BIDS DUE MONDAY, FEBRUARY 2, 2016, AT 10:00 AM, CST

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1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Preliminary Official Statement is delivered in final form. Under no circumstances shall the Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. (See Continuing Disclosure of Information herein) NEW ISSUE - Book-Entry-Only PRELIMINARY OFFICIAL STATEMENT Dated January 25, 2016 In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under TAX MATTERS herein, including the alternative minimum tax on corporations. THE BONDS WILL NOT BE DESIGNATED AS QUALIFIED TAX-EXEMPT OBLIGATIONS FOR FINANCIAL INSTITUTIONS $8,765,000* CITY OF RICHLAND HILLS, TEXAS (Tarrant County) GENERAL OBLIGATION BONDS, SERIES 2016 Dated Date: February 1, 2016 Due: August 15, as shown on page 2 Interest to accrue from Date of Delivery PAYMENT TERMS... Interest on the $8,765,000* City of Richland Hills, Texas General Obligation Bonds, Series 2016 (the Bonds ), will accrue from the Date of Delivery and will be payable February 15, 2017, and each August 15 and February 15 thereafter until maturity or prior redemption. Interest on the Bonds will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company, New York, New York ( DTC ) pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or integral multiples thereof within a maturity. No physical delivery of the Bonds will be made to the owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See THE OBLIGATIONS - Book-Entry-Only System herein. The initial Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas (see THE OBLIGATIONS - Paying Agent/Registrar ). AUTHORITY FOR ISSUANCE... The Bonds are issued pursuant to the Constitution and general laws of the State of Texas (the State ), including particularly, Texas Government Code, Chapter 1251 and Chapter 1331, as amended, an election held within the City of Richland Hills, Texas (the City ) on November 3, 2015 and an ordinance to be adopted by the City Council of the. The Bonds are direct obligations of the City payable from the levy and collection of a continuing annual ad valorem tax levied on all taxable property within the City, within the limits prescribed by law, as provided in the Bond Ordinance (see THE OBLIGATIONS - Authority for Issuance ). PURPOSE... Proceeds from the sale of the Bonds will be used (i) to finance capital improvements and parks; and (ii) to pay the costs of issuance of the Bonds. BOND INSURANCE... The City has made an application for the issuance of a municipal bond insurance policy in conjunction with the issuance of the Bonds. If an insurance policy is obtained, payment of principal of and interest on the Bonds when due will be insured by a financial guarantee insurance policy issued by an insurer simultaneously with the original delivery of the Bonds. See BOND INSURANCE RISK FACTORS herein. CUSIP PREFIX: MATURITY SCHEDULE & 9 DIGIT CUSIP See Schedule on Page 2 Ratings: S&P: AA (see OTHER INFORMATION Ratings herein) SEPARATE ISSUES... The Bonds are being offered by the City concurrently with the issuance of the $4,965,000* City of Richland Hills, Texas Combination Tax and Waterworks and Sewer System Revenue Certificates of Obligation, Series 2016 (the Certificates ) under a common Official Statement. The Bonds and the Certificates collectively, referred to herein as the Obligations are separate and distinct securities offerings being issued and sold independently except for this Official Statement, and while they share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including without limitation the type of obligation being offered, its terms for payment, the rights of the City to redeem the Obligations of either series, the federal, state or local tax consequences of the purchase, ownership or disposition of the Obligations and other features. LEGALITY... The Bonds are offered for delivery when, as and if issued and received by the Initial Purchaser and subject to the approving opinion of the Attorney General of Texas and the opinion of McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel (see Appendix C, Forms of Bond Counsel s Opinions ). DELIVERY... It is expected that the Bonds will be available for delivery through DTC on or about March 3, 2016 (the Date of Delivery ). BIDS DUE MONDAY, FEBRUARY 2, 2016, AT 10:00 AM, CST * Preliminary, subject to change. The City reserves the right to adjust the principal amounts of the Bonds shown on the Maturity Schedule on page 2.

2 CUSIP (1) Prefix: MATURITY SCHEDULE* 15-Aug Principal Interest Initial CUSIP 15-Aug Principal Interest Initial CUSIP Year Amount Rate Yield Suffix (1) Year Amount Rate Yield Suffix (1) 2018 $ 130, $ 305, , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 (Interest to accrue from the Date of Delivery) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services is managed on behalf of the American Bankers Association by Standard & Poor s Financial Services LLC. 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 Financial Advisor (as defined herein) shall be responsible for the selection or correctness of the CUSIP numbers set forth herein. OPTIONAL REDEMPTION... The City reserves the right, at its option, to redeem Bonds having stated maturities on and after August 15, 2026, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on August 15, 2025, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see THE OBLIGATIONS Redemption ). MANDATORY SINKING FUND REDEMPTION... In the event any of the Bonds are structured as term Bonds at the option of the Initial Purchaser, such term Bonds will be subject to mandatory sinking fund redemption in accordance with the applicable provisions of the Bond Ordinance, which provisions will be included in the final Official Statement. * Preliminary, subject to change. 2

3 This Preliminary Official Statement and the information contained herein are subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. (See Continuing Disclosure of Information herein) NEW ISSUE - Book-Entry-Only PRELIMINARY OFFICIAL STATEMENT Dated January 25, 2016 In the opinion of Bond Counsel, interest on the Certificates will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under TAX MATTERS herein, including the alternative minimum tax on corporations. THE CERTIFICATES WILL NOT BE DESIGNATED AS QUALIFIED TAX-EXEMPT OBLIGATIONS FOR FINANCIAL INSTITUTIONS $4,965,000* CITY OF RICHLAND HILLS, TEXAS (Tarrant County) COMBINATION TAX AND WATERWORKS AND SEWER SYSTEM REVENUE CERTIFICATES OF OBLIGATION, SERIES 2016 Dated Date: February 1, 2016 Due: August 15, as shown on page 4 Interest to accrue from Date of Delivery PAYMENT TERMS... Interest on the $4,965,000* City of Richland Hills Texas, Combination Tax and Waterworks and Sewer System Revenue Certificates of Obligation, Series 2016 (the Certificates ), will accrue from the Date of Delivery (defined below), will be payable February 15, 2017 and each August 15 and February 15 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 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 within a maturity. No physical delivery of the Certificates will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Certificates will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Certificates. See THE OBLIGATIONS - Book-Entry-Only System herein. The initial Paying Agent/Registrar is U.S. Bank National Association, Dallas, Texas (see THE OBLIGATIONS - 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, as amended, and constitute direct obligations of the City of Richland Hills, Texas (the City ), payable from a combination of (i) the levy and collection of a direct and continuing ad valorem tax on all taxable property in the City, within the limits prescribed by law and (ii) a limited pledge (not to exceed $1,000) of the surplus net revenues of the City s Waterworks and Sewer System (the System ), as provided in the ordinance authorizing the issuance of the Certificates (the Certificate Ordinance ) (see THE OBLIGATIONS - Authority for Issuance ). PURPOSE... Proceeds from the sale of the Certificates will be used for (i) financing the purchase, construction and acquisition of certain real and personal property for capital improvements and parks, to wit: (i) a recreation and community activity center and a surrounding green/park space, including extensions, renovations and improvements to the City s Waterworks and Sewer System; and (ii) paying legal, fiscal, engineering and architectural fees in connection with these projects and to pay costs of issuance of the Certificates. BOND INSURANCE... The City has made an application for the issuance of a municipal bond insurance policy in conjunction with the issuance of the Bonds. If an insurance policy is obtained, payment of principal of and interest on the Bonds when due will be insured by a financial guarantee insurance policy issued by an insurer simultaneously with the original delivery of the Bonds. See BOND INSURANCE RISK FACTORS herein. CUSIP PREFIX: MATURITY SCHEDULE & 9 DIGIT CUSIP See Schedule on Page 4 SEPARATE ISSUES... The Certificates are being offered by the City concurrently with the issuance of the $8,765,000* City of Richland Hills, Texas General Obligation Bonds, Series 2016 (the Bonds ) under a common Official Statement. The Bonds and the Certificates (collectively referred to herein as the Obligations ) are separate and distinct securities offerings being issued and sold independently except for this Official Statement, and while they share certain common attributes, each issue is separate from the other and should be reviewed and analyzed independently, including without limitation the type of obligation being offered, its terms for payment, the rights of the City to redeem the Obligations of either series, the federal, state or local tax consequences of the purchase, ownership or disposition of the Obligations and other features. LEGALITY... The Certificates are offered for delivery when, as and if issued and received by the Initial Purchaser of the Certificates and subject to the approving opinion of the Attorney General of Texas and the opinion of McCall, Parkhurst & Horton L.L.P., Bond Counsel, Dallas, Texas (see Appendix C, Forms of Bond Counsel s Opinions ). DELIVERY... It is expected that the Certificates will be available for delivery through DTC on March 3, 2016 (the Date of Delivery ). BIDS DUE FEBRUARY 2, 2016, AT 10:00 AM, CST Ratings: S&P: AA See OTHER INFORMATION Ratings herein * Preliminary, subject to change. The City reserves the right to adjust the principal amounts of the Certificates shown on the Maturity Schedule on page 4. 3

4 MATURITY SCHEDULE* CUSIP Prefix: (1) 15-Aug Principal Interest Initial CUSIP 15-Aug Principal Interest Initial CUSIP Year Amount Rate Yield Suffix (1) Year Amount Rate Yield Suffix (1) 2017 $ 145, $ 245, , , , , , , , , , , , , , , , , , ,000 (Interest to accrue from the Date of Delivery) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard and Poor s Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the City nor the Financial Advisor shall be responsible for the selection or correctness of the CUSIP numbers set forth herein. OPTIONAL REDEMPTION... The City reserves the right, at its option, to redeem Certificates having stated maturities on and after August 15, 2026, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on August 15, 2025, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see THE OBLIGATIONS Redemption ). MANDATORY SINKING FUND REDEMPTION... In the event any of the Certificates are structured as term Certificates at the option of the Initial Purchaser, such term Certificates will be subject to mandatory sinking fund redemption in accordance with the applicable provisions of the Ordinance, which provisions will be included in the final Official Statement. * Preliminary, subject to change. The City reserves the right to adjust the principal amounts of the Certificates shown on the Maturity Schedule above. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 4

5 For purposes of compliance with Rule 15c2-12 of the Securities and Exchange Commission, as amended and in effect on the date hereof, this document constitutes a Preliminary Official Statement of the City with respect to the Obligations that has been deemed final by the City as of its date except for the omission of no more than the information permitted by Rule 15c2-12. This Preliminary Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Preliminary Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Preliminary Official Statement does not constitute an offer to sell Obligations in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Financial Advisor. This Preliminary Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. THE OBLIGATIONS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE OBLIGATIONS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTION IN WHICH THE OBLIGATIONS HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THE CITY, ITS FINANCIAL ADVISOR, NOR THE INITIAL PURCHASER MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS PRELIMINARY OFFICIAL STATEMENT REGARDING DTC OR ITS BOOK-ENTRY-ONLY SYSTEM. IN CONNECTION WITH THE OFFERING OF THE OBLIGATIONS, THE INITIAL PURCHASER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OBLIGATIONS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE INFORMATION AND EXPRESSIONS OF OPINION CONTAINED HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE, AND NEITHER THE DELIVERY OF THIS PRELIMINARY OFFICIAL STATEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CITY OR OTHER MATTERS DESCRIBED HEREIN. SEE CONTINUTING DISCLOSURE OF INFORMATION FOR A DESCRIPTION OF THE CITY S UNDERTAKING TO PROVIDE CERTAIN INFORMATION ON A CONTINUING BASIS. THIS PRELIMINARY OFFICIAL STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM FUTURE RESULTS, PERFORMANCE, AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. TABLE OF CONTENTS OFFICIAL STATEMENT SUMMARY...6 CITY OFFICIALS, STAFF AND CONSULTANTS...9 ELECTED OFFICIALS...9 SELECTED ADMINISTRATIVE STAFF...9 CONSULTANTS AND ADVISORS...9 INTRODUCTION...11 THE OBLIGATIONS...12 BOND INSURANCE RISK FACTORS...17 TAX INFORMATION...18 TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT...22 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY23 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY...24 TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY...24 TABLE 5 - TEN LARGEST TAXPAYERS...24 TABLE 6 - TAX ADEQUACY...25 TABLE 7 - ESTIMATED OVERLAPPING DEBT...25 DEBT INFORMATION...26 TABLE 8 - PRO-FORMA GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS...26 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION...27 TABLE 10 COMPUTATION OF SELF-SUPPORTING DEBT...27 TABLE 11 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS...27 TABLE 12 OTHER OBLIGATIONS...28 FINANCIAL INFORMATION...31 TABLE 14 - MUNICIPAL SALES TAX HISTORY...33 TABLE 15 - CURRENT INVESTMENTS...35 THE SYSTEM TABLE 16 WATERWORKS AND SEWER SYSTEM OPERATING STATEMENT TABLE 17 TEN LARGEST WATER CUSTOMERS TABLE 18 TEN LARGEST SEWER CUSTOMERS TABLE 19 WATER AND SEWER RATES TAX MATTERS CONTINUING DISCLOSURE OF INFORMATION OTHER INFORMATION RATINGS LITIGATION REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS LEGAL MATTERS AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION FINANCIAL ADVISOR INITIAL PURCHASER OF THE OBLIGATIONS CERTIFICATION AS TO OFFICIAL STATEMENT FORWARD-LOOKING STATEMENTS DISCLAIMER MISCELLANEOUS APPENDICES GENERAL INFORMATION REGARDING THE CITY... A EXCERPTS FROM THE CITY S ANNUAL FINANCIAL REPORT... B FORMS OF BOND COUNSEL S OPINIONS... C The cover page hereof, this page, the Appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement.

6 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the 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 OBLIGATIONS... The City of Richland Hills, Texas (the City ) is located in Tarrant County, and is a political subdivision of the State of Texas and Home Rule municipality operating under a Council/City Manager form of government with a city council comprised of six members including the Mayor (the City Council ) (see "INTRODUCTION - Description of the City"). The $8,765,000* City of Richland Hills, Texas, General Obligation Bonds, Series 2016 are issued as serial certificates maturing on August 15 in each of the years 2018 through 2046 (see THE OBLIGATIONS Description of the Obligations ). The $4,965,000* City of Richland Hills, Texas, Combination Tax and Waterworks and Sewer System Revenue Certificates of Obligation, Series 2016 are issued as serial certificates maturing on August 15 in each of the years 2017 through 2036 (see THE OBLIGATIONS - Description of the Obligations ). The Bonds and the Certificates are sometimes referred to collectively herein as the Obligations. PAYMENT OF INTEREST... Interest on the Obligations accrues from their Date of Delivery, and is payable February 15, 2017, and each August 15 and February 15 thereafter until maturity or prior redemption (see THE OBLIGATIONS - Description of the Obligations ). AUTHORITY FOR ISSUANCE... SECURITY FOR THE OBLIGATIONS... The Bonds are authorized and issued pursuant to the constitution and general laws of the State, particularly Chapters 1251 and 1331, as amended, an election held within the City on November 3, 2015, and the ordinance authorizing the issuance of the Bond to be adopted by the City Council of the City (the Bond Ordinance ) (see THE OBLIGATIONS Authority of Issuance ). The Certificates are authorized and issued pursuant to the constitution and general laws of the State, particularly Subchapter C of Chapter 271, Texas Local Government Code, as amended, and an ordinance passed by the City Council of the City (the Certificate Ordinance ) (see THE OBLIGATIONS - Authority for Issuance ). The Obligations are direct obligations of the City payable from the levy and collection of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property located within the City, as provided in the Bond Ordinance and Certificate Ordinance (collectively referred to herein as the Ordinances ) authorizing the respective series of the Obligations. In addition, the Certificates are payable from a limited pledge (not to exceed $1,000) of surplus revenues of the City s Waterworks and Sewer System (the System ) (see THE OBLIGATIONS - Security and Source of Payment ). QUALIFIED TAX-EXEMPT OBLIGATIONS... The City will not designate the Obligations as Qualified Tax-Exempt Obligations for financial institutions. REDEMPTION... The City reserves the right, at its option, to redeem Obligations having stated maturities on and after August 15, 2026, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on August 15, 2025, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption (see THE OBLIGATIONS - Redemption ). In the event any of the Obligations of either series are structured as term Obligations, such term Obligations will be subject to mandatory sinking fund redemption in accordance with the applicable provisions of the respective Ordinance, which provisions will be included in the final Official Statement. * Preliminary, subject to change. The City reserves the right to adjust the principal amounts of the Obligations shown on the Maturity Schedule on pages 2 and 4. 6

7 TAX EXEMPTION... USE OF PROCEEDS... RATINGS... BOOK-ENTRY-ONLY SYSTEM... In the opinion of Bond Counsel, the interest on the Obligations will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under the caption TAX MATTERS herein, including the alternative minimum tax on corporations. Proceeds from the sale of the Bonds will be used for (i) to finance capital improvements and parks, and (ii) paying legal, fiscal, engineering and architectural fees in connection with these projects and to pay the costs of issuance of the Bonds. Proceeds from the sale of the Certificates will be used for (i) financing the purchase, construction and acquisition of certain real and personal property for capital improvements and parks, to wit: (i) a recreation and community activity center and a surrounding green/park space, including extensions, renovations and improvements to the City s Waterworks and Sewer System;, and (ii) paying legal, fiscal, engineering and architectural fees in connection with these projects and to pay costs of issuance of the Certificates. The Obligations and the presently outstanding tax supported debt of the City are rated AA by Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ), without regard to credit enhancement (see OTHER INFORMATION - Ratings ). The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations (see THE OBLIGATIONS - Book-Entry-Only System ). PAYMENT RECORD... The City has never defaulted in payment of its bonded indebtedness. SELECTED FINANCIAL INFORMATION Ratio Tax Per Supported Fiscal Per Capita Capita Debt % of Total Year Estimated Taxable Taxable Tax Tax to Taxable Tax Ended City Assessed Assessed Supported Supported Assessed Collections 9/30 Population (1) Valuation (2) Valuation Debt (3) Debt Valuation to Tax Levy ,801 $ 398,028,896 $ 51,023 $ 8,317,000 $ 1, % 99.80% , ,696,953 52,647 13,599,000 1, % 99.90% , ,136,128 55,139 12,551,000 1, % % , ,205,014 55,917 12,471,000 1, % 98.60% (4) , ,511,623 58,314 25,000,000 (5) 3,125 (5) 5.36% (5) 3.10% (6) (1) Source: Estimates derived from 2000 and 2010 data from the U.S. Census Bureau. (2) As reported by the Tarrant Central Appraisal District on the City s annual State Property Tax Reports; subject to change during the ensuing year. (3) Includes self-supporting debt. (4) Unaudited. (5) Projected. Includes the Obligations. Preliminary, subject to change. (6) Collections as of October 31,

8 GENERAL FUND CONSOLIDATED STATEMENT SUMMARY Fiscal Year Ended September 30, 2015 (1) Beginning Balance $ 2,050,276 $ 1,982,474 $ 2,068,647 $ 2,326,518 $ 2,074,822 Total Revenue 6,217,547 5,746,406 5,381,929 5,595,696 5,501,387 Total Expenditures 5,846,305 7,745,795 5,876,503 5,845,223 5,323,046 Other Financing Sources (Uses) 578,987 2,067, ,401 (8,344) 73,355 Net Funds Available 950,229 67,802 (86,173) (257,871) 251,696 Ending Balance $ 3,000,505 $ 2,050,276 $ 1,982,474 $ 2,068,647 $ 2,326,518 (1) Unaudited. For additional information regarding the City, please contact: Eric Strong W. Boyd London, Jr. City of Richland Hills Marti Shew City Manager or First Southwest Company 3200 Diana Drive 325 North St. Paul Richland Hills, Texas Suite 800 (817) Dallas, Texas (214) (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 8

9 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS Length of City Council Service Term Expires Occupation Bill Agan 3 Years May, 2016 Realtor Mayor Edward Lopez 4 Years May, 2017 Retail Manager Mayor Pro-Tem Roland Goveas 4 Years May, 2017 Business Owner Councilmember Allison Barrette 1 Year May, 2016 Accounts Payable/Receivable Councilmember Robert DeSoto 4 Years May, 2017 Business Owner Councilmember Beverly Williams 3 Years May, 2016 Housewife Councilmember SELECTED ADMINISTRATIVE STAFF Length of Length of Name Service Service to City Eric Strong City Manager 3 Years Cathy Bourg City Secretary 1 Year Barbara Mann Director of Finance 19 Years CONSULTANTS AND ADVISORS Auditors...Pattillo, Brown & Hill, L.L.P. Waco, Texas Bond Counsel...McCall, Parkhurst & Horton L.L.P. Dallas, Texas Financial Advisor... FirstSouthwest, a Division of Hilltop Securities Inc. Dallas, Texas 9

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11 PRELIMINARY OFFICIAL STATEMENT RELATING TO $8,765,000* CITY OF RICHLAND HILLS, TEXAS GENERAL OBLIGATION BOND, SERIES 2016 And $4,965,000* CITY OF RICHLAND HILLS, TEXAS COMBINATION TAX AND WATER AND SEWER SYSTEM REVENUE CERTIFICATES OF OBLIGATION, SERIES 2016 INTRODUCTION This Preliminary Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $8,765,000* City of Richland Hills, Texas, General Obligation Bonds, Series 2016 (the Bonds ) and the $4,965,000* City of Richland Hills, Texas, Combination Tax and Water and Sewer System Revenue Certificates of Obligation, Series 2016 (the Certificates and together with the Bonds, herein collectively referred to as the Obligations ). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the respective ordinances (the Bond Ordinance with respect to the Bonds and the Certificate Ordinance with respect to the Certificates), each to be adopted by the City Council of the City of Richland Hills, Texas (the City ) on the date of the sale of the Obligations which will authorize the issuance of the Obligations. The Bond Ordinance and the Certificate Ordinance are herein collectively referred to as the Ordinance(s). References to web site addresses presented in this Official Statement are for informational purposed only and may be in the form of a hyperlink solely for the reader s convenience. Unless otherwise specified, references to websites and the information or links contained therein are not incorporated into and are not a part of, this Official Statement. There follows in this Preliminary 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 City s Financial Advisor, FirstSouthwest a Division of Hilltop Securities Inc. ( FirstSouthwest ), Dallas, Texas. DESCRIPTION OF THE CITY... The City is a political subdivision and municipal corporation of the State of Texas (the State ), duly organized and existing under the laws of the State. The City is located in northeast Tarrant County, and is a Home Rule city governed by a mayor and the five member council. The Mayor and the other council members are elected at-large and councilmembers are elected by place for two year staggered terms. The City is located on State Highway 121, bordering the northeast corner of Fort Worth. The City covers approximately 3.9 square miles and the estimated 2016 population is 8,000. PLAN OF FINANCING PURPOSE... Proceeds from the sale of the Bonds will be used for (i) financing capital improvements and parks; and (ii) to pay the costs of issuance of the Bonds. Proceeds from the sale of the Certificates will be used for financing the purchase, construction and acquisition of certain real and personal property for capital improvements and parks, to wit: (i) a recreation and community activity center and a surrounding green/park space, including extensions, renovations and improvements to the City s Waterworks and Sewer System; and (ii) paying legal, fiscal, engineering and architectural fees in connection with such projects and said Certificates of Obligation. * Preliminary, subject to change. The City reserves the right to adjust the principal amounts of the Obligations shown on the Maturity Schedule on pages 2 and 4. 11

