ORDER NO. 31594 ISSUANCE OF $4,350,000 IN PRINCIPLE AMOUNT OF KERR COUNTY, TEXAS, TAX NOTES, SERIES 2010, LEVYING OF TAX FOR PAYMENT, EXECUTION OF PAYING AGENT/REGISTRAR AGREEMENT, AND PURCHASE CONTRACT, AND APPROVE OTHER INSTRUMENTS AND PROCEDURES AND SALES RELATED THERETO Came to be heard this the 11th day of January, 2010, with a motion made by Commissioner Williams, seconded by Commissioner Baldwin, the Court unanimously approved by a vote of 4-0-0 to: Approve the issuance of $4,350,000 in principal amount of Kerr County, Texas tax notes, series 2010, and authorizing the levying of a tax for payment thereof, and authorizing execution of the paying agent/registrar agreement and a purchase contract, and authorizing and approving other instruments and procedures related thereto, and the sale of those bonds. ~ I i~ COMMISSIONERS COURT AGENDA REQUEST V PLEASE FURNISH ONE ORIGINAL AND ONE COPY OF THIS REQUEST AND DOCUMENTS TO BE REVIEWED BY THE COURT. MADE BY: Judge Tinley OFFICE: County Judge MEETING DATE: January 11, 2010 TIME PREFERRED: SUBJECT: Consider, discuss and take appropriate action on Order Authorizing the Issuance of approximately $4,550,000 in principal amount of Kerr County, Texas Tax Notes, Series 2010; Authorizing the levying of a tax for the payment thereof; Authorizing execution of a paying agent/registrar agreement and a purchase contract; and Authorizing and approving other instruments and procedures and sale related thereto. EXECUTIVE SESSION REQUESTED: (PLEASE STATE REASON) NAME OF PERSON ADDRESSING THE COURT: Judge Tinley/Jeannie Hargis ESTIMATED LENGTH OF PRESENTATION: IF PERSONNEL MATTER -NAME OF EMPLOYEE: Time for submitting this request for Court to assure that the matter is posted in accordance with Title 5, Chapter 551 and 552, Government Code, is as follows: Meeting scheduled for Mondays: 5:00 P.M. previous Tuesday. THIS REQUEST RECEIVED BY: THIS REQUEST RECEIVED ON: All Agenda Requests will be screened by the County Judge's Office to determine if adequate information has been prepared for the Court's formal consideration and action at time of Court Meetings. Your cooperation will be appreciated and contribute towards you request being addressed at the earliest opportunity. See Agenda Request Rules Adopted by Commissioners' Court. KERB COUNTY, TEXAS TAX NOTES, SERIES 2010 DRAFT DATE: DECEMBER 30.2009 TABLE OF CONTENTS PRIMARY FINANCING DOCUMENTS AND AGREEMENTS Note Order ................................................................ 1 Purchase Contract .......................................................... 2 Final Official Statement ...................................................... 3 Paying Agent/Registrar Agreement ............................................. 4 Specimen Note ............................................................. 5 Blanket Issuer Letter of Representations ......................................... 6 DOCUMENTS RELATED TO MUNICIPAL BOND INSURANCE Financial Guaranty Insurance Policy ............................................ 7 Bond Insurer Certificate ...................................................... 8 Opinion of Bond Insurer ..................................................... 9 DOCUMENTS RELATED TO TAX EXEMPTION Federal Tax Certificate ...................................................... 10 Form 8038-G .............................................................. 11 CERTIFICATES Certificate of County Auditor ................................................. 12 General Certificate .......................................................... 13 Signature Identification and No-Litigation Certificate .............................. 14 Closing Certificate .......................................................... 15 MISCELLANEOUS DOCUMENTS Instruction Letters to Attorney General and Comptroller of Public Accounts ............ 16 Closing Memorandum ....................................................... 17 Receipt for Proceeds ........................................................ 18 Rating Letters .............................................................. 19 OPINIONS Attorney General's Opinion with Comptroller's Registration Certificate ................ 20 Opinion of Underwriter's Counsel .............................................. 21 Opinion of Bond Counsel .................................................... 22 Supplemental Opinion of Bond Counsel ......................................... 23 CERTIFICATE FOR ORDER THE STATE OF TEXAS COUNTY OF KERR I, the undersigned County Clerk of Kerr County, Texas (the "County") hereby certify as follows: 1. The Commissioners Court of the County convened in REGULAR MEETING ON THE 11 m OF JANUARY, 2010, at the County Courthouse, and the roll was called of the duly constituted officers and members of said Commissioners Court, to wit: Pat Tinley, County Judge H.A. "Buster" Baldwin, Commissioner, Precinct 1 William "Bill" Williams, Commissioner, Precinct 2 Jonathan Letz, Commissioner, Precinct 3 Bruce Oehler, Commissioner, Precinct 4 and all of said officers and members of said Commissioners Court were present, except the following absentees: ,thus constituting a quorum. Whereupon, among other business, the following was transacted at said Meeting: a written ORDER AUTHORIZING THE ISSUANCE OF $ IN PRINCIPAL AMOUNT OF KERB COUNTY, TEXAS TAX NOTES, SERIES 2010; AUTHORIZING THE LEVYING OF A TAX FOR THE PAYMENT THEREOF; AUTHORIZING EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND A PURCHASE CONTRACT; AND AUTHORIZING AND APPROVING OTHER INSTRUMENTS AND PROCEDURES RELATED THERETO was duly introduced for the consideration of said Commissioners Court. It was then duly moved and seconded that said Order be adopted; and, after due discussion, said motion carrying with it the adoption of said Order, prevailed and carried by the following vote: AYES: NOES: ABSTENTIONS: 2. A true, full and correct copy of the aforesaid Order adopted at the Meeting described in the above and foregoing paragraph is attached to and follows this Certificate; said Order has been duly recorded in said Commissioners Court's minutes of said Meeting; the above and foregoing paragraph is a true, full and correct excerpt from said Commissioners Court's minutes of said Meeting pertaining to the passage of said Order; the persons named in the above and foregoing paragraph are the duly chosen, qualified and acting officers and members of said Commissioners Court as indicated therein; each of the officers and members of said Commissioners Court was duly and sufficiently notified officially and personally, in advance, of the time, place and purpose of the aforesaid Meeting, and that said Order would be introduced and considered for passage at said Meeting, and each of said officers and members consented, in advance, to the holding of said Meeting for such purpose; and that said Meeting was open to the public and public notice of the time, place and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code. SIGNED AND SEALED the l 1~`' day of January, 2010. (SEAL) County Clerk, Kerr County, Texas CERTIFICATE OF COUNTY AUDITOR STATE OF TEXAS COUNTY OF KERR I, Jeannie Hargis, County Auditor of KERR COUNTY, TEXAS, hereby certify in connection with the issuance of $ in principal amount of KERR COUNTY, TEXAS TAX NOTES, SERIES 2010 (the "Notes") that in my capacity as County Auditor, and in compliance with Section 1431.002, Texas Government Code (which provides that the Commissioners Court may authorize the issuance of the Notes "on the recommendation of the county auditor"), I recommended to the Commissioners Court the issuance of the Notes on the financial terms, and for the purpose of financing the "Projects", set forth in the Order authorizing the issuance of the Notes approved by the Commissioners Court on January 11, 2010. Executed this 11`" day of January, 2010. Jeannie Hargis County Auditor Kerr County, Texas GENERAL CERTIFICATE THE STATE OF TEXAS COUNTY OF KERR We, the undersigned, hereby officially certify that we are the County Judge and County Clerk, respectively, of KERB COUNTY, TEXAS (the "County"), and we further certify as follows: 1. This Certificate is given for the benefit of the Attorney General of the State of Texas and all parties interested in KERB CourrTV, TEXAS Tax NOTES, SERIES 2010 (the "Notes"), dated as of January 15, 2010, and authorized by an order passed by the Commissioners Court of the County on January 11, 2010. 2. All meetings of the Commissioners Court of the County at which action was taken in preparation for or in connection with the issuance of the Notes occurred at the usual designated meeting place, being the Kerr County Courthouse. 3. No litigation of any nature has ever been filed pertaining to, affecting, questioning, or contesting: (a) the order which authorized the Notes; (b) the issuance, execution, delivery, payment, security or validity of the Notes, (c) the authority of the Commissioners Court and the officers of the County to issue, execute and deliver the Notes, (d) the validity of the corporate existence of the County, or (e) the current tax rolls of the County; and no litigation is pending pertaining, affecting, questioning, or contesting the current boundaries of the County. 4. The currently effective ad valorem tax appraisal roll of the County (the "Tax Roll") is the Tax Roll prepared and approved during the calendar year 2009, being the most recently approved Tax Roll of the County; that the taxable property in the County has been appraised, assessed, and valued as required and provided by the Texas Constitution and Property Tax Code (collectively, "Texas law");that the Tax Roll for said year has been submitted to the Commissioners Court of the County as required by Texas law, and has been approved and recorded by the Commissioners Court; and according to the Tax Roll for said year the net aggregate taxable value of taxable property in the County (after deducting the amount of all applicable exemptions required or authorized under Texas law), upon which the annual ad valorem tax of the County has been or will be imposed and levied, is $3,132,985,438. 