primary Government Business-Type Activities (3,308.354) 6,671,328 5,072,465 (6,020, 122) 662,841 (2,334,858) 748,783 1,492,103 1,492,103 2,859,344 72,870 ~9,745,250} {6,813,036) (5,320,933) 447,744,339 442,423,406 Total {13,359,687) (2,471 ,382) (2,387,188) (21,987,641) (15,073,874) (777,035) (26,194,073) (10,788,596) (2.228,975) {4,593,150) (99,861,601} (3,308,354) 6,671,328 5,072,465 (6,020,122) 662,841 (2,334,858) 748,783 1,492,103 (98,369,498) 44,496,973 30,554,632 2,853,205 939,456 9,654,-447 4,010,964 3,196,442 95,706,119 (2,663,379) 549,427,925 546,764,546 37 Component Units 121,995 1,113,755 1,235,750 8,636 8,636 1,244,386 !2.265,392! !1.021,006} ) CITY OF lUBBOCK, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2004 Other Total General Debt Service Governmental Governmental Fund Fund Funds Funds ASSETS Pooled cash and cash equivalents $ 5,888,268 2,282.997 21,407,030 29,578,295 Investments 1.426,351 553,024 5,229,256 7,208,631 Taxes receivable (net) 6,864,967 533,715 90,102 7,488,784 Accounts receivable (net) 6,098,853 162,485 2,433,012 8,694,350 Interest receivable 79,463 2.119 20,146 101,728 Due from other funds 1,930,500 1,930,500 Due from other governments 13,637 1,294,640 1,308,277 Due from others 781,704 679,746 1,461,450 Investment in property 218,503 218,503 Inventory 120,880 120,880 Bonds proceeds receivable 22,620,000 5,125,000 27,745,000 Secured receivables 5,653,444 5,653,444 Advances to other funds 445,676 445,676 Total Assets 23,650,299 26,154,340 42,150,879 91,955,518 LIABILITIES Accounts payable 1,836,027 418,0 17 3,131,290 5,385,334 Due to others 35,195 35,195 Due to other funds 1,480,500 1,480,500 Accrued liabilities 3,036,761 121,374 3,158,135 Payable to escrow agent 22,620,000 22,620,000 Advances from other funds 1,469,381 1,469,381 Deferred revenue 6,047,791 475,303 3,547,898 10,070,992 Total liabilities 10,955,774 23,5131320 9,750,443 44,219,537 FUND BALANCES Reserved for: Prepaid items/inventory 120,880 120,880 Advances to other funds 445,676 445,676 Debt service 2,641,020 2;641,020 Capital projects 24,870,961 24,670,961 Special revenue -grants 5,871,947 5,871,947 Unreserved, reported in General Fund 12,127,969 12,127,969 Special revenue funds 1,734,312 1,734,312 Capital projects funds {76,784} F6,784! Total fund balances 12,694,525 2,641!020 32,400,436 47,735,981 Total Liabilities and Fund Balances $ 23,650,299 26,154,340 42,150,879 91,955,518 See accompanying Notes to Basic Financial Statements. 39 CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ASSETS SEPTEMBER 30,2004 Total fund balance -governmental funds Amounts reported for governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds. Internal service funds (ISF's) are used by management to charge the costs of certain activities, such as insurance and telecommunications. to individual funds. The portion of the assets and liabilities of the I SF's primarily serving governmental funds are Included in governmental activities in the statement of net assets as follows: Net assets Net book value of capital assets (included in captial assets above) Compensated absences Amounts due from business-type ISFs for amounts overcharged Certain liabilities are not due and payable in the current period and therefore are not reported in the funds. Those liabilities are as follows: General obligation bonds Capital leases payable Compensated absences Accrued intetest on general obligation bonds Bond premiums are recognized as an other financing source in the fund statements but the premiums are amortized over the life of the bonds in the government-wide statements. Actual City contributions to the fire fighter's pension trust fund is greater than the actuarially determined required contribution. This will reduce future funding requirements and is not recognized as an asset at the fund level but is a prepaid expense in the Statement of Net Assets. Revenue earned but unavailable in the funds is deferred. Net assets of governmental activities See accompanying Notes to Basic Financial Statements. 40 $ 47,735,981 129,013,878 8,953.624 (1 ,353,658) 193,517 18,240 (70,221,217) (1 ,360,957) {14,918,508) (387,855) (1,179,722) 897,648 6,950,169 $ ===1=04=,34===1,!:::::14=0= CITY OF lUBBOCK, TEXAS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2004 ) Other Total General Debt Service Governmental Governmental Fund Fund Funds Funds REVENUES Taxes $ 74,381,814 7,943,630 5,373,390 87,698,834 Fees and fines 3,675,857 3,675,857 Licenses and permits 1,982,281 1,982,281 lntergovern mental 428,458 9,214,981 9,643.439 Charges for services 4,467,730 849,147 5,316,877 Interest 334,730 28,622 375,997 739,349 Miscellaneous 1,442,675 1,612,800 3,055,475 ) Total revenues 86,713,545 7,972,252 17,426,315 112,112,112 EXPENDITURES Current: Administration/Community Services 18,156,455 16,156,455 Electric -street lighting 2,185,286 2,185,286 Financial Services 2,333,469 2,333,469 Fire 20,613,077 20,613,077 General Government 5,633,469 16,992 13,650,037 19,300,498 Human Resources 754,225 754,225 Police 32,400,371 32,400,371 Planning and Transportation 7,180,843 7,160,843 Non-departmental 214,562 214,562 Public Works 3,012,987 3,012,987 Debt service: Principal 4,498,304 4,498,304 Interest and other charges 4,749,272 4,749,272 Capital outlay 475,585 16,190,551 16,666,136 Total expenditures 89,947,342 9,264,568 32,853,575 132,065,485 Excess (deficiency) of revenues over (under) expenditures (3,233,797) (1,292,316) (15,427,260) (19,953,373) OTHER FINANCING SOURCES (USES) Long-term debt issued 22,620,000 5,125,000 27,745,000 Due escrow agent (22,620,000) (22,620,000) Bond premium (discount) 1,179,722 1,179,722 Capital leases 1,535,075 1,535,075 Transfers in 10,723,891 20,715,403 6,120,514 37,559,808 Transfers out ( 4,212,915} ~19,955,679} {3,871 ,880~ ~28,040,474} Total other financing sources (uses) 6,510,976 1,939,446 8,908,709 17,359,131 Net change in fund balances 3,277,179 647,130 (6,518,551) (2,594,242) Fund balances -beginning of year 9,417,346 1,993,890 38,918,987 50,330,223 Fund balances -end of year $ 12,694,525 2,641,020 32,400,436 47,735,981 See accompanying Notes to Basic Financial Statements. 41 CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2004 Net change in fund balances -total governmental funds Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However. in the Statement of Activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays of $16,666,136 exceeded depreciation of $9,813,391 in the current period. Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the Statement of Net Assets. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces long-term liabilities in the Statement of Net Assets. This is the amount by which proceeds of $27,745.000 exceeded repayments and debt defeasence of $27,118.304. Capital lease transactions provide current financial resources to governmental funds and repayment of principal is an expenditure. This is the amount by which proceeds of $1,535,075 exceeded repayments of $1,170,595. Bond premiums are recognized as an other financing source in the governmental funds, but are considered deferred assets on the Statement of Net Assets. This amount will be amortized over the life of the bonds. Estimated long-term liabilities for compensated absences are recognized as expenses in the Statement of Activities as eamed, but are recognized when current financial resources are used in the governmental funds. This amount is the net change in the estimated long-term liability for compensated absences during the yea·r. Estimated long-term liabilities for rebatable arbitrage are recognized as expenses in the Statement of Activities as earned, but are recognized when current financial resources are used in the governmental funds. This amount is the net change in the estimated long-term liability for rebatable arbitrage during the year. Property taxes levied and court fines and fees earned. but not available, are deferred in the governmental funds, but are recognized when earned (net of estimated uncollectibles) in the Statement of Activities. This amount is the net change in deferred property taxes and court fines and fees for the year. The difference between the par value of debt defeased which is greater than the par value of the new debt is recognized as a contra expense in the Statement of Activities, but is a Note disclosure in the fund statements. Actual City contributions to the fire fighter's pension trust fund are greater than the actuarially detennined Net Pension Obligation (NPO). This amount is recognized as an expenditure at the fund level but is accrued when overpaid and reduces expenses on the Statement of Activities Internal service funds are used by management to charge the <X>sts of certain activities, such as insurance and telecommunications, to individual funds. The net revenue (expense) of certain internal service funds iS reported with governmental activities. Accrued interest is recognized as expenses in the Statement of Activities as incurred, but is recognized when current financial resources are used in the governmental funds. This amount is the net change in the accrued interest this year. The net effect of various miscellaneous transactions involving capital assets (e.g., sales and trade-ins) is to increase net assets. Change in net assets of governmental activities See accompanying Notes to Basic Financial Statements. 42 $ (2,594,242) 6,852,745 (626,696) (364,480} (1,179,722) (2,225,479) 122,984 2,537,988 213,662 15,025 {94,019) (57,560) 57,328 $ 2,657,554 CITY OF LUBBOCK, TEXAS BUDGETARY COMPARISON STATEMENT GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2004 Variance with Final Budget Budseted Amounts Actual Positive Original Final Amounts (Negative) REVENUES Taxes and fees $ 71.855,445 72,262,445 74,381,814 2,119,369 Fees and fines 3,288,500 3,288,500 3,675,857 387,357 licenses and permits 1,823,721 1,807,550 1,982,281 174,731 Intergovernmental 372,192 455,907 428,458 (27,449) Charges for services 4,541 ,034 4,325,642 4,467,730 142,088 Interest 236,689 164,118 334,730 170,612 Miscellaneous 935,379 1,125,711 1,442,675 316,964 Total Revenues 83,052,960 83,429,873 86,713,545 3,283,672 EXPENDITURES Ad ministration/Community Services 18,403,905 18,365,948 18,156,455 209,493 Electric -street lighting 2,302,033 2,210,784 2,185,286 25,498 Financial Services 1,873,928 2,185,455 2.333,469 (148,014) Fire 21,026,400 20.775,537 20,613.077 162,460 General Government 5,435,697 5,507,366 5,633,469 (126,103) Human Resources 714,336 801,863 754,225 47,638 Police 32,531,242 32.419,834 32,400,371 19,463 Planning and Transportation 7,659,089 7,664,495 7,180,843 483,652 Capital Outlay 53,000 502,136 475.585 26,551 Non-departmental 849,200 849,200 214,562 634,638 Total Expenditures 90,848,832 91,282,618 89,947,342 1,335,276 Excess (deficiency) of revenues over (under) expenditures (7, 795,872) (7,852,745) (3,233, 797) 4,618,948 OTHER FINANCING SOURCES (USES) Transfers in 11,138,094 10,936,402 10,723,891 (212,511) Transfers out (3,342,222~ (3,441,959~ (4,212,915} {770,956} Total other financing sources (uses) 7,795,872 7,494,443 6,510,976 {983,467~ Net change in fund balances (358,302) 3,277,179 3,635,481 Fund balances· beginning of year 9,417,346 9.417,346 9,417,346 Fund balances · end of year $ 9,417,346 9,059,044 12,694,525 3,635,481 See accompanying Notes to Basic Financial Statements. 43 CITY OF LUBBOCK, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS SEPTEMBER 30, 2004 Business-t~ee Activities-Enterprise Funds West Texas Municipal Power Electric Water Sewer Asencl iWTMPAl ASSETS Current assets: Pooled cash and cash equivalents $ 2,633,706 9,646,398 4,300,692 627,826 Investments 637.979 2,336,705 1,041,782 Receivables. net 13.392.448 3,935,759 2,356,470 6,892,959 Interest receivable 7.694 34,961 11.658 Due from others 28,081 Due from other funds 261,500 Inventories 32,981 170,483 Total current assets 16.704,808 16,413,887 7,710,602 7.520.785 Noncurrent assets: Restricted cash and cash equivalents 5,435,733 9,888,565 247,331 1,050,347 Restricted investments 5,017,600 12,590,121 572,230 Receivables, net 21,218.605 Restricted interest receivable 2.456 25,426 21,201 Deferred charges 3.344,444 407,251 Other assets 4,071 Advances to other funds Capital assets: Land 756,714 12,724,350 12,578,774 Construction in progress 9,488,738 45,999,985 5,227,618 Buildings 8,067,549 21,573,970 23,857,432 Improvements other than buildings 167,860,376 200,308,490 105,745,873 25,200 Machinery and equipment 48,790,387 19,405,223 15,856,542 Less accumulated depreciation (94.090.505} {77 ,889,617} (53.936.873~ {25,200} Total capital assets 140,873,259 222.122.401 109.329,366 Total noncurrent assets 154,673.492 244.630,584 110,170,128 22,676.203 Total Assets $ 171,378.300 261,044.471 117.880,730 30,196.988 See accompanying Notes to Basic Financial Statements. 44 Business-type Activities-Enterprise Funds Total Nonmajor Total Enterprise Proprietary Stormwater Funds Funds $ 938,663 5,826,657 23,973.942 227,378 1,509,702 5,753,546 705,599 2,226,503 29,509,738 7,264 29,257 90,834 1,091,079 1,119,160 261,500 467 557 671,021 1,878,904 11,150 755 61 379 741 22,394,882 4,990,434 44,007,292 22,785,586 10,306,990 51 ,272,527 21.218,605 23,277 28,282 100,642 3,751.695 4,071 1,023,705 1,023,705 115,669 5,500,647 31 ,676,154 43,053,522 9,493,563 113,263,426 64,580 41,756,630 95,320,161 8,158,852 91,972,033 574,070,824 2,766,404 43,677,838 130,496,394 {8,368,621} (100,941,974} (335,252,790) 45,790,406 91,458 737 609,574,169 90,994,151 107,808,148 730,952,706 $ 92,873,055 118,958,903 792,332,447 45 Internal Service Funds 2,554.816 618,869 309 9.381 13,148 1,512,586 4,709,109 2,803.882 18,994,420 150,686 45,603 65,343 1,632,378 1,608,618 313,341 8,178,213 {8,315, 760) 3,482,133 25.476,724 30,185,833 ) STATEMENT OF NET ASSETS PROPRIETARY FUNDS SEPTEMBER 30, 2004 Business-~~e Activities-Entererise Funds West Texas Municipal Power Electric Water Sewer Agency: (WTMPA~ LIABILITIES Current liabilities: Accounts payable $ 8,516,408 730,385 224,644 6,196,307 Accrued expenses 1,015,631 166,986 131,540 Accrued interest payable 602,093 700,818 122,246 129,608 Accrued insurance claims Due to other funds Customer deposits 969,689 24,715 Lease payable 1,525,000 235,259 Bonds payable 3,653,385 5,908,680 4,015,748 1,525,000 Total current liabilities 16,282,206 7,531,584 4,729,437 7,850,915 Noncurrent liabilities: Compensated absences 1,941,690 742,146 372,324 Deferred revenue Accrued insurance claims Landfill closure and post closure care Contracts/leases payable 18,679,792 422,232 Bonds payable 44,217,709 104,820,983 40,3291424 19,552,463 Total noncurrent liabilities 64,839,191 105,563,129 41,123,980 19,552,463 Total liabilities 81,121,397 113,094,713 45,853,417 27,403,378 NET ASSETS Invested in capital assets, net of related debt 76,855,904 125,395,032 65,684,404 Restricted for: Capital projects 6,394,802 8,476,392 Debt service 1,050,347 Other purposes Unrestricted 7,006,197 14,078,334 6,342,909 1,743,263 Total Net Assets $ 90,256,903 147,949,758 72,027,313 2,793.610 See accompanying Notes to Basic Financial Statements. 46 } Business-type Activities-Enterprise Funds Total Nonmajor Total Enterprise Proprietary Stormwater Funds Funds $ 54,385 1,157,219 16,879,348 471,617 405,685 2,191,459 56,399 1,611,164 711,500 711,500 6,122 1,000,526 387,183 2,147,442 1,281 ,550 887,355 17,271,718 1 807,552 3,611,463 41,813 157 71,659 626,968 3,754,787 29,353 29,353 3,051,116 3,051,116 348,533 19,450,557 71,801,015 11,360,594 292,082,188 71,872,674 15,416,564 318,366,001 73,680,226 19,028,027 360,181,158 5,504,853 82,376.213 355,816.406 12.383,463 11,396,278 38,650,935 1,050,347 1,304,513 6,158,385 36,633,601 I $ 19,192,829 99,930,876 432,151 ,289 47 Internal Service Funds 1,386,138 165,460 3,538,746 5,090,344 596,664 5,252,644 5,851,506 10,941,852 3,482,133 10,089,636 5,672,212 19,243,981 No Text CITY OF lUBBOCK, TEXAS RECONCiliATION OF THE STATEMENT OF NET ASSETS-PROPRIETARY FUNDS TO THE STATEMENT OF NET ASSETS SEPTEMBER 30, 2004 Total net assets-enterprise funds Amounts reported for business-type activities in the Statement of Net Assets are different because: Internal service funds {ISFs) are used by management to charge the costs of certain activities, such as insurance and telecommunications, to individual funds. The portion of assets and liabilities of the ISFs primarily serving enterprise funds are included in business-type activities in the Statement of Net Assets as follows: Net assets of business-type ISFs Amounts due to governmentallSFs for amounts overcharged Net assets of business-type activities See accompanying Notes to Basic Financial Statements. 49 $ 432.151,289 10,290,357 (18,240) $ 442,423,406 CITY OF LUBBOCK STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2004 Business·T~e:! Activities • Enter~rise Funds West Texas Municipal Power Electric Water Sewer Allene~ iWTMPA} OPERATING REVENUES Charges for services $ 103,864,178 32,222,280 18.203.020 48,966,215 Provision for bad debts !2.312,477! F38.125~ {301,780} Charges for services (net) 101,551,701 31,484.155 17.901.240 48.966,215 New taps and reconnects 423.738 Effluent water sales 754,970 Commodity sales 232,885 landing fees Parking Rentals Concessions Miscellaneous Total Operating Revenues 101.551,701 31,907,893 18,889,095 48,966,215 OPERATING EXPENSES Personal services 8,294,785 5.274,209 3,522,215 331,148 Supplies 456,933 1,021,166 642.948 Maintenance 2.756,885 2.019.918 1.095.564 320.000 Purchase of fuel and power 73,969,427 48,936,216 Collection expense 1,850,565 346,446 158.619 Other services and charges 3.758,830 6,138,536 4,070.608 1,685 Depreciation and amortization 9,033.112 5,958.903 5,075,034 133.274 Total Operating Expenses 98,269,972 22,263,297 14,752,815 49,880,942 Operating Income (Loss) 3.281.729 9,644,596 4,136.280 {914,727~ NON.QPERA TING REVENUES (EXPENSES) Interest income 129.257 588,435 88,789 1,006,104 Passenger facility charges/Federal grants Disposition of assets (240,692) 88.773 (8,481) (2,825,018} Miscellaneous 1.420,053 (137,795) (571,119) Pass-(hrough grant payments Interest expense on bonds l3.353,899l ~5.584,522} ~2.188,707} {1.062,316} Total non-operating revenues (expenses) ~2.045,281 ~ ~S.04S,109} !2.679,518} !2.881,2302 Income (loss) before contributions and transfers 1,236,448 4,599,487 1.456,762 (3,795,957) Capital contributions 1,849.662 2,642,778 3,203,482 Transfers in 1,777.956 6.891,766 6,235,864 356,922 Transfers (out) {3,150, 195} ~11 '172.003} {8.032.942} Change in net assets 1,713,871 2.962,028 2,863,166 (3.439,035) Total net assets· beginning of year 88,543,032 144,987,730 69,1641147 61232,645 Total net assets-ending $ 90,256,903 147,949,758 72,027,313 . 2,793,610 See accompanying Notes to Basic Financial Statements. 50 Business-Tll!e Activities· Ente!]!rise Funds Other Nonmajor Total Internal Enterprise Enterprise Service Stormwater Funds Funds Funds $ 6,131,806 14,835,148 224,222,649 35,943,622 (112.318} {439,776) {3.904,476! 6.019,490 14,395.372 220.318,173 35,943,622 423,738 754,970 232,885 749,037 749,037 1,065,638 1,065,838 1.696,683 1,696,683 1,114,712 1,114,712 139,451 139,451 175,459 6,019,490 19.161.093 226,495,487 36,119,081 645,260 9,643,788 27,711,405 5,272,295 1,599,917 3,720.964 6,852,554 148,564 2,647,316 8.988.247 1,473.732 122.905.643 295,069 292,217 2,942.916 49,413 4,398,830 18.417,902 23,122,204 553,592 13,291,441 34.045,356 602,494 1,691,898 31,873,509 218.732.433 37.323,279 4,327.592 {12,712.416) 7,763,054 (1,204, 196) 594,120 320,356 2,727,061 544,554 6.738,797 6.738,797 • (981,284} (3,966,702) (7,434) {307,464) (334,780) 68,895 12,584 (1,568.721} {1.568.721 I (3.658,830) (424,539) !16,272.813) (3,372, 174) 3,749,829 {12,273,483) 549 704 955,418 (8,962,567) (4,510,429) {654,494) 1,573,384 9,269,306 4,307,251 1,874,760 21,444,519 225,916 {4,618,513) {4,216,115) {31,189,768) 644,156 (9,730,558) (4,986,372) (428,578) 18.548,673 109,661,434 437,137 661 19672 559 $ 19,192.829 99,930,876 432,151,289 19,243,981 51 No Text CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS OF PROPRIETARY FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30,2004 Net change in fund net assets -total enterprise funds Amounts reported for business-type activities in the statement of activities are different because: Internal service funds (ISFs) are used by management to charge the costs of certain activities such as fleet services. central warehousing activities, management information activities, etc. to individual funds. The net revenue (expense) of certain ISFs is reported with business-type activities. Change in net assets of business-type activities See accompanying Notes to Basic Financial Statements. 53 $ (4,986,372) (334,56 1) $ (5,320,933) CITY OF LUBBOCK, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2004 Business· T;t!!! AcUvitles • Ente~rise Funds West Texas Municipal Power Electric Water Sewer Agenc;t ~MPA} CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 101,626,637 32,863,422 19,074,799 47,218.295 Payments to suppliers (78,396,377) (11,220.827) (8,259,433) (47,864,595) Paymenl.s to employees (7,891.004) (5., 17 .293) (3,401.569) Other receipts (Pltyments} 1.179,361 {49.0221 j579,600l Net cash provided (used} by operaling aclillities 16,518.617 16,476.280 8.8~.197 (6<16,300) CASH FLOWS FROM NONCAPITAL AND RELATED FINANCING ACTMTIES Trat>Sfers in trom other funds 1,7n.956 6,891,766 8,235.864 356,922 Trans~ out to other funds (3,150,195) (11.172.0()3) {6,()32.942) Sl\ott·tenn intesfund bocrowings 3.678,500 5,909 Advances from (to) olher fund$ Operating grants Peymenls receivedl(made} on advances {lo)/from oti'ler funds (4,64<1,865! Net eash provided (used) by noncapilal and related financing aetivilies {6,017,104} (601.737! jt,791,169) 356.922 CASH FLOWS FROM CAPITAL AND RELA TEO FINANCING ACTIVITIES Purchases of capital assets (12.307,612) (11,663,809) (5,551,770} Sale of capital aa.ets 2,646,037 110.281 201.939 22,810,000 RecelpiS(payments) on teases (174,165} 2,580,495 Payments for bond issuance cos1s (30,085) Principal paid on revenue bonds (4,413,300) (1.464,741) (1 .525,000) lnlerest paid on revenue bends (3,353,899) (2,233,809) (1,070,799) Principal paid on general obligation bonds and Olher debt (4.838,31 B) (3.654.354) lnteres1 paid on gen.eral obligalico bonds {3,391.605) (2.345,232) Issuance of revenue. G.O. bends, and capotaf leases 647,923 (22.810,000) Passenger facility cnargesJcapitaf grants Contributed capite! 1,849,662 Net cash provided (used} for capital and relsted 2,872,324 3.090,696 financing a..Wities (15,609,19!1 (20,181.7542 (8,432,886! (15,304} CASH FLOWS FROM INVESTING ACTIVITIES Proceecls from $8les and maturitie$ of investmeniS 932.430 10.2 19.927 2.665.663 Purchase of investments (6.588.009) (5.794.121) (626.508) Interest eamings on cash end investme n1s 52,369 571,337 86,012 17.005 Net cash provided by (used for) investing ectivities {5,603,210) 4,997,143 2,125,167 17.005 Net increue (dec:rease) in cash and cash equivalenta (1 0,71 0,894) 709,932 735.309 (287.677) Cash and cash equivalents • beginning of year 18,780.333 18,825.031 3 812.714 1.965,850 Ca~l\ and cash equivalents • end of year 8,069,439 19t534,963 4 548,023 1.676173 Reconciliation ol operating income (loss) to net cash provided (used) by operating actlvitles: Operating income poss) 3,281,729 9,644,596 4,136,280 (914,727) Ad,illslrnents to reconcile opeating income (loas) to net cash pniVided {u~ed) by operating activities: Depreciation and amol1izallon 9,033,112 5,&58,903 5,075,034 117,994 Other income (expense) 1,, 78.361 (49,022) (579,600) Change In cum~nt assets anel llatlillltes: A«:cunts receivable 74,936 955.547 185,704 (1.589,301) lnventOI}' 4,000 (53,333) Prepaid expei\Se3 oue rtom other governments 18.286 Accounts payable 1,876,018 (172.499) (82.105) 1,72<1,455 Dlher accrued expenses Z62,470 27,350 54,an 15.279 Customer deposits 644,570 24,715 Increase (decrease) in compensated absences 162.421 121.737 44 012 Net cash provided (used) by operating activities 16.518,617 18,478,280 8,834,197 j646,300) Supplemental cash now infomnatlon: NoncaSh capital Improvements and o1her <:toanges $ 20,204.792 96 133 112 786 See accompanying Noles to Basic Financial Statements. 54 CITY OF LUBBOCK, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY AMOS FOR THE YEAR ENOEO SEPTEMBER 30, 2.004 Butln""'Tl!l!• Activities· Ente!:J!!! .. Funda Othet Honmajor Intimal Enterprise s.rnee Stonnwat.et Funds Totlolt Fund8 CASH FLOWS FROM OPERATING ACnvrt1ES ReceiptS 11om customers $ 6,047,n9 20,044,130 226,875,062 36.000.252 Payme11ts to suppliers (510.507) (8,079,833) (152.331,512) (31,042,&46) Payments to employees (870,1at) (8,616,018) {2e.G98,073) (5.108,035) Olher receipts (payments) {307,46-4) (1,250,351! (1,007,07111 19348 Net c:ash provided (used} by operating activities 4,551,611 1,097,92& -46,840,341 {131,081) CASH FLOWS FROM NONCAPITAL AHD RELATED F1N.ANCING ACTMTIES T tanahlnl in rrom 01t1er funds 4,307,251 1,874,760 21,44-4,519 225,918 ·T tan lifers out to 01tlflf funds (4,6\11,513) (4,216, 115) (31 '1 89, 768) Short-Cerm interfund boiTOWings (644,181) 3,040,228 1,611 Advances rrom (to) other funds (1,03&,740) (1,038,7-40) ~ngg101nt.s 3,788.07'3 3,71111,073 Payments recaivedl(made) on adVanc:ea {to)lfrgm other funds Net cash provided (used) by IIOI'ICIIpltal 1,045,135 ~.599,730) and related financing activitiell ~11,262! 790932 {!,573,418) r21,527 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVIllES Purdlaaes ot capital a.ssetll (3,.C.C7,008) (3,928,747) (38,89U46) (823,-430) S.le ot atpital assets 225,16-4 25,91n,.C21 R-=eipta{pa)oment.s) on leases 2.-408,330 Paym.ents lor bond issuanoe c:osb (373,851) (403,936) Principal paid on revenue bond• (546,551) {7 ,9-49,5112) Interest paid on revenue bonds (3,658,830) (10,317,337} Principal paid on gl!fleral obSgation bonds ~ olher debt (762,349} (9,255,021) lnlllrest paid on geoetal obfigation banda (430,980) («1,167,817) INuanc:e or revenue, G.O. bonds, and capital t.ases {22,162,Dn) Pas.senger facility ehargeatcapital grants 1,402,003 1.-402,003 Contrlbu1sd capital 1.573 3&4 9,18&,066 Net cash provided (used) for capital and nllated financing activities {!,652,389)' {2,295,376~ (54,186,806) {8231-430! CASH FLOWS FROM INVESnNG ACTIVmES Proceeds fRim salea and matvrities ot lnveltmanb 1,3e0,7S7 7,275,615 rJ..-454,392 6,59-4,329 Pun:hase Of investments 332,322 (4,&48,301) (17,324,617) (5.081,927) Interest earnings on cash and investments 569120 291 746 1.587.589 511.156 Net cnh provided by (used~ invuting lldMiies Net Increase (dectease) in cash 2,26~ 199 2.91&,060 6,717,364 2,043.558 and cash equivalenls (1,1-41,833) 2,512,544 (8,162,6 t 9) 1,316,57-4 Caah and cash equivalents • beginning ot year 24,.C75,37e 8,304,547 76,183,853 4,042.12-4 Ceah end <:ash equivalents -encf or year 23,333.545 10,&17,091 67,981¢!1 5,358,898 ReeonciUaliofl of operating Income (loss) to net cute prvvlded (U141d) by Opel'lltlng KtlYffJH: Operating income (loss) -4,327,592 Adjustments to reconcile operating Income (lou) (12.712.418) 7,763,054 {1 ,204,198) lo net ouh provided (used} by openlting ldlvtlies: De~ and amortizalion 553,582 13,291,-4o41 3-4,0$0,076 802,494 Other Income (elQiense) (307,-464) Ctlange in cunem assets and nbilities: (1,34-4,022) (1,100.747) 19.348 Accounts tec:eiv:able 28,289 863.037 538.212 {118,829) lnvenloly (41.924) (91.257) (11-4,330) Prepaid expenses 12,097 12.097 Due hom other governments (19-4.307) (178,021) Accounts payable (11,800) 51-4,153 3,&48,222 -450,968 Other -=ued expenset (35,352) 130.882 -455,301 Customer deposits 150 ll88,435 -470,655 lncruse (decrease) in compensatad eb~ 4782 559037 891,989 ~,18!,! Net ca&h provided (used) by operating activities 4,559,619 1,097.928 <48,~0,341 {131,081! Supplemental cult flow Information: Noncash capital improvemenls and olher changea $ 21477 20.435,188 Sae accompanying Notes to Basic Financial Sllllementa .• 55 ASSETS CITY OF LUBBOCK, TEXAS STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS SEPTEMBER 30, 2004 Cash and cash equivalents $ Investments. at fair value: Pools Total assets LIABILITIES Accounts payable Total liabilities $ See accompanying Notes to Basic Financial Statements. 56 Agency Fund 1,099 73 1,172 1,172 1,172 CITY OF LUBBOC~ TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The llasic Financial Statements (BFS) of the City of Lubbock, Texas {City) have been prepared in conformity with Accounting Principles Generally Accepted in the United States of America (GAAP) as applied to government units, including specialized industry practices as specified in the American Institute of Certified Public Accountants audit and accounting guide titled Audits of State and Local Governmental Units (GASB 34 Edition). The Governmental Accounting Standards Board (GASB) is the acknowledged standard-setting body for establishing governmental accounting nnd financial reporting principles. With respect to proprictal)' activiti~s related to business-type activities and enterprise funds, including component units, the City applies all applicable GASB pronouncements as well as Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions and Accounting Research Bulletins of the Commiuce on Accounting J>rocedure, issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The more significant accounting policies are described below. A. REPORTING ENTITY The City is a municipal corporation governed by a Council-Manager form of government. The City, incorporated in 1909, is located in the northwestern part ofthc state. The City currently occupies a land area of 115 square miles and serves a population exceeding 206,000. The City is empowered to levy a property tax on both real and personal properties located within its boundaries. It is al$0 empowered by state statute to extend its corporate limits by annexation, which occurs periodically when deemed appropriate by the city council. The City provides a full range of services, including police and fire protection; recreational activities and cultural events; construction and maintenance of highways, streets, and other infrastructure; and sanitation services. The City also provides utilities for electricity, water. sewer, and stormwater as well as a public transportation system. The BFS present the City and its component units and include all activities, organizations, and functions for which the City is considered to be financially accountable. The criteria considered in determining activities· to be reported within the City's BFS are based upon and consistent with those set forth in the Codification of Governmental Accounting Standards. Section 2100, "Defining the Firumcial Reporting Enlity." The criteria include whether: • The organization is legally separate (can sue and be sued in its own name), • The City holds che corporate powers of the organization, • The City appoints a voting majority of the organization's board, • The City is able to impose its will on the organization, • The organization has the potential to impose a financial benefit or burden on the City, or • There is fiscal dependency by the organization on the City. As required by GAAP, the BPS present the reporting entity which consists of the City (the primaJY government), organizations for which the City is financially accountable, and other organizations for which the nature and significance of their relationship with the City are such that exclusion could cause the City's BFS to be misleading or incomplete. BLENDED COMPONENT UNITS The Urban Renewal Agency (URA) has been included in the City's financial reporting entity within the primary government using the blended method because, although it is legally separate, its operations are so intertwined with the City that it is, in substance, a part of the City. The URA was formed to provide urban renewal services including rehabilitation of housing, acquisition of housing, and disposition of land. The URA Board is composed of nine members appointed by the Mayor with the consent of the City Council, and acts only in an advisory capacity to the City Council. All powers to govern the URA are held by the City Council. There are no separate financial statements available for the URA. 57 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. REPORTING £NTITY (CONTINUED) West Texas Municipal Power Agency (WTMPA) is a legally separate municipal corporation, a political subdivision of Texas. and body politic and corporate. formed in 1983, governed by a Board of eight directors who serve without compensation. WTMPA has no employees and instead contracts with the City for general operations. WTMPA may engage in the business of generation, transmission, sale, and exchange of electric energy to the four participating public entities: Lubbock, Tulia, Brownfield, and Floydada. WTMPA may also participate in power pooling and power exchange agreements with other entities. WTMPA provides electricity to its four member cities with the City having an 88.5% interest in its operations. Each mc:mber city appoints two members to the WTMI'A board, however an affirmative vote of the "majority in interest" is required to approve the operating budget, approve capital projects, approve debt issuance, and approve any amendments to WTMPA rules and regulations. The City maintains the ''majority in interest" vote based on Kilowatt purchases, and consequently has majority voting control. As the City purchases approximately 88.5% of the electricity brokered, WTMPA provides services almost exclusively to the City and is therefore presented as a blended enterprise fund. Their separate audited financial statements may be obtained through the City. DISCRETELY PRESENTED COMPONENT UNITS The financial data for the Component Units are shown in the Government-Wide Financial Statements. They are reported in a separate column to emphasize that they are legally separate from the City. The following Component Units are included in the reporting entity because the primary government is financially accountable, is able to impose its will on the organization, or can significantly influence operations and/or activities of the organization. Civic Lubbock, Inc. is a legally separate entity that was organized to foster and promote the presentation of wholesome educational, cultural, and entertainment programs for the general moral, intellectual, physical improvement. and welfare of the citizens of Lubbock and its surrounding area. The seven-member board· is appointed by the City Council. City Council approves the annual budget. Separate financial statements for Civic Lubbock may be obtained from them at I SOl 6'h Street, Lubbock, Texas. Market Lubbock E<onomic Development Corporation, dba Market Lubbock, is a legally separate entity that was formed on October 10, 1995 by the City Council to create, manage, operate, and supervise programs and activities to promote, assist, and enhance economic development within and around the City. The City Council appoints the seven-member board and its operations are funded primarily through budgeted allocations of the City's property and hotel occupancy taxes. Separate financial statements may be obtained from Market Lubbock at 1301 Broadway, Suite 200. Lubbock, Texas. 58 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. REPORTING ENTITY <CONTINUED) RELATED ORGANIZATIONS The City Council is responsible for appointing the members of the boards of other organizations but the City's accountability for these organizations does not extend beyond making board appointments. The City Council is not able to impose its will on these entities and there is no financial benefit or burden relationship. Bonds issued by these organizations do not constilule indt:btednes~ of the City. The following Related Organizations are not included in the reporting entity: The Housing Authority of the City of Lubbock (Authority) is a legally separate entity. The Mayor appoints the five-member board. The Lubbock Health Facilities Development Corporation promotes health facilities development. City Council appoints the seven-member board. The Lubbock Housing Finance Corporation, Inc:. was formed pursuant to the Texas Housing Finance Corporation Act, to finance the cost of decent, safe, and affordable residential housing. The Mayor appoints the seven-member board. North & East Lubbock Community Development Corpor11tion (CDC) was formed from the recommendation of the mayor's commission formed in May 2002 to examine the condition of North & East Lubbock. Incorporated in February 2004, the CDC began work to effectuate change in North and East Lubbock. The North & East Lubbock Community Development Corporation is a local entity that drives social change; promotes autonomy and empowerment by increasing the supply of quality and affordable housing, generating economic activity, and coordinating the efficient delivery of social services. The City Council appoints two members of an eleven-member board. The City Council is not able to impose its will on the entity and there is no financial benefit/burden relationship. The Lubbock Education Facilities Authority, Inc. is a non-profit corporation and instrumentality of the City and was created pursuant to the Higher Education Authority Act, Chapter 53 Texas Education Code for the purpose of aiding institutions of higher education, secondary school, and primary schools in providing educational facilities, housing facilities. The seven-member Board is appointed by the City Council. The Lubboc k Firemct~'s Retirement and Relief Fund (Pension Trust Fund) operates under provisions of the Firemen's Relief and Retirement Laws of the State of Te:xas for purposes of providing retirement benefits for the City's firefighters. The Mayor's designee, the Cash & Debt Manager, three firefighters elected by members of the Pension Trust Fund and two at-large members elected by the Board, govern its affairs. It is funded by contributions from the firefighters and City matching contributions. As provided by enabling legislation, the City's responsibility to the Pension Trust Fund is limited to matching monthly contributions made by the members. Title to assets is vested in the Pension Trust Fund and not in the City. The State Firemen's Pension Commission is the governing body over the Pension Trust Fund and the City cannot significantly influence its operations. Their separate audited financial statements may be obtained through the City. 59 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 8. GOVERNMENT -WIDE AND FUNO FINANCIAL STATEMENTS The City's financial $talcments arc prepared using the reporting model specified in GASB Statement No. 34 - Basic Financial Statements -and Management 's Discussion and AMiysis ·for State and Local Governmenls, GASR Statement No. 37 -Basic Financial SLatements -and Management's Discussion and Analysis -For State and Local Governments -Omnibus, GASB Statement No. 38 -Certain Financial Statements Note Disclosures. and GASB Interpretation No. 6 -Recognition and Measuremtnt of Certain Liabilities and Expenditures in Governmental Fund Financial Statements. As specified by Statement No. 34. the Basic Financial Statements (BFS) include both Government-Wide and Fund Financial Statements. The Government-Wide Financial Statements (G WFS) (i.e., the Statement of Net Assets and the Statement of Activities) report information on all of the non-fiduciary activities of the City and its blended component units as a whole. The discretely presented component units are also aggregately presented within these statements. The effect of interfund activity has been removed from these statements by allocation of the activities of the various internal service funds to the governmental and business-type activities on a fund basis based on the predominant users of the services. Governmental activities, which are primarily supportt(j by taxes and intergovernmental revenues, are reportt(j separately from business-type activities, which rely to a significant extent on fees and charges for support. All activities, both governmental and business-type, are reported in the GWFS using the economic resources measurement focus and the accrual basis of accounting, which includes long-teml assets and receivables as well as long-term debt and obligations. The GWFS focus more on the sustainability of the City as an entity and the change in aggregate financial position resulting from the activities of the fiscal period. The Government-Wide Statement of Net Assets reports all financial and capital resources of the City, excluding those reported in the tiduciary fund. It is displayed in the format of assets less liabilities equals net assets, with the assets and liabilities shown in order of their relative liquidity. Net assets are required to be displayed in three components: (I) invested in capital assets net of related debt, (2) restricted, and (3) unrestricted. Jnvestt(j in capital assets net of related debt equals capital assets net of accumulated depreciation and reduced by outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted net assets are those with constraints placed on their use by either: (I) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or (2) imposed by law through constitutional provisions or enabling legislation. All net assets not otherwise classified as invested in capital assets net of related debt or restricted, are shown as unrestricted. Reservations or designations of net assets imposed by the City, whether by administrative policy or legislative actions of the City Council that does not otherwise meet the definition of restricted net assets, are not shown in the GWFS. The Government-Wide Statement of Activities demonstrates the degree to which the direct expenses for a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include, (I} charges to customers or applicants who purchase, use. or directly benefit from goods, servi~, or privileges provided by a given function or segment; and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. The general revenues support the net costs of the functions and segments not covered by program revenues. Also part of the BFS are Fund Financial Statements (F'FS) for governmental funds, proprietary funds, and the fiduciary fund. even though the latter is excluded from the GWFS. The focus of the FFS is on major funds, as defined by GASB Statement No. 34. Although GASB Statement No. 34 sets fol1h minimum criteria for determination of major funds, i'.e .• a percentage of assets, liabilities, revenue, or expenditures/expenses of fund category and of the governmental and enterprise funds combined. It also gives governments the option of displaying other funds as major funds. The City can elect to add some funds as major funds because of outstanding debt or community focus. Major individual governmental funds and JJUijor individual enterprise funds are reported as separate columns in the FFS. Other non-major funds are combined in a single column in the appropriate FFS. 60 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION Fund Financial Statements The GWFS arc reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary FFS. The City's fiduciary FFS includes only an agency fund that uses the accrual basis of accounting. However, because agency funds report only assets and liabilities, this fund does not have a measurement focus. Revenues are recorded when earnc:d and eKpenses are recorded when a liability is intuiTed. regardless of the timing of related cash flows. Property taxes are recogni:t1.."<l as revenues in the year for which they are levied. Grants and similor items are recognized as revenue as soon as all eligibility requirementS have been met. Be,ause the enterprise funds an: combined into a single business·type activities column on the GWFS, certain interfund activities between these funds are eliminated in the consolidation for the GWFS, but are included in the fund columns in the proprietary FFS. The effect ofinter·fund activity has been eliminated from the GWFS. Exceptions to this general rule are payments-in-lieu of taxes and other charges between the City's electric, water and sewer functions and various other functions of the government. Elimination of these charges would distort ,. the direct costs and program revenues reported for the various functions concerned. for instance, 88.5% of the operations of WTMPA representing transactions between WTMPA and Lubbock Power & Light have been eliminated for the GWFS presentation and Cor the c:lectric BT A. Governmental FFS are reported using the current financial resources measurement focus and the modified accrual basis of accounting. This is the traditional basis of accounting for governmental funds. This presentation is necessary, (I) to demonstrate legal and covenant compliance, (2) to demonstrate the sources and uses of liquid resources. and (3) to demonstrate how the City's actual revenues and expenditures conform to the annual budget. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available, generally, if they are collected within 45 days of the end of the current liscal period, with the exception of sales taxes which are considered to be available if they are collected within 60 days of year end. The City considers the grant availability period to be one year for revenue recognition. Expenditures generally are recorded when a liability is incurred, as under accrual ~ounting. However. debt service expenditures. as well as expenditures related to compensated absences, and claims and judgments are recorded only when the liability has matured. Because the governmental FFS are presented on a different basis of accounting than the GWFS, a reconciliation is provided immediately following each fund statement. These reconciliations explain the adjustmentS necessary to convert the FFS into the governmental activities column of the GWFS. Property taxes, sales taxes, franchise taxes, occupancy taxes, grants, licenses, court tines, and interest associated with the current fiscal period are all considered to be susceptible to accrual and have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the cuJTCnt fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered to be measurable and available only when the City receives cash. Fund Accounting The City uses funds to report its financial position and the results of its operations. Fund accounting segregates funds according to their intended purpose and is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain governmental functions or activities. A fund ·is a separate accounting entity with a self·balancing set of accounts. which includes assets, liabilities. fond balance/net assets, revenues and expenditures/expenses. Governmental funds are those through which most of the governmental functions of the City are financed. The City reportS two major governmental funds: The General Fund. The General Fund as the City's primary operating fund accounts for all financial resources of the general government, except those required to be accounted for in another fund. The Debt Service Fund is used to account for the accumulation of resources for, and the payment of, general long· term obligation principal and interest (other than debt service payments made by proprietary funds). 61 CITY OF LUBBOCK. TEXAS Notes to Basic Financial Statements Septe~ber30.2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION <CONTINUED) Enterprise Funds are used to account for operations, (I} that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be fin8llccd or recovered through user charges; or (2) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. The City reports the following major enterpdse funds: The Electric Fund accounts for the activities of Lubbock Power & Light (LP&L). the City·owned electric production and distribution system. The Water Fund accounts for the activities of the City's water system. The Sewer Fund accountS for the activities of the City's sanitary sewer system. The West Texas Municipal Power Agency (WTMPA) Fund accounts for the activities of power generation and power brokering to member cities. Member cities include Lubbock with 88.5% ownership, and Tulia, Brownfield, and Floydada comprising the remaining 11.5% ownership. The Stormwater Fund accounts for the activities of the stormwater utility, which provides stormwater drainage for the City. The City reports the following non-major funds: Governmental Funds Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than special assessmentS or major capital projects) that are legally restricted to expenditures for specified purposes. Capital Projects Funds are used to account for financial resources to be used for the acquisition or construction of major capital improvements (other than those recorded in the proprietary funds). The Permanent Fund is used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purpose of perpetual care for the cemetery grounds. Proprietary Funds distinguish operating revenues and expenses from non·operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's enterprise funds and of the City's internal service funds are charges to customers for sales and services. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assetS. All revenues 8lld expenses not meeting this definition are reported as non-operating revenues and expenses. Internal Service Funds are used to account for services provided to other departments, agencies of the departmentS or to other governments on a cost reimbursement basis (i.e., fleet maintenance, central warehouse, print shop, self-insurance, etc.). Enterprise Funds are used to account for services to outSide users where the full cost of providing services. including capital, is to be recovered through fees and charges, e.g., Lubbock Preston Smith International Airport (airport fund), Citibus. and the solid waste fund. Fiduciary Funds include an Agency Fund that is used to account for assetS held by the City as an agent for private organizations. 62 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES D. BUDGETARY ACCOUNTING The City Manager submits a proposed operating budget and capital improvement plan to the City Council annually for the upcoming fiscal year. Public hearings are conducted to obtain taxpayer comments, and the budget is legally enacted through passage of an ordinance by City Council. City Council action is also required for the approval of any supplemental appropriations. All budget amounts presented in the budget comparison statement reflect the original budget and the amended budget, which have been adjusted for legally authorized supplemental appropriations to the annual budgets during the fiscal year. The operating budget is adopted on a basis consistent with GAAP for the General Fund. Budgetary control is maintained at the department level in the following expenditure categories: personnel servi~s. supplies, other charges, and capital outlay. Management may make administrative transfers and increases or decreases in accounts within categories, as long as expenditures do not exceed budgeted appropriations at the fund level, the legal level of control. All annual operating appropriations lapse at the end of the fiscal year. Capital budgets do not lapse at fiscal year end but remain in effect until the project is completed and closed. In addition to the tax levy for general operations. in accordance with State law, the City Council sets an ad valorem tax levy for a sinking fund (General Obligation Debt Service) which, with cash and investments in the fund, is sufficient to pay all debt service due during the fiscal year. E. ENCUMBRANCES At the end of the f1scal year, encumbrances for goods and services that have not been received are canceled. At the beginning of the next fiscal year, management reviews all open encumbrances. During the budget revision process. encumbrances may be re-established. On October I, 2004, the General Fund had no significant amounts of open encumbrances. F. ASSETS. LIABILITIES AND FUND BALANCE/NET ASSETS Equity in Pooled Cash and Investments -The City pools the resources of the various funds in order to facilitate the management of cash and enhance investment earnings. Records are maintained which reflect each fund's equity in the pooled account. The City's investments are stated at fair value, except for repurchase agreements with maturities, when purchased, of one year or less. Fair value is based on quoted market prices as of the valuation date. Cash Equivalents -Cash equivalents are defined as short·tecm highly liquid investments that are readily convertible to known amounts of ca.~h and have original maturities of three months or less when purchased which present an insignificant risk of changes in value bc:Quse of changes in interest rates. Property Tax Receivable • The value of all real and business property located in the City is assessed annually on January I in conformity with Subtitle E of the Texas Property Code. Property taxes are levied on October I on those assessed values and the taxes are due on receipt of the tax bill. On the following January I, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. The taxes are considered delinquent if not paid before February I. Therefore, at fiscal year end all property taxes receivable are delinquent, but are secured by a tax lien. At the GWFS level property tax revenue is recognized upon levy. In governmental funds, the City records property taxes receivable upon levy and defers tax revenue until the taxes are collected or available. For each fiscal year, the City recognizes revenue in the amount of taxes collected during the year plus an estimate of taxes lo be collected in the subsequent 45 days. The City allocates property tax revenue between the General, certain Special Revenue, and Debt Service funds based on tax rates adopted for the year of levy. The Lubbock Central Appraisal District assesses property values, bills, collects, and remits the property taxes to the City. The City adjusts the allowance for uncollectible taxes and deferred tax revenue at fiscal year end based upon historical collection experience. To write off property taxes re~ivable, the City eliminateS the receivable and reduces the allowance for uncollectible aocounts. Enterprise Funds Receivables • Within the Electric, Water, Sewer, and WTMPA Enterprise Funds, services rendered but not billed as of the close of the fiscal year are a~rued and this amount is reflected in the accounts receivable balances of each fund. Amounts billed are reflected as accounts receivable net of an a.Jiowan~ for uncollectible ae<:ounts. 63 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES F. ASSETS, LIABILITIES, AND FUND BALANCE/NET ASSETS (CONTINUED) Inventories -Inventories consist of expendable supplies held for consumption. Inventories are valued at cost using the average co!:t method of valuation, and arc accounted for using the consumption method of accounting. i.e .. inventory is expensed when used rather than when purchased. Prepaid Items-Prepaid items are accounted for under the con.sumption method. Restricted Assets -Ccnain enterprise fund and governmental activities assets are restricted for construction; consequently, net assets have been restricted for these amounts. The excess of other restricted assets over related liabil itics are included as restricted net assets for capital projects, rate stabilization, economic development. and bond indentures. Mortgage R~eivables -Mortgage receivables consist of loans made to Lubbock residents under the City's Community Development Joan program. These loans were originally funded primarily through grants received from the U.S. Department of Housing and Urban Development. Capital Assets and Depreciation -Capital assets, including public domain infrastructure (streets, bridges, sidewalks and other assets that are immovable and of value only to the City) are defined as assets with an initial, individual cost of more than $5,000 and an estimated useful life in cltcess of one year. These capital assets are reponed in the GWFS and the proprietary FFS. Capital assets are recorded at cost or estimated historical cost if purchased or constructed. Donated assets are recorded at the estimated fair value on the date of donation. Major outlays for capital assets and improvements are capitalized as the projects are constructed. The cost of nonnal maintenance and repairs that do not add to the value of the asset or materially extend the asset lives are not capitalized. Major improvements are capitalized and depreciated over the remaining useful lives of the related capital assets. Depreciation is computed using the straight-line method over the estimated useful lives as follows: In frastructurtllm provemcn IS Buildings Equipment Water nghts 10·50 years IS-50 years 3-ts years 85 years Interest Capitalization -Because the City issues general·purpose capital improvement bonds, which are recorded within the proprietary funds, the City capitalizes interest costs for business-type activities and enterprise funds according to the financial Accounting Standards Board (FASB) Statement No. 34 Capitalization of Interest Cost and FASB Statement No. 62 Capitalization of Interest Co:rt:r. The City capitalized interest of approximately $457,000, net of interest earned, for the busin~type activities and the enterprise funds during the current fiscal year. Advances to Other Funds · Amounts owed to one fund by another that are not due within one year arc recorded as advances to other funds. Use of Estimates -The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses/expenditures during the reporting period. Actual results could differ from those estimates. 64 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES G. REVENUES, EXPENSES AND EXPENDITURES Interest Income on pooled cash and investments is allocated monthly hased on the percentage of a fund"s six· month rolling average monthly balance in pooled cash and investments to the total citywide six-month rolling average mo nthly balance in pooled cash and investments, except for certain Fiduciary Funds. certain Special Revenue Funds, Capital Project Funds, and certain Internal Service Funds. The interest income on pooled cash and investments of these funds is reported in the General Fund or the Debt Service Fund. Sales Tax Revenue for the City n:suhs from an alhx:ation of 1.125% of the total sales tax levy of 7.875%, which is collected by the State of Texas and remitted to the City monthly. The tax is collected by the vendor and is required to be remitted 10 the State by the 20th of the month following collection. The tax is then paid to the City by the IOih of the next month. Grant Revenut from federal and state grantS is recognized as revenue as soon as all eligibilily requirements have been met. The availability period for grants is considered to be one year. Inter-fund Transactions are accounted for as revenues, expenditures, expenses, or other financing sources or uses. Tr.msactions that constitute reimbursements to a fund for expenditures/expenses initially made from tllat fund that are properly applicable to another fund, are recorded as expenditures/expenses in the reimbursing fund and as reductions of expenditures/expenses in the fund that is reimbursed. In addition, transfers are made between funds to shift resources from a fund legally authorized 10 receive revenue to a fund authorized to expend the revenue. Compensated Absences consists of vacation leave and sick leave. Vacation leave of I 0-20 days is granted to all regular employees dependent upon the date employed, years of service, and civil service status. Currently, up to 40 hours of vacation leave may be "carried over" to the next calendar year. The City is obligated to make payment upon retirement or termination for any available, unused vacation leave. Sick leave for employees is accrued at 1-Y. days per month with a maximum accrual status of 200 days. After 15 years of continuous fu ll time service for non-civil service personnel, vested sick leave is paid on retirement or termination at the current hourly rate for up to 90 days. Upon retirement or termination, Civil Service Personnel (Police) are paid for up to 90 days accrued sick leave after one year of employment. Civil Service Personnel (Firefighters) are paid for up to I 35 days of accrued sick leave upon retirement or termination. The Texas Civil Service laws dictate certain benefits and personnel policies above and beyond those policies of the City. The liability for the accumulated vacation and sick leave is recorded in the GWFS and in the FFS for proprietary fund employees when earned. The liability is recorded in the governmental FFS to the extent it is due and payable. ·Post Employm11nt Benefits for retirees of the City of Lubbock include the option to purchase health and life insurance benefits at their own expense. Amounts to cover premiums and administrative costs, with an incremental charge for reserve funding, are determined by the City's health care administrator. Employer contributions are funded on a pay-as-you-go basis and approximated $1.3 million for fiscal 2004. These contributions are included in the amount of insurance ex.pense reflected in the financial activity reported in the Health Insurance Internal Service Fund. 6S CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30~ 2004 NOTE II. STEWARDSHIP, COMPLIANCE AND ACCOUNT ABILITY A. NET ASSET/FUND BALANCE DEFICITS The deficit of $76,784 in the General Capital Projects Fund is due to timing differences of incurring capital outlay expenditures for an internally financed project. The fund balance should be positive by the end of fiscal year 2004/2005 with the final internal payback from the Special Revenue Funds. The deficit of $6,700 in the Investment Pool Internal Service Fund is the result of not recovering actual cost with the allocation of interest earnings to this fund. This also represents a timing difference. The deficit of $1,864.119 in Market Lubbock Inc. (MLI) is due to long·tenn commitment$ for incentive and special project contracts and tentative open convention offers. MLI management expects future receipts of funding from the City of Lubbock to pay these long-tenn commitments. No other funds of the City had deficits in either total fund balances or total net assets. NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS A. POOLED CASH AND INVESTMENTS The City's investment polices are governed by State statute and City ordinances. The following are authorized investments for the City and all are authorized and further defined by the Public Funds Investment Act (Chapter 2256) ("PFIA"): • Obligations of the United States or its agencies and instrumentalities, which have a liquid market with a readily detenninable market value. • Direct obligations of this state or its agencies and instrumentalities. • Otller obligations, tile principal and interest of which are unconditionally guaranteed or insured by, or backed by tile full faith and credit of, this state or the United States or their respective agencies and instrumentalities. · • Obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating finn not less than A or its equivalent. • Fully collateralized certificates of deposit issued by a state or national bank doing business in Texas and guaranteed, or insured by the Federal Deposit Insurance Corporation or its successor, secured by obligations authorized by this subchapter, or secured in any other manner and amount provided by law for deposits of the investing entity. • Fully collateralized repurchase agreements with a defined tennination date; and secu~ by obligations authorized by the Act; such collateral pledged to the City, held in the City's name, and deposited at the time the investment is made with the City or with an independent third Plll1Y selected and approved by the City. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Resetve. or a bank doing business in this state. The tenn of any reverse repurchase agreements may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the City under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the tenn of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement. • Bankers' acceptances with a stated maturity of 270 days or fewer from the date of its issuance: and liquidated in full at maturity; and eligible for collateral for bonowing from a f-ederal Reserve Bank; and accepted by a bank organized and existing under the laws of the United States or any state, if the short-tenn obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less than A-I or P·l or an equivalent rating by at least one nationally recognized credit rating agency. • Commercial paper with a stated maturity of270 days or fewer from the date of its issuance, and rated not less than A-I or P-1 or an equivalent rating by at least two nationally recognized credit rating agencies. 66 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS A. POOLED CASH AND INVESTMENTS (CONTINUED) • No-load money market mutual funds regulated by the Securities and Exchange Commission, and with a dollar-weighted average stated maturity of 90 days or fewer, and whose investment objectives include the maintenance of a stable net assc:t value of S I for each share. • AAA-ratcd, constant dollar. investment pools authorized by the City Council and as further defined by the Act, which invests in eligible securities as authorized by the PFIA. Government Pool investments as of September 30, 2004, were invested in TexPool and TexSTAR. TexPool. The Comptroller of Public Accounts (the "Comptroller'") is the sole officer, director and shareholder of the Texas Treasury Satekeeping Trust Company (the "Trust Company") which is authorized to operate TexPool. Pursuant to the TexPool Panicipation Agreement, administrative and investment services to TexPool are provided by Lehman Brothers Inc. and Federated Investors, Inc. ("Lehman and Federated"), under an agreement with the Comptroller, acting on behalf of the Trust Company. The Comptroller maintains oversight of the services provided to TexPool by Lehman and Federated. In addition, the TexPool Advisory Board advises on TexPool's Investment Policy and approves any fee increases. As required by the PFIA. the Advisory Board is composed t:qually or participants in TexPool and other persons who do not have a business relationship with TexPool who are qualified to advise TexPool. TexPool is currently rated AAAm by Standard and Poor's. An explanation of the significance of such rating may be obtained from Standard & Poor's at 1221 Avenue of the Americas, New York, New York 10020. TexST AR. Texas Short Term Asset Reserve Program ("TEXST AR") has been organized in conformity with the lnterlocal Cooperation Act, Chapter 791 of the Texas Government Code, and the Public Funds Investment Act, Chapter 2256 of the Texas Government Code. JPMorgan Fleming Asset Management (USA), Inc. ("JPMF AM") and First Southwest Asset Management, Inc. ("FSAM") serve as co-administrators for TEXST AR under an agreement with the TEXST AR board of directors (the "Board"). IPMF AM provides investment services, and FSAM provides participant services and marketing. Custodial, transfer agency, fund accounting and depository services are provided by JPMorgan Chase Bank and/or its subsidiary J.P. Morgan Investor Servi~s Co. Finally, TEXSTAR is currently rated AAAm by Standard and Poor's. An explanation of the significance of such rating may be obtained from Standard & Poor's at 1221 Avenue of the Americas, New York, New York 10020. Collateral is required for demand deposits, certificates or obi igation, and repurchase agreements at I 02% of all amounts not covered by Federal deposit insurance. Obligations that may be plctlged as collateral are obligations of the United States and its agencies and obligations of the state and its subdivisions. The City's deposits and investments are categorized below to indicate the level of custodial credit risk assumed by the City at September 30, 2004. INVESTMENT CATEGORY OF CUSTODIAL CREDIT RISK (I) Insured, registered, or securities held by the City or its agent in the City's name. (2) Uninsured and unregistered, with securities held by the countcrparty's agent or trust department in the City's name. (3) Uninsured and unregistered, with securities held by the counterparty or by the trust department or agent but not in the City's name. DEPOSIT CATEGORY OF CUSTODIAL CREDIT RISK (I) Insured or collateralized with securities held by the City or by its agent in the City's name. (2) Collateralized with st:CI.Irities held by the pledging financial institution's trust department or agent in the City's name. (3) Uncollateralized. Amounts invested in investment pools and money market funds are not categorized, because they do not represent securities that exist in physical form. 67 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE Ill. DETAIL NOTES ON ALL ACTMTIES AND FUNDS A. POOLED CASH AND INVESTMENTS <CONTINUEDl The following table is a schedule of the City's pooled cash and investments at September 30, 2004: Category Carrying Invesanenu ~~~ i2) p~ Amount frimal;y QQvemm£n1 U.S. Treasuries $ },998,817 ~.998,817 Agency Obtigations 36,658,090 36.,658,090 Investment Pools 47,413,743 Money Market Mutual Fund 2,796,414 Total Primary Government 90,867,064 A&enc;,v Funds Investment Pools 73 Total Agency Funds 73 TollLI Investments 90,867,137 Cash and Category Bank Cattying Bank Oeeosits ~A~ (B) !9 Balance Amount Primaq Government $ 95,899,156 95,899,156 95,899,156 Agency Funds 1,099 1,099 1,099 Total $ 95,900,255 95,900,255 95,900,255 Cash and investments listed above include investment pools and money market mutual funds (mmmf). The table below categorizes the investment pools and mmmf's as cash and equivalents in unrestricted funds. Restricted funds include investment pool and nunmf balan~. The difference in total investment balances between the table above and the table below totals $7,019,071, which is due to the different reporting methods used in each table. Cash and investments are reported in the Statement of Net Assets as: Total Total Primary Agency Govemme.at Funds Total Oasb. and Equivalents -Untestricted s 56,107,053 56,107,053 Cash and Equivalents -Restricted 46,811,174 t,m 46,812,273 Total Cash and Equivalents 102,918,227 1,099 1 02,.9 19,326 Investments . Unrestricted 13,581,046 13,581,046 Investments-Restricted 70,2.66,947 73 70).67,021) Total Investments 83,847,993 73 83,848,066 Total Cash and Investments $ 186,766,220 1,172 186,767,392 68 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements SepteDlber30,2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS B. INTERFUND TRANSACTIONS lnterfund balances, specifically the due to and due fi'om other funds, are short-tenn loans to cover temporary cash deficits in various funds. This occasionally occurs prior to bond sales or grant reimbursements. These outstanding balances are repaid within the following fiscal year. lnterfund balances. specifically advances to and from other funds, are longer-term loans to cover Council directed internal financing of certain projects. At September 30. 2004 the City has nearly $1 .5 million of this type of internal financing. These balances are assessed an interest charge and are repaid over time through operations and transfers. Net interfund receivables and payables between governmental activities and business-type activities in the amount of $555,465, are included in the government-wide financial statements. The following amounts due to other funds or due from other funds, including advances, are included in the fund financial statements (all amounts in thousands): lnterfund Payables: Govetnmental Funds: Nonmajor Governmental Proprietary Funds: Electric Nonmajor Proprietary Tows Governmental Funds General $ 1,930 446 $ 2,376 lnterfuod Receivables Proprietary Funds Water s~r Solid Waste 1,024 261 261 1.024 Net transfers of $9,745,250 from business-type activities to governmental activities, up from $2.6 million during the prior yea.r, on the government-wide statement of activities is primarily the result of I) debt service payments made from dle debt sc::rvice fund, but funded from an operating fund; 2) subsidy tnmsfers from unrestricted general fUnds; and 3) transfers to move indirect cost allocations, payments in lieu of taxes (PILOT), and franchise fees to the genenl fund or other funds as appropriate. The following interfund transfers are ~fleeted in the fund ftnancial statements (all amounts in thousands): Intetfund Tnuulers Out: Governmental FwuiJ Proerie.wy Funds Debt Nonmaj01: Stonn-Nonrnajor In11:nl lnterfund Genenl Service Gov. Electric Watu Sewer Water Ent~rise Setvia: T rans£ere In: G~mmental Funda: Geneal Fund $ 1,483 1,068 3,997 1,751 311 2,114 Debt Service Fund 760 1,679 6,799 6,236 4,307 935 Nonrnajor Govemmcntal 3,221 1,449 330 1,121 Proprietary Funds: B!ectric 9 1,679 90 Water 93 6,799 Sewer 6,2:}6 Stoanwatcr 4,307 WTMPA 357 Nonmajoc Enterprise 849 935 91 lntemal Service Funds 41 46 46 46 46 Tow $ 4,213 19,956 3,872 3,150 11,172 8,033 4,619 4,216 69 Totals 2,954 707 3,661 Totals 10,724 20,715 6,121 1,778 6,892 6,236 4,307 357 1,875 226 59,230 '\ } CllY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE Dl. DETAIL NOTES ON ALL ACTMTIES AND FUNDS C. DEFERRED CHARGES D. The total deferred charges of $3,344,444 in the Electric Enterprise Fund represents an advenising contract with the United Spirit Arena. The advertising (and amortization) began with the opening of the spons arena in fiscal year 2000 and will continue for 30 years. The total deferred charges of $407,251 in the West Texas Municipal Power Agency Fund represents unamortized bond issuance costs related to the bonds issued to build the JRM8 cogeneration facility. CAPITAL ASSETS Capital asset activity for the year ended September 30, 2004, was as follows: Primary Government: Govt~:nmental Activities Beginniag Babnce lnueases Dec:.reascs C2piw Assets not being depreciated: Land $ 7,996,406 611,843 Construction in Pcogress 36,155,690 14,140,550 6,824,218 Total Oapital Assers not being depreciated 44,152.096 14,752,393 6,824,218 Capital Assers being depreciated: Buildings 51,475,936 6,864 28,522 Improvements Other tlun Buildings 125,742,157 3,908,958 Machinay and Equipment 48,896,000 S,S8S,646 1,526,973 Total Capital Assets being depreciated 2U,114,093 9,501,468 1,555,495 Less Accumulated Depreciation for: Buildings 25,873,452 1,815,260 28,522 lmpmvcments Otht~: than Buildings 88,642,271 3,826,069 Machinery and Equipment 34,015,3B 4,426,516 1,443,900 Total Accumulated Depreciation 148,531,036 10,067,845 1,472,422 Total Capital Assets being depreciated, net 77,583,057 !566.3!?2 83,073 Govenu:nenw Activities Capital Assets, net $ 121,735,153 14,186,016 6,907,291 Depreciation expense was charged to functions/programs of the governmental activities as follows: Governmental activities: General Government Financial Services Human Resources Administtation/Community Secvices Fire Police Streets Electric Internal Servi<:e funds Total depteciatioo expense -governmental activities Transfec in to accumulated depceciation -govemmenta.l activities Inaese in accumulated depreciation -govcmmenw activities 70 Endiag Balances 8,608,249 43,472,022 52,080,271 51,454,278 129,651,115 52,954,67l 2l4,060,066 27,600,190 92,468,340 36,997,929 157,126,459 76,933,607 129,013,878 $ 325,447 5,279 4,636 3,646,365 841,694 1,339,872 3,364,002 286,096 162,702 9,976,093 91,752 $ 10,067,845 } CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septennber30,2004 NOTE III. DETAIL NOTES ON ALL ACTMTIES AND FUNDS D. CAPITAL ASSETS (CONTINUED> Business-Type Activities Beginning Ending Balance lncrcucs Decreases Balances Capiw Assets not being deprcci2ted: Land $ 31,676,155 31,676,155 Construction in Progtess 104,689,207 28,965,883 19,693,719 113,961,371 Tow Capital Assets not being depreciated 136,365,362 28,965,883 19,693,719 145,637,526 upiw AS3cts beiag depredated: Buildings 96,941,635 6,034 18,891 96,928,778 Improvements Other than Buildings 555,982,769 20,441,780 2,065,581 574,358,968 Machinery and Eqcipment 137,992,381 25,692,.500 30,927,318 132,757,563 Tow Capital Assets being depreciated 790,916,785 46,140,314 33,011,790 804,045,309 Less Accumulated Deprcci2tion fot:: Buildings 26,180,634 2,465,313 18,891 28,627,056 Improvements Other than Buildings 225,416,823 19,574,185 1,473,470 243,517,538 Machinery and Equipment 58,219,321 12,838,270 5,221,994 65,835,597 Tow Accumubted Dept:eciation 309,816,778 34,877,768 6,714,.355 337,980,191 Tow Capiw Assets being depreciated, net 481,100,007 11,262,546 26,297,435 466,065,118 Business-Type Activities Capital Assets, net $ 617,465,369 40,228,429 45,991,154 611,702,644 Dep~iation expense was charged to functions/programs of the business-type activities as follows: Business-Type Activities: ~ecttic Watet Sewer Stonn\WI:er Solid Waste Airport Transit Intemal Setvic:e Funds Total dcpreciarioo expense · business-type activities Transfer in to accumulated depreciation-b11sincu-rype activities locrese in accusnulated depreciation -business-type activities 71 s ~.121,124 5,958,903 5,075,034 SS3,592 8,016,067 3,255,401 2,019,973 439,792 34,439,880 437,882 $ 34,877,768 CITY OF LUBBOCK, TEXAS Notes to Basic Financial StatementS September30,2004 NOTE 01. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS D. CAPITAL ASSETS {CONTINUED) Construdioa Commitments The City had many construction projects in progress at fiscal year end. Public Safety projects include construction of a fire pump test pit. Park projects include park irrigation and lighting systems. Street projects include the widening of 98111 street from Slide to Frankford. A security upgrade of Police Headquarters was also underway. Electric projects included the final touches on a new substation. Water projects included a new project to develop water wells south of Loop 289. Sewec projects included construction of sewer lines ahead of the Marsha Sharp Freeway. Airpon projects included an extension of the airpon's taxiways. Two large Stormwater projects are underway. The first project provides for the construction of an outfall storm sewer from Clapp Parle to Yellowhouse Canyon and a series of upstream storm sewers that will provide various protections around four playa lakes. The second project provides for the construction of a flood relief project for south Lubbock's chain of playa lakes. OrigilW Remaining Projects Commi~Dla!oll S~eDt-to-Date Commilimc:nta Public Safety $ 9,371,433 7,799,579 1,571.854 Puk Impcovemencs 13,078,502 7,481,061 5,597,441 Street Improvements 25,866,652 15,479,.352 10,.387,.300 Permanent Street M2in~na.nce 1,783,000 1,626,990 161,010 Geneml Capital Projects 355,171 285,505 69,666 Geneml Facilities &nd System lmprovements 10,062,864 7,773,968 2,288,896 T:u: lnttetnent Fund ~pital Projects 3,800,000 1,193,597 2.601,403 Grant Terrorism Lab 1,179,000 892,540 286,460 Electric 14,650,111 9,488,738 5,161,373 Water 70,435,418 45,999,985 24,435,433 Sewer 11,001,937 5,227,618 5.774,319 Solid Waste 9,591,700 5,950,400 3,641,.300 Airport 16,058,200 3,.339,364 12,718,836 Transit 203,799 203,799 Sto~mwater 79,900,000 43,053,522 36,846,478 Intem21 Semce Fund 2,956,000 1,632,378 1,323,622 Total s 270,298,787 157,433,396 112,865,391 72 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30. 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS £. RETIREMENT PLANS Each qualified employee is included in one of two retirement plans in which the City of Lubbock participates. These arc the Texas Municipal Retirement System (TMRS) and the Lubbock Firemen's Relief and Retirement Fund (LFRRF). The City does not maintain the accounting records, hold the investments or administer either retirement plan. Summary of significant data for each retirement plan follows: TEXAS MUNICIPAL RETIREMENT SYSTEM (TMRS} Plan Description The City provides pension benefits for all of its full·time employees (with the exception of firefighters) through a non·traditional, joint contributory, hybrid defined benefit plan in the state-wide TMRS, one of 794 administered by TMRS, an agent multiple-employer public employee retirement system. Benefits depend upon the sum of the employee's contributions 10 the plan, with interest, and the City- financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (I 00%, I 50%, or 200%} of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and City matching percent had always been in existence and if the employee's salary had always been the average of his salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer- financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. A member is vested after 5 years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Contributions The contribution rate for the employc:<:s is 7% and the City matching ratio is currently 2 to I, both as adopted by the governing body of the City. Under the state law governing TMRS, the actuary annually determines the City contribution rate and the prior service cost contribution rate, both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to the City matching percent, which are the obligation of the City as of an employee's retirement date, not at the time the employee's contributions are made. The nonnal cost contribution rate is the actuarially detennined percent of payroll necessary to satisfy the obligation of the City to each employee at the time his/her retirement becomes effective. The prior service contribution rate amortizes the unfunded (overfunded} actuarial liability (asset) over the remainder of the plan's 25-ycar amortization period. The unit credit actuarial cost method is used for determining the City contribution rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect (i.e. December 31,2003 valuation is effective for rates beginning January 2005). 73 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septembcr30,2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS <CONTINUED> Actuarial Assumptions The actuarial assumptions for the December 31, 2003 valuations are as follows: Actuarial cost method: Unit CTedit Amortization method: Remaining amortization period: Level percent of payrolJ 25 years-open period Amortized cost Asset valuation method: Investment rate of return: Projected salary increases: Includes inflation at: Cost of Living adjustments: As of September 30 2001 2002 2003 ']il/o None None None Annual Pen.slon Cost $ 8,398,S84 8,803,613 8,708,867 Contribution Made 8,398,884 8,803,613 8,708,867 TEXAS MUNICIPAL RETIREMENT SYSTEM THREE-YEAR HISTORICAL SCHEDULE OF ACTUARIAL LIABILITIES AND FUNDING PROGRESS REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) As or December 31 2001 2002 2003 ....., or Deu•beT31 2001 2002 2003 Actuarial Value of Assets $ 172,510,622 181,191,012 182,884,183 Annul Covered Payroll $ 58,173,019 60,285,077 57,577,743 Actuarial Accrued Liability 215,584,035 228,372,843 239,809,434 UAALasa% or covered Payroll 74.0% 78.3% 98.9% Perceo'-ge Funded 80.0% 79.3% 76.3% Unfunded Att•arial Accrued Liability (lJAAL) 43,073,413 47,181,831 56,925,251 The City of Lubbock is one of 794 municipalities having the benefit plan administered by !MRS. Each of the municipalities has an annual, individual acwarial valuation perfonned. All assumptions for the December 31, 2003 valuations ue contained in the 2003 lMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P.O. Box 149153, Austin, Texas 78714-9153. 74 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements SeptenGber30,2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS (CONTINUED> LUBBOCK FIREFIGHTER'S RELIEF AND RETIREMENT FUND (LFRRF) Plan Description The Board of Trustees of the LF'RRF is the administrator of a single-employer defined benefit pension plan. It is reported by the City as a related organization and is not considered to be a part of the City financial reporting entity. Pirefighters in the Lubbock Fire Department are covered by the LFRRF. The LFRRF provides service retirement, death, disability and withdrawal benefits. These benefits fully vest after 20 years of credited servi~. A partially vested Benefit is provided for firefighters who terminate employment with at least 10 but less than 20 years of service. Employees may retire at age 50 with 20 years of service. A reduced early service retirement benefit is provided for employees who terminate employment with 20 or more years of service. The LFRRF Plan effective November I, 2003 provides a monthly nonnal service retirement benefit, payable in a Joint and Two-Thirds to Spouse fonn of annuity, equal to 68.92% of final 48·month average salary plus $335.05 per month for each year of service in excess of 20 years. A firefighter has the option to participate in a Retroactive Deferred Retirement Option Plan (RETRO DROP) which provides a lump sum benefit and a reduced annuity upon termination of employment. Firefighters must be at least 5 I with 21 years of service at the selected "RETRO DROP benefit calculation date" (which is prior to date of employment termination). Early RETRO DROP with benefit reductions is available at age 50 with 20 years of service for the selected "early RETRO DROP benefit calculation date''. A Partial Lump Sum option is also available where a reduced monthly benefit is determined based on an elected lump sum amount such that the combined present value of the benefits under the option is actuarially equivalent to that of the nonnal form of the monthly benefit. Optional forms are also available at varying levels of surviving spouse: benefits instead of the standard two-thirds fonn. l11ere is no provision for automatic postretirement benefit increases. LFRRF has the authority to provide, and has periodically provided for in the past, ad hoc postretirement benefit increases. The benefit provisions of this plan are authorized by the Texas Local Fire Fighter's Retirement Act (Tl..FFRA). TLFFRA provides the authority and procedure to amend benefit provisions. Contributions Required and Contributions Made The contribution provisions of this plan are authorized by TLFFRA. TLFFRA provides the authority and procedure to change the amount of contributions detennined as a percentage of pay by each firefighter and a percentage of payroll by the City. State Jaw requires that each plan of benefits adopted by LFRRF be approved by an eligible actuary. The actuary certifies that the contribution commitment by the ftrefightc:rs and the City provides an adequate financing arrangement. Using the entry age actuarial cost method, LFRRF's nonnal cost contribution rate is detennincd as a percentage of payroll. The excess of the total contribution rate over the normal cost contribution rate is used to amortize LFRRF's unfunded actuarial accrued liability (UAAL), if any, and the number of years needed to amorti.u: LFRRF's unfunded actuarial liability, if any, is determined using a level percentage of payroll method. The costs of administering the plan are financed by LFRRF. 75 ) ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septernber30,2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS (CONTINUED) Annual Pension Cost For the fiscal year ended September 30. 2004, the City of Lubbock's Annual Pension Cost (APC) for the Lubbock Fire Fund was equal to $2,582,713 as described below in item 4 in the table below. Based on the results of the December 31, 2002 actuarial valuation of the Plan Effective November I, 2003, the Board's actuary found that the fund had an adequate financing arrangement. as described in the paragraph below. based on the fixed level of the firefighter contribution rates and on the assumed level of City contribution rates. Based on the Plan Effective November I, 2003, LfR.RF's funding policy requires contributions equal to 12.43% of pay by the firefighters. Contributions by the City are based on a formula, which causes the City's contribution rate to fluctuate from year to year. The December 31, 2002 actuarial valuation {most recent available) reflecting the Plan Effective November I, 2003 assumes that the City's contributions will average J8.67%ofpayroll in the future. Therefore, based on the December 31, 2002 actuarial valuation of the Plan Effective November I, 2003, the Annual Required Contributions (ARC) are not actuarially detcnnined but are equal to the City's actual contributions beginning January I, 2003. Prior to January I, 2003, the ARC was based on the December 31, 2000 actuarial valuation and was actuarially detennined as described below. The following shows the development of the Net Pension Obligation (NPO) as of September 30, 2004: I. Annual Required Contributions (ARC) 2. Interest on NPO 3. Adjustment to ARC 4. Annual Pension Cost (APC) 5. Actual City Contributions made 6. Increase (Decrease) in NPO/(assel) 7. NPO/(asset} at October I, 2002 8. NPO/(asset) at September 30. 2003 s 2,597,738 (70,609) 55 584 2,582,713 (2,597,738) (I 5,025) (882,623) ($897,648) The ARC for the period October I, 2002 through September 30, 2004 was based on the December 31, 2002 actuarial valuation. The entry age actuarial cost method was used with the normal cost calculated as a level percentage of payroll. The acwarial value of assets was market value smoothed by a five-year deferred recognition method, with the actuarial value not more than 110"4 or less than 90% of the market value of assets. The actuarial assumptions included in an investment return assumption of 8% per yw (net of expenses), projected salary increases including promotion and longevity averaging 6% per year over a 25-year career, and no postretirement cost-of-living adjustments. An inflation assumption of 4% per year was included in the investment return and salary increase assumptions. The UAAL is amortized with the excess of the assumed total contribution rate over the normal cost rate. The number of years needed to amortize the VAAL is determined using an open, level percentage of payroll method, assuming that the payroll will increase 4% per year, and was 25 years as of the December 31, 2002 actuarial valuation based on the plan provisions effective November I, 2003. 76 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septe0lber30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS <CONTINUED) Further details concerning the financial position of the LFRRF and the latest actuarial valuation are available by contacting the Board of Trustees, LF'RRF, City ofLubboclc, P.O. Box 2000, Lubbock, Texas 79457. A stand-alone financial report is available by contacting the LFRRF. Trend Information Fiscal Year Ended Annual Pension Cost (AP9 Percentage of APC Contributed Net Petuion Obligation (Asset) 9/30/02 9/30/03 9/30/04 $ 1,379,564 1,964,788 2,582,713 148% Ill 101 (660,692) (882,623) (897,648) ANALYIS OF FUNDING PROGRESS REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) Actuarial Actuarial Entry Age Unfunded Funded Annual UAAU Valuation Value of Actuarial AAL Ratio (alb) Covered Funding Date Anets (a) Accrued (UAAL) Payrol1 Excess as a Liability !Funding (c) Pen~eatage of (AAL) {b) excess (b-a) 12/31/98 1,2 $ 90,364,681 97,533,314 7,168,633 92.7% 10,290,190 12131/00 1,3 119,660,788 114,675,049 (4,985,739) 104.3 12,243,913 12131102 1,4 111,261,775 127,850,414 16,588,639 87.0 13,,21,366 I. Economic and demographic assumptions were revised. 2. Reflects changes in plan benefit provisions effective November I, 1999. 3. Reflects changes in plan benefit provisions e~ive December t, 2001. 