12 THE OBLIGATIONS DESCRIPTION OF THE OBLIGATIONS... The Obligations of each series are dated February 1, 2016 (the Dated Date ). The Obligations mature on August 15 in each of the years and in the amounts shown on pages 2 (with respect to the Bonds) and 4 (with respect to the Certificates) hereof. Interest on the Obligations will accrue from the Date of Delivery, will be computed on the basis of a 360-day year of twelve 30-day months and will be payable on February 15, 2017 and on each August 15 and February 15thereafter until maturity or prior redemption. The definitive Obligations will be issued only in fully-registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company ( DTC ) pursuant to the Book-Entry-Only System described herein. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Obligations will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations. See THE OBLIGATIONS - Book-Entry-Only System herein. AUTHORITY FOR ISSUANCE... The Bonds The Bonds are being issued pursuant to the Constitution and general laws of the State, particularly Chapter 1251 and Chapter 1331, Texas Government Code, as amended, and election held within the City on November 3, 2015, and the Bond Ordinance. The Bonds being issued are the first installment of bonds authorized by the voters to be issued by the City. See "DEBT INFORMATION Table 11". The Certificates - The Certificates are issued pursuant to the Constitution and general laws of the State, particularly Chapter 271, Subchapter C, Texas Local Government Code, as amended, and the Certificate Ordinance. SECURITY AND SOURCE OF PAYMENT... Tax Pledge... The Obligations constitute direct obligations of the City payable from an annual direct and continuing ad valorem tax levied against all taxable property within the City, within the limits prescribed by law (see "THE OBLIGATIONS - Tax Rate Limitation" below). Pledge of Surplus Waterworks and Sewer System Net Revenues for Certificates... The Certificates are additionally secured by a lien on and limited pledge of the revenues (not to exceed $1,000) of the City's combined Waterworks and Sewer System (the System ) remaining after payment of all operation and maintenance expenses thereof, and all debt service, reserve and other requirements in connection with all of the City's revenue obligations (now or hereafter outstanding), which are payable from all or part of said revenues, as provided in the Certificate Ordinance. TAX RATE LIMITATION... All taxable property within the City is subject to the assessment, levy and collection by the City of a continuing, direct annual ad valorem tax sufficient to provide for the payment of principal of and interest on all ad valorem tax debt within the limits prescribed by law. Article XI, Section 5, of the Texas Constitution is applicable to the City, and limits its maximum ad valorem tax rate to $2.50 per $100 Taxable Assessed Valuation for all City purposes. The Home Rule Charter of the City adopts the constitutionally authorized maximum tax rate of $2.50 per $100 Taxable Assessed Valuation. Administratively, the Attorney General of the State of Texas will permit allocation of $1.50 of the $2.50 maximum tax rate for all general obligation debt service, as calculated at the time of issuance. REDEMPTION... The City reserves the right, at its option, to redeem Obligations of either series having stated maturities on and after August 15, 2026, in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on August 15, 2025, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. If less than all the Obligations of any maturity are to be redeemed, the Paying Agent/Registrar (or DTC while the Obligations are in Book-Entry-Only form) shall determine by lot the Obligations, or portions thereof, within such maturity to be redeemed. If an Obligation (or any portion of the principal sum thereof) shall have been called for redemption and notice of such redemption shall have been given, such Obligation (or the principal amount thereof to be redeemed) shall become due and payable on such redemption date and interest thereon shall cease to accrue from and after the redemption date, provided funds for the payment of the redemption price and accrued interest thereon are held by the Paying Agent/Registrar on the redemption date. MANDATORY SINKING FUND REDEMPTION... In the event any of the Obligations are structured as term Obligations, such term Obligations will be subject to mandatory sinking fund redemption in accordance with the applicable provisions of the Ordinances, which provisions will be included in the final Official Statement. NOTICE OF REDEMPTION... Not less than 30 days prior to a redemption date for the Obligations, the City shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Obligations to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE OBLIGATIONS CALLED FOR 12

13 REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY OBLIGATION OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH OBLIGATION OR PORTION THEREOF SHALL CEASE TO ACCRUE, PROVIDED THAT MONIES FOR THE PAYMENT OF THE REDEMPTION PRICE AND THE INTEREST ACCRUED ON THE PRINCIPAL AMOUNT TO BE REDEEMED TO THE DATE OF REDEMPTION ARE HELD FOR THE PURPOSE OF SUCH PAYMENT BY THE PAYING AGENT/REGISTRAR. With respect to any optional redemption of the Obligations, unless moneys sufficient to pay the principal of and premium, if any, and interest on the Obligations to be redeemed shall have been received by the Paying Agent/Registrar prior to the giving of such notice of redemption, such notice may state that said redemption is conditional upon the receipt of such moneys by the Paying Agent/Registrar on or prior to the date fixed for such redemption, or upon the satisfaction of any prerequisites set forth in such notice of redemption; and, if sufficient moneys are not received, such notice shall be of no force and effect, the City shall not redeem such Obligations and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, to the effect that the Obligations have not been redeemed. DEFEASANCE... The Ordinances provide for the defeasance of the Obligations when the payment of the principal and premium, if any, on the Obligations, plus interest on the Obligations to the due date thereof is provided by irrevocably depositing with the Paying Agent/Registrar or another authorized escrow agent, in trust (1) money sufficient to make such payment and/or (2) Defeasance Securities to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the Obligations, and thereafter the City will have no further responsibility with respect to amounts available to such paying agent (or other financial institution permitted by applicable law) for the payment of such defeased Obligations, including any insufficiency therein caused by the failure of such paying agent (or other financial institution permitted by applicable law) to receive payment when due on the Defeasance Securities. The City has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the City moneys in excess of the amount required for such defeasance. Each Ordinance provides that Defeasance Securities means any securities and obligations now or hereafter authorized by State law that are eligible to discharge obligations such as the Obligations. Current State law permits defeasance with the following types of securities: (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, on the date the governing body of the City authorizes the defeasance, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (c) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the City adopts or approves the proceedings authorizing the financial arrangements, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, and (d) any other securities or obligations hereafter authorized under applicable state law in existence at the time of such defeasance that are eligible to discharge obligations such as the Obligations. There is no assurance that the current law will not be changed in a manner which would permit investments other than those described above to be made with amounts deposited to defease the Obligations. Because the Ordinances do not contractually limit such investments, registered owners will be deemed to have consented to defeasance with such other investments, notwithstanding the fact that such investments may not be of the same investment quality as those currently permitted under State law. There is no assurance that the ratings for U.S. Treasury securities used for defeasance purposes or that for any other Defeasance Security will be maintained at any particular rating category. Upon such deposit as described above, such Obligations 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 Obligations have been made as described above, all rights of the City to initiate proceedings to call the Obligations for redemption or take any other action amending the terms of the Obligations are extinguished; provided, however, that the right to call the Obligations 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 Obligations for redemption; (ii) gives notice of the reservation of that right to the owners of the Obligations immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. AMENDMENTS... In the Ordinances, the City has reserved the right to amend the respective Ordinance without the consent of any holder of the Obligations for the purpose of amending or supplementing the respective Ordinance to (i) cure any ambiguity, defect or omission therein that does not materially adversely affect the interests of the holders, (ii) grant additional rights or security for the benefit of the holders, (iii) add events of default as shall not be inconsistent with the provisions of the respective Ordinance that do not materially adversely affect the interests of the holders, (iv) qualify the respective Ordinance under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect or (v) make such other provisions in regard to matters or questions arising under the respective Ordinance that are not inconsistent with the provisions thereof and which, in the opinion of Bond Counsel for the City, do not materially adversely affect the interests of the holders. 13

14 The Ordinances further provide that the holders of the Obligations aggregating in principal amount a majority of the outstanding Obligations will have the right from time to time to approve any amendment not described above to the respective Ordinance if it is deemed necessary or desirable by the City; provided, however, that without the consent of 100% of the holders in original principal amount of the then outstanding Obligations, no amendment may be made for the purpose of: (i) making any change in the maturity of any of the outstanding Obligations; (ii) reducing the rate of interest borne by any of the outstanding Obligations; (iii) reducing the amount of the principal of, or redemption premium, if any, payable on any outstanding Obligations; (iv) modifying the terms of payment of principal or of interest or redemption premium on outstanding Obligations, or imposing any condition with respect to such payment; or (v) changing the minimum percentage of the principal amount of the Obligations necessary for consent to such amendment. Reference is made to the Ordinances for further provisions relating to the amendment thereof. BOOK-ENTRY-ONLY SYSTEM... This section describes how ownership of the Obligations is to be transferred and how the principal of and interest on the Obligations are to be paid to and credited by DTC while the Obligations are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Obligations, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Obligations), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Obligations. The Obligations will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered security certificate will be issued for each maturity of the Obligations, in the aggregate principal amount of each such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). Direct Participants and Indirect Participants are collectively referred to herein as the Participants. DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for the Obligations on DTC s records. The ownership interest of each actual purchaser of each Obligation ( Beneficial Owner ) is in turn to be recorded on the Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Participant through which the Beneficial Owners entered into the transaction. Transfers of ownership interest in the Obligations are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Obligations, except in the event that use of the book-entry system for the Obligations is discontinued. To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTC s records reflect only the identity of the Direct Participant to whose account such Obligations are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. 14

15 Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Obligations may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Obligations, such as redemptions, tenders, defaults, and proposed amendments to the Obligation documents. For example, Beneficial Owners may wish to ascertain that the nominee holding the Obligations for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Obligations within a maturity are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Obligations unless authorized by a Direct Participant in accordance with DTC s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Obligations will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts, upon DTC s receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar on payable dates in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as in the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent/Registrar or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest to 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 shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Participants. DTC may discontinue providing its services as securities depository with respect to the Obligations at any time by giving reasonable notice to the City and the Paying Agent/Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, Obligations are required to be printed and delivered. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository) with respect to the Obligations. In that event, the Obligations will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement... In reading this Official Statement it should be understood that while the Obligations are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Obligations, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinances will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the City, the Financial Advisor, or the Initial Purchaser of the Bonds or the Initial Purchaser of the Certificates. Effect of Termination of Book-Entry-Only System... In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the City with respect the Obligations, printed Obligations will be issued to the holders and the Obligations will be subject to transfer, exchange and registration provisions as set forth in the Ordinances and summarized under THE OBLIGATIONS - Transfer, Exchange and Registration below. PAYING AGENT/REGISTRAR... The initial Paying Agent/Registrar for each series the Obligations is U.S. Bank National Association, Dallas, Texas. In each 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 Obligations of either series are duly paid and any successor Paying Agent/Registrar shall be a commercial bank, trust company, financial institution or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Obligations. Upon any change in the Paying Agent/Registrar for the Obligations, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Obligations affected by the changes by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. 15

16 TRANSFER, EXCHANGE AND REGISTRATION... In the event the Book-Entry-Only System should be discontinued with respect to the Obligations, printed Obligations will be issued to the registered owners of the Obligations and thereafter such printed Obligations may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Obligations may be assigned by the execution of an assignment form on the respective Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Obligations will be delivered by the Paying Agent/Registrar, in lieu of the Obligations being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Obligations issued in an exchange or transfer of Obligations will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Obligations to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Obligations registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and for a like aggregate principal amount as the Obligations surrendered for exchange or transfer. See Book-Entry-Only System herein for a description of the book-entry-only system to be utilized initially in regard to ownership and transferability of the Obligations. Neither the City nor the Paying Agent/Registrar will be required to make any transfer, conversion, or exchange of a Obligation (i) during the period commencing with the close of business on any Record Date and ending with the opening of business on the next following principal or interest payment date, or (ii) with respect to any Obligation or any portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date. PAYMENT PROVISIONS... Interest on the Obligations 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 by United States mail, first class postage prepaid to the address of the registered owner recorded in the registration books of the Paying Agent/Registrar or (ii) by such other method, acceptable to the Paying Agent/Registrar requested by, and at the risk and expense of, the registered owner. Principal of the Obligations will be paid to the registered owner at the stated maturity or earlier redemption of a Obligation upon presentation to the designated payment/transfer office of the Paying Agent/Registrar; provided, however, that so long as Cede & Co. (or other DTC nominee) is the registered owner of the Obligations, all payments will be made as described under Book-Entry-Only System herein. If the date for the payment of the principal of or interest on the Obligations 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. RECORD DATE FOR INTEREST PAYMENT... The record date ( Record Date ) for the interest payable on the Obligations on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a Special Record Date ) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ( Special Payment Date, which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each holder of an Obligation appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. REPLACEMENT OBLIGATIONS... If any Obligation is mutilated, destroyed, stolen or lost, a new Obligation in the same principal amount as the Obligation so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Obligation, such new Obligation will be delivered only upon surrender and cancellation of such mutilated Obligation. In the case of any Obligation issued in lieu of and substitution for an Obligation which has been destroyed, stolen or lost, such new Obligation will be delivered only (a) upon filing with the Paying Agent/Registrar a certificate to the effect that such Obligation has been destroyed, stolen or lost and proof of ownership thereof, and (b) upon furnishing the Paying Agent/Registrar with indemnity satisfactory to hold the City and the Paying Agent/Registrar harmless. The person requesting the authentication and delivery of a new Obligation must pay such expenses as the Paying Agent/Registrar may incur in connection therewith. OBLIGATIONHOLDERS REMEDIES... Each Ordinance defines Event of Default as the failure to make payment for the Obligations when the same becomes due and payable or the default in the performance or observance of any other covenant, agreement or obligation of the City under the Ordinance, the failure to perform which materially, adversely affects the rights of the registered owners, including, but not limited to, their prospect or ability to be paid principal or any interest, and the continuation thereof for a period of 60 days after notice of such default is given by any registered owner to the City. Each Ordinance further provides that upon the occurrence of an Event of Default, the registered owners may seek a writ of mandamus to compel City officials to carry out their legally imposed duties with respect to the Obligations if there is no other available remedy at law to compel performance of the Obligations or the respective Ordinances and the City s obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, and thus rests within the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Obligations in the event of default and, 16

17 consequently, the remedy of mandamus may have to be relied upon from year to year. The Ordinances do not provide for the appointment of a trustee to represent the interest of the holders of Obligaitons upon any failure of the City to perform in accordance with the terms of the Ordinances, or upon any other condition, and, accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court has ruled in Tooke v.city of Mexia, 197 S.W.3rd 325 (Tex. 2006), that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in clear and unambiguous language. Because it is unclear whether the Texas legislature has effectively waived the City s sovereign immunity from a suit for money damages, holders of Obligations may not be able to bring such a suit against the City for breach of the Obligations or covenants of each Ordinance. Even if a judgment against the City could be obtained, it could not be enforced by direct levy and execution against the City s property. Further, the registered owners cannot themselves foreclose on property within the City or sell property within the City to enforce the tax lien on taxable property to pay the principal of and interest on the Obligations. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ( Chapter 9 ). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of ad valorem taxes in support of a general 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 Obligationholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinances and the Obligations are qualified with respect to the customary rights of debtors relative to their creditors, including principles of governmental immunity, and by general principles of equity which permit the exercise of judicial discretion. SOURCES AND USES OF OBLIGATION PROCEEDS... Proceeds from the sale of the Obligations are expected to be expended approximately as follows: The Bonds The Certificates SOURCES OF FUNDS Par Amount $ - $ - Reoffering Premium TOTAL SOURCES $ - $ - USES OF FUNDS Deposit to Project Construction Fund $ - $ - Total Underwriters' Discount Costs of Issuance Deposit to Debt Service Fund (1) TOTAL USES $ - $ - BOND INSURANCE RISK FACTORS GENERAL... The City has made application to bond insurance companies (collectively, the Insurer ) to provide a municipal bond insurance policy relating to the Obligations (the Policy ). In the event the Obligations are qualified for municipal bond insurance, and the Initial Purchaser of the Bonds or the Initial Purchaser of the Certificates, as the case may be, desires to purchase such insurance, the final Official Statement will disclose certain information relating to the Insurer and the Policy. If the Obligations of either series are insured under the Policy, the following risk factors related to municipal bond insurance policies generally apply. If the City defaults in the payment of principal or interest with respect to the Obligations when due, any owner of the Obligations shall have a claim under the applicable Policy for such payments. However, in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments are to be made in such amounts and at such times as such payments would have been due had there not been any such acceleration. The Policy may not insure against redemption premium, if any. The payment of principal and interest in connection with mandatory or optional redemption of the Obligations by the City which is recovered by the City from the Obligation owner as a voidable preference under applicable bankruptcy law may be covered by the Policy, however, such payments may be made by the Insurer at such time and in such amounts as would have been due absent such prepayment by the City unless the Insurer chooses to pay such amounts at an earlier date. The Insurer may require its consent to any remedies and the Insurer s consent may be required in connection with amendments to any applicable Obligation documents. 17

18 In the event the Insurer is unable to make payment of principal and interest as such payments become due under the Policy, the Obligations will be payable solely from the moneys pledged pursuant to the applicable Obligation documents. In the event the Insurer becomes obligated to make payments with respect to the Obligations, no assurance is given that such event will not adversely affect the market price of the Obligations or the marketability (liquidity) for the Obligations. The long-term ratings on the Obligations will be dependent in part on the financial strength of the Insurer and its claims-paying ability. The Insurer s financial strength and claims-paying ability are predicated upon a number of factors which could change over time. No assurance is given that the long-term ratings of the Insurer and of the ratings on the Obligations insured by the Insurer will not be subject to downgrade, and such event could adversely affect the market price of the Obligations or the marketability (liquidity) for the Obligations. See the description under OTHER INFORMATION - Ratings herein. The obligations of the Insurer are contractual obligations and in an event of default by the Insurer, the remedies available may be limited by applicable bankruptcy law or State law related to insolvency of insurance companies. Neither the City nor its Financial Advisor have made independent investigations into the claims-paying ability of any potential Insurer and no assurance or representation regarding the financial strength or projected financial strength of any potential Insurer is given. Thus, when making an investment decision, potential investors should carefully consider the ability of the City to pay principal of and interest on the Obligations and the claims-paying ability of the Insurer, particularly over the life of the Obligations. CLAIMS-PAYING ABILITY AND FINANCIAL STRENGTH OF MUNICIPAL BOND INSURERS... Moody s Investor Services, Inc., Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business and Fitch Ratings (the Rating Agencies ) have in the past downgraded the claims-paying ability and financial strength of most providers of municipal bond insurance. Additional downgrades or negative changes in the rating outlook for all bond insurers is possible. In addition, certain events in the credit markets have had substantial negative effects on the bond insurance business. These developments could be viewed as having a material adverse effect on the claims-paying ability of such bond insurers, including any bond insurer of the Obligations. TAX INFORMATION AD VALOREM TAX LAW... The appraisal of property within the City is the responsibility of the Tarrant 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 Title I of the Texas Tax Code (the Property Tax Code ) to appraise all property within the Appraisal District on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining the market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and the market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law requires the appraised value of a residence homestead to be based solely on the property s value as a residence homestead, regardless of whether residential use is considered to be the highest and best use of the property. State law further limits the appraised value of a residence homestead for a tax year to an amount that would not exceed the lesser of (1) the property's market value in the most recent tax year in which the market value was determined by the Appraisal District or (2) the sum of (a) 10% of the property's appraised value in the preceding tax year, plus (b) the property's appraised value in the preceding tax year, plus (c) the market value of all new improvements to the property. The value placed upon property within Appraisal District is subject to review by an Appraisal Review Board, consisting of members appointed by the Board of Directors of the Appraisal District. The Appraisal District is required to review the value of property within the Appraisal District at least every three years. The City may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the City by petition filed with the Appraisal Review Board. Reference is made to the Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution ( Article VIII ) and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value and the exemption of certain personal property from ad valorem taxation. Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision. Once authorized, such exemption may be repealed or decreased or increased in amount (i) by the governing body of the political subdivision or (ii) by a favorable vote of a majority of the qualified voters at an election called by the governing body of the political subdivision, which election must be called upon receipt of a petition signed by at least 20% of the number of qualified voters who voted in the preceding election of the political subdivision. In the case of a decrease, the amount of the exemption may not be reduced to less than $3,000 of the market value. 18

19 The surviving spouse of an individual who qualifies for the foregoing exemption for the residence homestead of a person 65 or older (but not the disabled) is entitled to an exemption for the same property in an amount equal to that of the exemption for which the deceased spouse qualified if (i) the deceased spouse died in a year in which the deceased spouse qualified for the exemption, (ii) the surviving spouse was at least 55 years of age at the time of the death of the individual s spouse and (iii) the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse. In addition to any other exemptions provided by the Property Tax Code, the governing body of a political subdivision, at its option, may grant an exemption of up to 20% of the market value of residence homesteads, with a minimum exemption of $5,000. Senate Joint Resolution 1 ("Senate Joint Resolution 1"), passed during the 84th Texas Legislature, proposed a constitutional amendment increasing the mandatory homestead exemption for school districts from $15,000 to $25,000 and requiring that the tax limitation for taxpayers who are age 65 and older or disabled be reduced to reflect the additional exemption. The proposed constitutional amendment was approved by the voters at a statewide election held on November 3, 2015, and is effective for the tax year beginning January 1, Legislation was also passed by the 84th Texas Legislature that includes provisions allowing for additional State aid to hold school districts harmless during the State's biennium for tax revenue losses resulting from the increased homestead exemption. Any hold harmless funding for future biennia must be approved in subsequent legislative sessions, and the District can make no representation that such approval will occur. The hold harmless legislation also prohibits a school district, municipality, or county from reducing the amount of, or repealing, an optional homestead exemption that was in place for the 2014 tax year (fiscal year 2015) through the period ending December 31, An optional homestead exemption reduces both the tax revenue and State aid received by a school district. In the case of residence homestead exemptions granted under Section 1-b, Article VIII, ad valorem taxes may continue to be levied against the value of homesteads exempted where ad valorem taxes have previously been pledged for the payment of debt if cessation of the levy would impair the obligation of the contract by which the debt was created. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse (for so long as the spouse remains unmarried) or children (under 18 years of age) of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000; provided, however, that a disabled veteran who receives from the from the United States Department of Veterans Affairs or its successor 100% disability compensation due to a service-connected disability and a rating of 100% disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veteran s residence homestead. In addition, effective January 1, 2012, and subject to certain conditions, surviving spouses of a deceased veteran who had received a disability rating of 100% will be entitled to receive a residential homestead exemption equal to the exemption received by the deceased spouse until such surviving spouse remarries. Under Article VIII and State law, the governing body of a county, municipality or junior college district, may provide for a freeze on the total amount of ad valorem taxes levied on the residence homestead of a disabled person or persons 65 years of age or older to the amount of taxes imposed in the year such residence qualified for such exemption. Also, upon receipt of a petition signed by five percent of the registered voters of the 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 who are disabled. Upon providing for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead. Also, a surviving spouse of a taxpayer who qualifies for the freeze on ad valorem taxes is entitled to the same exemption so long as the property was the residence homestead of the surviving spouse when the deceased spouse died and remains the residence homestead of the surviving spouse and the spouse was at least 55 years of age at the time of the death of the individual s spouse. If improvements (other than repairs or improvements required to comply with governmental requirements) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may not be repealed or rescinded. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1. Nonbusiness personal property, such as automobiles or light trucks, are exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VIII, Section 1-j, provides for freeport property to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. 19