5. Attached hereto as Exhibit A is a true, full and correct schedule and statement of the aforesaid proposed Notes, and all presently outstanding tax indebtedness of the County, and attached hereto as Exhibit B is a combined debt service schedule for all outstanding tax indebtedness of the County (including the aforesaid proposed Notes). 2 6. The following persons are the duly elected members of the Commissioners Court of the County as of the date hereof: Pat Tinley H.A. "Buster" Baldwin William "Bill" Williams Jonathan Letz Bruce Oehler County Judge Commissioner, Precinct 1 Commissioner, Precinct 2 Commissioner, Precinct 3 Commissioner, Precinct 4 7. The following persons are the duly appointed or elected County Clerk, County Auditor and County Treasurer of the County as of the date hereof: Peggy L. Friebele Jeannie Hargis Mindy Williams County Clerk County Auditor County Treasurer [The remainder of this page intentionally left blank] 3 SIGNED AND SEALED THIS Il TH DAY OF JANUARY, 2010. County Judge Kerr County, Texas County Clerk Kerr County, Texas (SEAL) [SIGNATURE PAGE TO THE GENERAL CERTIFICATE] EXHIBIT A SCHEDULE OF ALL OUTSTANDING GENERAL OBLIGATION INDEBTEDNESS OF KERB COUNTY, TEXAS THE PROPOSED TAX NOTES TAX NOTES, SERIES 2010, dated January 15, 2010, to be outstanding in the aggregate principal amount of ~ ,bearing interest and maturing as set forth in the Order authorizing such Notes. ALL PRESENTLY OUTSTANDING TAX INDEBTEDNESS: TITLE OF OUTSTANDING OBLIGATIONS DATED DATE CURRENT OUTSTANDING PRINCIPAL AMOUNT Limited Tax General Obligation Bonds, Series 1994 02/01/1994 $1,515,000 Certificates of Obligation, Series 2005 01/15/2005 390,000 Tax Notes, Series 2008 03/01/2008 1,645.000 A-1 EXHIBIT B COMBINED DEBT SERVICE SCHEDULE B-1 SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE We, the undersigned County Judge and County Clerk, respectively, of KERR COUNTY, TEXAS (the "County"), hereby certify as follows: (a) This Certificate is executed and delivered with reference to the KERR COUNTY, TEXAS TAX NOTES, SERIES 2010, dated January 15, 2010, authorized by an order passed by the Commissioners Court of the County on January 11, 2010 (the "Notes"). (b) Each of us signed the Notes by manually executing or causing facsimiles of our manual signatures to be printed or lithographed on each of the Notes, and we hereby adopt said facsimile signatures as our own, respectively, and declare that said facsimile signatures constitute our signatures the same as if we had manually signed each of the Notes. (c) The Notes are substantially in the form, and each of them has been duly executed and signed in the manner, prescribed in the order authorizing the issuance thereof. (d) At the time we so executed and signed the Notes we were, and at the time of executing this Certificate we are, the duly chosen, qualified, and acting officers indicated therein, and authorized to execute and sign the same. (e) No litigation of any nature has been filed or is now pending or, to our knowledge, threatened, to restrain or enjoin the issuance or delivery of any of the Notes, or which would affect the provision made for their payment or security, or in any manner questioning the proceedings or authority concerning the issuance of the Notes, and that so far as we know and believe no such litigation is threatened. (f) Neither the corporate existence nor boundaries of the County is being contested; no litigation has been filed or is now pending or, to our knowledge, threatened, which would affect the authority of the officers of the County to issue, execute, sign, and deliver any of the Notes; and no authority or proceedings for the issuance of any of the Notes have been repealed, revoked, or rescinded. (g) We have caused the official seal of the County to be impressed, or printed, or lithographed on each of the Notes; and said seal on each of the Notes has been duly adopted as, and is hereby declared to be, the official seal of the County. EXECUTED and delivered this MANUAL SIGNATURES OFFICIAL TITLES Pat Tinley, County Judge Peggy L. Friebele, County Clerk Before me, on this day personally appeared the foregoing individuals, known to me to be the officers whose true and genuine signatures were subscribed to the foregoing instrument in my presence. Given under my hand and seal of office this Notary Public Typed Name (My Commission Expires (Notary Seal) [SIGNATURE PAGE TO THE SIGNATURE IDENTIFICATION AND NO-LITIGATION CERTIFICATE] January 11, 2010 Texas State Comptroller of Public Accounts Cash and Securities Management Division Thomas Jefferson Rusk Building 208 East 10th Street, 4th Floor, Room 448 Austin, Texas 78701-2407 Attn: Melissa Mora RE: KERR COUNTY, TEXAS TAX NOTES, SERIES 2010 Ladies and Gentlemen: The Attorney General will deliver to you the above-described issues of obligations. At such time as you have registered such obligations, this will be your authority to deliver them to an authorized representative of McCall, Parkhurst & Horton L.L.P. who will deliver said obligations to the Paying Agent/Registrar named in the obligations for delivery to the purchasers thereof. At the time you have registered the obligations, please deliver three copies of the Attorney General's opinion and the Comptroller's Signature Certificate covering said issue of obligations to a representative of McCall, Parkhurst & Horton L.L.P., or send such documents by overnight courier to Thomas K. Spurgeon, McCall, Parkhurst & Horton L.L.P., 700 N. St. Mary's, Suite 1525, San Antonio, Texas 78205. Sincerely yours, KERB COUNTY, TEXAS County Judge cc: Attorney General of Texas January 11, 2010 The Attorney General of Texas Public Finance Division 300 W. 15 Street, 7`"Floor Austin, Texas 78701 RE: KERR COUNTY, TEXAS TAX NOTES, SERIES 2010 Ladies and Gentlemen: It is requested that you examine the above issues of obligations and the proceedings authorizing their issuance. We enclose herewith one signed but undated copy of the Signature Identification and No- Litigation Certificate. Upon approval of the obligations, you are authorized to insert the date of approval in said Signature Certificate. If any litigation should develop before you have approved the obligations, we will notify you at once both by telephone and telecopy. With this assurance you can rely upon the absence of any such litigation at the time you approve the obligations unless we advise you otherwise. After you have examined the obligations, kindly deliver them to the Office of the Comptroller of Public Accounts of the State of Texas. The Comptroller has received instructions as to disposition of such obligations following their registration. Sincerely yours, KERR COUNTY, TEXAS County Judge cc: Comptroller of Public Accounts RECEIPT FOR PROCEEDS The undersigned hereby certifies as follows: (a) This Receipt is executed and delivered with reference to the KERB COUNTY, TEXAS TAx NOTES, SERIES 2010 (the "Notes"), dated January 15, 2010, in the aggregate principal amount of $ ,authorized by an order passed by the Commissioners Court of KERR COUNTY, TEXAS (the "County") on January 11, 2010. (b) The undersigned is the duly chosen, qualified, and acting County Treasurer of the County. (c) The Notes have been duly delivered to the initial purchaser thereof, namely SOUTHWEST SECURITIES, INC. (d) The Notes have been paid for in full by said purchaser concurrently with the delivery of this Receipt, and the County has received, and hereby acknowledges receipt of, the agreed purchase price for the Notes, being $ (which amount is equal to par, plus/less a net original issue premium/discount of $ ,and less Underwriters' discount of $ ), plus accrued interest. EXECUTED and delivered this KERR COUNTY, TEXAS Mindy Williams, County Treasurer DRAFT DATE: DECEMBER 30, 2009 ORDER AUTHORIZING THE ISSUANCE OF $ IN PRINCIPAL AMOUNT OF KERB COUNTY, TEXAS TAX NOTES, SERIES 2010; AUTHORIZING THE LEVYING OF A TAX FOR THE PAYMENT THEREOF; AUTHORIZING EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND A PURCHASE CONTRACT; AND AUTHORIZING AND APPROVING OTHER INSTRUMENTS AND PROCEDURES RELATED THERETO .DATE OF APPROVAL: JANUARY I1, 2010 TABLE OF CONTENTS Recitals ............................................................. 1 Section 1. AMOUNT AND PURPOSE OF THE NOTES . ....................... 2 Section 2. DESIGNATION, DATE, DENOMINATIONS, NUMBERS, AND MATURITIES OF NOTES ...................................... 2 Section 3. INTEREST .................................................... 3 Section 4. CHARACTERISTICS OF THE NOTES; APPROVAL OF PAYING AGENT/REGISTRAR AGREEMENT ..................... 3 Section 5. FORM OF NOTE .............................................. 7 Section 6. INTEREST AND SINKING FUND; TAX LEVY ..................... 13 Section 7. CONSTRUCTION FUND ........................................ 14 Section 8. INVESTMENTS ............................................... 14 Section 9. EMPOWERED ................................................ 14 Section 10. DEFEASANCE OF THE NOTES .................................. 14 Section 11. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED NOTES ....................................................... 16 Section 12. CUSTODY, APPROVAL, AND REGISTRATION OF THE NOTES; BOND COUNSEL'S OPINION, BOND INSURANCE, AND CUSIP NUMBERS ....................................... 17 Section 13. COVENANTS REGARDING TAX-EXEMPTION OF INTEREST ON THE NOTES ............................................... 17 Section 14. CONTINUING DISCLOSURE UNDERTAKING ..................... 20 Section 15. SALE AND DELIVERY OF THE NOTES .......................... 23 Section 16. APPROVAL OF OFFICIAL STATEMENT .......................... 23 Section 17. AUTHORITY FOR OFFICERS TO EXECUTE DOCUMENTS AND APPROVE CHANGES ......................................... 23 Section 18. ORDER A CONTRACT; AMENDMENTS .......................... 24 Section 19. SECURITY INTEREST ......................................... 