4. Reflects changes in plan benefit provisions effective November I, 2003. S. The covered payroll is based on estimated annualized salaries used in the valuation. F. DEFERRED COMPENSATION The City offers its employees two deferred compensation plans in accordance with Internal Revenue Code ("IRC") Section 457. The plans, available to all City employees, pennit them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. The plans' assets arc held in trust for the exclusive benefits of the participants and their beneficiaries. The City does not provide administrative services or have any fiduciary responsibilities for these plans; therefore, they are not p~nted in the BFS. 77 Covered Payroll {{b-a}/c} 69.7% (40.7) 122.7 ' CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS G. SURFACE WATER SUPPLY Canadian River Municipal Water Authority The Canadian River Municipal Water Authority (CRMWA) is a Conservation and Reclamation District established by the Texas Legislature to construct a dam, water reservoir, and aqueduct system for the purpose of supplying water to surrounding cities. The District was created in 1953 and comprises eleven cities, including the City of Lubbock. The budget, financing. and operations of the District are governed by a Board of Directors selected by the governing bodies of each of the member cities, each city being entitled to one or two members dependent upon population. At September 30, 2004, the Board was comprised of 18 members, two of which represented the City. The City contracted with the CRM W A to reimburse it for a portion of the cost of the Canadian River Dam and aqueduct system in exchange for surface water. Prior to fiscal year 1998-99, such payments were made solely from water system revenues and were not considere<l general obligations of the City. The City's pro rata share of annual fixed and variable operating and reserve assessments are recorded as an expense of obtaining surface water. Prior to fiscal year 1998·99, long-term debt was owed to the U.S. Bureau of Reclamation for the cost of construction of the facility, which was completed in 1969. The City's allocation of project costs was $32,905,862. During the year ended September 30. 1999, bonds in the principal amount of$12,300,000 were issued to pay off the construction obligation owed to the U.S. Bureau of Reclamation via CRMWA in the amount of $20,809,067. The difference of $8,509,067 was a discount in the remaining principal provided by the U.S. Bureau of Reclamation to the member cities. This discount has been recorded as a deferre<l gain on refunding and is being amortized over the life of the refunding bonds. At September 30, 2004, $5,904,703 remains unamortized. The annual principal and interest payments are included in the disclosures for other City related long-terTn debt. The above cost for the rights are recorded as capital assets and are being amortized over 85 years. The cost and debt are recorde<J in the Water Enterprise Fund. Brazos Rinr Authority-Lake Alan H~nry During 1989, the City entered into an agreement with the Brazos River Authority (BRA) for the construction, maintenance, and operation of the facilities known as Lake Alan Henry. The BRA, which is authorized by the State of Texas to provide for the conservation and development of surface waters in the Brazos River Basin, issued bonds for the construction of the dam and lake facilities on the South Fork of the Double Mountains Fork of the Brazos River. Total costs are expected to exceed $120 million. The agreement obligates the City to provide revenues to BRA in amounts sufficient to cover all maintenance and operating costs, management fees of the authority, as well as funds sufficient to pay all capital costs associated with construction. The City will receive surface water for the payments to BRA. Approximately $515,005 was paid to the BRA for maintenance and operating costs during the fiscal year. The BRA issued $16,970,000 in revenue bonds in 1989 and $39,685,000 in revenue bonds in 1991 . These bonds were refunded luly 1995. Construction of the dam and lake facilities began in 1989. The City is obligated to provide sufficient funds over the remaining life of the bonds to service the debt requirement. The asset, Lake Alan Henry dam and facilities, are recorded as capital assets and are being depreciated over 50 years. The financial activity, along with the related obligation, is accounted for in the Water Enterprise Fund. tn ()rder to protect a~inst the risk of interest rate changes between March 28, 2002 and May I, 2005, the City entered into an interest rate swap agreement with IPMorgan Chase (herein referred to as the "Swap Provider') rate<l A+ by Standard&. Poor's and Aa3 by Moody's Investors Service with a notational dollar amount of $40,465,000. The City entered into an interest rate swap in order to achieve lower borrowing costs associated with an anticipative borrowing in 2005. This borrowing will prepay and refund the obligation of the City to pay debt service on Special Facilities (Lake Alan Henry) Revenue Refunding Bonds, Series 1995 issue<l by the BRA to finance or refinance the construction of surface water supply facilities known as Lake Alan Henry pursuant to a Water Supply Agreement, dated as of May II, 1989, as amended, between the BRA and the City; and under this agreement commencing Each August I, starting 78 ) ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septernber30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS G. SURFACE WATER SUPPLY (CONTINUED) August I, 2003 up to and including August I, 2005 the Swap Provider pays a premium of$280,000 to the City and in addition beginning May l, 2005, the swap Provider will pay the City of Lubbock interest on the notational amount of the swap based on the Bond Market Association (BMA) Municipal flood Index on a monthly (actual/actual) basis. On a monthly (30/360) basis, the City of Lubbock pays the Swap Provider interest at the fixed rare of 5.260%. Additionally, the Swap Provider has the right but, not the obligation, to terminate the transaction in whole when the 180 day weighted average of the Municipal Bond Index is more than 6.50%, but with no market value cost to the City. The notational amount of the swap reduces annually; the reductions begin on August I, 2006 and mature on August I, 2022. As of December 10, 2004, rates were as follows: Fixed payment Variable payment Fixed BMA 5.260% 1.450% At De<::ember I 0, 2004 the swap agreement had a negative fair value of $6,075,000. The fair value was developed by using the zero coupon method. This method calculates the future net settlement payments required by the agreement assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. At December I 0. 2004, the City was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change and the fair value of the swap become positive, the Cily could be expOS<::d to credit risk in the amount of the derivative's positive fair value. Should the swap have a positive fair value at some point the Swap Provider may be required to collateralize a percentage of their exposure. Since inception no impairments in respect to the Provider's ratings have occurred. The City's derivative contract uses the International Swap Dealers Association Master Agreement. The swap agreements include standard termination events, such as failure to pay, credit rating downgrades, and bankruptcy. Although the City has obtained provisions to avoid an unwanted early termination event, the result of such an occurrence could result in the City being required to make an unanticipated tennination payment. 79 " ~ ' CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS H. LONG-TERM DEBT GENERAL OBLIGATION BONDS AND CERTIFICATES OF OBLIGATION: Average Final Balance Interest Issue Maturity Amount OutstandiRg Rite Date Date Issued 9-30-04 9.01 OS-l.S-91 02-15-11 $ 1,085,000 370,000 5.50 05-15-92 02-1 5-04 34,520,000 1,725,000 3.97 05-01-93 02-1 5-15 14,425,000 725,000 .5.39 I ().(11-93 02-15-14 3,625,000 1,825,000 5.39 10-01-93 02-15-14 2,550,000 1,300,000 .5.20 10-01-93 02-15-14 1,470,000 225,000 5.14 10-01-93 02-IS-14 19,215,000 2,895,000 5.50 05·15-95 02-15-15 4,690,000 235,000 5.01 12-IS-95 02-15-16 6,505,000 6.50,000 5.07 12-15-95 02-15-16 10,000,000 1,000,000 4.91 01-15-97 02-IS-09 17,530,000 9,190,000 4.61 01-01-98 02-15-08 1,330,000 610,000 4.71 01-01-98 02-15-18 10,260,000 7,200,000 4.36 01-15-99 02-15-14 20,83.5,000 18,870,000 4.58 01-15-99 02-15-19 15,355,000 11,505,000 4.77 04-01-99 02-15-19 6,100,000 4,575,000 4.71 04-01-99 02-15-19 12,300,000 9,300,000 5.37 09-15-99 02-15-20 24,800,000 21,600,000 5.54 03-15-()0 02-JS.-20 7,000,000 2,430,000 4.90 02-01-01 02-IS-21 9,100,000 8,410,000 4.81 02-01-01 02-15-21 2,770,000 2,350,000 5.25 06-01-01 02-IS-31 35,000,000 33,715,000 4.68 02-IS-02 02-IS-22 9,400,000 9,095,000 4.71 02-15-02 02-15-22 6,4.50,000 6,235,000 4.70 02-15-02 02-15-22 1,545,000 1,490,000 4.62 07-01-02 02-15-22 2,60.5,000 2,440,000 3.18 07-01-02 02-15-10 10,810,000 7,865,000 4.42 07-15-03 02-15-23 11,8S5,000 11,255,000 4.47 07-IS-03 02-15-24 9,765,000 9,765,000 4.48 07-15-Q3 02-15-24 680,000 680,000 4.47 07-15-03 02-15-24 3,590,000 3,590,000 4.87 07-15-03 02-15-34 40,135,000 40,135,000 4.47 07-IS-03 02-15-24 3,79.5,000 3,795,000 4.60 08-15-03 04-15-23 8,900,000 8,465,000 4.60 08-IS-03 04-15-23 13,270,000 12,62S,OOO 4.09 09-28-04 02-IS-24 2,025,000 2,025,000 4.08 09·28-04 02-15-24 3,100,000 3,100,000 3.S8 09-28-04 02-15-20 22,620,000 22!6201000 Total $411,010,000 285,88S,OOO(A) (A) Excludes net deferred gains and losses on advance refundings, prior year bond discounts of $4,993, I 03 ($3,81 3,381 business-type and $1,179,722 governmental). Additionally, this amount includes$215,663,783 ofbonds used to finance entelprise fund activities. At September 30, 2004, management of the City believes that it was in compliance with all financial bond covenants on outstanding general obligation bonded debt, t:Qtificates of obligation, and water revenue bonded debt. 80 . ) ) ) CITY OF LUBBOCK. TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE 01. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS H. LONG~ TERM DEBT (CONTINUED} ELECTRIC REVENUE BONDS Fioal Amount Interest Rate{%} Issue Date Maturi~ Date bsued 3.80 to 5.50 6-15-95 4-15-08 s 13,560,000 4.25 to6.25 1·01-98 4-15-18 9,170,000 4.05 to S.OO S·Ol-98 2-15-18 28,910,000 3.10 to 5.00 1·15-99 4-15-19 14,97.5,000 4.00 to 5.25 7..()1-01 4-IS-21 9,200,000 Total $ 75,815,000 • Balance outstanding excludes ($595,420) of diSGOunt on bonds sold. Interest Rate 3.80 to 5.50% WATER REVENUE BONDS Issue Date 6-1-95 Final Maturity Date 8-15-21 Amount Issued $58,170,000 Balance Outstanding 9-30..()4 4,360,000 6,440,000 21,285,000 9,185,000 7,820,000 491090,000 • Balance Outstanding 9-30-()4 45,515,000 • • Balance outstanding excludes ($4,132,838) diSGOunt and deferred losses on bonds sold or refunded. The annual requirements to amortize all outstanding debt of the City as of September 30, 2004 are as follows: Governmental Activities Business-T~ Ac1ivitica Fiscal Gezteral Ob!!Jatio!l Bonds General Ob!!etion Bonds Revenue Bonds Year Priac!fal In~t PriDdJ.!.al Intaett Principal Interest 2004-05 $ 4,955,949 2,975,462 11,104,051 9,824,743 6,265,000 4,784,861 2005-06 4,479,101 2,867,175 10,845,899 9,380,451 6,305,000 4,475,173 2006-07 4,685,492 2,674,605 1 1,329,.508 8,916,898 6,370,000 4,176,228 2007-08 4,514,994 2,491,285 11,035,006 8,444,872 6,115,000 3,869,100 2008-09 4,468,654 2,298.592 10,861,346 7,974,453 5,415,000 3.571,735 2009-14 21,145,278 8,592,662 53,604,722 32,762,481 77,995,000 13,717,183 2014-19 15,776,749 4,246,685 44,128,251 21.506,908 29,750,000 6,206,365 2019-24 10,195,000 896,451 29,230,000 11,982,075 6,390,000 527,850 202+29 17 ,900,0CJ() 6,37J,z30 2029-34 15,625,000 1,695,013 Totals $ 70,221,217 27,042,917 215,663,783 118,859,124 94,605,000 41,328,494 The annual requirements on capital leases ofthe City as of September 30,2004, including interest payments of$106,232 are as follows: Governmental Businen-Type Total Capital Lease Capital Leue Capital Lease Fiscal Minimum Minimum MiniiiQum Year Pa:tment Paz:ment Pal!!!;ent 2004-05 $ 854,159 666,220 1,520,379 2005-06 545,380 418,741 964,121 2006-07 353,694 353,694 2007-08 22,202 22,202 Lese: Interest pa,ss:z~ ~671650l ~106,232~ Total $ 1,360,957 1,393,207 2,754,164 81 " > ' ., ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septe~ber30t2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS H. LONG-TERM DEBT <CONTINUED) The carrying values on the leased assets of the City as of September 30, 2004 are as follows: Accumulated Net Book Gtoss Value Deeteciation Value Governmenw Activities $ 3,558,489 1,441,188 2,117,301 Business-Type Activities 3,404,477 1,064,892 2,339,585 Total Le2sc:d Assets $ 6,962,966 2,506,080 4,456,886 Long-term obligations (net of discounts and premiwns) for governmental and business-type activities for the year ended September 30, 2004 are as follows: Debt Payable Debt Payable 9/30/ZJXJl Additions Deletions 9/30/2004 Govenunent~ activities: Tax-Supported - Oblig:a.tion Bonds s 69,808,204 27,745,000 27,331,987 70,221,217 Rcbatable Acbicrage 122.984 122.984 C"'piw Leases 996,477 1,535,075 1,170,595 1,360,957 Compensated Absences 12,636,967 7,918,589 5,637,048 14,918,508 Insurance Qaim Payable 2,720,897 14,.328,384 14,694,745 2,354,536 Bond Discounts/Ptemiums 1,179,722 1,179,722 Total Governmental activilics 86,285,529 52,706,770 48,957,359 90,034,940 Business-Type activities: Self-Suppo.cted · Obliglltion Bonds 226,126,796 10,46M13 215,603,783 Revenue Bonds 101,295,000 6,690,000 94,605,000 Capiw Leases 1,941,223 1,844,606 2,392,622 1)93,207 Rebauble Atbitr.~ge 119,152 t 19,152 Closute/Post Closure 2,690,001 361,115 3,051,116 Compensated Absences 3,695,242 2,849,947 2,385,047 4,160,142 Insunnce Claim Payable 6,000,000 5,904,528 5,467,674 6,436,854 Bond Discounts/Premiums !1,496,398~ 2,796,962 2,215,441 ~914,8z:!2 Total Business-Type activities $ 340,l71,016 13,757,158 29,732,949 324)95,225 Payments on bonds payable and arbitrage payable for governmental activities are made in the Debt Service Fund. Accrued compensated absences that pertain to governmental activities will be liquidated by the General Fund and Special Revenue funds. The Risk Management Internal Service Fund will liquidate insurance claims payable that pertain to governmental activities. Payments for the capital teases that pertain to the governmental activities will be liquidated by the general fund. 82 Due in oDex.cac 4,955,949 826,018 5,475,861 2,354,536 13,612,364 t 1,104,051 6,265,000 622,442 2,143,563 1,184,210 ~7,.333~ 21,221,933 ) " .I ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS lJ. LONG-TERM DEBT (CONTINUED) The tot11l long-term debt is reconciled to the total annual requirements to amortize long-term debt as follows: Long-term debt -Govcmmcntal Acovitics s 90,0}4,940 J mtg·tcrm debt -13usuH:s3·1)'fX-' Activities 324,395,225 lntcrc~t 11!7,230,535 To~ amount of debt 601,660.700 Net gains/lusscs. prcrmums/discounts (264,845) J .ess: Reb~ t3blc arbitngc Less: Capit~l lca..<cs (2,754,164) I.c$s: Insurance claims pay:ablc (8,791,390) Lc,;s: Comrcn•ated abscn$!:$ (19,078,650) Less: Closure/post closure (3,051,116) Total other debt (33,940,165) Tot:1l future bonded debt rcquin·m~nt:! s 567,720,535 The City Council called an election for May IS, 2004 to seek voter approval to issue general-purpose tax· supported bonds in the amount of $30,000,000, which represents the City's current six-year general- purpose debt plan. The following seven propositions were approved by the voters: street improvements. $9,210,000; civic center/auditorium renovations and improvements, $6,450,000; park improvements, $6,395,000; police/municipal court facilities, $3,350,000; library improvements, $2,145,000; fire stations, $1 ,405,000 and animal shelter renovations and improvements, $1,045,000. The City previously issued a capital improvement plan to voters in 1999, when voters in the City approved a $37,385,000 capital improvement plan. In September 2004, the City issued $2,025,000 General Obligation Bonds, Series 2004. This Issuance was the first installment of the capital improvement debt issuance approved by tile voters in 2004. The Obligations were issued at a net discount of $23,332. After paying issuance costs of $50,000, the net proceeds were $1,951,668. The proceeds from the sale of the Obligations will be used to fund the following projects: Fire station improvements, $80,000; animal shelter improvements, S 154,000; park improvements, $181,000; street improvements, $1,420,000; traffic control improvements, $100,000; and costs associated with issuance of the bonds. In September 2004, the City issued $3,100,000 Tax and Waterworks System SUiplus Revenue Certificates of Obligation, Series 2004. The Certificates were issued at a net discount of $36,042. After paying issuance costs of $58,000, the net proceeds were $3,005,958. Proceeds from the sale of these Certificates will be used for street improvements, including drainage, streetlights, and traffic signalization and the acquisition of land and necessary rights-of-way; and costs associated with the issuance of the Certificates. 83 ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE 111. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS J. ADVANCED REFUNDrNG On September 28. 2004, the City issued General Obligation Refunding Bonds, Series 2004 ("Refunding Bonds .. ) with a par value of $22.620,000 and a net interest cost of 3.7855% to refund $23,205,000 of out:;tanding bonds. These bonds were issued to refund a portion of the City's outstanding tax-supported debt to lower the debt service requirements on sucll indebtedness. The Refunding Bonds were issued at a net premium of $1,815,646. After paying issuance costs of $304,179, the net proceeds were $24,224,912. The net proceeds from the issuance of the Refunding Aonds were deposited with the Escrow Agent (JPMorgan Chase Bank, Dallas, Texas) in an amount necessary to accomplish the discharge and final payment of the Refunded Bonds on their scheduled redemption date. These funds will be held by the Escrow Agent in a special escrow fund and used to purchase d ircct obligations of the United State of America. Under the escrow agreement, between the City and JPMorgan Chase Bank, the escrow fund is irrevocably pledged to the payment of principal and interest on the Refunded Bonds. The Refunded Bonds were removed from the City's basic financial statements. As a result of the refunding, the City decreased its total debt service requirements by $874,031, which resulted in an economic gain of$836,312 and an accounting loss of$1,019,912. The net premium and bond issuance costs are allocated to both the governmental funds and the enterprise funds based on the fund type which will be responsible for servicing the debt. J. CONDUIT DEBT The City issued Housing Finance Corporation Bonds, Health Facilities Development Corporation Bonds. and Education Facilities Authority Bonds to provide financial assistance to private sector entities for the acquisition and construction of facilities deemed to be in the public interest. The bonds are secured by the property financed. Upon repayment of the bonds, ownership of the acquired facilities transfers to the private-sector entity served by the bond issuance. Neither the City, the State, nor any political subdivision thereof is obligated in any manner for repayment of the bonds. Accordingly, the bonds are not reported as liabilities in the accompanying financial statements. As of September 30, 2004, there were seven series of Lubbock Health Facilities Development Corporation Bonds outstanding with an aggregate principal amount payable of $338,358,912. The bonds were issued between 1993 and 2002. Also as of September 30, 2004, there was one series of Lubbock Education Facililies Authority Inc. Bonds outstanding with an aggregate principal amount payable of S 11,000,000. The bonds were issued in 1999. K. RISK MANAGEMENT The Risk Management Fund was established to account for liability claims, worlcec's wmpensation claims, and premiums for property/casualty insuranoe coverage. The Risk Management Fund generates its revenue through charges to oth.er departments, which are based on costs. In April \999, the City purchased worker's compensation coverage, with no deductible, from a third party. Prior to April 1999 the City was self insured for worker's compensation claims. Any claims outstanding prior to April 1999 continue to be the responsibility of the City. The City's self insurance liability program is on a cash tlow basis, which means that the servicing contractor processes, adjusts and pays claims from a deposit provided by the City. The City accounts for the liability program by charging premiums based upon losses, administrative fees and reserve requirements. In order to control the risks associated with liability claims, the City purchased excess liability coverage in September 1999 which is rtnewed annually. The policy has a SIO million annual aggregate limit and is subject to a $250,000 deductible per claim. 84 ' CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septernber30,2004 NOTE JII. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS K. RISK MANAGEMENT <CONTINUED> f'or self-insured coverage, the Risk Management fund establishes claim liabilities based on estimates of the ultimate cost of claims (including future claim adjustment expenses) that have been reported but not settled, and of claims that have been incurred but not reported (JBNR). The length of time for which such costs must be estimated varies depending on the coverage involved. Because actual claim costs depend on such complex factors as inflation, changes ill doctrines of legal liability, and damage awards, the process used in computing claim liabilities does not neces.sarily result in an exact amount, particularly for liability coverage. Claim liabilities are recomputed periodically using a variety of actuarial and statistical techniques to produce current estimates that reflect recent settlements, claim frequency, and other economic and social factOrs. Adjustments to claim liabilities are charged or credited to expense in the period in which they are incurred. Additionally, property and boiler coverage is accounted for in the Risk Management Fund. The property insurance policy was purchased from an outside insurance canier. The policy has a $250,000 deductible per occurrence, and the boiler coverage insurance deductible is up to $250,000 dependent upon the unit Premiums are charged to funds based upon estimated premiums for the upcoming year. Other small insurance policies, such as surety bond coverage and miscellaneous floater5., are also accounted for in the Risk Management Fund. Funds are charged based on premium amounts and administrative charges. The City has had no significant reductions in insurance coverage during the flSCal year. Settlements in the current year and preceding two years have not exceeded insurance coverage. The City accounts for all insurance activity in Internal Service Funds. L. HEALTHINSURANCE The City provides medical and dental insurance for all full-time employees that are accounted for in the Health Insurance Fund. Revenue for the health insurance premiums are generated from each cost center based upon the number of active full-time employees. The City's plan is self-insured under an Administrative Services Only (ASO) Agreement. The ASO Agreement provides excess coverage of $1 50,000 per covered individual annually and an aggregate cap of $12,546,9 I 3. The insurance vendor based on medical trend, claims history, and utilization detennines the aggregate deductible. The contract requires an rBNR reserve of approximately $2.3 million. The City also provides full-time employees basic tenn life insurance and long-tenn disability insurance. Revenues for the life insurance premiums and long-tenn disability premiums are also generated from each cost center based upon the number of active employees. The life insurance policy has a face value of $10,000 per employee. The City will discontinue providing long-tenn disability insurance as an employer paid benefit during fiscal year 2004-05. Long-tenn disability premiums are set at a. rate per $100 of annual salary. Full-time employees may elect to purchase medical and dental insurance for eligible dependents and the City subsidizes dependent premiums to reduce the cost to employees. Employees may also elect to participate in several voluntary insurance programs such as a cancer income policy, voluntary life, and personal accident insurance. Voluntary insurance products are fully paid by the employee. Retiring City employees may elect to retain medical and dental insurance and a reduced amount of life insurance on themselves and eligible dependents. The retiree pays a portion of the premium costs, but the City subsidies retiree premiums by about $1.3 million annually. The life insurance is fully paid by the retiree. 85 ... CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septeh1ber30,2004 NOTE fil. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS M. ACCRUED INSURANCE CLAIMS N. The Self-Insurance Funds establish a liability for self-insurance for both reported and unreported insured events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represents changes in those aggregate liabilities for the Self-Insurance Funds during the past two years ended September 30: 2004 2003 Workers' Compensation and liability R.esetves at b~ning of fiscal year s 6,000,000 6,000,000 Claims EKpenscs 5,467,674 4,561,925 Claims Paymena ~,030,82~ (4,561,925~ Work<:rs' Compensation :and Liability ~secves at end of fis<:al year 6,436,854 6,000,000 Medical and Dental Claims Liability at beginning of fiscal year 2,720,897 2,685,925 Claims Expenses 14,328,.384 B,148,048 Claims Pllyments {14,694,7452 {13,113,07~ Medical and Dental Claims Liability at cod of 6.sal year 2,.354,536 2,72!),897 Total Sdf-lnsurancc Liability at cod of fiscal year 8,791,390 8,720,897 Total Assets to pay claims at end of fiscal year 18,920,469 19,741,497 Acl:rucd insurance d:aims payable (rom restricted assets - current 3,538,746 4,220,897 Accrued insunnce claims payable -nonl:urrent 5,252,644 4,.500,000 TotaJ accrued insurance claims s 8.791,.390 a,no,S97 LANDFILL CLOSURE AND ~STCLOSURE CARE COST State and federal laws and regulations require the City to place final covers on its landfill sites when they stop accepting waste and to perform certain maintenance and tn()nitoring functions at the sites for thirty years after closure. Although closure and postclosure care costs wiU be paid only near or after the date that the landfills stop accepting waste, the City reports a portion of these closure and postclosure costs as operating expenses (and recognizing a conespondlng liability) in each period based on landfill capacity used as of each balance sheet date. The S3,0S 1,116 included in landfill closure and postclosure care liability at September 30, 2004, represents the cumulative amount expensed by lhe City to date for its two landfills that are registered under TCEQ pennit numbers 69 (Landfill69) and 2252 (Landfiii22S2), less amounts th.at have bcco paid. Over 92 percent of the estimated capacity of Landfill 69 has been used to date, with $753,669 remaining to be recognized over the remaining closure period, wftich is estimated at three years. Approximately 2.2 percent oflhe cstimaled capacity ofLandfill2252 has been used to date, wilh $22,867,597 remaining to be recognized over the remaining closure period, which is estimated at over 80 years. Postclosurc care costs are based on prior estimates and have been adjusted for inflation. Actual costs may be different due to inflation, deflation, changes in technology, or changes in regulations . The City is required by state and federal laws and regulations to provide assurance that financial resources will be available to provide for closure, postclosure care, and remediation or containment of environmental hazards a1 its landlills. The City is in compliance with these requirements and bas chosen the ~ Government Financial Test mecllanism for providing this assurance. The City expects to finance costs through nonnal operations. 86 " .I ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE ID. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS 0. DISAGREGATION OF ACCOUNTS Aa:ounls &cdvahle Swmrary QJun Property Fines ~ TxOOI' Pavina Granu Governmenlll activities: Genetal Fund $ 4,537,134 551,155 472,281 400,300 DebtSenice ~ 2,4~~.012 Total s 4,537,134 551,155 472,281 4<8,300 .2,433,012 .AoaM.mts &oeiv1lblc Summary GcneraJ Ptom C4dit Balaaoeat ec.-Otbets Card Msc. 9/!IJ/04 Business-type Aaivicies Ecr:tDc 14,192,556 l5)1J7 14)27,763 Wmr 4,181,134 452 7~59 4,189,145 Sc\= 2,380,864 89,104 11,875 2,481,84~ Stomw.w:c 768,042 768,042 WI'MPA 7,568,176 7,568,176 ~ 2,331,690 2,580 40,726 2,374,9% TObl $ 31,422,462 89~56 2,580 95,.367 31,1509,965 Misc. 385,908 162,485 5,938 554)31 Allowance for Doubcful Al;(;o\lllts Summa!! Balance at Ac<:ounts T:lolte5 9/30/04 Govcmmental Geneml Fund $ 250,925 1,202,795 1,453,720 Debt Service Fund 438,808 438,808 Non-Major 5,938 5,938 Business-Type Elec::tric 835,314 835,314 Water 253,386 253,386 Sn= 125,372 125)72 Stotmwa~r 62,443 62,443 WIMP A 675,217 675,217 Non-Major 148 493 148 493 Total $ 2,357,088 1,6411603 3~998,691 87 Balance at 9/30/04 6,349,778 162,485 2,4!z9SO 8,951,213 ) .. ' CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE UI. DETAIL NOTES ON ALL ACTrviTIES AND FUND 0. DISAGREGA TION OF ACCOUNTS <CONTINUED> Accounts Payable Swnma1y VouchetS Accounts Investments Miscellaneous Governmental Genenl Fund s 454,395 1,287,984 93,648 Debt Service 167,374 250,643 Non-Major 349,943 2,371,925 174,987 234,437 Blliiness-Type Electric 679,590 7,644,824 3,410 188,584 Water 78,964 580,589 1,462 69,370 Sewer 163,982 23,978 2,344 34,~ Stormwater 1,172 53,213 WfMPA 6,196,307 Non-Major 183,429 795,927 3,639 174,224 Total s 1,911,475 19,122,121 436,485 794,603 P. DISAGREGATION OF ACCOUNTS-GOVERNMENT-WIDE Net Receivables Accounts Interest Taxu Internal Service Receivable Receivable Rc:ccivablc: Puncb Receivables Governmental Activities 1 8,694,350 101,728 7,488,784 99,002 Bu~s-Type Activities 29,509,738 191,476 110,744 Total s 38,204,088 293,204 7,488,784 209,746 Accoun111 P2:abte Accounts Internal Service Balanuat P~ablc FWlds Pll)'ables 9/30/04 Governmmtal Activilic:.s s 5,385,334 373,401 5,758,795 BlUinC:S$-Type Activities 16,879,348 1,012,677 17,892,025 Total $ 2.2.,264,682 1,386,138 23,650,820 Q. FUND CLOSURES Balance at 9/30/04 1,836,027 418,017 3,131,292 8,516,408 730,385 224,644 54,385 6,196,307 1,157,219 22,264,684 Balance at 9/l0/04 16,383,864 29,811,958 46,195,822 In fiscal year 2004, management streamlined the accounting process and closed the following funds: Information Technology Improvements 1111d Community Improvements. 88 ) ., ... CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE IV. CONTINGENT LIABILITIES A. FEDERAL GRANTS In the nonnal course of operations. the City receives grant funds from various Federal and state agencies. The grant programs are subject to audits by agents of the granting authority to ensure compliance with conditions precedent to the granting of funds .. Any liability for reimbursement which may arise as the result of audits of grants is not believed to be significant. B. LITIGATION The City is currently in~olved in the following lawsuits which could have an impact on the financial position ifthc City is found liable. Adams, et al "· City of Lubbock: The City has been sued by numerous firefighters employed by the City of Lubbock. They claim that the City did not properly pay its firefighters for "move-up" pay pursuant to the Civil Service Act. Pursuant to the Civil Service Act firefighters can move-up and perform temporary duties in higher classifications. When they perfonn these duties they are entitled to the pay of the higher classification. While the City has paid them this higher pay, the plaintiffs assert they are also entitled to the "seniority pay" which they've earned at the lower classification. Their basis for this assertion is that the statute says that they are entitled to the base pay of the higher classification plus any "longevity or senioril)' pay". Both sides filed Motions for Summary Judgment in the trial court and the court ruled in favor of the plaintiffs. The City's Motion for Summary Judgment was denied. Plaintiffs were awarded damages, collectively, in the amount of $688,000 for damages through July 12, 2002, which includes pre-judgment interest. Plaintiffs were denied anomey's fees. The City of Lubbock appealed the trial court's decision to the appellate court. On October 7. 2004, the Appeals Court reversed the judgment of the trial court and rendered a decision in favor of the City, holding that the City paid its employees properly under the Civil Service Act. The Plaintiffs filed a Motion for Rehearing. which was denied. Plaint iii's have indicated they will attempt to have the Texas Supreme Court review the case. Barnard Construction Company, Inc. v. City of Lubbotk: The Plaintiff is a construction company suing the City for breach of contract. The plaintiff alleges the City owes It nearly $2,400,000 for rock it excavated on a drainage project. They assert that they are owed $204,000 for rock excavated on Line A I and assert they are owed nearly $2,200,()00 for rock C'XCavated on other lines on the projecL The City has agreed to pay for approximately $176,000 ofrock excavated on Line AI. However, the City denied that it owes Barnard any compensation for rock excavated on the other Lines. The Ciry filed a Motion for Summary Judgment as to this issue and a Trial Court ruled in the City's favor on September 28, 2004. Barnard has indicated it will appeal. Jeanette Livingston. et al v. City of Lubbock: Six Plaintiffs filed suit against the City alleging that the City and/or County failed to properly record infonnation in its cemetery records that would indicate where their relatives were buried. The Plaintiffs' attorneys have indicated that he has approximately eighty other clients in the same or similar position. The City asserts it is not responsible for the improper recordation by the prior entities. The City also asserts that the Plaintiffs have no physical injuries and there is no cause of action in Texas for the negligent infliction of emotional distress. The City is also asserting defenses under the statute of limitations. At this time. damages are difficult to ascertain but, colleetively, they would meet the $200,000 materiality definition for damages. 89 ) ) J .... .J ) CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septernber30,2004 NOTE IV. CONTINGENT LIABILITIES 8. LITIGATION <CONTINUED) Marcie Tanner v. City of Lubbock: The Plaintiff sued the City for racial discrimination, pursuant to 42 U.S.C. § 1981, after she was terminated from her employment with the City of Lubbock. The City asserts that she was tenninated because she sent duplicate mileage reimbursement requeslS to both the City her employer, and Texas Tech University. The Plaintiff also sued Texas Tech, but Texas Tech was dismissed. The City does not believe the potential damages are above $200,000. C. SITE REMEDIATION The City has identified specific locations requiring site remediation relative to underground fuel storage tanks and historical fire training sites. The potential exposure is not readily determinable as of September 30. 2004. In the opinion of management. the ultimate liability will not have ll materially adverse effect on the City's financial position. NOTE V. SUBSEQUENT EVENTS A. VOTER APPROVED CHARTER AMENDMENT The voters of the City of Lubbock on November 2, 2004, voted to amend the Charter of the City of Lubbock providing for an Electric Utility Board composed of nine Lubbock citizens and eligible voters appointed by City Council be created to govern, manage, and operate the City's electric utility. The City Council appointed the nine members of the new Electric Utility Board on November 12, 2004 pursuant to the Charter Amendment passed by the voters of the City of Lubbock on November 2, 2004. The purpose of the change is to give closer scrutiny to LP&L's competitive position and long term financial viability. B. LUBBOCK ECONOMIC DEVELOPMENT ALLIANCE. INC. CLEDA) Lubbock Economic Development Alliance, Inc. (LEDA) is a SOIC-4 Corporation created by the Lubbock City Council to take the lead in economic development for the City. LEDA is led by a five member Board appointed by the City Council and is funded by a 1/8 cent increase in the sales tax. The sales tax increase was approved by the voters for economic development activities in November 2003. LEDA will be considered a component unit of the City when it begins collecting funds from operations during the fiscal year 2004·05. 90 ) APPENDIXC FORM OF BOND COUNSEL'S OPINION ) ) J [FORM OF BOND COUNSEL OPINION] [Closing Date] $ ___ _ CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES aU> WE HAVE represented the City of Lubbock, Texas (the "City"), as its Bond Counsel in cormection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERJES ~ dated August 15, 2X6, issued in the principal amount of$ ___ _ The Certificates mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Certificates and in the ordinance adopted by the City Council of the City authorizing their issuance (the "Ordinance"). WE HA VB represented the City as its Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in cormection with the City's Official Statement prepared for use in cormection with the sale of the Certificates has been limited as described therein. IN OUR CAPACITY as Bond Counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the City, customary certificates of officers, agents and representatives of the City, and other VInson & Elkins LLP Attorneys .t uw Au51in Beijing Dallas Dubai HoU$COn London Moscow New Yortc Tokyo Washington C-1 TramrneU C!'OIIV Center. 2001 Ross Awnue. Suite 3700 Dalla&. Texas 75201·2975 Tel214.220. noo Fn 214.220.7716 www.velaw.com ) ' ' 1 public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined executed Certificate No. 1 of this issue. BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and, therefore, the Certificates constitute valid and legally binding obligations of the City; and (B) A continuing ad valorem tax upon all taxable property within the City, necessary to pay the interest on and principal of the Certificates, has been levied and pledged irrevocably for such purposes, within the limit prescribed by law, and the total indebtedness of the City, including the Certificates, does not exceed any constitutional, statutory or other limitations. In addition, the Certificates are further secured by a limited pledge (not to exceed $fa}) of the surplus net revenues of the City's Waterworks System, as described in the Ordinance. THE RIGHTS OF THE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar Jaws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity wh_~ch pennit the exercise of judicial discretion. IT IS OUR FURTHER OPINION THAT: (1) Interest on the Certificates is excludable from gross income for federal income tax purposes under existing law; and (2) The Certificates are not "private activity bonds" within the meaning of the Internal Revenue Code of 1985, as amended (the "Code,'' and interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be inc1uded in the "adjusted current earnings" of a corporation (other than an S corporation, regulated inves1ment company, REIT, REMIC or FASIT) for purposes of computing its alternative minimum tax liability. In providing such opinions, we have relied on representations of the City, the City's financial advisor and the underwriters of the Certificates with respect to matters solely within the knowledge of the City, the City's financial advisor and the underwriters respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the City fails to comply with the foregoing C-2 OFFICIAL STATEMENT Dated August 25, 2005 Ratings: Moody's: "Aaa" S&P: "AAA" Fitch: "AAA" FSA Insured NEW ISSUE • Book-Entry-Only (See "Bond Insurance" and "Other Information • Ratings" herein) !n the opinion of Bond Counsel, interest on the Certificates is excludable from gross income for federal income tax purposes under existing law and the Certificates are not private activity bonds. See "Tax Matters -Tax Exemption" herein for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations. THE CERTIFICATES WILL NOT BE DESIGNATED AS "QUALIFIED TAX-EXEMPT OBLIGATIONS" FOR FINANCIAL INSTITUTIONS $46,525,000 CITY OF LUBBOCK, TEXAS (Lubbock County) TAX AND WA TERWOR.KS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Dated Date: August 15, 2005 Due: February 15, as shown on inside cover PAYMENT TERMS ... Interest on the $46,525,000 City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates") will accrue from August 15, 2005 (the "Dated Date") and will be payable February IS, 2006, and on each August 1 S and February 15 thereafter until maturity or prior redemption. Interest on the :::ertificates will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Certificates will 'e initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of &5,000 or integral multiples thereof. No pllysical delivery of the Certificates will be made to tbe owners thereof. Principal )f, premium, if any, and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will nake distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners >fthe Certificates. See "The Certificates-Book-Entry-Only System" herein. The initial Paying Agent/Registrar is JPMorgan :hase Bank, National Association, Dallas, Texas (see "The Certificates-Paying Agent/Registrar"). ~UTHORJTY FOR ISSUANCE ... The Certificates are issued pursuant to the Constitution and general laws of the State of Texas :the "State"), particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971 ), as amended, and constitute direct obligations of the City of Lubbock, Texas (the ''City"), payable from a combination of )) the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property .vithin the City, and (ii) a pledge of surplus net revenues of the City's Waterworks System, not to exceed $500, as provided in :he ordinance authorizing the Certificates (the "Ordinance") (see "The Certificates-Authority for Issuance"). PURPOSE ••• Proceeds from the sale of the Certificates will be used for the purpose of (i) construction and acquisition of public mprovements, including streets, parks, drainage, water and sewer and electrical improvements, a water resources plan and an tirport parking lot and (ii) paying the costs associated with the issuance of the Certificates. I'FSA. The scheduled payment of principal and interest on the Certificates when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Certificates by FINANCIAL SECURITY ASSURANCE INC. CUSIP PREFIX: 549187 SEE MATURITY SCHEDULE, 9 Digit CUSIP AND llEDEMPTlON PROVISIONS ON THE REVERSE OF THIS PAGE LEGALITY •.• The Certificates are offered for delivery when, as and if issued and received by Underwriters and subject to the 1pproving opinion of the Attorney General of Texas and the opinion of Vinson & Elkins L.L.P., Bond Counsel, Dallas, Texas see Appendix C, "Form of Bond Counsel's Opinion"). Certain legal matters will be passed upon for the Underwriters by vicCall, Parkhurst & Horton L.L.P., Dallas, Texas, Counsel for the Underwriters. )ELJVERY .•• It is expected that the Certificates will be available for delivery through DTC on September 29, 2005. A. G. EDWARDS & SONS, INC. MATURITY SCHEDULE CUSIP Prefix: 549187 (ll Principal Maturity Interest Initial CUSIP Principal Maturity Interest Initial CUSIP Amount (febru~ IS~ Rate Yield Suffix 111 Amount (Febru~ IS) Rate Yield Suffix 111 $ 1,575,000 2006 3.000% 2.850"..1> T6 (9) s 1,080,000 2013 3.500% 3.640% W2(4) 1,600,000 2007 3.000% 2.960% 1i (7) 900,000 2013 5.000"4 3.640% us (9) 650,000 2008 3.000% 3.050% V3 (3) 2,070,000 2014 5.000",{, 3.740% U6 (7) 1,000,000 2008 3.250% 3.050% T8 (5) 2,155,000 2015 3.750% 3.830% U7 (5) 705,000 2009 3.10()% 3.170% vs (8) 2,260,000 2016 s.oow. 3.910% (2) us (3) 1,000,000 2009 3.375% 3.170"/o T9 (3) 2,370,000 2017 5.000% 3.970% (2) U'}(J} 1,770,000 2010 3.50()% 3.280"/o U2 (6) 2,475,000 2018 4.000% 4.170% V2 {S) 1,005,000 2011 3.350% 3.420"/o V7 (4) 3,160,000 2023 5.125% 4.120"/o (2) W3(2) 820,000 2011 3.625% 3.420"/o U3 (4) 3,335,000 2024 5.125% 4.150"/o (2) VS (2) 1,900,000 2012 3.750"/o 3.520"/o U4 (2) 3,505,000 2025 4.375% 4.460"/o V9(0} S 5,315,000 5.00% Term Certificates Due February IS, 2020, Priced to Yield 4.07%(21-CUSJP 549187 V4 (1) S 5,875,000 5.00% Term Certificates Due February IS, 2022, Priced to Yield 4.12%"1-CUSIP 549187 V6 (6) (Accrued Interest from August IS, 2005 to be added) (I) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, A Division of The McGraw-Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the City nor the Underwriters shaH be responsible for the selection or correcmess of the CUSIP numbers shown on the inside cover page. (2) Yield shown is yield to first call date, February 15,2015, at a redemption price of par. OPTIONAL REDEMPTION ••• The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2016, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on February 15, 2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see ''The Certificates -Optional Redemption"). MANDATORY SJNKINC FUND REDEMPTION •.• The Certificates maturing February 15, 2020, and February 15, 2022 (the "Term Certificates") shaH be subject to mandatory redemption prior to matUrity at the price of par plus accrued interest to the mandatory redemption date on the respective dates and in principal amounts as follows: Tenn Certificate due Febru!I}' 15, 2020 Redemption Date Principal Amount February 15, 2019 $ 2,590,000 February IS, 2020 * 2,725,000 * Maturity Tenn Certificate due February I 5, 2022 Redemption Date February 15, 2021 February 15, 2022 * Principal Amount $ 2,865,000 3,010,000 This O.ffklol Statement which includes the cover page. inside cover page and the App<!ruiicu hereto, doet not constitute an offer to sell or the solicitation of Dn offer to llll)' tn any }llrlsdiction to mry person to whom it is 111t/awjul to moke such offer, solicitotion or sale. No <kaler, broku, saksperson or othu penon hos wen authorized to give information or to moke any representation other than those contained in this Official Statement. tmd. if given or made, such other infonnation or representatioJtS must not be r<!lkd upon. The information set forth herein has wen obtained from the City and other sources believed to be refillbk. but such information is not guaranteed os to accuracy or completeness and is not to be construed os the promise or gutmmtee of tlte Financial Advi.rol', This Official Statement contains, in part, estimates and matten of opinion which are not intended os statements of foct, and no representation is made tll to the correctness of such estimates arui opinions, or that they will be realized. Tlte i'!fonnation 011d l!J(])Tustcns of opinwn contailled herein are subject to change without notice, and neither the delivery of this Official Statement nor any safe made lterelmder shoTT. 111tder any circll:mstmu:et, create any impli1:1:1tion thot titer<! htJI wen no ch011ge in the ajfofn of the City or othu 711Qners detcribed herein since the dale hereof. Su "Other l'!fonnation-Continuing I>i.rc10SIIl'e of Information" for a ducription of the Cil)''s uruJertolring to provide certain infonnation on a colllilflling btlli.r. THE CER11FICATES ARE EXEMPT FROM REGISTRATION WITH THE SECUJUTIFS AND EXCHANGE COMMlSSTON AND CONSEQUENTLY HAYE NOT BEEN REGISTERED THEREWITH. THE REGISTR.4TION. QUALIFICATION. OR EXEMPTION OF THE CERTIFlCATES IN ACCORDANCE WITH APPUCAJJLE SECURlTIES UW PROJ'ISIONS OF 11lE JfJRJSDJCTION IN WHICH THESE SECUJm'lES HAYE BEEN REGISTERED OR EXEMPTED SHOULD NOT BE REGARDED .AS .A RECOMMENDAT10NTHEREOF. NEITHER THE Cfl'Y NOR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONT.AINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR 11'$ BOOK-ENTRY-ONLY SYSTEM. AS SUCH INFORMATION HAS BEEN FURNISHED BY THEDEPOS/TORYTRUSTCOMPANY IN CONNECTION W1Tll111E OFFERING OF THE CERTIFICATES. THE UNDERWRITERS MAY O'YER-.ALLOT OR EFFECTTIUNSACTIONS THAT STABILIZE OR MAINTAIN THE MARXEI' PRICES OF THE CERTIFICATES AT A LEYEL ABOYE THAT WHICH MIGHJ' OTHERW'/SE PREI'.A/L IN THE OPEN MARKET. SUCH STABJLJZING, IF COMMENCED, MAY BE DISCONTINUED AT ANYTIME. The Underwriten have provided the folluwing smtuu:e for inclusion in tire Official Statement The Underwriter:s have reviewed the information in this Official Statement in accordimce with, and as part of, their responsibilitle.t to investors IInder the federal securities laws a.s applied to the facts Dnd circumstonces of this transaction, Ina tire Underwrit'-13 tfo not guarantee the accuracy or completeness of such information. TABLE OF CONTENTS OFFICIAL STATEMENf SUMMARY -----.. "-""""'"""'4 CITY OFFICIALS, STAFF AND CONSULT ANTS-.. --·-··' ELECTBD OFFICIALS .............................................................. 6 SELECTED ADMJNISTRA TIVE STAFF ...................................... 6 CONSULTANTS AND ADVISORS ............................................. 6 INTRODUCTION--.. -·----.. --·-----.. -----.. --.. -7 THE CERTmCATES ___ , _____ ,,_,_, _____ ,,_,_,, 7 BON» INSVRANCE-.. ----··-··--····-... -.... -... ·-····--··-13 DISCUSSION OF RECENT FINANCIAL AND )IANAGEl\tENT EVENTS •.... -... -.... -.... _,, __ ,,_,_14 TAX XNFORMATION._,_, __ .... _ .... _ .. ,_ .. _ .... __ , ___ ,_,zs TABLE l -VALUATION, ExEMnlONS AND GENERAL 0BUGATIONDEBT .................................................... 32 TABLE2-TAXABLBAsSSSS£DVALUATIONSBY CATEGOR¥ ................................................................ 34 TABLB3A-VALUATIONANDGENER.AL0BLIGATIOND£BT HlsTORY .................................................................... 3S TABLE 3B -DERIVATION OF GENERAL PllRPoSE F'UNDBD TAXDEBT ................................................................. 3S TABLB4-TAX RATE, LEVY ANDCOLLEcnONHJSTORY .35 TABLES-TI!NLARGESTTAXPAYEaS ............................... 36 TABLE 6 • TAX ADEQUAd1) ............................................. 36 TABLE7-EsTiMATED0VERLAPPJNGDEBT ...................... 37 DEBT INFORMATION ··-··-.. --.... -... -··-··-------38 TABLE 8A -GENERAL 08UGATION DEBT SERvrCE REQUIIU!MENTS ......................................................... 38 T ABLe8B • DMSION OF DEBT SER.VlCI! REQUIR.EMENTS. 39 TABLE 9 -INTEIU:ST AND SINKJNG FuND BUDGET PR.oJEcnoN .............................................................. 40 TABLB 10-COMPIJTATIONOFSELP-SUPPORTINGDEBT .. .41 TABLE 11 • AUTHORIZED BIJT UNISSUED GENERAL OBLIGATION BONDS ................................................. 42 TABLE 12-OnfER 0BLIGATIONS ....................................... 42 FINANCIAL INFORMATION ---···---··-M··-.. -.... _44 TABLE 13 -CHANm•-~ l'NNI':I' Ass~---···· TABLB l3-A-GENERAL FuND REvENUEs AND ExPBNDJTURE HISTORY ............................................ 45 TABLE 14 • MUNICIPAL SALES TAX HISTORY ................... 46 TABLE IS -C'URRI!:NT INvEsTMENTs ................................... SO TAX ~rrERS , ___ , _____ , __ ,_ .... _MHMUO_ .. _, __ Sl OTHER INFORMATION ·----------·--.. -----.. -53 RATINGS .............................................................................. S3 LmGATION .......................................................................... S3 RlsGJSTRA.TION AND QUALIFICATION OP CERTIFICATES FOR SALE ......................................................................... 54 LEGAL INVESTMENTs AND ELIGmn.ITY TO SECURE PuBLIC FuNDs JNTExAs ....................................................... 54 LEGAL OPTNIONS ................................................................. 54 CONTINUING DISCLOSURE OP INFORMATION ..................... 54 FINANCIAL ADVISOR ........................................................... S6 lJNDERWRmNG ................................................................... 56 FORW ARD-looKINO STA TEMENrS DISCLAIMER ................ 56 MISCELLANEOUS ................................................................. 51 APPENDICES GENERAL INFORMATION REGARDING Till! CITY ................. A Excans FROM 1HE ANNUAL FINANCIAL REPoRT.......... B FORM OF BOND COUNSEL'S OPINION ...... .. .. .. ...... ...... ......... C SPECIMEN MUNICIPAL BoND INSURANCE POLICY ............. D The cover page hereof, this page, the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement OFFICIALSTA TEMENT 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 Certificates to potential investors is made only by means of this entire Official Statement No person is authorized to detach this surn.rruuy from this Official Statement or to otherwise use it without the entire Official Statement. Tm: Crrv ..................................... The City of Lubbock, Texas (the "City") is a political subdivision and murucipal corporation of the State, located in Lubbock County, Texas. The City covers approximately I IS square miles and has an estimated 2005 population of209,120 (see "Introduction-Description of the City'~. THE CERTIFICATES ..................... The Certificates are issued as $46,525,000 Tax and Waterworks System Swplus Revenue Certificates of Obligation, Series 2005. The Certificates are issued as serial certificates maturing February 15 in each of the years 2006 through 2018 and 2023 through 2025 and as Term Certificates maturing February 15, 2020 and February IS, 2022 (see "The Certificates- Description of the Certificates"). PAYMENTOPINTEREST .............. Interest on the Certificates accrues from August 15,2005 and is payable February 15, 2006 and each August 15 and February 15 thereafter until maturity or prior redemption (see "The Certificates -Description of the Certificates" and "The Certificates-Optional Redemption"). AUTHORITY FOR IssuANCE.......... The Certificates are issued pursuant to the general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and an Ordinance passed by the City Council of the City (see "The Certificates - Authority for Issuance"). SECURITY FOR THE CERTIFICATES .............................. The Certificates constitute direct obligations of the City, payable from a combination of (i) the levy and coUection of a direct and continuing ad valorem tax, within the limits prescnbed by law, on all taxable property within the City, and (ii) a pledge of swp1us net revenues, not to exceed $500, of the City's Waterworks System (see ''The Certificates -Security and Source of Payment''). REDEMI'TION ............................... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15,2016, in whole or in part in principal amounts of$5,000 or any integral multiple thereof, on February IS, 2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see ''The Certificates • Optional Redemption"). The Certificates maturing on February 15 in the years 2020 and 2022 (the ''Term Certificates") are subject to mandatory redemption as descnbed in the Ordinance (see "The Certificates -Mandatory Sinking Fund Redemption"). TAX EXEMPTION............................ In the opinion of Bond Counsel, the interest on the Certificates will be excludable from gross income for federal income tax pwposes under existing law and the Certificates are oot private activity bonds. See ''Tax Matters -Tax Exemption" for a discussion of the opinion of Bond Counsel, including a description of the alternative minimum tax consequences for corporations. Ust: OF PROCEEDS ...... ................. Proceeds from the sale of the Certificates will be used for the purpose of (i) construction and acquisition of public improvements including streets, paries, drainage, water and sewer and electrical improvements, a water resources plan and an airport parking lot and (ii) paying the costs associated with the issuance of the Certificates. RATINGS ...................................... The Certificates are rated "Aaa" by Moody's Investors Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Services, A Division of The McGraw-Hill Companies, Inc. ("S&P") and "AAA" by Fitch RAtings ("Fitch") by virtue of insurance policies to be issued by Financial Security Assurance Inc. The presently outstanding uninsured tax supported debt of the City is rated "Al" by Moody's, "AA-" by S&P and "AA-" by Fitch. The City also has multiple issues outstanding which are rated "Aaa" by Moody's, "AAA" by S&P and "AAA" by Fitch through insurance by various commercial insurance companies (see "Othei Information -Ratings"). BooK-ENTRY-ONLY SYSTEM...................................... The definitive Certificates will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Certificates may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Certificates will be payable by the Paying Agent/Registrai to Cede & Co., which will make distribution of the amOUDts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates (see "The Certificates-Book-Entry-Only System"). PA YMtNT REcoRD ..................... The City bas never defaulted in payment of its general obligation tax debt SELECJ'ED FINANCIAL INFoRMATION Ratio <kneral Purpose Per Capita Funded Fiscal Per Capita General General Tax Debt Year Taxable Taxable Purpose Purpose to Taxable Ended Estimated Assessed Assessed Funded Funded Assessed 9/30 Population <•> Valuation Valuation Tax Debt (l) Tax Debt (l) Valuation (l) 2001 201,097 $ 6,638,911,093 2002 202,000 6,909,309,707 2003 204,737 7,342,344,867 2004 206,.290 7,921,590,380 2005 209,120 8,664,190,909 (I) Source: The City of Lubbock, Texas. (2) Does not include self-supporting debt (3) Projected, includes the Certificates. ( 4) Partial collections through July 31 , 2005. $ 33,013 34,205 35,862 38,400 41,432 $ 58,122,809 $ 289 0.88% 63,115,346 312 0.91% 70,188,204 343 0.96% 70,161,218 340 0.89% 95,083,286 (3) 455 (l) 1.10% Gt:NERAL FuND CONSOLIDATED STATEMENT SUMMARY Fiscal Year Elided September 30, 2004 2003 2002 2001 Fund Balance at Beginning of Year $ 9,417,346 $ 16,598,252 (1) $ 16,716,042 $ 16,620,652 Total Revenues and Transfers 97,437,436 91,753,809 92,490,374 90,463,799 Total Expenditures and Transfers 94,160,257 98,934,715 90,594,059 90,368,409 Fund Balance at End ofY ear $ 12,694,525 $ 9,417,346 $ 18,612,357 $ 16,716,042 Less: Reserves and Designations (1,903,690! ~2,361,860l Undesignated Fund Balance $ 12,694,525 $ 9,417,346 $ 16,708,667 $ 14,354,182 (3) %of Total Tax Collections 99.291'/t 99.41% 98.78% 99.69% 96.48% (.4) 2000 $ 17,248,025 85,518,102 86,145,475 $ 16,620,652 (2,857,096! $ 13,763,556 (1) The "Fund Balance at Beginning of Year" was restated See "Discussion of Recent Financial and Management Events-FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues" for a further explanation of the restatements. For additional information regarding the City, please contact Ms. Lee Ann Dumbauld Mr. Vince Viaille Mr. Jason Hughes CFO/ACM First Southwest Company First Southwest Company City of Lubbock or 1001 Main Street or 325 North St. Paul Street P.O. Box 2000 Suite 802 Suite 800 Lubbock. Texas 79457 Lubbock, Texas 79401 Dallas, Texas 75201 Phone (806) 775-2016 Phone (806) 749-3792 Phone(214)943-4000 Fax (806) 775-2051 Fax (806) 749-3793 Fax (214) 953-4050 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OmCIALS City Council Marc McDougal* Mayor Linda DeLeon Councilmember, District I Floyd Price Councilmember, District 2 Gary Boren Councilmember, District 3 Phyllis Jones Councilmember, District 4 Tom Martin Councilmcmber, District 5 Jim Gilbreath Councilmember, District 6 Date of Installation to Office May,2002 May,2004 June,2004 May,2002 May,2004 May,2002 May,2003 • Mr. McDougal has served on the Council since May, 1998. SELECI'ED ADMINISTRATIVE STAFF Tcnn Expires Occupation May,2006 Business Owner, Real Estate May,2006 Business Owner May, 2008 Retired May,2006 Business Owner, Personnel Services May,2008 Self-Employed May,2006 Retired Law Enforcement May,2008 Business Owner Date of Employment Date of Employment Total Government Name Position in Current Position with City of Lubbock Service Lou Fox City Manager February, 2004 February, 2004 24 Years Tom Adams Deputy City Manager August, 2004 August, 2004 22 Years Lee Ann Dumbauld Chief Financial Officer/ July, 2004 July, 2004 20+Years Assistant City Manager Quincy White Assistant City Manager September, 2000 September, 2000 13 Years Anita Burgess CityAnomey December, 1995 December, 1995 9Years Rebecca Garza City Secretary January, 2001 August, 1996 8Years Andy Burcham Cash & Debt Manager November, 1998 November, 1998 6Years CONSULTANTS AND ADVISORS Auditors .......................................................................................................................................................................... KPMO LLP Dallas, Texas Bond Counsel ................................................................................................................................................ Vinson & Elkins L.L.P. Dallas, Texas Financial Advisor ...................................................................................................................................... First Southwest Company Lubbock and Dallas, Texas OFFICIAL STATEMENT RELATING TO $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CER'ImCATES OF OBLIGATION, SERIES 2005 INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regardi.llg the issuance of $46,525,000 City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005. Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Ordinance to be adopted on the date of sale of the Certificates which will authorize the issuance of the Certificates, except as otherwise indicated herein. There follows in this Official Statement descriptions of the Certificates and certain information regarding the City and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the Dallas, Texas office of the City's Financial Advisor, First Southwest Company. DESCRJPTION OF THE CrrY •.. The City is a political subdivision and municjpal corporation of the State, duly organized and existing under the laws of the State, including the City's Home Rule Charter. The City was incorporated in 1909, and first adopted its Home Rule Charter in 1917. The City operates under a Council/Manager fonu of government with a City Council comprised of the Mayor and six Councilmembers. The Mayor is elected at-large for a two-year term ending in an even- numbered year. Each of the six members of the City Council is elected from a single-member district for a four-year tenu of office. The terms of three members of the City Council expire in each even-numbered year. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are: public safety (police and tire protection), highways and streets, electric, water and sanitary sewer utilities, ailport, sanitation and solid waste disposal, health and social services, cul~recreation, public transportation, public improvements, planning and zoning, and general administrative services. The 2000 Census population for the City was 199,564; the estimated 2005 population is 209,120. The City covers approximately 115 square miles. FINANCIAL AND MANAGEMENT CHALLENGES ... In the past three fiscal years, the City bas experienced a variety of financial and management challenges, and certain investigations and reports conducted or prepared by the City or its consultants have found weaknesses in the City's general management and fi.n.ancial practices, both with the City in general and the City's electric utility system, known as Lubbock Power & Light ("LP&L"), in particular. The City is of the view that it has substantially addressed many of these conditions. Reference is made to "Discussion of Recent Financial and Management Events" for a discussion of these events and a description of how the City bas responded to these events. THE CERTIFICATES DESCRIPTION OF THE CERTIFICATES ... The Certificates are dated August 15,2005, and mature on Febrwuy 15 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. Interest will be payable on February 15, 2006 and on each August IS and February 15 thereafter until maturity or prior redemption. The definitive Certificates will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ("DTC") pursuant to the Book-Entry-Only System described herein. No physical delivery of the Certificates will be made to the owners thereof. Principal of, premium, if any, and interest on the Certificates wiU be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members ofDTC for subsequent payment to the beneficial owners of the Certificates. See "The Certificates -Book-Entry-Only System" herein. AlJTRORITY FOR IssUANCE ••• The Certificates are be.ing issued pursuant to the Constitution and general laws of the State of Texas, particularly Subchapter C of Chapter 271, Texas Local Government Code (the Certificate of Obligation Act of 1971), as amended, and an ordinance passed by the City Council (the "Ordinance''). SECVRITY AND SoURCE o:r PAYMENT ... All taxable property within the City is subject to a continuing ~ annual ad valorem tax levied by the City sufficient to provide for the payment of princjpal of and interest on all obligations payable in whole or in part from ad valorem taxes, which tax must be levied within limits prescn'bed by law. Additionally, the Certificates are payable from and secured by a limited pledge {not to exceed $500) of surplus net revenues of the City's Waterworks System, as provided in the Ordinance authorizing the Certificates. TAX RATE LIMITATION .•. All taxable property within the City is subject to the levy, assessment and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the paymeDt of principal of and interest on all ad valorem tax debt within the limits prescn'bed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City adopts the constitutionally authorized maximum tax rate of$2.50 per $100 Taxable Assessed Valuation. OPTIONAL REDEMPTION ... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2016, in whole or in part in principal amounts of$5,000 or any integral multiple thereof, on February 15, 2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all of the Certificates are to be redeemed, the City may select the maturities of Certificates to be redeemed. Ifless than all the Certificates of any maturity are to be redeemed, the Paying AgeDt/Registrar (or DTC while the Certificates llle in Book-Entry-Only form) shall determine by lot the Certificates, or portions thereof, within such maturity to be redeemed. If a Certificate (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Certificate (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are beld by the Paying Agent/Registrar on the redemption date. MANDATORY SINKING FuND REDEMPTION .•. The Certificates maturing FebruliiY 15, 2020, and February 15, 2022 (the "Term Certificates") shall be subject to mandatory redemption prior to maturity at the price of par plus accrued interest to the mandatory redemption date on the respective dates and in principal amounts as follows: Term Certificate due February 15,2020 Term Certificate due February 15, 2022 Redemption Date Principal Amount Redemption Date Principal Amount February 15, 2019 $ 2,590,000 February 15,2021 $ 2,865,000 February 15,2020 • 2,725,000 February 15,2022 * 3,010,000 • Maturity At least forty~five ( 45) days prior to each redemption date specified above the Term Certificates are to be mandatorily redeemed, the Paying Agent/Registrar shall select by lot the nwnbers of the Tenn Certificates to be redeemed on tbe next following February 15 from moneys set aside for that purpose in the interest and sinking fund maintained for the payment of the Certificates. Any T enn Certificate not selected for prior redemption shall be paid on the date of its stated maturity. The principal amount of the Term Certificates of a stated maturity required to be redeemed pursuant to the operation of such mandatory redemption provisions may be reduced, at the option of the City, by the principal amount of Term Certificates of such stated maturity which, at least forty-five (45) days prior to a mandatory redemption date, (1) shall have been acquired by the City at a price not exceeding the principal amount of such Term Certificates plus accrued interest to the date of purchase thereof, and delivered to the Paying Agen11Registrar for cancellation or (2) shall have been redeemed pursuant to the optional redemption provisions and not theretofore credited against a mandatory redemption requirement. NOTICE OF REDEMPTION ... Not less than 30 days prior to a redemption date for the Certificates, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Certificates to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MATI...ED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHE1HER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE CERTIFICATES CALLED FOR REDEMPTION SHALL BECOME DUE AND PAY ABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING TIIAT ANY CERTIFICATE OR PORTION TIIEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH CERTIFICATE OR PORTION THEREOF SHALL CEASE TO ACCRUE. AMENDMENTS .•• The City may amend the Ordinance without the consent of or notice to any registered owners in any manner not detrimental to the interests of the registered owners, including the curing ofany ambiguity, inconsistency, fonnal defect or omission therein. In addition, the City may, with the written consent of the holders of a majority in aggregate principal amount of the Certificates then outstanding, amend, add to, or rescind any of the provisions of the Ordinance, except that, without the consent of the registered owners of all of the Certificates no such amendment, addition or rescission may (i) change the date specified as the date on which the principal on any installment of interest is due payable, reduce the principal amount or the rate of interest, or in any other way modify the tenns of their payment, (ii) give any preference to any Certificate over any other Certificate or (iii) reduce the aggregate principal amount required to be held by owners for consent to any amendment, addition or waiver. DEFEASANCE ... The Ordinance provides that the City may discharge its obligations to the registered owners of any or all of the Certificates to pay principal, interest and redemption price thereon in any matter permitted by law. Under current Texas law, such discharge may be accomplished by either (i) depositing with the Comptroller of Public Accounts of the State of Texas a sum of money equal to principal, premimn, if any and all interest to accrue on the Certificates to maturity or redemption and/or (ii) by depositing with a paying agent or other authorized escrow agent amounts sufficient to provide for the payment and/or redemption of the Certificates; provided that such deposits may be invested and reinvested only in (a) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (b) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent Under current Texas law, upon the making of a deposit as described above, such Certificates shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Certificates have been made as described above, all rights of the City to initiate proceedings to call the Certificates for redemption or to take any other action amending the terms of the Certificates are extinguished; provided however, the right to call the Certificates for redemption is not extinguished if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Certificates for redemption; (ii} gives notice of the reservation of that right to the owners of the Certificates immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. BooK-ENTRY-ONLY SYSTEM ... This section describes how ownership of the Certificates is to be transferred and how the principal of, premium, if any, and interest on the Certificates are to be paid to and credited by The Depository Trust Company ("DTC"), New YorA; New YorA; while the Certificates are registered in its n<:m~inee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in discJOStiTe documents such as this Officwl Statement. The City believes the source of such informaticm to be reliable, but taka no responsibility for the accuracy or completeness thereof. The City cannot and does not give any tl9Stmmee that (J) DTC will distribute payments of debt service on the Cutificates, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee {tl9 the registered owner of the Certificates), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative ofDTC. One fully-registered Certificate will be issued for each maturity of the Ccnificates, in the aggregate principal amount of each such maturity, and will be deposited with DTC. DTC, the world's largest depository, is a limited-pUipOse trust company organized under the New York Banlcing Law, a "banking organization" within the meaning of the New York: Banlcing 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 17 A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ( .. Din:ct 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. swmties 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, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries ofDTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. 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 COipOrations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. 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 Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in turn to be recorded on the Din:ct 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 weU as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Trat~Sfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive Certificate representing their ownership interests in Certificates, except in the event that use of the book-entry system for the Certificates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with DTC arc registered in the name ofDTC's p811nersbip nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownersltip. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only the identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as redemptions, tenders, defaults, and proposed amendments to the Certificate documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be piovided directly to them. Redemption notices shall be sent to DTC. If less than all of the Certificates within a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name, " and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or tbe City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Certificates are required to be printed and delivered. Subject to DTC's policies and guidelines, the City may discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Certificates will be printed and delivered. Use of Certain Terms in Otber Sections of this Official Statement In reading tltis Official Statement it should be understood that wltile the Certificates are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Certificates, but (i) all rights of ownersltip must be exercised through DTC and the Book-Entry-Only System, and (ii) except as descnbed above, notices that arc to be given to registered owners under the Ordinance will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City or the Underwriters. Effect of Termination of Book-Entry-Only System In the event that 1he Book-Entry-Only System is discontinued, printed Certificates will be issued to the holders and the Certificates will be subject to tratiSfer, exchange and registration provisions as set forth in the Ordinance and summari.zed under ''The Certificates -Transfer, Exchange and Registration" below. PAYING AGENT/REGISTRAR ••• The initial PayU.g Agent/Registrar is JPMorgan Chase Bank, National Association, Dallas, Texas. In the Ordinance, the City retaius the right to replace the Paying Agent/Registrar. The City oovenants to maintain and provide a Paying Agent/Registrar at all times until the Certificates are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws ofthe State ofTex.as or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Age.n11Registrar for the Certificates. Upon any change in the Paying Agent/Registrar for the Certificates, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Certificates by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Interest on the Certificates shall be paid to the registered owners appearing on the registration books of the Paying Agent/Registrar at the close of business on the Record Date (hereinafter defined), and such interest shall be paid (i) by c~k sent United States mail, first class, postage prepaid. to the address of the registered owner recorded in the registration boob of tM Paying Agent/Registrar or (ii) by such other method. acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner. Principal of the Certi1icates will be paid to the registered owner at the stated maturity or earlier redemption upon presentation to the designated payment/transfer office of the Paying Agent/Registrar. If the date for the payment of the principal of or interest on the Certificates shall be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the designated paymentltnmsfer office of the Paying Agent/Registrar is located are authorized to close, then the date for such payment shall be the next succeeding day which is not such a day, and payment on such date shall have the same force and effect as if made on the date payment was due. TRANSFER, EXCHANGE AND REGISTRATION •.• In the event the Book-Entry-Only System should be discontinued, the Certificates may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Certificates may be assigned by the execution of an assignment form on the respective Certificates or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Certificates will be delivered by the Paying Agen1/Registrar, in lieu of the Certificates being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Certificates issued in an exchange or transfer of Certificates will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Certificates to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Certificates registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Certificates surrendered for exchange or transfer. See "The Certificates -Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Certificates. Neither the City nor the Paying Agent/Registrar sball be required to transfer or exchange any Certificate called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of a Certificate. REcoRD DATE FOR INTEREST PAYMENT •.• The record date ("Record Date") for the interest payable on the Certificates on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a "Special Record Date") will be established by the Paying Agen1/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ("Special Payment Date", which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each Holder of a Certificate appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. CERTmCATEHOLD£RS' REMEDIES . . . The Ordinance establishes as "events of default" (i) the failure to malce payment of principal of or interest on any of the Certificates when due and payable; or (ii) default in the performance or observance of any other covenant, agreement or obligation of the City, which default materially and adversely affects the rights of the Owners, including, but not limited to, their prospect or ability to be repaid in accordance with the Ordinance, and the continuation thereof for a period of sixty days after notice of such default is given by any Owner to the City. Under State law there is no right to the acceleration of maturity of the Certificates upon the failure of the City to observe any covenant under the Ordinance. Although a registered owner of Certificates could presumably obtain a judgment against the City if a default occurred in the payment of principal of or interest on any such Certificates, such judgment could not be satisfied by execution against any property of the City. Such registered owner's only practical remedy, if a default occurs. is a mandamus or mandatory injunction proceeding to compel the City to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Certificates as it becomes due. The enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. In addition, recent Texas lower court decisions have questioned whether statutory language authorizing political subdivisions to "sue and be sued" is sufficient to waive a municipality•s sovereign immunity to suit While these decisions could affect the ability of an Owner to seek specific perfonnance of a covenant made by the City in the Ordinance or other bond document or to seell: recovery of damages from the City, the remedy of mandamus has not been at issue in these cases. These decisions are currently under review by the Texas Supreme Court. The Ordinance does not provide for the appointment of a trustee to represent the interests of the certificateholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition. Furthermore, the City is eligible to seek relief from its creditoiS under Chapter 9 of the U.S. Bankruptcy Code. Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or certificateholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be beard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Banlauptcy Court in administering any proceeding brought before it The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Certificates are qualified with respect to the customary rights of debtors relative to their creditors. SOURCI>S AND USES OF CERTIJi'ICATE PROCEEDS ... Proceeds from the sale of the Certificates are expected to be expended as follows: SOURCES OF FUNDS: Principal Amount of the Certificates Reoffering Premium Accrued Interest Total Sources of Funds USES OF FUNDS: Deposit to Construction Fund Original Issue Discount Debt Service Fund Deposit Underwriter's Discount Costs of Issuance (mcludes Bond Insurance Premium) Total Uses of Funds $ 46,525,000.00 1,982,4<;7.15 249,672.19 s 48,757,139.34 $47,780,720.00 108,11S.25 250,565.27 292,600.00 325,138.82 $ 48,757,139.34 BOND INSURANCE Other than with respect to information concerning Financial Security Assw:ance Inc. ("Financial Security"} contained under the caption "Bond Insurance" and Appendix D -"Specimen Municipal Bond Insurance Policy" herein, none of the information in this Official Statement bas been supplied or verified by Financial Security and Financial Secwity makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the Certificates; or (iii) the tax exempt status of the interest on the Certificates. Bond Insurance Policy Concurrently with the issuance of the Certificates, Financial Security will issue its Municipal Bond Insurance Policy for the Certificates (the "Policy"). The Policy guarantees the scheduled payment of principal of and interest on the Certificates when due as set forth in the form of the Policy included as an exhibit to this Official Statement (see Appendix D -"Specimen Municipal Bond Insurance Policy"). The policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Financial Sec:ority Assurance Joe. Financial Secwity is a New York domiciled insurance company and a wholly owned subsidiaty of Financial Security Assurance Holdings Ltd. ("Holdings"}. Holdings is an indirect subsidiary ofDexia, S.A., a publicly held Belgian corporation, and ofDexia Credit Local, a direct wholly-owned subsidiary ofDexia, S.A., through its bank subsidiaries, is primarily engaged in the business of public finance, banking, and asset management in France, Belgium and other European countries. No shareholder of Holdings or Financial Security is liable for the obligations of Financial Security. At March 31, 2005, Financial Security's total policyholders' surplus and contingency reserves were approximately $2,321,918,000 and its total unearned premium reserve was approximately $1,672,672,000 in accordance with statuto.ry accounting practices. At March 31,2005, Financial Security's total shareholder's equity was approximately $2,726,667,000 and its total net unearned premium reserve was approximately $1,356,678,000 in accordance with generally accepted accounting principles. The financial statements included as exhibits to the annual and quarterly reports filed by Holdings with the Securities and Exchange Commission are hereby incorporated herein by reference. Also incorporated herein by reference are any such financial statements so filed from the date of this Official Statement until the termination of the offering of the Certificates. Copies of materials incorporated by reference will be provided upon request to Financial Security Assurance Inc.: 350 Park Avenue, New York, New York 10022, Attention: Communications Department (telephone (212) 826-0100). The Policy does not protect investors against changes in market value of the Certificates, which marlcet value may be impaired as a result of changes in prevailing interest rates, changes in applicable ratings or other causes. Financial Security makes no representation regarding the Certificates or the advisability of investing in the Certificates. Financial Secwity makes no representation regarding the Official Statement, nor has it participated in the preparation thereo~ except that Financial Security has provided to the City the information presented under this caption for inclusion in the Official Statement DISCUSSION OF RECENT FINANCIAL AND MANAGEMENT EVENTS In the past three fiscal years (a fiscal year is referred to herein as "FY," with the year designation being the year in which the fiscal year ends; each City fiscal year begins on October 1 and ends on September 30), the City has experienced a variety of financial and management challenges. In response to the events and cirCUI'XIlltances that have created such challenges, the City or consultants retained by it have conducted a series of audits and reviews of City government Certain of the reports, including those described below, revealed weaknesses in the City's general management and financial practices. The City is of the view that progress bas been made in correcting many of these conditions (s« "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events''), although further work will be required before the City is capable of meeting its financial policies, particularly those associated with fund operating and rate stabilization reserves (see "Financiallnfonnation -Financial Policies''). The following discussion includes an analysis of the events that have occurred in the last two fiscal years, in particular, a summary of the measures taken in response to the challenges that have arisen, and a current desmption of the City's financial and management position. Caution Regarding Forward-Looking Statements This Official Statement, and in particular the information under the beading "Discussion of Recent Financial and Management Events.'' contains forward-looking statements. Although the City believes such forward-looking statements are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the considerations dcscn"bed below, among others, that could cause the actual financial results of the City to differ materially from those contemplated in such forward-looking statements. The City cannot fully predict what effects factors of the nature described below may have on the operations of the City and financial condition of the general fund of the City (the "General Fund'') or its business-type activities, including its electric enterprise fund, which operates as Lubbock Light & Power (referred to herein as "LP&L" or the "electric fund"), but the effects could be significant. The discussion of such factors herein does not pwport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof. With respect to LP&L, extensive information on the electric utility industry is, and will be, available from the legislative and regulatory bodies and other sources in the public domain, and potential purchasers of the securities of the City should obtain and review such information. Among the factors that could affect the operations and financial condition of the City in general, and its electric utility in particular, are the following: > Significant changes in governmental policies and regulatory actions, including those of the Federal Energy Regulatory Commission, the United States Environmental Protection Agency (the "EPA"), the United States Department of Homeland Security, the United States Department of the Treasury, the Texas Commission on Environmental Quality ("TCEQ''), the Public Utility Commission of Texas (the "PUC'') and the Southwest Power Pool, Inc., with respect to: -changes in and compliance with environmental and safety laws and policies effecting the City's water, sewer, stormwater and solid waste funds; -changes in and compliance with national and state homeland security laws and policies effecting the City's water, sewer, solid waste and airport funds; -electric transmission cost rate structure; • purchased power and recovery of investments in electric system assets; -acquisitions and disposal of assets and facilities; and -present or prospective wholesale and retail competition in the electric industry; > Unanticipated population growth or decline, and changes in llllllket demand, demographic patterns and the development of technology affecting the City's service area, its general government and public safety expenditures and City revenue from: -investor owned utility franchise fees, -City utility and service fees -sales tax revenues; and -ad valorem tax revenues; >With respect to LP&L: -the implementation of or adjustments made to new business strategies by LP&L; -competition for retail and wholesale customers by LP&L, particularly competition with Xcel (as defined below) and its subsidiaries; -access to adequate electric transmission facilities to meet CUITent and future demand for energy; -pricing and transportation of coal. natural gas and other commodities that may affect the cost of CDerg) purchased by LP&L; -inability of various contractual counteiparties to meet their obligations to the City, and with LP&L ii particular with respect to LP&L's fuel and power purchase arrangements > With respect to the City's financial performance in general: -legal and administrative proceedings and settlements; and -significant changes in critical accounting policies. FY 2003 Financial Conc:erns and Mid-Year Budget Amendments Going into FY 2003, the City Council adopted General Fund and Enterprise Fund budgets that were balanced. However, during the preparation of the budget it was apparent that the transfers to the General Fund from the City's electric fund would need to be reduced as compared to transfers included in prior years• budgets. This situation arose as a result of the cumulative effect of net losses to LP&L after transfers to the City's General Fund. During FY 2003, interfund loans were made to LP&L from the water fund and the General Fund. A number of facto.rs contributed to the LP&L losses (see "Discussion of Recent Financial and Management Events -Past Events Relating to LP&L and West Texas Municipal Power Agency"); a significant factor was that LP&L, unlike most other municipal electric utilities in Texas, competes directly with Southwestern Public Service Company ("SPS''), a subsidiary of a large investor owned energy company, Xcel Energy, Inc. Xcel Energy, Inc., and its subsidiaries with which the City has contracted for energy and other services -principally SPS -and with which it competes, are hereinafter referred to collectively as "Xcel." Xcel is based in :Minneapolis, Minnesota, and is the fourth-largest combination electricity and natural gas energy company in the U.S. In addition to the service area that has dual certification with Xcel, a small part of the City is also served by South Plains Electric Cooperative ("SPEC"). The City, through LP&L, has competed for both wholesale and retail electric customers against investor owned utilities for over 80 years. This competition has existed despite the fact that the City is not within the transmission system governed by the Electric Reliability Council of Texas ("ERCOT'). ERCOT was opened to retail elei:tric competition through the adoption of State deregulation legislation that went into effect on January 1, 2002. The competitive environment has made it difficult for LP&L to fully recover its fuel costs, particularly during periods of volatile and historically high natural gas prices. Prior to calendar year 2000, natural gas prices generally ranged from $2.00 to $3.00 per thousand cubic foot Since 2000, gas prices have held within a general range of $5.00 to $6.00 per thousand cubic foot, and reached as high as $25 per thousand cubic foot in February 2003. Despite the increases in gas prices that began in calendar year 2000, LP&L produced positive net operating income in each year until FY 2003. All LP&L electric generating units, which provided approximately 35% of its energy requirements in recent years preceding FY 2004 (the remaining energy was acquired through power purchase agreements), operate with natural gas as the primary generation fuel. Moreover, a majority of the units are older and significantly less fuel efficient than more modem units. Prior to FY 2004, the City operated LP&L in a manner that was designed to recover administrative or indirect costs provided by the General Fund for LP&L (such as legal and financial services) as well as certain other general transfers. Such transfers included a payment in lieu of ad valorem taxes, an allocation for indirect costs such as legal and financial services, and a cost of business transfer (which approximates a payment in lieu of franchise taxes, and was based on 3% of the gross operating revenues of LP&L) (collectively, the "Cost Recovery Payments"). In addition to the Cost Recovery Payments, prior to FY 2003 LP&L was required to annually transfer to the General Fund amounts to support economic development incentives in the City, a payment designated for infrastructure use, a "gas tax" transfer, and a reimbw-sement of the street lighting expense incurred by the City (collectively, the "Other Transfer Amounts"). Over the ten year period from 1993 to 2002, the average annual operating income of LP&L before transfers was $8 million, and during that period, LP&L transfe.rs to the General Fund for payments in lieu of taxes and recovery of costs of business averaged $8 million per year. Dwing the preparation of the FY 2003 City budgets, it was evident that the amount of money transferred from LP&L to the General Fund would need to be reduced given the financial condition of LP&L. Consequently, the FY 2003 budget trimmed $4.8 million from LP&L transfers included in prior year budgets. In February 2003, during a period of extraordinarily high natural gas prices, City finance staff projected that, in the absence of corrective measures, the electric enterprise fund would have an operating loss of$24 million for FY 2003. During the then current practice of undertaking a mid-year budget assessment, in the Spring of 2003 the City Council amended the LP&L and General Fund budgets to eliminate $7.7 million in transfers from LP&L to the General Fund. City management then undertook a comprehensive review of the General Fund and other enterprise funds for the purpose of identifying budget cuts throughout City government that would offset the reduced LP&L transfers. Ultimately, the City Council adopted budget amendments during the Spring 2003 mid-year review that totaled $9.7 million for the General Fund (hereinafter referred to as the "2003 Budget Adjustments"), which represented approximately 10.5% of the original FY 2003 General Fund budget. In addition to the $7.7 million budget adjustment made to address the LP&L transfer reduction, the City Council determined to write off$2 million owed to the General Fund from the golf course enterprise fund. A number of other budget adjustments were made including (i) the elimination of$2.5 million of capital expenditure items; (ii) a reorganization of the structure of City government was implemented that consolidated a number of positions; (iii) the implementation of a general hiring freeze throughout all City departments, and the elimination of 100 positions in both the General Fund and the electric fund (approximately 40 positions were eliminated at LP&L, a majority of which were in the energy production area); and (iv) a 1% increase of the transfers-in- lieu-of-franchise-payments was made for the water and solid waste funds, which increased the transfer for those fimds from 3% to 4% of their resp~tive gross revenues. Other measures that were taken after the 2003 Budget Amendments to address the projected LP &L operating loss included an increase in the fuel cost adjustment ("FCA'1 for residential and small commercial customers of LP&L by $0.01 per kWh effective May I, 2003 and, effective June I, 2003, the City increased the FCA for its two largest customers, which include Texas Tech University ('"Texas Tech"), and which w;;ount for approximately 10% of the energy sales of LP&L. At the time of the May I , 2003 FCA increase for residential and small commercial customers, the total electric cost energy for that class ofLP&L's customers was approximately 30% above those ofXcel. In addition, in August 2003, the City issued two series of tax-supported debt to refund $8.5 million of LP&L revenue bonds and to provide $13 million for LP&L capital expenditures. The City anticipates that such debt will be self·supporting from LP&L revenues, although as discussed below, LP&L failed to generate sufficient revenues to pay all of its outstanding bonds for FY 2003; nevertheless, the issuance of tax-supported debt for LP&L reduced the cost of borrowing for, and outstanding debt attributed directly to, LP&L. Past Eveats Relating to LP&L and West Texas Municipal Power Agency The City is a member of WfMP A, a municipal power agency that was formed by concurrent ordinances adopted by the governing bodies of the cities of Brownfield, Floydada, Lubboclc and Tulia, Texas (the "Member Cities'') in 1983. The original pwpose of WfMP A was to engage in the generation, transmission, sale and exchange of electric energy to the Member Cities. As described below, under the heading "Discussion of Recent Financial aDd Management Events -City's Responses to Recent Financial and Management Events -Recent Measures taken to Address Financial and Management Concerns at LP&L," the scope ofWTMPA's activities has changed as a result of a series of related agreements reached among WTMPA and the Member Cities in December 2003 (the "WTMPA Settlements"). WTMPA is a separate political subdivision under the Jaws of the State. In June 1998, WTMPA issued $28,910,000 of its Revenue Bonds, Series 1998 (the "WTMPA Bonds''), to finance the construction and acquisition of a 62 MW electric co-generation project (the "WTMPA Project''). The WTMPA Project consists of a 40 MW combustion turbine generator (the "Massengale Unit 8 turbine'') and the re-powering of an existing 22 MW generation unit, each located at the City's J.R. Massengale Plant. The Massengale Unit 8 turbine was originally scheduled to go online in the Spring of 1999, but during the course of the run test, the turbine experienced a catastrophic failure. In May 2001, the City and WTMPA tiled a lawsuit against the manufacturer of the Massengale Unit 8 turbine aDd the gas company that supplied fuel for the Unit, in connection with the failure of the turbine. During September 2002, the City engaged in mediation with the twbine manufacturer and the gas company with respect to the settlement of the litigation. During the course of the mediation, the director ofLP&L and a City Council member who served on the Board of WTMPA and as chairman of WTMPA made statements to the effect that WTMPA had retained the sum of $1.6 million, representing proceeds of the WTMPA Bonds, ttom the turbine manufacturer until the litigation could be resolved. Subsequent investigations revealed that such amount had been retained, but the money had eventually been applied, in February 2002, to pay debt service on the WI'MPA Bonds. In addition, as a result of the delayed completion of the Unit, costs associated with replacement energy were incurred by WTMPA, and the amount of that expense and the responsibility for the expense, subsequently became a disputed claim of the City against WTMPA (see "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events -Recent Measures taken to Address Financial and Management Concems at LP&L''). As a result of the confusion over the existence of the retained amount, the City embarked upon a series of internal fmancial and management audits of the relationship between LP&L and WTMPA, as well as an analysis of the internal controls of the City with respect to LP&L. Such audits (collectively, the "LP&L/WTMPA Management Audit") are available on the City's website at: www.cUubboclc.tx.us under the beading "West Texas Municipal Power Agency Audit." None of these reviews uncovered any malfeasance with respect to the administration of LP&L or WTMPA funds. However, the reviews concluded that the prevailing view that guided the administration of WTMPA affairs by the management of LP&L, was that WTMPA was indistinguishable from LP&L. This view stemmed from the facts that LP&L was contractually committed on a joint and several basis to pay the WTMPA Bonds, the WTMPA Project was operated by LP&L and, as a practical matter, LP&L was taking all the energy from the WI'MPA Project (the other Member Cities received lower-cost energy purchased under WTMPA and City power purchase contracts with SPS). According to the audits, this management perspective had resulted in a consistent failure to follow the terms of the various WTMPA organizational, operational and power purchase agreements. In addition to p001 contract administration by the management of LP&L, there were tin~gs in the LP&L/WTMP A Management Audit to the effec1 that LP&L was acting without proper oversight from the City Council and the City Manager's office. For a discussion of the measures taken to address the criticisms made in the audits, see "Discussion of Recent Financial and Management Events • City'~ Responses to Recent Financial and Management Events-General Fund and General Government Actions" below. In April2003, the WTMPA Member Cities (including the City) engaged Ernst & Young LLP ("E&Y") to conduct an audit of the records ofWTMPA and LP&L. The final report ofE&Y was delivered in May 2003, and included findings of misallocation o1 costs among the Member Cities. The report noted that no evidence of misappropriation of assets or intentional omissions o1 financial information was discovered. The E&Y report found that the misallocations, adding an interest factor for suet allocations, and an unbilled 5% management allocation that LP&L was entitled to under the power agreements, would result in ~ total amount owing to the City of $5,590,746, of which the City owed itself, as a Member City ofWI'MPA, approximately 901}1 of the total amount. In March 2005, the City delivered its Combination Tax and Electric Light and Power System Swplus Revenue Certificates of Obligation, Series 2005, in the aggregate principal amount of$23,055,000. A portion of the proceeds of this issue were used by the City to acquire the WTMP A Project. WTMP A used the proceeds received from the City to defease all of the outstanding WTMPA Bonds. Financial Staff and City Management Turnover Following the publication of the LP&UWTMPA Management Audit and the E&Y audit, several key City officers and LP&L management personnel resigned. Among the officials and management of the City who resigned was a member of the City Council with almost ll years of service, the City Manager, who had served 27 years with the City (the last ten of which as City Manager), the Deputy City Manager, who had almost 8 years of service to the City, the Assistant City Manager for Public Works, who had over five years of service to the City, and the Chief Executive Officer ofLP&L, who bad served in that capacity since 1998. Also, in late summer of 2002, the City's Chief Accountant died during the implementation of Governmental Accounting Standards Board Statement 34 ("GASB 34"). Between the beginning ofFY 2002 and the close ofFY 2003, some 29 persons who held senior management positions with the City left the City's employment, some on their own accord and others as a result of a reorganization of City government. For a discussion of the City's responses to these events, see "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events" below. September 30t 1003 F"mandal Results The General Fund . . . As hereafter described in ''Discussion of Recent Financial and Management Events -FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues", the financial position of the City in FY 2003 was impacted by significant changes in the reporting entity and prior period adjustments and reclassifications of the City's FY 2002 financial statements. With respect to the General Fund, the beginning fund balance/net assets was restated from $18.6 million to $16.6 million. The restatement was attributable to the write off of a receivable in the General Fund from the City's golf fund. In addition, the General Fund experienced a $7.2 million reduction in fund balance/net assets in FY 2003, the most significant drawdown of the General Fund reserves in over ten years. The decrease in fund balance occurred because of the $9.3 million transfer to LP&L to ensure the ongoing operation of LP&L and the payment of the senior lien revenue bonds issued by the City for LP&L. 1n addition, the General Fund reduction in fund balance was a result of the forgiveness of originally budgeted payments in lieu of taxes, franchise fees and indirect costs of $4.8 million from the electric fund to the General Fund. The aggregate result of restatement of the beginning fund balance and the FY 2003 usc of fund balance was a General Fund ending balance of$9.4 million. Coming in to FY 2003, the City bad a fund balance {adjusted) of$18.6 million. The City has adopted a policy (the "General Fund Balance Policy") to maintain an unreserved General Fund balance equal to two months operating expenditures. At September 30, 2002 the General Fund balance exceeded the General Fund Balance Policy by $4.5 million. At September 30, 2003, the General Fund Balance Policy required a fund balance of $14.2 million. As a result of the FY 2003 events described above, the City was $4.8 million under the fund balance required under its policy at the close of FY 2003. The decline in General Fund balance limits the City's ability to mitigate future risks of revenue shortfaUs and unanticipated expenditures. Reference is made to the information hereafter presented under the headings "Discussion of Recent Financial and Management Events-FY 2004 Budget and Year-End Financial Results" and"-FY 2005 Budget." for a discussion ofFY 2004 re,rults for the General Fund and a summary of the City's planning for FY 2005. The Electric Fund ... With respect to the City's electric fund (LP&L), the measures taken by the City Council during the FY 2003 mid-year budget review yielded substantial results as measured by the projected operating loss of $24 million in February 2003. LP&L ended FY 2003 with a $6.3 million operating loss. Before taking into account transfers from other funds, the electric fund reported a $9 million loss, the first such loss in over ten years. As a consequence of the ope.ratingloss, LP&L failed to meet its revenue bond .rate covenant under which the City has agreed to set rates for the electric system sufficient to produce net revenues equal to 1000/o of its senior lien bonded indebtedness. In FY 2003, LP&L produced $0.704 million that was available for the payment of debt service, which represents a 0.3 times coverage of ave.rage annual debt service and a 0.2 times cove.rage of maximum annual debt service, in each case after taking into account the issuance of City general obligation debt for LP&L that occurred in August 2003 (see "Discussion of Recent Financial and Management Events -FY 2003 Financial Concerns and Mid-Year Budget Amendments" for a description of such debt). Under the terms of its bond ordinances, the failure to meet the rate covenant, while significant, did not result in the acceleration of LP&L's debt Moreover, the failure did not materially affect LP&L's operations, as LP&L was able to make its debt payments after receiving a $9.3 million contribution ftom the General Fund, and LP&L has never defaulted in the payment of its bonded indebtedness. In making its debt payments, LP&L has not used any moneys set aside as a debt service reserve fund under its senior lien revenue bond ordinances. The electric fund added $0.587 million to total net assets for the year after factoring in the $9.6 million contribution from the General Fund. Cash and cash equivalents for LP&L were $0.330 million at September 30, 2003. As described above under "Discussion of Recent Financial and Management Events -FY 2003 Financial Concerns and Mid~ Year Budget Amendments," in May 2003, the City Council implemented an increase in the FCA ofLP&L, by $0.01 per kWh which resulted in LP&L's rates for residential and commercial customers being approximately 300/o above those of Xcel. As a result, from May I, 2003 to September 30, 2003 LP&L lost approximately 5.6% of its customers. Despite the increase in the FCA, operating revenues for LP&L declined from $97.4 million in FY 2002 to $91.7 million in FY 2003, while operating expenses increased from $88.3 million in FY 2002 to $98 million in FY 2003, which reflects a $10.7 million increase in cost of purchased fuel and power during the year. For FY 2003, LP&L's average fuel cost was approximately 61% above the cost in FY 2002. LP&L was able to reduce its fuel payments as a result of negotiating a third purchased power contract with SPS in July 2003 to minimize the use of its generation assets. Despite the relatively small operating income that resulted after taking into account the General Fund connibution to LP&L, total net assets of the electric fund decreased by $3.9 million during the year, to $88.5 million, as a result of a restatement of the beginning fund balance. The restatement reflected the write off of a $4.48 million receivable recorded from WTMPA in FY 2002, although the obligation was disputed by the other Member Cities ofwrMPA. As described below under "Discussion of Recent Financial and Management Events -City's Responses to Recent Financial and Management Events -Recent Measures taken to Address Financial and Management Concerns at LP&L," the WTMPA Settlements have resolved the disputed receivable. Other Maior Entemrise Funds: Water. Sewer. Solid Waste and Stonpwater ... In addition to the electric fund, for which FY 2003 financial results are discussed above, the City's other major enterprise funds, consisting of the water, sewer, solid waste and stormwater funds, produced total operatin.g revenues of $71.6 million in FY 2003, as compared to $73 .6 million for FY 2002. In FY 2003, operating expenses for those funds were $57.7 million, as compared with $51.6 million for FY 2002. Net operating transfers for the other major enterprise funds totaled $12.8 million in FY 2003 as compared to $6.5 million in FY 2002. The increase in net transfers out was due primarily to an increase of $5.2 million in net transfers from the solid waste fund that was attributable to the write off of an interfund loan made to the community investment fund in connection with an economic development grant agreement (see "Discussion of Recent Financial and Management Events -FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues -Audit Restatements"). In addition, operating expenses of the solid waste fund increased $5.8 million over FY 2002, which was the result of a change in accounting estimate related to depreciation expense for the City's landfills. FY 2003 Audit Restatements, Reclassifications and Internal Controls Issues As was the case with other municipalities in the State and U.S., the implementation of GASB 34 by the City in FY 2002 effected a substantial change in the presentation of the City's financial statements. Prior to the implementation of GASB 34, governmental accounting standards did not require the use of a government-wide perspective in the presentation of financial information; instead, fund accounting was generally used to present financial data. Under GASB 34, fund accounting has been supplemented by government-wide statements and certain aspects relating to the presentation of the fimd level statements have been modified, as well, particularly with respect to the presentation of restricted and unrestricted net assets within each fund. For additional information regarding accounting policies that arc applicable to the City, see Note I. "Swmnary of Significant Accounting Policies" in the financial statements of the City attached as Appendix B. The FY 2002 financial statements, and the City's financial statements dating to FY1993, were audited by Robinson Burdette Martin Seright & Burrows, L.L.P. (the "Former External Auditor"). In keeping with the overall reassessment of its financial and management affairs undertaken by the City following the occurrence of the events summarized under "Discussion of Recent Financial and Management Events-Past Events Relating to LP&L and West Texas Municipal Power Agency FY 2003," in the Summer of2003, the City conducted a request for qualifications for its external auditor and selected KPMG L.L.P. ("KPMG") to audit its FY 2003 financial statements. Consequently, the Former External Auditor guided the City through the initial yeaJ implementation of GASB 34, while in the second year of GASB 34 financial reporting, the City's financial statements were audited by KPMG. Audit Restatements ... During the preparation of the FY 2003 CAFR, some seven restatements to beginning fund balance/oe1 assets were made to various fund level statements of the City. The restatements totaled $36.7 million. These restatemen~ represented an aggregate increase in net assets of the City of $2 .. 56 million, as some affected funds bad their beginning balanc~ restated to a higher figure, while other funds were restated to decrease their beginning fund balance. As described above under "Discussion of Recent Fina.n<:ial and Management Events -FY 2003 Financial Concerns and Mid- Year Budget Amendments," the General Fund was restated from a fund balance of $18.6 million to $16.6 million to reflect 2 write off for an account receivable, which as of September 30, 2002 had ceased to be collectible. Also, as descn'bed above unde1 "Discussion of Recent Financial and Management Events -September 30, 2003 Financial Results -The Electric Fund," thf electric fund's beginning fund balance was restated downward by $4.48 million to reflect a receivable from WTMPA that Wll! uncollectible. Other enterprise fund restatements include an $0.867 million increase in the water fund beginning balance and f $0.722 million increase in the sewer fund beginning balance, each of which were made to reflect a change in accountin~ treatment pertaining to the appropriate party that is responsible for reimbursement of fees collected by the City for new watCI and sewer connections. With respect to the impact on a particular fund asset, the most significant restatement in beginning func balance occwred in the City's community investment fund, a fund used in prior years to account for economic developmen· initiatives, which was restated from a beginning balance of $46.8 million to $36.8 million. The change was associated with ar economic development grant made by that fimd in FY 2002 that was originally reflected on the accounting statements of the Cit) as a loan. In preparing the 2003 CAFR, it was determined that such transaction should be treated as a grant, not a loan, althoug} Market Lubbock, Inc., a component unit of the City that administers the grant agreement, retains certain recourse actions in the event that the grant recipient fails to satisfy its economic development initiative agreement. As a result, the receivable in the community investment fund for the $1 0 million amount was deleted as an asset of the fund ($6 million of the $10 million grant bad originally been funded through an interfund loan to the community investment fund from the water and solid waste funds). In addition to these five restatements of existing fund balances, in preparing the 2003 CAFR. new assessments were made with respect to two entities with which the City has longwstanding contractual relationships: a corporate entity that does business under contract with the City as "Citibus .. , and WTMPA, a legally separate municipal corporation. In prior fiscal years, the former entity bad been accounted for by the City as a discretely presented component unit of the City, while the City's relationship with WTMPA had been described in the footnotes to City fulancial statements as a contingent liability of the City, because the City bad contractually agreed to provide a debt service guarantee for the debt of the agency. In the 2003 CAFR, the accounting treatment of these entities was reconsidered, and each was added to the City's financial statements as an enterprise fund. The result of the addition of each of these funds was an increase in net assets, in the amoWlt of$12.3 million for the new ttansit fund, and $3.2 million for the new WTMP A fund. Audit Reclassifications ... In addition to the restatements summarized above, other reclassifications of net assets were made in connection with the preparation of the FY 2003 CAFR. Except for the restatements that were made to the financial statements, as described above, the reclassifications did not affect the "bottom line" statement of net assets for a particular fimd, and did not reflect the discovery of missing funds or uncollectible amounts from the prior fiscal period. Instead, the reclassifications pertain to the portion of a fund's net assets that are shown as invested in plant, restricted for future claims or that are unrestricted and available to support the operations of the entity, and as such, the incorrect information shown in the portions of the FY 2002 financial statements that required corrections, or reclassifications, could have provided a reader of the financial statements with misleading information regarding the liquidity of such funds. In the preparation of the FY 2003 CAFR, it was discovered that the portion of net assets shown in certain of the financial statements, particularly with respect to the enterprise funds (or business-type activities), had been mathematically incorrectly calculated in the FY 2002 CAFR. While the government-wide statement of net assets of the City included in the FY 2002 CAFR showed $37.9 million unrestricted net assets for business-type activities of the City, the fund financial statements showed an aggregate amount of unrestricted net assets of the enteq>rise funds that totaled $195.2 million of unrestricted net assets. The FY 2003 CAFR reports in the government-wide statement of net assets of the City $32.9 million of unrestricted net assets for business-type activities of the City and the fund financial statements in the FY 2003 CAFR report an aggregate amount of unrestricted net assets for the enterprise funds that total $30.2 milli0.11 (certain reconciliations are required to balance govemment-wide and fund level reports, thus small differences should appear between the two presentations). Internal Controls Issues ... In accordance with accounting guidelines, the external auditor customarily provides the governmental entity with a "management letter'' that includes a discussion of any material weaknesses in the audited government's internal control structure. In its FY 2003 Management Letter (the "2003 Management Letter''), KPMG noted several weakness in the City's internal controls, including an overall internal control weakness in the City during FY 2003. The 2003 Management Letter noted that the City operated during FY 2003 with an interim City Manager, an interim Chief Financial Officer and a vacant Internal Auditor, and that a high turnover of staff within the City Manager's office dating to late 2002 had a significant effect on the City's internal control structure. See "Discussion of Recent Financial and Management Events -Financial Staff and City Management Turnover" above. In addition, the 2003 Management Letter noted deficiencies in the year end GAAP financial reporting cycle, citing as examples the significant restatement of beginning net assets/fund balances and the reclassifications described above, as well as numerous adjustments that were required to be posted after the initial closing of the City's books for FY 2003. The failme to timely obtain financial statements from component units, including WTMPA, was also noted. KPMG recommended that the City review the personnel within the City's accounting department and the accounting staff within LP&L to determine whether sufficient qualified personnel were in place to provide accurate and timely closing of the City's books and preparation of annual financial statements. Other material weaknesses noted include the failure of the City to properly reconcile its cash balances, the failure of LP&L to meet its bond rate covenant (as described above under "Discussion of Recent Financial and Management Events - September 30, 2003 Financial Results -The Electric Fund''), a lack of oversight or monitoring of contracts with other entities (for example, WTMPA), and the failure of the City to abide by its General Fund Balance Policy (as described above under "Discussion of Recent Financial and Management Events· September 30, 2003 Financial Results -The General FWld"). FY 2004 Budget and Year-End Financial Results General Fund ... The City Council adopted the FY 2004 budget on September 18, 2003. In adopting the FY 2004 budget, the City Council restricted the transfers out of the electric fund to a transfer to the General Fund to an amount equal to the indirect cost recovery amount, or $1.1 million, which represented an approximately $6.6 million reduction in transfers from LP&L from the original FY 2003 budget. In addition, the City Council instructed the interim City Manager to prepare the budget using the principle that taxes would not increase as a result of the increase in taxable value from reappraisals of existing properties, which has represented a substantial portion of tax base growth in previous years. As a result, the tax rate was reduced from $0.5700 per $100 of taxable valuation in FY 2002 to $0.5457 in FY 2003, the equivalent of $1.9 million in revenue, although the tax rate was projected to generate additional revenues of $1.1 million due to new construction in the City. Other revenue enhancements included in the FY 2004 budget were increases in the franchise fees assessed to the gas franchisee and to Xcel, each of which :_..........,,...,..a&...-..-'20/.. ,.,,c,__.,.,. -· ...... -.... -•-.t:O/ ~_...: .. .,...,. " ............ -1..-1 "')1\1\_, 1'-... ...s..s:.: .... _ •L-"----J:'--.c.. ... ..._ .. t... ... ··~-• .. -... -...t ..... I~.J ____ _.,_ funds for the cost of business transfer (which approximates a payment in lieu of franchise taxes) was increased from 3% to 6% of gross revenues. On the expenditure side, seven employment positions were eliminated from the General Fund budget, while an additional five police officers and nine firefighters were funded in the budget. Total revenues and expenditures budgeted for the General Fund were balanced, at $94.2 million. Based on the audited records for FY 2004, total revenues were $86,713,545 and total expenditures were $89,947,342. After other financing sources and uses, including transfers in and out, the General Fund balance grew by $3,277,179 at year-end, to $12,694,525. Of this amount, $12,127,969 was unreserved. The increase in fund balance was primarily a result of strong growth in new constiUction and better than anticipated sales tax revenues, coupled with a concentrated effort by City management to contain expenditures. Excerpts from the City's Comprehensive Annual Financial Report of the fiscal year ended September 30, 2004 (the "FY 2004 CAFR''), including the audited financial statements and the management discussion and analysis (the "MD&A") are attached as Appendix B. Reference is made to Appendix B for a more complete presentation of FY 2004 financial results (the complete FY 2004 CAFR is available from the City upon request and may be downloaded from the City's web site: bttp:/lwww.ci.lubbock.tx.us). Entemrise Funds ... With respect to the major enterprise funds of the City, in FY 2003, the City adopted rate ordinances for the water and sewer enterprise funds that included a series of four 3% increases in water rates and a series of four 5% increases in sewer rates. FY 2004 was the second year of such increases (but see "Discussion of Recent Financial and Management Events - FY 2005 Budget" for a discussion of possible additional rate increases in the water, sewer and stormwater funds in FY 2005 below). Other key budgetary measures included the decrease in transfers from the electric fund to the General Fund and the increase in the cost of business transfer for the water and solid waste funds, each described above, and a planned use of fund balance in the stormwater fund to pay increased debt service on tax·supportcd debt issued by the City for drainage projects. Based on the audited records for year ended FY 2004, the income (loss) before contributions and transfers was $1,236,448 for Electric, $4,599,487 for Water, $1,456,762 for Sewer, ($3,795,957) for WTMPA, $955,418 for Stonnwater, and ($8,962,587) for other non-major enterprise funds. After capital contributions, transfers in, and transfers, the change in net assets for FY 2004 was $1,713,871 for Electric, $2,962,028 for Water, $2,863,166 for Sewer, ($3,439,035) for WTMPA, $644,156 for Stormwater, and ($9,730,558) for other non-major enterprise funds. The unrestricted net assets of the proprietary funds at the end of September 30, 2004 was $7,006,197 for Electric, $14,078,334 for Water, $6,342,909 for Sewer, $1,743,263 for WTMPA, $1,304,513 for Stormwater, and $6,158,385 for other non major enterprise funds. City's Responses to Recent Financial and Management Events As described above, the City has encountered in recent years criticism of its management practices in various reports and audits prepared by the City and outside consultants. At the same time, the City has experienced financial downturns, particularly in the General Fund and at LP&L. Moreover, through reorganizations of government designed to address these shortcomings, and in response to political pressures by the City Council to provide a more accountable City government while reducing the growth of the cost of City government, a significant number of senior management staff of the City have departed. In FY 2004, the City implemented a number of significant steps to address both its management needs and financial challenges. Certain of the measures taken by the City to strengthen City government in general, and to address its financial challenges, are described below. General Fund and General Government Actions > General Fund Budgetary Actions ... As discussed above under "Discussion of Recent Financial and Management Events • FY 2003 Financial Concerns and Mid-Year Budget Amendments" in adopting the 2003 Budget Amendments, as well as the FY 2004 budget and the FY 2005 budget, the City has demonstrated the ability after FY 2003 to meet General Fund obligations with balanced operating results. This has been achieved through various budget cuts and other austerity measures, including eliminating approximately 100 positions City-wide. The City will need to restore its General Fund balance over a period of years. For FY 2004, General Fund balance ended with a sUiplus of $12,127,969. While no assurances can be given as to future financial results, based on historic expenditme trends an increase in General Fund balance of an additional $1 million to $2 million is expected for FY 2005 year end. City management also bas implemented monthly assessments of the budget. > City Management Changes ... In February, 2004, the City completed its search for a new City Manager with the employment of Lou Fox. In late June 2004, City Manager Fox announced a new slate of senior managers for the City, including the hiring of a new Deputy City Manager, a new Chief Financial Officer/ Assistant City Manager and a new Director of Internal Audit (which position was created by the City Council in FY 2003, but was vacant until filled in June 2004). Each of the positions were filled by individuals from outside oftbe City, and each of the new City officers has extensive government service (see "City Officials, Staff and Consultants -Selected Administrative Staff'). Collectively, the new management team represents over 80 years of government service experience. The City is of the view that these moves reflect a return to management stability, and that they will assist the City in addressing the general internal control weakness cited by KPMG in the 2003 Management Letter. > Establishment of Audit Committee ... Through the adoption of a resolution in June 2003, the City Council established an independent Audit Committee composed of five members. The City believes it is one of only a few municipalities nationwide that has created an audit committee, taking its design in large part from the provisions of Sarbanes-Oxlcy Public Company Accounting Refotm and Investor Pro1ection Act. The Audit Committee is charged with maintaining an open avenue ot communication between the City Council, City Manager, internal auditor and independent external auditor to assist the City in fulfilling its fiduciary responsibility to its citizens. The committee bas the power to conduct or authorize investigations into the city's financial performances, internal fiscal controls, exposure and risk assessment. It reports to the City Council. The establishment of the Audit Committee is designed to serve as an additional check on the preparation of the City's financial statements and to avoid weaknesses in the City's internal controls, including the status and adequacy of infonnation systems and security. The chairperson is appointed by the Mayor and the other positions are filled by a vote of the City Council. At least two members of the Audit Committee are required to have a background in financial reporting, accounting or auditing, and at least one member is required to be a certified public accountant. The current membership of the committee consists of Mike Epps, an Exe<:Utive Vice President at American State Bank in Lubbock, Jim Brunjes, Senior Vice Chancellor and Chief Financial Officer for the Texas Tech University System; Dan Benson, a professor at the Texas Tech University School of Law with expertise in federal criminal law and appellate procedure; R.J. Givens, a real estate agent in the City; and Kim Turner, the Director of Internal Audit at Texas Tech. Mr. Brunjes is the chair of the Audit Committee. Recent Measures taken to Address Financial and Management Concerns at LP&L >New Chief Executive Officer for LP&L ... In March 2003, R. Carroll McDonald contracted with the City to perfonn the duties of Director of Electric Utilities for the City. Mr. McDonald bad previously been employed by LP&L, most recently in 1994, when he retired as CEO of LP&L. Mr. McDonald has over 40 years experience in the electric utility business in Lubbock and the Slttl'Ounding area, having also served in various positions with Southwestern Public Service Company (now Xcel) for over 25 years. Mr. McDonald's contract is scheduled to expire in May 2006. Under the management of Mr. McDonald, the City and LP&L have implemented a variety of measures designed to improve the accountability of LP&L to the City and to better position the utility for future profitability. Certain of those measures are described in the paragraphs that follow. The Electric Board (hereinafter defined) bas commenced the process of hiring a successor to Mr. McDonald and expects to have completed this process by December 2005. The City believes it is Mr. McDonald's intent to assist any successor as needed until his contract expires. > Increase in Fuel Cost Adjustment . . . As described under "Discussion of Recent Financial and Management Events -Past Events Relating to LP&L and West Texas Municipal Power Agency" in May 2003, the City Council approved an increase in the FCA portion of the residential and small commercial customers rate class by $0.01 per kWh, an average increase of 12.5% for both residential and commercial customers, which resulted in LP&L being approximately 30% higher in cost for those rate classifications than Xcel. The increase was approved in order to pass through fuel costs that had been incurred by LP&L but not recovered through its rate base. LP&L adjusts its FCA each month, and may do so under the existing methodology without further action of the City Council, to reflect current energy prices plus an additional measure to recover a portion of the rolling eighteen month average for uncollected fuel expense; provided, however, that no such adjustment is typically made unless the overall cost of energy after the FCA adjustment permits LP&L to remain competitive with Xcel. If the adjustments will not permit LP&L to remain competitive and are not passed through, they become an unrecovered fuel expense. As a result of the increase, from May 1, 2003 to September 30, 2003 LP&L lost approximately 5.6% of its customers. After losing almost 4,000 metered customers following the May 1, 2003 FCA increase, LP&L began to increase its customer count in May 2004. Since May 2004, LP&L bas had an average increase of approximately 259 customers per month. The City bas undertaken periodic adjustments to its fuel cost to remain competitive with Xcel. In May 2005, the City FCA was increased by $0.0095 per kWh, an increase that was in line with a rate increase imposed by Xcel. > Establishment of New Electric Utilities Board ... In December 2003, the City Council appointed the Lubbock Electric Utility Governance Commission to review and evaluate various issues relating to the governance of LP&L. In February 2004, that Commission presented its findings to the City Council (the "Electric Utility Governance Report"), and on February 5, 2004, the City Council adopted an ordinance (the "LP&L Governance Ordinance'') (1} creating a new Electric Utilities Board (the "Electric Board") for LP&L (the new board replaces a former board that was advisory only), (2) reserving certain duties and responsibilities with respect to LP&L to the City Council (i.e., the powers to approve LP&L's annual budget; set LP&L's rates; issue debt for LP&L; exercise the power of eminent domain for LP&L; and require the payment of an annual fee to the City), and (3) mandating the creation of certain reserve accounts by LP&L and restricting the transfer of revenues from LP&L to any other fund of the City, including, particularly, the General Fund, until such reserves have been funded. The Electric Board was appointed in February 2004. In June 2004, the City initiated a solicitation to the holders ofLP&L's senior revenue debt seeking approval to amend each LP&L bond ordinance to provide for the governance of LP&L by the Electric Board. In accordance with the provisions of the bond ordinances, the City was obligated to obtain the consent of at least 51% of the LP&L bondholders, and in August 2004 the City received the requisite consents. The City amended the bond ordinances to provide for the governance ofLP&L by the Electric Board in January 2005. On November 2, 2004, the voters of the City approved a referendum amending the City Charter to require the establishment of the Electric Board. The pw:pose of the charter amendment was to ensure the pennanent establishment of the Electric Board, as the action of the City Council in adopting the LP&L Governance Ordinance was subject to repeal by subsequent City Councils. The charter amendment requires the City Council to adopt an ordinance {the "New LP&L Governance Ordinance") by no later than January 1, 2005 setting forth other duties and responsibilities of the Electric Board not specifically set forth in the proposed .,..1\o..t.,.... ..,.'""-"""-t ~ .. ,-,.;.,., r ..... ., ... ~,a ,..:~:....: .......... •"• T n..o...r ,.._... ... __ ...,_ n......a.:-.... -.................... -...... ..1 .... 1 ............ _._..:s •1...-""'-··· ., no.:r Governance Ordinance on December 16,2004. Each of the New LP&L Governance Ordinance, the bond ordinance amendment and the charter amendment contain similar provisions regarding the powers of the Electric Board, although as noted above, and as further described below, the New LP&L Governance Ordinance includes additional provisions that pertain to the establishment of financial reserves and restrictioDS on transfer of funds from LP&L. In addition, the charter amendment stipulates that the Electric Board shall determine the transfer and disbursement of all net revenues of the City's electric utility. The New LP&L Governance Ordinance provides that the Electric Board consist of nine members appointed by the City Council, and that the City Council consider extensive business and/or financial experience as the primary qualification for serving on the Electric Board. Electric Board members serve without compensation. Under the New LP&L Governance Ordinance, the Board is given the authority, duties and responsibility to (1) approve an annual budget and electric rate schedule for submission to the City Council for approval and, from time to time, submit to the City Council amendments to the budget and/or the electric rate schedule; (2) oversee the audit of the electric fund, and engage an accounting finn for that purpose; and (3) subject to applicable law, including the City Charter and Code of Ordinances, govern, manage, administer and operate the City's electric system, including contracting for legal and other services separate and apart from those provided by the City. In addition, the City Manager is required to consult with, and seek approval of; the Electric Board prior to appointing and/or removing the director of LP&L. In accordance with the New LP&L Governance Ordinance, the director of LP&L reports to the Board. The adoption of the LP&L Governance Ordinance, the charter amendment election, and the subsequent adoption of the New LP&L Governance Ordinance reflects a decision by the City Council to provide a measure of independent management and financial self-determination for LP&L. In accordance wilh the findings presented to the City Council in lhe Electric Utility Governance Report, the primary purpose of the New LP&L Governance Ordinance is to permit LP&L to rebuild, and then better control, its financial reserves with substantially less input in the process from the City Council than in the past. The adoption of the New LP&L Governance Ordinance follows in lhe wake of the conclusions reached in lhe LP&I..IWTMPA Management Audit to the effect that there had been a history of poor contract adtni.nistration by the management of LP&L relative to WTMP A, and that LP&L had acted without proper oversight from tho City Council and the City Manager's office. While the City Council retains substantial powers over the electric system, an additional goal of the City in establishing the Electric Board is to develop local expertise in a pool of individuals who can provide a sharper focus by the City on the operation of LP&L than has occurred in the recent past. >Establishment of Reserve Funds for LP&L: Restriction on Transfers from LP&L .. .As noted above, the LP&L Governance Ordinance includes a provision that requires LP&L to establish reserve funds. Such funds consist of (I) an operations reserve fund to be equal to three months' gross retail electric revenue as determined by LP&L's previous fiscal year; (2) a rate stabilization reserve to be funded to an amount equal to two months' gross retail electric revenue as determined by LP&L's previous fiscal year; and (3) an electric utility development reserve to be funded to a level equal to one months' gross retail electric revenue as determined by LP&L's previous fiscal year and to be used solely to meet any rapid or unforeseen increase in development in the City. Under the LP&L Governance Ordinance, the City may not require that LP&L transfer any fee equivalent to a franchise fee, a payment in lieu of taxes or other disbursement of the net revenues ofLP&L until (a) all bond debt service requirements have been funded (which obligation is senior in right to the obligation to fund the reserves) and (b) the reserves have been fully funded. As noted above, the charter amendment provides that the Electric Board shall dete.rmine the transfer and disbursement of all net revenues. Consequently, subject to (i) provisions of State laws that govern municipal utilities, and which stipulate that a first use of the utility's gross revenues be used to pay operating expenses, and (ii) the obligations of the City with respect to LP&L's bonded indebtedness, it is possible that the Electric Board could devise a flow of funds for LP&L that is substantially different from that set forth in the LP&L Governance Ordinance. To date, the Electric Board bas not deviated from the flow offtmds contemplated under the LP&L Governance Ordinance. At present, LP&L has not funded any of the reserves established under the LP&L Governance Ordinance, as net revenues have been inadequate for that purpose. Moreover, the mere establishment of the funds does not imply that such reserves will be funded within any particular time frame, if ever. However, in adopting the LP&L Governance Ordinance and calling the special charter election, the City Council has evidenced its commitment that LP&L be given the opportunity to regain financial stability without being obligated to make transfers, other than its indirect cost of business transfer, to the General Fund or any other fund of the City. > New Contractual A.mmgements Aftecling LP&L Operations and Revenues ... In late 2003 and extending into the Summer o1 2004, City Management, including LP&L staff in particular, negotiated a series of new agreements that will change the long· term operating plan of LP&L. These agreements, which are summarized below, stemmed from a series of events and circumstances relating to LP&L that are described herein under "Discussion of Recent Financial and Management Events -Pas1 Events Relating to LP&L and West Texas Municipal Power Agency," including an ongoing dispute with WTMPA relating to the responsibility for costs incurred by the City during the delayed completion of the WTMPA Project. In addition, as a result of continued high (by historic levels) natural gas prices, following the negotiation of an additional wholesale power purch&S( agreement between the City and SPS in July 2003, the City concluded that, given the then prevailing gas prices, it was more economical to purchase wholesale energy from SPS than to operate its gas generation units, a significant portion of which au older and, in light of current gas prices, obsolete. In recent years, the City has explored several alternatives to the use of its g~ generation units, including the possible acquisition of new generation, perhaps through a joint ventme for a coal generatior facility, and the possibility of purchasing energy on a wholesale basis from entities other than Xcel or its subsidiaries. The Cit} is in a severely electric transmission-constrained area. The lack of sufficient transmission for delivery of energy to the City an( the absence of other energy providers in the vicinity of the City with excess energy for sale were factors that contributed to the failure of the City to negotiate a wholesale energy purchase agreement with an entity other than Xcel or its subsidiaries. Consequently, to reduce fuel and production expenses, in the Summer of 2004 the City began taking greater amounts of energy ftom the Xcel contracts, and restricted the generation of energy primarily to that produced at the WTMP A Project, and only then during periods of high energy demand. As described below under "Wholesale Energy Agreement with Texas T~h", these events led to a contract dispute between the City and Texas Tech, the largest LP&L customer. > The WTMPA Settlement Agreement ... In December 2003, the City, WTMPA and the other Member Cities of WTMPA entered into a series of agreements styled the "Comprehensive Settlement Agreement." Such agreements were negotiated for the purposes of (1) reallocating among the Member Cities of WTMPA, the right to WTMPA power resources and the costs associated with such power resources, which consist of the WTMP A Project and certain power purchase agreements between WTMPA and SPS; (2) resolving disputes regarding the composition and voting power of the WTMPA board; and (3) settling the outstanding, disputed claims for costs incurred by the City on behalf of WTMP A. The WTMP A Settlements include the following agreements: (a) all of the capacity and energy in the WTMPA Project was allocated to the City or its assignee (under the 1998 WTMP A Project agreements, the City had an 85% allocation of the energy from the WTMP A Project, although it had historically taken substantially all of the energy and dispatched pmchased energy to the other Member Cities to meet their needs); (b) the City assumed responsibility for the cost of operation and maintenance of the WTMP A Project; (c) the City agreed to annually pay WTMPA 100% ofthe debt service due on the WTMPA Bonds (under the basic agreement ofWTMPA, the agency's Power Sale Contract, each of the other Member Cities has joint and several liability for the WTMP A Bonds and will remain contingently liable in that capacity in the event the City should fail to make a bond payment obligation); (d) provision was made for title to the WTMP A Project to transfer to the City upon the retirement of the WTMP A Bonds (which occurred upon the defeasance of the WTMPA Bonds); and (e) the City released all ofits claims associated with costs that it had asserted was owed in connection with the energy costs incurred by the City for the Member Cities during the period when the WTMP A Project was delayed in coming online. In addition, the WTMP A Settlements include a pmchased power allocation under which the City has agreed to allocate to the other Member Cities energy requirements nominated by the other Member Cities from other agency purchased power agreements, and the City agreed to schedule such power for the other Member Cities. The WTMPA Settlements repealed certain power sales agreements and operating agreements entered into by the parties in connection with the issuance of the WTMP A Bonds that were associated with the operation of the WTMP A Project The WTMP A Settlements eliminated the position of WTMP A chairman, but the relative voting powers of the Member Cities were not modified. Under the WTMP A rules and regulations, each Member City appoints two members to the WTMP A Board, each of which has an equal vote (certain actions of the WTMP A Board require a six vote "super majority''), but, in addition to the affinnative votes of the board members, the rules and regulations provide, in effect, a veto right over WTMP A Board actions based upon the amount of net energy consumed by each Member City. As LP&L takes substantially all of the energy ftom WTMPA resources, it bas a veto over certain of the actions of the WTMP A Board, including adoption of a budget, certain energy sales and the amendment of the agency's bylaws. The City believes the comprehensive settlement agreement modifies the principal WTMP A agreements in a manner that better reflects the historical manner in which the Member Cities have engaged in energy activities. In addition, while LP&L will continue to schedule power deliveries for all Member Cities, the contract administration of WTMPA agreements has been simplified by the acquisition by the City of the WTMPA Project and the defeasance of the WTMPA Bonds. As noted under "Discussion of Recent Financial and Management Events -FY 2003 Audit Restatements, R~lassifications and Internal Controls Issues," for FY 2003 and subsequent years, WTMPA bas been classified as an enterprise fund of the City, which reflects the extensive associations between WTMPA and the City. >New Full Requirements Energy Agreement ... In June 2004, WTMPA entered into a IS year full requirements wholesale power agreement (the "New Power Agreement") with SPS. The New Power Agreement is effective July 1, 2004, and replaces a series of existing agreements between WTMPA and SPS and the City and SPS, which bad expiration dates in 2004 and 2005. Under the New Power Agreement, SPS or its permitted assigns is obligated to provide all energy requirements for each of the Member Cities ofWTMPA, including the City, during the term of the agreement, which terminates on June 30,2019. As in past WTMPA agreements, and in accordance with the WfMPA Settlements, LP&L will schedule energy purchased under the agreement for each of the other WTMP A Member Cities. The New Power Agreement includes a fixed demand charge and energy components, with a pass through of SPS's fuel cost, which is billed in accordance with SPS's FERC approved fuel cost adjustment schedule. Under the terms of the New Power Agreement. the fixed demand charge will increase incrementally, in most years annually, during the term of the agreement based upon a predetermined schedule set forth in the New Power Agreement SPS may terminate the agreement upon the occummce of an adverse regulatory action under which SPS is required to sell generation assets, and WTMPA may terminate the agreement upon notice and during the final four years of the scheduled termination date if WTMPA acquires an interest in replacement, coal-fired generation. Each party may require adequate assurances of performance whenever there is a reasonable basis therefor. The New Power Agreement represents a significant departure for LP&L, in that it reflects a long-term commitment to take all of its energy ftom SPS. The contract reflects a decision of the City to abandon the role of power generator, although, as descn"bed below, in connection with the consummation of the New Power Agreement the City has entered into two unit contingency agreements (the "Unit Contingency Agreements"} with SPS that will require LP&L to maintain its generation units for dispatch by SPS. Among the implications for LP&L of the New Power Agreement are that LP&L bas resolved its long-tenn power supply issues, and lessened its exposure to fuel price volatility, although SPS will pass through its fuel charges to LP&L on a monthly billing basis. SPS, in tum. may not pass its fuel costs through to its retail customers in the City more frequently than once every six months under current State law that requiies SPS to seek a rate order from the PUC before increasing retail fuel cost charges. As a result, the New Power Agreement provides the possibility of both advantages and disadvantages to the City with respect to cash flow, particularly if the City determines to match its FCA to changes in SPS's fuel adjustment, as it bas generally done in the past. According to information filed with various regulatory agencies, the City believes that over 60% of the energy that it purchases from SPS is from coal generation. This fuel mix was a significant factor in the City's determination to approve the New Power Agreement by WTMP A. In the event that gas prices should decline over the term of the Agreement, the City believes that SPS has the flexibility to switch a larger portion of its generation to gas, including through the use of the City's generation units in accordance with the Unit Contingency Agreements. With respect to the competitive posture of the City in light of the long-term commitment of the New Power Agreement, the City notes that under current market conditions, and taking into account the secondary benefits of the agreement, including future savings associated with reduced personnel and maintenance costs as a result of the shift from being an active electric generator to being a passive generator (for SPS under the terms of the Unit Contingency Agreements), the wholesale price of the purchased energy, together with the other financial benefits of the Unit Contingency Agreements and the possible receipt of revenues under the new WTMPA gas agreement described below, pemrits the City to compete favorably with SPS. An additional benefit of the New Power Agreement is that it will permit the City to increase its efforts in developing LP&L's distribution business. In light of recent rate slructure changes implemented by bt>th the City and SPS that require new developments in the City to fund electric infrastructure through a development charge paid when the development is platted, new principals in developments are choosing to install only one electric distribution infrastructure. Since this new development charge was implemented in FY 2003, all major new developments in the City have selected LP&L as the electric distributor, which positions the City as a distributor of energy to those developments in the future, even though the retail provider of such energy could be a utility other that LP&L and other electric providers could choose to build their own distribution infrastructure to serve the developments. Perhaps the greatest risk to LP&L from the New Power Agreement is that given the term of the agreement and the dynamic nature of electric competition, over time the wholesale price of the purchased energy will not permit the City to obtain the favorable margins that are currently being achieved by the City. While the City does not believe that the area served by LP&L will be opened in the short-term to retail deregulation, as is the case in other parts of the State, that could occur during the tenn of the New Power Agreement. While there are significant uncertainties as to how such deregulation, if it occurs, would be administered, it is possible that new retail energy providers could enter the market during the term of the New Power Agreement. In addition, by tying its energy requirements solely to SPS, and though the other new agreements discussed in this section, the City has significantly increased its dependence on SPS as a counterparty to vital agreements relating to the operation and financial condition of LP&L. Countaparty risk is risk associated with the countaparty's financial condition, credit ratings, changes in business strategies and other quantitative and qualitative measures that could affect the ability of the countcrparty to perform its obligations to the City. Both the long-tetm Unit Contingency Agreement and the New Power Agreement provides the City the right to demand certain credit assurances from its counterparty if it has reasonable grounds for insecurity regarding the performance of any contract obligation. The City was relatively unrestrained by existing gas purchase and transportation agreements in malcing the move from a generation utility to a full requirements energy purchase business strategy, as only one contract, for gas delivery, was i.n place that required the City to pay a fixed price component for gas transportation irrespective of whether the City purchases gas. That contract, between the City and ConocoPhillips, expires in February 2008. In connection with the Unit Contingency Agreements, the City has in place standby gas purchase agreements that can be used to supply LP&L with gas to the extent that SPS calls upon the units, and the City will receive an offset against its minimum gas transportation requirements from ConocoPhillips for any gas purchased by SPS under the new WTMPA gas contract, if any, described below. While such offset will be subject to the same rislcs described below with respect to the new gas contract, the City does not anticipate that it will incur substantial costs in connection with prior contractual commitments relating to the purchase and transportation of natural gas as a result of the new LP&L business strategy. >Other New Energy Related Agreements ... As noted above, in connection with the negotiation of the New Power Agreement, the City negotiated the Unit Contingency Agreements, which consist of two agreements that dedicate the City's generation capacity solely to SPS, which, subject to certain customary conditions, including reasonable notice and run times, has the right to call upon one or more of the generation units owned or controlled by LP&L, from time to time to meet energy requirements oi SPS. Including the WTMPA Project, all of the capacity of which, in accordance with the WTMPA Settlements, is dedicated tc LP&L, the City has dedicated generation capacity of219 megawatts ("MW") to SPS under the Unit Contingency Agreements. The most fuel efficient units within that capacity are the 39 MW capacity of Massengale Unit 8 and the 21 MW capacity ofth( Brandon Unit I ("Brandon Station"), which is located on the campus of Texas Tech (the "New Units"). The remaining capacit) is in twelve older units (the "Older Units"). With respect to the New Units, SPS may dispatch those units for a three year term ending June 30, 2007; the term of the Unit Contingency Agreement for the Older Units is fifteen years, matching the term of tht Power Purchase Agreement, with an expiration date of June 30, 2019. Aside from the differences in units covered, the term ol the agreements and certain termination provisions in the Older Unit agreement, each Unit Contingency Agreement ~ substantially identical. The Unit Contingency Agreements include a demand charge, which must be paid irrespective of whether SPS chooses to take energy from the City's units, and au energy charge that is based upon the output of any of the City's units that is dispatched for SPS. While the amount of the energy charge will depend upon the energy taken by SPS from the City's generation units, if any, the Unit Contingency Agreements provide an annual minimum payment by SPS to the City of $6.3 million. >Natural Gas Sale Agreement ... Subsequent to its execution of the New Power Agreement, WTMPA and other parties entered into a series of agreements (collectively, the "New WI'MPA Gas Agreements") under which WTMPA may acquire natural gas and effectively exchange it for electric power to realize a cost savings. Under the New WI'MP A Gas Agreements, WTMP A may purchase natural gas from Texas Municipal Gas Corporation ( .. TMOC") at below-market prices and sell the gas to SPS in return for a marlcet-priced credit (reduced by nominal administrative and incentive fees) against payments due from WTMP A under the New Power Agreement. The net savings, if any, will be applied proportionately to reduce the power charges of WTMPA's Member Cities, including the City. TMGC is a Texas public facility corporation created for the purpose of acquiring producing natural gas reserves and selling its production to municipal entities such as WTMPA and LP&L. The City's standby gas purchase agreement, mentioned above in connection with the Unit Contingency Agreements, is also with TMGC. Under the terms of the New WI'MP A Gas Agreements, SPS is not obligated to purchase gas from WI'MP A unless natural gas producers, dealers, or other suppliers execute contracts to sell gas to TMGC's upstream gas provider, those suppliers offer to sell such gas on terms that SPS considers at least as advantageous as those available from other producers and dealers, and the aggregate quantities sold do not exceed either SPS's Texas gas requirements or the quantities available to WTMP A from TMGC at a discount from the offered prices or the quantities needed to gene~ate WTMPA's electric requirements. WTMPA's marlcet- price credit is based on the prices offered by the qualified suppliers, and its supply of gas is dependent on sales by the qualified suppliers at those prices. TMGC bas secured contracts with five suppliers (Conoco Pbillps, Coral Energy, NGTS, Concorde Energy, and Tenasb). There can be no assurance that sufficient qualified suppliers will contract to sell gas, or that they will offer to do so on sufficiently advantageous terms, to supply all or any portion of WTMPA's gas requirements under the New WTMPA Gas Agreements. In addition, the discount now offered by TMGC may be reduced as necessary to enable it to comply with financial covenants, although the discount has remained essentially constant for three years. Moreover, TMGC's reserves are not expected to be able to meet WTMP A's gas requirements for discount gas beyond 2006, although TMGC has agreed to use reasonable efforts to acquire additional reserves to do so. For these and other reasons, there can be no assurance that WTMP A will be able to realize savings in any amount or for any term for the benefit of its members under the New WTMP A Gas Agreements. Nevertheless, the City believes that the New WTMPA Gas Agreements contain sufficient economic incentives to induce SPS to qualify sufficient suppliers and to accept gas under the agreements up to the permitted quantities, and that the TMGC discount will continue to bold. Accordingly, the City has included $4.1 million in gas rebate income in the electric system's FY 2005 operating budget. That amount assumes that the maximum quantities of gas will be acquired and credited by SPS under the New WTMPA Gas Agreements in FY 2005; City management is of the view, that it is possible the rebate budgeted will be achieved. > Wholesale Energy Agreement with Texas Tech ... As noted above, Texas Tech, a four year State institution of higher education with a student enrollment of almost 29,000, is the largest customer of LP&L in terms of both energy sold and revenues generated. In 1990, the City constructed Brandon Station on the campus of Texas Tech. The Brandon Station is a cogeneration plant and waste beat is used to produce steam which in the past bas been sold to the University. In addition, the City owns the electric distribution system on the campus of Texas Tech. Since 1998, the City has sold energy to Texas Tech under the terms of a power sale agreement (the "Old Texas Tech Agreement") that included pricing terms for the sale of steam and penalties in the event that the City was unable to produce steam in accordance with the agreement. As described above, beginning in the Summer of 2003, as a result of high gas prices, the City generally discontinued the production of energy from its generation units, including Brandon Station, therefor requiring Texas Tech to use its boilers for the generation of steam, as a result of which Texas Tech incurred increased costs for natural gas for its boilers. In the Spring of 2004, Texas Tech presented the City with a claim for stipulated damages under the terms of the Old Texas Tech Agreement The parties agreed to mediate the claim. Following that mediation, the City and Texas Tech commenced new negotiations for au energy sales agreement (the "New Texas Tech Agreement"). The negotiations have been concluded and the contract was executed by the parties on April 28, 2005. In general terms, Texas Tech has agreed to continue to purchase energy from the City at a price that will provide the City with a small rate of retum, and is paying for energy usage at the Iates provided in the New Texas Tech Agreement The City bas agreed that steam produced at Brandon Station, if any, will be delivered to Texas Tech at no charge. The City has also agreed wi1h Texas Tech that it may terminate the agreement upon reasonable notice to the City, in which event the City will wheel energy to Texas Tech in accordance with an energy delivery charge. The City is of the view that the New Texas Tech Agreement has resolved the dispute with its largest customer on terms that are mutually beneficial for the parties. FY 2005 Budgd General Fund ... The City Council adopted the FY 2005 budget on September 28, 2004. The City's FY 2005 budget for the General Fund is balanced with $98 million in total revenues and expenses. The budget projects that sales tax revenues will produce 52% of total tax revenues (tax revenues represent 86% oftbe General Fund's total operating revenues), while ad valorem tax revenue is budgeted to produce 39% of total tax revenues. The FY 2004 budget included a 41% to 46% mix of sales tax revenues to ad valorem tax revenues. The higher proportion of sales tax revenue to ad valorem tax revenue for FY 2005 versus FY 2004 is attributable to the one quarter cent sales tax for ad valorem tax reduction that was approved by the voters of the City on November 4, 2004. The City began to receive revenues from that sales tax in October 2004. This shift in General Fund revenue sources represents a greater dependence upon sales tax receipts, which is generally a more volatile revenue source than ad valorem taxes. However, the City's sales tax receipts have not demonstrated the volatility that has been experiencoo in other parts of the State, especially following the events of September 11, 2001. As sbown in Table 14 "Municipal Sales Tax History," the City's sales tax receipts have increased each year over the past six years. In FY 2005, the City's total tax rate will decline from $0.5457 per $100 taxable assessed valuation in FY 2004 to $0.4597. The largest decline in the tax rate is in the portion of the tax levied for the General Fund (see "Table 4 -Tax Rate, Levy and Collection History''). The City's tax roll increased $683 million, or 8.6%, from FY 2004 to FY 2005. In keeping with current City Council policy that taxes not increase solely as a result of the increase in taxable value from tax reappraisals of existing properties, a portion of the $4()2 million of the growth attributable to reappraisals was discounted for pwposes of determining the tax rate for FY 2005. Other factors used to determine the tax rate are revenues from the new quarter cent sales tax and a 2.7% cost of living adjustment, as measured by th.e consumer price index. The increase in sales tax revenues is intended to offset reduced franchise fee income and ad valorem tax income for the General Fund during FY 2005. Total tiansfcrs to the General Fund from enterprise and internal service funds are budgeted to increase only marginally, by $1 million, while tiansfers out increase by $1.7 million. On the expenditure side, administrative services, street lighting, financial services, fire, police, general government, human resources and planning and transp<>rtation budgets are comparable with FY 2004 budget amounts, with total General Fund operating expenditures increasing by $1.65 million over the FY 2004 budget. Enterprise Funds ... During the Summer of 2004 the City made significant changes to City management. The new management is presently assessing available resources for capital expenditures in the City's enterprise funds, and it is reevaluating the City's utility rate structure and its existing capital expenditure plans. It is possible that the FY 2005 budget summarized below will be amended during the year to reflect this evaluation, and that the FY 2005 budget could be amended in a manner that increases or decreases planned spending for enterprise fund capital improvements, the use or contribution to reserves and the rate structure for various enterprise funds. The FY 2005 budget for the solid waste fund is balanced with $15.5 million of revenues and expenditures, including an increased transfer to the General Fund of $1.1 million. The FY 2005 budget reflects $22.5 million in sewer fund revenues and expenditures, with $0.45 million earmarked as a contribution for sewer fund capital expenditure and an increase of $0.65 million in the tiansfer to the General Fund. The sewer budget includes a planned use of $2.3 million of fund reserves. The sewer budget reflects the third year of a planned overall four year rate increase, with rates increasing by 5% each year. The water fund budget for FY 2005 is balancoo at $39.8 million of revenues and expenditures, which reflects a 17% increase in the water fund budget, including a planned use of $4.2 million of fund reserves. Operating expenses increase by $1.5 million, spending for water system improvements increase by $0.9 million, debt and other expenditures of the water fund increase by $2.8 million. The increase in the water budget reflects the third year of a planned four year rate increase, with rates increasing by 3% each year. Water transfers to the General Fund are comparable to FY 2004 and the water budget reflects a $0.3 million net increase in reserves. With respect to the electric fund, the revenues and expenditures increase by $92 million and $82 million, respectively over the prior year mainly as a result of gas sale revenues and expenditures under the new gas contract between TMGC and WTMPA. The FY 2005 budget for the stormwater fund is balanced at $7.3 million ofrevenues and expenditures, including a planned use of $0.2 million of fund reserves. Proposed FY 1~2006 Budget The 2005-2006 proposed operating budget was proposed on July 28, 2005, and was prepared in accordance with guidelines provided by the City Council. The proposed budget includes a tax rate of $0.4472 per $100 assessed valuation, which is above the effective tax rate of$0.00713 but below the nominal rate of $0.0125. The following is a summary of the proposed 2005- 2006 General Fund Budget. Beginning Balance, October 1, 2004 (Budget Basis) Summary of Budgeted General Fund Resources Revenue: General Property Taxes City Sales Tax Other Taxes Gross Receipts/Franchise Fees Other Fees, Pennits, and Revenues Total Revenue Transfers ln: From Electric Fund From Water Fund From Sewer Fund From Solid Waste Fund From Airport Fund From Stormwater Fund Other Transfers Total Transfers In Total General Fund Resources Summary of Budgeted General Fund Requirements Departmental Appropriations: Administrative Services Community SeiVices Cultwal. and Recreation Services Public Works Public Safety Health Services Police Fire Health Municipal Court Total Departmental Appropriations Transfers Out: Transit Total Transfers Out Other Requirements Total General Fund Requirements Use of Beginning Balance Ending Balance $ $ $ $ 15,554,483 33,042,484 39,900,000 945,626 6,886,000 12,616,623 $ 93,390,733 879,810 4,649,264 2,623,397 1,728,777 1,099,077 907,310 484,208 $ 12,371,843 $ 1051762~76 11,059,376 2,255,005 14,213,397 8,484,875 39,342,092 24,065,511 3,572,085 1,382,324 $ 104,374,665 849,200 $ 849,200 $ 538,711 $ 105,762,576 0 15,554,483 TAX INFORMATION AD VALOREM TAX LAw ... The appraisal of property within the City is the responsibility of the Lubbock County Central Appraisal District (the "Appraisal District"). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal District is requiled under the Property Tax Code (defined below) to appraise all property within the Appraisal District on the basis of 1000/o of its market value and is prohibited from applying any assessment ratios. In detennining marla:t value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the marl<:et value of the property, or (2) the sum of (a) 10% of the appraised value of the property for the last year in which the property was appraised for taxation ti.mcs the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the madcet value of all new improvements to the property. The value placed upon property within the Appraisal District is subject to review by an Appraisal Review Board, consisting of three membets appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to review the value of property wi1hin the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to cballenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to Title I of the Texas Tax Code (the "Property Tax Code'~, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation pU1poses; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VID of the State Constitution ("Article VIII'~ and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Section 1-b, Article vm, and State law, the governing body of a political subdivision, at its option, may grant: (l) An exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; (2) An exemption of up to 20% of the maJket value of residence homesteads. The minimum exemption under this provision is $5,000. In the case of residence homestead exemptions granted under Section 1-b, Article vm, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article vm, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the a:nned fon:es; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximwn of $12,000. Effective January 1, 2004, under Article vm and State law, the governing body of a county, municipality or junior college district, may provide that the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older will not be increased above the amount of taxes imposed in the year such residence qualified for such limitation. Also, upon receipt of a petition signed by five percent of the registered voters of the county, municipality or junior college district, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads of persons 65 years of age or older or who are disabled. Upon providing for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead within the taxing unit and to a surviving spouse living in such homestead who is disabled or is at least 55 years of age. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then CUITent tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may not be repealed or rescinded. Tbe City bas established such a limitation on ad valorem taxes. Article vm provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including open-space land devoted to farm or ranch pU1poses or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-<l and 1-d-1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing bod) of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VID, Section 1-j, provides fur "freeport property., to be exempted from ad valorem taxation. Freeport property is defined ~ goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication Decisions to continue to tax may be reversed in the future; decisions to exempt fuleport property are not subject to reveaal. The City may create one or more tax incmnent financing zones, under which the tax values on property in the zone are ''frozen" a· the value of the property at the time of creation of the zone. Other overlapping taxing units may agree to contribute all or part 01 future ad valorem taxes levied and collected against the value of property in the zone in excess of the "frozen value" to pay or finance the costs of certain public improvements in the zone. Taxes levied by the City against the values of real property in the zone in excess of the "frozen value" are not available for general city use but are restricted to paying or financing "project costs" within the zone. The City also may enter into tax abatement agreements to encourage economic development Under the agreements, a property owner agrees to construct certain improvements on its property. The City in tum agrees not to levy a tax on all or part of the increased value attn'butable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. EFFECTIVE TAX RATE AND ROLLBACK TAX RATE ... By each September 1 or as soon thereafter as practicable, the City Council adopts a tax rate per $100 taxable value for the current year. The City Council is required to adopt the annual tax rate for the City before the later of September 30 or the 60111 day after the date the certified appraisal roll is received by the City. If the City Council does not adopt a tax rate by such required date the tax rate for that tax year is the lower of the "effective tax rate" calculated for that tax year or the tax rate adopted by the City for the preceding tax year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures and (2) a rate for debt service. Under the Property Tax Code, the City must annually calculate and publicize its "effective tax rate" and "rollback tax rate". A tax rate cannot be adopted by the City Council that exceeds the lower of the rollback tax rate or the effective tax rate until two public hearings are held on the proposed tax rate following a notice of such public bearings (including the requirement that notice be posted on the City's website if the City owns, operates or controls an internet website and public notice be given by television if the City bas free access to a television channel) and the City Council has otherwise complied with the legal requirements for the adoption of such tax rate. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the City by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. "Effective tax rate" means the rate that will produce last year's total tax levy (adjusted} ftom this year's total taxable values (adjusted}. "Adjusted" means lost values are not included in the calculation of last year's taxes and new values are not included in this year's taxable values. "Rollback tax rate" means the rate that will produce last year's maintenance and operation tax levy (adjusted) ftom this year's values (adjusted) multiplied by 1.08 plus a rate that will produce this yeats debt service from this year's values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY ASSESSMENT AND TAX PAYMENT ••• Property within the City is generally assessed as of January I of each year. Business inventory may, at the option of the taxpayer, be assessed as of September. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February I of each year and the final installment due on August I. PENALTIES AND INTEREST . . . Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12 6 18 After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 15% attorney's collection fee is added to the total tax penalty and interest charge. Under certam circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, "n'J"'<!''t•.u'\t tn l"'n'll"ri ftr,:l.,.. <tn .t"'n11AI""f' th.o Qftl\1\t"'fo Au.o.. 1::1.oA..o.eoo1 lo.ur A.t\A.O """''t oltn.u' ~""" •"• .-.-11-•:-..... ,...~...,..,., ..... ,.) .... , ......... A ;.,.+.o.........,.. ,._;.,..M an estate in banlauptcy. Federal banlauptcy law provides that an automatic stay of action by creditors and other entities, including govemroental units, goes into effect with the filing of any petition in banlauptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the banlauptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in banlauptcy or by order of the bankruptcy court. Crrv APPLICATION or TAX CODE ... The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $16,600; the disabled are also granted an exemption of $10,000. The City bas not granted any part of the additional exemption of up to 20% of the market value of residence homesteads; the minimum exemption that may be granted under this provision being $5,000. The City bas established the tax freeze on residence homesteads of disabled persons and persons 65 and over. See Table I for a listing of the amounts of the exemptions described above. Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; and the Appraisal District collects taxes for the City. The City does not permit split payments of taxes, and discounts for early payment of taxes are not allowed by the City, although permitted on a local-option basis by the Property Tax Code. In the past, the City has taxed freeport property, although beginning with the 1999 tax year the City has exempted freeport property from taxation. The City collects an additional one~ighth cent sales tax for reduction of ad valorem taxes. The City held an election on November 4, 2003 to increase this tax by one quarter cent, for a total of three eighths of a cent. The rate increase became effective on October I, 2004. The City bas adopted tax abatement policies, as described below. TAX ABATEMENT POLICIES ... The City has established a tax abatement program to encourage economic development. In order to be considered for tax abatement, a project must be located in a reinvestment zone or enterprise zone (a commercial project must be in an entetprise zone) and must meet several criteria pertaining to job creation and property value enhancement The City bas established three enterprise zones, the north zone, of approximately 18.6 square miles, the south zone, of approximately 15.7 square miles, and the international airport zone, of approximately 10.3 square miles. At present, there are 20 active enterprise projects and tax abatements, principally in the northeast and southeast sections of the City. In accordance with State law, the City has adopted policies for granting tax abatements, which provide guidelines for tax abatements for both industrial and commercial projects. The guidelines for industrial and commercial projects are similar, except that qualifying industrial projects may receive a ten year abatement, while qualifying commercial projects are limited to five year tax abatements. Although older abatements made by the City were given full (100%) tax abatement, since 1997 the City has negotiated abatements on a declining percentage basis, with a portion of the tax value being added to the City's tax roll each year during the life of the abatement. The City's policies provide a variety of criteria that affect the terms of the abatement, including the projected life of the project, the type of business seeking the abatement, with certain businesses targeted for abatement, the amount of real or personal property to be added to the tax roll, the number of jobs to be created or retained, among other factors. The policies disallow abatements for certain categories of property, including real property, inventories, tools, vehicles, aircraft, and housing. Each abatement policy provides for a recapture of the abated taxes if the business is discontinued during the term of the agreement, except for discontinuances caused by natural disaster or other factors beyond the reasonable control of the applicant. For a description of the amount of property in the City that has been abated for City taxation purposes, see "Table 1 - Valuations, Exemptions, and General Obligation Debt" TAX INCREMENT FINANCING ZONES ... Chapter 311, Texas Tax Code, provides that the City and other taxing entities may designate a continuous geographic area in its jurisdiction as a TIF if the area constitutes an economic or social liability in its present condition and use. Other overlapping taxing units may agree to contribute all or a portion of their taxes collected againS1 the "Incremental Value" in the TIF to pay for TIF projects. Any ad valorem taxes relating to growth of the tax base in a TIF above the frozen base may be used only to finance improvements within the TIF and are not available for the payment of othe1 tax supported debt of the City and other participating taxing units. Together with other taxing units, the City participates in twc TIFs, the Central Business District Reinvestment Zone (the "Downtown TIF'') and the North Overton Tax Increment Financin~ Reinvestment Zone (the "North Overton TIF"). The Downtown TIF covers an approximately 0.71 square-mile area which includes part of the central business district and abuts the North Overton TIF. The base taxable values of the Downtown TIP are frozen at the level of taxable values for 2001, the year of creation at $101,376,054. In J!Y 2005, the Downtown m has a taxable value of$117,046,263 before taking into account tax abatements and exemptions. After tax abatements and exemptions, the tax value in the Downtown TIF is $114,147,891. In addition to the City, the County, County Hospital District and the High Plains Underground Water Conservation District (collectively, the "Taxing Units") participate in the Downtown TIF. Given the relative tax rates of the participants, it is anticipated that the City will be the largest contributor to the tax increment fund if there is growth from the frozen base. The Downtown TIF was created pursuant to City ordinance and official action of the other participating taxing entities and is to expire in 2021. In addition to the Downtown TIF, the City enacted an ordinance in 2001 establishing the North Overton TIF. Each of the other Taxing Units in the Downtown TIP also participate in the North Overton TIP. As is the case with the Downtown Tn", the taxes levied by the City in the FY 2005 represent approximately 54.8% of all taxes levied by all participating Taxing Units. The City ordinance establishing the North Overton TIF provides that the North Overton TIF will terminate on December 31,2031 or at an earlier time designated by subsequent ordinance of the City Council. The North Overton TIF consists of approximately 325 acres near the Central Business District of the City. The frozen tax base for the North Overton TIF was established as of January 1, 2002 at $26,940,604. During the first year of its existence, there was no tax increment in the zone, due to the demolition of existing structures as land was be.ing acquired and pn:pared for future development. Given the relative tax rates of the participants, it is anticipated that the City will be the largest contributor to the tax increment fund if there is growth from the frozen base. In J!Y 2005, the North Overton m has a taxable value of$47,072,971. The Remainder of this Page Intentionally Left Blank. TABLE 1 • VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT 2004 Market Valuation Established by Lubbock. Central Appraisal District Less Exemptions/Reductions at 100% Market Value: Residential Homestead Exemptions Homestead Cap Adjustment Disabled Veterans Agricultural/Open-Space Land Use Reductions Pollution Exemptions Solar and Wind-powered Exemptions Freeport Exemptions Tax Abatement Reductions ~·J Historical Exemption 2004 Taxable Assessed Valuation City Funded Debt Payable from Ad ValOfem Taxes General Obligation Debt (as ofS-15-05) (2) The Certificates Total Funded Debt Payable from Ad Valorem Taxes Less: Self Supporting Debt (as of8-15-05) <41 Waterworks System General Obligation Debt Sewer System General Obligation Debt Solid Waste Disposal System General Obligation Debt Drainage Utility System General Obligation Debt Tax Increment Financing General Obligation Debt Electric Light and Power System General Obligation Debt General Purpose Funded Debt Payable from Ad Valorem Taxes (Sl General Obligation mterest and Sinking Fund as of7-31-05 Ratio Total Funded Debt to Taxable Assessed Valuation Ratio General Purpose Funded Debt to Taxable Assessed Valuation 2005 Estimated Population -209,120 Per Capita Taxable Assessed Valuation -$41,432 $ 202,962,443 97,892,885 13,497,140 53,151,755 2,706,800 80,992 62,093,896 63,387,926 144,359 $ 342,070,000 46,525,000 s 106,621,413 47,378,274 8,052,027 72,485,000 12,965,000 46,010,000 Per Capita Total Funded Debt Payable from Ad Valorem Taxes -$1,858 Per Capita General Purpose Funded Debt Payable from Ad Valorem Taxes-$455 (I) See above, "Tax Information -Tax Abatement Policies". $ 9,160,109,105 495,918,196 $ 8,664,190,909 s 388,595,000 (3) 293,511,714 $ 95,083,286 $ 1,551,241 4.4g&/o 1.10% (2) The statement of indebtedness does not include outstanding $24,840,000 Electric Light and Power System Revenue Bonds, as these Bonds are payable solely from the Net Revenues of the City's Electric Light and Power System. Includes the Tax and Waterworks System Surplus Revenue Refunding Bonds, Series 2005 delivered on August 15, 2005 and the General Obligatioo Refunding Bonds, Series 2005 delivered on July 28,2005. Includes $7,265,000 ofthe City's General Obligation Bonds, Serle~ 2005, scheduled to be delivered September 1, 2005 .. (3) As a matter of policy, the City provides debt service on general obligation debt issued to fund improvements to i~ Waterworks System, Sewer System, Solid Waste System and Drainage System from surplus revenues of these Systems (seE "Table SA-Pro-Forma General Obligation Debt Service Requirements", "Table 88 -Division of Debt Service Requirements", "Table 9 -Interest and Sinking Fund Budget Projection" and "Table 10 -Computation of Self-Supporting Debt"). "Waterworks System General Obligation Debt" includes $106,621,413 principal amount of outstanding general obligatior bonds, certificates of obligation and Tax and Waterworks System Surplus Revenue Refunding Bonds, Series 2005, delivered or August 15, 2005 that were issued to finance or refinance Waterworks System improvements, and that are being paid, or arc expected to be paid, from Waterworks System revenues. The City bas no outstanding Waterworks System Revenue Bonds bu· bas obligated revenues of the Waterworks System under water supply contracts. "Sewer System General Obligation Debt" includes $47,3 78),74 principal amount of general obligation bonds and certificates o: obligation that were issued to finance Sewer System improvements, and that are being paid, or are expected to be paid, frOJr Sewer System revenues. The City has no outstanding Sewer System Revenue Bonds. "Solid Waste Disposal System General Obligation Debt" includes $8,052,027 principal amount of general obligation debt that was issued for Solid Waste System improvements, and that is being paid, or is expected to be paid, from revenues derived from Solid Waste service fees. The City bas no outstanding Solid Waste Disposal System Revenue Bonds. "Drainage Utility System General Obligation Debt" includes $72,485,000 principal amount of general obligation debt that was issued for Drainage System improvements, and that is being paid, or that is expected to be paid, from revenues derived from Drainage Utility System fees. The City has no outstanding Drainage Utility System Revenue Bonds. "Tax Increment Financing General Obligation Debt" represents $12,965,000 principal amount of general obligation Tax Increment Certificates of Obligation issued for construction of improvements in the North Overton TIF, and is being paid, or is expected to be paid, from revenues derived from the Pledged Tax Increment Revenues. The City bas no outstanding Tax Increment Financing Revenue Bonds. However, for FY 2004 the City projects that the incremental tax revenue available to cover debt service on the existing Tax Increment Certificates of Obligation will cover approximately 30% of such debt, and that for FY 2005 (based upon the January 1, 2004 tax roll), the incremental tax revenue available to cover debt service on the existing Tax Increment Certificates of Obligation will cover approximately 60% of such debt. In FY 2006, based upon development projections that the City believes to be reasonable, but which are dependent in part on future economic conditions and other factors that the City can not control and as to which it can give no assurances, the City anticipates that tax increment revenues will be adequate to cover debt requirements on the existing Tax Increment Certificates of Obligation. In the interim, the City intends to make an interfund loan to cover the debt service, and if the projected development in the North Overton m proceeds as expected, the City would repay such loan from revenues received in future years. The North Overton master plan projects additional debt to be issued by the City for infrastructure improvements in the TIF. If that occurs, there would likely be years in which the m would not produce revenues in amounts sufficient to cover all debt issued for it, at least until the TIF bas reached full build-out status. "Electric Light and Power System General Obligation Debt" includes $46,010,000 principal amount of general obligation bonds and refunding bonds that were issued to finance Electric Light and Power System improvements and to refund certain Electric Light and Power System Revenue Bonds. (4) "General Purpose Funded Debt Payable from Ad Valorem Taxes" includes $94,202,036 of general obligation debt and $881,250 principal amount of outstanding Tax and Airport Surplus Revenue Bonds of Obligation on which debt service is provided from Passenger Facility Charge ("PFC") revenues (see Footnote (2), "Table 9 -Interest and Sinking Fund Budget Projection"). Source: City of Lubbock, Texas. TABLE2-TAXABLEASsESSEOVALUAnONSBYCATEGORY Taxable Appraisccl Value for Fisc:al Year Eaded ~ember 30, 2005 2004 2003 %of %of %of Category Amo'Wlt Total Amount Total Amollllt Total Real, Reaidentia!, Single-Family s 5,156,169,884 56.29% $ 4,690,158,161 55 .50% s 4,282,214,635 56.78% Real, Residcotlal, Multi·Fe.mi!y 614,631,057 6.71% 561,569,488 6.64% 455,993,262 6.05% Real, Vaeaut Lolsl:rraets 135,464,351 1.48% 108,625,954 1.29% 93,473,144 1.24% Real. Acre.ge (Land Oo.ly) 64,528,231 0.70".4 65,880,410 0.78% 59,644,971 0.79% Real, FNm aod Ranch Improvements 10,391,139 0.11% 10,835,088 0.13% 11,391,782 O.IS% Real, COGIIIlefCialand Industrial 1,701,145,839 18.57% 1,638,846,765 19.39% 1,370,730,397 18.18% Real, Oil. Gu aod Other Mineral R.e=ves 11,298,200 0.12% 8,923,810 0.11% 7,909,460 0.10% Real aod Taqible Pmonal, Utilities 173,908,469 1.90% 185,761,346 2.20% 192,138,423 2.55% TIIIJible Persooal, Commercial and Iadumal 1,198,078,620 13.08% 1,090,862,579 12.91% 974,534,729 12.92% Tangible Penooa\, Otbet 15,279,192 0.17% 16,287,022 0.19% 15,336,364 0.20% Real Property, lllveutol)' 10,987,935 0.12% 4,774,287 0.06% 11,087.603 0.15% Special mvCJIIOI)' 68,226,182 0.74% 68,663,514 0.81% 67,339,159 0.89% Total Appnised Value Before Bxemplioll4 s 9,160,109,105 100.00% s 8,451,188,424 100.000.4 $ 7,541,793,935 100.00% Leu: Total Exemption.s/R.eductions (495,918,196~ ~529,598,044) ~199,449,068! Taxable Assessed Value $ 8,664,190,909 s 7,921,590,380 $ 7,342,344,867 Tuable Appnised Value for Fiscal Ycat Eodecl S~lallber 30, 2002 2001 %of %of Categol)' Amount Total AmoUDt Total Real, Residential, Single-Faauly $ 3,935,486,660 53.59% s 3,771,725,980 53.71% Real, Resideutial, Multi-Family 466,775,473 6.36% 453,863,141 6.46% Real. Vae&~~t Lotslfracts 96,407,484 1.31% 88.,108,541 1.25% Real, Acmgc (Land Only) 60,171,506 0.82% 60,125,617 0.86% Real, Farm aod Ranch Improvements 12,003,318 0.16% 11,000,161 0.16% Real, Commercial and llldustrial 1,445,748,160 19.69"..4. I ,348,046,123 19.20% Real., Oil, Gas and Other Mineral Reserves 8,849,390 0.12% 7,000,000 0.10% R.ea\llld Tugible Personal, Utilities 185,588,935 2.53% 181,228)03 2.58% Tqible Pcz:sooal, Commacial and lndusuial 1,039,521,384 14.16Yo 1,072,713,960 15.28% T111gible Personal, Otbet 15,296,446 0.21% 14,786,889 0.21% Special hlventol)' 10,279,056 0.14% 13,320,136 0.19".4 Real Property, lllvent()l)' 67,429,634 0.92% 0.000!. TDtal Appraised Value Before Exemptions s 7,343,557,446 100.00% s 7,021,918,851 10().00% Less: Total Exemptioos/Reductions (434,247,739) (383,007,758) Taxable Assessed Value s 6,909.30?,707 s 6,638,911,093 NOTE: Valuations shown are certified taxable assessed values reported by the Lubbock Central Appraisal District to the City for purposes of establishing and levying the City's annual ad valorem tax rate and to the State Comptroller of Public Accounts. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. TABLE 3A • V ALUA TJON AND GENERAL OBLIGATION DEBT HISTORY General Purpose Ratio Fiscal Taxable Funded Tax. Debt Tax Debt Funded Year Taxable Assessed Outstanding to Taxable Debt Ended Estimated Assessed Valuation at End Assessed Per 9130 Population O> Valuation <2> PerCaEita of Year (.l) Valuation~> Capita<3> 2001 201,097 $ 6,638,911,093 $ 33,013 $ 58,122,809 0.88% $ 289 2002 202,000 6,909,309,707 34,205 63,115,346 0.91% 312 2003 204,737 7,342,344,867 35,862 70,188,204 0.96% 343 2004 206,290 7,921,590,380 38,400 70,161,218 0.89% 340 2005 209,120 8,664,190,909 41,432 95,083,286 l4) 1.10% l4' 455 l•> (I) Source: The City of Lubbock, Texas (2) As reported by the Lubbock Central Appraisal District on City's annual State Property Tax Board Reports; subject to change during the ensuing year. (3) Does not include self-supporting debt (see Table 3B and footnote 3 to Table 1). (4) Includes the Certificates. Includes the General Obligation Bonds, Series 2005 expected to be delivered September 1, 2005. TABLE 3B • DERIVATION OF GENERAL PuRPOSE FuNDED TAX DEBT The following table sets forth certain information with respect to the City's general purpose and self-supporting general obligation debt. The City is revising its capital improvement plan, but the City expects to issue additional self-supporting general obligation debt within the three to five year time frame. See "Debt InformatioiH::apital lmproveme.nt Program and Anticipated Issuance of General Obligation Debt." Fiscal Funded Tax Debt Less: General Purpose Year Outstanding Self-Supporting Funded Tax. Debt Ended at End Funded Tax. Outstanding 9/30 of Year Debt at End ofY ear 2001 $ 175,408,321 $ 117,285,512 $ 58,122,809 2002 217,.269,682 154,154,335 63,115,346 2003 295,935,000 225,746,796 70,188,204 2004 285,885,000 215,723,783 70,161,217 2005 388,595,000 (I) 293,511,7}4 (I) 95,083,.286 (I) (1) Includes the Certificates. Includes the General Obligation Bonds, Series 2005 delivery expected on September 1, 2005. TABLE 4 -TAX RATE, LEVY AND COLLECTION HISTORY Fiscal %ofCwrent %ofTotal Year Distribution Tax Tax Ended Tax General Economic Interest and Collections Collections 9/30 Rate Fund Develo2ment Sinkin~ Fund Tax Le::l: toTaxLe~ to Tax. Le::l: 2001 $ 0.5700 $ 0.42718 $ 0.03000 $ 0.11282 s 37,841,145 97.58% 99.29% 2002 0.5700 0.42844 0.03000 0.11156 39,351,.225 97.600/o 99.41% 2003 0.5700 0.43204 0.03000 0.10796 42,286,967 97.25% 98.78% 2004 0.5451 0.41504 0.03000 0.10066 43,659,111 97.02% 99.69% 2005 (Z) 0.4597 0.33474 0.03000 0.09496 39,786,978 96.99% (I) 99.30% (I) (1) Collections for part year only, through July 31, 2005. (2) For a discussion of the factors affecting the decline in the 2005 General Fund tax rate, see "Discussion of Recent Financial and Management Events-FY 2005 Budget." TABLES-TENLARCESTTAXPAYERS 2004/05 o/o of Total Taxable Taxable Assessed Assessed Name ofTaxEayer Nature of ProE:!!r Valuation Valuation Macerich Lubbock LTD Partnership Regional Shopping Mall $ 111,433,954 1.29% Southwestern Bell Telephone Co. Telephone Utility 59,427,700 0.69% Southwestern Public Service Electric Utility 53,466,701 0.62% United Supermarkets Distribution Center Retail Grocery 48,241,512 0.56% GrinDell Corp-Flow Control Division Manufacturing/Fire Sprinklers 45,933,080 0.53% Pyco Industries Cottonseed Oil Mill 43,349,210 0.50% McLane Food Services Food Wholesale 37,823,550 0.44% W almart Supercenter Retail 34,779,467 0.4()% X Fab Texas, Inc. Electronic Manufacturing 29,152,174 0.34% Lubbock SMSA L1d. Partnership Telephone Utility 27,671,690 0.32% $ 491,279,038 5.67% GENERAL OBLIGATION DEBT LIMITATION ... No general obligation debt limi1ation is imposed on the City under current S1ate Jaw or the City's Home Rule Charter (see ''Tax Rate Limitation"). Maximum Principal and Interest Requirements, All General Obligation Debt, 20<J6<2> ....................................•................................................................................... $ 38,151,642 $0.4494 Tax Rate at 98% Collection Produces ................................................................................................................. $ 38,158,137 Maximum Principal and Interest Requirements, General Purpose General Obligation Debt, zoot>O• .................................................................................................. s 9,934,088 $0.1 170 Tax Rate at 98% Collection Produces ................................................................................................................. $ 9,934,361 (1) Based on 2004-2005 taxable assessed valuation. (2) See Table SA. (3) See Table 8B. TABLE 7 -ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax bonds ("Tax Debt") was developed from infonnation contained in "Texas Municipal Reports" published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such infonnation as being accurate or complete. Furthennore, cercain of the entities listed may have issued additional Tax Debt since the date hereof, and such entities may have programs requiring the issuance of substantial amounts of additional Tax Debt, the amount of which cannot be determined. The following table reflects the estimated share of overlapping Tax Debt of the City. 2004105 TotaJ Funded City's Authorized Taxable Debt Estimaled Overlapping But Unissued Assessed Tax As Of % G.O.Debt Debt As Of Taxing Jurisdiction Value Rate 8-IS-OS AJ?Elicable As of8-1S-OS 8-15-0S City of lubbock $ 8,605,424,748 $ 0.4S970 $ 388,S9S,OOO (ll 100.00% $ 388,S9S,OOO $ 31,717,000 Lubbock IDdcpendeut Sc;hool Distri~ 6,303,339,726 1.60560 103,675,060 98.91% 102,545,002 S2,248,S~ Lubbock County 10,198,959.098 0.25S87 76,610,000 82.94% 63,540,334 SOS,347 Lubbock County Hospital District 10,194,687,811 0.10742 82.94% High Plains Uaderground Water Conservation Distri~ No. I 10,194,687,811 0.00830 82.94% Frensbip Independent Sdiool Dislrict 1,290,SOS,343 1.68060 41,960,026 64.44% 27,039,041 Idalou Independe11t School District 128,SS1,()70 l.SOOOO 79S,OOO 1.10".4 8,745 Lubbock ..COOper Independent School Distri~ 613,192,253 l.Sl760 J3,219,SSS 15.30% 2,022,592 New Dcallndepeode11t School District 124,2$8,155 1.50000 0.03% Total Direct 8Dd Overlapping G.O. Debt $ S83,750,713 Ratio ofl>ire<:t aad Overlapping 0.0. Debt to Taxable Assessed Valuation.. . . . .. .. . .. . . . . .. . . . .. . . . . .. . . . . . . . . . . .. . .. . . . 6.78% Per Capita Direct and Overlapping G.O. Debt .........................................•....•...••......•.................... $ 2,830 {I) Includes the Certificates. Includes the General Obligation Bonds, Series 2005, expected to be delivered September 1, 2005. DEBT INFORMATION ILE 8A -GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS Fiscal Year Total %of Ended Outstanding Debt (I) The Certificates<2l Combined Principal 9/30 Princi2al Interest Total Princieat Interest Total Reguirements Retired 2005 $ 16,005,000 $ 11,899,223 $ 27,904,223 $ -$ -$ -$ 27,904,223 2006 18,785,000 15,772,494 34,557,494 1,575,000 2,019,148 3,594,148 38,151,642 2007 19,975,000 14,556,311 34,531,311 1,600,000 1,971,523 3,571,523 38,102,833 2008 19,600,000 13,752,577 33,352,577 1,650,000 1,921,523 3,571,523 36,924,099 2009 19,460,000 12,939,418 32,399,418 1,705,000 1,867,720 3,572,720 35,972,138 24.80% 2010 19,250,000 12,121,091 31,371,091 1,770,000 1,808,943 3,578,943 34,950,033 2011 19,690,000 11,268,664 30,958,664 1,825,000 1,746,271 3,571,271 34,529,936 2012 18,930,000 10,407,440 29,337,440 1,900,000 1,678,950 3,578,950 32,.916,390 2013 19,380,000 9,549,947 28,929,.947 1,980,000 1,601,925 3,581,925 32,511,872 2014 19,895,000 8,650,933 28,545,933 2,070,000 1,508,775 3,578,775 32,124,708 51.17% 2015 17,390,000 7,814,549 25,204,549 2,155,000 1,416,619 3,571,619 28,776,168 2016 17,020,000 7,020,160 24,040,160 2,260,000 1,319,713 3,579,713 27,619,873 2017 16,825,000 6,204,126 23,029,126 2,370,000 1,203,963 3,573,963 26,603,089 2018 17,505,000 5,371,289 22,876,289 2,475,000 1,095,213 3,570,213 26,446,501 2019 16,245,000 4,507,100 20,752,100 2,590,000 980,963 3,570,963 24,323,063 75.11% 2020 13,820,000 3,777,606 17,597,606 2,725,000 848,088 3,573,088 21,170,694 2021 11,935,000 3,151,463 15,086,463 2,865,000 708,338 3,573,338 18,659,800 2022 8,925,000 2,644,440 11,569,440 3,010,000 561,463 3,571,463 15,140,903 2023 7,675,000 2,244,245 9,919,245 3,160,000 405,238 3,565,238 13,484,483 2024 5,450,000 1,887,289 7,337,289 3,335,000 238,803 3,573,803 10,.911,092 90.65% 2025 4,010,000 1,656,189 5,666,189 3,505,000 76,672 3,581,672 9,247,861 2026 3,395,000 1,463,114 4,858,114 4,858,114 2027 3,575,000 1,283,950 4,858,950 4,858,950 2028 3,755,000 1,095,068 4,850,068 4,850,068 2029 3,955,000 896,385 4,851,385 4,851,385 96.14% 2030 4,170,000 686,998 4,856,998 4,856,998 2031 4,390,000 466,390 4,856,390 4,856,390 2032 2,240,000 297,250 2,537,250 2,537,250 2033 2,350,000 182,500 2,532,500 2,532,500 2034 2,475,000 61,875 2,536,875 2,536,875 100.00% $ 358,075,000 J 173,630,081 $ 531,705,081 $ 46,525,000 $ 24,979,846 $ 71,504,846 $ 603,209,927 "Outstanding Debt" does not include lease/purchase obligations. Includes the General Obligation Bonds, Series 2005, expected to be delivered September I, 2005. Average life of the issue is 11.443 years. Less: Less: Less: Len: Le3s: Less: Solid Waste Drainage Tax Electric Waterworb Sewer Disposal Utility Inctanent Light and Genmll ;cal System System Sy~~ctem System Financing Power System Pwpose car General General General General General General General ded Combined Requitements<'> Obligation Obligation Obligation Obligation Obligation Obligation Obligation 30 Princieat Interest Total Requitementsm RequirementlJ01 Re9.uirementlJ R~uirements Requirementl!<11 Requircments0' Requirements<•> lOS $ 16,005,000 $ 11,899,223 $ 27,904,223 s 6,544,773 $ 5,834,616 s 789,006 $ 4,671,744 $ 286,725 $ 1,682,411 $ 8,094,947 l06 20,36{),000 17,791,642 38,151,642 11,032,075 5,955,068 796,411 4,840,465 997,403 4,596,132 9,934,088 107 21,575,000 16,527,833 38,102,833 10,920,621 6,130,296 783,365 4,841,912 1,001,453 4,519,111 9,906,076 108 21,250,000 15,674,099 36,924,099 10,510,830 5,802,890 773,284 4,843,899 999,615 4,453,718 9,539,864 109 21,165,000 14,807,138 35,972,138 10,353,630 5,514,037 758,285 4,841,240 1,002,464 4,374,633 9,127,849 110 21,020,000 13,930,033 34,950,033 10,178,511 5,221,626 743,402 4,843,115 1,004,664 4,297,724 8,660,992 Ill 21,515,000 13,014,936 34,529,936 10,092,180 5,059,490 722,710 4,842,660 1,000,873 4,233,577 8,578,447 112 20,830,000 12,086,390 32,916,390 9,213,978 4,819,934 711,200 4,837,830 1,000,969 4,152,161 8,180,318 113 21,360,000 11,151,872 32,511,872 9,166,557 4,633,553 699,174 4,840,404 999,444 4,083,024 8,089,716 114 21,965,000 10,159,708 32,124,708 9,132,436 4,468,918 681,755 4,838,253 999,494 4,004,176 7,999,675 115 19,545,000 9,231,168 28,776,168 9,008,493 2,593,093 664,681 4,842,053 998,766 3,927,745 6,741,338 116 19,280,000 8,339,873 27,619,873 8,979,816 1,817,520 647,661 4,841,828 1,001,494 3,847,641 6,483,912 117 19,195,000 7,408,089 26,603,089 8,946,980 1,775,085 625,225 4,837,078 1,004,869 3,768,889 5,644,964 118 19,980,000 6,466,501 26,446,501 8,896,406 1,747,434 612,346 4,841,953 999,013 3,701,531 5,647,819 119 18,835,000 5,488,063 24,323,063 8,549,676 1,712,403 418,175 4,836,203 1,001,438 2,159,994 5,645,175 120 16,545,000 4,625,694 21,170,694 6,142,044 954,975 411,863 4,839,578 1,004,428 2,161,213 5,656,594 121 14,800,000 3,859,800 18,659,800 4,2.48,825 955,606 404,813 4,836,703 1,000,300 2,156,825 5,056,729 122 11,935,000 3,205,903 15,140,903 1,565,425 954,219 270,400 4,852,254 999,175 2,161,475 4,337,955 123 10,835,000 2,649,483 13,484,483 1,022,825 628,769 273,644 4,850,863 1,000,563 2,156,463 3,551,358 124 8,785,000 2,126,092 10,911,092 1,021,141 624,616 271,294 4,851,845 999,316 476,481 2,666,400 125 7,515,000 1,732,861 9,247,861 286,125 511,359 . 4,852,714 7lS,313 481,300 2,335,050 126 3,395,000 1,463,114 4,858,114 . . . 4,858,114 127 3,575,000 1,283,95() 4,858,950 . . . 4,858,950 128 3,755,000 1,095,068 4,850,068 . . . 4,850,068 129 3,955,000 896,385 4,851,385 . --4,851,385 130 4,170,000 686,998 4,856,998 -- -4,856,998 131 4,390,000 466,390 4,856,390 ---4,856,390 •32 2,240,000 297,250 2,537,250 ---2,537,250 •33 2,350,000 182,500 2,532,500 --. 2,532,500 134 2,475,000 61,875 2,536,875 --. 2,536,875 s 404,600,000 $ 198,609,927 $ 603,209,927 $ 155,813,347 s 67,781,507 s 12,058,693 $ 138,263,118 $20,01'7;774 $ 67,396,224 s 141,879,266 :ludes the Certificates. Includes the General Obligation Bonds, Series 2005, expected to be delivered September 1, 2005. TABLE 9 -INTEREST AND SINJaNG FUND BUDGET PROJECTION General Obligation Debt Service Requirements (Pro-Forma), Fiscal Year Ending9-30-05 Fiscal Agent, Tax Collection and Other Uses TotaJ Requirements Sources of Funds Interest and Sinking Fund, 9-30-04 Budgeted Ad Valorem Tax Receipts Budgeted Transfers From: Water Fund (J) Sewer Fund (J) Solid Waste Fund OJ Drainage Utility Fund (I) Electric Fund<n TIF Fund Airport Fund-from Passenger Facility Charges ("PFCs") (l) Budgeted Interest Earned Total Sources of Funds Projected Balance, 9-30-05 (1) See "Table 10-Computation of Self-Supporting Debt". $ $ $ $ $ $ 27,904,223 15,000 27,919,223 2,852,843 7,954,344 7,085,088 5,940,796 813,084 4,852,706 1,682,4ll 286,725 195,630 189,405 31,853,032 3,933,809 (2) Passenger Facility Charges ("PFCs") are authorized by the FedcraJ Aviation Administration ("FAA"). PFC ~enues must be used for allowable costs of FAA approved aitport projects, including debt seJVice on aiiport obligations issued for approved aiiport projects. The City has issued several series of debt for municipal airport improvements ("Airport Debt''), including tax and airport surplus revenue certificates of obligation in 1993 and 1998, and general obligation refunding bonds in 1985 and 1997, which refunded prior issues of Allport Debt. A portion of the refunding bonds have been allocated to the airport in proportion to the principal amount of Airport Debt that was refunded. PFC revenues collected for fiscal year ending 9-30-04 were $1,402,033, and, $195,650 ofPFC revenues have been budgeted for payment of Airport Debt in 2004-05, which equates to self-supporting Airport Debt with a principal balance of$1,368,750. For 2004-05, the portion of Airport Debt that is being funded from general fund contributions (ad valorem taxes) equates to a principal balance of $2,366,250. TABLEIO • COMPUTATIONOJI'SELJI'-8UPPORTINGDEBT THE WATERWORKS SYSTEM (J} Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ended 9-30-0S Balance Available for Other Purposes Requirements for System General Oblifjation Debt, Fiscal Year Ending9-30-05 Percentage of System General Obligation Debt Self-Supporting $ 16,142,912 -0- $16,142,912 $ 6,544,773 100.00% (1) Each Fiscal Year the City tr.msfers Net Revenues of the Waterworks Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Waterworks System general obligation debt THE SEWER SYSTEM (I) Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending 9-30-05 Balance A vailab1e for Other Purposes Requirements for System General Obligation Debt, Fiscal Year Ending9-30-0S Percentage of System General Oblifjation Debt Self-Supporting $ 8,720,503 -0- $ 8,720,503 $ 5,834,616 100.00% (l) Each Fiscal Year the City tr.msfers Net Revenues of the Sewer Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Sewer System general obligation debt. THE SoLID WASTE DISPOSAL SYSTEM {1} Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending 9-30-05 Balance Available for Other Purposes Requirements for System General Obligation Debt, Fiscal Year Ending9-30-05 Percentage of System General Obligation Debt Self-Supporting $ 2,538,565 -0- $ 2,538,565 $ 789,006 100.00% (I) Each Fiscal Year the City transfers Net Revenues of the Solid Waste Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Solid Waste System general obligation debt THE DRAINAGE SYSTEM (I) Net System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending9-30-05 Balance Available for Other Purposes Requirements for System General Oblifjation Debt, Fiscal Year Ending9-30-0S Percentage of System General Obligation Debt Self~Supporting $ ~ $ 5,167,840 -0- 5,167,840 4,671,744 100.00% (1) Each Fiscal Year the City transfers Net Revenues of the Drainage Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Drainage System general obligation debt THE ELECTJUC LIGHT AND POWER SYSTEM Ul Net Electric Light and Power System Revenue Available, Fiscal Year Ended 9-30-04 Less: Requirements for Revenue Bonds, Fiscal Year Ending9-30-0S Balance Available for Other Purposes Requirements for Electric System General Obligation Debt, Fiscal Year Ending9-30-0S Percentage of Electric System General Obligation Debt Self-Supporting $10,269,560 4,276,703 $ 5,992,857 $ 1,682,411 100.00% (1} The City transfers Net Revenues of the Electric: Light and Power Enterprise Fund to the General Obligation Interest and Sinking Fund in an amount equal to debt service requirements on Electric Light and Power System general obligation debt. TABLE 11 -AUTHORIZED BUT UNISSUED GENERAL 0BLIGA nON BoNDS Amount Date Amount Previously Unissued PUipose Authorized Authorized Issued11) Balance< I) Waterworks System 10/17/87 $ 2,810,000 $ 200,000 s 2,610,000 Sewer System 5121n1 3,303,000 2,175,000 1,128,000 S1teet Improvements 5/1/93 10,170,000 10,166,000 4,000 Street Improvements 5/15/04 9,210,000 3,055,000 6,155,000 Civic Center/Auditorium Renovations and Improvements S/15/04 6,450,000 6,450,000 Park Improvements 5/15/04 6,395,000 4,670,000 1,725,000 Police/Municipal Coun Facilities 5/15/04 3,350,000 3,350,000 Library Improvements 5/15/04 2,145,000 2,145,000 F'"ue Stations 5115104 1,405,000 1,405,000 Animal Shelter Renovations and Improvements 5/15/04 1,045,000 160,000 885,000 $ 46,283,000 $ 21,831,000 s 24,452,000 (I) The City's $7,265,000 General Obligation Bonds, Series 2005, expected to be delivered September 1, 2005, are reflected in the totals shown . .ANTICIPATED IssUANCE OF GENERAL 0BLIGAnON DEBT •.• The City Council adopted a resolution during the 1984-85 budget process establishing capital maintenance funds for capital projects. A capital improvement plan is made for planning purposes and may identify projects that will be deferred or omitted entirely in future years. In addition, as conditions change, new projects may be added that are not currently identified. Under current City policy, for a project to be funded as a capital project it must bave a cost of $25,000 or more and a life of seven or more years. For FY 2004, the City Council approved $10.4 million in total expenditures for capital projects for all general purpose projects, as well as projects for the electric fund, water fund, sewer fund, solid waste fund, stonnwater fund and airport fund (down from $57.9 million in FY 2003). The Capital Projects Fund budget for FY 2004 also included an additional $151.9 million in future improvements for all City departments over 1he four succeeding fiscal years. The improvements included in the City's capital improvement plan are generally funded from a blend of bond proceeds, reserves or current year revenue sources. As shown in Table II, after the issuance of the General Obligation Bonds, Series 2005 the City has $20.71 million of authorized but unissued bonds from the May 15, 2004 bond election. When that election was held, the City anticipated that the bonds would be issued over 1he 2004 through 2008 time frame. The City typically issues voted bonds for general pmpose City projects, such as streets, parks, libraries, civic centers and public safety improvements. However, the City has incurred substantial unvoted tax supported debt to fund portions of the capital budget of the electric fund, water fund, sewer fund, solid waste fund, stormwater fund and airport fund. As described elsewhere in this Official Statement, such enterprise fund indebtedness is generally anticipated to be self-supporting from enterprise fund revenues. TABLE 12-OTHER OBLIGATIONS At December 31,2004, 1he City bad capital lease obligations for leased equipment in the following amounts: Fiscal Governmental Business-type Total Year Capital Lease Capital Lease Capital Lease Ended Minimum Minimum Minimum 9130 Payment Payment Payment 2005 s 854,159 s 643,732 $ 1,497,891 2006 545,380 418,741 964,121 2007 353,694 353,694 Less: Interest (38,582) (65,572) (104,154) $ 1,360,957 $ 1,350,595 s 2,711,552 PENSION FUND .•. TExAs MllNICIPAL RETnu!MENT SYSTEM (t)(2} ••• All pennanent, full-time City employees who are not firefighters are covered by the Texas Municipal Retirement System ("TMRS"). TMRS is an agent, multiple-employer, public- employee retirement system which is covered by a State statute and is administered by six trustees appointed by the Governor of Texas. TMRS operates independently of its member cities. The City joined TMRS in 1950 to supplement Social Security. All City employees except firefighters are covered by Social Security. Options offered under TMRS, and adopted by the City, include cwrent, prior and antecedent service credits, five year vesting, updated service credit, occupational disability benefits and survivor benefits for the spouse of a vested employee. An employee who retires receives an annuity based on the amount of the employees contributions over-matched two for one by the City. Since October 11, 1997, the employee contribution rate has been 7% of gross salary. The City's contribution nlte is calculated each year using actuarial techniques applied to experience. The 2004 contribution rate is 14.54%. Enabling statutes prohibit any member city from adopting options which impose liabilities that cannot be amortized over 25 years within a specified statutory rate. On December 31, 2004, the actuarial value of assets held by TMRS (not including those of the Supplemental Disability Fund, which is ''pooled"), for the City were $186,398,545. Unfunded actuarial accrued liabilities on December 31, 2004 were $62,034,262, which is being amortized over a 25-year period beginning January, 1997. Total contributions by the City to TMRS for Calendar Year 2004 were $9,174,744. FIREMEN'S RELIEF AND RETIREMENT FuND <•> ••• City of Lubbock firefighters are members of the locally administered Lubbock Firemen's Relief and Retirement Fund (the "Fund"), operating under an act passed in 1937 by the State Legislature and adopted by City firefighters, by vote of the department. in 1941. Firefighters are not covered by Social Security. The Fund is governed by seven trustees, three firefighters, two outside trustees (appointed by the other trustees), the Mayor or the representative thereof and the chief financial officer or the representative thereof. Execution of the act is monitored by the Firemen's Pension Commissioner, who is appointed by the Governor. Benefits of retired firemen are determined on a "formula" or a "final salary" plan. Actuarial reviews are performed every two years, and the fund is audited annually. Firefighters contribute a percentage of full salary into the fund. The firefighters' contribution rate for 2005 is 12.43%. The City must contribute a like amount; however, the city contributes on a basis of the percentage of salary which is a ratio adjusted annually that bears the same relationship to the firefighter's contribution rate that the City's rate paid into the TMRS and FICA bears to the rate other employees pay into the TMRS and FICA. The City's contribution rate for 2005 is 19.94%. A1s of December 31, 2003, unfunded pension benefit obligations were $16,588,639 which is being amortized over a 13 year period beginning January I, 1997. (I) For historical information concerning the retirement plans, see Appendix B, "Excerpts from the City's Annual Financial Report"-Note #Ill, Subsection E, "Retirement Plans".) (2) Source: Texas Municipal Retirement System, Comprehensive AnmJal Financial Report for Year Ended December 31, 2003, "City of Lubbock, Tex:m". FINANCIAL INFORMATION T .uu: 13 • CHANGES IN NET AssETsCll Fiscal Year Ended S:!!tember 30, 2004 2003 2002 Governmental Governmental Governmental Activities Activities Activities REVENUES· ~in OOO's~ (in OOO's~ (in OOO's) Program Revenues: Charges for services s 12,713 $ 13,888 s 9,369 Operating grants and contnbutions 9,643 12,137 7,007 General Revenues: Property Taxes 44,497 42,303 40,408 Sales Taxes 30,555 29,092 28,903 Other Taxes 3,793 3,712 3,681 Franchise Taxes 9,654 6,613 6,998 Grant/contributions not restricted to specific programs (25) Other 4,274 3,834 6,227 Total Revenues $ 115,129 $ 111,579 $ 102,568 EXPENSES· Administrative/Community Services $ 22,313 s 21,793 $ 32,483 EleGtric 2,471 2,373 2,585 Financial Services 2,387 1,965 1,908 Fire 21,998 20,207 18,664 General Government 20,562 21,009 23,436 Human Resources 777 786 883 Police 33,249 31,429 29,715 Streets 10,789 9,827 5,94() Public Works 3,078 9,856 4,322 Interest on L· T Debt 4,593 3,346 3,382 Total Expenses s 122,217 $ 122,591 $ 123,318 Change in net assets before special items & transfers (7,088) (11,012) (20,750) Special items (687) Transfers 9,745 2,554 15,668 Change in net assets $ 2,657 $ (8,458) $ (5,769) Net assets -beginning of year, as restated $ 101,684 $ 1101142 $ 115,911 Net assets-end of year $ 104,341 $ 101,684 $ 110,142 {I) Data shown in Table 13 reflects general govemmental activities reported in accordance with OASB Statement No. 34. The FY 2003 financial statements include a management discussion and analysis of the operating results of such fiscal year, including restatements to beginning fund balances and net assets. As of the date of this Official Statement, a copy of the FY 2003 financial statement can be accessed through the City's website, http://www.ci.lubbock.tx.us. TABLE 13-A • GENERAL FuND REVENUES AND ExPENDITURE HISTORY Fiscal Year Ended September 30,<1> Reyenues 2004 2003 2002 2001 2000 Ad Valorem Taxes $ 33,233,274 $ 32,194,087 $ 29,885,252 $ 28,604,141 s 26,595,709 Sales Taxes 30,554,632 29,092,032 28,902,649 28,183,746 27,121,078 Franchise Fees 9,654,447 6,612,822 6,998,085 7,684,683 6,619,755 Miscellaneous Taxes 939,456 848,816 820,507 774,587 743,771 Licenses and Permits 1,982,281 1,875,118 1,475,451 1,202,794 1,138,924 lntergovemmental 428,459 348,787 351,878 333,171 365,671 Charges for Services 4,467,733 4,945,591 4,472,094 4,299,958 4,210,334 Fines 3,675,856 3,672,509 3,069,362 3,051,055 2,834,208 Miscellaneous Taxes 1,442,677 1,532,346 1,058,237 995,494 1,143,226 Interest 334,730 285,756 433,393 1,058,096 1,108,662 Operating Transfers (l) 10,723,891 10,345,945 15,023,466 14,276,074 13,636,764 Total Revenues and Transfers $ 97,437,436 $ 91,753,809 $ 92,490,374 $ 90,463,799 $ 85,518,102 Expenditures General Government $ 5,633,469 $ 5,717,151 $ 5,596,868 $ 5,772,031 $ 5,255,236 Financial Services 2,333,469 1,969,413 1,958,051 1,833,933 1,919,299 Non-departmental 214,562 175,499 1,497,485 1,716,167 606,843 Admin/Community Services 18,156,455 17,837,076 17,997,152 18,314,255 17,293,247 Police 32,400,371 30,321,182 28,905,651 28,139,047 25,561,261 Fire 20,613,077 19,511,797 18,632,109 17,903,118 17,183,526 Streets 7,180,843 6,610,394 6,510,394 7,443,017 8,004,402 Electric Utilities 2,185,286 2,078,277 2,168,620 2,146,212 1,923,584 Human Resources 754,225 780,529 895,311 913,250 871,596 Capital Outlay 475,585 378,059 480,749 Operating Transfers 4,212,915 13,555,338 5,951,669 6,187,379 7,526,481 Total Expenditures $ 94,160,257 $ 98,934,715 $ 90,594,059 $ 90,368,409 $ 86,145,475 Excess (Deficiency) of Revenues and Transfers Over Expenditures $ 3,277,179 $ (7,180,906} $ 1,896,315 $ 95,390 $ (627,373) Fund Balance at Beginning of Year 9,417,346 16,598,252 (4) 16,716,042 16,620,652 17,248,025 Fund Balance at End of Year $ 12,694,525 $ 9,417,346 $ 18,612,357 $ 16,716,042 s 16,620,652 Less: Reserves and Designations (l) (1,903,690} (2,361,860} (2,857 ,096) Undesignated Fund Balance $ 12,694,525 $ 9,417,346 $ 16,708,667 $ 14,354,182 $ 13,763,556 (1) Prior years have been restated to reflect current organization. (2) For fiscal year 2003/04, the water, solid waste and waste water funds transferred an amount sufficient to cover the pro rata share of the City's general and administrative expenses and an amount representing a payment in lieu of ad valorem taxes. The water and solid waste funds transferred an amount representing a franchise payment equal to 4% of gross receipts. The waste water fund transferred an amount representing a franchise payment equal to 6% of gross receipts. The Electric System was not required to make transfers to the General Fund for any of the foregoing purposes during the fiscal year. (3) The City's financial policies target a General Fund undesignated balance of at least two months of General Fund expenditures. The undesignated fund balance is at 81% of the tuget established by the City's financial policies. (4) The "Fund Balance at Beginning ofYear" was restated. TABLE 14 • MUNICIPAL SALES TAX HISTORY Tbe City has adopted the Municipal Sales and Use Tax Act, Chapter 321 Texas Tax Code, which grants the City the power to impose and levy a I% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Certificates or other debt of the City. In addition, in January, 1995, the voters of the City approved the imposition of an additional sales and use tax of one-eighth of a cent as authorized by Chapter 321 Texas Tax Code, as amended. Collection for the additional tax commenced in October, 1995 with the proceeds from the one-eighth cent sales tax designated for the use and benefit of the City to replace property tax revenues lost as a result of the adoption of the tax. At an election held in the City on November 4, 2003, voters approved an additional one-quarter cent sales and use tax, with the proceeds to be dedicated to the reduction of ad valorem taxation, and an additional one-eighth cent sales and use tax under Section 4A of the Texas Development Corpomtion Act, to be used for economic development in the City. The City began to re<:eive proceeds of these taxes in October 2004. Collections and enforcements of the City's sales tax are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, to the City monthly, after deduction of a 2% service fee. Historical collections of the City's 1.125% local Sales and Use Tax are shown below: Fiscal Year %of Equivalent of Ended Total Ad Valorem Ad Valorem 9/30 Collected(!) TaxLe!i: 2001 $ 28,183,746 74.48% $ 2002 28,902,648 73.37% 2003 29,092,032 73.85% 2004 30,554,632 70.67% 2005 26,839,889 (l) 67.46% (I) Excludes bingo tax receipts. (2) Based on population estimates of the City. (3) Partial collections October 1, 2004 through July 31,2005. Effective October I, 2004 the sales tax brealcdown for the City is as follows: City: City Sales & Use Tax City Sales & Use Tax for Property Tax Relief City Sales & Use Tax for Economic Development County Sales & Use Tax State Sales & Use Tax Total FINANCIAL POLICIES Tax Rate 0.4245 0.4183 0.3962 0.3857 0.3098 1.000¢ 0.375¢ 0.125¢ 0.500¢ 6.250¢ 8.250¢ Per Capita0• $ 140.15 143.08 142.09 148.11 128.35 Basis of Accounting . . . The accounting policies of the City conform to generally accepted accounting principles of the Governmental Accounting Standards Board and program standards adopted by the Government Finance Officer's Association ol the United States and Canada ("GFOA''). Tbe GFOA bas awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for each of the fiscal years ended September 30, 1984 through September 30, 2002. The City will submi1 the City's 2004 report to GFOA to determine its eligibility for another certificate. Comprehensive Annual Financial Report (CAFR) ... Beginning with the year ended September 30, 2002, the City's CAFR lw been presented under the Governmental Accounting Standard Board ("GASB'') Statement No. 34, Basic Financial Statements- and Management's Discussion and Analysis -for State and Local Governments, GASB Statement No. 37, Basic Financia, Statements -and ManogemenJ's Discussion and Analysis-for State and Local Governments: Omnibus. and GASB Statement No 38, Certain Financial Note Disclosures. For additional information regarding accounting policies that are applicable to the City see Note I. "Summary of Significant Accounting Policies" in the financial statements of the City attached as Appendix B. General Fund Balance ... The City's objective is to maintain an unreservedlundesignated fund balance at a minimum of ar amount equal to two months budgeted operating expenditures to meet unanticipated contingencies and fluctuations in revenue The City's General Fund cmrently has an unreservcdlundesignated fund balance that is at 80.9% of the targeted working capita reserve amount. Enterprise Fund Balance ... It is the p<>licy of the City to maintain Unrestricted Net Assets equal to three months operatin~ -----.... _..a ..a-'L• -.--. .. :--... •~ : .... aft,..h ,..~ •J.w.. 'Pl~ ..... W'!lt..-<:,nli~ Wa.c:t_,.. ~,n S:PW!Pr fi1ntlq fnr nnf~n r.nnt;n~c1~ (although the Electric System has not funded any operating reserves under this policy). The City's financial policy provides that such Net Assets shall be accumulated over a ten year period, which commenced in 1996. For a variety of reasons, including increased transfers from the water, sewer and solid waste funds to the General Fund following the cessation of transfers to the General Fund from the ele<:tric fund in FY 2003, the City is not presently in compliance with its fund balance policies for all its enteq>rise funds. See "Discussion of Recent Financial and Management Events -September 30, 2003 Financial Results." According to audited numbers for FY 2004, the current requirements for operating and rate stabilization reserves for each enteq>rise fund and current unrestricted net assets for each enteq>rise fund are as follows: Enterprise Fund CDJTent Reserve Actual Required Unrestricted Net Assets Electric $28.5 million $7.0 million Water $6.5 million $14million Sewer $4.2 million $6.3 million Storm Water $.5 million $1.3 million Solid Waste $4.7 million $6.0 million Airport (1} $1.97 million $-1 million (l) The AiJport Fund has not recovered from the events of September 11, 200 I. Enterprise Fund Revenues ... It is the policy of the City that each of the Electric, Water, Solid Waste and Sewer funds be operated in a manner that results in self sufficiency, without the need for additional monetary transfers from other funds (although the Electric System received transfers from the General Fund during the FY 2003). Such self sufficiency is to be obtained through the rates, fees and charges of each of these enteq>rise funds. For purposes of determining self sufficiency, cost recovery for each enterprise fund includes direct operating and maintenance expense, as well as indirect cost recovery, in-lieu of transfers to the General Fund for property and franchise tax payments, capital expenditures and debt service payments, where appropriate. Debt Service Fund Balance . . . A reasonable debt service fund balance is maintained in order to compensate for unexpected contingencies. Bud'letmy Procedures ... The City follows these procedures in establishing operating budgets: 1) Prior to August 1, the City Manager submits to the City Council a proposed operating budget for the fiscal year commencing the following October I. The operating budget includes proposed expenditures and the means of financing them. 2) Public hearings are conducted to obtain taxpayer comments. 3) Prior to October I the budget is legally enacted through passage of an ordinance. 4) The City Manager is authorized to transfer budgeted amounts between accounts below the department level. Any transfer of funds between departments or higher level are presented to the City Council for approval by ordinance before the funds are transferred or expended. Expenditures may not legally exceed budgeted appropriations at the fund level. 5) Formal budgetary integration is employed as a management control device during the year for the Convention and Tourism, Criminal Investigation, and Capital Projects Funds. Budgets are adopted on an annual basis. Formal budgetary integration is not employed for Debt Service funds because effective budgetary control is alternatively achieved through general obligation bond indenture and other contract provisions. 6) The Budget for the General Fund is adopted on a basis consistent with generally accepted accounting principles. 7) Appropriations for the General Fund lapse at year-end. Unencumbered balances for the Capital Projects Funds continue as authority for subsequent period expenditures. 8) Budgetary comparison is presented for the General Fund in the combined financial statement section of the Comprehensive Annual Financial Report. The City has received the Distinguished Budget Presentation Award from the GFOA for the following budget years beginning October I, 1983-88 and 1990-04. The City will submit the FY 2005 budget to the GFOA to determine its eligibility for another award Insurance and Risk Management . . . The City is self-insured for public entity liability and health benefits coverage. Risk management purchases a $10,000,000 excess insurance policy for liability claims in excess of $250,000, per occurrence. Airport liability insurance and workers' compensation is insured Wlder guaranteed cost policies. The Health Benefits are covered a fully insured program with a $10,765,643 cap and a $150,000 individual cap. The City maintains insurance policies with large deductibles for fire and extended property coverage and boiler and machinery coverage. An lnsuraDce Fund has been established in the Internal Service Fund to account for insurance programs and budgeted ttansfers are made to this fund based upon estimated payments for claim losses. At September 30, 2004the total Net Assets of these insurance funds were as follows: Self-insurance -health Self-insurance-risk management s 4,375,796 s 5,727,822 The City obtains an actuarial study of its risk management fund (the "Risk Fund") every year. In fiscal year 2004, an actuarial study was conducted that considered the types of insurance protection obtained by the City, the loss exposure and loss history, and claims being paid or reserved that are not covered by insurance. The 2004 actuarial review recommended that the liabilities of the Rislc Fund be increased to $6,437,000 from $4,824,000 to the minimum expected confidence level of the Government Accounting Standard Board Statement Number 1 0 ("GASB I 0"), which requires maintenance of risk management assets at a level representing at least a 500/o confidence level that all liabilities, if presented for payment immediately, could be paid The Rislc Fund has net assets restricted for ins1.11a11ce claims of $5,715,000 over the re<:omroended funding level. Given the risk net assets balance, the City exceeds the minimum GASB 10 requirement INvEsTMENTs The City invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the City Council of the City. Both state law and the City's investment policies are subject to change. LEGAL INvESTMENTS ... Under Texas law, the City is authorized to invest in (1) obligations, including letters of credit, of the United States or i1s agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instnnnentalities, (3) collaleralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) certificates of deposit that are guaranteed or insmed by the Federal Deposit Insurance Cotporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amount provided by law for City deposits, (7) certificates of deposit meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code) that are issued by or through an institution that either bas its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insu.raocc C01poration or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in the clauses (I) through (5) and clause (12) or in any other lll8DDer and amount provided by law for City deposits, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-I or P-1 or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an inevocable letter of credit issued by a U.S. or state bank, (11) no- load money market mutual funds regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of$1 for each share, (12) no-load mutual funds registered with the Securities and Exchange Commission that: have an average weighted maturity ofless than two years; invests exclusively in obligations described in the preceding clauses; and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent, (13) bonds issued, assumed, or guaranteed by the State of Israel, and (14) guaranteed investment contracts secured by obligations of the United States of America or its agencies and instrumentalities, other than the prohibited obligations descn'bed in the next succeedin8 paragraph. The City may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm. or an equivalent by at least one nationally recognized rating service. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a marlcet index. Effective September I, 2003, governmental bodies in the State are authorized to implement securities lending programs if(i) the secwities loaned under the program are collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) of the first paragraph under this subcaption, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm not less than "A" or its equivalent, or (c) cash invested in obligations that are descn'bed in clauses (1) through (5) and (10) through (13) of the first paragraph under this subcaption, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the governmental body, held in the name of the governmental body and deposited at the time the investment is made with the City or a third party designated by the City; (ill) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities bas a term of one year or less. INvEsTMENT POLICIES ••• Under Texas law, the City is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a fon:nally adopted "Investment Strategy Statement" that specifically addresses each funds' investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, City investments must be made "with judgment and care, under prevailing cin:umstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived" At least quarterly the investment officers of the City shall submit an investment report detailing: (I) the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, ( 4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (S) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (1) the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) state law. No person may invest City funds without express written authority from the City Council ADDmONAL PROVISIONS •.. Under Texas law the City is additionally required to: (1) annually review its adopted policies and strategies; (2) require any investment officers' with personal business relationships or relatives with finns seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Council; (3) require the registered principal of firms seeking to sell securities to the City to: (a) receive and review the City's investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) perfonn an annual audit of the management controls on investments and adherence to the City's investment policy; (5} provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (1) restrict its investment in mutual funds in the aggregate to no more than 1 S percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, and to invest no portion of bond proceeds, reserves and funds held for debt service, in mutual funds; and (8) require local government investment pools to confonn to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements. TABLE 15-CtiRRENT INVESTMENTS As of July 31, 2005, the City's investable funds were invested in the following categories: Estimated Fair Book Value Market Valueu> Weighted %ofTotal %ofTotal Average !lEe Par Value Value Book Value Value Marlcet Value Maturi~ (Dal:!) United States Agency Obligations s 27,000,000 26,998,189 1$.18 s 26,7(]9,720 IS.OS 370days Interest Bearing Bauk DepositS<2l 96,981,819 96,981,819 54.54 96,981,819 54.63 1 day Money Market Mutual Funds(J) 3,106,350 3,106,350 1.75 3,\06,350 1.75 1 day Local government investment poob(4l 50,727,536 50,727,536 28.53 50,727,536 28.57 1 day 177,815,705 177,813,894 100.00 177,525,425 100.00 58 days (1) Market prices are obtained through infonuation provided by Wells Fargo Brokerage Services, LLC. As of such date, the market value of such investments was approximately I OO.OQG/o of their book value. No funds of the City are invested in mortgage-backed securities. The City holds all investments to maturity which minimizes the risk of market price volatility. (2) Deposits are held at Wells Fargo Bank, N.A. in fully collateralized interest earning savings accounts. (3) Money Market Mutual Funds (MMMF's), used by the City, have investment objectives 1hat include achieving a stable net asset value of $1.00 per share. ( 4) IAcaJ. government investment pools consist of entities with investment objectives that include achieving a stable net asset value of $1.00 per share. The investment pools used by the City include TexPool and TexSTAR TexSTAR is a local government investment pool for whom Fim Southwest Asset Management, Inc., an affiliate of Finlt Southwest Company, provides customer seiVice and marketing for the pool TexSTAR currently maintains a "AAA" rating from Standard & Poor's and has an investment objective of achieving and maintaining a stable net asset value of$1.00 per share. Daily investments or redemptions of funds is allowed by the participants. Fim S<ntthwest Company is the Financial Advisor for the City in oonnecti.on with the issuance of City debt. [THE R.llMAINDER OF THIS PAGE lNn!NnONALL Y LE.FT BLANK) TAXMATIERS TAX EXEMYilON ... In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on Certificates is excludable from gross income for federal income tax pwposes under existing law and (ii) interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. The Internal Revenue Code of 1986, as amended (the "Code"), imposes a nwnber of requirements that must be satisfied for interest on state or local obligations, such as the Certificates, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds and the source of repayment of certificates, limitations on tbe investment of bond proceeds prior to expenditure, a requirement that excess arbitrage eamed on the investment of bond proceeds be paid periodically to the United States and a requirement that the issuer file an infonnation report with the Internal Revenue Service. The City has covenanted in the Ordinance that it will comply with these requirements. Bond Counsel's opinion will assume continuing compliance with the covenants of the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes and, in addition, will rely on representations by the City, the City's Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the City, the City's Financial Advisor and the Underwriters, respectively, which Bond Counsel has not independently verified. If the City should fail to comply with the covenants in the Ordinance or if the foregoing representations or report should be determined to be inaccurate or incomplete, interest on the Certificates could become taxable from the date of delivery of the Certificates, regardless of the date on which the event causing such taxability occurs. The Code also imposes a 20% alternative minimum tax on the "alternative minimum taxable income" of a co.rporation if the amount of such alternative minimum tax is greater than the amount of the co.rporation's regular income tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation, regulated investment company, REIT, REMIC or FASIT), includes 75% of the amount by whicb its "adjusted current earnings" exceeds its other "alternative minimum taxable income." Because interest on tax exempt obligations, such as the Certificates, is included in a coipO.ration's "adjusted current earnings," ownership of the Certificates could subject a corporation to alternative minimum tax consequences. Except as stated above, Bond Counsel wiU express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition. ownership or disposition of, the Certificates. BOlld Counsel's opinions are based on existing law, which is subject to change. Such opinions are further based on BOlld Counsel's knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel's attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, BOlld Counsel's opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent Bond Counsel's legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service bas an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the Issuer as the taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future audit of the Certificates could adversely affect the value and liquidity of the Certificates during the pendency of the audit regardless of the ultimate outcome of the audit. ADDmONAL FEDERAL INCOME TAX CONSIDERATIONS COLLATERAL TAX CONSEQUENCES ••• Prospective purchasers of the Certificates should be aware that the ownership of tax exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax exempt obligations, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualifying for the earned income credit. In addition, certain foreign corporations doing business in the United States may be subject to the "branch profits tax" on their effectively connected earnings and profits, including tax exempt interest such as interest on the Certificates. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Certificates should also be aware that, under tbe Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Certificates, received or accrued during the year. TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE PREMiuM ••• The issue price of all or a portion of the Certificates may exceed the stated redemption price payable at maturity of such Certificates. Such Certificates (the "Premium Certificates") are considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis of a Premium Certificate in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Certificate in determining gain or Joss for federal income tax pw:poses. This reduction in basis will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax pwposes on the sale or other taxable disposition of a Premium Certificate by the initial owner. No corresponding deduction is allowed for federal income tax pwposes for the reduction in basis resulting from amOJ1izable bond premium. The amount of bond premium on a Premium Certificate that is amortizable each year (or sboner period in the event of a sale or disposition of a Premium Certificate) is determined using the yield to maturity on the Premium Certificate based on the initial offering price of such Certificate. The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of Premium Certificates that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Premium Certificates should comult their own tax advisors with respect to the determination for federal, state, and local income tax pwposes of amortized bond premium upon the redemption, sale or other disposition of a Premium Certificate and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Certificates. TAX ACCOUNTING 'l'REATMENT OF ORIGINAL IssUE DISCOUNT CERT1111CATES ••• The issue price of all or a portion of the Certificates may be less than the stated redemption price payable at maturity of such Certificates (the "OrigiDal Issue Discount Certificates"). In such case, the difference between (i) the amount payable at the maturity of each Original Issue Discount Certificate, and (ii) the initial offering price to the public of such Original Issue Discount Certificate constitutes original issue discount with respect to such Original Issue Discount Certificate in the hands of any owner who has purchased such Original Issue Discount Certificate in the initial public offering of the Certificates. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Certificate equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Certificate continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax pwposes, the discussion regarding interest on the Certificates under the caption "Collateral Tax Consequences" above generally applies, and should be considered in connection with the discussion in this portion of the Official Statement. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Certificate prior to stated maturity, however, the amount reali2ed by such owner in excess of the basis of such Original Issue Discount Certificate in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discol.Ult Certificate was held by such initial owner) is includable in gross income. The foregoing discussion assumes that (a) the Underwriter has purchased the Certificates for contemporaneous sale to the public and (b) all of the Original Issue Discount Certificates have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in ann's-le:ngth transactions for a price (and with no other coasideration being included) not more than the initial offering prices thereof stated on the cover page of this Official Statement. Neither the City nor Bond Counsel has made any investigation or offers any comfort that the Original Issue Discount Certificates will be offered and sold in accordance with such assumptions. Under existing law, the original issue discount on each Original Issue Discount Certificate is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semi.annual anniversary dates of the date of the Certificates and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Certificate for pwposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Certificate. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Certificates which are not purchased in the initial offering at the initial offering price may be determined ~ording to rules whi.ch differ from those descn"bed above. All owners of Originall.ssue Discount Certificates should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Certificates and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Certificates. OTHER INFORMATION RATINGS The Certificates are rated "Aaa" by Moody's, "A.AA" by S&P and "A.AA" by Fitch by virtue of the Policy to be issued by Financial Se<:urity. The presently outstanding uninsured tax supported debt of the City is rated "Al" by Moody's, "AA·" by S&P and "AA-" by Fitch. The City also has issues outstanding which are rated "Aaa" by Moody's, "AAA" by S&P and "AAA" by Fitch through insurance by various commercial insurance companies. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgment of either or both companies, circumstances so warrant. /uiy such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Certificates. LmGATION The City is involved in various legal proceedings related to alleged personal and property damages, breach of contract and civil rights cases, some of which involve claims against the City that exceed $500,000. State law limits municipal liability for personal injury at $250,000/$500,000 and property damage at $100,000 per claim. The following represents the significant litigation against the City at this time. There is one claim pending against the City, which is in a preliminary stage, that the City Attorney believes could be brought under Section 1983 of the post-Civil War Civil Rights Act ("Section 1983"). If a claim should be made under that law and damages are ultimately assessed against the City, the City would not be subject to limitations on damages. Insurance should cover all but the self-insured retention. The City is also involved in a lawsuit with the City's firefighters regarding pay issues. The firefighters obtained a $688,000 judgment against the City for damages that accrued through July 2002. Damages have continued to accrue since July 2002. The City appealed this judgment, and the Court of Appeals overturned the judgment. The plaintiffs have filed an appeal to the Texas Supreme Court. The Supreme Court has not made a decision on whether to hear the appeal. While any liability would not be covered by an insurance policy, the City Attorney only assesses the potential that the firefighters will obtain relief from the Texas Supreme Court as possible. The City is also involved in a suit filed by the general contractor for a large drainage project in the City. In the suit, the contractor asserted damages in excess of $2.3 million under a breach of contract claim. The City obtained a summary judgment in this case against the contractor. The contractor has appealed the decision to the Fifth Circuit Court of Appeals. While this liability is not covered by any insurance policy, the City Attorney only assesses the likelihood of recovery by the contractor as possible. The City has also been sued by a another contractor who was not awarded the bid on a different portion of the stormwater drainage proje<:t. The contractor bas alleged violations of the state bid statute and a violation of Section 1983. The plaintiffs took a nonsuit in state court and re.filed the case in federal court. The federal court has dismissed the contractor's Section 1983 claims, and the contractor has filed a Notice of Appeal. The City Attorney assesses the likelihood of liability as possible. Potential damages are unknown. The City Attorney believes there is insurance coverage for the Section 1983 claim, although there is a dispute with the carrier regarding coverage. The City has been sued by six plaintiffs who allege that the City and or Lubbock County failed to properly record information in its cemetery records that would show where their relatives were buried. The Plaintiffs' attorney indicates that he has about eighty other clients with similar claims. The City will assert a defense under statutes of limitations, that the City was not the owner of the property during portions of the time in question, and that the allegations fail to state a claim upon which relief can be granted. The City Attorney assesses the potential for liability as possible. There is no insurance coverage for these claims. The City intends to vigorously defend itself on all claims, although no assurance can be given that the City will prevail in all cases. However, the City Attorney and City management is of the view that its available sources for payment of any such claims, which include insurance policies and City reserves for self insured claims, are adequate to pay any presently foreseeable damages (see "Financial Policies -Insurance and Risk Management"). On the date of delivery of the Certificates to the Underwriters, the City will execute and deliver to the Underwriters a certificate to the effect that, except as disclosed herein, no litigation of any nature has been filed or is pending, as of that date, to restrain or enjoin the issuance or delivery of the Certificates or which would affect the provisions made for their payment or security or in any manner question the validity of the Certificates. REGISTRATION AND QUALIPICATION OF CERTU'ICATES FOR SALE The sale of the Certificates has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Certificates have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Certificates been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Certificates under the securities laws of any jurisdiction in which the Certificates may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Certificates shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INvESTMENTS AND ELIGIBILITY TO SECURE PuBLIC FuNDs IN TEXAS Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Certificates are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and fur the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Certificates by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Certificates be assigned a rating of "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 Certificates are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Certificates are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the City bas been made of the laws in other states to determine whether the Certificates are legal investments for various institutions in those states. LEGAL OPINIONS The City will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Certificates, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Certificate and to the effect that the Certificates are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to lilce effect and to the effect that the interest on the Certificates will be excludable from gross income for federal income tax purposes under Section 103(a) of 1he Code, subject to the matters described under ''Tax Matters" herein, including the alternative minimum tax on corporations. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Official Statement, and such finn bas not assumed any responsibility with respect thereto or 1mdertalcen independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such finn has reviewed the information under the captions ''The Certificates" (exclusive of the subcaption "Book-Entry-Only System"), and ''Tax Matters" and the subcaptions .. Legal Opinions" and "Legal Investments and Eligibility to Secure Public Funds in Texas" and "Continuing Disclosure of Information" under the caption "Other Information" in the Official Statement and such t-..rm is of the opinion that the information relating to the Certificates and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Certificates, such information conforms to the Ordinance. The legal fee to be paid to Bond Counsel for services rendered in connection with the issuance of 1he Certificates is contingent on the sale and delivery of the Certificates. The legal opinion will accompany the Certificates deposited with DTC or will be printed on the Certificates in the event of the discontinuance of the Book-Entry-Only System. Certain legal matters will be passed upon for the Underwriters by McCall, Parlchurst & Horton L.L.P., Dallas, Texas, Counsel to the Underwriters. The legal opinions to be delivered concurrently with the delivery of the Certificates express the professional judgment of the attorneys rendering the opinions as to the legal issues expressly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of an opinion gwu'8Dtee the outcome of any legal dispute that may arise from the transaction. CONTINUING DISCLOSURE OF INFORMATION In the Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Certificates. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Certificates. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscn"be to receive the information from the vendors. ANNUAL REPORTS ••• The City will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respcx;t to the City of the general type included in this Official Statement under Tables numbered 1 through 6 and 8A through 15, and in Appendix B. The City wilt update and provide this information within six months after the end of each fiscal year ending in or after 2005. The City will provide the updated information to each nationally recognized municipal securities infonnation repository ("NRMSIR") approved by the staff of the United States Securities and Exchange Commission ("SEC") and to any state infmmation depository ("SID") that is designated and approved by the State of Texas and by the SEC staff. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-l2. The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the City will provide unaudited financial information and operating data which is customarily prepared by the City 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 City may be required to employ from time to time pursuant to state law or regulation. The City's current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify each NRMSIR and the SID of the change. The Municipal Advisory Council of Texas (the "MAC") has been designated by the State of Texas and approved by the SEC staff as a qualified SID. The address of the MAC is 600 West 8th Street, P. 0. Box 2177, Austin, Texas 78768-2177, and its telephone number is 512/476-6947. The MAC has also received Securities and Exchange Commission approval to operate, and has begun to operate, a "central post office" for information filings made by municipal issues, such as the City. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.DisclosureUSA.com ("DisclosureUSA"). The City may utilize Disclosure USA for the filing of information relating to the Certificates. MATERIAL EVENT NOTICES ••• The City will also provide timely notices of certain events to certain information vendors. The City will provide notice of any of the following events with respect to the Certificates, if such event is material to a decision to purchase or sell Certificates: (I) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (S) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax op.inions or events affecting the tax-exempt status of the Certificates; (7) modifications to rights of holders of the Certificates; (8) Certificate calls; {9) defeasances; (10) release, substitution, or sale of property securing repayment of the Certificates; and (11) rating changes. In addition, the City will provide timely notice of any failure by the City to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports." The City will provide each notice described in this paragraph to the SID and to either each NRMSIR or the Municipal Securities Rulemaking Board ("MSRB"). AVAILABILITY OF INFORMATION FROM NRMSIRS AND SID ... The City has agreed to provide the foregoing information only to NRMSIRs (or the MSRB in the case of Material Events Notices) and the SID. The information will be available to holders of Certificates only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through secwities brokers who do so. AMENDMENTS .•. The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if {i} the agreement, as amended, would have permitted an underwriter to purchase or sell Certificates 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 Certificates consent to the amendment or (b) any person unaffiliated with the City (such as nationally recoguized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Certificates. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-l2 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 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 Certificates in the primary offering of the Certificates. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKJNGS .•• Tbe City became obligated to file annual reports and financ.ial statements with the state information depository ("SID") and each Dationally recognized municipal securities information repository ("NRMSIR") in an offering that took place in 1997. All of the City's General Obligation debt reports and financial statements were timely filed with both the SID and each NRMSIR; however, due to an administrative oversight, the City filed its fiscal year end 1999, 2000, and 2001 Electric and Power Revenue debt reports late to the SID and each NRMSIR.. The financial information bas since been filed, as well as a notice of late filing. The City has implemented procedures to eDsure timely filing of all future financial infonnation. Under previous continuing disclosure agreements made in connection with LP&L revenue bonds, the City committed to make prompt filings with the SID and either each NRMSIR or the MSRB upon the occurrence of any "'non-payment related defaults." The City's FY 2003 audited financial statements were not available until mid-September 2004. Therefore, when the City made its annual disclosure filing with the SID and NRMSIRs in March 2004, it filed unaudited financial statements in accordance with its undertaking. Several references in that filing, including in the unaudited MD&A, in notes to those statements and in the statistical tables, reported that for FY 2003 LP&L had failed to meet its rate covenant (see "Discussion of Recent Financial and Management Events -September 30, 2003 Financial Results -The Electric Fund''). Because there was an uncertainty as to an amount by which the rate covenant would fail to be met, which was not fiDally determined until the audited fiDancials were released in September 2004 (although the City had a reasonable belief prior to that time that the rate covenant had not been met), the City waited until September 2004 to make its event filing of non-c;ompliance with its LP&L rate covenant. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the City in connection with the issuance of the Certificates. The Financial Advisots fee for services rendered with respect to the sale of the Certificates is contingent upon the issuance and delivery of the Certificates. First Southwest Company, in its capacity as Financial Advisor does not assume any responsibility for the information, covenants and represcm.tations contained in any of the legal documents with respect to the federal income tax status of the Certificates, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor to the City bas provided the following sentence for inclusion in this Official Statement. The Financial Advisor bas reviewed the infonnation in this Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circwnstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such infonnation. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Certificates from the City, at an 1Dlderwriting discount of $292,600.00. The Underwriters will be obligated to purchase all of the Certificates if any Certificates are pw"Cbased. The Certificates to be offered to the public may be offered and sold to certain dealers (including the Underwriters and o1her dealers depositing Certificates into investment trusts) at prices lower than the public offering prices of such Certificates, and such public offering prices may be changed, from time to time, by the Underwriters. FoRWARD-LooKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other lnfonnation provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City's actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgements with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. MiscELLANEOUS The financial data and other information contained herein have been obtained from the City's records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further infonnation. Reference is made to original documents in all respects. The Ordinance authorizing the issuance of the Certificates will also approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further usc in the reoffering oftbe Certificates by the Underwriters. ATIEST: lsi REBECCA GARZA City Secretary lsi MARC McDOUGAL Mayor City of Lubbock, Texas TIDS PAGE LEFT BLANK INTENTIONALLY APPENDIX A GENERAL INFORMATION REGARDING THE CITY THIS PAGE LEFf BLANK INTENTIONALLY TREOTY LOCATION The City of Lubbock, which is the County Seat of Lubbock County, Texas, is located on the South Plains ofW est Texas. Lubbock is the ecooomic, educational, cultural and medical services center of the area. POPULATION Lubbock is the ninth lalgest City in Texas: 1910 Census 1920Census 1930 Census 194QCensus 1950Cc:Mus 1960Census 1970Census 1980 Census 1990 Census 2000Census 2005 (Estimated) (l) City of Lubbock (Cog>orate Limits) 1,938 4,051 20,520 31,853 71,747 128,691 149,701 173,979 186,206 199,564 209,120 MetrOj)Oljtan Statistical Area C'MSA''l CLubboolc Countv> 1970 Census 179,295 1980 Census 211,651 1990 Census 222,636 2000 Census 242,628 (1) Source: City of Lubbock, Texas AGRICULTURE; BusiNESS AND INDUSTRY Lubbock is the center of a highly mechanized agricultural area with a majority of the crops irrigated with water from underground sources. Principal crops are cotton and grain sorghums with livestock a major additional source of agricultural income. lD 2003, approximately 2.2 million bales of cotton were produced in Lubbock and the 25-counties surrounding Lubbock. This was less than the 3.2 million bales produced in 2002 and is 27% below the I ().year average of 2.80 million bales. Projections for the 2004 cotton crop are 3.89 million bales, depending on the growing conditions and the weather during the 2004 production season.O) Two major vegetable oil plants located in Lubbock have a combined weekly capacity between 50,000 and 70,000 tons of cottonseed oil and soybean oil. Several major seed companies are headquartered in Lubbock. Over 200 manufacturing plants in Lubbock produce such products as semiconductors, vegetable oils, irrigation equjpme:nt and pipe, plastics products, farm equipment. paperl>oard boxes, custom millworlc/shutters, foodstuffs, prefabricated homes, poultry and livestock feeds, boilers and pressure vessels, automatic sprinkler system heads, and structural steel fabrication. (1) Source: Plains Cotton Growers, Inc., Lubboclc. Texas. LUBBOCK MSA LABoR FORCE ESTIMA n:s (I) Civilian Labor Force Total Employment Unemployment Percent Unemployment March 2005(l) 139,181 133,308 5,873 4.20% (l) Source: Texas Workforce Commission. (2) Subject to revision. 2004 138,516 132,065 6,451 4.70% Annual Averages 2003 130,645 125,969 4,676 3.60% 2002 128,131 124,228 3,903 3.00% 2001 127;:293 124,046 3,247 2.60% 2000 124,756 121,482 3,274 2.60% Estimated non·agricultunl wage and salaried jobs in varioiL'l categories as of December, 2004 were: Ill Manufacturing Construction Trade, Transportation & Public Utilities Finance, Insurance and Real Estate Education & Health Savices Information 5,400 5,300 25,500 16,700 17,900 5,800 Leisure &Hospitality & Other Government 19,700 28,500 124,800 Total (1) Source: Texas Wodcfon:e Commission. MAJOR EMPLO\'&RS (300 EMPLOYEES OR MORE) Company Texas Tech Unrversity Covenant Health System Lubbock Independent School District University Medical Center United Supermarkets City ofLubbock Texas Tech Health Sciences Center Cingular Convergys Corporation Lubbock County Lubbock State School Texas Dept. of Criminal Justice Psychiatric Hospital Frenship ISO Tyco Fire Protection G Boren Services, Inc. SBC/Southwestem Bell Walm.art Supercenter U.S. Postal Service State National Bank of West Texas Texas Department of Transportation Gene Messer Ford Inc. Lubbock-Cooper lSD Lubbock Regional MHMR Center Operator Service Company Sonic Drive In ChaseCom/Staffmark Wells Fargo Phone Bank Lubbock Christian University Plains Capital Bank NTS Communications, Inc. American State Bank Dillards Department Stores Cox Cable of Lubbock, Inc. McLane High Plains Sodexho School Services ARAMARK Lubbock Heart Hospital Interim Healthcare of West Texas (I) Source: Market Lubbock. (2) Full and part time. Type of Business state University Hospital Public Schools Hospital Supermarkets City Government Medical and Allied Health School Wireless Communications Call Center County Government School for Mentally Retarded Psychiatric Hospital Public Schools M anufacturing!Fire Sprinklers Staffmg'HR Consulting Telephone Utility Discount Retailer Post Office Bank State Highway and Street Maintenance Automobile Dealership Public Schools Social Services Customer Service Restaurants Call Center Bank Phone Center CoUege/U Diversity /Professional School Bank Telephone Utility Bank Department Store Cable Utility Wholesale Food Distribution Facilities Management Manap Food Services Heart Hospital Home Health Care Estimated Employees July 1 2004\IJ 9,919 (2) 4,310 3,504 2,310 2,156 2,109 2,010 1,750 1,450 950-1200 850 755 Q) 639 525 516 500-999 500-999 500-999 500 474 449 444 427 427 425 400 392 384 371 367 355 341 339 330 316 316 308 300 (3) Sec Texas Depar1ment of Criminal Justice ("TDCJ") Prison Psychiatric Hospital following for mo.re detailed infonuation. EDUCATION-TEXAS TECH UNIVERSITY Established in Lubbock in 1923, Texas Tech University is the fifth largest State-owned University in Texas and bad a Spring, 2005, enrollment of 28,549. Accredited by the Southern Association of Colleges and Schools, the University is a c<Hducational, State- supported institution offering a bachelor's degree in 158 major fields, the master's degree in 107 major fields, the doctorate degree in 64 major fields, and a professional degree in 2 major fields (law and medicine). The University proper is situated on 451 acres of the 1,829 acre campus, and bas over 160 permanent buildings with additional construction in progress. Spring, 2004, total employment was 9,919 full time and part time employees. The medical school bad an enrollment of 2,100 for Spring, 2005, not including residents; there were 77 graduate students. The School of Nursing bad a Spring, 2005, enrollment of 443. The Allied Health School bad a Spring, 2005, enrollment of 731. Source: Texas Tech University. OTHER EDUCATION INFORMATION The Lubbock Independent School District, with an area of 87.5 square miles, includes over 90% of the City of Lubbock. There are approximately 3,504 total employees. The District operates four senior high schools, nine junior high schools, 39 elementary schools and o1hcr educational programs. Scholastic Membership History (I) School Year 2000..0 I 2001-02 2002-03 2003-04 2004-05 Average Daily Attendance 27,046 27,019 27,094 26,800 28,474 (2) (1) Source: Superintendent's Office, Lubbock Independent School District (2) Estimated Lubbock Christian University, a privately owned, ~cational senior college localed in Lubbock, bad an enrollment of 1,819 for the Spring Semester, 2005. The State of Texas School for the Mentally Retarded, located on a 226-acre site in Lubbock, consists of 40 buildings with bed- capacity for 436 students; 400 students were in residence. There are approximately 850 professional and other employees. Wayland Baptist College, Plainview Texas, operates a Lubbock Campus which bad a Spring, 2005, enrollment of 650 students. TRANSPORTATION Scheduled airline transportation at Lubbock Preston Smith International Airport is furnished by Southwest Airlines, Continental Airlines and American Eagle; non-stop service is provided to Dallas-Fort Worth International Aiiport, Dallas Love Field, Bush Intercontinental Airport (Houston), Houston Hobby, El Paso, Las Vegas, Austin, and Albuquerque. Passenger hoardings for 2001 536,670, for 2002 513,096 for 2003 514,250 and 541,549 for 2004. Extensive private aviation services are located at the aiiporl. Rail transportation is furnished by the Burlington Northern Santa Fe Railroad with through service to Dallas, Houston, Kansas City, Chicago, Los Angeles and San Francisco. Short-haul rail service is also furnished by the Seagraves, Whiteface and Lubbock Railroad. Texas, New Mexico and Oklahoma Bus Lines, a subsidiary of Greyhound Corporation, provides bus service. Several motor freight common carriers provide service. Lubbock has a well-developed highway networlc including Interstate 27 (Lubbock-Amarillo), four U.S. Highways, one State Highway, a oon1rolled-access outer loop and a county-wide system of paved farm-to-market roads. GOVERNMENT AND MILITARY (ll The fonner air base, now known as Reese Technology Center (the "Center") is a 2500-acre campus with over 1 million square feet of space. The Center is the 5th largest Research Park in the United States and is considered by Department of Defense as "one of the most rapid and successfully redeveloped closed military bases in the country." The Center is currently 80% occupied with 11 commercial tenants employing over 670 people (created over the last three years). Anchor tenants include Texas Tech Research and the 4,200-student campus of South Plains College, a two-year community college. Reese Center is the home of the prized Institute of Environmental and Hwnan Health (TIEHH). TIEHH is a joint venture between Texas Tech University and Texas Tech University Health Sciences Center and researches the exposure and effects toxic chemicals have on hWDan health and the environment. TIEHH has assisted in stimulating the Lubbock economy with over $50 million in grants. TIEHH's location as the anchor tenant at the Reese Technology Center has assisted the facility in being transformed into a research, industrial and commercial center. Cwrent areas of specialty at the Center include Biotechnology, Environmental Sciences, Food Technology and Work Force Development. Reese Center recently received an EDA grant for $1.7 million dollars to install an OC-192 fiber optic network and wireless system for the entire campus making it a leader in high tech communications. Other research facilities that have been relocated to Reese Technology Center are the Texas Tech University Wind Engineering and Advanced Vehicle Engineering Research Centers. Total economic impact of the Reese Technology Center has been $26.8 million dollars over the last three years. State of Texas ... More than 25 State of Texas boards, departments, agencies and commissions have offices in Lubbock; several of these offices have multiple units or offices. Federal Government ... Several Federal departments and various other administrations and agencies have offices in Lubbock; a Federal District Court is located in the City. (I) Source: City of Lubbock, Texas. TEXAS DEPARTMENT OF CRIMINAL JUSTICE ("TTCJ") PRISON PSYCHIATRIC HOSPITAL TDCJ operates a 550-bed Prison Psychiatric Hospital and a 48-bed regional prison hospital on a 1,303 acre site in southeast Lubbock. An adjacent 400-bed capacity "trusty" facility houses prison trusties some of whom work at the hospital. Employment for all facilities is approximately 870 with an annual estimated payroll of $17 million and an estimated remaining annual operating budget of $27 million. HOSPITALS AND MEDICAL CARE There are four hospitals in the City with over 1 ,500 beds. Covenant Medical Center is the largest and also operates an accredited nwsing school. Lubbock County Hospital District, with boundaries contiguous with Lubbock County, owns the University Medical Center which it operates as a teaching hospital for the Texas Tech Health Sciences Center. There are 102 clinics and over 700 practicing physicians, surgeons, and dentists. Lubbock's Health Care Sector employs over 17,000 people with a total payroll of $543.3 million and draws patients from 77 counties in West Texas and Eastern New Mexico. A radiology center for the treatment of malignant diseases is located in the City. RECREATION AND ENTERTAINMENT Lubbock's Mackenzie Regional Park and over 115 City parks and playgrounds provide recreation cen1el:s, shelter buildings, a garden and art center, swinuning pools, a golf course, tennis and volley ball cowts, baseball diamonds and picnic areas, including the Y cllowbouse Canyon Lakes system of six lalces and 750 acres of adjacent parldand exteDdlng from northwest to southeast Lubbock along the Yellowhouse Canyon. There are several privately-owned public swimming pools, golf courses, and country clubs. The City of Lubbock has developed a 36 square block area of approximately 100 acres adjacent to downtown Lubbock under the Lubbock Memorial Civic Center program. Approximately 50 acres contain the 300,000 square foot Lubbock Memorial Civic Center, the main City hbrary building and State Department of Public Safety offices; a 50-acre peripheral area bas been redeveloped privately with office buildings, hotels and motels, a hospital, and other facilities. Available to residents are Texas Tech University programs and events, Texas Tech University Museum, Planetarium and Ranchin~ Heritage Center exln'bits and programs, United Spirit Arena and its events, Lubbock: Memorial Civic Center and its events, Lubbock Symphony Orchestra programs, Lubbock Theatre Center, Lubbock Civic Ballet, Municipal Auditorium and coliseum prognliDS anc events, the library and its branches, the annual Panbandl~South Plains Fair, college and high school football, basketball and otheJ sporting events, as well as modem movie theaters. CHURCHES Lubbock has approximately 300 churches representing more than 25 denominations. UTILITY SERVICES Water and Sewer-City of Lubbock. Gas-Atmos Energy Company. Electric -City ofLubbock (Lubbock Power & Light) and Xcel Energy; and, in a small area, South Plains Electric Co-operative. ECONOMIC INDICES (I) Year 2000 2001 2002 2003 2004 Building Pennits $ 200.427,650 294,064,200 314,077,929 417,252,162 408,726,402 Water 70,111 70,756 72,615 12,505 74,026 Utility Connections Gas 65,000 65,332 67,308 69,954 70,196 (1) All data as of 12-31, except where noted; Source: City of Lubbock. Electric (LP&L Only)<2> 58,724 59,431 62,713 62.203 63,076 (2) Electric connections are those of City of Lubbock owned Lubbock Power and Light ("LP&L") and do not include those of Xcel Energy or Soutb Plains Electric Cooperative. LP&L provides service to approximately 700/o of the electric customers in the City. BUILDING PERMITS BY CLASSIFICATION (l) Residential Permits Single Family Multi-Family Total Residential Commercial, No. No. Public Total Calendar No. Dwelling Dwelling and Other Building Year Units Value Units <Z> Value Units (2> Value Pennits Pennits 2000 819 $87,501,009 281 $11,548,809 1,100 $ 99,049,818 $101,377,832 $200.427,650 2001 941 108,589,812 853 37,242,260 1,794 145,936.072 148,128,128 294,064,200 2002 1,281 148,190,769 549 31,700,960 1,830 178,891,729 134,186,200 314,077,929 2003 1,288 172,679,238 1,595 101,540,351 2,883 274,219,589 143,032,573 417,252,162 2004 1,204 169,075,633 2,382 114,339,697 3,586 283,415,330 125,311,072 408,726,402 2005 (l) 546 84,646,181 140 9,717,000 686 94,363,181 78,560,300 172,923,481 (I) Source: CityofLubbock, Texas. (2) Data shown under "No. Dwelling Units" is for each individual dwelling unit, and is not for separate buildings; includes duplex, triplex, quadruplex and apartment permits. (3) Through May 31,2005. TIUS P~GE LEFr BLANK. INTENTIONALLY APPENDIXB EXCERPTS FROM THE CITY OF LUBBOCK, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2004 The information contained in this Appendix coD.Sists of excetpts from the City of Lubbock. Texas Annual Financial Report for the Year Ended September 30, 2004, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information. This page intentionally left blank KPMG LLP Suite 3100 717 North Harwood Street Dallas, TX 75201..