20 Article VIII, Section 1-n of the Texas Constitution provides for an exemption from taxation for goods-in-transit, which are defined as (i) personal property acquired or imported into the State and transported to another location inside or outside the State, (ii) stored under a contract for bailment in public warehouses not in any way owned or controlled by the owner of the stored goods, and (iii) transported to another location inside or outside the State within 175 days of the date the property was acquired or imported into the State. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. Pursuant to changes enacted during the 2011 Texas Legislative Special Session, all taxing units, including those that have previously taken official action to tax goods-in-transit, may not tax goods-in-transit in the 2012 tax year or thereafter, unless the governing body of the taxing unit holds a public hearing and takes action on or after October 1, 2011, to provide for the taxation of the goods-in-transit. After holding a public hearing, a taxing unit may take official action prior to January 1 of the first tax year in which the governing body proposes to tax goods-in-transit. After taking such official action, the goods-in-transit remain subject to taxation by the taxing unit until the governing body of the taxing unit rescinds or repeals its previous action to tax goods-in-transit. If, however, a taxing unit took official action prior to October 1, 2011 to tax goods-in-transit and pledged the taxes imposed on the goods-in-transit for the payment of a debt, taxes may continue to be imposed on goods-in-transit until the debt is discharged, if cessation of the imposition of the tax would impair the obligation of the contract by which the debt was created. A city may utilize tax increment financing ( TIF ), pursuant to the Tax Increment Financing Act, Texas Tax Code, Chapter 311, as amended, to encourage development and redevelopment within a designated reinvestment zone. Taxes collected from increases in valuation above the base value (the captured appraised value ) by each taxing unit that levies ad valorem taxes on real property in the reinvestment zone may be used to pay costs of infrastructure or other public improvements in the reinvestment zone and to supplement or act as a catalyst for private development in the defined area of the reinvestment zone. The tax increment base value for a taxing unit is the total appraised value of all real property taxable by the taxing unit and located in the reinvestment zone as of January 1 of the year in which the city created the reinvestment zone. Each taxing unit can choose to dedicate all, any portion or none of its taxes collected from the captured appraised value to the costs of improvements in the reinvestment zone. The amount of a taxing unit s tax increment for a year is the amount of property taxes levied by the taxing unit for that year on the captured appraised value of real property taxable by the taxing unit and located in the reinvestment zone, multiplied by the taxing unit s percentage level of participation. The City also may enter into tax abatement agreements to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The City in turn, agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. Cities are also authorized, pursuant to Chapter 380, Texas Local Government Code, as amended ( Chapter 380 ), to establish programs to promote State or local economic development and to stimulate business and commercial activity in the City. In accordance with a program established pursuant to Chapter 380, the City may make loans or grants of public funds for economic development purposes, however, no obligations secured by ad valorem taxes may be issued for such purposes unless approved by voters of the City. 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 60th 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. Under current law, a tax rate cannot be adopted by the City Council that exceeds the lower of the rollback tax rate or of 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. 20

21 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 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Effective January 1, 2012, oil and gas reserves are assessed on the basis of a valuation process that uses pricing information contained in the most recently published Early Release Overview of the Annual Energy outlook published Early Release Overview of the Annual Energy Outlook published by the United States Energy Information Administration, as well as appraisal formulas developed by the State Comptroller of Public Accounts. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1. PENALTIES AND INTEREST... Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows: Cumulative Cumulative Month Penalty Interest Total February 6% 1% 7% March April May June July After July, the penalty remains at 12%, and interest accrues at a rate of one percent (1%) for each month or portion of a month the tax remains unpaid. A delinquent tax continues to incur the penalty interest as long as the tax remains unpaid, regardless of whether a judgment for the delinquent tax has been rendered. The purpose of imposing such interest penalty is to compensate the taxing unit for revenue lost because of the delinquency. In addition, if an account is delinquent in July, an attorney's collection fee of up to 20% may be added to the total tax penalty and interest charge. Under certain circumstances, taxes which become delinquent on the homestead of a taxpayer 65 years old or older incur a penalty of 8% per annum with no additional penalties or interest assessed. In general, property subject to the City's lien may be sold, in whole or in parcels, pursuant to court order to collect the amounts due. Federal law does not allow for the collection of penalty and interest against an estate in bankruptcy. Federal bankruptcy law provides that an automatic stay of action by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court. CITY APPLICATION OF TAX CODE... The City grants an exemption to the market value of the residence homestead of persons 65 years of age or older of $30,000; the disabled are also granted an exemption of 5,000 to $12,000; The City has not granted an additional exemption of 20% of the market value of residence homesteads; minimum exemption of $5,000. The City has adopted the tax freeze for citizens who are disabled or are 65 years of age or older, which became a local option and subject to local referendum on January 1, Ad valorem taxes are not levied by the City against the exempt value of residence homesteads for the payment of debt. The City does not tax nonbusiness personal property; and Tarrant County collects taxes for the City. The City does not permit split payments, and discounts are not allowed. The City does not tax freeport property. The City does tax goods-in-transit. The City does not collect the additional one-half cent sales tax for reduction of ad valorem taxes. 21

22 The City has adopted a tax abatement policy. TAX ABATEMENT POLICY... The City has established a tax abatement program to encourage economic development. In order to be considered for tax abatement, a project must meet several criteria pertaining to job creation and property value enhancement. Generally, projects are eligible for a tax abatement of up to 100% for a period of 10 years. TABLE 1 - VALUATION, EXEMPTIONS AND GENERAL OBLIGATION DEBT 2015/16 Market Valuation Established by Tarrant Central Appraisal District $ 480,328,726 Less Exemptions/Reductions at 100% Market Value: Totally Exempt Property $ 17,997,628 Disabled Veterans Exemptions 2,090,754 Nominal Value 526,725 Freeport 6,343,612 Agricultural Land Use Reduction 47,308 Over 65-Local Option 22,174,481 49,180,508 Taxable Assessed Value $ 431,148,218 Cases Before Arbitrage 4,489,258 Incomplete Accounts 30,874,147 Total 2015/16 Taxable Assessed Value $ 466,511,623 Debt Payable from Ad Valorem Taxes (as of 12/31/2015) $ 12,471,000 The Bonds (1) 8,765,000 The Certificates (1) 4,965,000 Total Debt Payable from Ad Valorem Taxes $ 26,201,000 Less: Self-Supporting Debt (2) $ 15,815,000 Net Debt Payable from Ad Valorem Taxes $ 10,386,000 Interest and Sinking Fund (as of 11/1/2015) $ 202,434 Ratio Tax Supported Debt to Taxable Assessed Valuation 6.08% 2016 Estimated Population - 8,000 Per Capita Taxable Assessed Valuation - $53,894 Per Capita Funded Debt - $3,275 (1) Preliminary, subject to change. (2) General obligation debt in the amounts shown for which repayment is provided from other revenue sources. The amount of self-supporting debt is based on the percentages of revenue support as shown in Table 10. It is the City s current policy to provide these payments from these revenues; this policy is subject to change in the future. In the event the City changes its policy, or such revenues are not sufficient to pay debt service on such obligations, the City will be required to levy an ad valorem tax to pay such debt service. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 22

23 TABLE 2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY Taxable Appraised Value for Fiscal Year Ended September 30, % of % of % of Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $ 246,358, % $ 241,936, % $ 238,781, % Real, Residential, Multi-Family 29,001, % 24,408, % 22,428, % Real, Vacant Lots/Tracts 7,330, % 7,717, % 8,411, % Real, Commercial and Industrial 127,062, % 103,223, % 100,638, % Real, Minerals, Oil and Gas 6,352, % 7,935, % 5,141, % Real and Tangible Personal, Utilities 5,163, % 20,317, % 19,682, % Tangible Personal, Commercial and Industrial 58,814, % 59,496, % 65,108, % Tangible Personal, Other 245, % % % Total Appraised Value Before Exemptions $ 480,328, % $ 465,036, % $ 460,192, % Less: Total Exemptions (49,180,508) (28,831,479) (30,056,442) Cases Before Arbitrage and Incomplete 35,363, Taxable Assessed Value $ 466,511,623 $ 436,205,014 $ 430,136,128 Taxable Appraised Value for Fiscal Year Ended September 30, % of % of Category Amount Total Amount Total Real, Residential, Single-Family $ 227,031, % $ 226,592, % Real, Residential, Multi-Family 20,574, % 18,278, % Real, Vacant Lots/Tracts 8,169, % 8,372, % Real, Commercial and Industrial 101,020, % 98,635, % Real, Minerals, Oil and Gas 4,000, % % Real and Tangible Personal, Utilities 17,980, % 16,723, % Tangible Personal, Commercial and Industrial 78,576, % 64,741, % Total Appraised Value Before Exemptions $ 457,354, % $ 433,344, % Less: Total Exemptions (46,657,671) (35,315,955) Taxable Assessed Value $ 410,696,953 $ 398,028,896 NOTE: Valuations shown are certified taxable assessed values reported by the Appraisal District. Certified values are subject to change throughout the year as contested values are resolved and the Appraisal District updates records. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 23

24 TABLE 3 - VALUATION AND GENERAL OBLIGATION DEBT HISTORY G.O. G.O. Fiscal Taxable Tax Debt Tax Debt General Year Taxable Assessed Outstanding to Taxable Obligation Ended Estimated Assessed Valuation At End Assessed Tax Debt 30-Sep Population (1) Valuation (2) Per Capita Of Year (3) Valuation Per Capita ,801 $ 398,028,896 $ 51,023 $ 8,317, % $ 1, , ,696,953 52,647 13,599, % 1, , ,136,128 55,139 12,551, % 1, , ,205,014 55,917 12,471, % 1, , ,511,623 58,314 25,000,000 (4) 5.36% (4) 3,125 (4) (1) Estimates derived from 2000 and 2010 data from the U.S. Census Bureau. (2) As reported by the Appraisal District on the City's annual State Property Tax Reports; subject to change during the ensuing year. (3) Includes self-supporting debt. (4) Projected. Includes the Obligations. Preliminary, subject to change. TABLE 4 - TAX RATE, LEVY AND COLLECTION HISTORY Fiscal Year Interest & Percent Percent Ended Tax General Sinking Tax Current Total 30-Sep Rate Fund Fund Levy Collections Collections 2012 $ $ $ $ 2,195, % 99.80% ,168, % 99.90% ,271, % % ,316, % (1) 98.60% (1) ,180, % (2) 3.10% (2) (1) Unaudited. (2) Collections as of October 31, TABLE 5 - TEN LARGEST TAXPAYERS 2015/16 % of Taxable Taxable Assessed Assessed Name of Taxpayer Nature of Property Valuation Valuation Creek on Calloway LP Aparment Complex $ 10,500, Wal-Mart Real Estate Bus Trust/Stores Tx LLC Retail 9,110, % First Industrial Texas LP Real Estate/Commercial 8,176, % CN Churchill III LLC Real Estate/Commercial 6,554, % Stuart C Irby Co Electrical Distributor 5,724, % Oncor Electric Delivery co LLC Electric Utility 5,176, % Charter Communications Cable Provider 5,111, % AT&T Telephone Utility 5,033, % Hung Properties 1 LP Real Estate/Commercial 4,100, % Chesapeake Operating Drilling 4,003, % $ 63,491, % GENERAL OBLIGATION DEBT LIMITATION... No general obligation debt limitation is imposed on the City under current State law or the City s Home Rule Charter (however, see THE OBLIGATIONS - Tax Rate Limitation ). 24

25 TABLE 6 - TAX ADEQUACY (1) 2016 Net Principal and Interest Requirements $ 316,658 $ Tax Rate at 99% Collection Produces $ 316,827 Average Annual Net Principal and Interest Requirements, $ 537,644 $ Tax Rate at 99% Collection Produces $ 538,051 Maximum Annual Net Principal and Interest Requirements, 2020 $ 594,044 $ Tax Rate at 99% Collection Produces $ 594,396 (1) Includes the Obligations; excludes self-supporting debt. Preliminary, subject to change. See Table 10 Computation of Self-Supporting Debt. TABLE 7 - ESTIMATED OVERLAPPING DEBT Expenditures of the various taxing entities within the territory of the City are paid out of ad valorem taxes levied by such entities on properties within the City. Such entities are independent of the City and may incur borrowings to finance their expenditures. This statement of direct and estimated overlapping ad valorem tax debt ( Tax Debt ) was developed from information contained in Texas Municipal Reports published by the Municipal Advisory Council of Texas. Except for the amounts relating to the City, the City has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed may have issued additional 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. 2015/16 City's Authorized Taxable 2015/16 Total Estimated Overlapping But Unissued Assessed Tax Tax % Tax Debt Debt as of Taxing Jurisdiction Value Rate Debt Applicable As of 12/31/15 12/31/2015 City of Richland Hills $ 466,511,623 $ $ 10,386,000 (1) % $ 10,386,000 (1) $ 135,000 Birdville ISD 7,421,963, ,161, % 13,422,869 58,200,000 Tarrant County 132,397,275, ,420, % 1,192,686 30,600,000 Tarrant County College District 132,593,775, % - - Tarrant County Hospital District 132,397,026, ,440, % 77,352 - Total Direct and Overlapping Tax Debt $ 25,078,907 (2) Ratio of Direct and Overlapping Tax Debt to Taxable Assessed Valuation % Per Capita Direct and Overlapping Tax Debt $.... 3, (1) Includes the Obligations; excludes self-supporting debt. Preliminary, subject to change. (2) Amount remaining after issuance of the Bonds. Preliminary, subject to change. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 25

26 TABLE 8 - PRO-FORMA GENERAL OBLIGATION DEBT SERVICE REQUIREMENTS DEBT INFORMATION Less: Fiscal Self- Total % of Year Outstanding Debt Service (1) The Bonds (2) The Certificates (3) Supporting Debt Principal End Principal Interest Total Principal Interest Total Principal Interest Total Debt (4) Service Retired 2016 $ 1,201,000 $ 443,897 $ 1,644,897 $ - $ - $ - $ - $ - $ - $ 1,328,239 $ 316, , ,549 1,372, , , , , ,174 1,530, , ,000, ,679 1,368, , , , , , ,875 1,527, , , ,546 1,058, , , , , , ,775 1,220, , , ,863 1,025, , , , , , ,575 1,218, , % , ,102 1,019, , , , , , ,375 1,221, , , ,580 1,016, , , , , , ,975 1,222, , , , , , , , , , ,475 1,107, , , , , , , , , , ,975 1,099, , , , , , , , ,000 96, ,375 1,100, , % , , , , , , ,000 91, ,088 1,109, , , , , , , , ,000 85, ,388 1,106, , , , , , , , ,000 78, , , , ,000 92, , , , , ,000 70, , , , ,000 69, , , , , ,000 62, , , , % ,000 46, , , , , ,000 54, , , , ,000 31, , , , , ,000 46, , , , ,000 16, , , , , ,000 37, , , , , , , ,000 28, , , , , , , ,000 19, , , , % , , , ,000 10, , , , , , , , , , , , , , , , , , , , % , , , , ,000 89, , , ,000 73, , , ,000 56, , , ,000 38, , , % ,000 19, , , % Totals $ 12,471,000 $ 3,692,440 $ 16,163,440 $ 8,765,000 $ 5,993,345 $ 14,758,345 $ 4,965,000 $ 1,667,999 $ 6,632,999 $ 20,887,813 $ 16,666,971 (1) Outstanding Debt does not include lease/purchase obligations. (2) Average life of the Bonds: years. Interest is calculated at an average rate for purposes of illustration. Preliminary, subject to change. (3) Average life of the Certificates: years. Interest is calculated at an average rate for purposes of illustration. Preliminary, subject to change. (4) General obligation debt in the amounts shown for which repayment is provided from other revenue sources of the City. The amount of self-supporting debt is based on the percentages of revenue support as shown in Table 10. It is the City s current policy to provide these payments from these revenues; this policy is subject to change in the future. In the event the City changes its policy, or such revenues are not sufficient to pay debt service on such obligations, the City will be required to levy an ad valorem tax to pay such debt service. 26

27 TABLE 9 - INTEREST AND SINKING FUND BUDGET PROJECTION (1) Principal and Interest Requirements, 9/30/16 $ 316,658 Interest and Sinking Fund, 9/30/15 (2) $ 202,434 Budgeted Interest and Sinking Fund Levy 234,890 Delinquent Tax Collections 2,450 Penalty & Interest 1,600 $ 441,374 Estimated Fund Balance, 9/30/16 $ 124,716 (1) Includes the Obligations; preliminary, subject to change. Excludes self-supporting debt. See Table 10-Computation of Self-Supporting Debt and Table 7 Pro Forma General Obligation Debt Service Requirements. (2) Unaudited. TABLE 10 COMPUTATION OF SELF-SUPPORTING DEBT Net Economic Development Corporation "EDC" Revenues Available, 9/30/15 (1) $ 255,711 Less: Annual EDC Debt Service Requirements for Fiscal Year Balance Available for Other Purposes $ 255,711 EDC Supported General Obligation Bond Requirements, Fiscal Year 2016 $ 136,305 Percentage of EDC General Obligation Bonds Self-Supporting 100% Net Hotel Occupancy Tax "HOT" Revenues Available, 9/30/15 (1) $ 127,032 Less: Annual HOT Debt Service Requirements for Fiscal Year Balance Available for Other Purposes $ 255,711 HOT Supported General Obligation Bond Requirements, Fiscal Year 2016 $ - Percentage of EDC General Obligation Bonds Self-Supporting 100% Net Water and Sewer Revenues Available, 9/30/15 (1) $ 750,664 Less: Annual Water and Sewer Debt Service Requirements for Fiscal Year Balance Available for Other Purposes $ 750,664 Water and Sewer Supported General Obligation Requirements, Fiscal Year 2016 $ 786,440 Percentage of Water and Sewer General Obligation Bonds Self-Supporting (1) Unaudited. Net Drainage Utility Revenues Available, 9/30/15 (1) $ 601,660 Less: Annual Drainage Utility Debt Service Requirements for Fiscal Year Balance Available for Other Purposes $ 601,660 Drainage Utiltiy Supported General Obligation Requirements, Fiscal Year 2016 $ 405,494 Percentage of Drainage Utility General Obligation Bonds Self-Supporting 100% TABLE 11 - AUTHORIZED BUT UNISSUED GENERAL OBLIGATION BONDS Amount Amount Remaining Date Amount Previously Being Unissued Purpose Authorized Authorized Issued Issued Balance Parks & Recreation 11/3/2015 $ 8,900,000 $ - $ 8,765,000 (1) $ 135,000 $ 8,900,000 $ - $ 8,765,000 $ 135,000 (1) Preliminary, subject to change. 27

28 ANTICIPATED ISSUANCE OF ADDITIONAL GENERAL OBLIGATION DEBT... The City does not anticipate the issuance of additional obligations secured by ad valorem taxes within the next twelve months. TABLE 12 OTHER OBLIGATIONS Capital Leases Payable On November 2, 2006, the City entered into a lease-purchase agreement with Chase Equipment Leasing, Inc. to finance an electronic meter read project for the Water and Sewer Fund. The total cost of the project was $581,801. The interest rate is 4.5% per annum. The $478,191 proceeds of the lease-purchase agreement were deposited into an escrow account with The Bank of New York Trust Company, N.A. During the fiscal year ending September 30, 2009, the remaining lease proceeds of $129,404 were received. Future minimum lease-purchase commitments are as follows: Fiscal Year Business-type Ending Activities 2015 $ ,265 Total debt service requirements $ 58,265 Less: interest portion 2,509 Debt principal $ 55,756 Assets under lease-purchase agreements and the related accumulated depreciation are reported as follows: Business-type Activities Water and Sewer Systems $ 581,801 Less: accumulated depreciation 239,993 Net $ 341,808 PENSION FUND... The City provides pension benefits for all of its eligible full-time employees through a non-traditional, joint contributory, hybrid defined benefit plan in the State-wide Texas Municipal Retirement System ( TMRS ) an agent multipleemployer public employee retirement system. The plan provisions that have been adopted by the City are within the options available in the state statutes governing of TMRS. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits, and actuarial methods and assumptions used by TMRS. This report may be obtained from TMRS website at The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS. Plan provisions for the City for 2014, 2013 and 2012, were the same and were as follows: Plan Year Plan Year Plan Year Employee deposit rate 7% 7% 7% Matching ratio (City to employee) 2 to 1 2 to 1 2 to 1 Years required for vesting Service retirement eligibility (expressed as age/years of service) 60/5, 0/20 60/5, 0/20 60/5, 0/20 Updated service credit 100% Repeating, 100% Repeating, 100% Repeating, Transfers Transfers Transfers Annuity increease (to retirees) 70% of CPI Repeating 70% of CPI Repeating 70% of CPI Repeating Contributions Under the state law governing TMRS, the contribution rate of each city is determined annually by the actuary, using the Projected Unit Credit actuarial cost method. This rate consists of the normal cost contribution rate and the prior service cost contribution rate, which is calculated to be a level percent payroll from year to year. The normal cost contribution rate finances the portion of an active member s projected benefit allocated annually; the prior service contribution rate amortizes the unfunded (over funded) actuarial liability (asset) over the applicable period for that city. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits, such as Updated Service Credits and Annuity Increases. 28

29 The City contributes to the TMRS plan at an actuarially determined rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that services as the basis for the rate and the calendar year when the rate goes into effect. The annual pension cost and net pension obligation/(asset) are as follows: Annual Required Contribution (ARC) $ 724,258 $ 679,284 $ 717,708 Interest on Net Pension Obligation 25,784 25,304 22,819 Adjustment to the ARC (22,492) (22,232) (19,615) Annual Pension Cost (APC) $ 727,550 $ 682,356 $ 720,912 Contributions Made 722, , ,414 Increase (decrease) in NPO $ 5,344 $ 6,856 $ 35,498 Net Pension Obligation/(Asset), beginning of year 368, ,486 - Net Pension Obligation/(Asset), end of year $ 373,686 $ 368,342 $ 35,498 Contributions as a percentage of ARC 99.27% 99.00% 95.08% Actuarial Assumptions - The required contribution rates for fiscal year 2014 were determined as part of the December 31, 2013 actuarial valuations. Additional information as of the actuarial valuation, December 31, 2013, also follows: Valuation Date 12/31/ /31/ /31/2013 Actuarial Cost Method Projected Unit Projected Unit Entry Age Normal Credit Credit Amortization Method Level percent of Level percent of Level percent of payroll payroll payroll GASB 25 Equivalent Single 26.2 years; 25.2 years; 25.0 years; Amortization Period closed period closed period closed period Amortization Period 30 years 30 years 30 years Gaines/Losses Asset Valuation Method 10-year Smoothed 10-year Smoothed 10-year Smoothed Market Market Market Assumption Investment return* 7.0% 7.0% 7.0% Projected salary increases Varies by age Varies by age Varies by age and service and service and service * Includes Inflation at 3.0% 3.0% 3.0% Cost-of-living adjustments 2.1% 2.1% 2.1% The funded status as of December 31, 2014, the most recent actuarial valuation date, is presented as follows: Schedule of Funding Progress Actuarial UAAL as a Actuarial Actuarial Accrued Percentage of Valuation Value of Liability Funded Unfunded AAL Covered Covered Date Assets (AAL) Ration (UAAL) Payroll Payroll 12/31/2014 $ 24,291,973 $ 27,751, % $ 3,459,475 $ 4,295, % Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. 29