24 -i- Section 20. REMEDIES IN EVENT OF DEFAULT ............................. 25 Section 2I . INTERESTED PARTIES ........................................ 25 Section 22. MUNICIPAL BOND INSURANCE POLICY ........................ 25 Section 23. INCORPORATION OF RECITALS ................................ 25 Section 24. SEVERABILITY ............................................... 25 Section 25. EFFECTIVE DATE ............................................. 26 SIGNATURES PAYING AGENT/REGISTRAR AGREEMENT ............................. Exhibit A DESCRIPTION OF ANNUAL FINANCIAL INFORMATION ................. Exhibit B FORM OF PURCHASE AGREEMENT .................................... Exhibit C REQUIREMENTS OF INSURER RELATING TO MUNICIPAL BOND INSURANCE POLICY ............................. Exhibit D -ii- ORDER AUTHORIZING THE ISSUANCE OF $ IN PRINCIPAL AMOUNT OF KERB COUNTY, TEXAS TAX NOTES, SERIES 2010; AUTHORIZING THE LEVYING OF A TAX FOR THE PAYMENT THEREOF; AUTHORIZING EXECUTION OF A PAYING AGENT/REGISTRAR AGREEMENT AND A PURCHASE CONTRACT; AND AUTHORIZING AND APPROVING OTHER INSTRUMENTS AND PROCEDURES RELATED THERETO STATE OF TEXAS COUNTY OF KERR WHEREAS, KERR COUNTY, TEXAS (the "Issuer" or the "County") is a political subdivision, and is operating and existing under the Constitution and laws, of the State of Texas; and WHEREAS, the Commissioners Court now deems it necessary to borrow funds to finance the acquisition and construction of the following improvements (collectively, the "Projects"): (i) construct a new building of approximately 12,000 square feet located at the County jail site for adult probation, sheriff facilities and storage; (ii) construct a water line at the City/County airport and fund a master study for the airport; (iii) acquire and equip approximately ten Sheriff patrol cars and other vehicles for the Sheriff s Department, and acquire a van for the Extension Service; (iv) acquire two trucks for the Building Maintenance Department and the Ag Barn; and (v) acquire various items of equipment including but not limited to computers and computer software for various county departments, radios and related communication equipment for the Sheriff s Department, the County Constables and the Environmental Health Department, video equipment for the Security Department, heavy equipment (including two front-end loaders) for the Road and Bridge Department, tables and chairs for the Ag Barn, dining tables and projection equipment for the Juvenile Detention Facility, scanners and other equipment for the Election Services Department, projection equipment for the District Attorney's office, safety equipment for the Courthouse, and various items of equipment for the County jail including but not limited to air conditioners, scanners, leg shackles, food cart, passenger van and equipment therefor, and rape prevention cameras; and WHEREAS, pursuant to Chapter 1431, Texas Government Code, as amended (the "Act"), particularly Section 1431.002 thereof, the Commissioners Court of the Issuer, on the recommendation of the County Auditor, is authorized and empowered to issue anticipation notes to pay contractual obligations incurred or to be incurred (i) for the construction of any public work, and (ii) forthe purchase ofmaterials, supplies, equipment, machinery, buildings, lands and rights-of--way for the Issuer's authorized needs and purposes; and WHEREAS, in compliance with Section 1431.002 of the Act, the County Auditor of the County has recommended the issuance of the notes authorized in this Order to finance the Projects; and WHEREAS, in accordance with the provisions of the Act, the Commissioners Court hereby finds and determines that anticipation notes should be issued and sold at this time to finance the Projects and to pay costs of issuance of such notes; and WHEREAS, the governing body of the Issuer deems it appropriate to adopt this Order and issue the notes herein authorized as permitted by the Act; and WHEREAS, it is hereby officially found and determined that the meeting at which this Order was adopted was open to the public and public notice of the time, place, and purpose of said meeting was given, all as required by Chapter 551, Texas Government Code; NOW, THEREFORE, BE IT ORDAINED BY THE COMMISSIONERS COURT OF THE KERR COUNTY, TEXAS: SECTION 1. AMOUNT AND PURPOSE OF THE NOTES. The Notes of the Issuer are hereby authorized to be issued and delivered in the aggregate principal amount of $ to finance the acquisition and construction of the Projects described in the second recital of this Order and to pay costs of issuance. SECTION 2. DESIGNATION, DATE, DENOMINATIONS, NUMBERS AND MATURITIES OF THE NOTES. Each note issued pursuant to and for the purpose described in Section 1 of this Order shall be designated: KERR COUNTY, TEXAS TAX NOTES, SERIES 2010, and initially there shall be issued, sold and delivered hereunder one fully registered note, without interest coupons, dated January 15, 2010, in the aggregate principal amount of $ , numbered T-1 (the "Initial Note"), with notes issued in replacement thereof being in the denomination of $5,000 or any integral multiple thereof and numbered consecutively from R-1 upward, all payable to the initial registered owner thereof (with the Initial Note being payable to the initial purchaser designated in Section 15 hereof), or to the registered assignee or assignees of said notes or any portion or portions thereof (in each case, the "Registered Owner"), and the notes shall mature and be payable serially on February I S in each of the years and in the principal amounts, respectively, as set forth in the following schedule: -2- YEAR OF MATURITY PRINCIPAL AMOUNT ($) YEAR OF MATURITY PRINCIPAL AMOUNT ($~ 2011 2014 2012 2015 2013 *** *** The term "Notes" as used in this Order shall mean and include the Notes initially issued and delivered pursuant to this Order and all substitute notes exchanged therefor, as well as all other substitute notes and replacement notes issued pursuant hereto, and the term "Note" shall mean any of the Notes. SECTION 3. INTEREST. The Notes shall bear interest calculated on the basis of a 360-day year composed of twelve 30-day months from the dates specified in the FORM OF NOTE set forth in this Order to their respective dates of maturity at the following rates per annum: YEAR OF MATURITY INTEREST RATE (%~ YEAR OF MATURITY INTEREST RATE (%~ 2011 2014 2012 2015 2013 *** *** Said interest shall be payable in the manner provided and on the dates stated in the FORM OF NOTE set forth in this Order. SECTION 4. CHARACTERISTICS OF THE NOTES; APPROVAL OF PAYING AGENT/REGISTRAR AGREEMENT. (a) Registration. Transfer. and Exchanges Authentication. The Issuer shall keep or cause to be kept at the designated corporate trust or commercial banking office (currently located in Austin, Texas) of WELLS FARGO BANK, N.A. (the "Paying Agent/Registrar") books or records for the registration of the transfer and exchange of the Notes (the "Registration Books"), and the Issuer hereby appoints the Paying Agent/Registrar as its registrar and transfer agent to keep such books or records and make such registrations of transfers and exchanges under such reasonable regulations as the Issuer and Paying Agent/Registrar may pre- scribe; and the Paying Agent/Registrar shall make such registrations, transfers and exchanges as herein provided. Attached hereto as ExhibitA is a copy of the Paying Agent/RegistrarRgreement between the Issuer and the Paying Agent/Registrar which is hereby approved in substantially final form, and the County Judge and County Clerk of the Issuer are hereby authorized to execute the Paying Agent/Registrar Agreement and approve any changes in the final form thereof. -3- The Paying Agent/Registrar shall obtain and record in the Registration Books the address of the registered owner of each Note to which payments with respect to the Notes shall be mailed, as herein provided; but it shall be the duty of each registered owner to notify the Paying Agent/Registrar in writing of the address to which payments shall be mailed, and such interest payments shall not be mailed unless such notice has been given. To the extent possible and under reasonable circumstances, all transfers of Notes shall be made within three business days after request and presentation thereof. The Issuer shall have the right to inspect the Registration Books during regular business hours of the Paying Agent/Registrar, but otherwise the Paying Agent/Registrar shall keep the Registration Books confidential and, unless otherwise required by law, shall not permit their inspection by any other entity. The Paying Agent/Registrar's standard or customary fees and charges for making such registration, transfer, exchange and delivery of a substitute Note or Notes shall be paid as provided in the FORM OF NOTE set forth in this Order. Registration of assignments, transfers and exchanges of Notes shall be made in the manner provided and with the effect stated in the FORM OF NOTE set forth in this Order. Each substitute Note shall bear a letter and/or number to distinguish it from each other Note. Except as provided in (c) below, an authorized representative of the Paying Agerit/Registrar shall, before the delivery of any such Note, date and manually sign the Paying Agent/Registrar's Authentication Certificate, and no such Note shall be deemed to be issued or outstanding unless such Certificate is so executed. The Paying Agent/Registrar promptly shall cancel all paid Notes and Notes surrendered for transfer and exchange. No additional ordinances, orders, or resolutions need be passed or adopted by the governing body of the Issuer or any other body or person so as to accomplish the foregoing transfer and exchange of any Note or portion thereof, and the Paying Agent/Registrar shall provide for the printing, execution, and delivery of the substitute Notes in the manner prescribed herein, and said Notes shall be of type composition printed on paper with lithographed