{)585 Independent Auditors' Report The Honorable Mayor and Members of the City Council City of Lubbock, Texas: We have audited the accompanying fmancial statements of the governmental activities, the business-type activities, the aggregate discretely presented compon~nt units, each major fund, and the aggregate remaining fund infonnation of the City of Lubbock, Texas, as of and for the year ended September 30, 2004, which collectively comprise the City's basic fmancial statements as listed in the table of contents. These fmancial statements are the responsibility of the City of Lubbock's management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Market Lubbock Economic Development Corporation and Civic Lubbock, Inc. which comprise the aggregate discretely presented component units. In addition, we did not audit the West Texas Municipal Power Agency, which is both a major fund and represents 4 percent, 1 percent, and 22 percent of the assets, net assets, and revenues of the business-type activities, respectively. Those fmancial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for the Market Lubbock Economic Development Corporation, Civic Lubbock, Inc., and the West Texas Municipal Power Agency are based on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fmancial statements are free of material misstatement. The financial statements of Market Lubbock Economic Development Corporation, Civic Lubbock, Inc. and the West Texas Municipal Power Agency Fund were not audited in accordance with Government Auditing Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Lubbock, Texas, as of September 30, 2004, and the respective changes in financial position and cash flows, where applicable, thereof and the budgetary comparison for the General Fund for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated March 28, 2005 on our consideration of the City of Lubbock's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts. and grant agreements and other matters. -The pwpose ofthat report is to describe the scope of our testing of internal control over financial reportiJ and compliance and the results of that testing and not to provide an opinion on the internal control 0\1 financial reporting or on compliance. That report is an integral part of an audit performed in accordan with Government Auditing Standards and should be considered in assessing the results of our audit. The management's discussion and analysis and schedules of funding progress on pages 19 through 34 a: 73 and 77, respectively, are not a required part of the basic financial statements but are supplementa information required by accounting principles generally accepted in the United States of America. We ba applied certain limited procedures, which consisted principally of inquiries of management regarding t methods of measurement and presentation of the required supplementary information. However, we did I audit the information and express no opinion on it. Our audit was conducted for the purpose of forming opinions on the financial statements that collectiv~ comprise the City of Lubbock's basic fmancial statements. The introductory section, combining fu statements and schedules, and statistical section are presented for purposes of additional analysis and < not a required part of the basic financial statements. The combining fund statements and schedules ha been subjected to the auditing procedures applied by us and the other auditors in the audit of the ba: financial statements and, in our opinion, based on our audit and the reports of other auditors, are fail stated in all material respects in relation to the basic financial statements taken as a whole. March 28, 2005 City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 As management of the City of Lubbock, Texas (City), we offer readers this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, 2004. We encourage readers of these financial statements to consider the information included in the transmittal letter and in the other sections of the Comprehensive Annual Financial Report (CAFR) e.g., combining statements and the statistical section in conjunction with this discussion and analysis. Financial Highlights These financial highlights sununarize the City's fmancial position and operations as presented in more detail in the Basic Financial Statements (BFS), as listed in the accompanying Table of Contents. • The assets of the City exceeded its liabilities at September 30, 2004 by $546 million (net assets). Of this amount, $51 million (unrestricted net assets) may be used to meet the City's ongoing obligations to citizens and creditors. • The City's total net assets decreased by nearly $2.7 million as a result of operations during the fiscal year. • The ending unreserved fund balance for the General Fund was $12.1 million or approximately 13.5% of total General Fund expenditures, or 14.0% of total General Fund revenues. • All of the City's govenunental funds reported combined ending fund balances of $47.7 million. Of this total amount, $13.8 million is available for spending at the City's discretion. • All of the City's business-type activities reported combined ending net assets of $442.4 million. Of this total amount, $41.2 million is available for spending at the City's discretion. • The City's proprietary funds net assets decreased by nearly $5.0 million from $437.1 million to $432.1 million. The Electric Fund (Lubbock Power & Light or LP&L) ended the year with operating income of nearly $3.3 million erasing a $6.3 million operating loss experienced in the prior year. • Near the end of the fiscal year, the City issued $22.6 million of bonds to refund $23.2 million in outstanding bonds. As a result of this transaction, the City will experience an economic gain of $0.8 million and an accounting loss of $1.0 million, with 4.2% in present value savings. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Overview of the Financial Statements Basic Financial Statements. Management's Discussion and Analysis (MD&A) is intended to serve as an introduction to the City's BFS. The BFS are comprised of three components: 1) Government-Wide Financial Statements (GWFS), 2) Fund Financial Statements (FFS), and 3) Notes to Basic Financial Statements (Notes). This CAFR also contains other supplementary information in addition to the BFS. Government-Wide Financial Statements. The GWFS, shown on pages 35-37 of this report, contain the statement of net assets and the statement of activities, described below: The statement of net assets presents information on all of the City's assets and liabilities (including capital assets and short-and long-term liabilities), with the difference between the two reported as net assets using the accrual basis. Over time, increases or decreases in net assets serve as a useful indicator of whether the financial position of the City is improving or deteriorating. The statement of activities presents a comparison between direct expenses and program revenues for each of the City's functions or programs (referred to as "activities"). Direct expenses are those that are specifically associated with an activity and are therefore clearly identifiable with that activity. Program revenues include charges paid by the recipient of the goods or services offered by the program, in addition to grants and contributions that are restricted to meeting the operational or capital requirements of a particular activity. Revenues that are not directly related to a specific activity are presented as general revenues. The comparison of direct expenses with revenues from activities identifies the extent to which each activity is self-financing, or alternatively, draws from any City generated general revenues. The governmental activities (activities that are principally supported by taxes and intergovernmental revenues) of the City include administration of community services, electric (street lighting), financial services, fire, general government, human resources, police, streets, and public works. The business-type activities (activities intended to recover all of their costs through user fees and charges) of the City include Electric (LP&L), Water, Sewer, Solid Waste, Stormwater, Transit, and Airport. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs (accrual basis), regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods, such as uncollected taxes and earned but unused vacation leave. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 Component Units. The GWFS include not only the City itself (the "primary government"), but also two legally separate entities (the "component units): Market Lubbock Economic Development Corporation, d/b/a Market Lubbock, Inc. and Civic Lubbock, Inc., for which the City is financially accountable. These entities provide economic development services and arts and cultural activities for the City. Financial infonnation for these component units is reported separately in the GWFS in order to differentiate them from the City's financial information. Neither of these component units are considered major component units. Fund Financial Statements. A fund is defined as a fiscal and accounting entity with a selfMbalancing set of accounts recording cash and other fmancial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. The principal role of funds in the new financial reporting model is to demonstrate fiscal accountability. The City, as with other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The focus of the FFS is on major funds. Major funds are those that meet minimum criteria (a percentage of assets, liabilities, revenue, or expenditures/expenses of fund category and of the governmental and enterprise funds combined), or those that the City chooses to report as major funds given their qualitative significance. Nonmajor funds are aggregated and shown in a single column in the appropriate financial statements. Combining schedules of nonmajor funds are included in the CAFR following the BFS. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. G(}vernmental FFS. Governmental funds are used to account for essentially the same functions reported as governmental activities in the GWFS. However, unlike the GWFS, governmental FFS focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the City's fiscal year. Such information is useful in evaluating the City's nearMtenn fman.cing requirements. Because the focus of governmental funds is narrower than that of the GWFS (modified accrual versus accrual basis of accounting, and current financial resources versus economic resources), it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the GWFS. By doing so, readers may better understand the long-term impact of the nearMterm financing decisions. Reconciliations are provided for both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances to facilitate the comparison between governmental funds and governmental activities. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 The City maintains 24 individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund only. The General Fund is considered to be a major fund. Data from the other governmental funds are combined into a single aggregated presentation. The City adopts a budget annually for the General Fund and all other funds. A budgetary comparison statement has been provided for the General Fund to demonstrate compliance with this budget. It is presented in the FFS following the statement of changes in revenues, expenditures, and changes in fund balances. The governmental FFS can be found on pages 39-43 of this report. Proprietary FFS. The City maintains two different types of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the GWFS. Enterprise FFS provide the same type of information as the GWFS, only in more detail. The City uses enterprise funds to account for its Electric (LP&L), Water, Sewer, West Texas Municipal Power Agency (WTMPA), Stonnwater, Transit, Solid Waste, and Airport activities, of which the first five activities are considered to be major funds by the City and are presented separately. The latter three activities are considered nomnajor funds by the City and are combined into a single aggregated presentation. Internal service funds are an accounting device used to accumulate and allocate costs internally among the City's various functions. The City uses internal service funds to account for its fleet of vehicles, management information systems, risk management, print shop, and central warehouse activities among others. The services provided by the internal service funds benefit both governmental and business-type activities, and accordingly, they have been included within governmental activities and business- type activities, as appropriate, in the GWFS. All internal service funds are combined into a single aggregated presentation in the proprietary FFS. Reconciliations are provided for both the proprietary fund statement of net assets and the proprietary fund statement of revenues, expenses, and changes in fund net assets to facilitate the comparison between enterprise funds and business-type activities. The proprietary FFS can be found on pages 44-55 of this report. Fiduciary FFS. Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the GWFS because the resources of those funds are not available to support the City's own programs. The City presents an agency fund as its only fiduciary fund in the FFS. The fiduciary FFS can be found on page 56 of this report. Notes to Basic Financial Statements. The Notes provide additional information that i~ essential to a full understanding of the data provided in the GWFS and FFS. The Note5 can be found on pages 57-90 of this report. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Required Supplementary Information Other Than .MD&A. The City has presented required supplementary information relating to its progress in funding its obligation to provide pension benefits to its employees in the Notes to the BFS. Government-Wide Financial Analysis As noted earlier, net assets serve as a useful indicator of the City's financial position. For the City, assets exceeded liabilities by $546 million (net assets) at the close of the fiscal year. This compared to assets exceeding liabilities by $549 million (net assets) at the end of the prior fiscal year. As a result of operations, total net assets decreased by $2.7 million during the period. By far the largest portion of the City~s net assets, 78.7%, reflect its investment in capital assets, e.g., land, buildings, infrastructure, machinery, and equipment, less any related debt used to acquire those assets that is still outstanding at the close of the fiscal year. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City's investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. City of Lubbock Net Assets September 30 (in OOO's) Governmental Business-Type Activities Activities Total 2004 2003 2004 1003 2004 2003 CUrrent and other assets $ 100,489 78,784 177,959 188,077 278,448 266,861 Capital assets 129,014 121,735 611,703 617,465 740,717 739,200 Total assets 229,503 200,519 789,662 805,542 1,019,165 1,006,061 CUrrent liabilities 48,739 25,697 44,156 37,774 92,895 63,471 Noncurrent liabilities 76,423 73,138 303,173 320,024 379,596 393,162 Total liabilities 125,162 98,835 347,329 357,798 472,491 456,633 Net assets: Invested in capital assets, net of related debt 74,433 78,475 355,816 371,427 430,249 449,902 Restricted 20,339 4,391 45,417 43,389 65,756 47,780 Unrestricted 9,569 18,818 41,190 32,928 50,759 51,746 Total net assets $ 104,341 101,684 442,423 447,744 546,764 549,428 An additional portion of the City's net assets, 12%, represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets of $50.7 million may be used to meet the City's ongoing obligations to citizens and creditors. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 The City also reports positive balances in all three categories of net assets for the City as a whole, as well as for its separate governmental activities, and business-type activities. The City's goverrunental activities experienced an increase in net assets of $2.7 million, while net assets decreased by $8.5 million during the prior fiscal year. This increase is primarily a result of strong growth in new construction and better than anticipated sales tax revenues coupled with a concentrated effort by City management to contain expenditures. This is the second year in a row that the City Council has been able to cut property tax rates while streamlining City operations. The City's business-type activities experienced a decrease in net assets of $5.3 million during the current fiscal year as compared to an increase of$3.6 million during the prior fiscal year. This decrease in net assets resulted from a change in accounting estimate on the life of the City's landfill. This change in accounting estimate resulted in the nearly doubled depreciation in the Solid Waste Fund. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 Changes in Net Assets Details ofthe following summarized information can be found on pages 36-37 of this report. City of IAlbbock Changes in Net Assets For tbe Year Ended September 30 (inOOO's) Business- Goverumental Type Activities Adivities Totals Revenues: 2004 2003 2004 2003 2004 2003 Program Revenues: Charges for services $ 12,713 13,888 181,411 178,536 194,124 192,424 Operating grants and contributions 9,643 12,137 6,739 5,219 16,382 17,356 Capital grants and contributions 9,269 7,909 9,269 7,9f.Y'J General Revermes: Property taxes 44,497 42,303 44,497 42,303 Sales taxes 30,555 29,092 30,555 29,092 Other taxes 3,793 3,712 3,793 3,712 Franchise fees 9,654 6,613 9,654 6,613 Grants/contributions not restricted to specific programs 259 259 Other 4,274 3,834 2932 2737 7,206 6,571 Total revenues Expenses: ll5zl29 lllz579 200,351 194,660 315,480 306,239 Administrative/Conmunity Services 22,313 21,793 22,313 21,793 Electric 2,471 2,373 2,471 2,373 Financial Services 2,387 1,965 2,387 1,965 F~ 21,998 20,2117 21,998 20,207 General Gov~nt 20,562 21,009 20,562 21,009 Human Resources 777 786 777 786 Police 33,249 31,429 33,249 31,429 Planning and Transportation 10,789 9,827 10,789 9,827 Public Worlcs 3,078 9,856 3,078 9,856 Interest on long-term debt 4,593 3,346 4,593 3,346 Electric 110,591 105,216 110,591 105,216 Water 27,879 27,461 27,879 27,461 Sewer 17,020 17,248 17,020 17,248 Solid Waste 17,662 19,559 17,662 19,559 Stormwater 5,357 3,315 5,357 3,315 Thmsit 10,565 9,163 10,565 9,163 Aitport 6,853 6,479 6,853 6,479 Golf 21 21 Total Expenses Change in net assds before 122,217 122z591 195,927 188,462 318,144 3111053 special items and transfers (7,088) (11,012) 4,424 6,198 (2,664) (4,814} Special items Transfers 9,745 2,554 ~9.74~ {2,554} Cbange in net assets 2,657 (8,458) (5,321) 3,644 (2,664) (4,814) Net assets-beginning of year 101!684 110,142 447,744 444,100 549,428 554~42 Net assets -end of year $ I<RZJ4I 101,684 442;423 447,744 546!'1i>4 54~;-~ ...... .. 0 0 e 'I!! 6 ~ City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 Governmental activities. Governmental activities increased the City's net assets by $2.7 million. Key elements of the increase follow: • Transfers to/from business-type activities during the fiscal year increased governmental activities net assets by $9.7 million. During the prior fiscal year these transfers increased governmental activities net assets by approximately $2.7 million. This is a net increase of $7.1 million in resources to governmental activities, which is the primary factor for the increase in net assets. Transfers from the business-type activities included payments in lieu of taxes, franchise fees, and indirect costs of operations for centralized services such as payroll and purchasing. • Total expenses decreased by nearly $.4 million from the prior year due primarily to a payment made in the prior year of $5.5 million for the City's share of the Marsha Sharp Freeway Project. This project will be owned and maintained by the State of Texas. However, the governmental activities did increase planning and transportation spending of $1.0 million for the City's streets and had an increase in public safety spending, police and fire of$3.6 million--a result of the City Council's commitment to public safety. • Revenues increased by approximately $3.6 million. The key factors impacting this increase include increases in property taxes of $2.1 million due to the additional property being added to the tax rolls, increases in franchise fees of $3.0 million due to changes in the fee structures, and increases in sales taxes of nearly $1.5 million. Also, charges for services and operating grants and contributions decreased by $1.1 million and 2.5 million, respectively. This graph depicts the expenses and program revenues generated through the City's various governmental activities. Expenses aad Program Revenues -Governmental Activities $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 so 70>! ~ '\ ~ \ t ~ '\ ~ ~ \: Ito~ .. ' ~ ~ 0:. ~C>-" ~ \ ~4. c;.. ~ ~, ~ ~ .... ~, ~ ·~ ~ ".>. ~'(. ~ 0~ ~ \ ' ... ' ~ ~ " ~ ' 't. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 The following graph reflects the source of the revenue and the percentage each source represents of the total. Cbarges for Services 11% Operating grants & Contributions 8o/o Franchise Fees 8% 3o/o Revenues by Source -Governmental Activities Miscellaneous 4% Sales Taxes 27o/o Property Taxes 39% Business-type activities. Business-type activities decreased the City's net assets by $5.3 million as a result of operations. Key elements of this increase follow: • Charges for services for business-type activities increased by $2.9 million. This is mainly due to increased sales in the Electric Fund (LP&L) with revenues up nearly $10.8 million over the prior year. Sales for the water fund were $.9 million less than the prior fiscal year in spite of an increase in rates, because 2004 was the second wettest year in recorded history for the City. WTMP A revenues were impacted because of the capital lease of the co-generation power plant JRM8 to the Electric Fund. The plant was not utilized due to the continued high natural gas prices. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 • Capital grants and contributions continue to be a significant revenue source for the Electric (LP&L), Ahport, Water, and Sewer Funds during the current fiscal year, producing nearly $9.3 million in revenue. This is comparable to the prior fiscal year's support of $7.9 million. These contributions primarily came from federal grants and from water and sewer lines and taps that were funded by property owners. • Expenses increased in total by $7.5 million over the prior fiscal year. This is mainly due to the increased cost of operations for electric activity, which increased nearly $5.4 million over the prior year. The stonnwater activity experienced a $2.0 million increase in expenses due primarily to scheduled interest payments on debt. The transit activity expenses increased by $1.4 million over the prior year due to the increased cost of personal services and other services. The following graph reflects the revenue sources generated by the business-type activities. As noted earlier, these activities include Electric (LP&L), Water, Sewer, Solid Waste, Transit, WTMP A, Airport, and Storm water Drainage. Charges for Services 9lo/o Revenues by Source -Business-type Activities Captial Grants & Contributions 5o/o Operating Grants & Contributions 3% City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 Financial Analysis oftbe City's Funds Governmental funds. The focus of the City's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City's financing requirements. In particular, unreserved fund balance serves as a useful measure of the City's resources available for spending at the end of the fiscal year. At the end of the fiscal year the City's governmental funds reported combined ending fund balances of$47.7 million. This compared to $50.3 million at the end of the prior fiscal year. A significant portion of this decrease resulted from the planned spend-down of fund balance in the Capital Projects Fund. This resulted in a reduction of net assets of $5.7 million. This reduction was partially offset by the results of operations of the General Fund that ended the year adding $3.3 million to net assets. Of the ending governmental fund balance, $13.8 million or 28.9% constituted unreserved fund balance, which is available for spending at the City's discretion. This compared to $10.6 million or 21.1% at the end of the prior fiscal year. The remainder of the fund balance is reserved to indicate it has already been committed to, 1) pay debt service, 2) use in construction of approved capital projects, or 3) for other restricted pwposes. The General Fund is the chief operating fund of the City. At the end of the fiscal year, unreserved fund balance in the General Fund was approximately $12.1 million compared to $8 .4 million in the previous fiscal year, representing an increase of $3.7 million. Total fund balance (reserved and unreserved) approximated $12.7 million at the end of the fiscal year compared to $9.4 million at the end of the prior fiscal year. As a measure of the General Fund's liquidity, it is useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represented 13.4% of total General Fund expenditures compared to 9.8% of total General Fund expenditures in the prior year. Total fund balance represented 14.1% of total General Fund expenditures compared to 11.0% in the prior year. The increase in fund balance is primarily a result of strong growth in new construction and better than anticipated sales tax revenues, coupled with a concentrated effort by City management to contain expenditures. Proprietary funds. The City's proprietary funds provide essentially the same type of information found in the GWFS, but in more detail. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 Unrestricted net assets of the major proprietary funds at the end of September 30 are shown next with amounts presented in OOOs: 2004 2003 Electric Fund $ 7,006 2,367 Water Fund 14,078 15,551 Sewer Fund 6,343 4,286 WTMPA 1,743 2,155 Storm water 1,305 869 $ 30,475 25,228 The Electric Fund (LP&L) increased unrestricted net assets by $4.6 million as opposed to a decrease of $.4 million during the prior year. This is mainly due to the results of operations, a capital contribution from the Water, Sewer, Stormwater, and Solid Waste Funds of $1.8 million for prior years costs of the utility billing system and a decision by City Council not to charge for payments in lieu of taxes and franchise fees until adequate cash reserves are established. The Water Fund reflected a current year decrease in unrestricted net assets of nearly $1.5 million compared to an increase of $3.6 million during the prior year. This is due to decreases in consumption. Despite a raise of approximately 3% in water rates, revenues were down with record rainfall. The Sewer Fund reflected a current year increase in unrestricted net assets of approximately $2.1 million compared to a $1.9 million decrease during the prior year. This is primarily due to sewer rates increases to all customers. The WTMPA Fund reflected a decrease in unrestricted net assets of$.4 million primarily as a result of operations. The prior fiscal year's change was an increase in unrestricted net assets of $2.5 million. The Stormwater Fund experienced an increase in unrestricted net assets of $.4 million during the fiscal year compared to a $1.6 million increase in the prior fiscal year. The increase continues to be due to an increase in stormwater rates of nearly 200%. This increase was necessitated to provide long-term funding for system improvements, maintenance, and flood prevention. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30, 2004 General Fund Budgetary HighHghts Differences between the original budget and the final amended budget were minimal. This is a result of the truth-in-budgeting initiative championed by the City Council. This resulted in fewer amendments as City management also made a concentrated effort to reduce spending and streamline operations. This also resulted in a planned increase in the General Fund's fund balance. Adjustments were made to expenditures to lessen the impact of the net reductions in transfers from LP&L. The General Fund ended the fiscal year with expenditures more than $1.3 million less than budgeted. As noted earlier, the City chose to issue $22.6 million in bonds to refund $23.2 million in outstanding debt. This resulted in present value savings of $836,312, decreasing total debt service requirements by $874,031. The transaction resulted in an accounting loss of $1,019,912. Due to stronger than anticipated growth in new construction and better than expected sales tax revenue, actual revenues were nearly $3.3 million more than budgeted for the fiscal year. Capital Assets and Debt Administration Capital assets. The City's investment in capital assets for its governmental and business- type activities at September 30, 2004 amounted to $741 million, net of accumulated depreciation. This was a $1.5 million increase over the prior fiscal year's balance of $739 million, net of accumulated depreciation. This investment in capital assets includes land, buildings and improvements, equipment, construction in progress, and infrastructure. Major capital asset events during the fiscal year included the following: • Work continued in the Water Fund with another $3.3 million expended on the construction of water lines ahead of the Marsha Sharp Freeway. Total expenditures on the project to date are $4.3 million. • $1.7 million was expended on Cell II construction at the landfill. Total expenditures on the project to date total $3.9 million. • $1.3 million was expended on the construction of the MacKenzie Park Amphitheater. Expenditures to date on the project total $1.7 million. • Scheduled improvements to LP&L's distribution infrastructure amount to $4 million. In addition, the Electric Fund spent an additional $3.2 million on a new substation to provide service to South and Southeast Lubbock. Total expenditures for this project to date total $3.7 million. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 • The City continues work on a flood relief project linking South Lubbock's chain of playa lakes with an underground drainage system spending $3.2 million during the fiscal year. Expenditures to date on the project total $4.8 million. At the end of the fiscal year, the City has construction commitments of $113 million. Land Buildings Improvements other than buildings Machinery and equipment Construction in progress Total City of Lubbock Capital Assets (Net of Accumulated Depredation) September 30 (in OOO's) Goveramental Activities 2004 2003 .$ 8,608 7,996 23,794 25,602 37,183 15,957 43,472 $ 129,014 37,100 14,881 36,156 121,735 Business- Type Activities 2004 2003 31,676 31 ,676 68,302 71,525 330,842 66,922 113,961 611,703 329,618 79,957 104,689 617,465 Totals 2004 2 40,284 92,096 368,025 82,879 157,433 740,717 Additional information about the City's capital assets can be found on pages 70-72 of this report. Long-term debt. A summary of the City's total outstanding debt follows: General obligation bonds Revenue bonds Total $ $ City of Lubbock Outstandiag Debt General Obllgatioa and Revenue Bonds September 30 (in OOO's) Busiuess· Governmental Type Activities Activities 2004 2003 2004 2003 70,221 69,808 215,664 226,127 941605 101,295 701221 69,808 310,269 327,422 Totals 2004 285,885 94,605 3801490 2003 295,935 101~95 3971230 There is no direct debt limitation in the City Charter or under State law. The City operates under a Home Rule Charter that limits the maximum tax rate for all City purposes to $2.50 per $100 of assessed valuation. The Attorney General of the State of Texas pennits an allocation of $1.50 of the $2.50 maximum tax rate for general obligation bonds debt service. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 The current interest and sinking fund tax rate per $100 of assessed valuation is $0.09496, which is significantly below the maximum allowable tax rate. Over the fiscal year, the City's total outstanding debt decreased by $16.74 million, or 4.2%. This is compared to an increase of$62.5 million, or 18.8%, during the prior fiscal year. The decrease in outstanding debt is attributed to the payment of scheduled debt service totaling $21.28 million and a reduction in outstanding debt of $.585 million as a result of the refunding. The reductions in outstanding debt were offset by the issuance of$5.125 million in debt to fund streets projects and the capital improvements plan. During the fiscal year, the City issued $2.025 million of General Obligation Bonds, Series 2004. This issuance was the fust installment of the $30 million capital improvement debt issuance approved by voters in 2004 to fund the current capital improvements plan. The City also issued $3.1 million in Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2004. This issuance funded streets projects that included right-of-way costs on the Marsha Sharp Freeway project, environmental study costs for future thoroughfares, and for citywide traffic signals and streetlights. The City also issued $22.62 million of General Obligation Refunding Bonds, Series 2004 to defease $23.205 million in outstanding bonds. All bonds issued during the fiscal year were insured to provide a lower cost of interest expense for the Cityts taxpayers. It is the City's policy to evaluate each bond issue to determine whether it is economically feasible to purchase bond insurance. The City of Lubbock maintains an "AA-" rating from Standard & Poor's and Fitch Ratings, Inc. and an "A1" rating from Moody's Investors Service for general obligation debt. The revenue bonds of LP&L and WTMPA have been rated "BBB-" by Standard & Poor's, "BBB+" by Fitch Ratings, Inc., and "A3" by Moody's Investors Service. Additional information about the City's long-term debt can be found on pages 80-84 of this report. Economic Factors and the Next Fiscal Year's Budget and Rates • At the end of the City's fiscal year the unemployment rate for the Lubbock area was 2.9 percent. This is a decrease from a rate of 3.1 percent one year earlier. This compares favorably to the state's average unemployment rate of 5.5 percent and the national average of 5.1 percent on December 30, 2004. • Total retail sales reflected a 2.4 percent increase over the prior year. City of Lubbock, Texas Management's Discussion and Analysis For the Year Ended September 30,2004 • Building permits for new construction decreased from 3,125 during 2003 to 2,644 in 2004, or about a 15% decrease. This compares to a 25% decrease during the prior period. Conversely, building permit values for new construction decreased from $370.6 million in 2003 to $357.2 million in 2004, or about a 3.6% decrease. • Total occupancy in local hotels and motels remained constant and the occupancy tax totaled nearly $2.9 million, nearly identical to the amount received during the prior fiscal year. • City Council again decided to support the operations of the Electric Fund by forgoing transfers for payments in lieu of taxes, and franchise fees for the upcoming fiscal year. The City Council intends to continue this support until such time as the Electric Fund has adequate monetary reserves. All of these factors were considered in preparing the City of Lubbock's budget for the 2004- 2005 fiscal year. During the just ended fiscal year, unreserved fund balance in the General Fund increased by nearly $3.7 million to $12.1 million compared to $8.4 million at the end of the prior fiscal year. It is intended that the unreserved undesignated fund balance be equal to 15% of operating expenditures, which equates to approximately $13.5 million. The City ended the year nearly $1.4 million under this target. City Management anticipates meeting this goal within the next few years. The Electric Fund increased rates in May 2004 twelve and one half percent for the larger commercial consumers as a result of higher than anticipated cost of power. Residential and small commercial consumers rates remained relatively unchanged due to the rate increases implemented in the prior fiscal year. Both the Water and Sewer Funds rates were increased for the 2003-2004 fiscal year. The water rates were increased by an average of 3 percent and the sewer rates were increased by an average of 5 percent for all customers. Currently, the City is in the process of having a rate study completed for both the water and sewer rates. The results of this study will impact future water rates. The water and sewer rates affected both residential and commercial consumers by approximately the same percentage. These rate increases were necessary to cover increased operating costs due to inflationary pressures. Requests for Information This financial report is designed to provide a general overview of the City of Lubbock'~ finances. Questions concerning any of the infonnation provided in the report or requests fot additional financial information should be addressed to the Chief Financial Officer, P.O. BoJC 2000, Lubbock, Texas, 79457. CITY OF LUBBOCK, TEXAS \.SIC [NANCIAL rATEMENTS THIS PAGE LEFf BLANK INTENTIONALLY CITY OF LUBBOCK, TEXAS STATEMENT OF NET ASSETS SEPTEMBER 30, 2004 Prima!1 Government Governmental Business-Type Compon Activities Activities Total Units ASSETS cash and cash equivalents $ 30,797,510 25,309,543 56,107,053 1,51 nents 7,503,969 6,077,077 13,581,046 49 ables, net 16,383,864 29,811,958 46,195,822 15 I balances (555,465) 555,465 1m other governments 1,308,277 1,308,277 1m others 1,470,831 1,119,160 2,589,991 1ries 190,034 2,114,453 2,304,487 8 nent in property 218,503 218,503 j expenses 897,648 897,648 2 ted assets: and cash equivalents 2,152,275 44,658,899 46,811,174 10 tives advances 9,16 :ments 6,723,257 63,543,690 70,266,947 mts receivable 1,013,813 1,013,813 proceeds re<:eivable 27,745,000 27,745,000 age receivables 5,653,444 5,653,444 assets: fepreciable 52,080,271 145,637,526 197,717,797 36 ·ciable 76,933,607 466,065,118 542,998,725 88 !d charges 3,751,695 3,751,695 ISSets 4,071 4,071 ssets 229,503,025 789,662,468 1 ,019,165,493 12,79. LIABILITIES ts payable 5,758,795 17,892,025 23,650,820 46: others 35,195 35,195 54. other governments 81 :1 expenses 3,204,277 2,310,777 5,515,054 151 :1 interest payable 387,855 1,611,164 1,999,019 ~ to escrow agent 22,620,000 22,620,000 1er deposits 1,000,526 1,000,526 d revenue 3,120,823 29,353 3,150,176 9,02! mt liabilities: hin one year: payable 4,955,949 17,271,718 22,227,667 ansated absences 5,475,861 2,143,563 7,619,424 ~d insurance claims 2,354,536 1,184,210 3,538,746 I leases payable 826,018 622,442 1,448,460 2,08~ 1ore than one year: payable 65,265,268 292,082,188 357,347,456 ed premium on bonds 1,179,722 1,179,722 ensated absences 9,442,647 2,016,571 11,459,218 ld insurance claims 5,252,644 5,252,644 I closure and postclosure care 3,051 '116 3,051,116 I leases payable 534,939 770,765 1,305,704 1,45~ ~bilities 125,161,885 347,239,062 472,400,947 13,8H NET ASSETS in capital assets, net of related debt 74,433,159 355,816,406 430,249,565 1,247 d for: I projects 7,869,506 38,650,935 46,520,441 ervice 2,223,003 1,050,347 3,273,350 :>urposes 10,246,203 5,715,380 15,961,583 100 tAr! (rjpfi~it\ Q "~Q .,~Q Ai -tan .,.,o J:l"\"7&:n~n-, ,,... ,,--n unctionsJPr~rams •rimary Government: Governmental Activities: Administration/Community Services Street Lighting Financial Services Fire General Government Human Resources Police Planning and Transportation Public Works Interest on Long-Term Debt Total Governmental Activities Business· Type Activities: Electric Water Sewer Solid Waste Stormwater Transit Airport Total Business-Type Activities otal Primary Government :omponent Units: Civic Lubbock, Inc. Market lubbock, Inc. otal Component Units CITY OF LUBBOCK, TEXAS STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2004 Program Revenues Operating Charges for Grants and Exeenses Services Contributions $ 22,313,139 2,912,165 6,041,287 2,471,382 2,387,188 21,998,241 10,600 20,563,083 3,516,980 1,972,229 777,035 33,248,228 5,424,232 1,629,923 10,788,596 3,078,122 849,147 4,593,150 122,218,164 12,713,124 9,643,439 110,591,149 105,433,133 27,879,343 31,907,893 17,020,092 18,889,095 17,661,438 11,641,316 5,356,649 6,019,490 10,565,159 2,893,507 5,336,794 6,852,874 4,626,270 1,402,003 195,926,704 181,410,704 6,738,797 318,144,868 194,123,828 16,382,236 1,609,630 1,731,625 5,721,854 127,826 6,707,783 $ 7,331,484 1,859,451 6,707,783 General revenues: Taxes: Property Sales Occupancy Other Franchise fees Investment earnings Miscellaneous Transfers, net Total general revenues and transfers Change in net assets Net assets -beginning of year Net assets -end of year :ee accompanying Notes to Basic Financial Statements. capital Grants and Contributiorn 1,849,6E 2,642,7i 3,203.~ 1,573.~ 9,269,3( 9,269,3( Net (Expense) Revenue and Changes in Net Assets ;,vemmental Activities (13,359,687) (2,471 ,382) (2,387,188) (21,987,641) (15,073,874) (777,035) (26,194,073) (10,788,596) (2,228,975) (4,593,150) (99,861 ,601) (99,861,601) 44,496,973 . 30,554,632 2,853,205 939,456 9,654,447 1,151,620 3,123,572 9,745,250 102,519,155 2,657,554 101,683,586 104,341 '140 Primary Government Business-Type Activities (3,308,354) 6,671 ,328 5,072,485 (6,020, 122) 662,841 (2,334,858) 748,783 1,492,103 1,492,103 2,859,344 72,870 (9,745,250) (6,813,036) {5,320,933) 447,744,339 442,423,406 Total (13,359,687) (2,471 ,382) (2,387 ,188) (21 ,987,641) (15,073,874) (777,035) (26,194,073) (10,788,596) (2,228,975) (4,593, 150) (99,861,601) (3,308,354) 6,671,328 5,072,485 (6,020,122) 662,841 (2,334,858) 748,783 1,492,103 (98,369,498) 44,496,973 30,554,632 2,853,205 939,456 9,654,447 4,010,964 3,196,442 95,706,119 (2,663,379) 549,427,925 546,764,546 Component Units ' 121,995 1,113,755 1,235,750 8,636 8,636 1,244,386 (2,265,392) (1,021,006) No Text CITY OF LUBBOCK, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2004 Other Total General Debt Service Governmental Governm1 Fund Fund Funds Fund! ASSETS d cash and cash equivalents $ 5,888,268 2,282,997 21 ,407,030 29,571 ments 1,426,351 553,024 5,229,256 7,201 ; receivable (net) 6,864,967 533,715 90,102 7,481 mts receivable (net) 6,098,853 162,485 2,433,012 8,69~ st receivable 79,463 2,119 20,146 10' ·om other funds 1,930,500 1,93( ·om other governments 13,637 1,294,640 1,30t ·om others 781,704 679,746 1.46' ment in property 218,503 21t ory 120,880 12( : proceeds receivable 22,620,000 5,125,000 27,74t ed receivables 5,653,444 5,65~ ces to other funds 445,676 44~ 31 Assets 23,650,299 26,154,340 42,150,879 91,95E LIABILITIES nts payable 1,836,027 418,017 3,131,290 5,38E • others 35,195 3E 1 other funds 1,480,500 1,48( ~d liabilities 3,036,761 121,374 3,1se le to escrow agent 22,620,000 22,620 ces from other funds 1,469,381 1,469 ed revenue 6,047,791 475,303 3,547,898 10,070 11 Liabilities 10,955,774 23,513,320 9,750.443 44,219 FUND BALANCES 1ed for: 1id items/inventory 120,880 120 nces to other funds 445,676 445 service 2,641,020 2,641 al projects 24,870,961 24,870 al revenue-grants 5,871,947 5,871 !rved, reported in ral Fund 12,127,969 12,127 al revenue funds 1,734,312 1,734 31 projects funds {76,784) {76 I fund balances 12,694,525 2,641 ,020 32,400,436 47,735. I liabilities and Fund Balances $ 23,650,299 26,154,340 42,150,879 91,955, companying Notes to Basic Financial Statements. CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE STATEMENT OF NET ASSETS SEPTEMBER 30, 2004 I fund balance • governmental funds $ 47,735,981 unts reported for governmental activities in the statement of net assets are rent because: tal assets used in governmental activities are not financial urces and therefore are not reported in the funds. 129,013,878 nal service funds (ISF's} are used by management to charge the costs of tin activities, such as insurance and telecommunications, to individual s. The portion of the assets and liabilities of the !SF's primarily serving lrnmental funds are included in governmental activities in the statement of 3Ssets as follows: t assets 8,953,624 t book value of capital assets (included in captial assets above) (1,353,658) mpensated absences 193,517 10unts due from business-type ISFs for amounts overcharged 16,240 ain liabilities are not due and payable in the current period therefore are not reported in the funds. Those liabilities are as ws: neral obligation bonds (70,221,217) pital leases payable (1 ,360,957) mpensated absences (1 4,918,508) :rued interest on general obligation bonds (387,855) d premiums are recognized as an other financing source in the fund 3ments but the premiums are amortized over the life of the bonds in the ~rnment-wide statements. (1,179,722) 1al City contributions to the fire fighter's pension trust fund is greater than ~ctuarially determined requ ired contribution. This will reduce future funding Jirements and is not recognized as an asset at the fund level but is a 1aid expense in the Statement of Net Assets. 897,648 enue earned but unavailable in the funds is deferred. 6,950,169 assets of governmental activities $ 104,341,140 CITY OF LUBBOCK, TEXAS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2004 Other General Debt Service Governmental Fund Fund Funds IES $ 74,381,814 7,943,630 5,373,390 I fines 3,675,857 and permits 1,982,281 lrnmental 428,458 9,214,981 for services 4,467,730 849,147 334,730 28,622 375,997 teO US 1,442,675 1,612,800 !Venues 86,713,545 7,972,252 17,426,315 ITURES tration/Community Services 18,156,455 -street lighting 2,185,286 11 Services 2,333,469 20,613,077 Government 5,633,469 16,992 13,650,037 Resources 754,225 32,400,371 J and Transportation 7,180,843 lartmental 214,562 Jorks 3,012,987 ·ice: I 4,498,304 and other charges 4,749,272 Jtlay 475,585 16,190,551 xpenditures 89,947,342 9,264,568 32,853,575 leficiency) of revenues der) expenditures (3,233, 797) (1 ,292,316) (15,427,260) ·rNANCING SOURCES (USES) 1 debt issued 22,620,000 5,125,000 >W agent (22,620,000) nium (discount) 1,179,722 :~ses 1,535,075 in 10,723,891 20,715,403 6,120,514 out {4,212,915~ {19,955,679} {3, 871 t 880} :her financing sources (uses) 6,510,976 1,939,446 8,908,709 mge in fund balances 3,277,179 647,130 (6,518,551) nces -beginning of year 9,417,346 1,993,890 38,918,987 nces -end of year $ 12,694,525 2,641,020 32,400,436 npanying Notes to Basic Financial Statements. Tota Governrr Fund 87,6! 3,6· 1,9: 9,6• 5,3· 7: 3,0! 112,1• 18,1! 2,1l 2.3~ 20,6' 19,3{ 7! 32,4( 7,H 2' 3,0' 4,4~ 4,7L 16,6E 132,0E (19,9!: 27,74 (22,62 1,17 1,53 37,55 {28,04 17,35 (2,59 50,33 47,73 CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2004 :hange in fund balances -total governmental funds unts reported for governmental activities in the statement of activities are different because: ~rnmental funds report capital outlays as expenditures. However, in the Statement of Activities the of those assets is allocated over their estimated useful lives and reported as depreciation nse. This is the amount by which capital outlays of $16,666,136 exceeded depreciation of 13,391 in the current period. 1 proceeds provide current financial resources to governmental funds, but issuing debt increases ·term liabilities in the Statement of Net Assets. Repayment of bond principal is an expenditure in JOVernmental funds, but the repayment reduces long-term liabilities in the Statement of Net Assets. is the amount by which proceeds of $27,7 45,000 exceeded repayments and debt defeasence of 118,304. tal lease transactions provide current financial resources to governmental funds and repayment of :ipal is an expenditure. This is the amount by which proceeds of $1 ,535,075 exceeded repayments 1,170,595. :1 premiums are recognized as an other financing source in the governmental funds, but are ;idered deferred assets on the Statement of Net Assets. This amount will be amortized over the life e bonds. nated long-term liabilities for compensated absences are recognized as expenses in the Statement ~ivities as earned, but are recognized when current financial resources are used in the lrnmental funds. This amount is the net change in the estimated long-term liability for pensated absences during the yea·r. nated long-term liabilities for rebatable arbitrage are recognized as expenses in the Statement of tities as earned, but are recognized when current financial resources are used in the governmental s. This amount is the net change in the estimated long-term liability for rebatable arbitrage during tear. >erty taxes levied and court fines and fees eamed, but not available, are deferred in the !rnmental funds, but are recognized when earned (net of estimated uncollectibles) in the Statement ctivities. This amount is the net change in deferred property taxes and court fines and fees for the difference between the par value of debt defeased which is greater than the par value of the new : is recognized as a contra expense in the Statement of Activities, but is a Note disclosure in the I statements. 1al City contributions to the fire fighter's pension trust fund are greater than the actuarially :rmined Net Pension Obligation (NPO). This amount is recognized as an expenditure at the fund I but is accrued when overpaid and reduces expenses on the Statement of Activities rna! service funds are used by management to charge the costs of certain activities, such as ranee and telecommunications, to individual funds. The net revenue (expense) of certain internal ·ice funds is reported with governmental activities. rued interest is recognized as expenses in the Statement of Activities as incurred, but is recognized n current financial resources are used in the governmental funds. This amount is the net change in accrued interest this year. net effect of various miscellaneous transactions involving capital assets (e.g., sales and trade-ins) • increase net assets. $ (2,594,24~ 6,852,74! (626,691 (364,481 (1 '179,72: {2,225,47• 122,98- 2,537,98 213,68 15,02 (94,01 (57,56 57,32 CITY OF LUBBOCK, TEXAS BUDGETARY COMPARISON STATEMENT GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2004 Variance Final Bu· Budgeted Amounts Actual Positi' Original Final Amounts (Negati REVENUES Taxes and fees $ 71,855,445 72,262,445 74,381,814 2,1H Fees and fines 3,288,500 3,288,500 3,675,857 38i Licenses and permits 1,823,721 1,807,550 1,982,281 17t Intergovernmental 372,192 455,907 428,458 (2i Charges for services 4,541,034 4,325,642 4,467,730 14~ Interest 236,689 164,118 334,730 17( Miscellaneous 935,379 1,125,711 1,442,675 31E Total Revenues 83,052,960 83,429,873 86,713,545 3,28~ EXPENDITURES Administration/Community Services 18,403,905 18,365,948 18,156,455 20~ Electric -street lighting 2,302,033 2,210,784 2,185,286 2e Financial Services 1,873,928 2,185,455 2,333,469 (14~ Fire 21,026,400 20,775,537 20,613,077 16~ General Government 5,435,697 5,507,366 5,633,469 (12€ Human Resources 714,338 801,863 754,225 47 Police 32,531,242 32,419,834 32,400,371 1€ Planning and Transportation 7,659,089 7,664,495 7,180,843 48~ Capital Outlay 53,000 502,136 475,585 2€ Non-departmental 849,200 849,200 214,562 634 Total Expenditures 90,848,832 91,282,618 89,947,342 1,335 =xcess (deficiency) of revenues over (under) expenditures (7, 795,872) (7,852,745) (3,233, 797) 4,618 )THER FINANCING SOURCES (USES) rransfers in 11,138,094 10,936,402 10,723,891 (212 rransfers out {3,342,222~ {3,441,959) {4,212,915) ~770 Total other financing sources (uses) 7,795,872 7,494,443 6,510,976 {983 Net change in fund balances (358,302) 3,277,179 3,635 =und balances-beginning of year 9,417,346 9,417,346 9,417,346 = und balances -end of year $ 9,417,346 9,059,044 12,694,525 3,635 >ee accompanying Notes to Basic Financial Statements. (QF LUBBOCK, TEXAS TEMENT OF NET ASSETS IPRIETARY FUNDS TEMBER 30, 2004 Business-ty~e Activities-EnterErise Funds West Texas Municipal Pov Electric Water Sewer Agency: (WTMI ASSETS ent assets: :>led cash and cash equivalents $ 2,633,706 9,646,398 4,300,692 627,8 estments 637,979 2,336,705 1,041,782 ceivables, net 13,392,448 3,935,759 2,356,470 6,892,9 ~rest receivable 7,694 34,961 11,658 e from others 28,081 e from other funds 261,500 entories 32.981 170483 ·otal current assets 16,704,808 16,413,887 7,710,602 7,520,7 current assets: stricted cash and cash equivalents 5,435.733 9,888,565 247,331 1,050,3 stricted investments 5,017,600 12,590,121 572,230 ceivables, net 21,218,6 stricted interest receivable 2,456 25,426 21 ,201 ferred ch arges 3,344,444 407,2 1er assets 4,071 vances to other funds pital assets: md 756,714 12,724,350 12,578,774 mstruction in progress 9,488,738 45,999,985 5,227,618 1ildings 8,067,549 21,573,970 23,857,432 provements other than buildings 167,860,376 200,308,490 105,745,873 25,2 ~chinery and equipment 48,790,387 19,405,223 15,856,542 .ess accumulated depreciation {94,090,505} {77 ,889,617} {53,936,873} (25,2 Total capital assets 140,873.259 222,122,401 109,329,366 Total noncurrent assets 154,673,492 244,630,584 110,170,128 22,676,2 Total Assets $ 171,378,300 261,044,471 117,880,730 30,196,9 Business-!}'pe Activities-Enterprise Funds Total Nonmajor Total Enterprise Proprietary Stormwater Funds Funds $ 938,663 5,826,657 23,973,942 227,378 1,509,702 5,753,546 705,599 2,226,503 29,509,738 7,264 29,257 90,834 1,091,079 1,119,160 261,500 ~ .. ~_671557 671,021 1,878,904 11,150,755 61,379,741 22,394,882 4,990,434 44,007,292 22,785,586 10,306,990 51,272,527 21,218,605 23,277 28,282 100,642 3,751,695 4,071 1,023,705 1,023,705 115,669 5,500,647 31,676,154 43,053,522 9,493,563 113,263,426 64,580 41,756,630 95,320,161 8,158,852 91,972,033 574,070,824 2,766,404 43,677,838 130,496,394 {8.3681621} {100,941,974) (3351252, 790) 451790,406 91.4581737 609,5741169 90,994,151 107,808,148 730,952,706 $ 921873,055 11819581903 79213321447 Internal Service Funds 2,554,816 618,869 309 9,381 13,148 115121586 4,7091109 2,803,882 18,994,420 150,686 45,603 65,343 1,632,378 1,608,618 313,341 8,178,213 (8,315,760l 3,4821133 25,4761724 30,185,833 TEMENT OF NET ASSETS PRIETARY FUNDS TEMBER 30, 2004 Business-ty~e Activities-Enter~rise Funds West Texas Municipal PoVI Electric Water Sewer Agencl (WTMI LIABILITIES ent liabilities: :ounts payable $ 8,516,408 730,385 224,644 6,196,3 :rued expenses 1,015,631 166,986 131,540 :rued interest payable 602,093 700,818 122,246 129,6 :rued insurance claims ~to other funds )tomer deposits 969,689 24,715 tse payable 1,525,000 235,259 1ds payable 3,653,385 5,908,680 41015,748 1,525,0 Total current liabilities 16,282,206 7,531,584 4,729,437 7,850,9 :;urrent liabilities: npensated absences 1,941,690 742,146 372,324 'erred revenue ;rued insurance claims 1dfill closure and post closure care "'tracts/leases payable 18,679,792 422,232 1ds payable 44,217,709 104,820,983 40,329,424 19,552,4 rota! noncurrent liabilities 64,839,191 105,563,129 41.123,980 19,552,4 Total Liabilities 81,121,397 113,094,713 45,853.417 27,403,3 NET ASSETS sted in capital assets, net of related debt 76,855,904 125,395,032 65,684,404 :ricted for: apital projects 6,394,802 8,476,392 abt service 1,050,3 ther purposes ~stricted 7p061197 14,078,334 6,342,909 1.]43,2 r otal Net Assets $ 90,256,903 147,949,758 72,027,313 2,793,6 Business-type Activities-Enterprise Funds Total Nonmajor Total Enterprise Proprietary Stormwater Funds Funds $ 54,385 1,157,219 16,879,348 471,617 405,685 2,191,459 56,399 1,611,164 711,500 711,500 6,122 1,000,526 387,183 2,147,442 1,281,550 887,355 17 271,718 1,807,552 3,611.463 41,813,157 71,659 626,968 3,754,787 29,353 29,353 3,051,116 3,051,116 348,533 19,450,557 71,801,015 11,360,594 292,082,188 71,872,674 15,416,564 318,368,001 73,680,226 19,028,027 360,181,158 5,504,853 82,376,213 355,816,406 12,383,463 11 ,396,278 38,650,935 1,050,347 1,304,513 6,158,385 36,633,601 $ 19,192,829 99,930,876 432,151,289 Internal Service Funds 1,386,138 165,460 3,538,746 5,090,344 598,864 5,252,644 5,851,508 10,941,852 3,482,133 10,089,636 5,672,212 191243,981 No Text CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE STATEMENT OF NET ASSETS-PROPRIETARY FUNDS TO THE STATEMENT OF NET ASSETS SEPTEMBER 30, 2004 Total net assets -enterprise funds Amounts reported for business-type activities in the Statement of Net Assets are different because: Internal service funds (ISFs) are used by management to charge the costs of certain activities, such as insurance and telecommunications, to individual funds. The portion of assets and liabilities of the ISFs primarily serving enterprise funds are included in business-type activities in the Statement of Net Assets as follows: Net assets of business-type ISFs Amounts due to governmentaiiSFs for amounts overcharged Net assets of business-type activities $ 432,151,289 10,290,357 (18,240) $ 442,423,406 OF LUBBOCK 'EMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS 3 RIETARY FUNDS THE YEAR ENDED SEPTEMBER 30, 2004 Business-T~2e Activities -Enter~rise Funds Electric Water Sewer ~ TING REVENUES rges for services $ 103,864,178 32,222,280 18,203,020 tision for bad debts ~21312,477) ~738, 125) p01,780) rges for services (net) 101,551,701 31,484,155 17,901,240 • taps and reconnects 423,738 1ent water sales 754,970 1modity sales 232,885 jing fees ;ing tals cessions :ellaneous otal Operating Revenues 101,551,701 31,907,893 18,889,095 ~TING EXPENSES ;onal services 8,294,785 5,274,209 3,522,215 plies 456,933 1,021 ,166 642,948 1tenance 2,756,885 2,019,918 1,095,564 :hase of fuel and power 73,969,427 action expense 1,850,565 346,446 ~r services and charges 3,758,830 6,138,536 4,070,608 reciation and amortization 9,033,112 519581903 5,075,034 'otal Operating Expenses 98,269,972 22,263,297 14,752,815 Operating Income (Loss) 3,281,729 9,644,596 4,1 361280 .OPERATING REVENUES (EXPENSES) -est income 129,257 588,435 88,789 ;;enger facility charges/Federal grants -osition of assets (240,692) 88,773 (8,481} :ellaneous 1,420,053 (137,795) (571,119) >-through grant payments -est expense on bonds ~3,353,899) ~5,584,522) ~2,188, 707) 'otal non-operating revenues (expenses) ~2,045,281) ~5,045,1 09~ ~2p9,518) ncome {loss) before contributions and transfers 1,236,448 4,599,487 1,456,762 ital contributions 1,849,662 2,642,778 3,203,482 1sfers in 1,777,956 6,891,766 6,235,864 osfe rs {out) {3,150,195) ~11 '172,003) ~8.032,942) Change In net assets 1,713,871 2,962,028 2,863,166 I net assets -beginning of year 88,543,032 144,987,730 69,164,147 I net assets -ending $ 90,256,903 147,949,758 72,027,313 ccompanying Notes to Basic Financial Statements. West Texas Municipal PowE Agenc~ (WTMPI 48,966,21 48,966,21 48,966,21 331 '14 320,0C 48,936,21 158,61 1,68 133,27 49,880,94 ~914172 1,006,10 (2,825,01 (1,062,31 ~2,881 ,23 (3,795,95 356,92 (3,439,03 6,232,64 2,793,61 Business-T~(!8 Activities-Entererise Funds Other Nonmajor Total Internal Enterprise Enterprise Service Stormwater Funds Funds Funds $ 6,131,808 14,835,148 224,222,649 35,943,622 (112,318) (439,776) (3,904,476) 6,019,490 14,395,372 220,318,173 35,943,622 423,738 754,970 232,885 749,037 749,037 1,065,838 1,065,838 1,696,683 1,696,683 1,114,712 1,114,712 139,451 139,451 175,459 6,019,490 19,161,093 226,495,487 36,119,081 645,260 9,643,788 27,711,405 5,272,295 1,599,917 3,720,964 6,852,554 148,564 2,647,316 8,988,247 1,473,732 122,905,643 295,069 292,217 2,942,916 49,413 4,398,830 18,417,902 23,122,204 553,592 13,291,441 34,045,356 602 494 1,691,898 31,873,509 218,732,433 37,323,279 4,327,592 (12,712,416) 7,763,054 (1,204, 198) 594,120 320,356 2,727,061 544,554 6,738,797 6,738,797 (981 ,284) (3,966,702} (7,434) (307,464) (334,780) 68,895 12,584 (1,568,721) (1 ,568, 721) (3,658,830) (424,539) (16,272,813) (31372,174) 3,749,829 (12 ,273,483) 549,704 955,418 (8,962,587) (4,510,429) (654,494) 1,573,384 9,269,306 4,307,251 1,874,760 21,444,519 225,916 (4,618,513) (4,216, 115) (31,189,768) 644,156 (9,730,558) (4,986,372) (428,578) 18,548,673 109,661.434 437,137,661 19,672,559 $ 19,192,829 99,930,876 432,151,289 19,.243,981 No Text CITY OF LUBBOCK, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS OF PROPRIETARY FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2004 Net change in fund net assets-total enterprise funds Amounts reported for business-type activities in the statement of activities are different because: Internal service funds (ISFs) are used by management to charge the costs of certain activities such as fleet services, central warehousing activities, management information activities, etc. to individual funds. The net revenue (expense) of certain ISFs is reported with business-type activities. Change in net assets of business-type activities $ (4,986,372) (334,561) $ (5,320,933} IF LUBBOCK, TEXAS .MENT OF CASH FLOWS 'tiET ARY FUNDS HE YEAR ENDED SEPTEMBER 30, 2004 Business-T~ Activities -Enle!J:l!ise Funds West Texas Municipal Power Electric Water Sewer Agenc): IWTMPAI FLOWS FROM OPERATING ACTIVITIES ipts from customers $ 101,626,637 32,863,422 19,074,7S9 47,218,295 oents to suppliers (78,396,3n) (11,220.827) (6,259,433) (47,864,595} oents to employees (7,891,004} (5,117 ,293) (3,401,56S) · receipts (payments) 1,179 361 j49,022l 1579,600) et cash provided (used) by operating activities 16 518 617 16,476,280 8 834,197 1646,3001 FLOWS FROM NONCAPITAL AND RELATED ~NCING ACTIVITIES 1fers in from other fune1s 1,777,956 6,891,766 6,235,864 356,922 sfers out to other funds {3,150,195) {11,172,003) (8,032,942) .-term intetfund borrowings 3,678,500 5,909 nces from (t.o) other funds ating grants 1ents received/( made) on advances (to)lfrom other funds {4.644,865! tet cash provided (used) by noncapital and related financing activities {6.017.1041 j601,7371 (1. 7S1,169l 356,S22 FLOWS FROM CAPITAL AND RELATED ANCING ACTIVITIES 1ases or capital assets (12,307,612) {11,663,809) (5,551,770} of capital assets 2,646,037 110.281 201,939 22,810,000 tipts{payments) on leases (174,165) 2.580,495 1ents lor bond issuance oosts (30,085) :ipat paid on revenue bonds (4,413,300) (1,464,741) (1,525,000) !St paid on revenue bonds (3,353,899) (2,233,809) (1,070,799) :ipal paid on general obligation bonds and other debt (4.838,318) {3,654,354) 3st paid on general obligation bonds (3,391,605) {2,345,232) 1nce of revenue, G.O. bonds, and capital leases 647,923 {22,810,000) .enger facility charges/capital grants ributed capital 1,849,662 2,672,324 3,090,696 tet cash provided (used) for capital and related financing activities !15,609,197} 120,161,754) (6.432,886) !15,304) I FLOWS FROM INVESTING ACTIVITIES eeds from sales and maturities of investments 932,430 10,219,927 2,665,663 !lase of investments (6,588,009) (5,794,121) (628,508) est earnings on casll and investments 52.369 571.337 86,012 17,005 Jet cash provided by (used for) investing activities !5.603,210) 4,997,143 2,125,167 17,005 Jet increase (decrease) in cash and cash equivalents (1 0,71 0,894) 709,932 735,309 (287,677) and cash equivalents -beginning of year 18,780,333 18,825.031 3,812,714 1,965,850 and cash equivalents-end of year 8.069.439 19,534,963 4 548,023 1 678,173 ncillatlon of operating income (loss) to nat cash provided d) by operating activities: rating income (loss) 3,281,729 9,644,596 4,136,280 {914,727) stments to reconcile operating inoome (toss) net casll provided (used) by operating activities: preciation and amortization 9,033,112 5,958,903 5,075,034 117,994 1er income (expense) 1,179,361 (49,022) (579,600) ange in current assets and liabilities: ::oou nts receivable 74,936 955,547 185,704 {1,589,301) ventory 4,000 (53,333) repaid expenses ue fl'om other governments 18,286 ::counts payable 1,876,018 (172,499) (82.105) 1,724,455 ther accrued e)(penses 262,470 27,350 54,872 15,279 us1omer deposits 644,570 24,715 rease (deaease) in compensated absences 162 421 121,737 44 012 \let cash provided (used) by operaling activities 16,518,617 16,476,280 8,834,197 j646,300l ~emental cash flow lnfonnation: \cash capital improvements and other changes $ 20.204,792 96133 112,786 1coompanying Noles to Basic Financial Statements. F LUBBOCK, TEXAS WENT OF CASH FLOWS IETARY FUNDS IE YEAR ENDED SEPTEMBER 30, 2004 Bualneaa-!II!! Aetlvltl" • Enterprlae Funds other Nollmajor lntemal Entarprtae Service Storm water F1111da Toblla Funda 'LOWS FROM OPERATING ACTMTIES l!a from customers $ 6,047,779 20,044,130 226,875,0&2 36,000,252 -nts to suppliers (510,507) (8,079,1133) (152,331,572) (31,042,646) nts to employees (870,189) (9,816,0111) (~.698.073) (5,108,035) l!Ceipts (payments} l307,464l l1,250,3511 (1,007,0761 111348 I eaah provided (uaed) by open~liog activities 4,559,619 1,097,928 4&,1140,341 i131,0811 LOWS FROM NONCAPJTAL AND RELATED iCING ACTMTIES lrs in from olher funds 4,307,251 1,874,780 21,444,519 225,918 1rs out to other funds (4,818,513) (4,216,115) (31,189,7811) ann lnteffund borrowings (844,181) 3,040,228 1,811 :es from (to) other funds {1,036,740) (1,036,740) inggl'llllla 3,768,073 3,768,073 nts recelve<i'(ma<le) on advances (to )!from other funds • cash provided {ueed) by noneapital 1,045,135 l3,599,730} td related financing at:Civltf" !311,282t 790,932 Q:,573,418! 227,527 LOWS FROM CAPJTAL AND RELATED fCING ACTIVITIES ses of capital assets {3,447,008) . (3,928,747) (36,888,946) (823,430) capital asaeta 225,164 25.~.421 ls(payments) on leasee 2,406,330 1\ts for bond issuance costs (373,851) (403,936) il paid on revenue bonds (548,551) (7,a49,592) paid on revenue bonds (3, 858, 830) (10,317,337) !II paid on general obligation bonds and other debt (782,349) (9,255,021) . paid on general obligation bonds (430,980) (8,107,817) :e of revenue, G.O. bonds, and c:apltalleases (22,182,077) ger faclliiY c:Mrges/capital grants 1,402,003 1,402,000 u1ed capital 1,573,384 9,1116,068 ta$h pi'OIIided (uaed) fur CllPital and relltt8d ancing~ Q:,~389l" j2,295,376! ~S..,188,906l {823,4301 .OWS FROM INVESTING ACTMTIES l$ from sales and maturilias of Investments 1,380,757 7,275,015 22,4S..,392 6,594,329 Ml of investmenta 332,322 (4,648,301) {17,324,817) (5,081,927) earnings on ta$h and investments 569,120 291 ,748 1,587,589 511,156 cash PfQVided by (IISed for) lnveatlng activities 2,282,199 2,919,080 8,717,364 2,043,558 increase (decrease) in cash :1 cash equivalents (1,141,833) 2,512,5« (8,182,619) 1,318,574 d cash equivalents -beginning ol year 24,475,378 8,304,547 78,153,853 4,042,124 d cash equivalants • end of year 23!333,545 10,817,091 67,981,234 5,358,698 latlon of operating Income (Jon) to net caah provided -yy operating activities: 19 income (loss) 4,327,592 (12,712,416) 7,763,054 (1,204, 198) entato reooncile operating income (lou) cash provic:lecS (used) by operating aCtivities: :iation and amor1Witlon 553,592 13,291,441 34,030,076 802,4a4 ncome (expense) (307,464) (1,344,022) {1 t 100,747) 19,348 a in current assals and liabilities: Jnla receivable 28,289 883,037 5311,212 (118,829) lory (41,924) (111,257) (114,330) idexpenses 12,097 12,097 'Om othar govemments {194,307) (178,021} rnts payable (11,800) 514,153 3,848,222 450,968 accrued expenses (35,352) 130,682 455,301 mer deposita 150 669,435 470,655 .e (dectease) in oompenaated absenc:ell 4.762 559,037 8111,9e9 {237,18!} :ash providecl (used) by open~tlng dllilies 4,559,619 1,097,928 48,&40,341 !131,0811 ental cash flow lnfomtatlon: 11 capl1al lmprovemanta and other changes $ 21477 20,435,188 npanylng.Notes to Basic Financial Statements. SSETS CITY OF LUBBOCK, TEXAS STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS SEPTEMBER 30, 2004 ;ash and cash equivalents $ nvestments, at fair value: Pools Total assets ABILITIES \ccounts payable Total liabilities $ 1Ccompanyin9 Notes to Basic Financial Statements. Agency Fund 1,099 73 1,172 1,172 1,172 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Basic Financial Statements (BFS) of the City of Lubbock, Texas (City) have been prepared in conformity with Accounting Principles Generally Accepted in the United States of America (GAAP) as applied to government units, including specialized industry practices as specified in the American Institute of Certified Public Accountants audit and accounting guide titled Audits of State and Local Governmental Units (GASB 34 Edition). The Governmental Accounting Standards Board (GASB) is the acknowledged standard-setting body for establishing governmental accounting and financial reporting principles. With respect to proprietary activities related to business-type activities and enterprise funds, including component units, the City applies all applicable GASB pronouncements as well as Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions and Accounting Research Bulletins of the Comminee on Accounting Procedure, issued on or before November 30, 1989, unless those pronounce.ments conflict with or contradict GASB pronouncements. The more significant accounting policies are described below. A. REPORTING ENTITY The City is a municipal corporation governed by a Council-Manager form of government. The City, incorporated in 1909, is located in the northwestern part ofthe state. The City currently occupies a land area of 11.5 square miles and serves a population exceeding 206,000. The City is empowered to levy a property tax on both real and personal properties located within its boundaries. It is also empowered by state statute to extend its corporate limits by annexation, which occurs periodically when deemed appropriate by the city council. The City provides a full range of services, including police and fire protection; recreational activities and cultural events; construction and maintenance of highways, streets, and other infrastructure; and sanitation services. The City also provides utilities for electricity, water, sewer, and stormwacer as well as a public transportation system. The BFS present the City and its component units and include all activities, organizations, and functions for which the City is considered to be financially accountable. The criteria considered in determining activities to be reported within the City's BFS are based upon and consistent with those set forth in the Codification of Governmental Accounting Standards. Section 21 00, "Defining the Financial Reporting EnJity. " The criteria include whether: • The organization is legally separate (can sue and be sued in its own name), • The City holds the corporate powers of the organization, • The City appoints a voting majority of the organization's board, • The City is able to impose its will on the organization, • The organization has the potential to impose a financial benefit or burden on the City, or • There is fiscal dependency by the organization on the City. As required by GAAP, the BFS present the reporting entity which consists of the City (the primary government), organizations for which the City is financially accountable, and other organizations for which the nature and significance of their relationship with the City are such that exclusion could cause the City's BFS to be misleading or incomplete. BLENDED COMPONENT UNITS The Urban Renewal Agency (URA) has been included in the City's financial reporting entity within the primary government using the blended method because, although it Is legally separate, its operations are so intertwined with the City that it is, in substance, a part of the City. The URA was formed to provide urban renewal services including rehabilitation of housing, acquisition ofhousing, and disposition of land. The URA Board is composed of nine members appointed by the Mayor with the consent of the City Council, and acts only in an advisory capacity to the City Council. All powers to govern the URA are held by the City Council. There are no separate financial statements available for the URA. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. REPORTING ENTITY (CONTINUED> West Texas Municipal Power Agency (WTMPA) is a legally separate municipal corporation, a political subdivision of Texas, and body politic and corporate, formed in 1983, governed by a Board of eight directors who serve without compensation. WTMPA has no employees and instead contracts with the City for general operations. WTMPA may engage in the business of generation, transmission, sale, and exchange of electric energy to the four participating public entities: Lubbock, Tulia, Brownfield, and Floydada. WTMPA may also participate in power pooling and power exchange agreements with other entities. WTMP A provides electricity to its four member cities with the City having an 88.5% interest in its operations. Each member city appoints two members to the WTMPA board, however an affirmative vote of the "majority in interest" is required to approve the operating budget, approve capital projects, approve debt issuance, and ap prove any amendments to WfMPA rules and regulations. The City maintains the "majority in interest" vote based on Kilowatt purchases, and consequently has majority voting control. As the City purchases approximately 88.5% of the electricity brokered, WTMPA provides services almost exclusively to the City and is therefore presented as a blended enterprise fund. Their separate audited financial statements may be obtained through the City. DISCRETELY PRESENTED COMPONENT UNITS The financial data for the Component Units are shown in the Government-Wide Financial Statements. They are reponed in a separate column to emphasize that they are legally separate from the City. The following Component Units are included in the reporting entity because the primary government is financially accountable, is able to impose its will on the organization, or can significantly influence operations and/or activities of the organization. Civit Lubbock, lne. is a legally separate entity that was organized to foster and promote the presentation of wholesome educational, cultural, and entertainment programs for the general moral, intellectual, physical improvement, and welfare of the citizens of lubbock and its surrounding area. The seven-member board is appointed by the City Council. City Council approves the annual budget. Separate financial statements for Civic Lubbock may be obtained from them at 1501 6'h Street, Lubbock, Texas. Market Lubbock Economic Development Corporation, dba Market Lubbock, is a legally separate entity that was formed on October 10, 1995 by the City Council to create, manage, operate, and supervise programs and activities to promote, assist, and enhance economic development within an d around the City. The City Council appoints the seven-member board and its operations are funded primarily through budgeted allocations of the City's property and hotel occupancy taxes. Separate financial statements may be obtained from Market Lubbock at 130 I Broadway, Suite 200, Lubbock, Texas. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30,2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. REPORTING ENTITY (CONTINUED) RELATED ORGANIZATIONS The City Council is responsible for appointing the members of the boards of other organizations but the City's accountability for these organizations does not extend beyond making board appointments. The City Council is not able to impose its will on these entities and there is no financial benefit or burden relationship. Bonds issued by these organizations do not constitute indebtedness of the City. The following Related Organizations are not included in the reporting entity: The Housing Authority of the City of Lubbock (Authority) is a legally separate entity. The Mayor appoints the five-member board. The Lubbock Health Facilities Development Corporation promotes health facilities development. City Council appoints the seven-member board. The Lubbock Housing Finance Corporation, Inc. was formed pursuant to the Texas Housing Finance Corporation Act, to finance the cost of decent, safe, and affordable residential housing. The Mayor appoints the seven-member board. North & East Lubbock Community Development Corporation (CDC) was formed from the recommendation of the mayor's commission formed in May 2002 to examine the condition of North & East Lubbock. Incorporated in February 2004, the CDC began work to effectuate change in North and East Lubbock. The North & East Lubbock Community Development Corporation is a local entity that drives social change; promotes autonomy and empowerment by increasing the supply of quality and affordable housing, generating economic activity, and coordinating the efficient delivery of social services. The City Council appoints two members of an eleven-member board. The City Council is not able to impose its will on the entity and there is no financial benefit/burden relationship. The Lubbock Eduution Facilities Authority, Inc. is a non-profit corporation and instrumentality of the City and was created pursuant to the Higher Education Authority Act, Chapter 53 Texas Education Code for the purpose of aiding institutions of higher education, secondary school, and primary schools in providing educational facilities, housing facilities. The seven-member Board is appointed by the City Council. The Lubbock Firemen's Retirement and Relief Fund (Pension Trust Fund) operates under provisions of the Firemen • s Relief and Retirement Laws of the State of Texas for purposes of providing retirement benefits for the City's firefighters. The Mayor's designee, the Cash & Debt Manager, three firefighters elected by members of the Pension Trust Fund and two at-large members elected by the Board, govern its affairs. It is funded by contributions from the firefighters and City matching contributions. As provided by enabling legislation, the City's responsibility to the Pension Trust Fund is limited to matching monthly contributions made by the members. Title to assets is vested in the Pension Trust Fund and not in the City. The State Firemen's Pension Commission is the governing body over the Pension Trust Fund and the City cannot significantly influence its operations. Their separate audited financial statements may be obtained through the City. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES B. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS The City's financial statements are prepared using the reporting model specified in GASB Statement No. 34 - Basic Financial Statements -and Management's Discussion and Analysis -for State and Local Governments, GASB Statement No. 37 -Basic Financial Statements -and Management's Discussion and Analysis -For State and Local Governments -Omnibus, GASB Statement No. 38 -Certain Financial Statements Note Disclosures, and GASB Interpretation No. 6 -Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements. As specified by Statement No. 34, the Basic Financial Statements (BFS) include both Government-Wide and Fund Financial Statements. The Government-Wide Financial Statements (GWFS) (i.e., the Statement of Net Assets and the Statement of Activities) report information on all of the non-fiduciary activities of the City and its blended component units as a whole. The discretely presented component units are also aggregately presented within these statements. The effect of interfund activity has been removed from these statements by allocation of the activities of the various internal service funds to the governmental and business-type activities on a fund basis based on the predominant users of the services. Governmental activities, which are primarily supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. All activities, both governmental and business-type, are reported in the GWFS using the economic resources measurement focus and the accrual basis of accounting, which includes long-term assets and receivables as well as long-term debt and obligations. The GWFS focus more on the sustainability of the City as an entity and the change in aggregate financial position resulting from the activities of the fiscal period. The Government-Wide Statement of Net Assets reports all financial and capital resources of the City, excluding those reported in the fiduciary fund. It is displayed in the format of assets less liabilities equals net assets, with the assets and liabilities shown in order of their relative liquidity. Net assets are required to be displayed in three components: (I) invested in capital assets net of related debt, {2) restricted, and (3) unrestricted. Invested in capital assets net of related debt equals capital assets net of accumulated depreciation and reduced by outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted net assets are those with constraints placed on their use by either: (l) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or (2) imposed by law through constitutional provisions or enabling legislation. All net assets not otherwise classified as invested in capital assets net of related debt or restricted, are shown as unrestricted. Reservations or designations of net assets imposed by the City, whether by administrative policy or legislative actions of the City Council that does not otherwise meet the definition of restricted net assets, are not shown in the GWFS. The Government-Wide Statement of Activities demonstrates the degree to which the direct expenses for a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include, (l) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment; and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. The general revenues support the net costs of the functions and segments not covered by program revenues. Also part of the BFS are Fund Financial Statements (FFS) for governmental funds, proprietary funds, and the fiduciary fund, even though the latter is excluded from the GWFS. The focus of the FFS is on major funds, as defined by GASB Statement No. 34. Although GASB Statement No. 34 sets forth minimum criteria for determination of major funds, i.e., a percentage of assets, liabilities, revenue, or expenditures/expenses of fund category and of the governmental and enterprise funds combined. It also gives governments the option of displaying other funds as major funds. The City can elect to add some funds as major funds because of outstanding debt or community focus. Major individual governmental funds and major individual enterprise funds are reported as separate columns in the FFS. Other non-major funds are combined in a single column in the appropriate FFS. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. MEASUREMENT FOCUS. BASIS OF ACCOUNTING. AND FINANCIAL STATEMENT PRESENTATION Fund Financial Statements The GWFS are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary FFS. The City's fiduciary FFS includes only an agency fund that uses the accrual basis of accounting. However, because agency funds report only assets and liabilities, this fund does not have a measurement focus. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. Because the enterprise funds are combined into a single business-type activities column on the GWFS, certain interfund activities between these funds are eliminated in the consolidation for the GWFS, but are included in the fund columns in the proprietary FFS. The effect of inter-fund activity has been eliminated from the GWFS. Exceptions to this general rule are payments-In-lieu of taxes and other charges between the City's electric, water and sewer functions and various other functions of the government. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned. For instance, 88.5% of the operations of WTMPA representing transactions between WTMPA and Lubbock Power & Light have bee.n eliminated for the GWFS presentation and for the electric BTA. Governmental FFS are reported using the current financial resources measurement focus and the modified accrual basis of accounting. This is the traditional basis of accounting for governmental funds. This presentation is necessary, (I) to demonstrate legal and covenant compliance, (2) to demonstrate the sources and uses of liquid resources, and (3) to demonstrate how the City's actual revenues and expenditures conform to the annual budget. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available, generally, if they are collected within 45 days of the end of the current fiscal period, with the exception of sales taxes which are considered to be available if they are collected within 60 days of year end. The City considers the grant availability period to be one year for revenue recognition. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences, and claims and judgments are recorded only when the liability has matured. Because the governmental FFS are presented on a different basis of accounting than the GWFS, a reconciliation is provided immediately following each fund statement These reconciliations explain the adjustments necessary to convert the FFS into the governmental activities column of the GWFS. Property taxes, sales taxes, franchise taxes, occupancy taxes, grants, licenses, court fines, and interest associated with the current fiscal period are all considered to be susceptible to accrual and have been recognized as revenues of the current fiscal period. Only the portion of special assessments receivable due within the current fiscal period is considered to be susceptible to accrual as revenue of the current period. All other revenue items are considered Co be measurable and available only when the City receives cash. Fund Accounting The City uses funds to report its financial position and the results of its operations. Fund accounting segregates funds according to their intended purpose and is designed to demonstrate legal compliance and to aid financial management by segregating transactions related to certain governmental functions or activities. A fund is a separate accounting entity with a self-balancing set of accounts, which includes assets, liabilities, fund balance/net assets, revenues and expenditures/expenses. Governmental funds are those through which most of the governmental functions of the City are financed. The City reports two major governmental funds: The Genera) Fund. The General Fund as the City's primary operating fund accounts for all financial resources of the general government, except those required to be accounted for in another fund. The Debt Service Fund is used to account for the accumulation of resources for, and the payment of, general long-tenn obligation principal and interest (other than debt service payments made by proprietary funds). CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30. 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION (CONTINUED) Enterprise Funds are used to account for operations, ( l) that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered through user charges; or (2) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. The City reports the following major enterprise funds: The Electric Fund accounts for the activities of Lubbock Power & Light (LP&L), the City-owned electric production and distribution system. The Water Fund accounts for the activities of the City's water system. The Sewer Fund accounts for the activities of the City's sanitary sewer system. The West Texas Municipal Power Agency (WTMPA) Fund accounts for the activities of power generation and power brokering to member cities. Member cities include lubbock with 88.5% ownership, and Tulia, Brownfield, and Floydada comprising the remaining 11.5% ownership. The Stormwater Fund accounts for the activities of the stormwater utility, which provides stormwater drainage for the City. The City reports the following non-major funds: Governmental Funds Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than special assessments or major capital projects) that are legally restricted to expenditures for specified purposes. Capital Projects Funds are used to account for financial resources to be used for the acquisition or construction of major capital improvements (other than those recorded in the proprietary funds). The Permanent Fund is used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purpose of perpetual care for the cemetery grounds. Proprietary Funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the City's enterprise funds and of the City's internal service funds are charges to customers for sales and services. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Internal Service Funds are used to account for services provided to other departments, agencies of the departments or to other governments on a cost reimbursement basis (i.e., fleet maintenance, central warehouse, print shop, self-insurance, etc.). Enterprise Funds are used to account for services to outside users where the full cost of providing services, including capital, is to be recovered through fees and charges, e.g., Lubbock Preston Smith International Airport (airport fund), Citibus, and the solid waste fund. Fiduciary Funds include an Agency Fund that is used to account for assets held by the City as an agent for private organizations. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES D. BUDGETARY ACCOUNTING The City Manager submits a proposed operating budget and capital improvement plan to the City Council annually for the upcoming fiscal year. Public hearings are conducted to obtain taxpayer comments. and the budget is legally enacted through passage of an ordinance by City Council. City Council action is also required for the approval of any supplemental appropriations. All budget amounts presented in the budget comparison statement reflect the original budget and the amended budget, which have been adjusted for legally authorized supplemental appropriations to the annual budgets during the fiscal year. The operating budget is adopted on a basis consistent with GAAP for the General Fund. Budgetary control is maintained at the department level in the following expenditure categories: personnel services, supplies, other charges, and capital outlay. Management may make administrative transfers and increases or decreases in accounts within categories, as long as expenditures do not exceed budgeted appropriations at the fund level, the legal level of control. All annual operating appropriations lapse at the end of the fiscal year. Capital budgets do not lapse at fiscal year end but remain in effect until the project is completed and closed. In addition to the tax levy for general operations, in accordance with State law, the City Council sets an ad valorem tax levy for a sinking fund (General Obligation Debt Service) which, with cash and investments in the fund, is sufficient to pay all debt service due during the fiscal year. E. ENCUMBRANCES At the end of the fiscal year, encumbrances for goods and services that have not been received are canceled. At the beginning of the next fiscal year, management reviews all open encumbrances. During the budget revision process, encumbrances may be re-established. On October I, 2004, the General Fund had no significant amounts of open encumbrances. F. ASSETS, LIABILITIES AND FUND BALANCE/NET ASSETS Equity in Pooled Cash and Investments -The City pools the resources of the various funds in order to facilitate the management of cash and enhance investment earnings. Records are maintained which reflect each fund's equity in the pooled account. The City's investments are stated at fair value, except for repurchase agreements with maturities, when purchased, of one year or Jess. Fair value is based on quoted market prices as of the valuation date. Cash Eqt~ivalents -Cash equivalents are defined as short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less when purchased which present an insignificant risk of changes in value because of changes in interest rates. Property Tax Receivable-The value of all real and business property located in the City is assessed annually on January I in conformity with Subtitle E of the Texas Property Code. Property taxes are levied on October I on those assessed values and the taxes are due on receipt of the tax bill. On the following January I, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. The taxes are considered delinquent if not paid before February I. Therefore, at fiscal year end all property taxes receivable are delinquent, but are secured by a tax lien. At the GWFS level property tax revenue is recognized upon levy. In governmental funds, the City records property taxes receivable upon levy and defers tax revenue unci! the taxes are collected or available. For each fiscal year, the City recognizes revenue in the amount of taxes collected during the year plus an estimate of taxes to be collected in the subsequent 45 days. The City allocates property tax revenue between the General, certain Special Revenue, and Debt Service funds based on tax rates adopted for the year of levy. The Lubbock Central Appraisal District assesses property values, bills, collects, and remits the property taxes to the City. The City adjusts the allowance for uncollectible taxes and deferred tax revenue at fiscal year end based upon historical collection experience. To write off property taxes receivable, the City eliminates the receivable and reduces the allowance for uncollectible accounts. Enterprise Funds Receivables -Within the Electric, Water, Sewer, and WTMP A Enterprise Funds, services rendered but not billed as of the close of the fiscal year are accrued and this amount is reflected in the accounts receivable balances of each fund. Amounts billed are reflected as accounts receivable net of an allowance for uncollectible accounts. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES F. ASSETS. LIABILITIES, AND FUND BALANCE/NET ASSETS <CONTINUED) Inventories -Inventories consist of expendable supplies held for consumption. Inventories are valued at cost using the average cost method of valuation, and are accounted for using the consumption method of accounting, i.e., inventory is expensed when used rather than when purchased. Prepaid Items -Prepaid items are accounted for under the consumption method. Restricted Assets -Certain enterprise fund and governmental activities assets are restricted for construction; consequently, net assets have been restricted for these amounts. The excess of other restricted assets over related liabilities are included as restricted net assets for capital projects, rate stabilization, economic development, and bond indentures. Mortgage Receivables • Mortgage receivables consist of loans made to Lubbock residents under the City's Community Development loan program. These loans were originally funded primarily through grants received from the U.S. Department of Housing and Urban Development. Capital Assets and Depreciation -Capital assets, including public domain infrastructure (streets, bridges, sidewalks and other assets that are immovable and of value only to the City) are defined as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. These capital assets are reported in the GWFS and the proprietary FFS. Capital assets are recorded at cost or estimated historical cost if purchased or constructed. Donated assets are recorded at the estimated fair value on the date of donation. Major outlays for capital assets and improvements are capitalized as the projects are constructed. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend the asset Jives are not capitalized. Major improvements are capitalized and depreciated over the remaining useful lives of the related capital assets. Depreciation is computed using the straight-line method over the estimated useful lives as follows: Infrastructure/1m provements Buildings Equipment Water righlS 10·50 years 15-50 years 3-15 years 85 years Interest Capitalization -Because the City issues general-purpose capital improvement bonds, which are recorded within the proprietary funds, the City capitalizes interest costs for business-type activities and enterprise funds according to the Financial Accounting Standards Board (F ASB} Statement No. 34 Capitalization of Interest Cost and F ASB Statement No. 62 Capitalization of Interest Costs. The City capitalized interest of approximately $457,000, net of interest earned, for the business-type activities and the enterprise funds during the current fiscal year. Advances to Other Funds -Amounts owed to one fund by another that are not due within one year are recorded as advances to ot.her funds. Use of Estimates -The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affe<:t the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses/expenditures during the reporting period. Actual results could differ from those estimates. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES G. REVENUES. EXPENSES AND EXPENDITURES Interest Income on pooled cash and investments is allocated monthly based on the percentage of a fund's six- month rolling average monthly balance in pooled cash and investments to the total citywide six-month rolling average monthly balance in pooled cash and investments, except for certain Fiduciary Funds, certain Special Revenue Funds, Capital Project Funds, and certain Internal Service Funds. The interest income on pooled cash and investments of these funds is reported in the General Fund or the Debt Service Fund. Sales Tax Revenue for the City results from an allocation of 1.125% of the total sales tax levy of 7.875%, which is collected by the State of Texas and remitted to the City monthly. The tax is collected by the vendor and is required to be remitted to the State by the 20th of the month following collection. The tax is then paid to the City by the lOth of the next month. Grant Revenue from federal and state grants is recognized as revenue as soon as all eligibility requirements have been met. The availability period for grants is considered to be one year. Inter-fund Transactions are accounted for as revenues, expenditures, expenses, or other financing sources or uses. Transactions that constitute reimbursements to a fund for expenditures/expenses initially made from that fund that are properly applicable to another fund, are recorded as expenditures/expenses in the reimbursing fund and as reductions of expenditures/expenses in the fund that is reimbursed. In addition. transfers are made between funds to shift resources from a fund legally authorized to receive revenue to a fund authorized to expend the revenue. Compensated Absences consists of vacation leave and sick leave. Vacation leave of 10-20 days is granted to all regular employees dependent upon the date employed, years of service, and civil service status. Currently, up to 40 hours of vacation leave may be "carried over" to the next calendar year. The City is obligated to make payment upon retirement or termination for any available, unused vacation leave. Sick leave for employees is accrued at 1-Y. days per month with a maximum accrual status of 200 days. After 15 years of continuous full time service for non-civil service personnel, vested sick leave is paid on retirement or termination at the current hourly rate for up to 90 days. Upon retirement or termination, Civil Service Personnel (Police) are paid for up to 90 days accrued sick leave after one year of employment Civil Service Personnel (Firefighters) are paid for up to 135 days of accrued sick leave upon retirement or termination. The Texas Civil Service laws dictate certain benefits and personnel policies above and beyond those policies of the City. The liability for the accumulated vacation and sick leave is recorded in the GWfS and in the FFS for proprietary fund employees when earned. The liability is recorded in the governmental FFS to the extent it is due and payable. Post Employment Benefits for retirees of the City of Lubbock include the option to purchase health and life insurance benefits at their own expense. Amounts to cover premiums and administrative costs, with an incremental charge for reserve funding, are determined by the City's health care administrator. Employer contributions are funded on a pay-as-you-go basis and approximated $1.3 million for fiscal 2004. These contributions are included in the amount of insurance expense reflected in the financial activity reported in the Health Insurance Internal Service Fund. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE II. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. NET ASSET/FUND BALANCE DEFICITS The deficit of $76,784 in the General Capital Projects Fund is due to timing differences of incurring capital outlay expenditures for an internally financed project. The fund balance should be positive by the end of fiscal year 2004n005 with the final internal payback from the Special Revenue Funds. The deficit of $6,700 in the Investment Pool Internal Service Fund is the result of not recovering actual cost with the allocation of interest earnings to this fund. This also represents a timing difference. The deficit of $1,864, 119 in Market Lubbock Inc. (MLI) is due to long-tenn commitments for incentive and special project contracts and tentative open convention offers. MLI management expects future receipts of funding from the City of Lubbock to pay these long-tenn commitments. No other funds of the City had deficits in either total fund balances or total net assets. NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS A. POOLED CASH AND INVESTMENTS The City's investment polices are governed by State statute and City ordinances. The following are authorized investments for the City and all are authorized and further defined by the Public Funds Investment Act (Chapter 2256) ("PFIA"): • Obligations of the United States or its agencies and instrumentalities, which have a liquid market with a readily determinable market value. • Direct obligations of this state or its agencies and instrumentalities. • Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities. • Obi igations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating finn not less than A or its equivalent. • Fully collateralized certificates of deposit issued by a state or national bank doing business in Texas and guaranteed, or insured by the Federal Deposit Insurance Corporation or its successor, secured by obligations authorized by this subchapter, or secured in any other manner and amount provided by Jaw for deposits of the investing entity. • Fully collateralized repurchase agreements with a defined termination date; and secured by obligations authorized by the Act; such collateral pledged to the City, held in the City's name, and deposited at the time the investment is made with the City or with an independent third party selected and approved by the City. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a bank doing business in this state. The term of any reverse repurchase agreements may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the City under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the tenn of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement. • Bankers' acceptances with a stated maturity of 270 days or fewer from the date of its issuance; and liquidated in full at maturity; and eligible for collateral for borrowing from a Federal Reserve Bank; and accepted by a bank organized and existing under the laws of the United States or any state, if the short-tenn obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less than A·l or P-I or an equivalent rating by at least one nationally recognized credit rating agency. • Commercial paper with a stated maturity of 270 days or fewer from the date of its issuance, and rated not less than A-1 or P-1 or an equivalent rating by at least two nationally recognized credit rating agencies. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS A. fOOLED CASH AND INVESTMENTS <CONTINUED> • No-load money market mutual funds regulated by the Securities and Exchange Commission, and with a dollar-weighted average stated maturity of 90 days or fewer, and whose investment objectives include the maintenance of a stable net asset value of $1 for each share. • AAA-rated, constant dollar, investment pools authorized by the City Council and as further defined by the Act, which invests in eligible securities as authorized by the PFIA. Government Pool investments as of September 30, 2004, were invested in TexPool and TexST AR. TexPool. The Comptroller of Public Accounts (the "Comptroller") is the sole officer, director and shareholder of the Texas Treasury Safekeeping Trust Company (the "Trust Company") which is authorized to operate TexPool. Pursuant to the TexPool Participation Agreement, administrative and investment services to TexPool are provided by Lehman Brothers Inc. and Federated lnvesto~ Inc. ("Lehman and Federated"), under an agreement with the Comptroller, acting on behalf of the Trust Company. The Comptroller maintains oversight of the services provided to TexPool by Lehman and Federated. In addition, the TexPool Advisory Board advises on TexPool's Investment Policy and approves any fee increases. As required by the PFIA, the Advisory Board is composed equally of participants in TexPool and other persons who do not have a business relationship with TexPool who are qualified to advise TexPool. TexPool is currently rated AAAm by Standard and Poor's. An explanation of the significance of such rating may be obtained from Standard & Poor's atl221 Avenue ofthe Americas, New York, New York 10020. TexSTAR. Texas Short Term Asset Reserve Program ("TEXST AR") has been organized in conformity with the Interlocal Cooperation Act, Chapter 791 of the Texas Government Code, and the Public Funds Investment Act, Chapter 2256 of the Texas Government Code. JPMorgan Fleming Asset Management (USA), Inc. (''JPMFAM") and First Southwest Asset Management, Inc. ("FSAM") serve as co-administrators for TEXST AR under an agreement with the TEXST AR board of directors (the "Board"). JPMF AM provides investment services, and FSAM provides participant services and marketing. Custodial, transfer agency, fund accounting and depository services are provided by JPMorgan Chase Bank and/or its subsidiary J.P. Morgan Investor Services Co. Finally, TEXSTAR is currently rated AAAm by Standard and Poor's. An explanation of the significance of such rating may be obtained from Standard & Poor's at 1221 Avenue of the Americas, New York, New York 10020. Collateral is required for demand deposits, certificates of obligation, and repurchase agreements at I 02% of all amounts not covered by Federal deposit insurance. Obligations that may be pledged as collateral are obligations of the United States and its agencies and obligations of the state and its subdivisions. The City's deposits and investments are categorized below to indicate the level of custodial credit risk assumed by the City at September 30, 2004. INVESTMENT CATEGORY OF CUSTODIAL CREDIT RISK (I) Insured, registered, or securities held by the City or its agent in the City's name. (2) Uninsured and unregistered, with securities held by the counterparty's agent or trust department in the City's name. (3) Uninsured and unregistered, with securities held by the counterparty or by the trust department or agent but not in the City's name. DEPOSIT CATEGORY OF CUSTODIAL CREDIT RISK (I) Insured or collateralized with securities held by the City or by its agent in the City's name. (2) Collateralized with securities held by the pledging financial institution's trust department or agent in the City's name. (3) Uncollateralized. Amounts invested in investment pools and money market funds are not categorized, because they do not represent securities that exist in physical form. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septe~bet30,2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS A. POOLED CASH AND INVESTMENTS (CONTINUED) The following table is a schedule of the City's pooled cash and investments at September 30,2004: Category Investments ~1~ ~2~ !3~ frirnil)! G2vernment U.S. Treasuries $ 3,998,817 Agency Obligations 36,658,090 Investment Pools Money Market Mutual Fund Total Primary Government Agency Funds lovestment Pools Total Agency Funds Total Investments Cash and Category Bank Bank DeEosits iA~ (B) ~C! Balance Primary Government $ 95,899,156 95,899,156 Agency Funds 1,099 1,099 Total $ 95,900,255 95,900,255 Canying Amount 3,998,817 36,658,090 47,413,743 2,796,414 90,867,064 73 73 90.867,137 Cattying Amowtt 95,899,156 1,099 95,900,255 Cash and investments listed above include investment pools and money market mutual funds (mnunt). The table below categorizes the investment pools and mnunf's as cash and equivalents in unrestricted funds. Restricted funds include investment pool and mmmf balances. The difference in totaJ investment balances between the table above and the table below totals $7,019,071, which is due to the different reporting methods used in each table. Cash and investments are reported in the Statement of Net Assets as: Total Total Primary Agency Government Funds Total Cash and Equivalents -Unrestricted $ 56,107,053 56,107,053 Cash and Equivalents -Restricted 46,811,174 1,099 46,812,273 Total Cash and Equivalents 102,918,227 1,099 102,919,326 Investments -Unrestricted 13,$81,046 13,581,046 Investments -Restricted 70,266,947 73 70,267,020 Total Investments 83,847,993 73 83,848,066 Total Cash and Investments $ 186,766,220 1,172 186,767,392 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE m. DETAIL NOTES ON ALL ACTMTIES AND FUNDS B. INTERFlJND TRANSACTIONS Interfund balances. specifically the due to and due from other funds, are short-tenn loans to cover temporary cash deficits in various funds. This occasionally occurs prior to bond sales or grant reimbursements. These outstanding balances are repaid within the following fiscal year. Jnterfund balances, specificaJJy advances to and from other funds, are longer-tenn loans to cover Council directed internaJ financing of certain projects. At September 30, 2004 the City has nearly $ J .S million of this type of intemaJ financing. These balances are assessed an interest charge and are repaid over time through operations and transfers. Net interfund receivables and payables between governmental activities and business-type activities in the amount of $SS5,46S, are included in the government-wide financial statements. The following amounts due to other funds or due from other funds. including advances. are included in the fund financiaJ statements (aU amounts in thousands): Intetfund Payables: Governmental Funds: Norunajor Governmental Proprietary Funds: Electric Nonmajor Proprietuy Totals Governmental Funds Genenl 1,930 446 $ 2,376 lnterfund Receivables ProprietaJy Funds Water Sewer Solid Waste 1,024 261 261 1,024 Net transfers of $9,745,250 from business-type activities to governmentaJ activities. up from $2.6 million during the prior year, on the government-wide statement of activities is primarily the result of I) debt service payments made from the debt service fund, but funded from an operating fund; 2) subsidy transfers from unrestricted general funds; and 3) transfers to move indirect cost allocations, payments in lieu of taxes (PILOT), and francllise fees to the general fund or other funds as appropriate. The following interfund transfers are reflected in the fund financial statements (all amounts in thousands): lnterfund Transfers Out: Governmental Funds p,.O£rietaty Funda Debt Nonmajor Stonn-Nonmajor Intcnl lnterfund General Service Gov. Electric Water Sewer Water Entetpti.se Service Tramfers ID: Governmental Funds: General Fund $ 1,483 1,068 3,997 1,751 311 2,114 Debt Service Fund 760 1,679 6,799 6,236 4,307 93S Nonmajor Governmental 3,221 1,449 330 1,121 Proprietary Funds: Electric 9 1,679 90 Water 93 6,799 Sewer 6,236 Stonnwater 4,307 WTMPA 357 Nonmajor Ente.rprise 849 935 91 Internal Service Funds 41 46 46 46 46 Total $ 4.213 19,956 3,872 3,150 11,172 8,033 4,619 4,216 Totals 2,954 707 3,661 Totals 10,724 20,715 6,121 1,ns 6,892 6,236 4,307 357 1,875 226 59,230 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS C. DEFERRED CHARGES The to•al deferred charges of $3,344,444 in the Electric Enterprise Fund represents an advertising contract with the United Spirit Arena. The advertising (and amortization) began with the opening of the sports arena in fiscal year 2000 and will continue for 30 years. The total deferred charges of $407,251 in the West Texas Municipal Power Agency Fund represents unamortized bond issuance costs related to the bonds issued to build the JRM8 cogeneration facility. D. CAPITAL ASSETS Capital asset activity for the year ended September 30, 2004, was as follows: Primary Government: Governmental Activities Beginning Balance Increases Dec:reases Capital Assets not being depreciated: Land $ 7,996,406 611,843 Construction in Progress 36,155,690 14,140,550 6,824,218 Tow Capitru Assets not being depreciated 44,152,096 14,752,393 6,824,218 Capital Assets being depreciated: Buildings 51,475,936 6,864 28,522 Improvements Othet than Buildings 125,742,157 3,908,958 Machinery and Equipment 48,896,000 5,585,646 1,526,973 Total Capital Assets being depreciated 226,114,093 9,501,468 1,555,495 Less Accumulated Depreciation for: Buildings 25,873,452 1,815,260 28,522 Improvements Other than Buildings 88,642,271 3,826,069 Machiner:y and Equipment 34,015,313 4,426,516 1,443,900 Totil Accumulated Depreciation 148,531,036 10,067,845 1,472,422 Total Capital Assets being depreciated, net 77,583,057 !566,37:?2 83,073 Governmental Activities Capital Assets, net $ 121,735,153 14,186,016 6,907,291 Depreciation expense was charged to functions/programs of the governmental activities as follows: Governmental activities: General Government Financial Services Human Resources Administration/Community Services Fire Police Streets Electric Intemal Service Funds Total depreciation expense-govemmentru activities Transfer in to accumulated depreciation -govemmental activities lncrese in accumulated depreciation -governmental activities Endiog Balances 8,608,24~ 43,472,0Z 52,080,271 51,4S4,27t 129,651,11! 52,954,671 234,060,061 27,660,19( 92,468,34( 36,997,9~ 157,126,45! 76,933,60·. 129,013,871 $ 325,44~ 5,27~ 4,63( 3,646,36~ 841,69• 1,339,87~ 3,364,00~ 286,09( 162,70~ 9,976,09: 91,75~ $ 10,067,84! CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS D. CAPITAL ASSETS (CONTINUED> Business-Type Activities Beginning Ending Balaoce Increases Decreases BaiiUICC8 Capital Assets not being depreciated: Land $ 31,676,155 31,676,155 Construction in Progress 104,689,207 28,965,883 19,693,719 113,961)71 Total Capital Assets not being depreciated U6,365,362 28,965.883 19,693,719 145,637,526 Capital Assets being depreciated: Buildings 96,941,635 6,034 18,891 96,928,778 Improvements Otha than Buildings 555,982,769 20,441,780 2,065,581 574,358,968 Machinery and Equipment 137,992,381 25,692,500 30,927,318 132,757,563 Total Capital Assets being depreciated 790,916,785 46,140,314 33,011,790 804,045)09 Less Accumulated Depreciation for: Buildings 26,180,634 2,465,3U 18,891 28,627,056 Improvements Other than Buildings 225,416,823 19,574,185 1,47},470 243,517,538 Machinery and Equipmeat 58,219,321 12,838,270 5,221,994 65,835,597 Total Accumulated Depreciation 309,816,778 34,877,768 6,714)55 337,980,191 Total Capital Assets being depreciated, net 481,100,007 11,262,546 26,297,435 466,065,118 Business-Type Activities Capital Assets, net $ 617,465,369 40,228,429 45,991,154 611,702,644 Depreciation expense was charged to functions/programs of the business-type activities as follows: Business-Type Activities: Electric Water Sewer Storm water Solid Waste Airport Transit Inteln21 Service Funds Total dcpreci1tioo expense-business-type activities Transfer io to accwnubted depreciation-business-type activities Increse in accumulated depreciation -business-type activities $ 9,121,124 5,958,903 5,075,034 553,592 8,016,067 3,2.55,401 2,019,973 439,792 34,439,886 437,882 $ 34,877,768 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE m. DETAIL NOTES ON ALL ACTMTIES AND FUNDS D. CAPITAL ASSETS (CONTINUED) Construction Commitments The City had many construction projects in progress at fiscal year end. Public Safety projects include construction of a fire pump test pit. Park projects include park irrigation and lighting systems. Street projects include the widening of 98111 street from Slide to Frankford. A security upgrade of Police Headquarters was also underway. Electric projects included the final touclles on a new substation. Water projects included a new project to develop water wells south of Loop 289. Sewer projects included construction of sewer lines ahead of the Marsha Sharp Freeway. Airport projects included an extension of the airport's taxiways. Two large Stormwater projects are underway. The first project provides for the construction of an outfall storm sewer from Clapp Park to Yellowhouse Canyon and a series of upstream storm sewers that will provide various protections around four playa lakes. The second project provides for the construction of a flood relief project for south Lubbock's chain of playa lakes. Original Remaining Pr~eets Commitmen18 S~nt-to-Date Commitimenta Public Safety $ 9,371,433 7,799,579 1,571,854 P21:k Improvements 13,078,.502 7,481,061 5,.597,441 Street Improvements 25,866,6)2 15,479)52 10,387,300 Permanent Street Maioteoancc 1,788,000 1,626,990 161,010 General Capital Projects 355,171 285,)05 69,666 General Facilities and System Improvements 10,062,864 7,773,968 2,288,896 Tax Increment Fund Capibl Projects 3,800,000 1,198,597 2,601,403 Grant Terrorism Lab 1,179,000 892,540 286,460 Electric 14,650,111 9,488,738 5,161,373 Water 70,435,418 45,999,985 24,435,433 Sewer 11,001,937 5,227,618 5,774,319 Solid Waste 9,591,700 5,950,400 3,641)00 Airport 16,058,200 3,339,364 12,718,836 Transit 203,799 203,799 Stormwater 79,900,000 43,053,522 36,846,478 IntemaJ Service Fund 2,956,000 1,632,378 1,323,622 Total $ 270,298,787 157,433,396 112,865,391 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS Each qualified employee is included in one of two retirement plans in which the City of Lubbock participates. These are the Texas Municipal Retirement System {TMRS) and the Lubbock Firemen's Relief and Retirement Fund (LFRRF). The City does not maintain the accounting records, hold the investments or administer either retirement plan. Summary of significant data for each retirement plan follows: TEXAS MUNICIPAL RETIREMENT SYSTEM (TMRS) Plan Description The City provides pension benefits for all of its full-time employees (with the exception of firefighters) through a non-traditional, joint contributory, hybrid defined benefit plan in the state-wide TMRS, one of 794 administered by TMRS, an agent multiple-employer public employee retirement system. Benefits depend upon the sum of the employee's contributions to the plan, with interest, and the City- financed monetary credits, with interest. At the date the plan began, the City granted monetary credits for service rendered before the plan began of a theoretical amount equal to two times what would have been contributed by the employee, with interest, prior to establishment of the plan. Monetary credits for service since the plan began are a percent (I 00%, 150%, or 200"/o) of the employee's accumulated contributions. In addition, the City can grant, as often as annually, another type of monetary credit referred to as an updated service credit which is a theoretical amount which, when added to the employee's accumulated contributions and the monetary credits for service since the plan began, would be the total monetary credits and employee contributions accumulated with interest if the current employee contribution rate and City matching percent had always been in existence and if the employee's salary had always been the average of his salary in the last three years that are one year before the effective date. At retirement, the benefit is calculated as if the sum of the employee's accumulated contributions with interest and the employer- financed monetary credits with interest were used to purchase an annuity. Members can retire at ages 60 and above with 5 or more years of service or with 20 years of service regardless of age. A member is vested after 5 years. The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS and within the actuarial constraints also in the statutes. Contributions The contribution rate for the employees is 7% and the City matching ratio is currently 2 to 1, both as adopted by the governing body of the City. Under the state law governing TMRS, the actuary annually determines the City contribution rate and the prior service cost contribution rate, both of which are calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the currently accruing monetary credits due to the City matching percent, which are the obligation of the City as of an employee's retirement date, not at the time the employee's contributions are made. The normal cost contribution rate is the actuarially determined percent of payroll necessary to satisfY the obligation of the City to each employee at the time his/her retirement becomes effective. The prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the remainder of the plan's 25-year amortization period. The unit credit actuarial cost method is used for determining the City contribution rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect (i.e. December 31, 2003 valuation is effec.tive for rates beginning January 2005). CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS (CONTINUED) Actuarial Assumptions The actuarial assumptions for the December 31, 2003 valuations are as follows: Actuarial cost method: Unit credit Amortization method: Remaining amortization period: Level percent of payroll 25 years-open period Amortized cost Asset valuation method: Investment rate of return: Projected salary increases: Includes inflation at: Cost of Living adjustments: As of September 30 2001 2002 2003 7% None None None Annual Pension Cost $ 8,398,884 8,803,613 8,708,867 Contribution Made 8,398,884 8,803,613 8,708,867 TEXAS MUNICIPAL RETIREMENT SYSTEM THREE-YEAR tnSTORICAL SCHEDULE OF ACTUARIAL LIABILITIES AND FUNDING PROGRESS REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) As of December31 2001 2002 2003 As of December31 2001 2002 2003 Actuarial Value of Assets s 172,510,622 181,191,012 182,884,183 Annual Covered Payroll $ 58,173,019 60,285,071 57,577,743 Actuarial Accrued Liability 215,584,035 228,372,843 239,809,434 UAALasa% Of Covered Payroll 74.00/o 78.3% 98.9% Unfunded Actuarial Accrued Percentage Liability Funded (UAAL) 80.0% 43,073,413 79.3% 47,181,831 76.3% 56,925,251 The City of Lubbock is one of794 municipalities having the benefit plan administered by TMRS. Each of the municipalities has an annual, individual actuarial valuation performed. AJI assumptions for the December 31, 2003 valuations are contained in the 2003 TMRS Comprehensive Annual Financial Report, a copy of which may be obtained by writing to P.O. Box 149153, Austin, Texas 78714-9153. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS <CONTINUED) LUBBOCK FIREFIGHTER'S RELIEF AND RETIREMENT FUND (LFRRF) Plan Description The Board of Trustees of the LFRRF is the administrator of a single-employer defined benefit pension plan. 1t is reported by the City as a related organization and is not considered to be a part of the City financial reporting entity. Firefighters in the Lubbock Fire Department are covered by the LFRRF. The LFRRF provides service retirement, death. disability and withdrawal benefits. These benefits fully vest after 20 years of credited service. A partially vested Benefit is provided for firefighters who terminate employment with at least I 0 but less than 20 years of service. Employees may retire at age 50 with 20 years of service. A reduced early service retirement benefit is provided for employees who terminate employment with 20 or more years of service. The LFRRf Plan effective November 1, 2003 provides a monthly normal service retirement benefit, payable in a Joint and Two-Thirds to Spouse form of annuity, equal to 68.92% of final 48-momh average salary plus $335.05 per month for each year of service in excess of 20 years. A firefighter has the option to participate in a Retroactive Deferred Retirement Option Plan (RETRO DROP) which provides a Jump sum benefit and a reduced annuity upon termination of employment. Firefighters must be at least 51 with 21 years of service at the selected "RETRO DROP benefit calculation date" (which is prior to date of employment termination). Early RETRO DROP with benefit reductions is available at age 50 with 20 years of service for the selected "early RETRO DROP benefit calculation date". A Partial Lump Sum option is also available where a reduced monthly benefit is determined based on an elected lump sum amount such that the combined present value of the benefits under the option is actuarially equivalent to that of the normal form of the monthly benefit. Optional forms are also available at varying levels ofsurviving spouse benefits instead of the standard two-thirds form. There is no provision for automatic postretirement benefit increases. LFRRF has the authority to provide, and has periodically provided for in the past, ad hoc postretirement benefit increases. The benefit provisions of this plan are authorized by the Texas Local Fire Fighter's Retirement Act (TLFFRA). TLFFRA provides the authority and procedure to amend benefit provisions. ContTibutions Required and Contributions Made The contribution provisions of this plan are authorized by TLFFRA. TLFFRA provides the authority and procedure to change the amount of contributions determined as a percentage of pay by each firefighter and a percentage of payroll by the City. State law requires that each plan of benefits adopted by LFRRF be approved by an eligible actuary. The actuary certifies that the contribution commitment by the firefighters and the City provides an adequate financing arrangement. Using the entry age actuarial cost method, LFRRf's normal cost contribution rate is determined as a percentage of payroll. The excess of the total contribution rate over the normal cost contribution rate is used to amortize LFRRf's unfunded actuarial accrued liability (UAAL), if any, and the number of years needed to amortize LFRRF's unfunded actuarial liability, if any, is determined using a level percentage of payroll method. The costs of administering the plan are financed by LFRRF. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS <CONTINUED) Annual Pension Cost For the fiscal year ended September 30, 2004, the City of Lubbock's Annual Pension Cost (APC) for the Lubbock Fire Fund was equal to $2,582,713 as described below in item 4 in the table below. Based on the results of the December 31, 2002 actuarial valuation of the Plan Effective November I, 2003, the Board's actuary found that the fund had an adequate financing arrangement, as described in the paragraph below, based on the fixed level of the firefighter contribution rates and on the assumed level of City contribution rates. Based on the Plan Effective November 1, 2003, LFRRF's funding policy requires contributions equal to 12.43% of pay by the firefighters. Contributions by the City are based on a formula, which causes the City's contribution rate to fluctuate from year to year. The December 31, 2002 actuarial valuation (most recent available) reflecting the Plan Effective November 1, 2003 assumes that the City's contributions will average 18.67% of payroll in the future. Therefore, based on the December 31, 2002 actuarial valuation of the Plan Effective November I, 2003, the Annual Required Contributions (ARC) are not actuarially determined but are equal to the City's actual contributions beginning January I, 2003. Prior to January I, 2003, the ARC was based on the December 31, 2000 actuarial valuation and was actuarially determined as described below. The following shows the development of the Net Pension Obligation (NPO) as of September 30,2004: 1. Annual Required Contributions (ARC) 2. Interest on NPO 3. Adjustment to ARC 4. Annual Pension Cost (APC) 5. Actual City Contributions made 6. Increase (Decrease) in NPO/(asset) 7. NPO/(asset) at October I, 2002 8. NPO/(asset) at September 30, 2003 $2,597,738 (70,609) 55,584 2,582,713 (2,597, 738) (15,025) (882,623) ($897,648) The ARC for the period October I, 2002 through September 30, 2004 was based on the December 31, 2002 actuarial valuation. The entry age actuarial cost method was used with the normal cost calculated as a level percentage of payroll. The actuarial value of assets was market value smoothed by a five-year deferred recognition method, with the actuarial value not more than 110% or Jess than 90% of the market value of assets. The actuarial assumptions included in an investment return assumption of 8% per year (net of expenses), projected salary increases including promotion and longevity averaging 6% per year over a 25-year career, and no postretirement cost·of·living adjustments. An inflation assumption of 4% per year was included in the investment return and salary increase assumptions. The UAAL is amortized with the excess of the assumed total contribution rate over the normal cost rate. The number of years needed to amortize the UAAL is determined using an open, level percentage of payroll method, assuming that the payroll will increase 4% per year, and was 25 years as of the December 31, 2002 actuarial valuation based on the plan provisions effective November 1, 2003. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS E. RETIREMENT PLANS CCONTINUEDl Further details concerning the financial position of the LFRRF and the latest actuarial valuation are available by contacting the Board ofTrustces, LFRRF, City of Lubbock, P.O. Box 2000, Lubbock, Texas 79457. A stand-alone financial report is available by contacting the LFRRF. Trend Information Fisal Year Ended Annual Pension Cost (AP9 Percentage of APC Contributed Net Pension ObUgation (Asset) 9/30/02 9/30/03 9/30/04 $ 1,379,564 1,964,788 2,582,713 148% 111 101 (660,692) (882,623) (897,648) ANALYIS OF FUNDING PROGRESS REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) Actuarial Actuarial Entry Age Unfunded Funded Annual UAAU Valuation Value of Actuarial AAL htio (alb) Covered Funding Date Assets (a) Ace rued (UAAL) Payroll Exc:ess as a Liability /Funding (c) Percentage of (AAL)(b) eness (b-a) 12131/98 1,2 $ 90,364,681 97,533,314 7,168,633 92.7% 10,290,190 12131/00 1,3 119,660,788 114,675,049 ( 4,985, 739) 104.3 12,243,913 12131/02 1,4 111,261,775 127,850,414 16,588,639 87.0 13,521,366 I. Economic and demographic assumptions were revised. 2. Reflects changes in plan benefit provisions effective November I, 1999. 3. Reflects changes in plan benefit provisions effective December I, 200 I. 4. Reflects changes in plan benefit provisions effective November 1, 2003. 5. The covered payroll is based on estimated annualized salaries used in the valuation. F. DEFERRED COMPENSATION The City offers its employees two deferred compensation plans in accordance with Internal Revenue Code ("IRC") Section 457. The plans, available to all City employees, pennit them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. The plans' assets are held in trust for the exclusive benefits of the participants and their beneficiaries. The City does not provide administrative services or have any fiduciary responsibilities for these plans; therefore, they are not presented in the BFS. Covered Payroll {{b-a~c:) 69.7% (40.7) 122.7 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS G. SURFACE WATER SUPPLY Canadian River Municipal Water Authority The Canadian River Municipal Water Authority (CRMW A) is a Conservation and Reclamation District established by the Texas Legislature to construct a dam, water reservoir, and aqueduct system for the purpose of supplying water to surrounding cities. The District was created in 1953 and comprises eleven cities, including the City of Lubbock. The budget, financing, and operations of the District are governed by a Board of Directors selected by the governing bodies of each of the member cities, each city being entitled to one or two members dependent upon population. At September 30, 2004, the Board was comprised of 18 members, two of which represented the City. The City contracted with the CRMWA to reimburse it for a portion ofthe cost of the Canadian River Dam and aqueduct system in exchange for surface water. Prior to fiscal year 1998-99, such payments were made solely from water system revenues and were not considered general obligations of the City. The City's pro rata share of annual fixed and variable operating and reserve assessments are recorded as an expense of obtaining surface water. Prior to fiscal year 1998-99, long-term debt was owed to the U.S. Bureau of Reclamation for the cost of construction of the facility, which was completed in 1969. The City's allocation of project costs was $32,905,862. During the year ended September 30, 1999, bonds in the principal amount of$12,300,000 were issued to pay off the construction obi igation owed to the U.S. Bureau of Reclamation via CRMWA in the amount of $20,809,067. The difference of $8,509,067 was a discount in the remaining principal provided by the U.S. Bureau of Reclamation to the member cities. This discount has been recorded as a deferred gain on refunding and is being amortized over the life of the refunding bonds. At September 30, 2004, $5,904,703 remains unamortized. The annual principal and interest payments are included in the disclosures for other City related long-tenn debt. The above cost for the rights are recorded as capital assets and are being amortized over 85 years. The cost and debt are recorded in the Water Enterprise Fund. Brazos River Authority-Lake Alan Henry During 1989, the City entered into an agreement with the Brazos River Authority (BRA) for the construction, maintenance, and operation of the facilities known as Lake Alan Henry. The BRA, which is authorized by the State of Texas to provide for the conservation and development of surface waters in the Brazos River Basin, issued bonds for the construction of the dam and lake facilities on the South Fork of the Double Mountains Fork of the Brazos River. Total costs are expected to exceed $120 million. The agreement obligates the City to provide revenues to BRA in amounts sufficient to cover all maintenance and operating costs, management fees of the authority, as well as funds sufficient to pay all capital costs associated with construction. The City will receive surface water for the payments to BRA Approximately $515,005 was paid to the BRA for maintenance and operating costs during the fiscal year. The BRA issued $16,970,000 in revenue bonds in 1989 and $39,685,000 in revenue bonds in 1991. These bonds were refunded July 1995. Construction of the dam and lake facilities began in 1989. The City is obligated to provide sufficient funds over the remaining Life of the bonds to service the debt requirement. The asset, Lake Alan Henry dam and facilities, are recorded as capital assets and are being depreciated over 50 years. The financial activity, along with the related obligation, is accounted for in the Water Enterprise Fund. In order to protect against the risk of interest rate changes between March 28, 2002 and May I, 2005, the City entered into an interest rate swap agreement with JPMorgan Chase (herein referred to as the "Swap Provider") rated A+ by Standard & Poor's and Aa3 by Moody's Investors Service with a notational dollar amount of $40,465,000. The City entered into an interest rate swap in order to achieve lower borrowing costs associated with an anticipative borrowing in 2005. This borrowing will prepay and refund the obligation of the City to pay debt service on Special Facilities (Lake Alan Henry) Revenue Refunding Bonds, Series 1995 issued by the BRA to finance or refinance the construction of surface water supply facilities known as Lake Alan Henry pursuant to a Water Supply Agreement, dated as of May 11, 1989, as ..,.,.,o ... A•rl h•""~•~ th~ QD A .,nA th• r":h1• .,.,...,.t ttnn...,r thiC! ~nN~~•rn•nt ~nn"''n"'.-nrtnn ):'~,..h A''"''ct 1 ~t~rttnn CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS G. SURFACE WATER SUPPLY <CONTINUED} August I, 2003 up to and including August I, 2005the Swap Provider pays a premium of$280,000 to the City and in addition beginning May I, 2005, the swap Provider will pay the City of Lubbock interest on the notational amount of the swap based on the Bond Market Association (BMA) Municipal Bond Index on a monthly (actual/actual) basis. On a monthly (30/360) basis, the City of Lubbock pays the Swap Provider interest at the fixed rate of 5.260%. Additionally, the Swap Provider has the right but, not the obligation, to terminate the transaction in whole when the 180 day weighted average of the Municipal Bond Index is more than 6.50%, but with no market value cost to the City. The notational amount of the swap reduces annually; the reductions begin on August I, 2006 and mature on August I, 2022. As of December I 0, 2004, rates were as follows: Fixed payment Variable payment Fixed BMA 5.260% 1.4500/o At December I 0, 2004 the swap agreement had a negative fair value of $6,075,000. The fair value was developed by using the zero coupon method. This method calculates the future net settlement payments required by the agreement assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. At December I 0, 2004, the City was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change and the fair value of the swap become positive, the City could be exposed to credit risk in the amount of the derivative's positive fair value. Should the swap have a positive fair value at some point the Swap Provider may be required to collateralize a percentage of their exposure. Since inception no impairments in respect to the Provider's ratings have occurred. The City's derivative contract uses the International Swap Dealers Association Master Agreement. The swap agreements include standard termination events, such as failure to pay, credit rating downgrades, and bankruptcy. Although the City bas obtained provisions to avoid an unwanted early termination event, the result of such an occurrence could result in the City being required to make an unanticipated termination payment. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements SepteDlber30,2004 NOTE m. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS H. LONG-TERM DEBT GENERAL OBLIGATION BONDS AND CERTIFICATES OF OBLIGATION: Average Final Balance Interest Issue Maturity Amount Outstanding Rate Date Date Issued 9-3()...()4 9.01 05-15-91 02-15-11 $ 1,085,000 370,000 5.50 05-15-92 02-15-04 34,520,000 1,725,000 3.97 05-01-93 02-15-15 14,425,000 725,000 5.39 10-01-93 02-15-14 3,625,000 1,825,000 5.39 10-01-93 02-15-14 2,550,000 1,300,000 5.20 10-01-93 02-15-14 1,470,000 225,000 5.14 10-01-93 02-15-14 19,215,000 2,895,000 5.50 05-15-95 02-15-1.5 4,690,000 23.5,000 5.07 12-15-95 02-1.5-16 6,505,000 6.50,000 5.07 12-15-95 02-15-16 10,000,000 1,000,000 4.91 01-15-97 02-15-09 17,530,000 9,190,000 4.61 01-01-98 02-15-08 1,330,000 610,000 4.71 01-01-98 02-15-18 10,260,000 7,200,000 4.36 01-15-99 02-15-14 20,835,000 18,870,000 4.58 01-15-99 02-15-19 15,355,000 11,505,000 4.77 04-01-99 02-15-19 6,100,000 4,575 ,000 4.71 04-01-99 02-15-19 12,300,000 9,300,000 5.37 09-15-99 02-1.5-20 24,800,000 21 ,600,000 5.54 03-15-00 02-15-20 7,000,000 2,430,000 4.90 02-01-01 02-15-21 9,100,000 8,410,000 4.81 02-0t-01 02-15-21 2,770,000 2,350,000 5.25 06-01-01 02-15-31 35,000,000 33,715,000 4.68 02-15-02 02-15-22 9,400,000 9,095,000 4.71 02-15-02 02-15-22 6,450,000 6,235,000 4.70 02-15-02 02-15-22 1,545,000 1,490,000 4.62 07-01-02 02-15-22 2,605,000 2.440,000 3.18 07-01-02 02-15-10 10,810,000 7,865,000 4.42 07-15-03 02-15-23 11,855,000 11,255,000 4.47 07-15-03 02-15-24 9,765,000 9,76.5,000 4.48 07-15-03 02-15-24 680,000 680,000 4.47 07-15-03 02-15-24 3,590,000 3,590,000 4.87 07-15-03 02-15-34 40,135,000 40,135,000 4.47 07-15-03 02-15-24 3,795,000 3,795,000 4.60 08-15-03 04-15-23 8,900,000 8,465,000 4.60 08-15-03 04-15-23 13,270,000 12,625,000 4.09 09-28-04 02-15-24 2,025,000 2,025,000 4.08 09-28-04 02-!5-24 3,100,000 3,100,000 3.58 09-28-04 02-15-20 2226201000 2216201000 Total $4 t I ,Ot 0,000 285,885,000(A) (A) Excludes net deferred gains and losses on advance refundings, prior year bond discounts of $4,993,103 ($3,813,381 business-type and $1,179,722 governmental). Additionally, this amount includes $215,663,783 of bonds used to finance enterprise fund activities. At September 30, 2004, management of the City believes that it was in compliance with all financial bond covenants on outstanding general obligation bonded debt, certificates of obligation, and water revenue bonded debt CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septemnber30,2004 NOTE m. DETA.a NOTES ON ALL ACTIVITIES AND FUNDS H. LONG-TERM DEBT (CONTINUED) ELECTRIC REVENUE BONDS Final Amount Interest Rat!{%} Issue Date Maturi~ Date Issued 3.80 to 5.50 6-15-95 4-15-08 $ 13,560,000 4.25 to 6.25 1-01-98 4-15-18 9,170,000 4.05 to 5.00 5-01-98 2-15-18 28,910,000 3.10 to 5.00 1-15-99 4-15-19 14,975,000 4.00 to 5.25 7-01-0 1 4-15-21 9,200,000 Total $ 75,815,000 • Balance outstanding excludes ($595,420) of discount on bonds sold. lntnest Rate 3.80 to 5.50% WATER REVENUE BONDS Issue Date 6-1-95 Final Maturity Date 8-15-21 Amount Issued $58,170,000 Balanee Outstanding 9..J()...04 4,360,000 6,440,000 21,285,000 9,185,000 7,820,000 49,090,000 • Balance Outstanding 9..J0-04 45,515,000 • • Balance outstanding excludes ($4,132,838) discount and deferred losses on bonds sold or refunded. The annual requirements to amortize all outstanding debt of the City as of September 30, 2004 are as follows: Governmental Activitica Business-Tlfe Activities Fiscal General Obli&ation Bonds Geoeral Ob!!satioo Bonds Reveoue Bonda Year Prind£al Interest Prin2£al Interest Prind£al Interest 2004-05 $ 4,955,949 2,975,462 11,104,051 9,824,74l 6,265,000 4,784,861 2005-()6 4,479,101 2,867,175 10,845,899 9)80,451 6,305,000 4,475,173 2006-07 4,685,492 2,674,605 11,329,508 8,916,898 6,370,000 4,176,228 2007-08 4,514,994 2,491,285 11,035,006 8,444,872 6,115,000 3,869,100 2008-09 4,468,654 2,298,592 10,861)46 7,974,453 5,415,000 3,571,735 2009-14 21,145,278 8,592,662 53,604,722 32,762,481 27,995,000 13,717,183 2014-19 15,776,749 4,246,685 44,128,251 21,506,908 29,750,000 6,206,365 2019-24 10,195,000 896,451 29,230,000 11,982,075 6)90,000 527,850 2024-29 17,900,000 6.371,230 2029-34 15,625,000 1,695,013 Totals $ 70,221,217 27,042,917 215,663,783 118,859,124 94,605,000 41,328,494 The annual requirements on capital leases of the City as of September 30, 2004, including interest payments of$106,232 are as follows: Governmental Businese-Type Total Capital Lease Capital Lease Capital Lease Fie cal Minimum Minimum Minimum Year PaEent PaEcnt Palment 2004-05 s 854,159 666,220 1,520,379 2005-06 545,380 418,741 964,121 2006-07 353,694 353,694 2007-08 22,202 22,202 Less: Interest ~38,582) {67,650) ~106,2322 Total $ 1,l60,957 1,393,207 2,754,164 CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS H. LONG-TERM DEBT (CONTINUED> The carrying values on the leased assets of the City as of September 30, 2004 are as follows: Governmental Activities Business-Type Activities Total Leased Assets Gross Value $ 3,558,489 3,404,477 $ 6,962,966 Accumulated Depreciation 1,441,188 1,064,892 2,506,080 Net Book Value 2,117,301 2,339,585 4,456,886 Long-tenn obligations (net of discounts and premiums) for governmental and business-type activities for the year ended September 30, 2004 are as follows: Debt Payable Debt Payable 9/l0/2003 Additions Deletions 9/l0/2004 Govemmental aecivities: Tu-Supported - Obligation Bonds $ 69,808,204 27,745,000 27,:m,9s7 70,221,217 Rebatable Acbitnge 122,984 122,984 Capital Leases 996,477 1,535,075 1,170,595 1,360,957 Compensated Absences 12,636,967 7,918,589 5,637,048 14,918,508 Insumnce Claim Pay2hle 2,720,897 14,328,384 14,694,745 2,354,536 Bond Discounts/Premiums 1,179,722 1,179 722 Total Governmental activities 86,285,529 52,706,770 48,957,359 90,0~,940 Business-Type activities: Self-Suppotted - Obligation Bonds 226,126,796 10,463,013 215,663,783 Revenue Boods 101,295,000 6,690,000 94,605,000 Capital Lases 1,941,223 1,844,606 2,392,622 1,393,207 Rebatable Atbitnge 119,152 119,152 Oosure/Post Closu£e 2,690,001 361,115 3,051,116 Compensated Absences 3,695,242 2,849,947 2,385,047 4,160,142 Insurance Claim Payable 6,000,000 5,904,528 5,467,674 6,436,854 Bood Discounts/Premiums ~1,496,398~ 2,796,962 2,215,441 !914,8Z] Total Business~ Type activities $ 340,371,016 13,757,158 29,732,949 324,395,225 Payments on bonds payable and aroitrage payable for governmental activities are made in the Debt Service Fund. Acc.rued compensated absences that pertain to governmental activities wiU be liquidated by the General Fund and Special Revenue funds. The Risk Management Internal Service Fund will liquidate insurance claims payable that pertain to governmental activities. Payments for the capital leases that pertain to the governmental activities will be liquidated by the general fund. Duei one~ 4,95 82 5,47 2,35 13,61 11,10 6,26 62 2,14 l,tE ~~ 21.2' CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS H. LONG-TERM DEBT (CONTINUED) The total long-term debt is reconciled to the total annual requirements to amortize long-term debt as follows: l..ong·term debt-Governmental Activities Long-term debt-Busincss·typc Activities Interest Total amount of debt Net gains/losses, premiums/discounts Less: Rebatable arbitrage Less: Capitallca$cs Less: Imurancc claims payable Less: Compensated absenses Less: Closure/post closure Total other debt Total future bonded debt requirements $ 90,034,940 324,395,225 187,230,535 (264,845) (2,754,164) (8,791,390) (19 ,078,650) (3,051,116) 601,660,700 (33,9<W,165) s 567,720,535 The City Council called an election for May 15, 2004 to seek voter approval to issue general-purpose tax- supported bonds in the amount of $30,000,000, which represents the City's current six-year general- purpose debt plan. The following seven propositions were approved by the voters: street improvements, $9,210,000; civic center/auditorium renovations and improvements, $6,450,000; park improvements, $6,395,000; police/municipal court facilities, $3,350,000; library improvements, $2,145,000; fire stations, $1,405,000 and animal shelter renovations and improvements, $1,045,000. The City previously issued a capital improvement plan to voters in 1999, when voters in the City approved a $37,385,000 capital improvement plan. In September 2004, the City issued $2,025,000 General Obligation Bonds, Series 2004. This issuance was the first installment of the capital improvement debt issuance approved by the voters in 2004. The Obligations were issued at a net discount of $23,332. After paying issuance costs of SSO,OOO, the net proceeds were $1 ,951 ,668. The proceeds from the sale of the Obligations will be used to fund the following projects: Fire station improvements, $80,000; animal shelter improvements, $154,000; park improvements, $181,000; street improvements, $1,420,000; traffic control improvements, $100,000; and costs associated with issuance of the bonds. In September 2004, the City issued $3,100,000 Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2004. The Certificates were issued at a net discount of $36,042. After paying issuance costs of $58,000, the net proceeds were $3,005,958. Proceeds from the sale of these Certificates will be used for street improvements, including drainage, streetlights, and traffic signalization and the acquisition of land and necessary rights-of-way; and costs associated with the issuance of the Certificates. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements Septernber30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS I. ADVANCED REFUNDING On September 28, 2004, the City issued General Obligation Refunding Bonds, Series 2004 ("Refunding Bonds"} with a par value of $22,620,000 and a net interest cost of 3.7855% to refund $23,205,000 of outstanding bonds. These bonds were issued to refund a portion of the City's outstanding tax-supported debt to lower the debt service requirements on such indebtedness. The Refunding Bonds were issued at a net premium of $1,815,646. After paying issuance costs of $304,179, the net proceeds were $24,224,912. The net proceeds from the issuance of the Refunding Bonds were deposited with the Escrow Agent (JPMorgan Chase Bank, Dallas, Texas} in an amount necessary to accomplish the discharge and final payment of the Refunded Bonds on their scheduled redemption date. These funds will be held by the Escrow Agent in a special escrow fund and used to purchase direct obligations of the United State of America. Under the escrow agreement, between the City and JPMorgan Chase Bank, the escrow fund is irrevocably pledged to the payment of principal and interest on the Refunded Bonds. The Refunded Bonds were removed from the City's basic financial statements. As a result of the refunding, the City decreased its total debt service requirements by $874,031, which resulted in an economic gain of $836,312 and an accounting loss of $1,019,912. The net premium and bond issuance costs are allocated to both the governmental funds and the enterprise funds based on the fund type which will be responsible for servicing the debt. J. CONDUIT DEBT The City issued Housing Finance Corporation Bonds, Health Facilities Development Corporation Bonds, and Education Facilities Authority Bonds to provide financial assistance to private sector entities for the acquisition and construction of facilities deemed to be in the public interest. The bonds are secured by the property financed. Upon repayment of the bonds, ownership of the acquired facilities transfers to the private-sector entity served by the bond issuance. Neither the City, the State, nor any political subdivision thereof is obligated in any manner for repayment ofthe bonds. Accordingly, the bonds are not reported as liabilities in the accompanying financial statements. As of September 30, 2004, there were seven series of Lubbock Health Facilities Development Corporation Bonds outstanding with an aggregate principal amount payable of $33 8,358,912. The bonds were issued between 1993 and 2002. Also as of September 30, 2004, there was one series of Lubbock Education Facilities Authority Inc. Bonds outstanding with an aggregate principal amount payable of $11,000,000. The bonds were issued in 1999. K. RISK MANAGEMENT The Risk Management Fund was established to account for liability claims, worker's compensation claims, and premiums for property/casualty insurance coverage. The Risk Management Fund generates its revenue through charges to other departments, which are based on costs. In April 1999, the City purchased worker's compensation coverage, with no deductible, from a third party. Prior to April 1999 the City was self insured for worker's compensation claims. Any claims outstanding prior to April 1999 continue to be the responsibility ofthe City. The City's self insurance liability program is on a cash flow basis, which means that the servicing contractor processes, adjusts and pays claims from a deposit provided by the City. The City accounts for the liability program by charging premiums based upon losses, administrative fees and reserve requirements. In order to control the risks associated with liability claims, the City purchased excess liability coverage in September 1999 which is renewed annually. The policy has a $10 million annual aggregate limit and is subject to a $250,000 deductible per claim. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS K. RISK MANAGEMENT (CONTINUED) For self-insured coverage, the Risk Management Fund establishes claim liabilities based on estimates of the ultimate cost of claims (including future claim adjustment expenses) that have been reported but not settled, and of claims that have been incurred but not reported (IBNR}. The length of time for which such costs must be estimated varies depending on the coverage involved. Beeause actual claim costs depend on such complex factors as inflation, changes in doctrines of legal liability, and damage awards, the process used in computing claim liabilities does not necessarily result in an exact amount, particularly for liability coverage. Claim liabilities are recomputed periodically using a variety of actuarial and statistical techniques to produce current estimates that reflect recent settlements, claim frequency, and other economic and social factors. Adjustments to claim liabilities are charged or credited to expense in the period in which they are incurred. Additionally, property and boiler coverage is accounted for in the Risk Management Fund. The property insurance policy was purchased from an outside insurance carrier. The policy has a $250,000 deductible per occurrence, and the boiler coverage insurance deductible is up to $250,000 dependent upon the unit. Premiums are charged to funds based upon estimated premiums for the upcoming year. Other small insurance policies, such as surety bond coverage and miscellaneous floaters, are also accounted for in the Risk Management Fund. funds are charged based on premium amounts and administrative charges. The City has had no significant reductions in insurance coverage during the fiscal year. Settlements in the current year and preceding two years have not exceeded insurance coverage. The City accounts for all insurance activity in Internal Service funds. L. HEALTHINSURANCE The City provides medical and dental insurance for all full-time employees that are accounted for in the Health Insurance Fund. Revenue for the health insurance premiums are generated from each cost center based upon the number of active full-time employees. The City's plan is self-insured under an Administrative Services Only (ASO) Agreement. The ASO Agreement provides excess coverage of $150,000 per covered individual annually and an aggregate cap of $12,546,913. The insurance vendor based on medical trend, claims history, and utilization determines the aggregate deductible. The contract requires an IBNR reserve of approximately $2.3 million. The City also provides full-time employees basic term life insurance and long-term disability insurance. Revenues for the life insurance premiums and long-term disability premiums are also generated from each cost center based upon the number of active employees. The life insurance policy has a face value of $10,000 per employee. The City will discontinue providing long-term disability insurance as an employer paid benefit during fiscal year 2004-05. Long-term disability premiums are set at a rate per $100 of annual salary. Full-time employees may elect to purchase medical and dental insurance for eligible dependents and the City subsidizes dependent premiums to reduce the cost to employees. Employees may also elect to participate in several voluntary insurance programs such as a cancer income policy, voluntary life, and personal accident insurance. Voluntary insurance products are fully paid by the employee. Retiring City employees may elect to retain medical and dental insurance and a reduced amount of life insurance on themselves and eligible dependents. The retiree pays a portion of the premium costs, but the City subsidies retiree premiums by about $1.3 million annually. The life insurance is fully paid by the retiree. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE Ill. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS M. ACCRUED INSURANCE CLAIMS N. The Self-Insurance Funds establish a liability for self-insurance for both reported and unreported insured events, which includes estimates of both future payments of losses and related claim adjustment expenses. The following represents changes in those aggregate liabilities for the Self-Insurance Funds during the past two years ended September 30: 2004 2003 Wocken' Compensation and Liability Reserves at beginning of fiscal year $ 6,000,000 6,000,000 Cl2ims Expenses 5,467,674 4,561,925 Cl2ims Payments ~5,030,820~ ~4,561,925l Workers' Compensation and Liability Reserves at end of fiscal year 6,436,854 6,000,000 Medical and Dental Claims Liability at beginning of fiscal year 2,720,897 2,685,925 Claims Expenses 14,328,384 13,148,048 Claims Payments ~14,694,745l ~13,113,076) Medical and Dental Cl2ims Liability at end of fJSCal year 2,354,536 2,720,897 T ot:al &lf-ln su.tance Li2bility at eod of fiScal year 8,791,390 8,720,897 Total Assets to pay claims at end of fiscal year 18,920,469 19,741,497 Accrued inswance claims )nyable &oro restricted assets · cun:ent 3,538,746 4,220,897 Accrued insurance cl2ims payable · noncurrent 5,252,644 4,500,000 Total accrued insurance claims $ 8,791,390 8,720,897 LANDFILL CLOSURE AND POSTCLOSURE CARE COST State and federal laws and regulations require the City to place final covers on its landfill sites when they stop accepting waste and to perform certain maintenance and monitoring functions at the sites for thirty years after closure. Although closure and postclosure care costs will be paid only near or after the date that the landfills stop accepting waste, the City reports a portion of these closure and postclosure costs as operating expenses (and recognizing a corresponding liability) in each period based on landfill capacity used as of each balance sheet date. The $3,051,116 included in landfill closure and postclosure care liability at September 30, 2004, represents the cumulative amount expensed by the City to date for its two landfills that are registered under TCEQ permit numbers 69 (Landfill69) and 2252 (Landfill2252), less amounts that have been paid. Over 92 percent of the estimated capacity of Landfill 69 has been used to date, with $753,669 remaining to be recognized over the remaining closure period, which is estimated at three years. Approximately 2.2 percent of the estimated capacity ofLandfil12252 has been used to date, with $22,867,597 remaining to be recognized over the remaining closure period, which is estimated at over 80 years. Postclosure care costs are based on prior estimates and have been adjusted for inflation. Actual costs may be different due to inflation, deflation, changes in technology, or changes in regulations. The City is required by state and federal laws and regulations to provide assurance that financial resources will be available to provide for closure, postclosure care, and remediation or containment of environmental hazards at its landfiJis. The City is in compliance with these requirements and has chosen the Local Government Financial Test mechanism for providing this assurance. The City expects to finance costs through normal operations. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September 30, 2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUNDS 0. DISAGREGATION OF ACCOUNTS Acoount8 Receivable Summaty Court Property Fines Damage TxOOI' Paving Graals Govunme.otal adiv:ilies: GeoeWFund $ 4,537,134 551,155 472,281 403,300 Debt Serv.ice NonMajor ~433z012 Total $ 4,537,134 551,155 472,281 403,300 2,433,012 koouots Receivable~!!! •!!r G:neral From Credit JWanceat Coasumet Olbers Cacd Misc. 9/YJ/04 Business-type Activities Electtic: 14,192,556 35)1Jl 14,227,763 water 4,181,134 452 7,559 4,189,145 Sewer 2,380,864 89,104 11,875 2,481,843 Stoauwater 768,042 768,042 WIMP A 7,568,176 7,568,176 Non-Major 2,331,690 ~ 40,726 2,374,996 Total $ 31,422,462 89,556 .2,580 95,367 31,609,965 Misc. 385,908 162,485 51938 554,331 Allowance for Doubtful Accounts Summ~ Balance at Accounts Taxes 9/30/04 Governmental Genenl Fund $ 250,925 1,202,795 1,453,720 Debt Service Fund 438,808 438,808 Non-Major 5,938 5,938 Business-Type Electric 835,314 835,314 Water 253,386 253,386 Sewer 125,372 125,372 Stormwater 62,443 62,443 WfMPA 675,217 675,217 Non-Major 148493 148,493 Tow $ 2,357,038 1,641,603 3,998,691 Balaocleat 9/YJ/04 6,349,778 162,485 ~4~950 8251,ztl CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE III. DETAIL NOTES ON ALL ACTIVITIES AND FUND 0. DISAGREGATION OF ACCOUNTS (CONTINUED) Accounts Payable Summary Vouchen Accounts Investments Miscellaneous Governmental Genet:d Fund $ 454,395 1,287,984 93,648 Debt Service 167,374 250,643 Non-Major 349,943 2,371,925 174,987 234,437 Business-Type Electric 679,590 7,644,824 3,410 188,584 Water 78,964 580,589 1,462 69,370 Sewu 163,982 23,978 2,344 34,340 Storm~ter 1,172 53,213 WI'MPA 6,196,307 Non-Major 183,429 795,927 3,639 174~24 Total $ 1,911,475 19,122,121 436,485 794,603 P. DISAGREGA TION OF ACCOUNTS· GOVERNMENT-WIDE Net Receivables Accounts Interest Taxes lntemal Service Receivable Receivabk Receivable Fuoda Receivables Governmental Activities $ 8,694,350 101,728 7,488,784 99,002 Business-Type Activities 29,509,738 191,476 110,744 Tow $ 38,204,088 293,204 7,488,784 209,746 Accounts Payable Accounts Internal Service Balance at P~able Funds P~ablee 9/l0/04 Governmental Activities $ 5,385,334 373,461 5,758,795 Business-Type Activities 16,879,348 1,012,677 17,892,025 Total s 22,264,682 1,386,138 23,650,820 Q. FUND CLOSURES Balance at 9/30/04 1,836,027 418,017 3,131,292 8,516,408 730,385 224,644 54,385 6,196,307 1,157,219 22,264,684 Babnceat 9/30/04 16,383,864 29,811,958 46,195,822 In fiscal year 2004, management streamlined the accounting process and closed the following funds: Information Technology Improvements and Community Improvements. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE IV. CONTINGENT LIABILITIES A. FEDERAL GRANTS In the nonnal course of operations, the City receives grant funds from various Federal and state agencies. The grant programs are subject to audits by agents of the granting authority to ensure compliance with conditions precedent to the granting of funds. Any liability for reimbursement which may arise as the result of audits of grants is not believed to be significant. B. LITIGATION The City is currently involved in the following lawsuits which could have an impact on the financial position if the City is found liable. Adams, et al v. City of Lubbock: The City has been sued by numerous firefighters employed by the City of Lubbock. They claim that the City did not properly pay its firefighters for "move-up" pay pursuant to the Civil Service Act. Pursuant to the Civil Service Act firefighters can move-up and perfonn temporary duties in higher classifications. When they perfonn these duties they are entitled to the pay of the higher classification. While the City has paid them this higher pay, the plaintiffs assert they are also entitled to the "seniority pay" which they've earned at the lower classification. Their basis for this assertion is that the statute says that they are entitled to the base pay of the higher classification plus any "longevity or seniority pay". Both sides filed Motions for Summary Judgment in the trial court and the court ruled in favor of the plaintiffs. The City's Motion for Summary Judgment was denied. Plaintiffs were awarded damages, collectively, in the amount of$688,000 for damages through July 12, 2002, which includes pre-judgment interest. Plaintiffs were denied attorney's fees. The City of Lubbock appealed the trial court's decision to the appellate court. On October 7, 2004, the Appeals Court reversed the judgment of the trial court and rendered a decision in favor of the City, holding that the City paid its employees properly under the Civil Service Act. The Plaintiffs filed a Motion for Rehearing, which was denied. Plaintiffs have indicated they will attempt to have the Texas Supreme Court review the case. Barnard Construction Company, Inc. v. City of Lubbock: The Plaintiff is a construction company suing the City for breach of contract. The plaintiff alleges the City owes it nearly $2,400,000 for rock it excavated on a drainage project. They assert that they are owed $204,000 for rock excavated on Line AI and assert they are owed nearly $2,200,000 for rock excavated on other lines on the project. The City has agreed to pay for approximately $176,000 of rock excavated on Line A 1. However, the City denied that it owes Barnard any compensation for rock excavated on the other Lines. The City filed a Motion for Summary Judgment as to this issue and a Trial Court ruled in the City's favor on September 28, 2004. Barnard has indicated it will appeal. Jeanette Livingston, et a) v. City of Lubbock: Six Plaintiffs filed suit against the City alleging that the City and/or County failed to properly record infonnation in its cemetery records that would indicate where their relatives were buried. The Plaintiffs' attorneys have indicated that he has approximately eighty other clients in the same or similar position. The City asserts it is not responsible for the improper recordation by the prior entities. The City also asserts that the Plaintiffs have no physical injuries and there is no cause of action in Texas for the negligent infliction of emotional distress. The City is also asserting defenses under the statute of limitations. At this time, damages are difficult to ascertain but, collectively, they would meet the $200,000 materiality definition for damages. CITY OF LUBBOCK, TEXAS Notes to Basic Financial Statements September30,2004 NOTE IV. CONTINGENT LIABILITIES B. LITlGATION (CONTINUED> Marcie Tanner "· City of Lubbock: The Plaintiff sued the City for racial discrimination, pursuant to 42 U.S.C. § 1981, after she was terminated from her employment with the City of Lubbock. The City asserts that she was terminated because she sent duplicate mileage reimbursement requests to both the City her employer, and Texas Tech University. The Plaintiff also sued Texas Tech, but Texas Tech was dismissed. The City does not believe the potential damages are above $200,000. C. SITE REMEDIATION The City has identified specific locations requiring site remediation relative to underground fuel storage tanks and historical fire training sites. The potential exposure is not readily determinable as of September 30, 2004. In the opinion of management, the ultimate liability will not have a materially adverse effect on the City's financial position. NOTE V. SUBSEQUENT EVENTS A. VOTER APPROVED CHARTER AMENDMENT The voters of the City of Lubbock on November 2, 2004, voted to amend the Charter of the City of Lubbock providing for an Electric Utility Board composed of nine Lubbock citizens and eligible voters appointed by City Council be created to govern, manage, and operate the City's electric utility. The City Council appointed the nine members of the new Electric Utility Board on November 12, 2004 pursuant to the Charter Amendment passed by the voters of the City of Lubbock on November 2, 2004. The purpose of the change is to give closer scrutiny to LP&L's competitive position and long term financial viability. B. LUBBOCK ECONOMIC DEVELOPMENT ALLIANCE. INC. <LEDA) Lubbock Economic Development Alliance, Inc. (LEDA) is a SOIC·4 Corporation created by the Lubbock City Council to take the lead in economic development for the City. LEDA is Jed by a five member Board appointed by the City Council and is funded by a 1/8 cent increase in the sales tax. The sales tax increase was approved by the voters for economic development activities in November 2003. LEDA will be considered a component unit of the City when it begins collecting funds from operations during the fiscal year 2004-05. APPENDIXC FORM OF BOND COUNSEL'S OPINION THIS P~GE LEFJ' BLANK INTENTIONALLY nson&Elkins [FORM OF BOND COUNSEL OPINION] [Closing Date] $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES2005 WE HAVE represented the City of Lubbock, Texas (the "City"), as its Bond Counsel in connection with an issue of certificates of obligation (the "Certificates") described as follows: CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005, dated August 15,2005, issued in the principal amount of$46,525,000. The Certificates mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Certificates and in the ordinance adopted by the City Council of the City authorizing their issuance (the "Ordinance'l WE HAVE represented the City as its Bond Counsel for the sole pwpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income for federal income tax pwposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. IN OUR CAP A CITY as Bond Counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the City, customary certificates of officers, agents and representatives of the City, and other C-1 public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined executed Certificate No. 1 of this issue. BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and, therefore, the Certificates constitute valid and legally binding obligations of the City; and (B) A continuing ad valorem tax upon all taxable property within the City, necessary to pay the interest on and principal of the Certificates, has been levied and pledged irrevocably for such purposes, within the limit prescribed by law, and the total indebtedness of the City, including the Certificates, does not exceed any constitutional, statutory or other limitations. In addition, the Certificates are further secured by a limited pledge (not to exceed $500) of the surplus net revenues of the City's Waterworks System, as described in the Ordinance. THE RIGHTS OF TilE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION THAT: (l) Interest on the Certificates is excludable from gross income for federal income tax purposes under existing law; and (2) The Certificates are not ''private activity bonds" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code," and interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be included in the "adjusted current earnings" of a corporation (other than an S corporation, regulated investment company, REIT, REMIC or FASIT) for purposes of computing its alternative minimum tax liability. In providing such opinions, we have relied on representations of the City, the City's financial advisor and the underwriters of the Certificates with respect to matters solely within the knowledge of the City, the City's fmancial advisor and the underwriters respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the City fails to comply with the foregoing provisions of the Ordinance, interest on the Certificates could become includable in gross income from the date of original delivery, regardless of the date on which the event causing such inclusion occurs. Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Certificates. The opinions set forth above are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We asswne no duty to update or supplement these opinions to reflect any facts or circwnstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to detennine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer. We observe that the City has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes. 1HIS PAGE LEFf BLANK INTENTIONALLY APPENDIXD SPECIMEN OF BOND INSURANCE POLICY THIS PAGE LEFT BLANK INTENTIONALLY ISSUER: BONDS: FINANCIAL SECURITY ASSURANCE® MUNICIPAL INSURA modified by an endorsement hereto, the following terms shall have s of this Policy. "Business Day" means any day other than (a) a day or ( ) ada which banking institutions in the State of New York or the Insurer's equired by law or executive order to remain closed. ·oue for Payment" referrin the principal of a Bond, payable on the stated maturity date thereof or the sam shall have been duly called for mandatory sinking fund redemption and does t efe t an earlier date on which payment is due by reason of call for redemption (other than by m da ry sin ·ng fund redemption), acceleration or other advancement of maturity unless Financial Securi s I ct, in its sole discretion, to pay such principal due upon such acceleration together with any a ru Interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the s ted date for payment of Interest. "Nonpayment" means, in respect of a Bond, the failure of the lssu to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for ent in full of all principal and interest that is Due for Payment on such Bond. "Nonpayment" shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment Page 2 of2 Policy No. -N made to an Owner by or on behalf of the Issuer which has been recovered fr: the United States Bankruptcy Code by a trustee in bankruptcy in accor:d order of a court having competent jurisdiction. "Notice" means le h subsequently confinned in a signed writing, or written notice by registe d or the Trustee or the Paying Agent to Financial Security which no s all making the claim, (b) the Policy Number, (c) the claimed am t n (d) e became Due for Payment. "Owner" means, in respect of a rs Nonpayment, is entiUed under the terms of such Bond r:eof, include the Issuer or any person or entity whose dir li at security for the Bonds. s II not be modified, altered or rca o amendment thereto. Except p m1um paid in respect of this Policy CE INC. has caused this Policy to be executed FINANCIAL SECURITY ASSURANCE INC. By ______ ~~~~~~---------Authorized Officer f F ancial Security Assurance Holdings ltd. eet, NewYor1<, N.Y. 10019 (212) 826-0100 Financial Advisory Services Provided By .1 1 ~i.~~.~~~~~~~~~ ~~~~~~' ' ' PURCHASE CONTRACT RELATING TO $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 August 25, 2005 The Honorable Mayor and Members of the City Council City of Lubbock P.O. Box 2000 Lubbock, Texas 79457 Dear Mayor and Members of the City Council: A. G. EDWARDS & SONS, INC (the" Authorized Representative"), M.E. ALLISON & Co., INC andRBC DAIN RAUSCHER INC.( collectively, the "Underwriters"), offer to enter into this Purchase Contract (the "Purchase Contract") with the CITY OF LUBBOCK, TEXAs (the "City") for the purchase by the Underwriters of the City's Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates"). This offer is made subject to the City's acceptance of this Purchase Contract on or before 5:00p.m. Central Time on August 25, 2005. l. Purchase and Sale of the Certificates. Upon the tenns and conditions and upon the basis of the representations set forth herein, the Underwriters jointly and severally hereby agree to purchase from the City, and the City hereby agrees to sell and deliver to the Underwriters an aggregate of $46,525,000 (representing the original aggregate principal amount of the Certificates). The Certificates shall have the maturities, interest rates and be subject to redemption in accordance with the provisions of Exhibit A hereto and shall be issued and secured under the provisions of the Ordinance (as defined below). The purchase price for the Certificates shall be $48,106,751.90 (representing the principal amount of the Certificates, plus original issue premium on the Certificates in the amount of $1,874,351.90, and less an Underwriters' discount on the Certificates of$292,600.00) plus accrued interest from their dated date to the date of the payment for and delivery of the Certificates. A.G. Edwards & Sons, Inc. represents that it has been duly authorized to execute this Purchase Contract and has been duly authorized to act hereWJ.der as the Authorized Representative. All actions that may be taken by the Underwriters hereunder may be taken by the Authorized Representative alone. ) ) ) 2. Ordinance. The Certificates shall be as described in and shall be issued and secured under the provisions of an ordinance adopted by the City on August 25, 2005, authorizing the issuance and sale of the Certificates (the "Ordinance"). The Certificates shall be secured and payable as provided in the Ordinance. 3. Public Offering. It shall be a condition of the obligations of the City to sell and deliver the Certificates to the Underwriters, and of the obligations of the Underwriters to purchase and accept delivery of the Certificates, that the entire principal amount of the Certificates authorized by the Ordinance shall be sold and delivered by the City and accepted and paid for by the Underwriters at the Closing. The Underwriters agree to make a bona fide public offering of all of the Certificates, at not in excess of the initial public offering prices, as set forth in the Official Statement; provided however at least ten percent (10%) of the principal amount of the Certificates of each maturity thereof shall be sold to the "public" (exclusive of dealers, brokers and investment bankers, etc.) at the initial offering price set forth in the Official Statement. 4. Security Deposit. Delivered to the City herewith is a corporate check of the Authorized Representative payable to the order of the City in the amount of$486,350. Such check is a common "Good Faith" check for the Certificates, and such check may be applied toward any obligation of the Underwriters owing as a result of the failure of the Underwriters to accept delivery of the Certificates as provided herein. The City agrees to hold such check uncashed until the Closing to ensure the performance by the Underwriters of their obligation to purchase, accept delivery of and pay for the Certificates at the Closing. Concurrently with the payment by the Underwriters of the purchase price of the Certificates, the City shall return such check to the Authorized Representative as provided in Paragraphs 7 and 8 hereof. Should the City fail to deliver the Certificates at the Closing, or should the City be unable to satisfy the conditions of the obligations of the Underwriters to purchase, accept delivery of and pay for the Certificates, as set forth in this Purchase Contract (unless waived by the Authorized Representative), or should such obligations of the Underwriters be tenninated for any reason permitted by this Purchase Contract, such check shall immediately be returned to the Authorized Representative. In the event the Underwriters fail (other than for a reason permitted hereunder) to purchase, accept delivery of and pay for the Certificates at the Closing as herein provided, such check shall be retained by the City as and for full liquidated damages for such failure of the Undenvriters and for any defaults hereunder on the part of the Underwriters. The Authorized Representative hereby agrees not to stop or cause payment on said check to be stopped unless the City has breached any of the terms of this Purchase Contract. 5. Official Statement. The Official Statement, including the cover pages and Appendices thereto, of the City, dated August 25, 2005, with respect to the Certificates, as further amended only in the manner herein provided, is hereinafter called the "Official Statement." The City hereby authorizes the Ordinance and the Official Statement and the infonnation therein contained to be used by the Underwriters in connection with the public offering and sale of the Certificates. The City confinns its consent to the use by the Underwriters prior to the date hereof of the Preliminary Official Statement, relative to the Certificates, dated August 22, 2005 (the "Preliminary Official Statement"), in connection with the preliminary public offering and sale of the Certificates, and it is "deemed fmal" as of its date, within the meaning, and for the purposes, ofRule 2 15c2-12 promulgated under authority granted by the federal Securities and Exchange Act of 1934 (the "Rule"). The City agrees to cooperate with the Underwriters to provide a supply of final Official Statements within seven business days of the date hereof in sufficient quanti ties to comply with the Underwriters' obligations under the Rule and the applicable rules of the Municipal Securities Rulemaking Board. The Underwriters will use their best efforts to assist the City in the preparation of the final Official Statement in order to ensure compliance with the aforementioned rules. If at any time after the date of this Purchase Contract but before the first to occur of (i) the date upon which the Underwriters notify the City that the period of the initial public offering of the Certificates has expired or (ii) the date that is 90 days after the date hereof, any event shall occur that might or would cause the Official Statement to contain any untrue statement of a material fact or to omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, the City shall notify the Authorized Representative, and if, in the opinion of the Authorized Representative, such event requires the preparation and publication of a supplement or amendment to the Official Statement, the City will at its expense supplement or amend the Official Stat~ment in the form and in a manner approved by the Authorized Representative and furnish to the Underwriters a reasonable number of copies requested by the Authorized Representative in order to enable the Underwriters to comply with the Rule. To the best knowledge and belief of the City, the Official Statement contains information, including financial information or operating data, as required by the Rule. Except as disclosed in the Official Statement, the City has not failed to comply with any undertaking specified in paragraph (b)(5)(i) of the Rule within the last five years. 