30 Actuarial calculations are based on the benefits provided under the terms of the substantive plan in effect at the time of each valuation, and reflect a long-term perspective. Consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. The schedule of funding progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability of benefits. OTHER POST-EMPLOYMENT BENEFITS... The City also participates in the cost sharing multiple-employer defined benefit group-term life insurance plan operated by TMRS known as the Supplemental Death Benefits Fund (SDBF). The city elected, by ordinance, to provide group-term life insurance coverage to both current and retired employees. The City may terminate coverage under and discontinue participation in the SDBF by adopting an ordinance before November 1 of any year to be effective the following January 1. The death benefit for active employees provides a lump-sum payment approximately equal to the employee s annual salary (calculated based on the employee s actual earnings, for the 12-month period preceding the month of death); retired employees are insured for $7,500; this coverage is an other post-employment benefit, or OPEB. The City contributes to the SDBF at a contractually required rate as determined by an annual actuarial valuation. The rate is equal to the cost of providing one-year term life insurance. The funding policy for the SDBF program is to assure that adequate resources are available to meet all death benefit payments for the upcoming year; the intent is not to pre-fund retiree term life insurance during employees entire careers. The City s contributions to the TMRS SDBF for the years ended 2014, 2013 and 2012 were $12,260, $9,151 and $9,974, respectively, which equaled the required contributions each year. Plan/ Annual Actual Percentage Calendar Required Contribution of ARC Year Contribution Made Contriubuted % 0.04% 100% % 0.04% 100% % 0.03% 100% (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 30

31 FINANCIAL INFORMATION TABLE 13A - CHANGES IN NET ASSETS Fiscal Year Ended September 30, 2015 (1) Revenues: Program Revenues: Charges for Services $ 1,166,840 $ 1,392,697 $ 1,281,205 $ 1,040,455 $ 1,309,146 Operating Grants and Contributions 393, , , , ,290 Capital Grants and Contributions 329, ,747 1,885, , ,993 General Revenues: Property Taxes $ 2,306,724 $ 2,298,865 $ 2,174,946 $ 2,204,507 $ 2,197,570 Sales Taxes 4,024,115 3,029,601 2,743,469 3,077,839 2,593,770 Franchise Taxes 590, , , , ,015 Hotel Occupancy Taxes 210, , , , ,597 Investment Earnings 1,076 1,469 2,076 2,416 3,806 Micellaneous 63,743 62,306 37,191 12,053 97,145 Total Revenues and Transfers $ 9,086,827 $ 8,628,634 $ 9,173,907 $ 7,829,148 $ 7,525,332 Expenditures: General Government $ 1,839,671 $ 2,178,338 $ 654,916 $ 628,950 $ 452,544 Parks and Beautification 81,620 58,280 15,628 34,013 21,182 Economic Development Public Safety 5,021,055 4,984,115 4,977,046 4,903,622 5,032,257 Public Works 936, , ,031 1,211,553 1,151,899 Culture and Recreation 403, , , , ,741 Community Development 425, , , , ,100 Interest on Long-Term Debt 34,338 47,957 70,283 79,132 56,979 Total Expenses $ 8,742,971 $ 8,839,419 $ 7,627,268 $ 7,861,352 $ 7,780,702 Change in Net Assets 343,855 (210,785) 1,546,639 (32,204) (255,370) Transfers 504,119 1,148,890 (57,091) (116,198) (300,788) Beginning Net Assets 14,156,409 13,218,304 (1) 11,774,687 11,923,089 12,745,347 Prior Period Adjustments (266,100) Ending Net Assets $ 15,004,383 $ 14,156,409 $ 13,264,235 $ 11,774,687 $ 11,923,089 (1) Unaudited. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 31

32 TABLE 13 GENERAL FUND REVENUES AND EXPENDITURE HISTORY Fiscal Years Ended September 30, 2015 (1) Revenues: Taxes: General Property $ 2,049,519 $ 2,121,307 $ 2,028,481 $ 1,943,002 $ 1,978,741 Sales and Use 2,685,321 2,022,750 1,829,996 2,053,482 1,904,776 Franchise 590, , , , ,321 Fines and Fees 449, , , , ,819 Licenses and Permits 131, ,111 99, , ,680 Charges for Service 253, , , , ,010 Intergovernmental - 159, , , ,961 Interest Income ,171 1,276 1,600 Other Revenue 58,113 65,487 69,439 78,319 94,479 Total Revenues $ 6,217,547 $ 5,746,406 $ 5,381,929 $ 5,595,696 $ 5,501,387 Expenditures Current: General Government $ 1,379,995 $ 2,118,860 $ 610,000 $ 838,508 $ 424,446 Parks and Beautification 81,620 51,492 8,110 26,991 10,378 Puablic Works 243, , , , ,913 Public Safety 3,318,662 4,331,553 3,618,600 3,738,984 3,742,173 Culture and Recreation 396, , , , ,008 Community Development 425, , , , ,936 Capital Outlay - 150, , , ,192 Debt Service - 77,931 99, Total Expenditures $ 5,846,305 $ 7,745,795 $ 5,876,503 $ 5,845,223 $ 5,323,046 Revenues (Under) Expenditures $ 371,242 $ (1,999,389) $ (494,574) $ (249,527) $ 178,341 Proceeds from Sale of General Capital Assets $ 6, $ - $ 37, $ - $ 23, Proceeds from Insurance Recovery ,000-50,146 Transfers In 572,535 2,067,191 13,050 7,854 - Transfers Out - - (57,091) (16,198) - Total Other Financing Sources (Uses) $ 578,987 $ 2,067,191 $ 408,401 $ (8,344) $ 73,355 (Under) Expenditures and Other Financing Uses $ 950,229 $ 67,802 $ (86,173) $ (257,871) $ 251,696 Fund Balance, Beginning $ 2,050,276 $ 1,982,474 $ 2,068,647 $ 2,326,518 $ 2,074,822 Fund Balance, Ending $ 3,000,505 $ 2,050,276 $ 1,982,474 $ 2,068,647 $ 2,326,518 (1) Unaudited. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 32

33 TABLE 14 - MUNICIPAL SALES TAX HISTORY The City has adopted the Municipal Sales and Use Tax Act, Texas Tax Code, Chapter 321, which grants the City the power to impose and levy a 1% Local Sales and Use Tax within the City; the proceeds are credited to the General Fund and are not pledged to the payment of the Obligations. Collections and enforcements are effected through the offices of the Comptroller of Public Accounts, State of Texas, who remits the proceeds of the tax, after deduction of a 2% service fee, to the City monthly. In January of 1996, the voters of the City approved the imposition of an additional sales and use tax of one-half of one percent (½% of 1%) for economic development. At an election in 2005, voters approved the reduction of the ½% sales tax rate to 1/8%. The sales tax for economic development is collected solely for the benefit of Richland Hills Economic Development Corporation (the "Corporation" or the EDC ), and may be pledged to secure payment of sales tax revenue bonds issued by the Corporation. In the same election, the voters approved the creation of the Richland Hills Crime Control and Prevention District and the levy of a 3/8% sales tax, the proceeds of which may be expended solely for crime control and prevention purposes. The sales tax for the Richland Hills Crime Control and Prevention District was renewed in the November 2015 election. Fiscal Economic Crime Equivalent Year Development Prevention % of of Ended Total 1% 0.125% 0.375% Ad Valorem Ad Valorem Per 9/30 Collected (1) Sales Tax Sales Tax Sales Tax Tax Levy Tax Rate Capita 2012 $ 3,102,619 $ 2,075,351 $ 259,419 $ 767, % $ $ ,850,928 1,897, , , % ,984,625 1,991, , , % ,850,096 2,567, , , % ,977 (2) 462,075 57, , % (1) Includes the sales and use taxes collected for the benefit of the City s Type A or Type B economic development corporations, both of which are not available for the City. (2) Collections as of November HOTEL OCCUPANCY TAX COLLECTIONS Fiscal Year Ended Hotel/Motel Total 9/30 Collected 2012 $ 182, , , , ,399 (1) (1) Collections as of October See Table 10 Computation of Self-Supporting Debt, for additional information regarding the EDC. FINANCIAL POLICIES Basis of Accounting... The City s accounting records of all governmental and expendable trust funds are accounted for using the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become measurable and available as net current assets. Expenditures are generally recognized under the modified accrual basis of accounting when the related fund liability is incurred except for (1) accumulated unpaid vacation, sick pay, and other employee amounts which are not accrued; and (2) principal and interest on general long-term debt which is recognized when due. Proprietary Funds are accounted for using the accrual basis of accounting. Their revenues are recognized when they are earned, and their expenses are recognized when they are incurred. General Fund Balance... The General Fund is the operating fund of the City. It is used to account for all financial resources except those required to be accounted for in another fund. Budgetary Procedures... The official city budget is prepared for adoption for the Governmental Fund Type and the Proprietary Fund Type during the month of September. 33

34 INVESTMENTS The City invests its investable funds in investments authorized by the State 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 current State law, the City is authorized to invest in: (1) obligations, including letters of credit of the United States or its agencies and instrumentalities, (2) direct obligations of the State or its agencies and instrumentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) bonds issued, assumed, or guaranteed by the State of Israel, (7) certificates of deposit 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 has its main office or a branch in the State, and are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for City deposits, (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by a combination of cash and obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City and held in the City s name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds registered with the Securities and Exchange Commission that have a dollar-weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in this paragraph and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of no less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described below. 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 AAA-m or an equivalent by at least one nationally recognized rating service. The City may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the City retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the City must do so by order, ordinance, or resolution. The City is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under State 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, the maximum average dollar-weighted maturity allowed for pooled fund groups, methods to monitor the market price of investments acquired with public funds, a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, and procedures to monitor rating changes in investments acquired with public funds and the liquidation of such investments consistent with the Public Funds Investment Act. 34

35 All City funds must be invested consistent with a formally 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) market ability of each investment, (5) diversification of the portfolio, and (6) yield. The City is required to designate one or more officers or employees as investment officers to be responsible for the investment of its funds. In the administration of the duties of an investment officer, the person so designated shall exercise the judgment and care, under prevailing circumstances that a prudent person would exercise in the management of the person s own affairs. Unless authorized by law, a person may not deposit, withdraw, or manage in any other manner the funds of the City. Under State law, City investments must be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion and intelligence would exercise in the management of the person s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. At least quarterly the investment officers of the City shall submit an investment report for the period. The report must: (1) describe the investment position of the City, (2) be prepared jointly and signed by each investment officer, (3) contain a summary of each pooled fund group that states: the beginning market value, the ending market value and the fully accrued interest for the reporting period of each pooled fund group, (4) state the book value and market value of each separately listed asset at the end of the reporting period, (5) state the maturity date of each separately invested asset, (6) state the account or pooled fund group for which each individual investment was acquired, and (7) state the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) State law. If the City invests in other than money market mutual funds, investment pools or accounts offered by its depository bank in the form of Obligations of deposit, or money market accounts or similar accounts, the reports prepared by the investment officers shall be reviewed at least annually by an independent auditor, and the result of the review shall be reported to the City Council. No person may invest City funds without express written authority from the City Council. Under Texas law, the City is additionally required to: (1) annually review its adopted policies and strategies and adopt a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and record any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance, or resolution; (2) require any investment officers with personal business relationships or family relationships with firms seeking to sell securities to the City to disclose the relationship and file a statement with the Texas Ethics Commission and the City, (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 investment activities between the City and the business organization that are not authorized by the City's investment policy (except to the extent that this authorization is dependent on an analysis of the City's entire portfolio or requires an interpretation of subjective investment standards), and (c) deliver a written statement attesting to these requirements; (4) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the City's investment policy, (5) 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, (6) restrict the investment in mutual funds in the aggregate to no more than 80% of the City's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, and further restrict the investment in no-load mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to no more than 15% of the City's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer and (9) at least annually review, revise, and adopt a list of qualified brokers that are authorized to engage in investment transactions with the City. The City s current investment policy is in compliance with the State law requirements described above. TABLE 15 - CURRENT INVESTMENTS As of October 31, 2015, the City s investable general funds were invested in the following categories: Description Book Value % of Portfolio Market Value % of Portfolio Cash Depository Bank $ 7,202, % $ 7,202, % Certificate of Deposit 162, % 162, % Certificate of Deposit 175, % 175, % TexPool 3, % 3, % Total $ 7,543, % $ 7,543, % 35

36 THE SYSTEM WATERWORKS SYSTEM The City obtains approximately one-half of its daily water supply from five wells, and the balance from the City of Fort Worth. The City contracts with the City of Fort Worth to purchase treated water at rates commensurate with the cost of supplying the water. The City's contract with the City of Fort Worth expires on September 30, 2031, and is subject to renewal on terms mutually agreeable to the parties thereto. The City is not, however, granted an absolute right of renewal or extension and, as a result, such renewal or extension is not guaranteed. In the event the City is unable to secure a renewal or extension of its contract with the City of Fort Worth, the City will be required to obtain its water from other sources. STORAGE FACILITIES The City has five ground storage tanks with a total capacity of 1,729,000 gallons. In addition, the City has two elevated storage tanks with a combined capacity of 600,000 gallons. DISTRIBUTION SYSTEM The City's Distribution system consists of approximately 47 miles of water lines in the 6 inch to 12 inch diameter range. Most residential areas are serviced by 6 inch lines, connecting to the larger lines near the plant sites. The combined pumping capacity of the City's pump station approximates 1.56 MGD. WASTEWATER SYSTEM On May 1, 1965, the City entered into a contract with the City of Fort Worth to provide sewage treatment for the City and its residents. The contract will remain in effect until 2017, and is renegotiated annually. The City pays a base volume charge plus adjustments for biochemical oxygen demand and total suspended solids per month for the treatment of its sewage. The contract is subject to renegotiation on the date of its expiration, June 1, 2017, but neither party has an absolute right of renewal or extension. In the event the City is unable to secure a renewal or extension of its contract with the City of Fort Worth, the City will be required to obtain its wastewater services from other sources. The City also entered into a contract on May 13, 1986 with the City of Hurst to provide sewage treatment to the City. This contract remains in force until such time as notice is given by either party, at least six months prior to termination. TABLE 16 WATERWORKS AND SEWER SYSTEM OPERATING STATEMENT Fiscal Year Ended September 30, Operating Revenues (1) $ 4,552,311 $ 4,290,606 $ 4,124,847 $ 4,007,569 $ 3,843,860 Operating Expenses (2) 3,092,824 3,056,183 2,538,500 1,679,794 3,092,114 Net Revenue Available for Debt Service $ 1,459,487 $ 1,234,423 $ 1,586,347 $ 2,327,775 $ 751,746 Annual Debt Service Requirements (3) $ 166, Coverage Ratio (1) Includes interest revenue. (2) Excludes depreciation. (3) As of September 30, 2011, the City no longer has Waterworks and Sewer System Revenue Debt outstanding. Does not include General Obligation debt that is self-supported by Waterworks and Sewer System Revenues. 36

37 TABLE 17 TEN LARGEST WATER CUSTOMERS Average Monthly Average Name of Customer Consumption Monthly Bill The Creek on Calloway 855,683 $ 6, QW Coin Services 389,742 2, Birdville ISD 381,475 3, Alterra Healthcare Corp 342,700 2, Richland Nursing Home 284,633 1, First Industrial Realty Trust 252,683 1, Lexington Place Nursing 245,775 1, Ash Park Apartments 229,033 1, Seagate Richland 177,867 1, Austin Road CO 148,967 1, TABLE 18 TEN LARGEST SEWER CUSTOMERS Average Monthly Average Name of Customer Consumption Monthly Bill The Creek on Calloway 667,258 $ 5, QW Coin Services 359, Richland Nursing Home 270, Ash Park Apartments 234,292 1, Lexington Place Nursing 228, Birdville ISD 224, Alterra Healthcare Corp 177, First Industrial Realty Trust 169, Seagate Richland 152,364 1, El Chico 122, TABLE 19 WATER AND SEWER RATES Residential: First 2,000 Gallons, Minimum $ ,001-4,000 Gallons Total, per 1,000 additional gallons ,001-10,000 Gallons Total, per 1,000 additional gallons ,001-20,000 Gallons Total, per 1,000 additional gallons 4.97 Over 20,000 Gallons, per 1,000 additional gallons 6.03 Non Residential: First 2,000 Gallons, Minimum $ ,001-4,000 Gallons Total, per 1,000 additional gallons ,001-10,000 Gallons Total, per 1,000 additional gallons ,001-20,000 Gallons Total, per 1,000 additional gallons 5.48 Over 20,000 Gallons, per 1,000 additional gallons 6.62 Residential Sewer (based on winter month water average) Minimum Rate (First 2,000 Gallons) $ Over 2,000 (Maximum at 10,000 Gallons) 1.98 Non Residential Sewer (based on water usage) Minimum Rate (First 2,000 Gallons) $ Over 2,

38 Stormwater Utility System Stormwater Utility Fee Calculation the stormwater utility fees are calculated based on the total stormwater runoff potential for improved parcels for each customer class within the City measured as impervious area in square feet (SF). The monthly stormwater fee calculation is based on the average impervious area of 2,600 SF for an equivalent residential unit (ERU) Stormwater Utility Fees The total storm water runoff potential for the service area is divided into the two customer classes of residential and non-residential based on the relative amount of impervious area in each class. 1. Residential Property Fees Stormwater utility fees for residential property are calculated as: a. A monthly flat rate fee per equivalent residential unit (ERU) b. One flat rate ERU fee will be charged for each dwelling unit on each residential parcel c. The flat rate fee to be charged is established in the schedule of charges provided below. Fiscal Year 2009 = $ 8.00 Fiscal Year 2010 = 8.50 Fiscal Year 2011 = 9.00 Fiscal Year 2012 = 9.50 Fiscal Year 2013 = Fiscal Year 2014 = Fiscal Year 2015 = Fiscal Year 2016 = Fiscal Year 2017 = Fiscal Year 2018 = Fiscal Year 2019 = Non-residential Property Fees Storm water utility fees for each improved non-residential property or allocated portion of a property shall be calculated based on the impervious area in square feet (SF) at the rate established in the schedule provided below. Fiscal Year 2009 = $ per SF Fiscal Year 2010 = per SF Fiscal Year 2011 = per SF Fiscal Year 2012 = per SF Fiscal Year 2013 = per SF Fiscal Year 2014 = per SF Fiscal Year 2015 = per SF Fiscal Year 2016 = per SF Fiscal Year 2017 = per SF Fiscal Year 2018 = per SF Fiscal Year 2019 = per SF Stormwater Utility Revenues and Expenses The following table provides the revenues and expenses of the stormwater utility: Fiscal Year Ended September 30, 2015 (1) Revenues (2) $ 865,828 $ 850,301 $ 819,441 $ 780,559 $ 742,805 Expenses (3) 454, , , , ,028 Total $ 411,573 $ 554,308 $ 610,137 $ 563,854 $ 412,777 (1) Unaudited. (2) Includes Interest revenue. (3) Excludes depreciation. 38

39 TAX MATTERS OPINION... On the date of initial delivery of each series of the Obligations, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel to the City, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ( Existing Law ), (1) interest on the Obligations for federal income tax purposes will be excludable from the gross income of the holders thereof and (2) such Obligations of either series will not be treated as specified private activity bonds, the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the Code ). Except as stated above, Bond Counsel will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Obligations. See Appendix C - Forms of Bond Counsel s Opinions. In rendering their opinions, Bond Counsel will rely upon (a) certain information and representations of the City, including information and representations contained in the City s federal tax certificate, and (b) covenants of the City contained in the documents authorizing the Obligations relating to certain matters, including arbitrage and the use of the proceeds of the Obligations and the property financed therewith. Failure of the City to comply with these representations or covenants could cause the interest on the Obligations to become includable in gross income retroactively to the date of issuance of the Obligations. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Obligations in order for interest on the Obligations to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Obligations to be included in gross income retroactively to the date of issuance of the Obligations. The opinions of Bond Counsel are rendered in reliance upon the compliance by the City with such requirements, and Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Obligations. Bond Counsel s opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel s opinion is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Obligations. A ruling was not sought from the Internal Revenue Service by the City with respect to the Obligations or the property financed with proceeds of either series of the Obligations. No assurances can be given as to whether the Internal Revenue Service will commence an audit of the Obligations, or as to whether the Internal Revenue Service would agree with the opinions of Bond Counsel. If an Internal Revenue Service audit is commenced, under current procedures the Internal Revenue Service is likely to treat the City as the taxpayer and the holders of either series of the Obligations may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. FEDERAL INCOME TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT... The initial public offering price to be paid for one or more maturities of the Obligations may be less than the maturity amount thereof or one or more periods for the payment of interest on the Obligations may not be equal to the accrual period or be in excess of one year (the Original Issue Discount Obligations ). In such event, the difference between (i) the stated redemption price at maturity of each Original Issue Discount Obligation, and (ii) the initial offering price to the public of such Original Issue Discount Obligation would constitute original issue discount. The stated redemption price at maturity means the sum of all payments to be made on the Obligations less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under Existing Law, any owner who has purchased such Original Issue Discount Obligation in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Obligation equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see the discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Obligation prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Obligation in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Obligation was held by such initial owner) is includable in gross income. Under Existing Law, the original issue discount on each Original Issue Discount Obligation is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Obligations and ratably within each such six-month period) and the accrued amount is added to an initial owner s basis for such Original Issue Discount Obligation for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each 39

40 accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Obligation. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Obligations which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Obligation should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Obligations and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Obligations. COLLATERAL FEDERAL INCOME TAX CONSEQUENCES... The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Obligations. This discussion is based on Existing Law, which is subject to change or modification, retroactively. The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed earned income credit, certain S corporations with accumulated earnings and profits and excess passive investment income, foreign corporations subject to the branch profits tax (taxpayers qualifying for the health insurance premium) assistance credit, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations. THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE OBLIGATIONS. Interest on the Obligations will be includable as an adjustment for adjusted current earnings to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, holders of tax-exempt obligations, such as the Obligations, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Obligations, if such obligation was acquired at a market discount and if the fixed maturity of such obligation is equal to or exceeds, one year from the date of issue. Such treatment applies to market discount Obligations to the extent such gain does not exceed the accrued market discount of such Obligations, although for this purpose, a de minimis amount of market discount is ignored. A market discount Obligation is one which is acquired by the holder at a purchase price which is less than the stated redemption price or, in the case of a Obligation issued at an original issue discount, the revised issue price (i.e., the issue price plus accrued original issue discount). The accrued market discount is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the Obligation bears to the number of days between the acquisition date and the final maturity date. STATE, LOCAL AND FOREIGN TAXES... Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Obligations under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons. FUTURE AND PROPOSED LEGISLATION... Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the federal or state level, may adversely affect the tax-exempt status of interest on the Obligations under federal or state law, and could affect the market price or marketability of the Obligations. Any of the foregoing could limit the value of certain deductions and exclusions, including the exclusion for tax-exempt interest. The likelihood of any of the foregoing becoming effective cannot be predicted. Prospective purchasers of the Obligations should consult their own tax advisors regarding the foregoing matters. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 40