or steel engraved borders of customary weight and strength. Pursuant to Chapter 1201, Texas Government Code, and particularly Subchapter D and Section 1201.067 thereof, the duty of transfer and exchange of Notes as aforesaid is hereby imposed upon the Paying Agent/Registrar, and, upon the execution of said Certificate, the transferred and exchanged Note shall be valid, incontestable, and enforceable in the same manner and with the same effect as the Notes which initially were issued and delivered pursuant to this Order, approved by the Attorney General, and registered by the Comptroller of Public Accounts. (b) Payment of Notes and Interest. The Issuer hereby further appoints the Paying Agent/Registrar to act as the paying agent for paying the principal of and interest on the Notes, all as provided in this Order. The Paying Agent/ Registrar shall keep proper records of all payments made by the Issuer and the Paying Agent/Registrar with respect to the Notes. (c) In General. The Notes (i) shall be issued in fully registered form, without interest coupons, with the principal of and interest on such Notes to be payable only to the registered owners thereof, (ii) may be transferred and assigned, (iii) may be exchanged for other Notes, (iv) shall have the characteristics, (v) shall be signed, sealed, executed and authenticated, (vi) shall be payable as to principal and interest, and (vii) shall be administered and the Paying Agent/Registrar and the Issuer shall have certain duties and responsibilities with respect to the Notes, all as provided, and in the manner and to the effect as required or indicated, in the FORM OF NOTE set forth in this -4- Order. The Initial Note is not required to be, and shall not be, authenticated by the Paying Agent/Registrar,but oneach substitute Note issued in exchange for the Initial Note issued under this Order the Paying Agent/Registrar shall execute the PAYING AGENT/REGISTRAR'S AUTHENTICATION CERTIFICATE, in the form set forth in the FORM OF NOTE. In lieu of the executed Paying Agent/Registrar's Authentication Certificate described above, the Initial Note delivered on the closing date (as further described in subparagraph (i) below) shall have attached thereto the Comptroller's Registration Certificate substantially in the form set forth in the FORM OF NOTE below, manually executed by the Comptroller of Public Accounts of the State of Texas or by her duly authorized agent, which certificate shall be evidence that the Initial Note has been duly approved by the Attorney General of the State of Texas and that it is a valid and binding obligation of the Issuer, and has been registered by the Comptroller. (d) Substitute Paving e,~ nt/Registrar. The Issuer covenants with the registered owners of the Notes that at all times while the Notes are outstanding the Issuer will provide a competent and legally qualified bank, trust company, financial institution, or other entity to act as and perform the services of Paying Agent/Registrar for the Notes under this Order, and that the Paying Agent/Registrarwill beone entity and shall be an entity registered with the Securities and Exchange Commission. The Issuer reserves the right to, and may, at its option, change the Paying Agent/Registrar upon not less than 120 days written notice to the Paying Agent/Registrar, to be effective not later than 60 days prior to the next principal or interest payment date after such notice. In the event that the entity at any time acting as Paying Agent/Registrar (or its successor by merger, acquisition, or other method) should resign or otherwise cease to act as such, the Issuer covenants that promptly it will appoint a competent and legally qualified bank, trust company, financial institution, or other agency to act as Paying Agent/Registrar under this Order. Upon any change in the Paying Agent/Registrar, the previous Paying Agent/Registrar promptly shall transfer and deliver the Registration Books (or a copy thereof), along with all other pertinent books and records relating to the Notes, to the new Paying Agent/Registrar designated and appointed by the Issuer. Upon any change in the Paying Agent/Registrar, the Issuer promptly will cause a written notice thereof to be sent by the new Paying Agent/Registrar to each registered owner of the Notes, by United States mail, first-class postage prepaid, which notice also shall give the address of the new Paying Agent/Registrar. By accepting the position and performing as such, each Paying Agent/Registrar shall be deemed to have agreed to the provisions of this Order, and a certified copy of this Order shall be delivered to each Paying Agent/Registrar. (e) Book-Entry Only S sy tem for Notes. The Notes issued in exchange for the Notes initially issued to the purchaser specified in Section 15 herein shall be initially issued in the form of a separate single fully registered Note for each of the maturities thereof. Upon initial issuance, the ownership of each such Note shall be registered in the name of Cede & Co., as nominee of The Depository Trust Company of New York ("DTC"), and except as provided in subsection (i) hereof, all of the outstanding Notes shall be registered in the name of Cede & Co., as nominee of DTC. With respect to Notes registered in the name of Cede & Co., as nominee of DTC, the Issuer and the Paying Agent/Registrar shall have no responsibility or obligation to any securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created ("DTC Participant") to hold securities to facilitate the clearance and -5- settlement of securities transaction among DTC Participants or to any person on behalf of whom such a DTC Participant holds an interest in the Notes. Without limiting the immediately preceding sentence, the Issuer and the Paying Agent/Registrar shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC Participant with respect to any ownership interest in the Notes, (ii) the delivery to any DTC Participant or any other person, other than a registered owner of the Notes, as shown on the Registration Books, of any notice with respect to the Notes, or (iii) the payment to any DTC Participant or any other person, other than a registered owner of Notes, as shown in the Registration Books of any amount with respect to principal of or interest on the Notes. Notwithstanding any other provision of this Order to the contrary, the Issuer and the Paying Agent/Registrar shall be entitled to treat and consider the person in whose name each Note is registered in the Registration Books as the absolute owner of such Note for the purpose of payment of principal and interest with respect to such Note, for the purpose of registering transfers with respect to such Note, and for all other purposes whatsoever. The Paying Agent/Registrar shall pay all principal of and interest on the Notes only to or upon the order of the registered owners, as shown in the Registration Books as provided in this Order, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge the Issuer's obligations with respect to payment of principal of and interest on the Notes to the extent of the sum or sums so paid. No person other than a registered owner, as shown in the Registration Books, shall receive a Note certificate evidencing the obligation of the Issuer to make payments of principal and interest pursuant to this Order. Upon delivery by DTC to the Paying Agent/Registrar of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions in this Order with respect to interest checks being mailed to the registered owner at the close of business on the Record Date, the words "Cede & Co." in this Order shall refer to such new nominee of DTC. (~ Successor Securities Depository • Transfers Outside Book-Entry Only Systems. In the event that the Issuer determines that DTC is incapable of discharging its responsibilities described herein and in the representation letter of the Issuer to DTC or that it is in the best interest of the beneficial owners of the Notes that they be able to obtain certificated Notes, the Issuer shall (i) appoint a successor securities depository, qualified to act as such under Section 17(a) of the Securities and Exchange Act of 1934, as amended, notify DTC and DTC Participants of the appointment of such successor securities depository and transfer one or more separate Notes to such successor securities depository or (ii) notify DTC and DTC Participants of the availability through DTC of Notes and transfer one or more separate Notes to DTC Participants having Notes credited to their DTC accounts. In such event, the Notes shall no longer be restricted to being registered in the Registration Books in the name of Cede & Co., as nominee of DTC, but may be registered in the name of the successor securities depository, or its nominee, or in whatever name or names registered owners transferring or exchanging Notes shall designate, in accordance with the provisions of this Order. (~ Payments to Cede & Co. Notwithstanding any other provision of this Order to the contrary, so long as any Note is registered in the name of Cede & Co., as nominee for DTC, all payments with respect to principal of and interest on such Note and all notices with respect to such Note shall be made and given, respectively, in the manner provided in the representation letter of the Issuer to DTC. -6- (h) DTC Letter of Representation. The officers of the Issuer are herein authorized for and on behalf of the Issuer and as officers of the Issuer to enter into one or more Letters of Representation with DTC establishing the book-entry only system with respect to the Notes. (i) Deliverv of Initial Note. On the closing date, one Initial Note representing the entire principal amount of the respective series of Notes, payable in stated installments to the initial registered owner named in Section 15 of this Order or its designee, executed by manual or facsimile signature of the County Judge and County Clerk of the Issuer, approved by the Attorney General of Texas, and registered and manually signed