6. Representations, Warranties and Agreements of the City. On the date hereof, the City represents, warrants and agrees as follows: (a) The City is a home rule municipality and a political subdivision of the State ofTexas and a body politic and corporate, and has full legal right, power and authority to enter into this Purchase Contract, to adopt the Ordinance, to sell the Certificates, and to issue and deliver the Certificates to the Underwriters as provided herein and to carry out and conswnmate all other transactions contemplated by the Ordinance and this Purchase Contract; (b) By official action of the City prior to or concurrently with the acceptance hereof, the City has duly adopted the Ordinance, has duly authorized and approved the execution and delivery of, and the performance by the City of the obligations contained in the Certificates and this Purchase Contract and has duly authorized and approved the performance by the City of its obligations contained ~ the Ordinance; (c) The City is not in breach of or default under any law or administrative regulation of the State of Texas or the United States (including regulations of its agencies) 3 applicable to the issuance of the Certificates or any applicable judgment or decree or any loan agreement, note, order, agreement or other instrument, except as may be disclosed in the Official Statement, to which the City is a party or to the knowledge of the City it is otherwise subject, that would have a material and adverse effect upon the business or fmancial condition of the City; and the execution and delivery of the Certificates and this Purchase Contract by the City and the adoption of the Ordinance by the City and compliance with the provisions of each thereof will not violate or constitute a breach of or default under any existing law or administrative regulation, or any judgment, decree or agreement or other instrument to which the City is a party or, to the lmowledge of the City, is otherwise subject; (d) All approvals, consents and orders of any goverrunental authority or agency having jurisdiction of any matter that would constitute a condition precedent to the performance by the City of its obligations to sell and deliver the Certificates hereunder will have been obtained prior to the Closing; (e) At the time of the City's acceptance hereof and at the time of the Closing, the Official Statement does not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (f) Between the date of this Purchase Contract and the Closing, the City will not, without the prior written consent of the Underwriters, sell or issue any additional bonds, notes or other obligations for borrowed money payable in whole or in part from ad valorem taxes except the City's General Obligation Bonds, Series 2005 and the City will not incur any material liabilities, direct or contingent, nor will there be any adverse change of a material nature in the financial position of the City; (g) Except as described in the Official Statement, no litigation is pending or, to the knowledge of the City, threatened in any court affecting the corporate existence ofthe City, the title of its officers to their respective offices, or seeking to restrain or enjoin the issuance or delivery of the Certificates, the levy, collection or application of the ad valorem taxes and the surplus net revenues (the "Pledged Revenues") of the City's Waterworks System pledged or to be pledged to pay the principal of and interest on the Certificates, or in any way contesting or affecting the issuance, execution, delivery, payment, security or validity of the Certificates, or in any way contesting or affecting the validity or enforceability of the Ordinance, or contesting the powers of the City, or any authority for the Certificates, the Ordinance or this Purchase Contract or contesting in any way the completeness, accuracy or fairness of the Preliminary Official Statement or the Official Statement; (h) The City will cooperate with the Underwriters in arranging for the qualification of the Certificates for sale and the determination of their eligibility for investment under the laws of such jurisdictions as the Authorized Representative designates, and will use its best efforts to continue such qualifications in effect so long as required for 4 " I distribution of the Certificates; provided, however, that the City wili not be required to execute a consent to service of process or to qualifY to do business in connection with any such qualification in any jurisdiction; (i) The descriptions of the Certificates and the Ordinance contained in the Official Statement accurately summarize certain provisions of such instruments, and the Certificates, when validly executed, authenticated and delivered in accordance with the Ordinance and sold to the Underwriters as provided herein, will be validly issued and outstanding obligations of the City entitled to the benefits of, and subject to the limitations contained in, the Ordinance; G) If prior to the Closing an event occurs affecting the City that is materially adverse for the purpose for which the Official Statement is to be used and is not disclosed in the Official Statement, the City shall notify the Authorized Representative, and if in the opinion of the City and the Authorized Representative such event requires a supplement or amendment to the Official Statement, the City will supplement or amend the Official Statement in a fonn and in a manner approved by the Authorized Representative; (k) The financial statements contained in the Official Statement present fairly the financial position of the City as of the date and for the period covered thereby and are stated on a basis substantially consistent with that of the prior year's audited financial statements; (1) Any certificate signed by any official of the City and delivered to the Underwriters shall be deemed a representation and warranty by the City to the Undetwriters as to the truth of the statements therein contained; (m) The City has not been notified of any listing or proposed listing by the Internal Revenue Service to the effect that it is a bond issuer whose arbitrage certifications may not be relied upon; and (n) The City will not knowingly take or omit to take any action, which action or omission will in any way cause the proceeds from the sale of the Certificates to be applied in a manner other than as provided in the Ordinance or that would cause the interest of the Certificates to be includable in gross income of the holders thereof for federal income tax purposes. 7. Closing. At I 0:00 A.M., Central Time, on September 29, 2005 (the 11Closing"), the City will deliver the initial securities certificates of the Certificates (as provided for in the Ordinance) to the Underwriters and the City shall take appropriate steps to provide DTC with one definite securities certificate for each year of maturity of the Certificates, and to provide the Underwriters with the other documents hereinafter mentioned. On or prior to the date of Closing, the Underwriters shall make arrangements with The Depository Trust Company ("DTC") for the Certificates to be immobilized and thereafter traded as book-entry only securities and on the date of Closing the Underwriters will accept such delivery and pay the pw-chase price of the Certificates 5 as set forth in Paragraph l hereof in immediately available funds. Concurrently with such payment by the Underwriters, the City shall return to the Authorized Representative the check referred to in paragraph 4 hereof. Delivery and payment as aforesaid shall be made at the office of the paying agent/registrar for the Certificates, as identified in the Official Statement, or such other place as shall have been mutually agreed upon by the City and the Authorized Representative. In addition. the City and the Underwriters agree that there shall be a preliminary closing held at such place as the City and the Underwriters shall mutually agree, commencing at least 24 hours prior to the Closing; provided, however, in lieu of this preliminary closing Bond Counsel, as defined below, may provide the counsel to the Underwriters with a complete Transcript of Proceedings on the business day preceding the Closing. Drafts of all documents to be delivered at the Closing shall be prepared and distributed to all parties and their counsel for review at least three business days prior to the Closing. 8. Conditions. The Underwriters have entered into this Purchase Contract in reliance upon the representations and warranties of the City contained herein and to be contained in the documents and instruments to be delivered at the Closing, and upon the performance by the City of its obligations hereunder, both as of the date hereof and as of the date of Closing. Accordingly, the Underwriters' obligations under this Purchase Contract to purchase and pay for the Certificates shall be subject to the performance by the City of its obligations to be performed hereunder and under such documents and instruments at or prior to the Closing, and shall also be subject to the following conditions: (a) The representations and warranties of the City contained herein shall be true, complete and correct in all material respects on the date hereof and on and as of the date of Closing, as if made on the date of Closing; (b) At the time of the Closing, (i) the Ordinance shall be in full force and effect, and the Ordinance shall not have been amended, modified or supplemented and the Official Statement shall not have been amended, modified or supplemented, except as may have been agreed to by the Authorized Representative; and (ii) the net proceeds of the sale of the Certificates shall be deposited and applied as described in the Official Statement and in the Ordinance; (c) At the time of the Closing, all official action of the City related to the Ordinance shall be in full force and effect and shall not have been amended, modified or supplemented; (d) The City shall not have failed to pay principal or interest when due on any of its outstanding obligations for borrowed money; (e) At or prior to the Closing, the Underwriters shall have received each of the following documents: 6 ; j \ ( 1) The Official Statement of the City, executed on behalf of the City by the Mayor and City Secretary or a conformed copy thereof; (2) The Ordinance, certified by the City Secretary under the seal of the City as having been duly adopted by the City and as being in effect, with such changes or amendments as may have been agreed to by the Underwriters. The Ordinance shall contain the agreement of the City, in form satisfactory to the Underwriters, that is described under the caption "Other Information -Continuing Disclosure of Information" in the Preliminary Official Statement; (3} the Paying Agent/Registrar Agreement, having been duly executed on behalf of the City and JPMorgan Chase Bank, National Association, as Paying Agent/Registrar; (4) The opinion pertaining to the Certificates, dated the date of Closing, ofV mson & Elkins L.L.P. ("Bond Counsel") in substantially the form and substance of Appendix C to the Official Statement; (5) An opinion or certificate with respect to the Certificates, dated on or prior to the date of Closing, of the Attorney General of Texas, approving the Certificates as required by law and the registration certificate of the Comptroller of Public Accounts of the State ofTexas; ( 6) The supplemental opinion, dated the date of Closing, of Bond Counsel, addressed to the City and the Underwriters, which provides that the Underwriters may rely upon the opinion of Bond Counsel delivered in accordance with the provisions of paragraph 8( e)( 4) hereof, and opining to the effect that (a) the Purchase Contract has been duly authorized, executed and delivered by the City and (assuming due authorization by the Underwriters) constitutes a binding and enforceable agreement of the City in accordance with its terms; (b) in its capacity as Bond Counsel, such finn has reviewed the information in the Official Statement under the captions or subcaptions "The Certificates" (exclusive of the information under the subcaptions "Book-Entry-Only System" and "Certificateholders' Remedies"), "Tax Matters" and the subcaptions "Legal Investments and Eligibility to Secure Public Funds in Texas," "Legal Opinions" and "Continuing Disclosure of Information" (exclusive of the information under the subcaption "Compliance with Prior Undertakings") under the caption "Other Information" in the Official Statement, and such fmn is of the opinion that such descriptions present a fair and accurate summary of the provisions of the laws and instruments therein described and, with respect to the Certificates, such information conforms to the Ordinance; and (c) the Certificates are exempt from registration pursuant to the Securities Act of 1933, as amended, and the Ordinance is exempt from qualification as an indenture pursuant to the Trust Indenture Act of 1939, as amended; 7 (7) An opinion or opinions of McCall, Parkhurst & Horton L.L.P., Underwriters' Counsel addressed to the Underwriters, and dated the date of Closing in substantially the form attached hereto as Exhibit B; (8) A certificate, dated the date of Closing, signed by the Mayor and Chief Financial Officer of the City, to the effect that (i) the representations and warranties of the City contained herein are true and correct in all material respects on and as of the date of Closing as if made on the date of Closing; (ii) except to the extent disclosed in the Official Statement, no litigation is pending or, to the know ledge of such persons, threatened in any court to restrain or enjoin the issuance or deli very of the Certificates, or the levy, collection or application of the ad valorem taxes and Pledged Revenues pledged or to be pledged to pay the principal of and interest on the Certificates, or the pledge thereof, or in any way contesting or affecting the validity of the Certificates, the Ordinance, or contesting the powers of the City or the authorization of the Certificates, the Ordinance, or contesting in any way the accuracy, completeness or fairness ofthe Official Statement (but in lieu of or in conjunction with such certificate, the Underwriters may, in their sole discretion, accept certificates or opinions of the City Attorney that, in the opinion thereof, the issues raised in any such pending or threatened litigation are without substance or that the contentions of all plaintiffs therein are without merit); (iii) to the best of their knowledge, no event affecting the City has occurred since the date of the Official Statement that should be disclosed in the Official Statement for the purpose for which it is to be used or that it is necessary to disclose therein in order to· make the statements and information therein not misleading in any respect; and (iv) that there has not been any material and adverse change in the affairs or financial condition of the City since September 30, 2004, the latest date as to which audited financial information is available; (9) An opinion or opinions of the City Attorney addressed to the Underwriters and dated the date of Closing substantially in the form and substance of Exhibit C hereto; ( 1 0) A certificate, dated the date of the Closing, of an appropriate officer of the City to the effect that, on the basis of the facts, estimates and circumstances in effect on the date of delivery of the Certificates, it is not expected that the proceeds of the Certificates will be used in a manner that would cause the Certificates to be "arbitrage bonds" within the meaning of Section 148 of the Internal Revenue Code of 1986, as amended; (11) Evidence of the rating on the Certificates, which shall be "Aaa" by Moody's Investors Service, Inc. ("Moody's"), "AAA" by Standard and Poor's Corporation, a division of the McGraw-Hill Companies, Inc. ("S&P"), and "AAA" by Fitch Ratings C'Fitch"), shall be delivered in a form acceptable to the Underwriters; 8 ' ' ) (12) A copy of the policy of municipal bond insurance issued by Financial Security Assw-ance Inc. with respect to the Certificates; (13) Such additional legal opinions, certificates, instrwnents and other documents as Bond Counsel or the Underwriters may reasonably request to evidence the truth, accuracy and completeness, as of the date hereof and as of the date of Closing, of the City's representations and warranties contained herein and of the statements and information contained in the Official Statement and the due performance and satisfaction by the City at or prior to the date of Closing of all agreements then to be performed and all conditions then to be satisfied by the City. All of the opinions, letters, certificates, instruments and other documents mentioned above or elsewhere in this Purchase Contract shall be deemed to be in compliance with the provisions hereof if, but only if, they are satisfactory to the Underwriters. If the City shall be unable to satisfy the conditions to the obligations of the Underwriters to purchase, to accept delivery of and to pay for the Certificates as set forth in this Purchase Contract, or if the obligations of the Underwriters to purchase, to accept delivery of and to pay for the Certificates shall be terminated for any reason permitted by this Purchase Contract, this Purchase Contract shall terminate, the security deposit referred to in Paragraph 4 of this Purchase Contract shall be retmned to the Authorized Representative and neither the Underwriters nor the City shall be under further obligation hereunder, except that the respective obligations of the City and the Underwriters set forth in Paragraphs 10 and 12 hereof shall continue in full force and effect 9. Termination. The Underwriters may terminate its obligation to purchase at any time before the Closing if any of the following should occur: (a) (i) Legislation shall have been enacted by the Congress of the United States, or recommended to the Congress for passage by the President of the United States or favorably reported for passage to either House of the Congress by any Committee of such House; or (ii) a decision shall have been rendered by a court established under Article III of the Constitution of the United States or by the United States Tax Court; or (iii) an order, ruling or regulation shall have been issued or proposed by or on behalf of the Treasury Department of the United States or the Internal Revenue Service or any other agency of the United States; or (iv) a release or official statement shall have been issued by the President of the United States or by the Treasury Department ofthe United States or by the lntemal Revenue Service, the effect of which, in any such case described in clause (i), (ii), (iii), or {iv), would be to impose, directly or indirectly, federal income taxation upon interest received on obligations of the general character of the Certificates or upon income of the general character to be derived by the City, other than any imposition of federal income taxes upon interest received on obligations of the general character as the Certificates on the date hereof and other than as disclosed in the Official Statement, in such a manner as in the judgment of the Authorized Representative would materially impair the marketability or materially reduce the market price of obligations of the general character of the Certificates. 9 ) ) ) (b) Any action shall have been taken by the Securities and Exchange Commission or by a court that would require registration of any security under the Securities Act of 1933, as amended, or qualification of any indenture under the Trust Indenture Act of 1939, as amended, in connection with the public offering of the Certificates, or any action shall have been taken by any court or by any governmental authority suspending the use of the Preliminary Official Statement or the Official Statement or any amendment or supplement thereto, or any proceeding for that purpose shall have been initiated or threatened in any such court or by any such authority. (c) (i) The Constitution of the State of Texas shall be amended or an amendment shall be proposed, or (ii) legislation shall be enacted, or (iii) a decision shall have been rendered as to matters of Texas law, or {iv) any order, ruling or regulation shall have been issued or proposed by or on behalf of the State of Texas by an official, agency or department thereof, affecting the tax status of the City, its property or income, its securities (including the Certificates) or the interest thereon, that in the judgment of the Authorized Representative would materially affect the market price of the Certificates. (d) A general suspension of trading in securities shall have occurred on the New York Stock Exchange. {e) A material disruption in securities clearance, payment or settlement services in the United States shall have occurred. (f) There shall have occurred any (i) material outbreak of hostilities (including, without limitation, an escalation of hostilities that existed prior to the date hereof or an act of terrorism) or (ii) material other national or international calamity or crisis, or any material adverse change in the financial, political or economic conditions affecting the United States, the effect of which on U.S. financial markets of such an event described in clauses (i) or (ii) shall make it, in the reasonable judgment of the Authorized Representative, impractical or inadvisable to proceed with the offering or delivery of the Certificates as contemplated by the final Official Statement (exclusive of any amendment or supplement thereto). (g) An event described in Paragraph 6G) hereof occurs that, in the reasonable judgment of the Authorized Representative, requires a supplement or amendment to the Official Statement that is deemed by them, in their discretion, to adversely affect the market for the Certificates. {h) A general banking moratorium shall have been declared by authorities of the United States, the State of New York or the State of Texas. (i) A lowering of the ratings of"Aaa," "AAA" and "AAA," initially assigned to the Certificates by Moody's, S&P and Fitch, respectively, shall occur prior to the Closing. 10 ) ) 10. Expenses. (a) The City shall pay all expenses incident to the issuance of the Certificates, including but not limited to: (i) the cost of the preparation, printing and distribution of the Preliminary Official Statement and the Official Statement; (ii) the cost of the preparation and printing ofthe Certificates; (iii) the fees and expenses of Bond Counsel to the City; (iv) the fees and disbursements of the City's accountants, advisors, and of any other experts or consultants retained by the City; (v) the fees for the bond ratings and any travel or other expenses incurred incident thereto; and (vi) the premium, if any, for municipal bond insurance policy pertaining to the Certificates. (b) The Underwriters shall pay (i) all advertising expenses in connection with the offering of the Certificates; (ii) the cost of the preparation and printing of all the underwriting documents; and (iii) the fee of McCall, Parkhurst & Horton L.L.P. for such finn's opinion required by Paragraph 8(e)(7) hereof. 11. Notices. Any notice or other communication to be given to the City under this Purchase Contract may be given by delivering the same in writing at the address for the City set forth above, and any notice or other communication to be given to the Underwriters under this Purchase Contract may be given by delivering the same in writing to A.G. Edwards & Sons, Inc., 70 Northeast Loop 410, Suite 915 San Antonio, Texas 78216 Attention: Ms. Nora Chavez. 12. Parties in Interest. This Purchase Contract is made solely for the benefit of the City and the Underwriters (including the successors or assigns of any Underwriter) and no other person shall acquire or have any right under this contract. The City's representations, warranties and agreements contained in this Purchase Contract that exist as of the Closing, and without regard to any change in fact or circumstance occuning subsequent to the Closing, shall remain operative and in full force and effect, regardless of (i) any investigations made by or on behalf of the Underwriters, and (ii) delivery of any payment for the Certificates hereunder; and the City's representations and warranties contained in Paragraph 6 of this Purchase Contract shall remain operative and in full force and effect, regardless of any termination of this Purchase Contract. 13. Severability. If any provision of this Purchase Contract shall be held or deemed to be or shall, in fact, be invali~ inoperative or unenforceable as applied in any particular case in any jurisdiction or jurisdictions, or in all jurisdictions because it conflicts with any provisions of any constitution, statute, rule of public policy, or any other reason, such circumstances sha11 not have the effect of rendering the provision in question invalid, inoperative or unenforceable in any other case or circumstances, or of rendering any other provision inoperative or unenforceable to any extent whatever. 14. Choice of Law. This Purchase Contract shall be governed by and construed in accordance with the laws of the State of Texas. 15. Execution in Counterparts. This Purchase Contract may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Purchase Contract by signing any such counterpart. ll 16. Section Headings. Section headings have been inserted in this Contract as a matter of convenience of reference only, and it is agreed that such section headings are not a part of this Contract and will not be used in the interpretation of any provisions of this Contract. 17. Status of the Underwriters. The City acknowledges that in connection with the offering of the Certificates and the discussions and negotiations relating to the terms of the Certificates set forth in this Contract: (a) the Underwriters have acted at anns length, are not agents of or advisors to, and owe no fiduciary duties to, the City or any other person, (b) the Underwriters' duties and obligations to the City shall be limited to those contractual duties and obligations set forth in this Contract and (c) the Underwriters may have interests that differ from those of the City. The City waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Certificates. [Signature page follows.] 12 ) If you agree with the foregoing, please sign the enclosed counterpart of this Purchase Contract and return it to the Authorized Representative. This Purchase Contract shall become a binding agreement between you and the Underwriters when at least the counterpart of this Purchase Contract shall have been signed by or on behalf of each of the parties hereto. Very truly yours, A. G. Edwards & Sons, Inc. M.E. Allison & Co., Inc. RBC Dain Rauscher Inc. By: By: Name: Nora W. Chavez Title: Managing Director -Investment Banking ACCEPTANCE ACCEPTED pursuant to a motion adopted by the City Council of the City ofLubbock, Texas on the 25m day of August, 2005. By: ) EXHIBIT A ) Schedule of Maturities, Interest Rates, Yields and Redemption Provisions $46,525,000 City of Lubbock, Texas Tax and Waterworks System Surplus Revenue Certificates of Obligation Series 2005 Maturity Principal Interest Rate Yield {February 15} Amount (%} {%} 2006 $1,575,000 3.000 2.850 2007 1,600,000 3.000 2.960 2008 650,000 3.000 3.050 2008 1,000,000 3.250 3.050 2009 705,000 3.100 3.170 2009 1,000,000 3.375 3.170 2010 1,770,000 3.500 3.280 2011 1,005,000 3.350 3.420 2011 820,000 3.625 3.420 2012 1,900,000 3.750 3.520 2013 1,080,000 3.500 3.640 2013 900,000 5.000 3.640 2014 2,070,000 5.000 3.740 2015 2,155,000 3.750 3.830 2016 2,260,000 5.000 3.910 2017 2,370,000 5.000 3.970 2018 2,475,000 4.000 4.170 *** *** *** *** 2020 5,315,000 5.000 4.070 *** *** *** *** 2022 5,875,000 5.000 4.120 2023 3,160,000 5.125 4.120 2024 3,335,000 5.125 4.150 2025 3,505,000 4.375 4.460 [The Remainder of this Page Intentionally Left Blank] A-I ) ) ) Optional Redemption. The City reserves the right, at its option, to redeem Certificates having stated maturities on and after February 15, 2016, in whole or in part in principal amounts of$5,000 or any integral multiple thereof, on February 15,2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. Mandatory Sinking Fund Redemption. The Certificates maturing on February 15 in the years 2020 and 2022 shall be subject to mandatory sinking fund redemption prior to their scheduled maturities in the following amounts, on the following dates, at a price equal to the principal amount thereof and accrued and unpaid interest to the date of redemption, without premium. *Final Maturity *Final Maturity $5,315,000 Term Certificates Due February 15,2020 Redemption Date (February IS) 2019 2020* Principal Amount $2,590,000 $2,725,000 $5,875,000 Term Certificates Due February 15, 2022 Redemption Date (February 15} 2021 2022* Principal Amount $2,865,000 $3,010,000 A-2 ) ) EXHIBITS Proposed Form of Underwriters' Counsel Opinion of McCall, Parkhurst & Horton L.L.P. September 29, 2005 A. G. Edwards & Sons, Inc. M.E. Allison & Co., Inc. RBC Dain Rauscher lnc. c/o A.G. Edwards & Sons, Inc. 70 Northeast Loop 410, Suite 915 San Antonio, Texas 78216 RE: $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Ladies and Gentlemen: We have acted as counsel for you as the underwriters of the Certificates described above (the "Certificates"), issued under and pursuant to an Ordinance of the City of Lubbock, Texas (the "Issuer"), authorizing the issuance of the Certificates, which Certificates you are purchasing pursuant to a Purchase Contract, dated August 25, 2005. All capitalized undefined terms used herein shall have the meaning set forth in the Purchase Contract. In connection with this opinion letter, we have considered such matters of law and of fact, and have relied upon such certificates and other information furnished to us, as we have deemed appropriate as a basis for our opinion set forth below. We are not expressing any opinion or views herein on the authorization, issuance, delivery, validity of the Certificates and we have assumed, but not independently verifie~ that the signatures on all documents and Certificates that we have examined are genuine. Based on and subject to the foregoing, we are of the opinion that, under existing laws, the Certificates are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Ordinance is not required to be qualified under the Trust Indenture Act of 1939, as amended. Because the primary purpose of our professional engagement as your counsel was not to establish factual matters, and because of the wholly or partially nonlegal character of many of the deternrinations involved in the preparation of the Official Statement dated August 25, 2005 (the "Official Statement11) and because the information in the Official Statement under the headings "THE BONDS -Book-Entry-Only System," "TAX MAITERS," "OTHER INFORMATION- Continuing Disclosure of Information-Compliance with Prior Underta.kings11 and Appendices A, B-1 ) ) B, and C thereto were prepared by others who have been engaged to review or provide such information, we are not passing on and do not asswne any responsibility for, except as set forth in the last sentence of this paragraph, the accuracy, completeness or fairness of the statements contained in the Official Statement (including any appendices, schedules and exhibits thereto) and we make no representation that we have independently verified the accuracy, completeness or fairness of such statements. In the course of our review of the Official Statement, we had discussions with representatives of the City regarding the contents of the Official Statement. In the course of our participation in the preparation of the Official Statement as your counsel, we had discussions with representatives of the Issuer, including its City Attorney, Bond Counsel and Financial Advisor, regarding the contents of the Official Statement. In the course of such activities, no facts came to our attention that would lead us to believe that the Official Statement (except for the financial statements and other financial and statistical data contained therein, the information set forth under the headings "THE BONDS-Book·Entry-Only System," "TAX MA TfERS," "OTHER INFORMATION -Continuing Disclosure oflnformation-Compliance with Prior Undertakings" and Appendices A, B, and C thereto, as to which we express no opinion), as of its date contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. This opinion letter may be relied upon by only you and only in connection with the transaction to which reference is made above and may not be used or relied upon by any other person for any purposes whatsoever without our prior written consent. Respectfully, B-2 ' ) ) ) EXHIBITC Opinion of the City Attorney September 29, 2005 A.G. Edwards & Sons, Inc. M.E. Allison & Co., Inc. RBC Dain Rauscher Inc. c/o A.G. Edwards & Sons, Inc. 70 Northeast Loop 41 0, Suite 915 San Antonio, Texas 78216 RE: $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Ladies and Gentlemen: I am the City Attorney for the City ofLubbock, Texas (the "City") at the time of the issuance of the above referenced Certificates (the "Certificates"), pursuant to the provisions of the Ordinance duly adopted by the City CoWicil of the City on August 25, 2005. Capitalized tenns not otherwise defined in this opinion have the meanings assigned in the Purchase Contract. In my capacity as City Attorney to the City, I have reviewed such agreements, documents, certificates, opinions, letters, and other papers as I have deemed necessary or appropriate in rendering the opinions set forth below. In making my review, I have assumed the authenticity of all documents and agreements submitted to me as originals, conformity to the originals of all documents and agreements submitted to me as certified or photostatic copies, the authenticity of the originals of such latter documents and agreements, and the accuracy of the statement contained in such documents. Based upon the foregoing, and subject to the qualifications and exceptions hereinafter set fo~ I am of the opinion that under the applicable laws of the United States of America and the State of Texas in force and effect on the date hereof: 1. Based on reasonable inquiry made of the responsible City employees and public officials, the City is not, to the best of my know ledge, in breach of or in default under any applicable law or administrative regulation of the State ofTexas or the United States, or any applicable judgment or decree or any trust agreement, loan agreement, bond, note, resolution. ordinance, agreement or other instrwnent to which the City is party or is otherwise subject and, to the best of my know ledge after due inquiry, no event has occurred and is continuing that, with the passage ,of time or the giving of notice, or both, would constitute such a default by the City under any of the foregoing; and the execution and delivery of the Purchase C-1 ) > ) ) 2. Contract, the Certificates and the adoption of the Ordinance and compliance with the provisions of each of such agreements or instruments does not constitute a breach of or default under any applicable law or administrative regulation of the State of Texas or the United States or any applicable judgment or decree or, to the best of my knowledge, any trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the City is a party or is otherwise subject; and Except as disclosed in the Official Statement, no litigation is pending, or, to my knowledge, threatened, in any court in any way (a) challenging the titles of the Mayor or any of the other members of the City Council to their respective offices; (b) seeking to restrain or enjoin the issuance, sale or delivery of any of the Certificates, or the levy, collection or application of the ad valorem taxes and the Pledged Revenues pledged or to be pledged to pay the principal of and interest on the Certificates; (c) contesting or affecting the validity or enforceability of the Certificates, the Ordinance or the Purchase Contract; (d) contesting the powers of the City or any authority for the issuance of the Certificates, or the adoption of the Ordinance; or (e) that would have a material and adverse effect on the financial condition of the City. 3. I have reviewed the information in the Official Statement contained under the caption "Other Information--Litigation" and such information in all material respects accurately and fairly summarizes the matters described therein. Tiris opinion is furnished solely for your benefit and may be relied upon only by the addresses hereof or anyone to whom specific pennission is given in writing by me. Very truly yours, C-2 ) ) ) REGISTERED REGISTERED $1,575,000 No. I United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 INTEREST RATE: MATURITY DATE: CERTIFICATE CUSIP NUMBER: ··~ \. t 3.000% February 15, 2006 ~u • s~.~~-'. 549187 T69 The City of Lubbock (the "City"), in the~:.·. . ¥· State of Texas, for value received, hereby promises to pay to .• ·-:.""). ~ -·~~ · ~tied above, the sum of RED SEVENTY -FIVE THOUSAND DOLLARS and to pay interest on such pnncipal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest bas been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Paymentrrransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Paymentrrransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) REGISTERED No.2 United States of America State ofTexas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,600,000 ~\; ' INTEREST RATE: MATURITY DATE: CERTIFICA 'f'S.tJA .. :· .··. USIP NUMBER: 3.000% February 15,2007 ,..._ 11\.u~ r~~.iA.. , 549187 T77 r. ~.>~ll\~~~ The City of Lubbock (the "Ci~,~ {J4 Cok~ oclc, State of Texas, for value received, hereby promises to pay i ·,:11" v (r~ ~&CO. or registered assigns, on the ~y ate specified above, the swn of ONE MILLION SIX HUNDRED THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) REGISTERED No.3 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $650,000 INTEREST RATE: MATURITY DATE: CERTIFICATE :. CUSIP NUMBER: ... , "' 3.000% February 15, 2008 A~si\§~ ~ ·. 549187 V33 The City of Lubbock (the "City''), in ~~~· · ~ , State of Texas, for value received, hereby promises to pay to ~ .... ;;>.' • ~ ~' ~ ~ ~n~~ or registered assigns, on th~iare'y:;fied ab~ve, the swn of SIX H RED FIFTY THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) ) ) REGISTERED No.4 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,000,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360~day year of twelve 30wday months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1 ,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the HRecord Date," which shall be the last business day of the month next preceding such interest payment date. ) ) REGISTERED No.5 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $705,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: 3.100% February 15, 2009 ·~ 549187 V58 SEVEN HUNDRED FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Paymenttrransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment!fransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) REGISTERED No.6 United States of America State ofTexas County of Lubbock CITY OF LUBBOCK, TEXAS TAXANDWATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,000,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: 3.375% February 15,2009 ~Au~~~· . 549187 T93 The City of Lubbock (the "City"), i~:-tgE(~· · ~'Wck, State of Texas, for value received, hereby promises to pay to . ~-"'l { ' ' :··_,-P" ·w .... ,~ ..... ,~ .... ~ co ~l • . -~ or registered assigns, on...,~vty e specified above, the sum of ONE MILLION DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trusf office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment!fransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1 ,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the pwpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) REGISTERED No.7 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,770,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: ' . or registered assigns, on th'arw~MmLJ ONE MILLION EN HUNDRED SEVENTY THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Paymentffransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment!fransfer Office of such successor. futerest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date,'' which shall be the last business day of the month next preceding such interest payment date. ) ) } REGISTERED No.8 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,005,000 INTEREST RATE: MATURITY DATE: 3.350% February 15, 2011 CUSIP NUMBER: 549187 V74 The City of Lubbock (theft' ·~ , received, hereby promises n ' .. -':::..~ ~ t" ,;_.-hDE & CO. or registered assigns, o~aturity Date specified above, the sum of ONE MILLION FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per armum rate of interest specified above, computed on the basis of a 360~day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated PaymenUTransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) REGISTERED No.9 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $820,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: 549187 U34 3.625% EIGHT HUNDRED TWENTY THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment!fransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment!fransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. 'I ) REGISTERED No. 10 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,900,000 INTEREST RATE: MATURITY DATE: CERTIFICATE CUSIP NUMBER: 3.750% February 15, 2012 and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360Mday year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation_ and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date,'' which shall be the last business day of the month next preceding such interest payment date. ) REGISTERED No. 11 United States of America State ofTexas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $1,080,000 fNTEREST RATE: MATURITY DATE: CUSIP NUMBER: 3.500% February 15, 2013 and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated PaymenttTransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment!fransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date,H which shall be the last business day of the month next preceding such interest payment date. ' ' , REGISTERED No. 12 United States of America State ofTexas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $900,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: 5.000% February 15, 2013 549187 U59 c , State of Texas, for value DRED THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Paymentffransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the ''Record Date," which shall be the last business day of the month next preceding such interest payment date. ) REGISTERED No. l3 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $2,070,000 INTEREST RATE: MATURITY DATE: CERTIFICATE DATE: CUSIP NUMBER: 5.000% February 15, 2014 <il . ;_ ~ and to pay interest on ~rincipal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for Wltil payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amo\Ult of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) ) REGISTERED No. 14 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $2,155,000 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: "!; or registered assigns, on the~·~IID ........ : TWO MILLION 0 DRED FIFTY-FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Paymentrrransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1 ,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) REGISTERED REGISTERED $2,260,000 No. 15 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 INTEREST RATE: MATURITY DATE: CERTIFICATE DATE: CUSIP NUMBER: 5.000% February 15,2016 August 15, 200~ 549187 U83 The City of Lubbock (the "City'), in the County of~~ ... ~ f Texas, for value received, hereby promises to pay to CED~~ ~ or registered assigns, on the Maturi ~~· the sum of TWO MILLI SIXTY THOUSAND DOLLARS and to pay interest on such .PI!.. amount from the later of the Certificate Date specified above or the most recent inter -· ayment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the. address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ... J ) REGISTERED No. 16 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $2,370,000 INTEREST RATE: MATURITY DATE: CERTIFICATE DATE: CUSIP NUMBER: 5.000% February 15,2017 August 1 . 549187 U91 ( ' The City of Lubbock (the "City''), in ~ ~·~ , te of Texas, for value received, hereby pro~:to pa:t~ (;\\~ \ or registered assigns, ~tfi/~specified above, the sum of TWO MILL " HREE HUNDRED SEVENTY THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Paymentffransfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Paymentffransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) REGISTERED No. 17 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $2,475,000 lNTEREST RATE: MATURITY DATE: CERTIFICATE DA : CUSIP NUMBER: 4.000% February 15,2018 Au , 20 549187 V25 receiVed, hereby prom1ses to S! ~ DE ~ . . .. · · · \. or registered assigns, o~ . · :y l~:~;~ed above, the sum of .... ~.// . .,-.. TWO MILLION FOUR HUNDRED SEVENTY -FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, conunencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ' ) ) ) ' REGISTERED No. 18 United States of America State ofTexas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $3,160,000 INTEREST RATE: MATURITY DATE: CERTIFICATE DATE: CUSIP NUMBER: 5.125% February 15, 2023 f and to pay interest on such .· ,ri· ipal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate) the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) ) REGISTERED No. 19 United States of America State ofTex.as County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $3,335,000 INTEREST RATE: MATURITY DATE: CERTIFICATE DATE: CUSIP NUMBER: RED THIRTY -FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the cotporate trust office in Dallas, Texas {the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Paymentffransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/R.egistrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. REGISTERED REGISTERED No. 20 $3,505,000 United States of America State of Texas County of Lubbock J CITY OF LUBBOCK, TEXAS ) TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 INTEREST RATE: MATURITY DATE: ER FICATE : CUSIP NUMBER: 4.375% February1s,2o2s ~C , 549187V9o The City of Lubbock (the~·)~ . ~~ , State of Texas, for value ~~~ .. •·•··· ·l/. received, hereby promises to~a t . ! . \L. -~~ \ . · · . £EDE-'& CO. , ~·~ or registered assigns, o~~a~· rity 6~~~-specified above, the sum of ............ THREE MILLION FIVE HUNDRED FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, conunencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office.,), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date~ and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) REGISTERED REGISTERED $5,315,000 No. 21 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 INTEREST RATE: MATURITY DATE: CUSIP NUMBER: 5.000% February 15, 2020 ~ ,, · _,,· · 549187 V 4 I The City of Lubbock (the "City"W~'\V~bbock, State of Texas, for value received, hereby promises to pay~.'· ,-~:. ~ 0 . · CEDE&CO. ••. '\'!.,_.....,.• or registered assigns, on the Maturity Date specified above, the sum of FIVE MILLION THREE HUNDRED FIFTEEN THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, commencing February 15, 2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office~'), of JPMorgan Chase Bank:, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Payment/Transfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) REGISTERED No.22 United States of America State of Texas County of Lubbock CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 REGISTERED $5,875,000 INTEREST RATE: MATURITY DATE: CERTIFICATE DATE: CUSIP NUMBER: 5.000% February 15,2022 August 15,. 549187 V66 received, hereby promises to pay to . ~ ,t'f '-1> ~ . or registered assigns, on the ~o~~ve, the sum of FIVE MILLION EIG~RED SEVENIY-FIVE THOUSAND DOLLARS and to pay interest on such principal amount from the later of the Certificate Date specified above or the most recent interest payment date to which interest has been paid or provided for until payment of such principal amount has been paid or provided for, at the per annum rate of interest specified above, computed on the basis of a 360-day year of twelve 30-day months, such interest to be paid semiannually on February 15 and August 15 of each year, conunencing February 15,2006. The principal of this Certificate shall be payable without exchange or collection charges in lawful money of the United States of America upon presentation and surrender of this Certificate at the corporate trust office in Dallas, Texas (the "Designated Payment/Transfer Office"), of JPMorgan Chase Bank, National Association, or, with respect to a successor Paying Agent/Registrar, at the Designated Paymentrrransfer Office of such successor. Interest on this Certificate is payable by check dated as of the interest payment date, and will be mailed by the Paying Agent/Registrar to the registered owner at the address shown on the registration books kept by the Paying Agent/Registrar or by such other customary banking arrangement acceptable to the Paying Agent/Registrar and the registered owner; provided, however, such registered owner shall bear all risk and expenses of such customary banking arrangement. At the option of an Owner of at least $1,000,000 principal amount of the Certificates, interest may be paid by wire transfer to the bank account of such Owner on file with the Paying Agent/Registrar. For the purpose of the payment of interest on this Certificate, the registered owner shall be the person in whose name this Certificate is registered at the close of business on the "Record Date," which shall be the last business day of the month next preceding such interest payment date. ) ) If the date for the payment of the principal of or interest on this Certificate shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Designated Paymentffransfer Office of the Paying Agent/Registrar is located are required or authorized by law or executive order to close, the date for such payment shall be the next succeeding day that is not a Saturday, Sunday, legal holiday, or day on which banking institutions are required or authorized to close, and payment on such date shall have the same force and effect as if made on the original date payment was due. This Certificate is one of a series of fully registered certificates specified in the title hereof issued in the aggregate principal amount of $46,525,000 (herein referred to as the "Certificates"), issued pursuant to a certain ordinance of the City (the "~rdinance'') for the purpose of paying contractual obligations to be incurred for au-~lic improvements ( collectivel?', the "Pr~ject"), as described in ~e Ordi~anc~~ th . ctu_al obligati~ns for professiOnal servtces of attorneys, financtal 1 , pfdti 1on~s m connection with the Project and the issuance of the s. · ) . . .-,., '~ ·_,) . 'f , ' .! ·')-t ~ til The City has rese i . . o redeem •the Certificates maturing on or after February 15, 2016, in who o part, bbfore their respective scheduled maturity dates, on February 15,2015, or on any date thereafter, at a price equal to the principal amount of the Certificates so called for redemption plus accrued interest to the date fixed for redemption. If less than all of the Certificates are to be redeemed, the City shall determine the maturity or maturities and the amounts thereof to be redeemed and shall direct the Paying Agent/Registrar to call by lot or other customary method that results in a random selection the Certificates, or portions thereof, within such maturity and in such principal amounts, for redemption. Certificates maturing on February 15 in each of the years 2020 and 2022 (the "Term Certificates") are subject to mandatory sinking fund redemption prior to their scheduled maturity, and will be redeemed by the City, in part at a redemption price equal to the principal amount thereof, without premium, plus interest accrued to the redemption date, on the dates and in the principal amounts shown in the following schedule: Term Certificates Maturing February 15, 2020 Redemption Date February 15, 2019 February 15, 2020 (maturity) Principal Amount $2,590,000 2,725,000 Term Certificates Maturing February 15. 2022 Redemption Date February 15, 2021 February 15, 2022 (maturity) Principal Amount $2,865,000 3,010,000 The Paying Agent/Registrar will select by lot or by any other customary method that results in a random selection the specific Certificates (or with respect to Certificates having a denomination in excess of $5,000, each $5,000 portion thereof) to be redeemed by mandatory redemption. The principal amount of Certificates required to be redeemed on any redemption LUB200ni003 D~Has 1007937_1.DOC -2- ) date pursuant to the foregoing mandatory sinking fund redemption provisions hereof shall be reduced, at the option of the City, by the principal amount of any Certificates which, at least 45 days prior to the mandatory sinking fund redemption date (i) shall have been acquired by the City at a price not exceeding the principal amount of such Certificates plus accrued interest to the date of purchase thereof, and delivered to the Paying Agent/Registrar for cancellation, or (ii) shall have been redeemed pursuant to the optional redemption provisions hereof and not previously credited to a mandatory sinking fund redemption. Notice of such redemption or redemptions shall be given by first class mail, postage prepaid, not less than 30 days before the date fixed for redemption, to the registered owner of each of the Certificates to be redeemed in whole or in part. Notice having been so given, the Certificates or portions thereof designated for redemption shall become due and payable on the redemption date specified in such notice; from and after such date, notwithstanding that any of the Certificates or portions thereof so called for redemption shall ~t Ieve been surrendered for payment, interest on such Certificates or portions thereof sh~ · .~rue. As provided in the Ordinance, an · t c l:it · · ~~~erein set forth, this the Paying Agent/Regi~~g, · em~ vidence of transfer as is acceptable to the Paying Agen~ · r on:.. orte .~ ore new fully registered Certificates of the same stated maturity, o~ ~· ed ~minations, bearing the same rate of interest, and for the same aggregate principal ~ount will be issued to the designated transferee or transferees. The City, the Paying Agent/Registrar, and any other person may treat the person in whose name this Certificate is registered as the owner hereof for the purpose of receiving payment as herein provided (except interest shall be paid to the person in whose name this Certificate is registered on the Record Date) and for all other purposes, whether or not this Certificate be overdue, and neither the City nor the Paying Agent/Registrar shall be affected by notice to the contrary. IT IS HEREBY CERTIFIED AND RECITED that the issuance of this Certificate and the series of which it is a part is duly authorized by law; that all acts, conditions, and things to be done precedent to and in the issuance of the Certificates have been properly done and performed and have happened in regular and due time, form, and manner as required by law; that ad valorem taxes upon all taxable property in the City have been levied for and pledged to the payment of the debt service requirements of the Certificates within the limit prescribed by law; that, in addition to said taxes, further provisions have been made for the payment of the debt service requirements of the Certificates by pledging to such purpose Surplus Revenues, as defined in the Ordinance, derived by the City from the operation of the Waterworks System in an amount limited to $500; that when so collected, such .taxes and Surplus Revenues shall be appropriated to such purposes; and that the total indebtedness of the City, including the Certificates, does not exceed any constitutional or statutory limitation. LUB200nJ003 Dallas 1007937_UXX: -3- ) ) IN WITNESS WHEREOF, the City has caused this Certificate to be executed by the manual or facsimile signature of the Mayor of the City and countersigned by the manual or facsimile signature of the City Secretary, and the official seal of the City has been duly impressed or placed in facsimile on this Certificate. ~~ LUB200n1003 City Secret.Qlt:J, ~. - City of Lubbock, Texlls _. Dallas l007937_1.DOC -4- ) CERTIFICATE OF PAYING AGENT/REGISTRAR The records of the Paying Agent/Registrar show that the Initial Certificate of this series of Certificates was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas, and that th~· is'e of the Certificates referred to in the within-mentioned Ordinance. ~r . ft ~ r, \ '*eegis~onal Association Dated: ~ ~ ·;~--. ' By: Authorized Signatory LUB200nt 003 Dallas 1007937_l.DOC -5- ) \ , ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto (print or typewrite name, address and Zip Code of transferee): -------------- Dated: Signature Guaranteed By: Authorized Signatory LUB200nt003 Dallas 1007937_l.DOC .... -6- NOTICE: The signature on this Assignment must correspond with the name of the registered owner as it appears on the face of the within Certificate in every particular and must be guaranteed in a manner acceptable to the Paying Agent/Registrar. ' ) ) STATEMENT OF INSURANCE Financial Security Assurance Inc. ("Financial Security") New York, New York, has de.liv~red its m~icipal bond ~nsurance policy with respectt!·o t gc~ uled pa~~nts due of pnnctpal of and mterest on thts Bond to JPMorg~·~3§~ · . I Assoctatlon, Dallas, Texas, or it~ successo~, as p~ying agent f?f.:~~a~·· " . ~g · "). Said Policy is on file and avatlable for mspec~. tt:·· . · nilfipal t~ · g t and a copy thereof may be obtained from,~ ·c ·. t\he PJ · . · FINANCIAL SECTht .. A · RANC~ fNC. \ ) ) ) PFSA MUNICIPAL BONO INSURANCE COMMITMENT FINANCIAL SECURITY ASSURANCE INC. ("Financial Security" or "FSA") hereby commits to issue its Municipal Bond Insurance Policy (the "Policy") relating to whole maturities of the debt obligations described in Exhibit A attached hereto (the "Bonds"), subject to the terms and conditions set forth in this Commitment, of which Commitment Exhibit A is an integrated part, or added hereto (the •commitment"). To keep this Commitment in effect after the Expilation Date set forth in Exhibit A attached hereto, a request for renewal must be submitted to Financial Security prior to such Expiration Date. Financial Security reserves the right to refuse wholly or in part to grant a renewal. THE MUNICIPAL BONO INSURANCE POLICY SHALL BE ISSUED IF THE FOLLOWING CONDITIONS ARE SATISFIED: 1. The documents to be executed and delivered in connection with the issuance and sale of the Bonds shall not contain any untrue or misleading statement of a material fact and shall not fail to state a material fact necessary in order to make the information contained therein not misleading. 2. No event shall occur which would permit any underwriter or purchaser of the Bonds, otherwise required, not to be required to underwrite or purchase the Bonds on the date scheduled for the issuance and delivery thereof {"Closing Date"). 3. There shall be no material change in or affecting the Bonds (including, without limitation. the security for the Bonds) or the financing documents or the Official Statement (or any similar disclosure documents) to be executed and delivered in connection w!th the issuance and sale of the Bonds from the descriptions or forms thereof approved by Financial Security. 4. The Bonds shall contain no reference to Financial Security, the Policy or the insurance evidenced thereby except as may be approved by Rnancial Security. BONO PROOFS SHALL HAVE BEEN APPROVED BY FINANCIAL SECURITY PRIOR TO PRINTING. The Bonds shall bear a Statement of Insurance in the form provided by Financial Security. 5. Financial Security shall be provided with: (a) Executed eopies of all financing documents, any disclosure document {the "Official Statement•) and the various legal opinions delivered in connection with the issuance and sale of the Bonds (which shall be dated the Closing Date and which, except for the opinions of counsel relating to the adequacy of disclosure, shall be addressed to Financial Security or accompanied by a letter of such counsel permitting Financial Security to rety on such opinion as if such opinion were addressed to Financial Security}, including, without limitation, the approving opinion of bond counsel. Each of the foregoing shall be in form and substance acceptable to Financial Security. Copies of all drafts of such documents prepared subsequent to the date of the Commitment (blacklined to reflect all revisions from previously reviewed drafls) shall be fumished to Financial Security for review and approval. Final drafts of such documents shall be provided to Financial Security at least three (3} business days prior to the issuance of the Policy, unless Financial Security shall agree to some shorter period. (b) Evidence of wire transfer in federal funds of an amount equal to the insurance premium, unless alternative arrangements for the payment of such amount acceptable to Rnancial Security have been made prior to the delivery date of the Bonds. (c} Standard & Poor's Credit Market Services, Moody's Investors Service Inc. and Fitch JBCA, Inc. will separately present bills for their respective fees relating to the Bonds. Payment of such bills by the Issuer should be made directly to such rating agency. Payment of the rating fee Is not a condition to release of the Policy by Financial Security. 6. Promptly after the closing of the Bonds, Financial Security shall receive three completed sets of executed documents (one original and either (i) two photocopies (each unbound) or (ii) three compact discs). ·7. The Official Statement shall contain the language provided by Rnancial Security and only such other references to Rnancial Security or otherwise as Rnancial Security shall supply or approve. FINANCIAL SECURITY SHALL BE PROVIDED WITH FOUR PRINTED COPIES OF THE OFFICIAL STATEMENT. ) ' l ) EXHIBIT A TERM SHEET FOR MUNICIPAL BOND INSURANCE COMMITMENT Issuer: City of Lubbock, Texas (lubbock County) Principal Amount ol Bonds Insured: Not to Exceed $48,635,000 Name of Bonds Insured: Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 Date of Commitment: August 25, 2005 Expiration Date: Friday, October 28, 2005* Premium: . 182% of total debt service on the Bonds Insured. Bond Counsel Opinion --Language Requirements: The approving opinion of Bond Counsel shall include language to the effect that the Bonds are a full faith and credit obligation of the Issuer, the payment for which the Issuer is obligated to exercise its ad valorem taxing power, within the limits prescribed by law, upon all taxable property within the Issuer. The approving opinion of Bond Counsel shall also include language to the effect that the Bonds are payable from and secured by a lien on and pledge of the Net Revenues of the Issuer's combined Waterworks and Sewer System. Additional Conditions: None. FINANCIAL SECURITY ASSURANCE INC. Authorized Officer *To keep the Commitment in effect to the Expiration Date set forth above, Financial Security must receive a duplicate of this Exhibit A executed by an authorized officer by the earlier of the date on which the Official Statement containing disclosure language about Financial Security is circulated and ten days from the Date of Commitment. The undersigned agrees that if the Bonds are insured by a policy of municipal bond insurance, such insurance shall be provided by Financial Security in accordance with the tenns of the Commitment. L:\LEGAL\MUNIS\STATES\TX\96709_C.doc CITY OF LUBBOCK, TEXAS (LUBBOCK COUNTY) Authorized Officer ) ) ) PROCEDURES FOR PREMIUM PAYMENT TO FINANCIAL SECURITY ASSURANCE INC. Financial Security's issuance of its municipal bond insurance policy at bond closing is contingent upon payment and receipt of the premium. NO POLICY MAY BE RELEASED UNTIL PAYMENT OF SUCH AMOUNT HAS BEEN CONFIRMED. Set forth below are the procedures to be followed for confirming the amount of the premium to be paid and for paying such amount: Confirmation of Amount to be Paid: Upon determination of the final debt service schedule, fax such schedule to Financial Security Attention: Michael Caldiero, Assistant Vice President Phone No.: (212} 339-3468 Fax No.: (212) 339-3450 Confirm with the individual in our underwriting department that you are in agreement with respect to par and premium on the transaction prior to the closing date. Payment Date: Date of Delivery of the insured bonds. Method of Payment: Wire transfer of Federal Funds. Wire Transfer Instructions: Bank: ABA#: Acct. Name: Account No.: Transaction No.: The Bank of New York 021 000 018 Financial Security Assurance Inc. 8900297263 86709 CONFIRMATION OF PREMIUM WIRE NUMBER AT CLOSING Financial Security will accept as confirmation of the premium payment a wire transfer number and the name of the sending bank, to be communicated on the closing date to Erika Oiaz, Legal Assistant and Closing Coordinator • (212) 893-2706. ) .. In the event the Insurer is unable to fulfill Its contractual obligation under this policy or contract or application or certificate or evidence of coverage, the policyholder or certlflcateholder Is not protected by an Insurance guaranty fund or other solvency protection arrangement. FINANCIAL SECURITY ASSURANCE® ISSUER: City of Lubbock, Texas {Lubbock County) BONDS: $46,525,000 in aggregate principal amount of Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 MUNICIPAL BOND INSURANCE POLICY Policy No.: 205774-N Effective Date: September 29, 2005 Premium: $130,138.82 FINANCIAL SECURITY ASSURANCE INC. {"Financial Security"), for consideration received, hereby UNCONDITJONALL Y AND IRREVOCABLY agrees to pay to the-trustee (the '1"rustee") or paying agent (the "Paying Agent"} (as set forth In the documentation providing for the issuance of and securing the Bonds) for the Bonds, for the benefit of the Owners or, at the election of Financial Security, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the Business Day next following the Business Day on Which Financial Security shall have received Notice of Nonpayment. Financial Security will disburse to or for the benefit of each Owner of a Bond the face amount of principal of and interest on the Bond that Is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by Financial Security, in a form reasonably satisfactory to it, of (a) evidence of the Owner's right to receive payment of the principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner's rights with respect to payment of such principal or interest that Is Due for Payment shall thereupon vest in Financial Security. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by Financial Security is incomplete, it shall be deemed not to have been received by Financial Security for purposes of the preceding sentence and Financial Security shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, who may submit an amended Notice of Nonpayment. Upon disbursement in respect of a Bond, Financial Security shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the Bond and shall be fully subrogated to the rights of the Owner, including the Ownel's right to receive payments under the Bond, to the extent of any payment by Financial Security hereunder. Payment by Financial Security to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of Financial Security under this Policy. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. RBusiness Day" means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer's Fiscal Agent are authorized or required by law or executive order to remain closed. "Due for Payment" means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless Financial Security shall 1elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. "Nonpayment" means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there Is no Trustee, to the Paying Agent for payment in full of all principal and interest that Is Due for Payment on such Bond. RNonpayment~ shall also include, in respect of a Bond, any payment of principal or interest that is Due for Payment made to an Owner by or on behalf of the Issuer which has been J'e{;()Vered from such Owner pursuant to the ., Page 2of2 Policy No. 205774-N United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a ~urt having competent jurisdiction. "Notice" means , telephonic or telecopied notice, subsequently confirmed in a signed writing, or written notice by registered or certified mall, from an Owner, the Trustee or the Paying Agent to Financial Security which nonce shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. "Owner" means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that "Owner"' shall not include the Issuer or any person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds. Financial Security may appoint a fiscal agent (the "Insurer's Fiscal Agent") for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer's Fiscal Agenl From and after the date of receipt of such notice by the Trustee and the Paying Agent, (a) copies of all notices required to be delivered to Financial Security pursuant to this Policy shall be simultaneously delivered to the Insurer's Fiscal Agent and to Financial Security and shall not be deemed received until received by both and (b) all payments required to be made by Financial Security under this Policy may be made direcUy by Financial Security or by the Insurer's Fiscal Agent on behalf of Financial Security. The Insurer's Fiscal Agent is the agent of Financial Security only and the Insurer's Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer's Fiscal Agent or any failure of Financial Security to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, Financial Security agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights {whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to Financial Security to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy sets forth in full the undertaking of Financial Security, and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Exc~pt to the extent expressly modified by an endorsement hereto, (a) any premium paid in respect of this. Policy is nonrefundable for ~ny reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity and (b) this Policy may not be canceled or revoked. THIS POUCYi IS ~OT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. In witness whereof, FINANCIAL SECURITY ASSURANCE I executed on its behalf by its Authorized Officer. A subsidiary of Financial Security Assurance Holdings Ltd. 31 West 52nd Street. New York, N.Y. 10019 Fonn 500NY (5/90) (212} 826-0100 ) ) ) GENERAL CERTIFICATE We, the undersigned, Mayor, City Secretary and City Manager, respectively, of the City of Lubbock, Texas (the "City"), do hereby certify the following information: 1. This certificate relates to the City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates,), dated August 15, 2005. Capitalized terms used herein and not otherwise defined shall have the meaning assigned thereto in the ordinance authorizing the issuance of the Certificates (the "Ordinance"). 2. The total tax supported debt of the City, after giving effect to the issuance of the proposed Certificates, is $388,595,000. 3. The assessed value of property for the purpose of taxation in the City of Lubbock, Texas, as shown by its official tax rolls for the year 2004, being its latest approved official assessment rolls is $8,664,190,909, which amount is net of the amount of any exemptions to which property otherwise subject to taxation was entitled pursuant to applicable provisions of the Constitution and laws of the State of Texas. 4. A true and correct copy of the debt service schedule for the Certificates and all other outstanding indebtedness of the City payable from ad valorem taxes is set forth in the table entitled "General Obligation Debt Service Requirements" on page 38 of the City's Official Statement under the heading "DEBT INFORMATION," such debt service schedule being incorporated herein by reference for all purposes. 5. The City of Lubbock, Texas, is a duly incoxporated Home Rule City, and is operating and existing under the Constitution and laws of the State of Texas and the duly adopted Home Rule Charter of the City. The Home Rule Charter was last amended at an election held in the City on November 2, 2004. 6. The following are duly qualified and acting, elected or appointed officials of the City of Lubbock, Texas: Marc McDougal, Mayor Tom Martin, Mayor Pro Tern Lee Ann Dwnbauld, City Manager Jeffrey A. Yates, ChiefFinancial Officer Rebecca Garza, City Secretary Linda DeLeon ) Floyd Price ) GaryO. Boren ) Members of Phyllis S. Jones ) the Council Jim Gilbreath ) 7. No litigation of any nature has been filed or is now pending to restrain or enjoin the issuance or delivery of the Certificates or which would affect the provisions made for their payment or security, or in any manner questioning the proceedings or authority concerning the issuance of the Certificates, and so far as we know and believe, no such litigation is threatened. LUB200nl003 Dallas 1006942_4.00C 8. Neither the corporate existence nor the boundaries of the City, nor the title of its present officers to their respective offices is being contested, and so far as we know and believe no litigation is threatened regarding such matters, and no authority or proceedings for the issuance of the Certificates have been repealed, revoked or rescinded. 9. There has not been filed or presented to the City Secretary or the City Council any petition protesting, challenging or otherwise questioning the issuance of the Certificates. 10. A true and correct statement of the revenues and expenses of the System for fiscal years 2002, 2003 and 2004, together with a true and correct statement of current rates and charges for the services of the System, is attached hereto as Exhibit A. 11. Except for the pledge of income and revenues of the System to the payment of: (i) water supply contracts with the Canadian River Municipal Water Authority, (ii) the Certificates, and (ii) the obligations set forth in Exhibit B hereto, none of the City's debts or obligations will be secured by a lien on and pledge of the revenues or income of the System. 12. The City is not in default in the payment of principal and interest on its debt obligations. 13. The descriptions and statements of or pertaining to the City contained in its Official Statement pertaining to the Certificates (the .. Official Statement"), and any addenda, supplement or amendment with respect to such descriptions or statements thereto, on the date of such Official Statement, on the date of sale of the Certificates and on the date of the delivery, were and are true and correct in all material respects. 14. Insofar as the City and its affairs, including its financial affairs, are concerned, such Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 15. Insofar as the descriptions and statements, including financial data, of or pertaining to entities other than the City and their activities contained in such Official Statement are concerned, such statements and data have been obtained from sources which the City believes to be reliable and the City has no reason to believe that they are untrue in any material respect. 16. There has been no material adverse change in the financial condition and affairs of the City since the date of the Official Statement. 17. The undersigned Mayor and City Secretary officially executed and signed the Certificates, including the Initial Certificate delivered to the initial purchaser of the Certificates, by manually executing the Certificates or by causing facsimiles of our manual signatures to be imprinted or copied on each of the Certificates, and we hereby adopt said manual or facsimile signatures as our own, respectively, and declare that said facsimile signatures constitute our signatures the same as if we had manually signed each of the Certificates. LUB200nJ003 Dallas 1006942_4.00C -2- ) ) ) 18. The Certificates, including the Initial Certificate delivered to the initial purchasers of the Certificates, are substantially in the form, and have been duly executed and signed in the manner, prescribed in the ordinance authorizing the issuance of the Certificates. 19. At the time we so executed and signed the Certificates we were, and at the time of executing this certificate we are, the duly chosen, qualified, and acting officers indicated therein, and authorized to execute the same. 20. We have caused the official seal of the City to be impressed, or printed, or copied on each of the Certificates; and said seal on the Certificates has been duly adopted as, and is hereby declared to be, the official seal of the City. [EXECUTION PAGE FOLLOWS] LUB200ni003 Dallas 1006942_4.DOC -3- ) ) ) ) EXECUTED AND DELIVERED this 29~y tf$wkmbelf ~ODS • STATE OF TEXAS § § COUNTY OF LUBBOCK § OFFICIAL TITLE Mayor, City of Lubbock, Texas Before me, the undersigned authority, on this day personally appeared Marc McDougal, Mayor, of the City of Lubbock, Texas, known to me to be such person who signed the above and foregoing certificate in my presence and acknowledged to me that such person executed the above and foregoing certificate for the purposes therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE THIS 21~¢4¥(/f~emltt; YJ()5 [SEAL] e CELIAWEBB NUy Nile. Slate d'Teal My Commission EJrpiet 03-01-2006 ·~~ ~tary Public, In and for the State of Texas Signature Page for General Certificate ' ) EXECUTED AND DELIVERED this ~hV.V ~\ el.o o..r . MANUAL SIGNATURE STATE OF TEXAS § § COUNTY OF LUBBOCK § OFFICIAL TITLE City Manager City of Lubbock, Texas Before me, the undersigned authority, on this day personally appeared Lee Arm Dumbauld, City Manager of the City of Lubbock, Texas, known to me to be such person who signed the above and foregoing certificate in my presence and acknowledged to me that such person executed the above and foregoing certificate for the purposes therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE THIS 2.CfHl t;.({-Ugpfw.};IYj_2fxf5 ~~t'f'.:;.c. JANE MARIE BElL If~~\ Notary Public. State of Textls li~.]li\-:7 .. f Mv Commission Expires ~~~~ December 08, 2008 [SEAL] Signature Page for General Certificate ) ) ) EXECUTED AND DELIVERED this .Ji., f~ d-f( l:Lo os-. MANUAL SIGNATURE STATEOFTEXAS § § COUNTY OF LUBBOCK § OFFICIAL TITLE City Secretary, City of Lubbock, Texas Before me, the undersigned authority, on this day personally appeared Rebecca Garza, City Secretary, of the City of Lubbock, Texas, known to me to be such person who signed the above and foregoing certificate in my presence and acknowledged to me that such person executed the above and foregoing certificate for the purposes therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE THIS A/a dq;? jl~ _/ ~f Notary u he, In and for the State of Texas Signature Page for General Certificate ) EXHIBIT A W A T£RWOIU<S SYSTEM CONDENSED STAT£MtNT OF 0P£RA TIONS Fiscal Year Ended Seetember 301 2004 2003 2002 2001 2000 REVENUE Operating Revenues $ 31,907,893 $ 32,770,781 s 32,727,207 s 30,463,694 $ 29,037,723 Non-Operating Revenues 539,413 1,3371330 1.313,649 2,491,890 3,404,850 Gross Revenues s 32,447,306 s 34,108,111 s 34,040,856 s 32,955,584 $ 32,442,573 EXPENSE Operating Expense 1'1 20,.55{),379 20.137.448 19,.596,079 20,194,590 18.238,.503 Net Revenues $ 11.896.927 $ 13,970,663 $ 14.444,777 $ 12.760,994 $ 14,204,071 Water Meters 72,500 75,505 71,039 70,756 ?0,037 (I) Operating expense includes construction repayment costs and operoting and maintenance chalges paid to CRMWA and BRA and excludes deprecialion and capital expendirures. Note: 1be City bas no outstanding or authorized Waterworks System Revenue Bonds, however, !here is general obligation debt outstanding issued or planned for issuance for water system purposes on whi~h annual debt service is provided from revenues of the System, including the Bonds (see "Table 10 ·Computation of Self-Supporting Debt"). It is the City's policy and intention to maintain rates and charges for water service that will provide Net Revenues of the Waterworks System that will fully provide for debt service on general obligalion debt issued for Walerworks System purposes over the life of the present Waterworks System general obligation and any additional Waterworks System general obligation debt issued in the future. Within the Waterworks System enterprise fund, the City maintains a working capital fund reserve and a rate stabilization reserve. As for other City enterprise funds, d1e financial policies of the City include n rolling ten year accumulation period for such reserves. At present, the ten year reserve goal for Waterworks System working capital is $8,300,000 and for System rate stabilization is $1,700,000. While no assurances can be given, City Staff anticipate thnt the actual amounts in such reserves will be approximately $8,391,000 and $1,680,000 at the end of the current fiscal year. . .. . · .. ) ) MONTHLY WATER RATES On August 26, 1999, the Lubbock City Council adopted a three year 12% increase in water rates to generate revenues sufficient to pay the debt service on the Ciry's $24,800,000 Tax & Waterworks System Surplus Revenue Certificates of Obligation, Series 1999, which funded the City's share of the construction cost of the CRMWA Well Project. On August 29, 2002, the City Council adopted a water rate ordinance that provided for an approximately 3% water rate increase for the 2002-03 fiscal year, and three additional rate increases of approximately 3% to be implemented in each of the following three fiscal years. The City Council reviews water rates in connection with the adoption of the annual City budget, and it is possible that the anticipated rate increases could be greater or less in future years due to operating costs of the Waterworks System and the necessity of making additional capital improvements to the Waterworks System. The tnble below shows the rate for the current year, as oompared to the rates in place for the 2003-04 fiscal year. Base Rare 3/4" meter I" meter {single family residential) I" meter (irrigation) I" meter (other than residential) I Y:t" meter 2~ meter 3" meter 4" meter 6" meter 8" meter 10" meter Flow Rate Charge per 1,000 Gallons Single Family Residential Multi-Family Residential Commercial Schools Sprinkler System Prior Rate s 9.43 12.01 It.21 20.14 37.97 59.51 12.8.91 336.59 668.92 848.75 1,693.39 $ 1.73 1.46 1.60 1.63 2.02 Rate Effective 10/112004 s 9.71 12.37 11.55 20.74 39.11 6 1.29 132.78 346.69 688.99 874.21 1,744.19 $ 1.78 1.51 1.64 1.68 2.08 City Staff is in the process of preparing the FtSCal Year 2006 budget to present to the City Council for consideration. It is anticipated that a rate increase of3% for Fiscal Year 2006 will be part of the budget proposal presented to the City Council. TABLE 17-HISTORICAL WATER CONSUMPTION (MILLION GALLONS) Average Maximum Calendar Daily Consumption Year Consum(!tion D~/Year 2000 39.413 67.815 2001 38.25S 73.086 2002 37.401 63.911 2003 38.119 73.605 2004 34.421 65.994 ' ' ) Exhibit B Tax and Waterworks System Surplus Revenue Refunding Bonds, Series 2005, dated July 1, 2005, issued in the original principal amount of$43,080,000 Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2004, dated September 15, 2004, issued in the original principal amount of$3,100,000 Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2003, dated July 15, 2003, issued in the original principal amount of$9,765,000 Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2002, dated February 15, 2002, issued in the original principal amount of$6,450,000 Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 1999, dated September 15, 1999, issued in the original principal amount of$24,800,000 Tax and Waterworks System Surplus Revenue Refunding Bonds, Series 1999, dated April I, 1999, issued in the original principal amount of$12,300,000 Tax and Waterworks System (Limited Pledge) Revenue Certificates of Obligation, Series 1999, dated January 15, 1999, issued in the original principal amount of$15,355,000 Tax and Waterworks System (Limited Pledge) Revenue Certificates of Obligation, Series 1998, dated October 1, 1998, issued in the original principal amount of$10,260,000 Tax and Waterworks System (Limited Pledge) Revenue Certificates of Obligation, Series 1995, dated December 15, 1995, issued in the original principal amount of $10,000,000 LU8200nt003 Dallas 1006942_3.DOC B-1 ) CityofLubbock, Texas August 25, 2005 JPMorgan Chase Bank, National Association 2001 Bryan Street, 8th Floor Dallas, Texas 75201 Re: City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 Ladies and Gentlemen: The Issuer and the Underwriters of the captioned series of Certificates have designated your bank as the place, and as their agent, for the delivery and payment of the captioned Certificates. The initial Certificate for the above captioned series (the "Initial Certificate") is being delivered to you and you are hereby authorized and directed to hold the Initial Certificate for safekeeping pending said delivery and payment. Upon your receipt of the final unqualified legal opinion of Vinson & Elkins L.L.P ., as to the validity of the Certificates, and upon receipt of payment therefor from the Underwriters thereof, you are authorized and directed to cancel the Initial Certificate and to deliver the definitive Certificates to DTC on behalf of the Underwriters thereof. You are further authorized and directed to remit all of the aforesaid proceeds received from the delivery and payment of the Certificates as further directed by the Chief Financial Officer of the City. Sincerely, EXAS LUB200nt003 Dallas 1007006_1.DOC ' } ) ) The Attorney General of Texas William P. Clements Building 300 West 15th Street, 9th Floor Austin, Texas 78701 Attention: Public Finance Division Comptroller of Public Accounts Thomas 1 efferson Rusk Building 208 East 1Oth Street, Room 448 Austin, Texas 78701-2407 City of Lubbock, Texas August 25, 2005 Attention: Economic Analysis Center Re: City of Lubbock, Texas Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 To the Attorney General: The executed Initial Certificate for the captioned series has been or soon will be delivered to you for examination and approval. In COIUlection therewith, enclosed is a General Certificate executed and completed except as to date. When the Initial Certificate has received your approval and is ready for delivery to the Comptroller of Public Accounts for registration, this letter will serve as your authority to insert the date of your approval in the General Certificate and deliver the Initial Certificate to the Comptroller. Should litigation in any way affecting such Certificates develop the undersigned will notify you at once by telephone and telecommunication. You may be assured, therefore, that there is no such litigation at the time the Initial Certificate is finally approved by you, unless you have been advised otherwise. To the Comptroller: The approved Initial Certificate for the captioned series will be delivered to you by the Attorney General of Texas. You are hereby requested to register the Initial Certificate as required by law and by the proceedings authorizing such Initial Certificate. Following registration, you are hereby authorized and directed to notify and deliver the Initial Certificate to Vinson & Elkins L.L.P ., Dallas, Texas, which has been instructed to pick up same at your office. UJB200ni003 Dallas 1006940_1.00C ) ) ) ) ) Please also deliver to Vinson & Elkins L.L.P ., Dallas, Texas, three copies of each of the following: 1. Attorney General's approving opinion; and 2. Comptroller's signature certificate. Very truly yours, CITY OF LUBBOCK, TEXAS By: LUB200ni003 Dallas 1006940_l.DOC -2- ) ) ) ) FEDERAL TAX CERTIFICATE I, the undersigned officer of the City of Lubbock> Texas (the "Issuer"), make this certification for the benefit of all persons interested in the exclusion from gross income for federal income tax purposes of the interest to be paid on the Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates") which are being issued and delivered simultaneously with the delivery of this Certificate. I do hereby certify as follows in good faith as of the date hereof (the "Issue Date"): 1. Definitions. Each capitalized term used in this Certificate has the meaning or is the amount, as the case may be, specified for such term in this Certificate or in Exhibits to this Certificate and shall for all purposes hereof have the meaning or be the amount therein specified. All such terms defined in the Code or Regulations shall for all purposes hereof have the same meanings as given to those terms in the Code and Regulations unless the context clearly requires otherwise. 2. Responsible Officer. I am the duly chosen, qualified and acting officer of the Issuer for the office shown below my signature; as such, I am familiar with the facts herein certified and I am du1y authorized to execute and deliver this Certificate on behalf of the Issuer. I am the officer of the Issuer charged, along with other officers of the Issuer, with responsibility for issuing the Certificates. 3. Code and Regulations. I am aware of the provisions of sections 141, 148, 149 and 150 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury Regu1ations (the "Regu1ations") heretofore promulgated under sections 141, 148, 149 and 150 of the Code. This Certificate is being executed and delivered pursuant to sections 1.141-1 through 1.141-15, 1.148-0 through 1.148-11, 1.149(b)-l, 1.149(d)-1, 1.149(g)-1, 1.150-1 and 1.150-2 of the Regu1ations. 4. Reasonable Expectations. The facts and estimates that are set forth in this Certificate are accurate. The expectations that are set forth in this Certificate are reasonable in light of such facts and estimates. There are no other facts or estimates that wou1d materially change such expectations. In connection with this Certificate, the undersigned has to the extent necessary reviewed the certifications set forth herein with other representatives of the Issuer as to such accuracy and reasonableness. The undersigned has also relied, to the extent appropriate, on representations set forth in the Issue Price Certificate of A. G. Edwards & Sons, Inc., the manager of a group of underwriters (the "Underwriters"), attached as Exhibit A to this Certificate, and the certificate of First Southwest Company (the "Financial Advisor"), attached as Exhibit B to this Certificate. The undersigned is aware of no fact, estimate or circumstance that would create any doubt regarding the accuracy or reasonableness of all or any portion of such docwnents. 