41 CONTINUING DISCLOSURE OF INFORMATION In each Ordinance, the City has made the following agreement for the benefit of the registered and beneficial owners of the Obligations. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Obligations. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually and timely notice of specified events to the Municipal Securities Rulemaking Board ( MSRB ). This information will be publicly available on the MSRB s Electronic Municipal Market Access System ( EMMA ) at ANNUAL REPORTS... The City will provide certain updated financial information and operating data to the MSRB on an annual basis. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under Tables numbered 1 through 6 and 8 through 19 (the Annual Operating Report ). The City will update and provide this information within six months after the end of each fiscal year ending in and after The City will additionally provide audited financial statements of the City (the Financial Statements ) and such Financial Statements will be provided within 12 months after the end of each fiscal year ending in or after If the audit of such financial statements is not complete within 12 months after any such fiscal year end, then the City will file unaudited financial statements within such 12-month period and audited financial statements for the applicable fiscal year, when and if the audit report on such statements becomes available. 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 may provide updated information in full text or may incorporate by reference documents available on EMMA or filed with the U.S. Securities and Exchange Commission (the SEC ). The City s current fiscal year end is September 30. Accordingly, the Annual Operating Report must be provided by March 31 in each year, and the Financial Statements must be provided by September 30 of each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify the MSRB of the change. EVENT NOTICES... The City will also provide to the MSRB notices of certain events in a timely manner but not in excess of 10 business days after the occurrence of the event. The City will provide notice of any of the following events with respect to the Obligations: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB), or other material notices or determinations with respect to the tax status of the Obligations, or other material events affecting the tax status of the Obligations; (7) modifications to rights of holders of the Obligations, if material; (8) Obligation calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Obligations, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership, or similar event of the City, which shall occur as described below; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into of a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of any trustee, if material. (Neither the Obligations nor the Ordinances make any provision for a bond trustee, debt service reserves or credit enhancement.) In addition, the City will provide timely notice of any failure by the City to provide annual financial information in accordance with their agreement described above under "Annual Reports". For these purposes, any event described in (12) in the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. LIMITATIONS AND AMENDMENTS... The City has agreed to update information and to provide notices of material events only as described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Obligations at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Obligations may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Obligations in the offering described herein 41

42 in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Obligations consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the registered and beneficial owners of the Obligations. The City may also amend or repeal the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Obligations in the primary offering of the Obligations. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS... The City became obligated to make annual disclosure of certain financial information by filing with each nationally recognized municipal securities information repository ( NRMSIR ) and with each state information depository ( SID ) in an offering that took place in Certain required financial information was not timely filed with each NRMSIR and SID for fiscal year ending During the past five years, the City has substantially complied in all material respects with its previous continuing disclosure agreements made in accordance with the SEC Rule 15c2-12. All required 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. OTHER INFORMATION RATINGS The Obligations and the presently outstanding tax supported debt of the City are rated AA by S&P, without regard to credit enhancement. An explanation of the significance of such ratings may be obtained from the companies furnishing the ratings. The ratings reflect only the view of such companies 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 of such companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Obligations. LITIGATION It is the opinion of the City Attorney and City Staff that there is no pending litigation against the City that would have a material adverse financial impact upon the City or its operations. REGISTRATION AND QUALIFICATION OF OBLIGATIONS FOR SALE The sale of the Obligations has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Obligations have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been qualified under the securities acts of any jurisdiction. The City assumes no responsibility for qualification of the Obligations under the securities laws of any jurisdiction in which the Obligations may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Obligations shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS The Obligations. Section of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Obligations are negotiable instruments, investment securities governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Obligations are legal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loan associations. The Certificates. Section , Texas Local Government Code, provides that the Certificates are legal and authorized investments for banks, savings banks, trust companies, savings and loan associations, insurance companies, fiduciaries, trustees and guardians, and for the sinking funds of municipalities, school districts, and other political subdivisions or public agencies of the State of Texas. The Certificates are eligible to secure deposits of any public funds of the State, municipalities, school districts, and other political subdivisions of the State, and are legal security for those deposits to the extent of their market value. 42

43 General Considerations. For political subdivisions in Texas that have adopted investment policies and guidelines in accordance with the Public Funds Investment Act (Texas Government Code, Chapter 2256), the Obligations may have to be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency before such obligations are eligible investments for sinking funds and other public funds. The City has made no investigation of other laws, rules, regulations, or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Obligations for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Obligations for such purposes. The City has made no review of laws in other states to determine whether the Obligations are legal investments for various institutions in those states. LEGAL MATTERS The City will furnish to the Initial Purchaser a complete transcript of proceedings had incident to the authorization and issuance of the Obligations, including the unqualified approving legal opinion of the Attorney General of Texas approving the Obligations and to the effect that the Obligations are valid and legally binding obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to like effect, and to the effect that the interest on the Obligations will be excludable from gross income for federal income tax purposes under Section 103(a) of the Code, subject to the matters described under TAX MATTERS herein, including the alternative minimum tax on corporations. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Obligations, or which would affect the provision made for their payment or security, or in any manner questioning the validity of the Obligations will also be furnished. Though it may represent the Financial Advisor and purchasers of bonds, such as the Initial Purchaser of the bonds or the Initial Purchaser of the Certificates from time to time in matters unrelated to the issuance of the Obligations, Bond Counsel has been engaged by and only represents the City in the issuance of the Obligations. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Notice of Sale and Bidding Instructions, the Official Bid Form and the Official Statement, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained herein, except that, in its capacity as Bond Counsel, such firm has reviewed the information describing the Obligations in the Official Statement to verify that such description conforms to the provisions of each Ordinance. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Obligations is contingent on the sale and delivery of the Obligations. The legal opinions to be delivered concurrently with the delivery of the Obligations express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from City records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and ordinances contained in this Official Statement are made subject to all of the provisions of such statutes, documents and ordinances. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. FINANCIAL ADVISOR FirstSouthwest is employed as Financial Advisor to the City in connection with the issuance of the Obligations. The Financial Advisor s fee for services rendered with respect to the sale of the Obligations is contingent upon the issuance and delivery of the Obligations. The Financial Advisor has agreed, in its Financial Advisory contract, not to bid for the Obligations, either independently or as a member of a syndicate organized to submit a bid for the Obligations. FirstSouthwest, in its capacity as Financial Advisor, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Obligations, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor 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. First Southwest Company, LLC ( FirstSouthwest ) merged with its common control affiliate, Hilltop Securities Inc. ( HilltopSecurities ). The merger was completed at the close of business on January 22, 2016, at which time HilltopSecurities, as the surviving entity, automatically assumed all rights and obligations of FirstSouthwest. 43

44 INITIAL PURCHASER OF THE OBLIGATIONS After requesting competitive bids for the Bonds, the City accepted the bid of (the Initial Purchaser of the Bonds ) to purchase the Bonds at the interest rates shown on page 2 of this Official Statement at a price of. The Initial Purchaser of the Bonds can give no assurance that any trading market will be developed for the Bonds after their sale by the City to the Initial Purchaser of the Bonds. The initial yields shown on page 2 of this Official Statement will be established by and are the sole responsibility of the Initial Purchaser of the Bonds and may subsequently be changed at the sole discretion of the Initial Purchaser of the Bonds. The City has no control over the determination of the initial yields and has no control over the prices at which the Bonds are sold in the secondary market. After requesting competitive bids for the Certificates, the City accepted the bid of (the Initial Purchaser of the Certificates ) to purchase the Certificates at the interest rates shown on page 4 of this Official Statement at a price of. The Initial Purchaser of the Certificates can give no assurance that any trading market will be developed for the Certificates after their sale by the City to the Initial Purchaser of the Certificates. The initial yields shown on page 2 of this Official Statement will be established by and are the sole responsibility of the Initial Purchaser of the Certificates and may subsequently be changed at the sole discretion of the Initial Purchaser of the Certificates. The City has no control over the determination of the initial yields and has no control over the prices at which the Certificates are sold in the secondary market. CERTIFICATION AS TO OFFICIAL STATEMENT At the time of payment for and delivery of the Obligations, the City will furnish the Initial Purchaser a certificate, executed by an authorized representative of the City, acting in such person s representative capacity, to the effect that to the best of such person s knowledge and belief: (a) the descriptions and statements of or pertaining to the City contained in the Official Statement, and any addenda, supplement or amendment thereto, on the date of the Official Statement, on the date of sale of the Obligations and the acceptance of the best bid therefor, and on the date of the delivery, were and are true and correct in all material respects; (b) insofar as the City and its affairs, including its financial affairs, are concerned, the 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 light of the circumstances under which they were made, not misleading in any material respect; (c) insofar as the descriptions and statements, including financial data, of or pertaining to entities, other than the City, and their activities contained in the 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; and (d) there has been no material adverse change in the financial condition of the City since the date of the last audited financial statements of the City. FORWARD-LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-looking statements, including statements regarding the City s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. The City s actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 44

45 MISCELLANEOUS The Ordinances authorizing the issuance of the Obligations will approve the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorize its further use in the reoffering of the Obligations by the Initial Purchaser. ATTEST: Mayor City of Richland Hills, Texas City Secretary City of Richland Hills, Texas 45

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47 APPENDIX A GENERAL INFORMATION REGARDING THE CITY

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49 THE CITY LOCATION AND POPULATION... The City of Richland Hills (the City ) is a residential suburb of Fort Worth located on State Highway 121. The City's 2010 Census was 7,801 and the estimated 2016 population is 8,000. ECONOMY AND INDUSTRY... Tarrant County was created in 1849 and is the fourth most populated county in Texas. The county is a manufacturing and wholesale trade center for much of west Texas, with its economy closely tied in with the Dallas/Fort Worth urban area. Tarrant County is one of the largest manufacturing counties in the United States. Industries include banking and finance, aerospace, helicopter manufacturing, food and beverage, auto assembly, tourism, mercantile and insurance. Dallas/Fort Worth International Airport, the nation's largest, is located here. In addition, Tarrant County is the home of Alliance and Meacham Airports and the Texas Motor Speedway. PRINCIPAL EMPLOYERS Number of Company Business Description Employees Birdville ISD (3 Schools) Independent School District 178 Harris Packaging Corrugated Boxes 120 Rehabilitation Services Nursing and Personal Care 101 Valley Dynamo Table Top Games 100 Hamilton Form Company Industrial M achinery and Equipment 100 City of Richland Hills Municipality 78 Royal Bath Plastic Plumbing Fixture M anufacturing 72 Sterling House Nursing Nursing and Personal Care 65 Trugreen Chemlawn Landscape and Horticulture 60 Richland Hills Nursing Home Nursing and Personal Care 59 EDUCATION... The City schools are in the Birdville Independent School District (BISD). Of the 33 schools in the BISD, two elementary schools and one middle school are located in the City. Institutions of higher education in Tarrant County include The University of Texas at Arlington, Tarrant County Junior College District, Texas Christian University, Texas College of Osteopathic Medicine, Texas Weslyan College and the University of North Texas Health Science Center. EMPLOYMENT RATES Annual Averages 2015 (1) Tarrant County Civilian Labor Force 996, , , , ,168 Total Employment 956, , , , ,103 Total Unemployment 40,511 49,734 58,967 62,667 73,065 Percent Unemployment 4.1% 5.0% 6.0% 6.6% 7.8% State of Texas Civilian Labor Force 13,086,488 13,111,548 12,904,629 12,597,465 12,451,504 Total Employment 12,518,397 12,447,551 12,104,092 11,742,600 11,464,525 Total Unemployment 568, , , , ,979 Percent Unemployment 4.3% 5.1% 6.2% 6.8% 7.9% Source: Texas Workforce Commission (1) As of October A - 1

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51 APPENDIX B EXCERPTS FROM THE CITY OF RICHLAND HILLS, TEXAS ANNUAL FINANCIAL REPORT For the Year Ended September 30, 2014 The information contained in this Appendix consists of excerpts from the City of Richland Hills, Texas Annual Financial Report for the Year Ended September 30, 2014, and is not intended to be a complete statement of the City's financial condition. Reference is made to the complete Report for further information.

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53 INDEPENDENT AUDITORS REPORT To the Honorable Mayor and Members of the City of Council City of Richland Hills, Texas Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Richland Hills, Texas (the City ), as of and for the year ended September 30, 2014, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 1

54 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City, as of September 30, 2014, and the respective changes in financial position, and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note I to the financial statements, in 2014 the City adopted new accounting guidance, GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, the Schedule of Revenues, Expenditures and Changes in Fund Balance Budget and Actual General Fund, and the Schedule of Funding Progress for Participation in the Texas Municipal Retirement System be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City s basic financial statements. The introductory section, combining and individual nonmajor fund financial statements and schedules, and statistical section, are presented for purposes of additional analysis and are not a required part of the basic financial statements. 2

55 The combining and individual nonmajor fund financial statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual nonmajor fund financial statements and schedules are fairly stated in all material respects in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 31, 2015, on our consideration of the City s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City s internal control over financial reporting and compliance. Waco, Texas March 31,

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57 MANAGEMENT S DISCUSSION AND ANALYSIS

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59 MANAGEMENT S DISCUSSION AND ANALYSIS As management of the City of Richland Hills, Texas, we offer readers of the City of Richland Hills financial statements this narrative overview and analysis of the financial activities of the City for the fiscal year ended September 30, We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found in the introductory section of this report. Financial Highlights The assets of the City exceeded its liabilities at the close of the most recent fiscal year by $25,533,228 (net position) compared to $24,171,909 for the prior year. Of this amount, $6,503,298 represents unrestricted net position that may be used to meet the City s ongoing obligations to citizens and creditors. The City s total net position increased by $1,639,702. The City s governmental activities net position increased by $938,105 and the business-type activities net position increased by $701,597. At of the close of the current year, the City of Richland Hills governmental funds reported combined ending fund balances of $3,717,185 compared to $3,376,923 for the prior year. Approximately $1,702,950 is available for spending at the City s discretion (unassigned fund balance). At the end of the current year, unassigned fund balance for the General Fund was $1,776,039, or 23% of total General Fund expenditures. Overview of the Financial Statements This discussion and analysis are intended to serve as an introduction to the City s basic financial statements. The City s basic financial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Government-wide financial statements. The government-wide financial statements are designed to provide readers with a broad overview of the City s finances, in a manner similar to a private-sector business. The statement of net position presents information on all of the City s assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving or deteriorating. 4

60 The statement of activities presents information showing how the City s net position changed during the most recent year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods (e.g., uncollected taxes and fees). Both of the government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include general government, legislative, municipal court, police, fire and ambulance, code enforcement, animal control, clean city, streets and highways, library, community center, parks and beautification and economic development. The business-type activities of the City include water production and distribution, sewer collection and treatment and drainage utility. The government-wide financial statements can be found on pages 17 through 19 of this report. Fund Financial Statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the City can be divided into two categories: governmental funds and proprietary funds. Governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. Unlike the government-wide financial statements, however, governmental fund financial statements focus on nearterm inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the City s nearterm financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate the comparison between governmental funds and governmental activities. The City maintains 12 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, which is considered a major fund. Data from the other governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in this report. The basic governmental fund financial statements can be found on pages 20 through 23 of this report. 5

61 Proprietary funds. Proprietary funds can be further classified into two different types of funds. Enterprise Funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses Enterprise Funds to account for its water and sewer operations and drainage utility operations. Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The proprietary fund financial statements provide separate information for the Water and Sewer Fund and Drainage Utility Fund. The proprietary fund financial statements can be found on pages 24 through 27 of this report. Notes to the basic financial statements. The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and funds financial statements. The notes to the financial statements can be found on pages 28 through 52 of this report. Other information. In addition to the basic financial statements and accompanying notes, this report also presents certain required supplementary information that further explains and supports the information in the financial statements. The required supplementary information can be found on pages 53 through 55 of this report. The individual major governmental funds and combining and individual nonmajor governmental funds are presented immediately following the required supplementary information. These statements can be found on pages 56 through 66 of this report. Government-wide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government s financial position. In the case of the City, assets exceeded liabilities by $25,533,228 as of September 30, The largest portion of the City s net position (70%) reflects its investment in capital assets (e.g. land, improvements other than buildings, buildings, machinery and equipment, streets and construction in progress); less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the City s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since capital assets themselves cannot be used to liquidate these liabilities. An additional portion of the City s net position (5%) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net position $6,503,298 may be used to meet the City s ongoing obligations to citizens and creditors. At the end of the current year, the City is able to report positive balances in all three categories of net position for the government as a whole, as well as for its separate governmental activities. 6

62 Following are summaries of the City s statement of net position and statement of activities. Condensed Statement of Net Position Governmental Activities Business-type Activities Totals Current and other assets $ 5,338,029 $ 5,084,410 $ 7,957,312 $ 10,562,326 $ 13,295,341 $ 15,646,736 Capital assets 11,187,996 10,980,299 16,288,955 13,820,277 27,476,951 24,800,576 Total assets 16,526,025 16,064,709 24,246,267 24,382,603 40,772,292 40,447,312 Deferred outflows of resourses ,429-82,429 - Current liabilities 723, , , ,173 1,389,232 1,299,022 Long-term liabilities 1,646,173 1,965,625 12,286,088 13,010,756 13,932,261 14,976,381 Total liabilities 2,369,616 2,800,474 12,951,877 13,474,929 15,321,493 16,275,403 Net position: Net investment, in capital assets 10,136,996 9,777,284 7,741,269 7,096,222 17,878,265 16,873,506 Restricted 1,151,665 1,245, ,151,665 1,245,956 Unrestricted 2,867,748 2,240,995 3,635,550 3,811,452 6,503,298 6,052,447 Total net position $ 14,156,409 $ 13,264,235 $ 11,376,819 $ 10,907,674 $ 25,533,228 $ 24,171,909 7

63 Changes in Net Position Governmental Activities Business-type Activities Totals Revenues: Program revenues: Charges for services $ 1,392,697 $ 1,281,205 $ 4,846,022 $ 4,933,914 $ 6,238,719 $ 6,215,119 Operating grants and contributions 615, , , ,669 Capital grants and contributions 479,747 1,885, ,747 1,885,625 General revenues: Property taxes 2,298,865 2,174, ,298,865 2,174,946 Sales taxes 3,029,601 2,743, ,029,601 2,743,469 Franchise taxes 545, , , ,759 Hotel occupancy taxes 202, , , ,967 Investment earnings 1,469 2,076 4,939 4,141 6,408 6,217 Miscellaneous 7,961 8,513 6,909 6,233 14,870 14,746 Gain on sale of assets 54, ,345 - Total revenues 8,628,634 9,145,229 4,857,870 4,944,288 13,486,504 14,089,517 Expenses: General government 2,178, , ,178, ,916 Public safety 4,984,115 4,977, ,984,115 4,977,046 Public works 665, , , ,031 Culture and recreation 398, , , ,470 Parks and beautification 58,280 15, ,280 15,628 Community development 506, , , ,894 Interest on long-term debt 47,957 70, ,957 70,283 Water sewer - - 2,482,137 3,183,727 2,482,137 3,183,727 Drainage utility , , , ,407 Total expenses 8,839,419 7,627,268 3,007,383 3,732,134 11,846,802 11,359,402 Increase (decrease) in net position before transfers ( 210,785) 1,517,961 1,850,487 1,212,154 1,639,702 2,730,115 Transfers 1,148,890 ( 57,091) ( 1,148,890) 57, Change in net position 938,105 1,460, ,597 1,269,245 1,639,702 2,730,115 Net position, beginning 13,264,235 11,774,687 10,907,674 9,638,429 24,171,909 21,413,116 Prior period adjustment ( 45,931) - ( 232,452) - ( 278,383) - Net position, beginning, as restated 13,218,304 11,774,687 10,675,222 9,638,429 23,893,526 21,413,116 Net position, ending $ 14,156,409 $ 13,235,557 $ 11,376,819 $ 10,907,674 $ 25,533,228 $ 24,143,231 Governmental activities. Governmental activities increased the City s net position by $938,105 in the current year compared with a $1,517,961 increase in the prior year. Total governmental activities revenues increased -$516,595 (-6%) to $8,628,634. Total governmental activities expenses increased $1,212,151 (15.9%) from the prior year. Key elements of these changes are as follows: The reason for increase in revenues was due to an increase in property taxes primarily due to an increase in valuations and higher sales tax collections from new businesses in the City. The expenses increased primarily due to change in accounting for the cost of administration, city secretary, utility expense, building maintenance and contractual expense for insurance coverage. In past years, the expense was budgeted in both the General Fund and as a percentage in other funds. In FY 2014, the expense was budgeted in the General Fund and shown as a revenue transfer from the contributing fund. 8

64 Below are two graphs summarizing governmental activities revenues and expenses: Governmental Activities - Revenues by Source Capital Grants and Contributions, 5% Operating Grants and Contributions, 6% Transfers, 12% Interest income, 0% Miscellaneous, 0% Property taxes, 24% Charges for services, 14% Hotel occupancy taxes, 2% Franchise taxes, 6% Sales and use taxes, 31% 9

65 Business-type activities. Business-type activities increased the City s net position by $701,597 in the current year compared to an increase in net position of $1,212,154 in the prior year. The business-type activities total revenues decreased $86,418 (2%) to $4,857,870, and total expenses decreased $724,751 (19%) to $3,007,383. Key elements of these changes are as follows: The reason for the decrease in revenues and expenses is due to change in accounting for the cost of administration, city secretary, utility expense, building maintenance and contractual expense for insurance coverage. In past years, the expense was budgeted in both the General Fund and as a percentage in other funds. In FY 2014, the expense was budgeted in the General Fund and shown as a revenue transfer from the enterprise fund. 10

66 Below are two graphs summarizing business-type activities revenues and expenses: Financial Analysis of the Government s Funds As noted earlier, the City uses fund accounting to ensure and demonstrate compliance with financerelated legal requirements. Governmental funds. The focus of the City s governmental funds is to provide information on nearterm inflows, outflows, and balances of spendable resources. Such information is useful in assessing the City s financing requirements. In particular, unassigned fund balance may serve as a useful measure of the City s net resources available for spending at the end of the fiscal year. 11

67 At year-end, the City s governmental funds reported combined ending fund balances of $3,717,185. $1,702,950 (46%) constitutes unassigned fund balance, which is available for spending at the government s discretion. The remainder of fund balance is restricted or committed to indicate that it is not available for new spending because of external and internal restrictions on its use. The General Fund is the chief operating fund of the City. At the end of the current fiscal year, unassigned fund balance of the General Fund was $1,776,039. Fund balance of the General Fund increased (67,802) compared to a decrease of (86,173) in the prior year. Key factors in this decrease are as follows: Revenues decreased $690,291 (7.51%). General Fund property taxes increased $109,039 due to a increases in the property valuations. Sales and franchise taxes increased $286,132. Intergovernmental revenue decreased $1,405,878 due to substantial completion of Safe Routes to School Project. Expenditures decreased $753,735 (7.58%). The decrease is due to infrastructure and capital outlay expenditures. Below are two graphs summarizing governmental fund revenues and expenditures. 12

68 Proprietary funds. The City s proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. Unrestricted net position of the Water and Sewer Fund at the end of the year amounted to $2,062,639 and those for the Drainage Utility Fund amounted to $1,572,911. The total change in net position for both funds was (250,792) and $952,389, respectively. Other factors concerning the finances of these two funds have already been addressed in the discussion of the City s business-type activities. General Fund Budgetary Highlights The City did not amend its General Fund budget this year. During the year, expenditures were less than budgetary estimates, with the largest variance involving capital outlay expenditures. Capital Assets The City s investment in capital assets for its governmental and business-type activities as of September 30, 2014, amounts to $27,476,951 (net of accumulated depreciation). This investment in capital assets includes land, buildings, water and sewer systems, improvements other than buildings, machinery and equipment, and infrastructure. 13