by the Comptroller of Public Accounts of the State of Texas, will be delivered to the initial purchaser or its designee. Upon payment for the Initial Note, the Paying Agent/Registrar shall cancel the Initial Note and deliver to the initial registered owner or its designee one registered definitive Note for each year of maturity of the Notes, in the aggregate principal amount of all of the Notes for such maturity. SECTION 5. FORM OF NOTE. The form of the Notes, including the form of Paying Agent/Registrar's Authentication Certificate, the form of Assignment, and the form of Registration Certificate of the Comptroller of Public Accounts of the State of Texas (to be attached only to the Notes initially issued and delivered pursuant to this Order), shall be, respectively, substantially as follows, with such appropriate variations, omissions, or insertions as are permitted or required by this Order. FORM OF NOTE R- INTEREST RATE February 15, 20_ REGISTERED OWNER: PRINCIPAL AMOUNT: DATE OF SERIES January 15, 2010 PRINCIPAL AMOUNT CUSIP NO. DOLLARS ON THE MATURITY DATE specified above, the CITY OF SHINER, TEXAS (the "Issuer"), being a political subdivision and home-rule municipality of the State of Texas, hereby promises to pay to the Registered Owner specified above, or registered assigns (hereinafter called the "Registered Owner"), the Principal Amount specified above, and to pay interest thereon (calculated on the basis of a 360-day year of twelve 30-day months) from the date of initial delivery of the series of Notes described above (as shown on the records of the Paying Agent/Registrar UNITED STATES OF AMERICA STATE OF TEXAS KERR COUNTY, TEXAS TAX NOTES, SERIES 2010 MATURITY DATE -7- described below) at the Interest Rate per annum specified above, payable on February 15, 2011, and semiannually on each February 15 and August 15 thereafter to the Maturity Date specified above; except that if this Note is required to be authenticated and the date of its authentication is later than the first Record Date (hereinafter defined), such Principal Amount shall bear interest from the interest payment date next preceding the date of authentication, unless such date of authentication is after any Record Date but on or before the next following interest payment date, in which case such principal amount shall bear interest from such next following interest payment date; provided, however, that if on the date of authentication hereof the interest on the Note or Notes, if any, for which this Note is being exchanged is due but has not been paid, then this Note shall bear interest from the date to which such interest has been paid in full. THE PRINCIPAL OFAND INTEREST ONthis Note are payable in lawful money of the United States of America, without exchange or collection charges. The principal of this Note shall be paid to the Registered Owner hereof upon presentation and surrender of this Note at maturity at the designated corporate trust or commercial banking office (currently located in Austin, Texas) of WELLS FARGO BANK, N.A., which is the "Paying Agent/Registrar" for this Note. The payment of interest on this Note shall be made by the Paying Agent/Registrar to the Registered Owner hereof on each interest payment date by check, dated as of such interest payment date, drawn by the Paying Agent/Registrar on, and payable solely from, funds of the Issuer required by the Order authorizing the issuance of this Note (the "Order") to be on deposit with the Paying Agent/Registrar for such purpose as hereinafter provided; and such check shall be sent by the Paying Agent/Registrar by United States mail, first-class postage prepaid, on each such interest payment date, to the Registered Owner hereof, at its address as it appeared on the last business day of the month next preceding each such date (the "Record Date") on the Registration Books kept by the Paying Agent/Registrar, as hereinafter described. In the event of anon-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 Issuer. Notice of the Special Record Date and of the scheduled payment date of the past due interest (the "Special Payment Date" which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each Registered Owner 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. The Issuer covenants with the Registered Owner of this Note that on or before each principal or interest payment date for this Note it will make available to the Paying Agent/Registrar, from the "Interest and Sinking Fund" created by the Order, the amounts required to provide for the payment, in immediately available funds, of all principal of and interest on the Notes, when due. IF THE DATE for the payment of the principal of or interest on this Note shall be a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, or the United States Postal Service is not open for business, then the date for such payment shall be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close, or the United States Postal Service is not open for business; and payment on such date shall have the same force and effect as if made on the original date payment was due. -8- THENOTESARENOTSUBJECT TO OPTIONAL OR MANDATORYREDEMPTION PRIOR TO STATED MATURITY. THIS NOTE is one of a series of Notes dated as of January 15, 2010, authorized in accordance with the Constitution and laws of the State of Texas in the aggregate principal amount of ~ FOR THE PURPOSE OF PAYING COSTS OF ISSUANCE AND CONSTR UCTING AND ACQUIRING VARIOUS "PROJECTS" AS DEFINED AND MORE FULLYDESCRIBED INTHE ORDER, WHICHPROJECTSARE GENERALLYDESCRIBED AS FOLLOWS: CONSTRUCTINGAND EQUIPPINGANEW BUILDING PRIMARILYFOR USE BY THE SHERIFF'S DEPARTMENT AND FOR ADULT PROBATION; CONSTRUCTING A WATER LINE AT THE CITY/COUNTYAIRPORT AND FUNDING A MASTERSTUDYFORTHEAIRPORT; CONSTRUCTINGREPAIRSANDIMPROVEMENTS TO CERTAIN DAMS; ACQUIRING AND EQUIPPING SHERIFF PATROL CARS; AND ACQUIRING OTHER VEHICLES AND VARIOUS ITEMS OFEQUIPMENTAND OTHER PERSONAL PROPERTY FOR VARIOUS COUNTYDEPARTMENTS. ALL NOTES OF THIS SERIES are issuable solely as fully registered Notes, without interest coupons, in the denomination of any integral multiple of $5,000. As provided in the Order, this Note, may, at the request of the Registered Owner or the assignee or assignees hereof, be assigned, transferred and exchanged for a like aggregate principal amount of fully registered Notes, without interest coupons, payable to the appropriate Registered Owner, assignee or assignees, as the case maybe, having the same denomination or denominations in any integral multiple of $5,000 as requested in writing by the appropriate Registered Owner, assignee or assignees, as the case may be, upon surrender of this Note to the Paying Agent/Registrar for cancellation, all in accordance with the form and procedures set forth in the Order. Among other requirements for such assignment and transfer, this Note must be presented and surrendered to the Paying Agent/Registrar, together with proper instruments of assignment, inform and with guarantee of signatures satisfactory to the Paying Agent/Registrar,evidendng assignment of this Note or any portion or portions hereof in any integral multiple of $5,000 to the assignee or assignees in whose name or names this Note or any such portion or portions hereof is or are to be registered. The form of Assignment printed or endorsed on this Note maybe executed by the Registered Owner to evidence the assignment hereof, but such method is not exclusive, and other instruments of assignment satisfactory to the Paying Agent/Registrar may be used to evidence the assignment of this Note or any portion or portions hereof from time to time by the Registered Owner. The Paying Agent/Registrar's reasonable standard or customary fees and charges for transferring and exchanging any Note or portion thereof shall be paid by the Issuer, but any taxes or governmental charges required to be paid with respect thereto shall be paid by the one requesting such assignment, transfer or exchange as a condition precedent to the exercise of such privilege. The Paying Agent/Registrar shall not be required to make any such transfer or exchange 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. WHENEVER THE BENEFICL4L OWNERSHIP of this Note is determined by a book entry at a securities depository for the Notes, the foregoing requirements of holding, delivering or -9- transferring this Note shall be modified to require the appropriate person or entity to meet the requirements of the securities depository as to registering or transferring the book entry to produce the same effect. INTHEEVENT any Paying Agent/Registrar for the Notes is changed by the Issuer, resigns, or otherwise ceases to act as such, the Issuer has covenanted in the Order that it promptly will appoint a competent and legally qualified substitute therefor, and cause written notice thereof to be mailed to the Registered Owners of the Notes. IT IS HEREBY certified, recited, and covenanted that this Note has been duly and validly authorized, issued, and delivered; that all acts, conditions, and things required or proper to be performed, exist, and be done precedent to or in the authorization, issuance, and delivery of this Note have been performed, existed, and been done in accordance with law; that this Note is a general obligation of the Issuer, issued on the full faith and credit thereof; and that ad valorem taxes sufficient to provide for the payment of the interest on and principal of this Note, as such interest comes due, and as such principal matures, have been levied and ordered to be levied against all taxable property in the Issuer, and have been pledged for such payment, within the limits prescribed by law. THE CITY also has reserved the right to amend the Order as provided therein, and under some (but not all) circumstances amendments thereto must be approved by the registered owners of a majority in aggregate principal amount of the outstanding Notes. BY BECOMING the Registered Owner of this Note, the Registered Owner