5. Description of Governmental Pur.pose. The Issuer is issuing the Certificates pursuant to the resolution, order or ordinance, as the case may be, adopted by the Issuer for purposes of authorizing the issuance of the Certificates (the "Certificate Document") for the purposes of funding (a) the Project as described more fully in the Official Statement prepared in connection with the offering of the Certificates and (b) the costs of issuance of the Certificates. The primary purpose of each transaction undertaken in connection with the issuance of the J017119_1.DOC ) ) ) Certificates is a bona fide governmental purpose. The Project is described as follows: construction and acquisition of public improvements, including streets, parts, drainage, water and sewer and electrical improvements, a water resources plan and an airport parking lot. 6. Amount and Expenditure of Sale Proceeds of the Certificates. (a) Amount of Sale Proceeds. The Issuer sold the Certificates to the Underwriters for $48,106,751.90, which price does not include Pre-Issuance Accrued Interest. The Sale Proceeds from the issuance of the Certificates is $48,399,351.90, based on the amount set forth on Exhibit A hereto. Such amount represents the Stated Redemption Price at Maturity (excluding Pre- Issuance Accrued Interest for those Certificates the interest on which is paid at least once annually) of the Certificates, plus any Original Issue Premimn, less any Original Issue Discount. No portion of the purchase price of any of the Certificates is provided by the issuance of any other issue of obligations. (b) Expenditure of Sale Proceeds. The Sale Proceeds of the Certificates will be expended as follows: {i) The amount of$292,600.00 will be allocated on the date of issuance of the Certificates to the payment of Underwriters' discount or compensation. (ii) The amount of $195,000.00 will be disbursed to pay other Issuance Costs on the Certificates (including any rating agency fees charged to the Issuer by the Bond insurer). (iii) The amount of $130,138.82 will be allocated on the date of issuance of the Certificates to the payment of Bond Insurance Premiwn on the Certificates (net of any rating agency fees). {iv) The amount of $47,781,613.08 will be deposited in the Construction or Project Fund and is expected to be disbursed to pay or reimburse the costs of acquisition and construction of the Project. The aggregate amount of the costs of acquisition and construction of the Project is anticipated to be not less than such amount. Any costs of the Project not financed out of original or investment proceeds of the Certificates will be financed out of the Issuer's available funds. (c) Reimbursement. Other than to the extent of preliminary expenditures (i.e., architectural, engineering, surveying, soil testing, Certificate issuance, and similar costs that are incurred prior to conunencement of acquisition, construction, or rehabilitation of the Project, other than land acquisition, site preparation, and similar costs incident to conunencement of construction), no portion of the amount described in paragraph 6(b) above will be disbursed to reimburse the Issuer for any expenditures made by the Issuer prior to the date that is 60 days before the earlier of the Issue Date or the date the Issuer adopted a resolution (the "Declaration"), if any, describing the Project, stating the maximum principal amount of obligations expected to be issued for the Project, and stating the Issuer's reasonable expectation on that date that it would reimburse expenditures for costs of the Project with proceeds of an obligation. The Declaration, if any, is not an official intent to reimburse that was declared as a matter of course, or in an amount substantially in excess of the amount expected to be necessary for the Project. The -2- 1017ll9_l.DOC ) } ) Issuer has not engaged in a pattern of failure to reimburse original expenditures covered by official intents. Such reimbursed portion will be treated as spent for purposes of paragraphs 11 (b) and 15 below. Any such Declaration is attached hereto as Exhibit C. (d) No Working CapitaL Except for an amount that does not exceed 5 percent of the Sale Proceeds of the Certificates (and that is directly related to capital expenditures financed by the Certificates), the Issuer will only expend proceeds of the Certificates for (i) costs that would be chargeable to the capital accounts of the Project if the Issuer's income were subject to federal income taxation and (ii} interest on the Certificates in an amount that does not cause the aggregate amount of interest paid on all of the Certificates to exceed that amount of interest on the Certificates that is attributable to the period that commences on the date hereof and ends on the later of (A) the date that is three years from the Issue Date of the Certificates or (B) the date that is one year after the date on which the Project is placed in service. (e) No Sale of Conduit Loan. No portion of the sale proceeds of the Certificates has been or will be used to acquire, finance, or refinance any conduit loan. (f) No Overissuance. The proceeds of the Certificates will not exceed by more than a minor portion (as defined in paragraph 13 below) the amount necessary to accomplish the govenunental purposes of the Certificates and, in fact, are not expected to exceed by any amount the amount of proceeds allocated to expenditures for the govenunental purposes of the Certificates. (g) Allocations and Accounting. The proceeds of the Certificates will be allocated to expenditures not later than 18 months after the later of the date the expenditure is made or the date the Project is placed in service, but in no event later than the date that is 60 days after the fifth anniversary of the date hereof or the retirement of the last Certificate, if earlier. The allocation of proceeds will be made by consistently employing the direct-tracing method of accounting. No proceeds of the Certificates will be allocated to any expenditures to which proceeds of any other obligations have heretofore been allocated. The Issuer will maintain records and docwnentation regarding the allocation of expenditures to proceeds of the Certificates and the investment of gross proceeds of the Certificates for at least six years after the close of the ·final calendar year during which any Certificate is outstanding. 7. Pre-Issuance Accrued Interest. The Issuer will also receive from the Underwriters on the Issue Date of the Certificates Pre-Issuance Accrued Interest from the Dated Date through the Issue Date in the amount of$249,672.19. Such amount will be deposited in the Debt Service Fund, and will be disbursed on the first interest payment date for the Certificates. 8. Expenditure of Investment Proceeds. The best estimate of the Issuer is that Investment Proceeds resulting from the investment of any proceeds of the Certificates pending expenditure of such proceeds for costs of the Project will be retained in the Construction Fund and disbmsed to pay or reimburse Project costs in addition to those described in paragraph 6 above. 9. No Replacement Proceeds. Other than amounts described herein, there are no amounts that have a sufficiently direct nexus to the Certificates or to the governmental purposes -3- 1017119_1.DOC ' ) ) ) of the Certificates, other than solely by reason of the mere availability or preliminary earmarking, that the amounts would have been used for such purpose if the proceeds of the Certificates were not used or to be used for such purpose. (a) No Sinking Funds. Other than to the extent described herein, there is no debt service fund, redemption fund, reserve fund, replacement fund, or similar fund reasonably expected to be used directly or indirectly to pay principal or interest on the Certificates. (b) No Pledged Funds. Other than amounts described herein, there is no amount that is directly or indirectly pledged to pay principal or interest on the Certificates, or to a guarantor of part or all of the Certificates, such that such pledge provides reasonable assurance that such amount will be available to pay principal or interest on the Certificates if the Issuer encounters financial difficulty. For purposes of this certification, an amount is treated as so pledged if it is held under an agreement to maintain the amount at a particular level for the direct or indirect benefit of the holders or the guarantor of the Certificates. (c) No Other Replacement Proceeds. There are no other replacement proceeds allocable to the Certificates because the Issuer reasonably expects that the tenn of the Certificates will not be longer than is reasonably necessary for the governmental purposes of the Certificates. The Certificates would be issued to achieve the governmental purpose of the Certificates independent of any arbitrage benefit as evidenced by the expectation that the Certificates reasonably would have been issued if the interest on the Certificates were not excludable from gross income (assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt interest rate). (d) Weighted Average Economic Life. The Weighted Average Maturity of the Certificates will not be greater than 120 percent of the weighted average estimated economic life of the portion of the Project financed, determined in accordance with section 14 7(b) of the Code. Such weighted average estimated economic Life is determined in accordance with the following assumptions: (a) The weighted average was determined by taking into account the respective costs of each asset financed by the Certificates, (b) the reasonably expected economic life of an asset was determined as of the later of the date hereof or the date on which such asset is expected to be placed in service (i.e., available for use for the intended purposes of such asset); (c) the economic lives used in making this determination are not greater than the useful lives used for depreciation under section 167 of the Code prior to the enactment of the current system of depreciation in effect under section 168 of the Code (i.e., the "mid-point lives") under the asset depreciation range ("ADR") system of section 167(m) of the Code, as set forth in Revenue Procedure 83-35, 1983-1 C.B. 745, where applicable, and the "guideline lives" under Revenue Procedure 62-21, 1962-2 C.B. 418, in the case of structures; and (d) land or any interest therein has not beeri taken into account in determining the average reasonably expected economic life of such Project, unless 25 percent or more of the net proceeds of the Certificates is to be used to finance land. 10. Yield on the Certificates. For the purposes of this Certificate, the Yield on the Certificates is the discount rate that, when used in computing the present value as of the Issue Date of the Certificates, of all unconditionally payable payments of principal, interest and fees for qualified guarantees on the Certificates, produces an amount equal to the present value, using . -4- 1017119_l.DOC ) ) the same discount rate, of the aggregate Issue Price of the Certificates as of the Issue Date. For pUiposes of determining the yield on the Certificates, the Issue Price of the Certificates is the sum of the issue prices for each group of substantially identical Certificates, plus Pre-Issuance Accrued Interest. For each group of substantially identical Certificates, the issue price is the first price at which a substantial amount (i.e., ten percent) is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters and wholesalers). The Issue Price is based upon the representations of the Underwriters set forth in Exhibit A hereto. No Underwriters' discountt issuance costs, or costs of carrying or repaying the Certificates is taken into account for purposes of computing the yield on the Certificates, except the cost of the Bond Insurance Premium. As set forth in paragraph 6(b)(iii) above, proceeds of the Certificates will be allocated on the date of issuance of the Certificates to the payment to the Insurer for municipal bond insurance for the Certificates. The Bond Insurance Premium paid to the Insurer is a qualified guarantee fee because: (a) As of the date hereof, the present value of the Bond Insurance Premium paid to the Insurer will be less than the present value of the expected interest savings on the Certificates as a result of the guarantee, computed using the Yield on the Certificates (determined with regard to such guarantee payments) as the discount rate; (b) The guarantee creates a guarantee in substance because it imposes a secondary liability on the Insurer that unconditionally (except for reasonable procedural or administrative requirements) shifts substantially all of the credit risk for all or part of the payments on the Certificates; (c) The Insurer is not a co-obligor and does not expect to make any payments other than payments for which the Insurer will be reimbursed immediately; (d) The Insurer and any related parties will not use more than ten percent of the gross proceeds of the Certificates that are guaranteed by the Insurer; (e) The Bond Insurance Premium paid or to be paid to the Insurer does not exceed a reasonable ann's length charge for the transfer of credit risk; (f) The Bond Insurance Premium paid or to be paid to the Insurer does not include any payment for any direct or indirect services other than the transfer of credit risk (including fees for the Insurer's overhead and other costs relating to the transfer of credit risk); (g) The Bond Insurance Premium paid or to be paid to the Insurer does not include any payments for the costs of underwriting or remarketing the Certificates or for the cost of insurance for casualty to the Issuer's property; (h) No portion of the Bond Insurance Premium paid or to be paid to the Insurer is refundable upon redemption of the Certificates before the final maturity date in an amount that would exceed the portion of such Bond Insurance Premium that had not been earned; and -5- J017119_l.DOC ) ) ) ) ) (i) The Insurer is reasonably assured that the Certificates will be repaid if the Project is not completed. The Yield with respect to that portion of the Certificates, if any, subject to optional redemption (other than the Certificates scheduled to mature in the years 2016, 2017, 2020, and 2022 through 2024 (the ''Yield-to-Call Certificates")) is computed by treating such Certificates as retired at the stated redemption price at the final maturity date because (a) the Issuer has no present intention to redeem prior to maturity the Certificates that are subject to optional redemption; (b) no Certificate is subject to optional redemption at any time for a price less than the retirement price at final maturity plus accrued interest; (c) no Certificate is subject to optional redemption within five years of the Issue Date of the Certificates; (d) no Certificate subject to optional redemption is issued at an issue price that exceeds the stated redemption price at maturity of such Certificate by more than one-fourth of one percent multiplied by the product of the state redemption price at maturity of such Certificate and the number of complete years to the first optional redemption date for such Certificate; and (e) no Certificate subject to optional redemption bears interest at a rate that increases during the term of the Certificate. Yield with respect to the Yield-to-Call Certificates is computed by treating such Bonds as retired at the stated redemption price on the dates that produce the lowest combined yield on the Bonds because the Underwriters have represented that such portion of the Bonds is issued at an issue price that exceeds the stated redemption price at maturity of each such Bond by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity of each such Bond and the number of complete years to the first optional redemption date for each such Bond. Such lowest yield determination is made separately for each individual group of Bonds. In the case of that portion of the Certificates, if any, subject to mandatory redemption, the yield on the Certificates is calculated by treating the outstanding stated principal amounts payable on the mandatory redemption dates as payments on such dates because the Underwriters have represented that the stated redemption price at maturity of such Certificates does not exceed the issue price of such Certificates by more than one-fourth of one percent multiplied by the product of the stated redemption price at maturity and the number of years to the date of the weighted average maturity (determined by taking into account the mandatory redemption schedule} of such Certificates. The Yield on the Certificates is calculated in the manner set forth above. The Issuer has not entered into a hedging transaction with respect to the Certificates. The Issuer will not enter into a hedging transaction with respect to the Certificates unless there is first received an opinion of nationally recognized bond counsel to the effect that such hedging transaction will not adversely affect the exclusion of interest on the Certificates from gross income for federal income tax pwposes. . -6- JO 17119 _I. DOC } ) 11. Temporary Periods and Yield Restriction. (a} Pre·lssuance Accrued Interest. The amount described in paragraph 7 represents Pre-Issuance Accrued Interest on the Certificates for a period not in excess of one year and will be expended within one year; therefore, such amount may be invested at an umestricted yield. (b) Project. The Issuer has incurred or will incur within six months of the date hereof a binding obligation to a third party which is not subject to any contingencies within the control of the Issuer or a related party pursuant to which the Issuer is obligated to expend at least five percent of the sale proceeds of the Certificates on the Project. The Issuer reasonably expects that work on or acquisition of the Project will proceed with due diligence to completion and that the proceeds of the Certificates will be expended on the Project with reasonable dispatch. The Issuer reasonably expects that 85 percent of the Sale Proceeds of the Certificates will have been expended on the Project prior to the date that is three years after the Issue Date. Any Sale Proceeds not expended prior to the date that is three years after the Issue Date> will be invested at a yield not "materially higher" than the Yield on the Certificates, except as set forth in paragraph 13 below. The Issuer reasonably expects that any amount derived from the investment of moneys received from the sale of the Certificates and from the investment of such investment income will not be commingled with substantial other receipts or revenues of the Issuer and will be expended prior to the date that is three years after the Issue Date, or one year after receipt of such investment income, whichever is later. Any such investment proceeds not expended prior to such date will be invested at a yield not "materially higher" than the Yield on the Certificates, except as set forth in paragraph 13 below. 12. Debt Service Fund. Pursuant to the Certificate Document, the Issuer has created or continued, as the case may be, a debt service fund (the "Debt Service Fund") and the proceeds from all taxes levied, assessed and collected for and on account of the Certificates are to be deposited in such Fund. The Issuer expects that taxes levied, aSsessed and collected for and on account of the Certificates will be sufficient each year to pay such debt service. All amounts which will be depleted at least once each bond year, except for a reasonable carryover amount not in excess of the greater of the earnings on such portion of the Fund for the immediately preceding bond year or one-twelfth of the principal and interest payments on the Certificates for the immediately preceding bond year, will constitute a bona fide debt service fund component of the Debt Service Fund (the "Bona Fide Portion"). Such Bona Fide Portion of the Debt Service Fund will be used primarily to achieve a proper matching of revenues and principal and interest payments on the Certificates within each bond year. Amounts held in the Bona Fide Portion of the Debt Service Fund will be invested at an unrestricted yield because such amounts will be expended within 13 months of the date such amounts are received. The remaining portion of the Debt Service Fund (the 11Reserve Portion"), if any, will be treated separately for purposes of this Certificate. Amounts on deposit from time to time in the Bona Fide Portion and the Reserve Portion are allocable between the Certificates and any other obligations of the Issuer secured by the Debt Service Fund on the basis of one of the methods set forth in section 1.148-6( e)( 6) of the Regulations. The portion of the Reserve Portion allocable to the Certificates will not exceed at any time the least of (a) ten percent of the stated principal amount of the Certificates (or sale proceeds in the event that the amount of original issue discount exceeds two percent multiplied by the stated redemption price at matmity ofthe·Certificates}, (b) the maximum annual principal and interest requirements of the Certificates, and (c) 125 percent of average annual principal and -7- 1017119_l.DOC ) \ ' I } interest requirements of the Certificates. Therefore, all amounts therein may be invested at an umestricted yield. Any amounts held in the Bona Fide Portion for longer than 13 months or held in the Reserve Portion in excess of the least of the amounts described above, will be invested in obligations the yield on which is not in excess of the Yield on the Certificates, except as set forth in paragraph 13 below. 13. Minor Portion. All gross proceeds will be invested in accordance with paragraphs 11 and 12 above. To the extent such amounts remain on hand following the periods set forth in paragraphs 11 and 12 above or exceed the limits set forth in paragraph 12 above, the Issuer will invest such amounts at a restricted yield as set forth in such paragraphs; provided, however, that a portion of such amounts, not to exceed in the aggregate the lesser of $100,000 or five percent of the sale proceeds of the Certificates (the "Minor Portion"), may be invested at a yield which is higher than the Yield on the Certificates. 14. Issue. There are no other obligations that (a) are sold at substantially the same time as the Certificates (i.e., within 15 days), (b) are sold pursuant to the same plan of financing with the Certificates, and (c) will be paid out of substantially the same source of funds as the Certificates. 15. Compliance With Rebate Requirements. (a) General. The Issuer has covenanted in the Certificate Document that it will take all necessary steps to comply with the requirement that 11rebatable arbitrage earnings" on the investment of the "gross proceeds" of the Certificates, within the meaning of section 148(f) of the Code be rebated to the federal government. Specifically, the Issuer will (a) maintain records regarding the investment of the "gross proceeds" of the Certificates as may be required to calculate such "rebatable arbitrage earnings" separately from records of amounts on deposit in the funds and accounts of the Issuer which are allocable to other bond issues of the Issuer or moneys which do not represent "gross proceeds" of any bonds of the Issuer, (b) calculate at such intervals as may be required by applicable Regulations, the amount of "rebatable arbitrage earnings," ifanyt earned from the investment ofthe "gross proceeds" of the Certificates and (c) payt not less often than every fifth anniversary date of the delivery of the Certificates and within 60 days following the final maturity of the Certificates, or on such other dates required or permitted by applicable Regulations, all amounts required to be rebated to the federal govenunent. The Issuer will maintain a copy of any such calculations, and all documentation necessary to produce such calculations or necessary to establish qualification for an exemption from the need to produce such calculationst for at least six years after the close of the final calendar year during which any Certificate is outstanding. Further, the Issuer wilt not indirectly pay any amount otherwise payable to the federal government pursuant to the foregoing requirements to any person other than the federal government by entering into any investment arrangement with respect to the "gross proceeds" of the Certificates that might r~ult in a reduction in the amount required to be paid to the federal government because such arrangement results in a smaller profit or a larger loss than would have resulted if the arrangement had been at ann's-length and bad the yield on the issue not been relevant to either party. (b) Two-Year Spending Exception. The Issuer hereby makes the elections, if any, set forth below for purposes of the two-year spending exception from arbitrage rebate: -8- 1017119_1.DOC ; ) ) ELECT rxl D D D DO NOT ELECT D N/A IT D D D 1. To use actual facts to apply the proVISions of paragraphs (e) tlu'ough (m) of section 1.148-7 of the Regulations. Section 1.148-7(£)(2) of the Regulations. 2. To exclude earnings on a reasonably required resenre or replacement fund from the definition of "available construction proceeds" for purposes of the spending requirements. Section l.I48-7(i)(2) of the Regulations. · 3. To treat the portion of the Tax-Exempt Certificates that is not a refunding issue as two, and only two, separate issues, one of which (a) meets the definition of a construction issue and (b) is reasonably expected as of the date hereof to finance all of the construction expenditures to be financed by the Tax-Exempt Certificates. Section 1.148- 7(j)(l) of the Regulations. 4. To pay a penalty (the 111-1/2% penalty") to the United States in lieu of the obligation to pay arbitrage rebate on available construction proceeds in the event that the Tax- Exempt Certificates fail to satisfy any of the semiannual spending requirements for the two-year rebate exception. Section l.l48-7(k)(l) of the Regulations. The Issuer reasonably expects that at least 75 percent of the "available construction proceeds" of the Certificates, within the meaning of section 1.148-7(i} of the Regulations, will be allocated to "construction expenditures," within the meaning of section 1.148-7(g) of the Regulations, for property owned by the Issuer.] 1 16. Not an Abusive Transaction. (a) General. No action taken in connection with the issuance of the Certificates will enable the Issuer to (i) exploit, other than during an allowable temporary period, the difference between tax-exempt and taxable interest rates to obtain a material financial advantage (including as a result of an investment of any portion of the gross proceeds of the Certificates over any period of time, notwithstanding that, in the aggregate, the gross proceeds of the Certificates are not invested in higher yielding investments over the term of the Certificates), and (ii) issue more bonds, issue bonds earlier, or allow bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental pwposes of the Certificates. To the best of our knowledge, no actions have been taken in connection with the issuance of the. Certificates other than actions that would have been taken to accomplish the governmental purposes of the Certificates if the interest on the Certificates were not excludable from gross income for federal 1 Use for an other issues. -9- l017119_l.DOC ) ) ) ) ) income tax purposes (assuming the hypothetical taxable interest rate would be the same as the actual tax-exempt interest rate on the Certificates). (b) No Sinking Fund. No portion of the Certificates has a term that has been lengthened primarily for the purpose of creating a sinking fund or similar fund with respect to the Certificates. (c) No Window. No portion of the Certificates has been structured with maturity dates the primary purpose of which is to make available released revenues that will enable the Issuer to avoid transferred proceeds or to make available revenues that may be invested to be ultimately used to pay debt service on another issue of obligations. 17. No Arbitrage. On the basis of the foregoing facts, estimates and circumstances, it is expected that the gross proceeds of the Certificates will not be used in a manner that would cause any of the Certificates to be an ttarbitrage bond" within the meaning of section 148 of the Code and the Regulations. To the best of the knowledge and belief of the undersigned, there are no other facts, estimates or circumstances that would materially change such expectations. 18. No Private Use, Payments or Loan Financing. (a) General. The Issuer reasonably expects, as of the date hereof, that no action or event during the entire stated term of the Certificates will cause either the "private business tests" or the uprivate loan financing test," as such terms are defined in the Regulations, to be met. (i) Not more than ten percent of the proceeds of the Certificates will be used in a trade or business of a nongovenunental person. For purposes of determining use, the Issuer will apply rules set forth in applicable Regulations and Revenue Procedures promulgated by the Internal Revenue Service, including, among others, the following rules: (A) Any activity carried on by a person other than a natural person or a state or local governmental unit will be treated as a trade or business of a nongovenunental person; (B) the use of all or any portion of the Project is treated as the direct use of proceeds; (C) a nongovernmental person will be treated as a private business user of proceeds of the Certificates as a result of ownership, actual or beneficial use pursuant to a lease, or a management or incentive payment contract, or certain other arrangements such as a take-or-pay or other output-type contract; and (D) the private business use test is met if a nongovernmental person has special legal entitlements to use directly or indirectly the Project. (ii) The Issuer has not taken and will not take any deliberate action that would cause or permit the use of any portion of the Project to change such that such portion will be deemed to be used in the trade or business of a nongovernmental person for so long as any of the Certificates remains outstanding (or until an opinion of nationally recognized bond counsel is received to the effect that such change in use will not adversely affect the excludability from gross income for federal income tax purposes of interest payable on the Certificates). For this purpose, any action within the control of the Issuer is treated as a deliberate action. A deliberate action occurs on the date the Issuer enters into a binding -10- 1017119_1.DOC ) ) > contract with a nongoverrunental person for use of the Project that is not subject to any material contingencies. (iii) No portion of the proceeds of the Certificates will be directly or indirectly used to make or finance a loan to any person other than a state or local governmental unit. Except to the extent permitted by section 141 of the Code and the Regulations and rulings thereunder) the Issuer shall not use gross proceeds of the Certificates to make or finance loans to any person or entity other than a state or local government. For purposes of the foregoing covenant, gross proceeds are considered to be "loaned" to a person or entity if ( 1) property acquired, constructed or improved with gross proceeds is sold or leased to such person or entity in a transaction which creates a debt for federal income tax purposes) (2) capacity in or service from such property is committed to such person or entity under a take-or-pay, output, or similar contract or arrangement, or (3) indirect benefits, or burdens and benefits of ownership, of such gross proceeds or such property are otherwise transferred in a transaction which is the economic equivalent of a loan. (b) Dispositions of Personal Property in the Ordinary Course. The Issuer does not reasonably expect that it will sell or otherwise dispose of personal property components of the Project financed with the Certificates other than in the ordinary course of an established governmental program that satisfies the following requirements: (i) The weighted average maturity of the portion of the Certificates financing personal property is not greater than 120 percent of the reasonably expected actual use of such personal property for governmental purposes; (ii) The reasonably expected fair market value of such personal property on the date of disposition will be not greater than 25 percent of its cost; (iii) Such personal property will no longer be suitable for its governmental purposes on the date of disposition; and (iv) The Issuer is required to deposit amounts received from such disposition in a conuningled fund with substantial tax or other governmental revenues and the Issuer reasonably expects to spend such amounts on governmental programs within 6 months from the date of conuningling. Furthermore, the Issuer will not sell or otherwise dispose of all or any portion of the Project in circumstances in which the foregoing requirements are not satisfied unless it has received an opinion of nationally recognized bond counsel to the effect that such disposition will not adversely affect the treatment of interest on the Certificates as excludable from gross income for federal income tax purposes. (c) Other Agreements. The Issuer will not enter into any agreement with any nongovernmental person regarding the use of all or any portion of the Project during the stated term of the Certificates Wlless it has received in each and every case an opinion of nationally recognized bond counsel to the effect that such agreement will not adversely affect the treatment of interest on the Certificates as excludable from gross income for federal income tax purposes. -11- 1017119_1.00C ) ) 19. Weighted Average Maturity. The Weighted Average Maturity of the Certificates set forth on Exhibit B attached to this Certificate is the sum of the products of the Issue Price of each group of identical Certificates and the number of years to maturity (determined separately for each group of identical Certificates and taking into account mandatory redemptions), divided by the aggregate Sale Proceeds of the Certificates. 20. Certificates are Not Hedge Bonds. Not more than 50 percent of the proceeds of the Certificates will be invested in nonpurpose investments (as defined in section 148(f)(6)(A) of the Code) having a substantially guaranteed yield for four years or more within the meaning of section 149(g)(3)(A)(ii) of the Code. Further, the Issuer reasonably expects that at least 85 percent of the spendable proceeds of the Certificates will be used to carry out the governmental purposes of the Certificates within the three-year period beginning on the date the Certificates are issued. WITNESS MY HAND, this 29th day of September, 2005. CTIY OF LUBBOCK, TEXAS By: Title: City Manager Attachments: Exhibit A: Issue Price Certificate ExhibitB: Certificate of Financial Advisor -12- 2430614_1.DOC ) ) ) EXHIBIT A CERTIFICATE OF UNDERWRITERS I, the undersigned officer of the Underwriters, make this certification for the benefit of all persons interested in the exclusion from gross income for federal income tax purposes of the interest on the Certificates: Each capitalized tenn used herein has the meaning or is the amount, as the case may be, specified for such tenn in the Federal Tax Certificate to which this Exhibit A is attached (the "Federal Tax Certificate"). I hereby certify as follows in good faith as of the Issue Date: 1. I am the duly chosen, qualified and acting officer of the Underwriters for the office shown below my signature; as such, I am familiar with the facts herein certified and I am duly authorized to execute and deliver this certificate on behalf of the Underwriters. I am the officer of the Underwriters charged, along with other officers of the Underwriters, with responsibility for the Certificates. 2. The Underwriters have made a bona fide public offering to the public of the Certificates at the issue prices to the public set out on the cover of the Official Statement. The issue prices set forth on the cover of the Official Statement were detennined on the date the Certificates were purchased by the Underwriters based on the reasonable expectations regarding the initial public offering prices. The issue price for each maturity of the Certificates, represents the first price (including original issue premium and discount and accrued interest to the Issue Date only) of the Certificates at which a substantial amount (at least 10 percent) of each such maturity was sold to the public. The aggregate of such issue prices of all of the Certificates is $48,649,024.09 (the "Issue Price"), which price includes Pre-Issuance Accrued Interest in the amount of $249,672.19. The initial public offering price described above does not exceed the fair market value for the Certificates on the sale date. The tenn "public," as used herein, does not include bondhouses, brokers, dealers, and similar persons or organizations acting in the capacity of underwriters or wholesalers. 3. The Issuer may rely on the statements made herein in connection with making the representations set forth in the Federal Tax Certificate and in its efforts to comply with the conditions imposed by the Code on the exclusion of interest on the Certificates from the gross income of their owners. Vinson & Elkins L.L.P. also may rely on this certificate for purposes of its opinion regarding the treatment of interest on the Certificates as excludable from gross income for federal income tax purposes. Title: Managing Director -lnvesunent Banking Exhibit A-1 Tax Certificate ) ) ) ) EXHIBITB CERTIF1CATE OF F1NANCIAL ADVISOR I, the undersigned officer of the Financial Advisor, make this certificate for the benefit of all persons interested in the exclusion from gross income for federal income tax purposes of the interest on the Certificates. Each capitalized term used herein has the meaning or is the amount, as the case may be, specified for such tenn in the Federal Tax Certificate to which this Exhibit B is attached (the "Federal Tax Certificate"). I hereby certify as follows as of the Issue Date: I. I am the duly chosen, qualified and acting officer of the Financial Advisor for the office shown below my signature; as such, I am familiar with the facts herein certified and I am duly authorized to execute and deliver this certificate on behalf of the Financial Advisor. I am the officer of the Financial Advisor who has worked with representatives of the Issuer in structuring the financial terms of the Certificates. 2. The Issue Price (including Pre-Issuance Accrued Interest) of the Certificates based on the representations set forth in Exhibit A to the Certificate to which this Exhibit is attached is not more than $48,649,014.09. The yield on the Certificates, based on such Issue Price (including Pre-Issuance Accrued Interest) is not less than 4.0433 percent (the ''Yield"). For purposes of this certificate, the term "yield" means that yield which is computed as described in paragraph 10 of the Federal Tax Certificate. The purchase price of the Certificates and the Bond Insurance Premium, if any, used in computing yield on the Certificates is based solely on the Issue Price Certificate of the Underwriters attached as Exhibit A to the Federal Tax Certificate. 3. The Financial Advisor computed the Weighted Average Maturity of the Certificates to be 11.411 years, as set forth in paragraph 19 of the Federal Tax Certificate. 4. To the best of my knowledge the statements set forth in paragraph 16 of the Federal Tax Certificate are true. 5. The Issuer may rely on the statements made herein in connection with making the representations set forth in the Federal Tax Certificate and in its efforts to comply with the conditions imposed by the Code on the exclusion of interest on the Certificates from the gross income of their owners. Vinson & Elkins L.L.P. also may rely on this certificate for purposes of its opinion regarding the treatment of interest on the Certificates as excludable from gross income for federal income tax purposes. FIRST SOUTIIWEST COMPANY By:~J:;> Title: l/rVL-~-~ Date: * -.l. 'j { ~ 0'7 s-- Exhibit B~l Tax Certificate. DOC ) ) ) Vinson &Elkins Julie Willl11111s jWilliamsOvelaw.oom Tel713.758.3878 Fu 713.615.5059 October 14, 2005 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7003 1680 0000 6476 9724 District Director Internal Revenue Service Ogden, UT 84201 Re: $46,525,000 City of Lubbock, Texas Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 Dear Sir: Enclosed please find an originally executed Form 8038-G (Information Return for Tax- Exempt Govenunental Obligations) for the above-captioned bond issue. Please acknowledge receipt of the Form 8038-G by stamping and returning the copy of the Form 8038-G attached to the self-addressed, postage-paid envelope that we have provided. cc: Julie Partain/ 94S755_1.00C Vinson & Elkins UP Attorneys at Law Aus11n Beijing Dallu Dubai Houston London Mosoow New YOlK Tokyo Washington Very truly yours, %:i~ (:!~ 8 Assistant Arst City Tower, 1001 Fannin Street, Suite 2300, Houston, Texas 11002-6760 Tel713.758.2222 Fax 713.758.2:34& www.wlaw.com ) ) ) Focm8038-G Information Return for Tax-Exempt Governmental Obligations (AllY. N<Mmber 2000) .... thllr 11'111ma1 R4MIIUe Codeaec:aon 149(e) OM9No.1~ .... See ....... ~ Depemlenlolllw. T~ lnlemal AIHenue Sellolce c.utlon: Jfthll/ssuepr;;;.Js und«'$100,000, u.se Fonn8038-GC. I Part II Reporting Aa..uovm~ If Amended Retum, check here..,. J ] • lssuet's l\ll'llt 2 ......~ ...... tllnc.clon I'II.IIIW Citv of Lubbock. Texas 7s-6000590 3 Number and street (or P.O. box If mall I$ not dellYered l!o s1reet address) Room/$ulte 4 Report number P.O. Box 2000 3 05 s City. town. Of posl dflce. state. and ZIP code • Oaleoll- Lub~k. Texas 79457 Seotember l9 1005 7 N11tne of lsaua 8 CUSIP numbef Tax and Waterworks System Surplus Revenue Certificates of ObMation. Series 2005 549187V66 ' ~ andtllleol ollleet or legal repteeantal!Ye \lltlom 1t1e IRS maycallfol' more 1n1otma11on 10 ~numberolollloer•lel'lll~ Lee ADn Dumbauld; Citv Ma.na2er (806) 775-2000 I Part Ill Type of Issue (check applicable box(es) and enter tha Issue Price) See instructions and attach schedule 11 0 Education . • • . . . . • . • • . . • . • • . . . . . . . • • . • • • • • • • • • • . • • • • • • • • • :. • • • • • • • . • • . . . • • . • 11 12 0 Health and hospital • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • :. • • • • . • • • . . . • . . • • • • . 12 13 0 Transportation ••.•••••••..••••••••••••••••••••••••••••••••.•••••••..•.•••••. 13 14 0 Public safety • • • . • • • • • . • . . • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • . . • • • . • 14 15 0 Environment (induding sewage bonds) •...•..•••...•.•........••••••.•...•.....•.. 15 16 O HotJSing ....................................................................... 16 17 0 UtifiUes ....................................................................... 17 18 Iii Olhet. Describe..,. Stt~~ I! arks. Dninal@. Utiliti~ Airj!ort 18 Atl 'tOQ_~4\2 19 If obligations are TANs or RAN&, check box..,. 0 Jf obligations are BANs, check box • • • • • • ..,. 0 20 If obligations are In lhe fonn of a Jease or Installment sale, check box . • • . . . • • • • . • • • • • • ..,. Fi I Part Ill I Description of Obligations. (Complete for the entire Issue for which this form is being filed.) (a) Final maturity date 00 lssue l"ke (c) Slal8d rodempdon (cl) Welg!Md (e) Yield priQe at mlllllrlty •~rage maturity 21 lll51l0l5 $ 48.399.352 $ 46.515000 11.411 years 4.0433 o/o I Part lVI Uses of Proceeds of Bond ls8ue (lnctudlng underwrlterst discount 22 Proceeds used for accrued interest •••••••••••••••••••••••••••••••.••••.•••....•••••• 22 249.672 23 Issue price of entire issue (enter amount from line 21, column (b)) •.•••••••••••••••••••••••• 23 48399~5%_ 24 P1oceeds used tor bond issuance costs (lnducling underwriters· discount} 24 .ttl7 ,;an 25 Proceeds used for credit enhancement • • • • • • • • • • • • • • • • • • • • • • • • • • • 25 nn. no 26 Proceeds allocated to reasonably required reserve or replacement fund •• 26 toi 'Z1 Proceeds used to currently refund prior issues •••••.••••••••••••••• 'Z1 ro1 28 Proceeds used to advance refund prior issues ••••••••••••••••••••• 28 {0) 29 Total (add lines 24 through 28) •••••.••••••••••••••••••••••••••••••••••••••••••••••• .29 617739 30 Nonrefunding proceeds of the Issue (subtract line 29 from line 23 and enter amount hetel ••...•.. 30 47781.613 I Part VI De6crtptlon of Refunded Bonde eta thfs part only for refunding bonds.) 31 Enter the remaining weighted average maturity of 1he bonds to be currently refunded. • • • • • • • • • • ..,. _____ --.Lyea~=s 32. Enter the remaining weighted average maturity of lhe bonds to be advance refunded • • • • • • • • • • • ..,. _____ -..~.years= 33 Enter the last date on which the refunded bonds will be called • • • • • • • . • • • • • • • . . . . • • • . . . • • . ~ ------- 34 Enter the date(s) the refunded bonds were Issued ~ IPartVJI MJsceiiMeOUS 35 Enter the amount ot the state volume cap allocated to the Issue under section 141(b)(S} •••.••••• 35 (0} 36a Enter the amlli.D d iJOSS ptl.lCfl8Js invested or to be invested in a ~eed lnvestmai COI'lllaCt (see ln&1ructions) •••• 36a (0) b Entet the final maturity date of the guaranteed Investment conttact..,. :rt Pooled financings: a Proceed& ol this issue that are to be used to make loans to dher IPifi!Miental units ••••••••••• :rta (0} b If this Issue is a toan made from the proceeds of another tax-exempt Issue. check box ..,. 0 and enter the name ot the issu« ~ and 1he date of the issue..,.---------- 38 If the issuer has designated the issue under section 265(b)(3)(B)0)(111) {small issuer exception), check box •••••••..••• .,. 0 39 If the lssuet has elected to pay a penalty in lieu of arbitrage rebate, dlec:k box • • • • • • • • • . • • • • • • • • • • • • • • • • • • • • • . • • ~ 0 40 If the issuer has Identified a hedge, check box ••••••••••••••••••••••.••••••••••••••••••••••••••••••••••• ..,. Under panaltles o1 perjury, I c*lanl flat 1 h&vt a.mlned lila mum and accompatl)illg sc!ledulfot and s1a1lamanls, and ID IIIII best ol my llnowledge and belief, Sign Here lheV are M, correc:i. w complete. ~ Xu~~ t/·2/·D$ , SIJ.Ci;c;;;;;.uuillOiiZIICl~ Oate fot Paperwork Alductlon Act Notice, ... page 2 c* 1he lnlbucllons. ISA STF FeDe403F ~ Lee ADn Dumbauld; City Manager r l' Of ptlnt name w tiu. Fonn 80:J8.G (RtY. H-2000) U.S. Postal Service, CERTIFIED MAILII RECEIPT ::r ::r ruru I'-['o r IT' (Domestic Mail On/ : No f ·ance Coverage Provtded) ..lJ . ..D 1'-1"-::r ::r- ..JJ..D 0 c Cedlllecl Fee co gg~~ 1-------i Cl . 0 Rellrlr:llld Oe@'My Fee .:0 :.:o ~-It~ ..D ..D 1--------{ r'l r'l 'Ti*l ~& ,_ $ L..=.------1 rn rnnr.~~~----------------------------------, o ·c ~ c !c 1'-. I'-District l)ircctor lnternal Revenue Service Cent« o~den. ur 84201 '· .· · ... .. ( ., • I • RECEIPT AND CERTIFICATE OF DELIVERY OF PAYING/AGENT REGISTRAR The undersigned, authorized representative of JPMorgan Chase Bank, as Paying Agent/Registrar, hereby makes the following acknowledgments and certifications in connection with the issuance and delivery of $46,525,000 principal amount of City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "CertificatesH). Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Ordinance authorizing the issuance thereof adopted by the City Council of the City of Lubbock, Texas (the "Issuer"). The undersigned hereby: I. Acknowledges receipt of (i) $48,356,424.09 from A. G. Edwards & Sons, Inc. (the "Underwriter"), representing the principal amount of the Certificates plus accrued interest of $249,672.19 and plus a net premium of $1,874,351.90 and less underwriters' discount of $292,600. 2. Acknowledges and certifies the application of amounts described in paragraph 1 hereof as required by and in accordance with the Closing Instructions attached hereto as Exhibit A prepared by First Southwest Company, the Issuer's Financial Advisor. 4. Certifies that the Initial Certificate for the Certificates, registered by the Comptroller of Public Accounts of the State of Texas and representing the aggregate principal amount of the Certificates, was delivered to or upon order of the Underwriter and was duly canceled this date upon delivery of the definitive Certificates to the Underwriter through The Depository Trust Company. DATED: September 29,2005. JPMORGAN CHASE BANK as Paying Agent/Registrar By: Title: LUB200171 003 Dallas 1020019_l.DOC Exhibit A WB200nt003 Dallas 1020019_l.DOC ) .:f j First Southwest Comoamr fiiil Investment Bankers Since 1119-46 1001 Main Street Suite 802 lubbock, Texas 79401 806.749.3792 Direct 806.790.5191 Cell 806.749.3792 Fax September 26, 2005 City of lubbock Ms. Lee Ann Dumbauld P. 0. Box2000 Lubbock, Texas79457 Phone: (806) 775-2016 Fax: (806) 775-2051 City of Lubbock Mr. Jeff Yates P.O. Box 2000 lubbock, Texas 79457 Phone: (806) 775-2161 Fax: (806) 775-2051 City of Lubbock Mr. Andy Burcham P.O. Box 2000 Lubbock, Texas 79457 Phone: (806) 775-2149 Fax: (806) 775-2051 McCall, Parkhurst & Horton l.L.P. Mr. Jeff Leuschel 717 North Harwood, Ninth Floor Dallas, Texas 75201 Phone: (214) 754-9200 Fax: (214)754-9250 Vinson & Elkins L.l.P. Ms. Jennifer W. Taffe 3700 Trammell CrCNI Center 2201 Ross Avenue Dallas, Texas 75201 Phone: (214) 220-7941 Fax: (214}999-7941 Ms. Erica Diaz Financial Security Assurance 31 West 521\d Street New York, NY 10019 Phone: (212) 893-2706 Fax: (212) 857-0349 Vince Viaille Vice President Wiaille@firstsw.com A.G. Edwards & Sons. Inc. Ms. Nora Chavez 70 NE loop410, Suite 915 San Antonio, Texas 78216 Phone: (210) 384-8811 Fax: (210) 384-8283 Wells Fargo Bank, N.A. Mr. Vince Vasquez 420 Montgomery Street San Francisco, CA 94163 Phone: (806) 767-7461 Fax: (806) 767-7465 Mr. lsraellugo JPMorgan Chase Bank, N.A. 2001 Bryan Street-8th Floor Dallas. Texas 75201 Phone: (214) 468-5105 Fax: (214) 468-6322 Re: Closing Instructions for the $46,525,000 City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the ·certificates") Payment for the above referenced Bonds is scheduled to occur at 10:00 AM, COT, on Thursday, September 29, 2005, and payment therefor is to occur at the offices of JPMorgan Chase Bank ( .. JPMorgan"). SOURCES OF FUNDS Par Amount of Certificates ......................................................................... . Reoffering Premium ................................................................................... . Accrued Interest (08/15/05 to 09129/05) ..................................................... . Less: Original Issue Discount. ................................................................... . Less: Underwriters OiSC<X.~nt ..................................................................... . TOTAL FUNDS AVAILABLE AT CLOSING .................................................. . USES OF FUNDS $ 46,525,000.00 1,982,467.15 249,672.19 (1 06,115.25) (292,600.00) $ 48,356,424.09 Deposit to Construction Fund ..................................................................... . $ 47,780,720.00 250,565.27 130,138.82 300.00 194.700.00 Deposit to Interest & Sinking Fund (accrued interest & rounding) ............ . Gross Bond Insurance Fee ........................................................................ . Paying Agent/Registrar Fee ....................................................................... . Costs of Issuance ....................................................................................... . TOTAL USES OF FUNDS ............................................................................. . $ 48,356,424.09 (A) On Thursday, September 29, 2005, the Underwriters, represented by A.G. Edwards & Sons, Inc .• shall wire $48,356,424.09 in immediately available funds to the paying agent bank, JPMorgan, prior to 10:00 AM, COT, for the account of the City of Lubbock, in payment for the purchase price of the Certificates. See wiring instructions below. Wiring Instructions for JPMorgan are as follows: JPMorgan Chase ABA: 113000609 Credit AJC #: 001 03237013 FFC: City of Lubbock, Certificates Series 2005 Attn: Issuer Administrative Services /Israel Lugo (B) On Thursday, September 29, 2005, JPMorgan shall wire or transfer immediately available funds, promptly upon receipt of the wire from A. G. Edwards & Sons, Inc., and in no event later than 11:00 AM, COT, as follows: (1) Transmit by wire or transfer to The Bank of New York ABA: 021000018, Acct. Name: Financial Security Assurance Inc. Account No.: 8900297263 For the City of lubbock, Texas Policy #205n4-N ............................................ $ 130,138.82 JPMorgan shall call Jennifer Taffe at (214) 220-7941 to provide the federal reference wire number so that she may call Financial Security Assurance, Inc. the release of the policy. (2) Transmit by wire to State Street Bank and Trust Company, Boston MA ABA #011 000028, BNF =Attn: TexPool #67573n4 RFB = location 10 #77963 OBI = Pool # 449, Account #015521 00019 Participant name: City of lubbock .................................................................... 47,780,720.00 (3) Transmit by wire to Wells Fargo Bank, N.A.. San Francisco, CA ABA #121 000248, Attn: Mr. Vince Vasquez Phone (806) 788-2~32, depository bank for City of Lubbock for credit to City of lubbock Master, Account #4000047951 .................................. 250,565.27 (Interest and Sinking Fund) (4) Retain in payment of services to be rendered as Paying Agent/Registrar ........ (5) Transmit by wire to Bank One, Texas ABA #111000614, Attn: Jack Addams Account #1822155345 for client# 0336-040 300.00 for credit to First Southwest Company for costs of issuance ............................. __ ---:.1 :::.;94~. 7~0~0,_,.0=0 Total Disbursement of Funds .......................................................................................... $ 48.356.424.09 The cooperation of the addressees with the above instructions is greatly appreciated. If you have any questions or cannot comply with any portion of the instructions, please contact us immediately at (806) 749-3792. Sincerely yours, Vince Viaille Vice President Cc: Jad< Addams Joe Brawner Mary Ann Ounda Arst SouthweSt Company 2 DISCLOSURE, NO DEFAULT AND TAX CERTIFICATE OF FINANCIAL SECURITY ASSURANCE INC. ) The undersigned hereby certifies on behalf of Financial Security Assurance Inc. (•Financial Security"), In connection with the issuance by Financial Security of its Policy No. 205774-N (the •poJicy") in respect of the $46,525,000 in aggregate principal amount of the City of Lubbock, Texas (Lubbock County) Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the ·aonds") that: ) (i) the information set forth under the caption "BOND INSURANCE -Financial Security Assurance InC in the official statement dated August 25, 2005, relating to the Bonds is true and correct, (ii) At June 30, 2005, Financial Security's total policyholders' surplus and contingency reserves were approXImately $2,365,896,000 and its total unearned premium reserve was approximately $1,719,641,000 in accordance with statutory accounting principles. At June 30, 2005, Financial Security's total shareholder's equity was approximately $2,819,103,000 and its total net unearned premium reserve was approximately $1,404,195,000 in accordance with generally accepted accounting principles, (iii) Financial Security is not currently in default nor has Financial Security ever been in default under any policy or obligation guaranteeing the payment of principal of or interest on an obligation, (iv) the Policy is an unconditional and recourse obligation of Financial Security (enforceable by or on behalf of the holders of the Bonds) to pay the scheduled principal of and interest on the Bonds in the event of Nonpayment by the Issuer (as set forth in the Policy), (v) the insurance premium of $130,138.82 (the "Premium") is a charge for the transfer of credit risk and was determined in arm's length negotiations and is required to be paid to Financial Security as a condition to the issuance of the Policy, (vi) no portion of such Premium represents an indirect payment of costs of issuance, including rating agency fees, other than fees paid by Financial Security to maintain its ratings, which, together with all other overhead expenses of Financial Security, are taken into account in the formulation of its rate structure, or for the provision of additional services by us, nor the direct or indirect payment for a cost, risk or other element that is not customarily bome by insurers of tax-exempt bonds (in transactions in which the guarantor has no involvement other than as a guarantor), (vii) Financial Security is not providing any services in connection with the Bonds other than providing the Policy, and except for the Premium, Financial Security will not use any portion of the Bond proceeds, (viii) except for payments under the Policy in the case of Nonpayment by the Issuer, there is no obligation to pay any amount of principal or interest on the Bonds by Financial Security, (ix) Financial Security does not expect that a claim will be made on the Policy, (x) the Issuer is not entitled to a refund of the premium for the Policy in the event a Bond is retired before the final maturity date, and (xi) for Bonds which are secured by a debt service reserve, Financial Security would not have issued the Policy unless the authorizing or security agreement for the Bonds provided for a debt service reserve account or fund funded and maintained in an amount at least equal to, as of any particular date of computation, the reserve requirement as set forth in such agreement Financial Security makes no representation as to the nature of the interest to be paid on the Bonds or the treatment of the Policy under Section 1.148-4(f) of the Income Tax Regulations. FINANCIAL SECURITY ASSURANCE INC. By: I Authorized Officer Dated: September 29, 2005 Financial Security Assurance 31 West 52nd Street New York, NY 10019 To Whom It May Concern: Moody's Investors Service 99 Church Street New York, NY September 28, 2005 Moody's Investors Service has assigned the rating of Aaa (Financial Security Assurance Insured -Policy No. 205774-N) to the $46,525,000.00, City of Lubbock, Texas (Lubbock County)-Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005, dated August 15, 2005 which sold through negotiation on August 25, 2005. The rating is based upon an insurance policy provided by Rnancial Security Assurance. Should you have any questions regarding the above, please do not hesitate to contact the assigned analyst, Margaret Kessler at (212) 553-7884. Sincerely yours, Margaret L. Kessler Vice President/Senior Analyst MLK/PS No Text ) 09/23/05 14:48 FAX 13077547995 FITCH ~002 -.--------·-·-·-·--·---------·-·--·--- FitchRatings September 23, 2005 Mr. Rebert P. Cochran l :2:ll East 1 :h Sin!<t Powc!!l. W'f 82435 Chairman & Chief ececutive Officer Financial Security Assurance lnc. 31 West 52nd Street New York, NY 10019 Re: l..ubbodc (TX) I Policy #20577 4--N Dear Mr. Coc:hran; T SG7 754 20!2 / 800 a5 FITCH ... w.».fih;hratir.poom Fitch RamQs has ~ one or men ratings 3ndlor Olherwi$e taken rating action(s), as detailed on the attached Notice of Rating .A.etion. Ratings assigned by F'rtch are baSed on documents and infonnalian pro'licled to us by Issuers. obligor$, and/or their experts and agents. and &r9 subject to receipt of 1he final do!*lQ documents. Fitch does not audit or verify the tMh or aowtaey of $Uch inb'mation. It is Important that F'ddt be provided with aD infonnatiOl'l that may be material to im nrtfnQs so that they continue to accurately refte<:t the stafljs of the rated issues. Ratings may be changed, withdrawn, suspended or placed on Raling Watch due to change& in, adcfdJons to or Ute inadequacy of lnfoonation. Rating$ are not recommendations to buy, sen or hold securities. R$tlngs do not comment on tM adeqwcy of market price, the suilabifity of all)' security for a particufar lnve$10r, or the tax-exempt nature or1axabllity of payment$ made in respect of any security. The assignment of a 11l&lg by Fitch shaD not QOC\Sii'lute a consent by Fitch to use itS name as an expert in connection with any regfstratiot'l sfateJn$nt or other filing under u.s., U.K., or any ~er relevant securities taws. We are pleased to have had the opportooityto be ofseMc8 to)W. If we can be dfulther assistsnc:e. please feef he to contact us at any time. DLS/jw Enc: Notice of Rating Action (Doc 10: 17387) Sincerely, ) ) ) ) 09/23/05 14:48 FAX 13077547995 FITCH ---------------·---------- Notice of Rating Action OutlooN Rating ~ ~ lAdllxlck (TX) CIOf!Qnallon tp & wtrwb sys awpl~ tfiN Long Term Upgade . MA RO:sta z.sep.2005 ctrs of WM!l set 2005 {'11\SUred; Fll'lal'ldll Setllrtty f.s&lllal'lc:e Inc..) Key: RO; Rating Oulloolc. RW: Rating W..,; PM: pg,jljve, Neg; NagaiMI. Sta: Stllble. Ew: EWhin9 ~ 1 The rating illi based llldetj on ~ fliMciOtiiiult PftJWided by a bond ftscnnc8 polir;:y issued 111 Fln .. cial Sewrily ~ 11\Q., ...-hlch has .nlnstnt FINII'ICial Sbvnglh rating r:ri'AAA'. (Doc 10: 11387) Paget of1 I(D003 No Text STANDARD &POOR'S September 26, 2005 Financial Security Assurance Inc Financial Guaranty Group 31 West 52nd Street New York, NY 10019 Attention: Mr. Richard Bauerfeld, Managing Director 55 Water Street, 38th Aoor New York, NY 1004Hl003 tel212 43&-2074 refefence no.: 739075 Re: $46,525,000 City of Lubbock, Texas (Lubbock County), Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005, dated: August 15, 2005, due: February 15,2006-2018, February 15,2013-2025, Term Certificates due: February 15, 2020, February 15,1021, (POLIC¥#205774-N) Dear Mr. Bauerfeld: Standard & Poor's has reviewed the rating on the above-referenced obligations. After such review, we have changed the rating to" AAA" from "AA-". The rating reflects our assessment of the likelihood of repayment of principal and interest based on the bond insurance policy your company is providing. Therefore, rating adjustments may result from changes in the financial position of your company or from alterations in the documents governing the issue. The rating is not investment, financial, or other advice and you should not and cannot rely upon the rating as such. The rating is based on information supplied to us by you but does not represent an audit. We tmdertake no duty of due diligence or independent verification of any information. The assignment of a rating does not create a fiduciary relationship between us and you or between us and other recipients of the rating. We have not consented to and will not consent to being named an "expert" under the applicable securities laws, including without limitation, Section 7 of the Securities Act of 1933. The rating is not a "market rating., nor is it a recommendation to buy, bold, or sell the obligations. This letter constitutes Standard & Poor's pennission to you to disseminate the above-assigned rating to interested parties. Standard & Poor's reserves the right to inform its own clients, subscribers, and the public of the rating. Standard & Poor's relies on the issuer and its counsel, accountants, and other experts for the accuracy and completeness of the information submitted in connection with the rating. This rating is based on financial information and documents we received prior to the issuance of this letter. Standard & Poor's asswnes that the docwnents you have provided to us are final. If any subsequent changes were made in the final documents, you must notify us of such changes by sending us the revised fmal documents with the changes clearly marked . • i • ' ~~ " Mr. Richard Bauerfeld Page2 September 26, 2005 Standard & Poor's is pleased to be of service to you. For more information please visit our website at www .standardandooors.com. If we can be of help in any other way, please contact us. Thank you for choosing Standard & Poor's and we look forward to working with you again. Sincerely yours, Standard & Poor's Ratings Services a division of The McGraw-Hill Companies, Inc. aw .::; i~\0.: 1).'\i<.t l :; . P!' :( nr~~ CERTIFICATE PURSUANT TO CERTIFICATE PURCHASE CONTRACT We, the undersigned officials of the City of Lubbock, Texas (the "Issuer"), acting in our official capacity, in connection with the issuance and delivery by the Issuer of its City of Lubbock, Texas, Tax and Revenue Certificates of Obligation, Series 2005 (the "Certificates"), hereby certify that: 1. This Certificate is delivered pursuant to the Purchase Contract, dated August 25, 2005 (the "Purchase Contract,), between the Issuer and A.G. Edwards & Sons, Inc., RBC Dain Rauscher Inc. and M.E. Allison & Co., Inc (the "Underwriters"). Capitalized words used herein as defined tenns and not otherwise defined herein have the respective meanings assigned to them in the Purchase Contract. 2. The representations and warranties of the Issuer contained in the Purchase Contract are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof. 3. Except to the extent disclosed in the Official Statement, no litigation is pending or, to our knowledge, threatened in any court to restrain or enjoin the issuance or delivery of the Certificates, or the levy, collection or application of the ad valorem taxes or the Pledged Revenues pledged or to be pledged to pay the principal of and interest on the Certificates, or the pledge thereof, or in any way contesting or affecting the validity of the Certificates or the Ordinance or contesting the powers of the City or the authorization of the Certificates or the Ordinance, or contesting in any way the accuracy, completeness or fairness of the Official Statement. 4. To the best of our knowledge, no event affecting the City has occurred since the date of the Official Statement that should be disclosed in the Official Statement for the purpose for which it is to be used or that it is necessary to disclose therein in order to make the statements and information therein not misleading in any respect. 5. There has not been any material and adverse c~ange in the affairs or financial condition of the City since September 30, 2004, the latest date as to which audited financial information is available. LUB20Gn1003 Dallas 10070SO_l.DOC SEP 2 9 2005 DATED: _______ _, 2005. Mayor CityofLubb ck, Texas Chie ~ancial Officer/ Assistant City Manager City of Lubbock, Texas Signature Page for Certificate Pursuant to Purchase Contract ) ) ) ) ) ) Vinson &Elkins September 29,2005 $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION SERIES 2005 WE HAVE represented the City of Lubbock, Texas (the "City"), as its Bond Counsel in connection with an issue of certificates of obligation (the "Certificates") described as follows : CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005, dated August 15, 2005, issued in the principal amount of$46,525,000. The Certificates mature, bear interest, are subject to redemption prior to maturity and may be transferred and exchanged as set out in the Certificates and in the ordinance adopted by the City Council of the City authorizing their issuance (the ''Ordinance"). WE HAVE represented the City as its Bond Counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates under the Constitution and laws of the State of Texas and with respect to the exclusion of interest on the Certificates from gross income for federal income tax purposes. We have not investigated or verified original proceedings, records, data or other material, but have relied solely upon the transcript of proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the City or the disclosure thereof in connection with the sale of the Certificates. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates has been limited as described therein. IN OUR CAP A CITY as Bond Counsel, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Certificates, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the City, customary certificates of officers, agents and representatives of the City, and other public officials and other certified showings relating to the authorization and issuance of the Certificates. We have also examined executed Certificate No. 1 of this issue. Vinson & Elkins LLP Anomeys at Law Austin Beijing Dallas Dubai Houston London Mosoow New York Tokyo Washington Trammell Crow Center, 2001 Ross Avanue, Suite 3700 Dallas, Texas 75201·2975 Tel214.220.noo Fax 214.220.7716 www.vel-.com ) ) ) ) ) ) ) ) V&E BASED ON SUCH EXAMINATION, IT IS OUR OPINION THAT: (A) The transcript of certified proceedings evidences complete legal authority for the issuance of the Certificates in full compliance with the Constitution and laws of the State of Texas presently effective and, therefore, the Certificates constitute valid and legally binding obligations of the City; and (B) A continuing ad valorem tax upon all taxable property within the City, necessary to pay the interest on and principal of the Certificates, has been levied and pledged irrevocably for such purposes, within the limit prescribed by law, and the total indebtedness of the City, including the Certificates, does not exceed any constitutional, statutory or other limitations. In addition, the Certificates are further secured by a limited pledge (not to exceed $500) of the surplus net revenues of the City's Waterworks System, as described in the Ordinance. THE RIGHTS OF THE OWNERS of the Certificates are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION THAT: (1) Interest on the Certificates is excludable from gross income for federal income tax purposes under existing law; and (2) The Certificates are not ''private activity bonds" within the meaning of the Internal Revenue Code of 1986, as amended {the "Code," and interest on the Certificates is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Certificates will be included in the "adjusted current earnings" of a corporation (other than an S corporation, regulated investment company, REIT, REMIC or FA SIT) for purposes of computing its alternative minimum tax liability. In providing such opinions, we have relied on representations of the City, the City's financial advisor and the underwriters of the Certificates with respect to matters solely within the knowledge of the City, the City's financial advisor and the underwriters respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Ordinance pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Certificates for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the City fails to comply with the foregoing provisions of the Ordinance, interest on the Certificates could become includable in gross income 1017597_l.DOC -2- ' ) ) ) V&E from the date of original delivery, regardless of the date on which the event causing such inclusion occurs. Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Certificates. The opinions set forth above are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to detennine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Certificates. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer. We observe that the City has covenanted in the Ordinance not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Certificates as includable in gross income for federal income tax purposes. J017S97_l.DOC -3- ) ) Vinson &Elkins September 29, 2005 City of Lubbock, Texas P.O. Box 2000 Lubbock, Texas 79457 A. G. Edwards & Sons, Inc. RBC Dain Rauscher Inc. M.E. Allison & Co., Inc. c/o A.G. Edwards & Sons, Inc. 70 Northeast Loop 410, Suite 915 San Antonio, Texas 78216 City of Lubbock, Texas Tax and Waterworks System Surplus Revenue Certificates of Obligation Series 2005 Ladies and Gentlemen: We have served as Bond Counsel to the City of Lubbock, Texas (the "Issuer") in connection with the issuance of its $46,525,000 City of Lubbock, Texas, Tax and Waterworks System Surplus Revenue Certificates of Obligation, Series 2005 (the "Certificates"), issued pursuant to the provisions of an ordinance duly adopted by the City Council of the Issuer on August 25, 2005 (the "Ordinance''). This opinion is delivered pmsuant to the provisions of Section 8( e)( 6) of the Purchase Contract (hereinafter defined). Capitalized terms not otherwise defined in this opinion have the meanings assigned in the hereinafter defined Purchase Contract. In our capacity as Bond Counsel to the Issuer, we have reviewed the following: (a) a certified copy of the Ordinance; (b) an executed counterpart of the Purchase Contract dated August 25, 2005 (the "Purchase Contract") between the Issuer and the Underwriters named in such Purchase Contract; (c) a copy of the Official Statement dated August 25, 2005; and (d) such other agreements, documents, certificates, opinions, letters, and other papers as we have deemed necessary or appropriate in rendering the opinions set forth below. Vinson a Elkins U.P Attorneys at Law Austin Beijing Dallas Dubai Houston London Moscow New York Tokyo Washington Trammell Crow Center, 2001 Ross Avenue, Su"e 3700 Dallas, Texas 75201·2975 Tel214.220.7700 Fax 214.220.7716 www.velaw.com ) ) .. . ) ) ) ) V&E In making our review, we have assumed the authenticity of all documents and agreements submitted to us as originals, conformity to the originals of all documents and agreements submitted to us as certified or photostatic copies, the authenticity of the originals of such latter documents and agreements, and the accuracy of the statements contained in such documents. Based upon the foregoing, and subject to the qualifications and exceptions hereinafter set forth, we are of the opinion that under the applicable laws of the United States of America and the State of Texas in force and effect on the date hereof: 1. The Certificates are exempted securities within the meaning of Section 3(a)(2) of the Securities Act of 1933, as amended (the "1933 Act") and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and it is not necessary in connection with the offering and sale of the Certificates to register the Certificates under the 1933 Act, or to qualify the Ordinance under the Trust Indenture Act, as amended. 2. Except as to the extent noted herein, we have not verified and are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the information contained in the Official Statement. We have, however, reviewed the statements and information in the Official Statement under the captions ''The Certificates" (exclusive of the information under the subcaptions "Book-Entry-Only System" and "Certificateholders' Remedies") and"Tax Matters" and the subcaptions "Legal Investments and Eligibility to Secure Public Funds in Texas/' "Legal Opinions" and "Continuing Disclosure of Information" (exclusive of the information under the subcaption "Compliance with Prior Undertakings") under the caption "Other Information,, and we are of the opinion that such statements and information present a fair and accurate summary of the provisions of the laws and instruments therein described and, with respect to the Certificates, such information conforms to the Ordinance. 3. The Purchase Contract has been duly authorized, executed and delivered by the City and (assuming due authorization by the Underwriters) constitutes a binding and enforceable agreement of the City in accordance with its terms. The addressees may rely on our opinion, dated as of the date hereof, delivered in connection with the issuance of the Certificates to the same extent as if such opinions were specifically addressed to them. This opinion is furnished solely for your benefit and may be relied upon only by the addresses hereof or anyone to whom specific pennission is given in writing by us. Very truly yours, !(}~ + ~ :/~r_ 1019905_l.OOC -2- LAW OF'F'JCES MCCALL, PARKHURST & HORTON L.L.P. 600 CONGRESS AVENUE 1250 ONE AMERICAN CENTER AUSTIN, TEXAS 78701·3248 TELEPHONE! Sl2 4?8·380!1 FACStMtU:: S t2 4?.2·08?1 A. G. Edwards & Sons, Inc. M.E. Allison & Co., Inc. RBC Dain Rauscher Inc. c/o A G. Edwards & Sons, Inc. 70 Northeast Loop 410, Suite 915 San Antonio, Texas 78216 717 NORTH HARWOOD NINTH F"LOOR DALLAS, TEXAS 75201-6587 TI!LEPHON£: 21 .. 7!14·9200 September 29, 2005 700 N. ST. MARY'S STREET 1525 ONE RIVERWALK PLACE SAN ANTONIO, TEXAS 78205-3503 TELEPHONE! 210 22!1·2600 FACS.IMIL£! 2 t0 225·2984 RE: $46~525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Ladies and Gentlemen: We have acted as counsel for you as the underwriters of the Certificates described above (the "Certificates"}, issued under and pursuant to an Ordinance of the City of Lubbock, Texas (the "Issuer"), authorizing the issuance of the Certificates, which Certificates you are purchasing pursuant to a Purchase Contract, dated August 25, 2005. All capitalized undefined terms used herein shall have the meaning set forth in the Purchase Contract. In connection with this opinion letter, we have considered such matters oflaw and of fact, and have relied upon such certificates and other information furnished to us, as we have deemed appropriate as a basis for our opinion set forth below. We are not expressing any opinion or views herein on the authorization, issuance, delivery, validity ofthe Certificates and we have assumed, but not independently verified, that the signatures on all documents and Certificates that we have examined are genuine. Based on and subject to the foregoing, we are of the opinion that, under existing laws, the Certificates are not subject to the registration requirements of the Securities Act of 1933, as amended, and the Ordinance is not required to be qualified under the Trust Indenture Act of1939, as amended. Because the primary purpose of our professional engagement as your counsel was not to establish factual matters, and because of the wholly or partially nonlegal character of many of the determinations involved in the preparation of the Official Statement dated August 25, 2005 (the "Official Statement") and because the information in the Official Statement under the headings "THE BONDS-Book-Entry-Only System," "TAX MATTERS," "OTHER INFORMATION -Continuing Disclosure of Information-Compliance with Prior Undertakings" and Appendices A, B, and C ) thereto were prepared by others who have been engaged to review or provide such information, we are not passing on and do not assume any responsibility for, except as set forth in the last sentence of this paragraph, the accuracy, completeness or fairness of the statements contained in the Official Statement (including any appendices, schedules and exhibits thereto) and we make no representation that we have independently verified the accuracy, completeness or fairness of such statements. In the course of our review of the Official Statement, we had discussions with representatives of the City regarding the contents of the Official Statement. In the course of our participation in the preparation of the Official Statement as your counsel, we had discussions with representatives of the Issuer, including its City Attorney, Bond Counsel and Financial Advisor, regarding the contents of the Official Statement. In the course of such activities, no facts came to our attention that would lead us to believe that the Official Statement (except for the financial statements and other financial and statistical data contained therein, the information set forth under the headings "THE BONDS-Book- Entry-Only System," "TAX MATTERS," "OTHER INFORMATION-Continuing Disclosure of Information-Compliance with Prior Undertakings" and Appendices A, B, and C thereto, as to which we express no opinion), as of its date contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. This opinion letter may be relied upon by only you and only in connection with the transaction to which reference is made above and may not be used or relied upon by any other person for any purposes whatsoever without our prior written consent. Respectfully, 1( ) ' :J ) ) ' ATTORNEY GENERAL OF TEXAS GREG ABBOTT September 27, 2005 THIS IS TO CERTIFY that the City ofLubbocJ4 Texas (the "Issuer") has submitted to me City of Lubbock. Texas. Tax and Waterworks System Surplus Revenue Certificate of Obligation. Series 2005 (the "Certificate") in the principal amount of $46,525,000 for approvaL The Certificate is dated August 15, 2005, numbered T -1, and was authorized by an Ordinance of the Issuer passed on August 25,2005 (the "Ordinance"). I have examined the law and such certified proceedings and other papers as I deem necessary to render this opinion. As to questions of fact material to my opinion, I have relied upon representations of the Issuer contained in the certified proceedings and other certifications of public officials furnished to me without undertaking to verify the same by independent investigation. I express no opinion relating to the official statement or any other offering material relating to the Certificate. Based on my examination, I am of the opinion, as of the date hereof and under existing law, as follows (capitalized tenns, except as herein defined, have the meanings given to them in the Ordinance): No.43932 (1) The Certificate is been issued in accordance with law and is a valid and binding obligation of the Issuer. (2) The Certificate is payable from the proceeds of an ad valorem tax levied, within the limits prescribed by law, upon all taxable property in the Issuer and is further payable from and secured by a limited pledge of the Surplus Revenues derived by the Issuer from the operation of the Issuer's System, as provided in the Ordinance. Therefore, the Certificate is approved. Book No. 200SC MM POST OFFICE Box 12548, AUSTIN, TEXAS 78711·2548 TEL:(SJ2)463-2100 WWW.OAO.STATli..TX.US AA E.IJN•I Empl'.}l?ttltl OpporiN!ti(J F.mpi'.J" · Printtd u Rtt)lltli Paptr ' ) ) OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, CAROLE KEETON STRAYHORN, Comptroller of Public Accounts of the State of Texas, do hereby certify that the attachment is a true and correct copy of the opinion of the Attorney General approving the: City of Lubbock. Texas. Tax and Waterworks System Surplus Revenue Certificate of Obligation. Series 2005 numbered T-1. of the denomination of$ 46.525.000, dated August 15. 2005, as authorized by issuer, interest various percent, under and by authority of which said bonds/certificates were registered electronically in the office of the Comptroller, on the 27th day of September. 2005, under Registration Number 70589. Given under my hand and seal of office, at Austin, Texas, the 27th day of September. 2005. CAROLE KEETON STRAYHORN Comptroller of Public Accounts of the State of Texas ) ) ) ) ) ) OFFICE OF COMPTROLLER OF THE STATE OF TEXAS I, Melissa Mora , D Bond Clerk ~ Assistant Bond Clerk in the office of the Comptroller of the State of Texas, do hereby certify that, acting under the direction and authority of the Comptroller on the 27th day of Seotember. 2005, I signed the name of the Comptroller to the certificate of registration endorsed upon the: City of Lubbock. Texas. Tax and Waterworks System Surplus Revenue Certificate of Obligation. Series 2005, IN WI ~:o.="'--'-"""-'2=0=0"""5, d that in signing the certificate of registration I used the SS WHEREOF I ha~ exe uted this ~ day of SRmb~r. I, Carole Keeton Strayhorn, Comptroller of Public Accounts of the State of Texas, certify that the person who has signed the above certificate was duly designated and appointed by me under authority vested in me by Chapter 403, Subchapter H, Government Code, with authority to sign my name to all certificates of registration, and/or cancellation of bonds required by law to be registered and/or cancelled by me, and was acting as such on the date first mentioned in this certificate, and that the bonds/certificates described in this certificate have been duly registered in the office of the Comptroller, under Registration Number 70589. GIVEN under my hand and seal of office at Austin, Texas, this the 27th day of September. 2005. CAROLE KEETON STRAYHORN Comptroller of Public Accounts of the State of Texas "' J ... ) FSA A Desia Company September 29, 2005 Municipal Bond Insurance Policy No. 205774-N With Respect to $46.525.000 In Aagreaate Principal Amount of City of Lubbock. Texas (Lubbock CounM Tax and Waterworks System Surolus Revenue Certificates of Obligation. Series 2005 ladies and Gentlemen: I am Associate General Counsel of Financial Security Assurance Inc., a New Yori< stock insurance company ("Financial Security"). You have requested my opinion in such capacity as to the matters set forth below in connection with the issuance by Financial Security of its above-referenced policy (the ~Policy"). In that regard, and for purposes of this opinion, I have examined such corporate records. documents and proceedings as I have deemed necessary and appropriate. Based upon the foregoing. I am of the opinion that: 1. Financial Security is a stock insurance company duly organized and validly existing under the laws of the State of New Yori< and authorized to transact financial guaranty insurance business therein. 2. The Policy has been duly authorized, executed and delivered by Financial Security. 3. The Policy constitutes the valid and binding obligation of Financial Security, enforceable in accordance with its terms. subject, as to the enforcement of remedies. to bankruptcy, insolvency, reorganization, rehabilitation, moratorium and other similar laws affecting the enforceability of creditors' rights generally applicable in the event of the bankruptcy or insolvency of Financial Security and to the application of general principles of equity. In addition, please be advised that I have reviewed the description of the Policy under the caption "BOND INSURANCE-Bond Insurance Policy" in the official statement relating to the above-referenced Bonds dated August 25, 2005 (the •Official Statement"). There has not come to my attention any information which would cause me to believe that the description of the Policy referred to above, as of the date of the Official Statement or as of the date of this opinion. contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Please be advised that I express no opinion with respect to any information contained in, referred to or omitted from under the caption "BOND INSURANCE -Financial Security Assurance Inc.• 1 am a member of the Bar of the State of New York, and do not express any opinion as to any law other than the laws of the State of New York. City of Lubbock, Texas (lubbock County), 1625 13th Street, Lubbock, Texas 79457..0001. A.G. Edwards & Sons, Inc., 70 N.E. Loop 410, Suite 915, San Antonio, Texas 78216. Financial Security Assurance 31 West !)2nd Street· New York. New York 10019 ·Tel: .mu.826.o1oo · Fax: .212.688.3101 New York· Dallas · Sao Francisco • London · Madrid • Paris . Singapore . Sydney . 'lbkyo Very truly yours. [___~ Assoc1ate General Counsel ) Vinson &Elkins September 29,2005 Financial Security Assurance 350 Park A venue New York, New York 10022 Re: City of Lubbock, Texas, Tax and Waterworks System Smplus Revenue Certificates of Obligation, Series 2005 Ladies and Gentlemen: You are hereby authorized to rely on our opinion dated the date hereof and delivered in connection with the issuance of the captioned obligations as if such opinion were specifically addressed to you. This letter is delivered to you at the request of our client, the City of Lubbock, Texas. Vinson & Elkins LLP Attorneys at Law Austin Beijing Dallas Dubai Houston London Moscow New YOI'k Tokyo Washington Very truly yours, Trammell Crow Center, 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201·2975 Tel214.220.7700 Fax 214.220.771& www.velaw.com ) ) ) P.O. Box 2000 • 1625 13th Street Lubbock. Texas 79457 (806) 775-2222 • Fax (806) 775-3307 A. G. Edwards & Sons, Inc. M.E. Allison & Co., Inc. RBC Dain Rauscher Inc. c/o A.G. Edwards & Sons, Inc. 70 Northeast Loop 410, Suite 915 San Antonio, Texas 78216 Office of the City Attorney September 29, 2005 RE: $46,525,000 CITY OF LUBBOCK, TEXAS TAX AND WATERWORKS SYSTEM SURPLUS REVENUE CERTIFICATES OF OBLIGATION, SERIES 2005 Ladies and Gentlemen: I am the City Attorney for the City ofLubbock, Texas (the "City") at the time ofthe issuance of the above referenced Certificates (the "Certificates"), pursuant to the provisions of the Ordinance duly adopted by the City Council of the City on August 25, 2005. Capitalized terms not otherwise defined in this opinion have the meanings assigned in the Purchase Contract. In my capacity as City Attorney to the City, I have reviewed such agreements, documents, certificates, opinions, letters, and other papers as I have deemed necessary or appropriate in rendering the opinions set forth below. In making my review, I have assumed the authenticity of all documents and agreements submitted to me as originals, conformity to the originals of all documents and agreements submitted to me as certified or photostatic copies, the authenticity of the originals of such latter documents and agreements, and the accuracy of the statement contained in such documents. Based upon the foregoing, and subject to the qualifications and exceptions hereinafter set forth, I am of the opinion that under the applicable laws of the United States of America and the State of Texas in force and effect on the date hereof: 1. Based on reasonable inquiry made of the responsible City employees and public officials, the City is not, to the best of my knowledge, in breach of or in default under any applicable law or administrative regulation of the State of Texas or the United States, or any applicable ) judgment or decree or any trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the City is party or is otherwise subject and, to the best of my knowledge after due inquiry, no event has occurred and is continuing that, with the passage of time or the giving of notice, or both, would constitute such a default by the City under any ofthe foregoing; and the execution and delivery of the Purchase Contract, the Certificates and the adoption of the Ordinance and compliance with the provisions of each of such agreements or instruments does not constitute a breach of or default under any applicable law or administrative regulation of the State of Texas or the United States or any applicable judgment or decree or, to the best of my knowledge, any trust agreement, loan agreement, bond, note, resolution, ordinance, agreement or other instrument to which the City is a party or is otherwise subject; and 2. Except as disclosed in the Official Statement, no litigation is pending, or, to my knowledge, threatened, in any court in any way (a) challenging the titles ofthe Mayor or any of the other members of the City Council to their respective offices; (b) seeking to restrain or enjoin the issuance, sale or delivery of any of the Certificates, or the levy, collection or application of the ad valorem taxes and the Pledged Revenues pledged or to be pledged to pay the principal of and interest on the Certificates; (c) contesting or affecting the validity or enforceability of the Certificates, the Ordinance or the Purchase Contract; (d) contesting the powers of the City or any authority for the issuance of the Certificates, or the adoption ofthe Ordinance; or (e) that would have a material and adverse effect on the financial condition of the City. 3. I have reviewed the information in the Official Statement contained under the caption 110ther lnformation--Litigation11 and such information in all material respects accurately and fairly summarizes the matters described therein. This opinion is furnished solely for your benefit and may be relied upon only by the addresses hereof or anyone to whom specific permission is given in writing by me. Very truly yours, LL L~~--~ Anita E. Burgess City Attorney