69 Major capital asset events during the current fiscal year included the following: Governmental Activities: Remodel of City Hall, Community Development Area $16,625 Walter Infiltration Treatment, Animal Services Facility 15,900 Bathroom Addition, Fire Department 13,051 Building Generator, Fire Department 10,855 Remodel of Offices, Police Department Annex 20,994 Fire Truck 341,187 Hydrant Master & Blitzfire 6,530 Storage Cabinets 5,944 Awe Bilingual Early Literacy Station 6,500 Toughbook Laptops 28,448 Tasers 19,025 Night Vision Equipment 6,138 Police Vehicle Accessories 22,549 Business-type Activities: Public Works Awning $16,105 Public Works Truck 20,188 Improvements to SCADA system 13,384 Levee Pump 148,351 Sewer Line Improvements 20,368 City of Richland Hills Capital Assets (Net of Depreciation) Governmental Activities Business-type Activities Totals Land $ 714,170 $ 564,175 $ 256,267 $ 256,267 $ 970,437 $ 820,442 Construction in progress 369,132 2,102,774 3,565, ,975 3,934,561 2,909,749 Improvements other than buildings 280, ,070 2,567,952 2,626,393 2,848,478 2,869,463 Buildings 1,217,453 1,298,421 4,539 5,170 1,221,992 1,303,591 Water and sewer system - - 9,789,774 10,009,716 9,789,774 10,009,716 Machinery and equipment 891, , , , ,327 1,064,566 Infrastructure 7,715,382 5,823, ,715,382 5,823,049 Total $ 11,187,996 $ 10,980,299 $ 16,288,955 $ 13,820,277 $ 27,476,951 $ 24,800,576 Additional information on the City s capital assets can be found in Note F on pages of this report. 14

70 Long-term Debt City of Richland Hills Outstanding Debt Governmental Activities Business-type Activities Totals Certificates of obligation $ 250,000 $ 365,000 $ 9,960,000 $ 10,600,000 $ 10,210,000 $ 10,965,000 Contractual obligation 801,000 1,004, ,000 1,004,000 Capital leases payable , , , ,167 Revenue bonds - - 1,540,000 1,630,000 1,540,000 1,630,000 Total $ 1,051,000 $ 1,369,000 $ 11,609,110 $ 12,390,167 $ 12,660,110 $ 13,759,167 The City s outstanding debt continues to have favorable ratings. The ratings are as follows: Moody's Investor Service Standard & Poor's Combination Tax and Revenue Certificates of Obligation, Series 2001 Combination Tax and Water and Sewer Revenue Certificates of Obligation, Series 2007 A3 A1 Combination Tax and Water and Sewer Revenue Certificates of Obligation, Series 2010 AA- Combination Tax and Water and Sewer Revenue Refunding Bonds, Series 2011 AA- No direct funded debt limitation is imposed on the City under current state law or the City s Home Rule Charter. However, bond covenant requirements of the revenue bonds require that the City maintain a coverage ratio of 1.25 times the annual debt service. The measure of adequacy of service liability of this debt is the revenue bond coverage factor (net revenues available for debt service divided by the current debt service requirements). For the current fiscal year, this ratio is measured at 2.94, meaning sufficient net revenues were available to comply with this bond covenant. Comparative data for the Water and Sewer Fund for the past three fiscal years is presented in the following schedule Gross revenues $ 4,003,607 $ 4,124,847 $ 4,290,606 Direct operating expenses 1,679,794 2,538,500 3,056,183 Net revenue available for debt 2,323,813 1,586,347 1,234,423 Debt service 789, , ,174 Debt coverage ratio (Revenue available for debt service (divided by current year debt service) 15

71 More detailed information about the City s debt is presented in Note III.F. in the financial statements. Economic Factors and Next Year s Budgets and Rates The property tax rate for the City was adopted at the same rate of $ per $100 taxable value for the 2015 fiscal year. The taxable assessed value for the 2015 fiscal year increased from approximately $430 million to $447 million. The most significant budgeted decrease in General Fund revenues is a result of restructuring an accounting for the cost of municipal operations and resulted in a decrease of $1,494,656 for interfund transfers. Sales tax revenue projections increased approximately $273,107. Total expenditures for the General Fund are budgeted to decrease by approximately $1,464,517 from 2014 projected expenditures. This total includes $1,494,656 from fund transfers mentioned above. Water and wastewater billing revenues are expected to remain flat due to no changes in the billing rates for fiscal year Requests for Information This financial report is designed to provide a general overview of the City s finances for all those with an interest in the City s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Finance Department, 3200 Diana Drive, Richland Hills, Texas

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73 BASIC FINANCIAL STATEMENTS

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75 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF NET POSITION SEPTEMBER 30, 2014 Primary Government Governmental Business-type Activities Activities Total ASSETS Cash and cash equivalents $ 3,014,341 $ 3,588,072 $ 6,602,413 Investments 164, , ,925 Receivables, net of allowance for uncollectibles Taxes 900, ,004 Accounts 641, ,702 1,526,435 Intergovernmental 335, ,911 Internal balances 7,302 ( 7,302) - Inventories - 22,914 22,914 Restricted assets: Cash and cash equivalents - 3,566,739 3,566,739 Internal balances due in more than one year 274,237 ( 274,237) - Capital assets: Land 714, , ,437 Construction in progress 369,132 3,565,429 3,934,561 Buildings 2,530, ,022 2,704,314 Improvements other than buildings 1,217,459 2,892,872 4,110,331 Water and sewer systems - 16,728,487 16,728,487 Machinery and equipment 4,010,133 1,215,285 5,225,418 Infrastructure 22,650,248-22,650,248 Less: accumulated depreciation ( 20,303,438) ( 8,543,407) ( 28,846,845) Total capital assets 11,187,996 16,288,955 27,476,951 Total assets 16,526,025 24,246,267 40,772,292 DEFERRED OUTFLOWS OF RESOURCES Deferred loss on refunding - 82,429 82,429 Total deferred outflows of resources - 82,429 82,429 LIABILITIES Accounts payable 477, , ,300 Accrued liabilities 239,459 19, ,650 Unearned revenue Current liabilities payable from restricted assets: Interest payable 5,777 86,786 92,563 Customer deposits - 121, ,281 Noncurrent liabilities: Due within one year - unrestricted 385,869 18, ,630 Due within one year - restricted - 833, ,355 Due in more than one year 1,260,304 11,433,972 12,694,276 Total liabilities 2,369,616 12,951,877 15,321,493 NET POSITION Net investment in capital assets 10,136,996 7,741,269 17,878,265 Restricted for: Debt service 157, ,076 Public safety 434, ,742 Economic development 559, ,847 Unrestricted 2,867,748 3,635,550 6,503,298 Total net position $ 14,156,409 $ 11,376,819 $ 25,533,228 The accompanying notes are an integral part of these financial statements. 17

76 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF ACTIVITIES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Program Revenues Operating Capital Charges Grants and Grants and Functions/Programs Expenses for Services Contributions Contributions Primary government Governmental activities General government $ 2,178,338 $ 205,536 $ 30,000 $ - Public safety 4,984,115 1,166, ,582 - Public works 665, , ,747 Culture and recreation 398,638-19,030 - Parks and beautification 58, Community development 506,160 21,028 21,801 - Interest on long-term debt 47, Total governmental activities 8,839,419 1,392, , ,747 Business-type activities Water sewer 2,482,137 3,996, Drainage utility 525, , Total business-type activities 3,007,383 4,846, Total primary government $ 11,846,802 $ 6,238,719 $ 615,544 $ 479,747 General revenues: Taxes Property, levied for general purposes Property, levied for debt service Sales Franchise Hotel occupancy Investment earnings Miscellaneous revenues Gain on sale of assets Transfers Total general revenues and transfers Changes in net position Net position, beginning Prior period adjustment Net assets, beginning, as restated Net position, ending The accompanying notes are an integral part of these financial statements. 18

77 Net (Expense) Revenue and Changes in Net Position Primary Government Governmental Business-type Activities Activities Total $( 1,942,802) $ - $( 1,942,802) ( 3,671,400) - ( 3,671,400) 211, ,947 ( 379,608) - ( 379,608) ( 58,280) - ( 58,280) ( 463,331) - ( 463,331) ( 47,957) - ( 47,957) ( 6,351,431) - ( 6,351,431) - 1,514,561 1,514, , ,078-1,838,639 1,838,639 $( 6,351,431) $ 1,838,639 $( 4,512,792) $ 2,123,739 $ - $ 2,123, , ,126 3,029,601-3,029, , , , ,779 1,469 4,939 6,408 7,961 6,909 14,870 54,345-54,345 1,148,890 ( 1,148,890) - 7,289,536 ( 1,137,042) 6,152, , ,597 1,639,702 13,264,235 10,907,674 24,171,909 ( 45,931) ( 232,452) ( 278,383) 13,218,304 10,675,222 23,893,526 $ 14,156,409 $ 11,376,819 $ 25,533,228 19

78 CITY OF RICHLAND HILLS, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2014 Total Other Governmental General Governmental Funds ASSETS Cash and cash equivalents $ 1,640,273 $ 1,374,068 $ 3,014,341 Investments 164, ,501 Receivables (net of allowances for uncollectibles) Taxes 699, , ,004 Accounts 537, , ,733 Intergovernmental 15, , ,911 Due from other funds 394, , ,561 Advances to other funds 274, ,237 Total assets $ 3,726,192 $ 2,211,096 $ 5,937,288 LIABILITIES Liabilities: Accounts payable $ 323,068 $ 149,388 $ 472,456 Accrued liabilities 239, ,459 Due to other funds 222, , ,572 Total liabilities 784, ,505 1,316,487 DEFERRED INFLOWS OF RESOURCES Unavailable revenue 890,934 12, ,616 Total deferred inflows of resources 890,934 12, ,616 FUND BALANCES Nonspendable 274, ,237 Restricted - 1,716,573 1,716,573 Assigned - 23,425 23,425 Unassigned 1,776,039 ( 73,089) 1,702,950 Total fund balance 2,050,276 1,666,909 3,717,185 Total liabilities, deferred inflows of resources and fund balance $ 3,726,192 $ 2,211,096 $ 5,937,288 The accompanying notes are an integral part of these financial statements. 20

79 CITY OF RICHLAND HILLS, TEXAS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET POSITION FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Total fund balances - governmental funds $ 3,717,185 Capital assets used in governmental activities are not financial resources and therefore are reported in the governmental funds. 11,187,996 Long-term liabilities, including bonds payable (net of unamortized costs), are not due and payable in the current period and, therefore, are not reported in the funds. ( 1,651,950) Other long-term assets are not available to pay for current period expenditures and, therefore, are deferred in the funds. 903,178 Net position of governmental activities $ 14,156,409 The accompanying notes are an integral part of these financial statements. 21

80 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Total Other Governmental General Governmental Funds REVENUES Taxes: General property $ 2,121,307 $ 175,126 $ 2,296,433 Sales and use 2,022,750 1,006,851 3,029,601 Franchise 533, ,857 Hotel occupancy - 202, ,779 Fines and fees 419, , ,946 Licenses and permits 201, ,111 Charges for services 221, ,449 Intergovernmental 159, , ,634 Interest income ,469 Miscellaneous 65, , ,618 Total revenues 5,746,406 2,757,491 8,503,897 EXPENDITURES General government 2,118,860-2,118,860 Public safety 4,331, ,200 4,748,753 Public works 272,938 4, ,196 Culture and recreation 354, ,525 Parks and beautification 51,492-51,492 Community development 388, , ,160 Capital outlay 150, , ,280 Debt service: Principal 72, , ,000 Interest and fiscal charges 5,931 42,328 48,259 Total expenditures 7,745,795 1,566,730 9,312,525 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES ( 1,999,389) 1,190,761 ( 808,628) OTHER FINANCING SOURCES (USES) Transfers in 2,067, ,487 2,200,678 Transfers out - ( 1,051,788) ( 1,051,788) Total other financing sources (uses) 2,067,191 ( 918,301) 1,148,890 NET CHANGE IN FUND BALANCES 67, , ,262 FUND BALANCES, BEGINNING 1,982,474 1,394,449 3,376,923 FUND BALANCES, ENDING $ 2,050,276 $ 1,666,909 $ 3,717,185 The accompanying notes are an integral part of these financial statements. 22

81 CITY OF RICHLAND HILLS, TEXAS RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF THE GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Amounts reported for governmental activities in the statement of activities are different because: Net change in fund balances - total governmental funds $ 340,262 Governmental funds report all capital outlay as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This reconciling item represents the amount by which capital outlay exceeded depreciation in the current period. ( 122,303) The issuance of long-term debt (e.g., bonds, notes payable) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This reconciling item represents the net effect of these differences in the treatment of long-term debt and related items. 318,000 Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. This reconciling item reflects the net of such expenses. 1,754 The net revenue (expense) of internal service funds is reported with governmental activities. 330,000 Some revenues in the statement of activities do not provide current financial resources and are not included in the governmental funds. 70,392 Change in net position of governmental activities - statement of activities $ 938,105 The accompanying notes are an integral part of these financial statements. 23

82 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF NET POSITION PROPRIETARY FUNDS SEPTEMBER 30, 2014 ASSETS Current assets: Governmental Business-type Activities - Enterprise Funds Activities- Water Drainage Internal and Sewer Utility Totals Service Cash and cash equivalents $ 2,279,218 $ 1,308,854 $ 3,588,072 $ - Investments 176, ,424 - Accounts receivable, net of allowances 884, ,702 - Due from other funds 2, , ,793 5,313 Inventory 22,914-22,914 - Restricted assets: Cash and cash equivalents 2,125,838 1,440,901 3,566,739 - Total current assets 5,491,428 3,062,216 8,553,644 5,313 Noncurrent assets: Capital assets: Land 207,267 49, ,267 - Construction in progress - 3,565,429 3,565,429 - Buildings 174, ,022 - Improvements other than buildings 83,761 2,809,111 2,892,872 - Waterworks and sewer system 16,728,487-16,728,487 - Equipment 1,108, ,861 1,215, ,000 Less: accumulated depreciation ( 8,158,473) ( 384,934) ( 8,543,407) - Total noncurrent assets 10,143,488 6,145,467 16,288, ,000 Total assets 15,634,916 9,207,683 24,842, ,313 DEFERRED OUTFLOWS OF RESOURCES Deferred loss on refunding 82,429-82,429 - Total deferred outflows of resources 82,429-82,429 - LIABILITIES Current liabilities: Accounts payable 435,258 3, ,531 5,313 Accrued liabilities 11,859 7,332 19,191 - Due to other funds 314,937 7, ,095 - Compensated absences payable 18,761-18,761 - Current liabilities payable from restricted assets: Interest payable 62,624 24,162 86,786 - Capital leases payable 53,355-53,355 - Revenue bonds payable 570, , ,000 - Customer deposits payable 121, ,281 - Total current liabilities 1,588, ,925 1,840,000 5,313 Noncurrent liabilities: Advances from other funds 274, ,237 - Compensated absences payable 75,043-75,043 - Net pension obligation 71,380 6,479 77,859 - Capital leases payable 55,755-55,755 - Revenue bonds payable 6,051,024 5,174,291 11,225,315 - Total noncurrent liabilities 6,527,439 5,180,770 11,708,209 - Total liabilities 8,115,514 5,432,695 13,548,209 5,313 NET POSITION Net investment in capital assets 5,539,192 2,202,077 7,741, ,000 Unrestricted 2,062,639 1,572,911 3,635,550 - Total net position $ 7,601,831 $ 3,774,988 $ 11,376,819 $ 330,000 The accompanying notes are an integral part of these financial statements. 24

83 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION PROPRIETARY FUNDS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Governmental Business-type Activities - Enterprise Funds Activities- Water Drainage Internal and Sewer Utility Totals Service OPERATING REVENUES Charges for services $ 3,996,698 $ 849,324 $ 4,846,022 $ - Miscellaneous 6,909-6,909 - Total operating revenues 4,003, ,324 4,852,931 - OPERATING EXPENSES Personnel services 549, , ,455 - Contractual services 27,060 8,418 35,478 - Repairs and maintenance 81,802 52, ,180 - Other supplies and expenses 1,021,922 50,752 1,072,674 - Depreciation 435,980 72, ,169 - Total operating expenses 2,115, ,182 2,483,956 - OPERATING INCOME 1,887, ,142 2,368,975 - NONOPERATING REVENUES AND EXPENSES Interest and investment income 3, ,939 - Gain on sale of capital assets ,000 Interest expense and fiscal charges ( 366,363) ( 157,064) ( 523,427) - Total nonoperating revenues and expenses ( 362,401) ( 156,087) ( 518,488) 330,000 INCOME BEFORE CAPITAL CONTRIBUTIONS AND TRANSFERS 1,525, ,055 1,850, ,000 Transfers in 351, ,182 1,190,550 - Transfers out ( 2,127,592) ( 211,848) ( 2,339,440) - CHANGE IN NET POSITION ( 250,792) 952, , ,000 NET POSITION, BEGINNING 8,043,000 2,864,674 10,907,674 - PRIOR PERIOD ADJUSTMENT ( 190,377) ( 42,075) ( 232,452) - NET POSITION, ENDING 7,852,623 2,822,599 10,675,222 - NET POSITION, ENDING $ 7,601,831 $ 3,774,988 $ 11,376,819 $ 330,000 The accompanying notes are an integral part of these financial statements. 25

84 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Governmental Business-type Activities - Enterprise Funds Activities- Water Drainage Internal and Sewer Utility Totals Service CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 4,036,227 $ 849,324 $ 4,885,551 $ - Cash paid to suppliers for goods and services ( 547,830) ( 167,615) ( 715,445) 5,313 Cash paid to employees for services ( 908,880) ( 115,233) ( 1,024,113) - Net cash provided by operating activities 2,579, ,476 3,145,993 5,313 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Cash received from other funds - 28,736 28,736 - Cash paid to other funds ( 138,791) - ( 138,791) ( 5,313) Transfers from other funds 351, ,182 1,190,550 - Transfers to other funds ( 2,127,592) ( 211,848) ( 2,339,440) - Net cash provided (used) by noncapital financing activities ( 1,915,015) 627,334 ( 1,287,681) ( 5,313) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal repayments on debt ( 591,057) ( 190,000) ( 781,057) - Interest and fiscal charges on debt ( 357,566) ( 138,235) ( 495,801) - Proceeds from the disposition of capital assets ,000 Acquisition of capital assets ( 222,676) ( 2,692,461) ( 2,915,137) ( 330,000) Net cash flows used by capital and related financing activities ( 1,171,299) ( 3,020,696) ( 4,191,995) - CASH FLOWS FROM INVESTING ACTIVITIES Earnings on investments 3, ,939 - Net cash provided by investing activities 3, ,939 - NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 502,835) ( 1,825,909) ( 2,328,744) - CASH AND CASH EQUIVALENTS, BEGINNING 4,907,891 4,575,664 9,483,555 - CASH AND CASH EQUIVALENTS, ENDING $ 4,405,056 $ 2,749,755 $ 7,154,811 $ - RECONCILIATION OF CASH AND CASH EQUIVALENTS PER STATEMENT OF CASH FLOWS TO THE STATEMENT OF NET ASSETS Cash and cash equivalents $ 2,279,218 $ 1,308,854 $ 3,588,072 $ - Restricted cash 2,125,838 1,440,901 3,566,739 - Total cash and cash equivalents $ 4,405,056 $ 2,749,755 $ 7,154,811 $ - 26

85 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS (Continued) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Governmental Activities- Water Drainage Internal and Sewer Utility Totals Service RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 1,887,833 $ 481,142 $ 2,368,975 $ - Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation and amortization expense 457,826 83, ,294 - Changes in assets and liabilities: Increase in accounts receivable 26,609-26,609 - Increase in inventory 1,731-1,731 - Increase (decrease) in accounts payable 220,168 ( 3,687) 216,481 5,313 Increase in accrued liabilities ( 16,231) 5,387 ( 10,844) - Decrease in compensated absences ( 4,820) - ( 4,820) - Increase in customer deposits 6,011-6,011 - Increase in net pension obligation Net cash provided by operating activities $ 2,579,517 $ 566,476 $ 3,145,993 $ 5,313 The accompanying notes are an integral part of these financial statements. 27

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87 CITY OF RICHLAND HILLS, TEXAS NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2014 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity The City of Richland Hills is a municipal corporation governed by an elected mayor and five-member council. The financial statements of the City of Richland Hills, Texas (the City ) include all governmental activities, organizations, and functions for which the City exercises significant oversight responsibility. The criteria considered in determining governmental activities to be reported within the City s financial statements included: the City s accountability for the entity s fiscal matters; the scope of public service of the entity; and the nature of any special financing relationships which may exist between the City and a given governmental entity. Blended component units, although legally separate entities, are, in substance, part of the government s operations and so data from these units are combined with data of the primary government. The City has two blended component units. Separate financial information for each can be obtained from the City. Blended Component Units The Richland Hills Development Corporation (a nonprofit development corporation formed under the Development Corporation Act of 1979, Texas Rev Civil Statute) was incorporated June 28, The Corporation serves all citizens of the City and is governed by a Board of seven directors appointed by the City Council. Four of the directors are Council Member directors and three are citizen member directors. The purpose of the Corporation is to promote infrastructure improvements, parks and park facilities and economic development within the City and the State of Texas in order to eliminate unemployment and underemployment and to promote and encourage employment and the public welfare of, for and on behalf of the City by developing, implementing, providing, and financing projects. Operation of the Corporation is funded by a percent sales tax approved by the voters. The Corporation is reported as a Special Revenue Fund. On November 8, 2005, citizens of the City of Richland Hills voted to create the Richland Hills Crime Control and Prevention District (the District ) dedicated to crime reduction programs. The City Council serves as the Board of Directors for the District. Operation of the District is funded by a percent sales tax approved by the voters. The District is also reported as a Special Revenue Fund. 28

88 B. Government-wide and Fund Financial Statements The government-wide financial statements (i.e., the statement of net position and the statement of changes in net position) report information on all of the activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are 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. The statement of activities demonstrates the degree to which the direct expenses of 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 1) 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. Separate financial statements are provided for governmental funds and proprietary funds. Major individual funds and individual Enterprise Funds are reported as separate columns in the fund financial statements. C. Measurement Focus, Basis of Accounting and Basis of Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund financial statements. Revenues are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized as soon as they are measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. The government considers all revenues available if they are collected within 60 days after yearend. Expenditures generally are recorded when the related fund liability is incurred, as under accrual accounting; however, debt service expenditures and expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Property, franchise, and sales taxes, along with interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. All other revenue items are considered to be measurable and available only when the City receives payment. 29

89 The accounts of the City are organized and operated on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements. Governmental Funds are those through which most functions of the City are financed. The acquisition, use, and balances of the City s expendable financial resources and the related liabilities (except those accounted for in the proprietary fund type) are accounted for through governmental funds. The measurement focus is upon determination of changes in financial position, rather than upon net income determination. The City reports the following major governmental fund: The General Fund is the government s primary operating fund. It accounts for the resources used to finance the basic operations of the City and covers all activities for which a separate fund has not been established. The City reports the following major proprietary funds: The Water and Sewer Fund is used to account for the operation of the water and sewage systems for the City. The Drainage Utility Fund is used to account for the construction and maintenance of the drainage system for the City. Additionally, the government reports the following fund and fund types: The Special Revenue Funds are governmental funds that account for the proceeds of specific revenue sources (other than for major capital projects) that are legally restricted to expenditure for specific purposes. The Debt Service Fund accounts for the servicing of general long-term debt not being financed by proprietary or nonexpendable trust funds. The Capital Projects Funds account for the acquisition of capital assets or construction of major capital projects not being financed by proprietary funds. The accounting and reporting policies of the City relating to the funds included in the accompanying basic financial statements conform to accounting principles generally accepted in the United States of America applicable to state and local governments. Generally accepted accounting principles for local governments include those principles prescribed by the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants in the publication entitled, Audits of State and Local Governmental Units and by the Financial Accounting Standards Board (when applicable). 30