thereby acknowledges all of the terms and provisions of the Order, agrees to be bound by such terms and provisions, acknowledges that the Order is duly recorded and available for inspection in the official minutes and records of the governing body of the Issuer, and agrees that the terms and provisions of this Note and the Order constitute a contract between each Registered Owner hereof and the Issuer. IN WITNESS WHEREOF, the Issuer has caused this Note to be signed with the manual or facsimile signature of the County Judge of the Issuer, and countersigned with the manual or facsimile signature of the County Clerk of the Issuer, and the official seal of the Issuer has been duly impressed, or placed in facsimile, on this Note. Countersigned: (facsimile si ng~ature) County Clerk, Kerr County, Texas facsimile si ng_ature) County Judge, Kerr County, Texas (CITY SEAL) -10- FORM OF REGISTRATION CERTIFICATE OF THE COMPTROLLER OF PUBLIC ACCOUNTS: COMPTROLLER'S REGISTRATION CERTIFICATE: REGISTER NO. I hereby certify that this Note has been examined, certified as to validity, and approved by the Attorney General of the State of Texas, and that this Note has been registered by the Comptroller of Public Accounts of the State of Texas. Witness my signature and seal this (COMPTROLLER'S SEAL) Comptroller of Public Accounts of the State of Texas FORM OF PAYING AGENT/REGISTRAR'S AUTHENTKATION CERTIFICATE PAYING AGENT/REGISTRAR'S AUTHENTKATION CERTIFICATE (To be executed if this Note is not accompanied by an executed Registration Certificate of the Comptroller of Public Accounts of the State of Texas) It is hereby certified that this Note has been issued under the provisions of the Order described in the text of this Note; and that this Note has been issued in exchange for a note or notes, or a portion of a note or notes of a series which originally was approved by the Attorney General of the State of Texas and registered by the Comptroller of Public Accounts of the State of Texas. Dated WELLS FARGO BANK, N.A. Austin, Texas Paying Agent/Registrar By Authorized Representative -Il- FORM OF ASSIGNMENT: ASSIGNMENT FOR VALUE RECEIVED, the undersigned Registered Owner of this Note, or duly authorized representative or attorney thereof, hereby sells, assigns and transfers this Note and all rights hereunder unto / / (Assignee's Social Security or (Please print or typewrite Assignee's name and address, Taxpayer Identification Number) including zip code) and hereby irrevocably constitutes and appoints attorney to transfer the registration of this Note on the Paying Agent/Registrar's Registration Books with full power of substitution in the premises. Dated: Signature Guaranteed: NOTICE: Signature(s) must be guaranteed by NOTICE: The signature above must a member firm of the New York Stock correspond with the name of the Registered Exchange or a commercial bank or trust Owner as it appears upon the front of this company. Note in every particular, without alteration or enlargement or any change whatsoever. INITIAL NOTE INSERTIONS The Initial Note shall be in the form set forth above except that: Immediately under the name of the Note, the headings "INTEREST RATE" and "MATURITY DATE" shall be completed with the words "As shown below" and "CUSIP NO. "shall be deleted. 2. The first paragraph shall be deleted and the following shall be inserted: "ON THE RESPECTIVE MATURITYDATES specified below, the CITYOFSHINER, TEXAS (the "Issuer"),being apolitical subdivision and municipal corporation ofthe State of Texas, hereby promises to pay to the Registered Owner specified above, or registered assigns (hereinafter called the "Registered Owner"), the respective Principal Installments specified below, and to pay interest thereon (calculated on the basis of a 360-day year composed of twelve 30-day months) from the date of initial delivery of the series of Notes described above (as shown on the records of the Paying Agent/Registrar described below) at the respective Interest Rates per annum specified below, -12- payable on February 15, 2011, and semiannually on each February 15 and August 15 thereafter to the respective Maturity Dates specified below. The respective Maturity Dates, Principal Installments and Interest Rates for this Note are set forth in the following schedule: MATURITY DATE (FEBRUARY 15) PRINCIPAL INSTALLMENT INTEREST RATE 1~'IATURITY DATE (FEBRUARY 15} PRINCIPAL INSTALLMENT INTEREST RATE [Insert principal and interest information from Sections 2 and 3 above]" (C) The Initial Note shall be numbered "T-1." SECTION C. INTEREST AND SINKING FUND; TAX LEVY. A special Interest and Sinking Fund (the "Interest and Sinking Fund") is hereby created solely for the benefit of the Notes, and the Interest and Sinking Fund shall be established and maintained by the Issuer at an official depository bank of the Issuer for so long as the Notes or interest thereon are outstanding and unpaid. The Interest and Sinking Fund shall be kept separate and apart from all other funds and accounts of the Issuer, and shall be used only for paying the interest on and principal of the Notes. Until expended for the purposes set forth in Section 1 hereof, the proceeds derived from the sale of the Notes shall be held as further security for the timely payment of the principal and interest on the Notes. All ad valorem taxes levied and collected for and on account of the Notes and all accrued interest and premium on the Notes received by the Issuer from the initial purchaser of the Notes shall be deposited, as collected, to the credit of the Interest and Sinking Fund. During each year while any of the Notes or interest thereon are outstanding and unpaid, the Issuer shall compute and ascertain a rate and amount of ad valorem tax which will be sufficient, together with other moneys deposited to the credit of the Interest and Sinking Fund, to raise and produce the money required to pay the interest on the Notes as such interest comes due, and to provide and maintain a sinking fund adequate to pay the principal of its Notes as such principal matures (but never less than 2% of the original principal amount of the Notes as a sinking fund each year); and said tax shall be based on the latest approved tax rolls of the Issuer, with full allowance being made for tax delinquencies and the cost of tax collection. Said rate and amount of ad valorem tax is hereby levied, and is hereby ordered to be levied, against all taxable property in the Issuer for each year while any of the Notes or interest thereon are outstanding and unpaid; and said tax shall be assessed and collected each such year and deposited to the credit of the aforesaid Interest and Sinking Fund. Said ad valorem taxes sufficient to provide for the payment of the interest on and principal of the Notes, as such interest comes due and such principal matures, are hereby pledged for such payment, within the limits provided by law. -13- SECTION 7. CONSTRUCTION FUND. There is hereby created and established in the depository of the Issuer, a fund to be called the Kerr County, Texas Tax Notes (Series 2010) Construction Fund (herein called the "Construction Fund"). Proceeds from the sale and delivery of the Notes (other than proceeds representing accrued interest on the Notes and any premium on the Notes that is not used by the Issuer to pay costs of issuance in accordance with the provisions of Section 1201.042(d), Texas Government Code, as amended, which shall be deposited in the Interest and Sinking Fund) shall be deposited in the Construction Fund. Money in the Construction Fund shall be subject to disbursements by the Issuer for payment of all costs incurred in carrying out the purpose for which the Notes are issued, including but not limited to costs for construction, engineering, architecture, financing, financial consultants and legal services related to the project being financed with proceeds of the Notes and the issuance of the Notes. All funds remaining on deposit in the Construction Fund upon completion of the projects being financed with the proceeds from the Notes, if any, shall be transferred to the Interest and Sinking Fund. SECTION 8. INVESTMENTS. Funds on deposit in the Interest and Sinking Fund and the Construction Fund shall be secured by the depository bank of the Issuer in the manner and to the extent required by law to secure other public funds of the Issuer and may be invested from time to time in any investment authorized by applicable law, including but not limited to the Public Funds Investment Act (Chapter 2256, Texas Government Code), and the Issuer's investment policy adopted in accordance with the provisions of the Public Funds Investment Act; provided, however, that investments purchased for and held in the Interest and Sinking Fund shall have a final maturity no later than the next principal or interest payment date for which such funds are required, and investments purchased for and held in the Construction Fund shall have a final maturity of not later than the date the Issuer reasonably expects the funds from such investments will be required to pay costs of the projects for which the Notes were issued. Income and profits from such investments shall be deposited in the respective Fund which holds such investments; however, any such income and profits from investments in the Construction Fund may be withdrawn by the Issuer and deposited in the Interest and Sinking Fund to pay all or a portion of the interest next coming due on the Notes. It is further provided, however, that any interest earnings on Note proceeds which are required to be rebated to the United States of America pursuant to Section 13 hereof in order to prevent the Notes from being arbitrage bonds shall be so rebated and not considered as interest earnings for the purposes of this Section. SECTION 9. EMPOWERED. The County Clerk is hereby ordered to do any and all things necessary to accomplish the transfer of monies to the Interest and Sinking Fund of this issue in ample time to pay such items of principal and interest. SECTION 10. DEFEASANCE OF THE NOTES. (a) De easance. Any Note and the interest thereon shall be deemed to be paid, retired and no longer outstanding (a "Defeased Note") within the meaning of this Order, except to the extent provided in subsection (d) of this Section, when payment of the principal of such Note, plus interest thereon to the due date (whether such due date be by reason of maturity or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof, or (ii) shall have been provided for on or before such due date by irrevocably depositing with or making available to the Paying Agent/Registrar in accordance with an escrow agreement or other instrument (the "Future Escrow Agreement") for such payment -14- (1) lawful money of the United States of America sufficient to make such payment or (2) Defeasance Securities that mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to provide for such payment, and when proper arrangements have been made by the Issuer with the Paying Agent/Registrar for the payment of its services until all Defeased Notes shall have become due and payable. At such time as a Note shall be deemed to be a Defeased Note hereunder, as aforesaid, such Note and the interest thereon shall no longer be secured by, payable from, or entitled to the benefits of, the ad valorem taxes or revenues herein levied and pledged as provided in this Order, and such principal and interest shall be payable solely from such money or Defeasance Securities. (b) Investment Funds in Defeasance Securities. Any moneys so deposited with the Paying Agent/Registrar may at the written direction of the Issuer be invested in Defeasance Securities, maturing in the amounts and times as hereinbefore set forth, and all income from such Defeasance Securities received by the Paying Agent/Registrarthat is not required for the payment of the Notes and interest thereon, with respect to which such money has been so deposited, shall be turned over to the Issuer, or deposited as directed in writing by the Issuer. Any Future Escrow Agreement pursuant to which the money and/or Defeasance Securities are held for the payment of Defeased Notes may contain provisions permitting the investment or reinvestment of such moneys in Defeasance Securities or the substitution of other Defeasance Securities upon the satisfaction of the requirements specified in subsection (a)(i) or (ii) of this Section. All income from such Defeasance Securities received by the Paying Agent/Registrar which is not required for the payment of the Defeased Notes, with respect to which such money has been so deposited, shall be remitted to the Issuer or deposited as directed in writing by the Issuer. (c) De rnition ofDefeasance Securities. The term "Defeasance Securities" means (i) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date of the purchase thereof are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent, (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date on the date the governing body of the Issuer 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 (iv) any other then authorized securities or obligations under applicable state law that may be used to defease obligations such as the Notes. (d) Duties o, f Payin~Agent/Re ig stray. Until all Defeased Notes shall have become due and payable, the Paying Agent/Registrar shall perform the services of Paying Agent/Registrar for such Defeased Notes the same as if they had not been defeased, and the Issuer shall make proper arrangements to provide and pay for such services as required by this Order. (e) Selection ofNotes to be Defeased. In the event that the Issuer elects to defease less than all of the principal amount of Notes of a maturity, the Paying Agent/Registrar shall select, or cause to be selected, such amount of Notes by such random method as it deems fair and appropriate. -15- SECTION 11. DAMAGED, MUTILATED, LOST, STOLEN, OR DESTROYED NOTES. (a) Replacement Notes. In the event any outstanding Note is damaged, mutilated, lost, stolen, or destroyed, the Paying Agent/Registrar shall cause to be printed, executed, and delivered, anew note of the same principal amount, maturity, and interest rate, as the damaged, mutilated, lost, stolen, or destroyed Note, in replacement for such Note in the manner hereinafter provided. (b) ~~lication for ReplacementNotes. Application for replacement of damaged, mutilated, lost, stolen, or destroyed Notes shall be made by the registered owner thereof to the Paying Agent/Registrar. In every case of loss, theft, or destruction of a Note, the registered owner applying for a replacement note shall furnish to the Issuer and to the Paying Agent/Registrar such security or indemnity as maybe required by them to save each of them harmless from any loss or damage with respect thereto. Also, in every case of loss, theft, or destruction of a Note, the registered owner shall furnish to the Issuer and to the Paying Agent/Registrar evidence to their satisfaction of the loss, theft, or destruction of such Note, as the case may be. In every case of damage or mutilation of a Note, the registered owner shall surrender to the Paying Agent/Registrar for cancellation the Note so damaged or mutilated. (c) No Default Occurred. Notwithstanding the foregoing provisions of this Section, in the event any such Note shall have matured, and no default has occurred which is then continuing in the payment of the principal of or interest on the Note, the Issuer may authorize the payment of the same (without surrender thereof except in the case of a damaged or mutilated Note) instead of issuing a replacement Note, provided security or indemnity is furnished as above provided in this Section. (d) Char~g for Issuing Replacement Notes. Prior to the issuance of any replacement note, the Paying Agent/Registrar shall charge the registered owner of such Note with all legal, printing, and other expenses in connection therewith. Every replacement note issued pursuant to the provisions of this Section by virtue of the fact that any Note is lost, stolen, or destroyed shall constitute a contractual obligation of the Issuer whether or not the lost, stolen, or destroyed Note shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Order equally and proportionately with any and all other Notes duly issued under this Order. (e) Authority for Issuing Replacement Notes. In accordance with Chapter 1201, Texas Government Code, as amended, this Section of this Order shall constitute authority for the issuance of any such replacement note without necessity of further action by the governing body of the Issuer or any other body or person, and the duty of the replacement of such notes is hereby authorized and imposed upon the Paying AgentlRegistrar, and the Paying Agent/Registrar shall authenticate and deliver such Notes in the form and manner and with the effect, as provided in Section 4(a) of this Order for Notes issued in exchange for other Notes. -16- SECTION 12. CUSTODY, APPROVAL, AND REGISTRATION OF THE NOTES; BOND COUNSEL'S OPINION, BOND INSURANCE, AND CUSIP NUMBERS. The County Judge of the Issuer is hereby authorized to have control of the Notes initially issued and delivered hereunder and all necessary records and proceedings pertaining to the Notes pending their delivery and their investigation, examination, and approval by the Attorney General of the State of Texas, and their registration by the Comptroller of Public Accounts of the State of Texas. Upon registration of the Notes said Comptroller of Public Accounts (or a deputy designated in writing to act for said Comptroller) shall manually sign the Comptroller's Registration Certificate attached to such Notes, and the seal of said Comptroller shall be impressed, or placed in facsimile, on such Certificate. The approving legal opinion of the Issuer's Bond Counsel (with an appropriate certificate pertaining thereto executed by facsimile signature of the County Clerk of the Issuer), a statement regarding the issuance of a municipal bond insurance policy to secure payment of debt service on the Notes, if any, and the assigned CUSIP numbers may, at the option of the Issuer, be printed on the Notes issued and delivered under this Order, but neither shall have any legal effect, and shall be solely for the convenience and information of the registered owners of the Notes. SECTION 13. COVENANTS REGARDING TAX-EXEMPTION OF INTEREST ON THE NOTES. (a) Covenants. The Issuer covenants to take any action necessary to assure, or refrain from any action which would adversely affect, the treatment of the Notes as obligations described in section 103 of the Internal Revenue Code of 1986, as amended (the "Code"),the interest on which is not includable in the "gross income" of the holder for purposes of federal income taxation. In furtherance thereof, the Issuer covenants as follows: (1) to take any action to assure that no more than 10 percent of the proceeds of the Notes or the projects financed therewith (less amounts deposited to a reserve fund, if any) are used for any "private business use," as defined in section 141(b)(6) of the Code or, if more than 10 percent of the proceeds of the Notes or the projects financed therewith are so used, such amounts, whether or not received by the Issuer, with respect to such private business use, do not, under the terms of this Order or any underlying arrangement, directly or indirectly, secure or provide for the payment of more than 10 percent of the debt service on the Notes, in contravention of section 141(b)(2) of the Code; (2) to take any action to assure that in the event that the "private business use" described in subsection (1) hereof exceeds 5 percent of the proceeds of the Notes or the projects financed therewith (less amounts deposited into a reserve fund, if any) then the amount in excess of 5 percent is used fora "private business use" which is "related" and not "disproportionate," within the meaning of section 141(b)(3) of the Code, to the governmental use; (3) to take