90 As a general rule, the effect of interfund activity has been eliminated from the governmentwide financial statements. Exceptions to this general rule are charges and transfers between the governmental activities and the business-type activities. Elimination of these charges would distort the direct costs and program revenue reported for the various functions concerned. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of the City s Enterprise Funds are charges to customers for sales and services. Operating expenses for the Enterprise Funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. When both restricted and unrestricted resources are available for use, it is the City s policy to use restricted resources first, then unrestricted resources as they are needed. D. Assets, Deferred Outflows/Inflows of Resources, Liabilities and Net Position or Equity 1. Deposits and Investments The government s cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments that are highly liquid with maturity within three months or less when purchased. Assets reported as cash and cash equivalents and investments are considered cash and cash equivalents for the statement of cash flows. 2. Receivables and Payables All receivables are reported at their gross value and, where appropriate, are reduced by the estimated portion that is expected to be uncollectible. Transactions between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as due to/due from other funds. Any residual balances outstanding between the governmental activities and the business-type activities are reported in the government-wide financial statements as internal balances. 31

91 3. Property Taxes Ad valorem property taxes are levied each October 1 from valuations assessed as of the prior January 1 and are recognized as revenue beginning on the date of levy, October 1, when they become available. Available means collected within the current period or expected to be collected soon thereafter to be used to pay current liabilities. Taxes not expected to be collected within 60 days of the fiscal year ending are recorded as deferred revenue and are recognized when they become available. Taxes collected prior to the levy date to which they apply are recorded as deferred revenue and recognized as revenue of the period to which they apply. Taxes are due on October 1 immediately following the levy date and are delinquent after the following January 31. Tax liens are automatic on January 1 each year. 4. Inventory The inventory of supplies held by the Enterprise Funds is valued at cost using the firstin first-out ( FIFO ) method. The costs of governmental fund type inventories are recorded as expenditures when consumed rather than when purchased. 5. Capital Assets Capital assets, which include property, plant and equipment, and infrastructure assets, are reported in the applicable governmental activities or business-type activities columns in the government-wide financial statements and in the proprietary funds financial statements. The City defines capital assets as assets with an initial, individual cost of $5,000 and an estimated useful life in excess of one year. Such assets are recorded at cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at their estimated fair value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Property, plant and equipment of the primary government and proprietary funds are depreciated using the straight-line method over the following estimated useful lives. Buildings and improvements Office equipment Autos and trucks Equipment Waterworks and sewer system Infrastructure years 5-20 years 4-5 years 3-20 years 5-40 years years The City has reported infrastructure capital assets acquired prior to the implementation of GASB Statement No. 34 at estimated historical cost. 32

92 6. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. The City is reporting balances for deferred losses on bond refundings in the Statement of Net Position Proprietary Funds. A deferred loss on a bond refunding results when the reacquisition price of the refunded debt exceeds the carrying value. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position or fund balance that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The City has one type of item, which arises only under a modified accrual basis of accounting that qualifies for reporting in this category. Accordingly, the item, unavailable revenue, is reported only in the governmental funds balance sheet. Deferred inflows of resources reported in the governmental funds for unavailable revenues are as follows: 7. Compensated Absences It is the City s policy to permit employees to accumulate earned but unused vacation, compensatory time, and sick pay benefits. Sick pay benefits are not paid upon separation; therefore no liability is reported for unpaid accumulated sick leave. Vacation and compensatory time is accrued when incurred in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in the governmental funds only if they have matured, for example, as a result of employee resignations and retirements. 8. Long-term Obligations The government-wide financial statements and proprietary fund type financial statements report long-term debt and other long-term obligations as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statements of net position. Bond premiums and discounts are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of the applicable bond premium or discount. In the fund financial statements, governmental fund types recognize bond premiums and discounts during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 33

93 9. Fund Balance Classification The governmental fund financial statements present fund balances based on classifications that comprise a hierarchy that is based primarily on the extent to which the City is bound to honor constraints on the specific purposes for which amounts in the respective governmental funds can be spent. The classifications used in the governmental fund financial statements are as follows: Nonspendable: This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) are legally or contractually required to be maintained intact. Nonspendable items are not expected to be converted to cash or are not expected to be converted to cash within the next year. Restricted: This classification includes amounts for which constraints have been placed on the use of the resources either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation. Committed: This classification includes amounts that can be used only for specific purposes pursuant to constraints imposed by board resolution of the City Council, the City s highest level of decision making authority. The City Council is the highest level of decision-making authority for the government that can, by adoption of an ordinance prior to the end of the fiscal year, commit fund balance. Once adopted, these amounts cannot be used for any other purpose unless the City Council removes or changes the specified use by taking the same type of action that was employed when the funds were initially committed (adoption of another ordinance). This classification also includes contractual obligations to the extent that existing resources have been specifically committed for use in satisfying those contractual requirements. Assigned: This classification includes amounts that are constrained by the City s intent to be used for a specific purpose but do not meet the criteria to be classified as restricted nor committed. The City Council has by resolution authorized the City Manager to assign fund balance. The Council may also assign fund balance as it does when appropriating fund balance to cover the gap between estimated revenues and appropriations in the subsequent year s appropriated budget. Unlike commitments, assignments only exist temporarily. In other words, an additional action does not normally have to be taken for removal of an assignment. Conversely, as discussed above, an additional action is essential to either remove or revise a commitment. Unassigned: This classification includes the residual fund balance for the General Fund. The unassigned classification also includes negative residual fund balance of any other governmental fund that cannot be eliminated by offsetting of assigned fund balance amounts. When an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available, the City considers restricted funds to have been spent first. When an expenditure is incurred for which committed, assigned, or unassigned fund balances are available, the City considers amounts to have been spent first out of committed funds, then assigned funds, and finally unassigned funds. 34

94 10. Net Position Net position represent the difference between assets and liabilities. Net position invested in capital assets, net of related debt, consist of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowing used for the acquisition, construction or improvements of those assets, and adding back unspent proceeds. Net position are reported as restricted when there are limitations imposed on their use either through the enabling legislations adopted by the City or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. 11. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates. II. RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS Explanation of Certain Differences Between the Governmental Fund Balance Sheet and the Government-wide Statement of Net Position The fund financial statements includes a reconciliation between fund balance total governmental funds and net position governmental activities as reported in the governmentwide statement of net position. One element of that reconciliation explains, Long-term liabilities, including bonds payable (net of amortized costs) are not due and payable in the current period and, therefore, are not reported in the funds. The details of this $(1,651,950) difference are as follows: Certificates of obligation $( 250,000) Contractual obligations ( 801,000) Accrued interest payable ( 5,777) Compensated absences ( 299,347) Net pension obligations ( 295,826) Net adjustment to reduce fund balance - total governmental funds to arrive at net assets - governmental activities $( 1,651,950) 35

95 The governmental fund balance sheet includes a reconciliation between fund balance total governmental funds and net position governmental activities as reported in the governmentwide statement of net position. One element of that reconciliation explains, Other long-term assets are not available to pay for current period expenditures and, therefore are deferred in the funds. The details of this $903,178 difference are as follows: Property taxes receivable $ 105,686 Court fines receivable 485,409 Franchise taxes receivable 259,759 Ambulance receivable 52,324 Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $ 903,178 Explanation of Certain Differences Between the Governmental Fund Statement of Revenue, Expenditures and Changes in Fund Balances and the Government-wide Statement of Activities The governmental fund statement of revenue, expenditures and changes in fund balances includes a reconciliation between net changes in fund balances total governmental fund and changes in net position of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains, 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. The details of this $(122,303) difference are as follows: Capital outlay $ 588,429 Depreciation expense ( 710,732) Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $( 122,303) Another element of that reconciliation states, Some revenues in the statement of activities do not provide current financial resources and are not included in the governmental funds. The details of this $70,392 difference are as follows: Property taxes $ 2,432 Court fines receivable 44,936 Franchise taxes receivable 11,769 Other receivables 11,255 Net adjustment to increase net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $ 70,392 36

96 Another element of that reconciliation states, The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net position. The details of this $318,000 difference are as follows: Principal repayments $ 318,000 Net adjustment to decrease net changes in fund balances - total governmental funds to arrive at changes in net assets of governmental activities $ 318,000 III. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY At September 30, 2014, the Safe Routes to School Capital Project Fund and Green Ribbon Project Capital Projects Fund, both nonmajor governmental funds, had deficit fund balances of $41,476 and $31,613, respectively. These deficits occurred because expenditures in these funds exceeded available resources. The deficits will be eliminated as additional revenues are collected in the subsequent year. IV. DETAILED NOTES ON ALL FUNDS A. Deposits and Investments As of September 30, 2014, the City had the following investments: Weighted Percentage Credit Average of Total Fair Investment Rating Maturities Investments Cost Value TexPool AAAm 68 days % $ 3,616 $ 3,616 Reconciliation to financial statements $ 3,616 $ 3,616 Investments from Statement of Net Assets $ 340,925 Less: Certificates of deposit 337,309 $ 3,616 37

97 The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the City to adopt, implement and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, and (9) bid solicitation preferences for certificates of deposit. Statutes authorize the City to invest in (1) obligations of the U. S. Treasury, certain U. S. agencies, and the State of Texas; (2) certificates of deposit, (3) certain municipal securities, (4) money market savings accounts, (5) repurchase agreements, (6) bankers acceptances, (7) Mutual Funds, (8) investment pools, (9) guaranteed investment contracts, and (10) common trust funds. The Act also requires the City to have independent auditors perform test procedures related to investment practices as provided by the Act. The City is in substantial compliance with the requirements of the Act and with local policies. The City s investment pool is a 2a7-like pool. A 2a7-like pool is one which is not registered with the Securities and Exchange Commission ( SEC ) as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC s Rule 2a7 of the Investment Company Act of The City uses the following external investment pool: TexPool Under the TexPool Participation Agreement, administrative and investment services to TexPool are provided by Lehman Brothers, Inc. and Federated Investors, Inc. through an agreement with the State of Texas Comptroller of Public Accountants. The State Comptroller is the sole officer, director, and shareholder of the Texas Treasury Safekeeping Trust Company authorized to operate TexPool. TexPool is rated AAAm by Standard & Poor s. As a requirement to maintain the rating, weekly portfolio information must be submitted to Standard & Poor s, as well as the Office of the Comptroller of Public Accounts for review. TexPool uses amortized cost rather than market value to report net position to compute share prices. Accordingly, the fair value of the position in TexPool is the same as the value of TexPool shares. Custodial Credit Risk Deposits Custodial credit risk is the risk that in the event of a bank failure, the government s deposits may not be returned to it. State statutes require that all deposits in financial institutions be fully collateralized by U. S. Government Obligations or its agencies and instrumentalities or direct obligations of Texas or its agencies and instrumentalities that have a fair value of not less than the principal amount of deposits. As of September 30, 2014, the City s $10,647,370 deposit balance was collateralized with securities held by the pledging financial institution or covered by FDIC insurance. 38

98 Credit Risk Investments The City controls credit risk by limiting its investments to those instruments allowed by the State Public Funds Investment Act described above. Interest Rate Risk Investments The City manages interest rate risk by structuring its portfolio so that it will experience minimal volatility during economic cycles. This is accomplished by purchasing high quality, short to medium term securities which will complement each other. The dollar weighted average maturity of 365 days or less will be calculated using the stated final maturity date of each security. B. Restricted Assets Certain proceeds of the City s Enterprise Fund revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the balance sheet because their use is limited by applicable bond ordinances and other legal restrictions. Enterprise Funds restricted assets are held for the following purposes in accordance with bond ordinances or other legal restrictions: Current Revenue Bonds Reserve Cash $ 37, Revenue Bonds Construction Cash Revenue Bonds I&S Cash Revenue Bonds Construction Cash 1,432, Revenue Bonds I&S Cash 8, Revenue Bonds I&S Cash 2,087,820 $ 3,566,739 C. Property Taxes Property tax rates, established in accordance with state law, are levied on real and personal property within the City for use in financing and general and debt service expenditures for the 2014 fiscal year (2013 tax year), resulting in an adjusted tax levy of approximately $2.2 million based on an assessed property valuation of approximately $430.1 million were as follows: Tax Rate per $100 of Assessed Value General fund $ Debt service fund Total tax rate $

99 D. Receivables Amounts recorded as receivable as of September 30, 2014, for the City s individual major and nonmajor funds, including the applicable allowances for uncollectible accounts, are as follows: Water Nonmajor General and Sewer Governmental Total Receivables: Taxes $ 739,483 $ - $ 205,815 $ 945,298 Intergovernmental 15, , ,911 Fines 1,618, ,618,030 Accounts - 1,517, ,000 1,621,869 Ambulance 2,616, ,616,203 Gross receivables 4,988,966 1,517, ,476 7,137,311 Less: allowance for uncollectibles 3,736, ,167 5,435 4,374,961 Net total receivables $ 1,252,607 $ 884,702 $ 625,041 $ 2,762,350 E. Interfund Receivable, Payables and Transfers The composition of interfund balances for the City s individual major funds and nonmajor funds as of September 30, 2014, is as follows: Receivable Fund Payable Fund Amount General Other governmental funds $ 382,117 Water and sewer 10,661 Drainage utility 1,796 Other governmental funds General 209,107 Drainage utility 2,880 Total governmental funds $ 606,561 Drainage utility General $ 8,035 Water and sewer 304,276 Water and sewer Drainage utility 2,482 Total enterprise funds $ 314,793 Internal service fund General $ 5,313 The General Fund paid expenditures for the other governmental funds, the Water and Sewer Fund and the Drainage utility fund but was not reimbursed before year-end. The revenue of other governmental funds was deposited into the General Fund but not transferred to the appropriate other governmental funds before year-end. The Water and Sewer Fund collected customer billing on behalf of the Drainage Utility Fund but did not transfer it before yearend. 40

100 $274,237 of the interfund balance between the General Fund and the Water and Sewer Fund is not expected to be repaid within the next year. The General Fund has reported nonspendable fund balance and the payable has been reported as a noncurrent liability in the proprietary funds statement of net position. The composition of interfund transfers for the City s individual major funds and nonmajor funds at September 30, 2014, is as follows: Transfers in Transfers out Amount Purpose General Other governmental funds $ 566,933 Debt service Water and sewer 1,288,410 Debt service Drainage utility 211,848 Debt service Other governmental funds Other governmental funds 133,487 Debt service Water and sewer Other governmental funds 351,368 Increased water sewer costs Drainage utility Water and sewer 839,182 Debt service F. Capital Assets Capital asset activity for the year ended September 30, 2014, was as follows: Beginning Ending Governmental activities Balance Increases Decreases Adjustments Balance Capital assets, not being depreciated: Land $ 564,175 $ 149,995 $ - $ - $ 714,170 Construction in progress 2,102, ,132 2,102, ,132 Total capital assets not being depreciated 2,666, ,127 2,102,774-1,083,302 Capital assets, being depreciated: Improvements other than buildings 1,140,035 77, ,217,459 Buildings 2,530, ,530,292 Machinery and equipment 4,164, , ,688-4,010,133 Streets 20,386,262 2,263, ,650,248 Total capital assets, being depreciated 28,221,038 2,777, ,688-30,408,132 Less: accumulated depreciated for: Improvements other than buildings ( 896,964) ( 39,969) - - ( 936,933) Buildings ( 1,231,870) ( 80,969) - - ( 1,312,839) Machinery and equipment ( 3,215,690) ( 218,143) ( 315,033) - ( 3,118,800) Streets ( 14,563,214) ( 371,652) - - ( 14,934,866) Total capital assets being depreciated ( 19,907,738) ( 710,733) ( 315,033) - ( 20,303,438) Total capital assets being depreciated, net 8,313,300 2,067, ,655-10,104,694 Total governmental activities, net $ 10,980,249 $ 2,586,176 $ 2,378,429 $ - $ 11,187,996 41

101 Beginning Ending Business-type activities Balance Increases Decreases Balance Capital assets, not being depreciated: Land $ 256,267 $ - $ - $ 256,267 Construction in progress 806,975 2,758,454-3,565,429 Total capital assets not being depreciated 1,063,242 2,758,454-3,821,696 Capital assets, being depreciated: Improvements other than buildings 2,876,767 16,105-2,892,872 Buildings 174, ,022 Water and sewer systems 16,546, ,102-16,728,487 Machinery and equipment 1,195,097 20,188-1,215,285 Total capital assets, being depreciated 20,792, ,395-21,010,666 Less: accumulated depreciated for: Improvements other than buildings ( 250,374) ( 74,546) - ( 324,920) Buildings ( 168,851) ( 632) - ( 169,483) Water and sewer systems ( 6,536,672) ( 402,041) - ( 6,938,713) Machinery and equipment ( 1,079,341) ( 30,950) - ( 1,110,291) Total capital assets being depreciated ( 8,035,238) ( 508,169) - ( 8,543,407) Total capital assets being depreciated, net 12,757,033 ( 289,774) - 12,467,259 Total business-type activities, net $ 13,820,275 $ 2,468,680 $ - $ 16,288,955 Depreciation expense was charged to functions of the primary government as follows: Governmental activities: General government $ 35,734 Public safety 235,362 Public works 388,736 Culture and recreation 44,113 Parks and beautification 6,788 Total depreciation expense- governmental activities $ 710,733 Business-type activities: Water/sewer $ 435,980 Drainage utility 72,189 Total depreciation expense - business-type activities $ 508,169 G. Long-term Liabilities Governmental Activities Combination Tax and Revenue Certificates of Obligation, Series 2001 A series of certificates of obligation totaling $1,325,000 were issued on May 15, 2001, for the construction of street improvements and to pay the costs of issuing the certificates. The City reserves the right to redeem the certificates maturing on and after August 15, 2011, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on August 15, 2009, or any date thereafter, at a redemption price of par plus accrued interest. Interest rates range from 4.25% to 5.6%. Total maturity of this series is on August 15,

102 The obligations and interest are direct, and general obligations of the City and are payable from collection of ad valorem taxes and limited surplus net revenues derived from operation of the water and sewer system, if any. The balance of this obligation at September 30, 2014 is $250,000. City of Richland Hills, Public Property Finance Contractual Obligation Series 2007 A series of contractual obligations totaling $535,000 dated February 1, 2007, were issued for the purpose of paying all or a portion of the Issuer s contractual obligations to be incurred in connection with the acquisition or purchase of personal property, in accordance with the provisions of the Public Property Finance Act, and to pay the costs incurred in connection with the issuance of the contractual obligation. The interest rate is 3.825% and the obligation matures through August 15, Principal and interest are payable from ad valorem taxes. The balance of this obligation at September 30, 2014, is $325,000. City of Richland Hills, Public Property Finance Contractual Obligation Series 2011 A series of contractual obligations totaling $473,000 dated February 1, 2011, were issued for the purpose of paying all or a portion of the Issuer s contractual obligations to be incurred in connection with the acquisition or purchase of personal property, in accordance with the provisions of the Public Property Finance Act, and to pay the costs incurred in connection with the issuance of the contractual obligation. The interest rate is 3.64% and the obligation matures through August 15, Principal and interest are payable from ad valorem taxes. The balance of this obligation at September 30, 2014, is $299,000. City of Richland Hills, Public Property Finance Contractual Obligation Series 2012 A series of contractual obligations totaling $415,000 dated October 4, 2012, were issued for the purpose of paying all or a portion of the Issuer s contractual obligations to be incurred in connection with the acquisition or purchase of personal property, in accordance with the provisions of the Public Property Finance Act, and to pay the costs incurred in connection with the issuance of the contractual obligation. The interest rate is 3.66% and the obligation matures through February 15, Principal and interest are payable from ad valorem taxes. The balance of this obligation at September 30, 2014, is $273,000. Business-type Activities Combination Tax and Water and Sewer Revenue Certificates of Obligation, Series 2007 Certificates of Obligation dated March 15, 2007, were issued for paying all or a portion of the City s contractual obligations incurred in connection with (i) acquiring, constructing, installing and equipping additions, extensions and improvements to the City s waterworks and sewer system, and the acquisition of land and interests in land as necessary; and (ii) legal, fiscal, design and engineering fees in connection with such projects. 43

103 On August 15, 2017, or on any date thereafter, the certificates of this series having stated maturities on and after August 15, 2018, may be redeemed prior to their scheduled maturities, at the option of the issuer with funds derived from any available and lawful source, as a whole, or in part, in principal amounts of $5,000 or any integral multiple thereof, at a redemption price of par plus accrued interest. Interest rates range from 3.6% to 4.0%. Total maturity of this series is on August 15, Ad valorem taxes and the surplus revenues of the Water and Sewer Fund are pledged to the payment of the certificates, however, if surplus revenues or other lawfully available funds of the City are actually on deposit in the Interest and Sinking Fund in advance of the time when ad valorem taxes are scheduled to be levied for any year, then the amount of taxes required to be levied may be reduced by the revenues on deposit in the Interest and Sinking Fund. The balance of these certificates at September 30, 2014, is $1,540,000. Combination Tax and Water and Sewer Revenue Certificates of Obligation, Series 2010 Certificates of Obligation dated March 1, 2010, were issued for paying all or a portion of the City s contractual obligations incurred in connection with (i) acquiring, constructing, installing and equipping improvements to the City s storm water and drainage utility system, and the acquisition of land and interests in land as necessary therefore; and (ii) legal, fiscal, design and engineering fees in connection with such projects. On February 15, 2020, or on any date thereafter, the certificates of this series having stated maturities on and after August 15, 2020, may be redeemed prior to their scheduled maturities, at the option of the issuer with funds derived from any available and lawful source, as a whole, or in part, in principal amounts of $5,000 or any integral multiple thereof, at a redemption price of par plus accrued interest. Interest rates range from 3.000% to 4.125%. Total maturity of this series is on August 15, Ad valorem taxes and the surplus revenues of the Drainage Utility Fund are pledged to the payment of the certificates, however, if surplus revenues or other lawfully available funds of the City are actually on deposit in the Interest and Sinking Fund in advance of the time when ad valorem taxes are scheduled to be levied for any year, then the amount of taxes required to be levied may be reduced by the revenues on deposit in the Interest and Sinking Fund. The balance of these certificates at September 30, 2014, is $2,385,000. Combination Tax and Water and Sewer Revenue Refunding Bonds, Series 2011 $3,110,000 of Revenue Refunding Bonds dated November 11, 2011, were issued to refund $1,340,000 of Waterworks and Sewer System Revenue Bonds, Series 2002 and $1,860,000 of Combination Tax and Water and Sewer Revenue Certificates of Obligation, Series 1998 and to pay costs related to the issuance of the bonds. The bonds are not subject to redemption prior to stated maturity. Interest rates range from 2.000% to 2.500%. Total maturity of this series is on August 15, The bonds constitute direct obligations of the City and are payable as to principal and interest from an annual ad valorem tax levied against all taxable property therein, within the limits prescribed by law, and by a lien on pledge of surplus net revenues of the City s combined waterworks and sewer system, as provided in the bond ordinance. The balance of these certificates at September 30, 2014, is $2,005,

104 Combination Tax and Water and Sewer Revenue Refunding Bonds, Series 2013 $5,730,000 of Revenue Refunding Bonds dated June 18, 2013, were issued for paying all or a portion of the City s contractual obligations incurred in connection with (i) drainage improvements throughout the City; and (ii) construction of improvements and extensions to the City s waterworks and sewer system; and (iii) legal, fiscal and engineering fees in connection with such projects. The City reserves the right, at its option, to redeem certificates having stated maturities on and after August 15, 2024, in whole or in part in principal amounts of $5000 or any integral multiple thereof, on August 15, 2023, or any date thereafter, at the par value thereof plus accrued interest to the date of the redemption. Interest rates range from 3.000% to 4.500%. Total maturity of this series is on August 15, The bonds constitute direct obligations of the City and are payable as to principal and interest from an annual ad valorem tax levied against all taxable property therein, within the limits prescribed by law, and by a lien on pledge of surplus net revenues of the City s combined waterworks and sewer system, as provided in the bond ordinance. The balance of these certificates at September 30, 2014, is $5,570,000. Future Requirements The annual requirements to amortize all certificates of obligation, tax notes, contractual obligations and revenue bonds outstanding as of September 30, 2014, are as follows: Fiscal Year Governmental Activities Business-type Activities Totals Ending Principal Interest Principal Interest Principal Interest 2015 $ 330,000 $ 30,065 $ 780,000 $ 386,934 $ 1,110,000 $ 416, ,000 19, , ,819 1,151, , ,000 9, , , , , ,000 8, , , , , ,000 6, , , , , ,000 10,328 3,020,000 1,078,900 3,155,000 1,089, ,910, ,150 2,910, , ,710,000 93,200 1,710,000 93,200 Totals $ 1,051,000 $ 84,337 $ 11,500,000 $ 3,398,410 $ 12,551,000 $ 3,482,747 45

105 The following is a summary of long-term debt transactions of the City for the year ended September 30, Beginning Ending Due Within Balance Increases Decreases Balance One Year Governmental activities: Certificates of obligation $ 365,000 $ - $ 115,000 $ 250,000 $ 120,000 Contractual obligation bonds 1,004, , , ,000 Compensated absences 305, , , ,347 59,869 Net pension obligation 291,109 4, ,826 - Total governmental activities 1,965, , ,386 1,646, ,869 Business-type activities: Combination tax and revenue certificates 12,230, ,000 11,500, ,000 Premiums on long-term debt 537,466-32, ,314 - Capital lease payable 160,167-51, ,110 53,355 Compensated absences 98,624 32,045 36,865 93,804 18,761 Net pension 77, ,860 - Total business-type activities 13,103,490 32, ,074 12,286, ,116 Defeasance of Bonds $ 15,069,113 $ 294,608 $ 1,431,460 $ 13,932,261 $ 1,237,985 In prior years, the City defeased certain bonds by placing the proceeds of refunding bonds in irrevocable trusts to provide for all future debt service payments on the defeased bonds. Accordingly, the trusts assets and liabilities for the defeased bonds are not included in the City s financial statements. At September 30, 2014, the outstanding balance of the defeased bonds is $2,180,000. Compensated Absences and Net Pension Obligations Compensated absences and the net pension obligations of the governmental activities and business-type activities have historically been liquidated by the General Fund and Water and Sewer Fund, respectively. H. Capital Leases Payable On November 3, 2006, the City entered into a lease-purchase agreement with Chase Equipment Leasing, Inc. to finance an electronic meter read project for the Water and Sewer Fund. The total cost of the project was $581,801. The interest rate is 4.5% per annum. The $478,191 proceeds of the lease-purchase agreement were deposited into an escrow account with the Bank of New York Trust Company, N.A. During the fiscal year ending September 30, 2009, the remaining lease proceeds of $129,404 were received. Future minimum leasepurchase commitments are as follows: Fiscal Year Ending 46 Business-type Activities 2015 $ 58, ,264 Total debt service requirements 116,528 Less: interest portion 7,418 Debt principal $ 109,110

106 I. Fund Balance As of September 30, 2014, governmental fund balance is composed of the following: Other Fund Balance Classification General Governmental Totals Nonspendable: Advances to other funds $ 274,237 $ - $ 274,237 Restricted: Retirement of long-term debt - 144, ,394 Capital acquisition and construction - 577, ,590 Tourism activities - 189, ,319 Economic development - 370, ,528 Crime control district - 344, ,005 Red Light Camera Enforce - 90,737 90,737 Assigned: Capital acquisition and construction - 23,425 23,425 Unassigned 1,776,039 ( 73,089) 1,702,950 Total governmental fund balance $ 2,050,276 $ 1,666,909 $ 3,717,185 V. OTHER INFORMATION A. Risk Management The City is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The City s risk management program encompasses obtaining property and liability insurance through Texas Municipal League (TML), an Intergovernmental Risk-Pool. The City has not had any significant reduction in insurance coverage and the amounts of insurance settlements have not exceeded insurance coverage for any of the last three years. The participation of the City in TML is limited to payment of premiums. During the year ended September 30, 2014, the City paid premiums to TML for provisions of various liability, property and casualty insurance. The City has various deductible amounts ranging from $250 to $25,000 on various policies. At year-end, the City did not have any significant claims. TML will be self-sustaining through member premiums and will reinsure through commercial companies for claims in excess of specified dollar amounts for each insured event. The City also provides workers compensation insurance on its employees through TML. Workers compensation is subject to change when audited by TML. At year-end, September 30, 2014, the City believed the amounts paid on workers compensation would not change significantly from the amounts recorded. 47

107 B. Deferred Compensation Plan The City offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all fulltime government employees at their option, permits participant to defer a portion of their salary until future years. The plan is administered by the Public Employees Benefit Services Corporation (PEBSCO). The City does not contribute to this plan nor does it have any liability for this plan. C. Retirement Plan Plan Description The City provides pension benefits for all of its eligible employees through a nontraditional, joint contributory, hybrid defined benefit plan in the statewide Texas Municipal Retirement System (TMRS) an agent multiple-employer public employee retirement system. The plan provisions that have been adopted by the City are within the options available in the governing state statutes of TMRS. TMRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information (RSI) for TMRS; the report also provides detailed explanations of the contributions, benefits and actuarial methods and assumptions used by the System. This report may be obtained by writing to TMRS, P. O. Box , Austin, Texas or by calling ; in addition, the report is available on TMRS website at The plan provisions are adopted by the governing body of the City, within the options available in the state statutes governing TMRS. Plan provisions for the City for 2014 and 2013, were the same and were as follows: Plan Year Plan Year Plan Year Employee deposit rate 7% 7% 7% Matching ratio (City to employee) 2 to 1 2 to 1 2 to 1 Years required for vesting 5 years 5 years 5 years Service retirement eligibility (expressed as age/years of service) 60/5, 0/20 60/5, 0/20 60/5, 0/20 Updated service credit 100% repeating, 100% repeating, 100% repeating, transfers transfers transfers Annuity increase (to retirees) 70% of CPI 70% of CPI 70% of CPI repeating repeating repeating 48

108 Contributions Under the state law governing TMRS, the contribution rate for each city is determined annually by the actuary, using the Projected Unit Credit actuarial cost method. This rate consists of the normal cost contribution rate and the prior service cost contribution rate, which is calculated to be a level percent of payroll from year to year. The normal cost contribution rate finances the portion of an active member s projected benefit allocated annually; the prior service contribution rate amortizes the unfunded (overfunded) actuarial liability (asset) over the applicable period for that city. Both the normal cost and prior service contribution rates include recognition of the projected impact of annually repeating benefits, such as Updated Service Credits and Annuity Increases. The City contributes to the TMRS plan at an actuarially determined rate. Both the employees and the City make contributions monthly. Since the City needs to know its contribution rate in advance for budgetary purposes, there is a one-year delay between the actuarial valuation that serves as the basis for the rate and the calendar year when the rate goes into effect. The annual pension cost and net pension obligation/(asset) are as follows: Annual required contribution (ARC) $ 724,258 $ 679,284 $ 717,708 Interest on net pension obligation 25,784 25,304 22,819 Adjustment to ARC ( 22,492) ( 22,232) ( 19,615) Annual pension cost (APC) 727, , ,912 Contributions made 722, , ,414 Increase (decrease) in NPO 5,344 6,856 35,498 Net pension obligation/(asset), beginning 368, , ,988 Net pension obligation/(asset), ending $ 373,686 $ 368,342 $ 361,486 Contributions as a percentage of APC 99.27% 99.00% 95.08% Actuarial Assumptions The required contribution rates for fiscal year 2014 were determined as part of the December 31, 2013 actuarial valuation. Additional information as of the latest actuarial valuation, December 31, 2013, also follows: Actuarial valuation date 12/31/ /31/ /31/2013 Actuarial cost method Projected unit credit Projected unit credit Projected unit credit Amortization method Level percent of payroll Level percent of payroll Level percent of payroll GASB 25 Equivalent single 27.2 years; 26.2 years; 26.2 years; amortization period Closed period Closed period Closed period Amortization period for new gains/losses 30 years 30 years 30 years Asset valuation method 10-year 10-year 10-year smoothed market smoothed market smoothed market Actuarial assumptions: Investment rate of return* 7.00% 7.00% 7.00% Projected salary increases* Varies by age and service Varies by age and service Varies by age and service *Includes inflation at: 3.00% 3.00% 3.00% Cost-of-living adjustments 2.10% 2.10% 2.10% 49

109 Funded Status The funded status as of December 31, 2013 is presented as follows: Actuarial UAAL as a Actuarial Actuarial Accrued Percentage of Valuation Value of Liability Funded Unfunded AAL Covered Covered Date Assets (AAL) Ratio (UAAL) Payroll Payroll 12/31/2013 $ 26,883,077 $ 22,582, % $ 4,300,315 $ 4,086, % Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. Actuarial calculations are based on the benefits provided under the terms of the substantive plan in effect at the time of each valuation, and reflect a long-term perspective. Consistent with that perspective, actuarial methods and assumptions used include techniques that are designed to reduce short-term volatility in actuarial accrued liabilities and the actuarial value of assets. The Schedule of Funding Progress, presented as Required Supplementary Information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability of benefits. D. Other Postemployment Benefits Supplemental Death Benefits Fund The City also participates in the cost sharing multiple-employer defined benefit group-term life insurance plan operated by the Texas Municipal Retirement System (TMRS) known as the Supplemental Death Benefits Fund (SDBF). The City elected, by ordinance, to provide group term life insurance coverage to both current and retired employees. The City may terminate coverage under and discontinue participation in the SDBF by adopting an ordinance before November 1 of any year to be effective the following January 1. The death benefit for active employees provides a lump sum payment approximately equal to the employee s annual salary (calculated based on the employee s actual earnings, for the 12- month period preceding the month of death); retired employees are insured for $7,500; this coverage is an other postemployment benefit, or OPEB. The City contributes to the SDBF at a contractually required rate as determined by an annual actuarial valuation. The rate is equal to the cost of providing one-year term life insurance. The funding policy for the SDBF program is to assure that adequate resources are available to meet all death benefit payments for the upcoming year; the intent is not to pre-fund retiree term life insurance during employees entire careers. The City s contributions to the TMRS SDBF for the years ended 2014, 2013 and 2012 were $12,260, $9,151, and $9,974, respectively, which equaled the required contributions each year. 50

110 Schedule of Contribution Rates (retiree-only portion of rates) Plan/ Required Actual Percentage Calendar Contribution Contribution of ARC Year Rate Rate Contributed E. Contingent Liabilities % 0.03% 100% % 0.04% 100% % 0.04% 100% Federal and State Programs Federal and state funding received related to various grant programs are based upon periodic reports detailing reimbursable expenditures made, in compliance with program guidelines, to the grantor agency. These programs are governed by various statutory rules and regulations of the grantors. Amounts received and receivable under these various funding programs are subject to periodic audit and adjustment by the funding agencies. To the extent, if any, the City has not complied with all the rules and regulations with respect to performance, financial or otherwise, adjustment to or return of fund monies may be required. As it pertains to other matters of compliance, in the opinion of the City s administration, there are no significant contingent liabilities relating to matters of compliance and accordingly, no provision has been made in the accompanying financial statements for such contingencies. F. Contracts and Commitments Wastewater Treatment On June 8, 1987, the City entered into a 30-year agreement with the City of Fort Worth whereby Fort Worth agreed to provide wastewater treatment to the City. The agreement allows the City to connect its wastewater system to the Fort Worth wastewater system. Charges to the City are based upon cost of service rate studies performed by independent utility rate consultants. This contract has been amended various times during the years. Charges during 2014 for the treatment of wastewater by the City of Fort Worth were $210,502. Water Treatment The City entered into a 20-year agreement with the City of Fort Worth effective January 1, 2011, through September 30, 2031, whereby Fort Worth agreed to provide treated to the City. Rates to purchase the water will be based upon a cost-of-service rate study conducted every three years by independent utility rate consultants. Charges during 2014 for the purchase of treated water from the City of Fort Worth were $587,

111 Transportation of Sewerage On May 13, 1986, the City entered into an agreement with the City of Hurst to allow sewerage to be metered to Hurst then transported through the Trinity River Authority Calloway Branch sewer line to the City of Fort Worth. Charges to the City are based upon current sewer rates charged to Hurst by the Trinity River Authority and a $75.00 per month meter service charge. Charges during 2014 from the City of Hurst were $97,

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113 REQUIRED SUPPLEMENTARY INFORMATION

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115 CITY OF RICHLAND HILLS, TEXAS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL GENERAL FUND FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 Variance With Final Budget Budgeted Amounts Favorable Original Final Actual (Unfavorable) REVENUES Taxes: General property $ 2,125,207 $ 2,125,207 $ 2,121,307 $( 3,900) Sales and use 1,822,130 1,822,130 2,022, ,620 Franchise 558, , ,857 ( 24,246) Fines and fees 425, , ,735 ( 5,405) Licenses and permits 102, , ,111 98,941 Charges for services 285, , ,449 ( 64,545) Intergovernmental , ,887 Interest income 1,118 1, ( 295) Miscellaneous 66,732 66,732 65,487 ( 1,245) Total revenues 5,386,594 5,386,594 5,746, ,812 EXPENDITURES Current: General government 1,890,486 1,890,486 2,118,860 ( 228,374) Public safety 4,503,537 4,503,537 4,331, ,984 Public works 268, , ,938 ( 4,258) Culture and recreation 360, , ,525 5,625 Parks and beautification 72,700 72,700 51,492 21,208 Community development 402, , ,212 13,905 Capital outlay 351, , , ,195 Debt service: Principal 72,000 72,000 72,000 - Interest and fiscal charges 6,128 6,128 5, Total expenditures 7,927,277 7,927,277 7,745, ,482 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES ( 2,540,683) ( 2,540,683) ( 1,999,389) 541,294 OTHER FINANCING SOURCES (USES) Proceeds from sale of general capital assets 7,500 7,500 - ( 7,500) Transfers in 2,210,453 2,210,453 2,067,191 ( 143,262) Total other financing sources (uses) 2,217,953 2,217,953 2,067,191 ( 150,762) NET CHANGE IN FUND BALANCE ( 322,730) ( 322,730) 67, ,532 FUND BALANCE, BEGINNING 1,982,474 1,982,474 1,982,474 - FUND BALANCE, ENDING $ 1,659,744 $ 1,659,744 $ 2,050,276 $ 390,532 53

116 CITY OF RICHLAND HILLS, TEXAS TEXAS MUNICIPAL RETIREMENT SYSTEM SCHEDULE OF FUNDING PROGRESS Actuarial UAAL as a Actuarial Actuarial Accrued Unfunded Percentage Valuation Value of Liability Funded AAL Covered of Covered Date Assets (ALL) Ratio (UAAL) Payroll Payroll 12/31/11 $ 19,416,364 $ 23,636, % $ 4,219,992 $ 3,982, % 12/31/12 20,844,012 24,723, % 3,879,869 3,967, % 12/31/13 22,582,762 26,883, % 4,300,335 4,086, % 54

117 CITY OF RICHLAND HILLS, TEXAS NOTES TO REQUIRED SUPPLEMENTARY INFORMATION SEPTEMBER 30, STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary Information Annual budgets are adopted on a basis consistent with generally accepted accounting principles for the General Fund, Richland Hills Development Corporation, Crime Control and Prevention District, Red Light Enforce, and Hotel Occupancy Tax Special Revenue Funds, Debt Service Fund, and all the Capital Projects Funds. All annual appropriations lapse at fiscal year-end. At least 35 days prior to the beginning of the budget year, October 1, the City Manager will submit the proposed City budget for the ensuing year to the City Council. From its date of submission, the proposed budget shall be a public record. The City Council shall hold a public hearing on the proposed budget at least 14 days before the beginning of the budget year. At least 10 days notice of such public hearing will be given by notice in the official newspaper. After a hearing, the City Council may make such changes it deems proper in the proposed budget and adopt a final budget prior to the beginning of the budget year. All budget hearings and actions on the budget shall be open to the public. If a final budget is not adopted by the beginning of the budget year, the proposed budget of the City Manager shall be deemed to have been approved. The budget shall go into effect on the first day of the budget year. The budget may be amended during the year only after complying with the notice procedure called for above for adoption of the budget. The City Manager is authorized to transfer budgeted amounts between line items and departments within any fund; however, any revisions that alter the total expenditures of any fund must be approved by the City Council. Encumbrances for goods or purchased services are documented by purchase orders or contracts. Under Texas law, appropriations lapse at September 30, and encumbrances outstanding at the time are to be either canceled or appropriately provided for in the subsequent year s budget. There were no outstanding encumbrances at the end of the year that were provided for in the subsequent year s budget. The City s budget was properly amended throughout the year as needed. B. Excess of Expenditures Over Appropriations The Red Light Camera Enforcement Fund had expenditures in excess of appropriations of $50,016. The Debt Service Fund had expenditures in excess of appropriations of $294 and the Oil and Gas Lease Capital Projects fund had expenditures in excess of appropriations of $28,

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119 APPENDIX C FORMS OF BOND COUNSEL S OPINIONS

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121 Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. CITY OF RICHLAND HILLS, TEXAS GENERAL OBLIGATION BONDS, SERIES 2016 AS BOND COUNSEL for the City of Richland Hills, Texas (the "City"), the issuer of the bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which Bonds are issued in the aggregate principal amount of $. The Bonds bear interest from the date and mature on the dates specified on the face of the Bonds, and are subject to redemption prior to maturity on the dates and in the manner specified on the face of the Bonds, all in accordance with the ordinance of the City authorizing the issuance of the Bonds (the "Ordinance"). Terms used herein and not otherwise defined shall have the meaning given in the Ordinance. WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution and laws of the State of Texas, the charter of the City, certified copies of the proceedings of the City, and other proofs authorizing and relating to the issuance of the Bonds, including one of the executed Bonds (Bond No. R-1); however, we express no opinion with respect to any statement of insurance printed on the Bonds. BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Bonds have been authorized, issued and delivered in accordance with the Constitution and laws of the State of Texas, and constitute valid and legally binding obligations of the City; and that the ad valorem taxes, upon all taxable property within the City, necessary to pay the interest on and principal of the Bonds, have been pledged for such purpose, within the limits prescribed by the Constitution and the charter of the City. The opinion hereinbefore expressed is qualified to the extent that the obligations of the City, and the enforceability thereof, are subject to applicable bankruptcy, reorganization or similar laws relating to or affecting creditors' rights generally, and the exercise of judicial discretion in accordance with general principles of equity. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants, regarding the use and investment of the proceeds of the Bonds and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or upon a failure by the City to comply with

122 such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as Bond Counsel for the City, and, in that capacity, we have been engaged by the City for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the City, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on certificates executed by officials of the City as to the current outstanding indebtedness of, and assessed valuation of taxable property within, the City. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer. We observe that the City has covenanted not to take any action, or omit to take any

123 action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. Respectfully,

124 Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Certificates of Obligation, assuming no material changes in facts or law. CITY OF RICHLAND HILLS, TEXAS COMBINATION TAX AND WATERWORKS AND SEWER SYSTEM REVENUE CERTIFICATES OF OBLIGATION, SERIES 2016 AS BOND COUNSEL for the City of Richland Hills, Texas (the "City"), the issuer of the certificates of obligation described above (the "Certificates of Obligation"), we have examined into the legality and validity of the Certificates of Obligation, which Certificates of Obligation are issued in the aggregate principal amount of $. The Certificates of Obligation bear interest from the date and mature on the dates specified on the face of the Certificates of Obligation, and are subject to redemption prior to maturity on the dates and in the manner specified on the face of the Certificates of Obligation, all in accordance with the ordinance of the City authorizing the issuance of the Certificates of Obligation (the "Ordinance"). Terms used herein and not otherwise defined shall have the meaning given in the Ordinance. WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution and laws of the State of Texas, and a transcript of certified proceedings of the City, and other pertinent instruments authorizing and relating to the issuance of the Certificates of Obligation, including one of the executed Certificates of Obligation (Certificate of Obligation No. R-1); however, we express no opinion with respect to any statement of insurance printed on the Certificates of Obligation. BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Certificates of Obligation have been authorized, issued and delivered in accordance with law, and constitute valid and legally binding obligations of the City; that the interest on and principal of the Certificates of Obligation shall be payable from the proceeds of an ad valorem tax levied and pledged for such purpose, within the limit prescribed by law; and that the principal of and interest on the Certificates of Obligation are additionally secured by and payable from a limited pledge (not to exceed $1,000) of the surplus revenues from the operation of the City's combined waterworks and sewer system remaining after payment of all operation and maintenance expenses thereof and any other obligations heretofore or hereafter incurred to which such revenues have been or shall be encumbered by a lien on and pledge of such revenues superior to the lien on and pledge of such revenues to the Certificates of Obligation. The opinion hereinbefore expressed is qualified to the extent that the obligations of the City, and the enforceability thereof, are subject to applicable bankruptcy, reorganization or similar laws relating to or affecting creditors' rights generally, and the exercise of judicial discretion in accordance with general principles of equity. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Certificates of Obligation is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Certificates of Obligation are not

125 "specified private activity bonds" and that, accordingly, interest on the Certificates of Obligation will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants, regarding the use and investment of the proceeds of the Certificates of Obligation and the use of the property financed therewith. We call your attention to the fact that if such representations are determined to be inaccurate or upon a failure by the City to comply with such covenants, interest on the Certificates of Obligation may become includable in gross income retroactively to the date of issuance of the Certificates of Obligation. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Certificates of Obligation. WE CALL YOUR ATTENTION TO THE FACT that interest on tax-exempt obligations, such as the Certificates of Obligation, is included in a corporation s alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations under section 55 of the Internal Revenue Code of WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Certificates of Obligation, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Certificates of Obligation is as Bond Counsel for the City, and, in that capacity, we have been engaged by the City for the sole purpose of rendering an opinion with respect to the legality and validity of the Certificates of Obligation under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Certificates of Obligation for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the City, or the disclosure thereof in connection with the sale of the Certificates of Obligation, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Certificates of Obligation and have relied solely on certificates executed by officials of the City as to the current outstanding indebtedness of the City, the assessed valuation of taxable property within the City, and the revenues of the City additionally pledged to the payment of the Certificates of Obligation. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Certificates of Obligation has been limited as described therein. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become

126 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 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 the Service will commence an audit of the Certificates of Obligation. 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 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 of Obligation as includable in gross income for federal income tax purposes. Respectfully,

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