any action to assure that no amount which is greater than the lesser of $5,000,000, or 5 percent of the proceeds of the Notes (less amounts deposited into a reserve fund, if any) is directly or indirectly used to finance loans to persons, other than state or local governmental units, in contravention of section 141(c) of the Code; -17- (4) to refrain from taking any action which would otherwise result in the Notes being treated as "private activity bonds" within the meaning of section 141(b) of the Code; (5) to refrain from taking any action that would result in the Notes being "federally guaranteed" within the meaning of section 149(b) of the Code; (6) to refrain from using any portion of the proceeds of the Notes, directly or indirectly, to acquire or to replace funds which were used, directly or indirectly, to acquire investment property (as defined in section 148(b)(2) of the Code) which produces a materially higher yield over the term of the Notes, other than investment property acquired with -- (A) proceeds of the Notes invested for a reasonable temporary period of three years or less until such proceeds are needed for the purpose for which the Notes are issued, (B) amounts invested in a bona fide debt service fund, within the meaning of section 1.148-1(b) of the Treasury Regulations, and (C) amounts deposited in any reasonably required reserve or replacement fund to the extent such amounts do not exceed 10 percent of the proceeds of the Notes; (7) to otherwise restrict the use of the proceeds of the Notes or amounts treated as proceeds of the Notes, as may be necessary, so that the Notes do not otherwise contravene the requirements of section 148 of the Code (relating to arbitrage) and, to the extent applicable, section 149(d) of the Code (relating to advance refundings); (8) to pay to the United States of America at least once during each five-year period (beginning on the date of delivery of the Notes) an amount that is at least equal to 90 percent of the "Excess Earnings," within the meaning of section 148(f) of the Code and to pay to the United States of America, not later than 60 days after the Notes have been paid in full, 100 percent of the amount then required to be paid as a result of Excess Earnings under section 148(f) of the Code; and (9) to assure that the proceeds of the Notes will be used solely for new money projects. (b) Rebate Fund. In order to facilitate compliance with the above covenant (8), a "Rebate Fund" is hereby established by the Issuer for the sole benefit of the United States of America, and such fund shall not be subject to the claim of any other person, including without limitation the bondholders. The Rebate Fund is established for the additional purpose of compliance with section 148 of the Code. -18- (c) Proceeds. The Issuer understands that the term "proceeds" includes "disposition proceeds" as defined in the Treasury Regulations and, in the case of refunding bonds, transferred proceeds (if any) and proceeds of the refunded bonds expended prior to the date of issuance of the Notes. It is the understanding of the Issuer that the covenants contained herein are intended to assure compliance with the Code and any regulations or rulings promulgated by the U.S. Department of the Treasury pursuant thereto. In the event that regulations or rulings are hereafter promulgated which modify or expand provisions of the Code, as applicable to the Notes, the Issuer will not be required to comply with any covenant contained herein to the extent that such failure to comply, in the opinion of nationally recognized bond counsel, will not adversely affect the exemption from federal income taxation of interest on the Notes under section 103 of the Code. In the event that regulations or rulings are hereafter promulgated which impose additional requirements which are applicable to the Notes, the Issuer agrees to comply with the additional requirements to the extent necessary, in the opinion of nationally recognized bond counsel, to preserve the exemption from federal income taxation of interest on the Notes under section 103 of the Code. In furtherance of such intention, the Issuer hereby authorizes and directs the County Judge, the County Clerk, the County Treasurer and the County Auditor of the Issuer to execute any documents, certificates or reports required by the Code and to make such elections, on behalf of the Issuer, which may be permitted by the Code as are consistent with the purpose for the issuance of the Notes. (d) Allocation of. and Limitation on. Expenditures for the Project. The Issuer covenants to account for the expenditure of sale proceeds and investment earnings to be used for the purposes described in Section 1 of this Order (collectively referred to herein as the "Projects") on its books and records in accordance with the requirements of the Internal Revenue Code. The Issuer recognizes that in order for the proceeds to be considered used for the reimbursement of costs, the proceeds must be allocated to expenditures within 18 months of the later of the date that (1) the expenditure is made, or (2) the Projects are completed; but in no event later than three years after the date on which the original expenditure is paid. The foregoing notwithstanding, the Issuer recognizes that in order for proceeds to be expended under the Internal Revenue Code, the sale proceeds or investment earnings must be expended no more than 60 days after the earlier of (1) the fifth anniversary of the delivery of the Notes, or (2) the date the Notes are retired. The Issuer agrees to obtain the advice ofnationally-recognized bond counsel if such expenditure fails to comply with the foregoing to assure that such expenditure will not adversely affect the tax-exempt status of the Notes. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (e) Disposition ofPro~ects. The Issuer covenants that the property constituting the Projects financed or refinanced with the proceeds of the Notes will not be sold or otherwise disposed in a transaction resulting in the receipt by the Issuer of cash or other compensation, unless the Issuer obtains an opinion ofnationally-recognized bond counsel that such sale or other disposition will not adversely affect the tax-exempt status of the Notes. For purposes of the foregoing, the portion of the property comprising personal property and disposed in the ordinary course shall not be treated as a transaction resulting in the receipt of cash or other compensation. For purposes hereof, the Issuer shall not be obligated to comply with this covenant if it obtains an opinion that such failure -19- to comply will not adversely affect the excludability for federal income tax purposes from gross income of the interest. (~ Designation as Qualified Tax-Exempt Obligations. The Issuer hereby designates the Notes as "qualified tax-exempt bonds" as defined in section 265(b)(3) of the Code. In furtherance of such designation, the Issuer represents, covenants and warrants the following: (i) that during the calendar year in which the Notes are issued, the Issuer (including any subordinate entities) has not designated nor will designate bonds, which when aggregated with the Notes, will result in more than $30,000,000 of "qualified tax-exempt bonds" being issued; (ii) that the Issuer reasonably anticipates that the amount of tax-exempt obligations issued, during the calendar year in which the Notes are issued, by the Issuer (or any subordinate entities) will not exceed $30,000,000; and (iii) that the Issuer will take such action or refrain from such action as necessary, and as more particularly set forth in this Section, in order that the Notes will not be considered "private activity bonds" within the meaning of section 141 of the Code. SECTION 14. CONTINUING DISCLOSURE UNDERTAKING. (a) De tuitions. As used in this Section, the following terms have the meanings ascribed to such terms below: "EMMA" means the Electronic Municipal Market Access system being established by the MSRB. "MSRB" means the Municipal Securities Rulemaking Board. "Rule" means SEC Rule 15c2-12, as amended from time to time. "SEC" means the United States Securities and Exchange Commission. (b) Annual Reports. The Issuer shall provide annually to the MSRB through EMMA within six months after the end of each fiscal year ending in or after 2010, financial information and operating data with respect to the Issuer of the general type included in the final Official Statement authorized by this Order being the information described in Exhibit B hereto. Additionally, the Issuer shall provide to the MSRB through EMMA its audited financial statements for its fiscal year ended September 30, 2009 promptly after it becomes available. Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit B hereto, or such other accounting principles as the Issuer may be required to employ from time to time pursuant to state law or regulation, and (2) audited, if the Issuer commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the Issuer shall provide (1) unaudited financial statements for such fiscal year within such six month period, and (2) audited financial statements for the applicable fiscal year to the MSRB through EMMA when and if the audit report on such statements become available. -20- If the Issuer changes its fiscal year, it will notify the MSRB through EMMA of the date of the new fiscal year end prior to the next date by which the Issuer otherwise would be required to provide financial information and operating data pursuant to this paragraph (b). The financial information and operating data to be provided pursuant to this paragraph (b) may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to the MSRB through EMMA or filed with the SEC. (c) Material Event Notices. The Issuer shall notify the MSRB through EMMA in a timely manner, of any of the following events with respect to the Notes, if such event is material within the meaning of the federal securities laws: A. Principal and interest payment delinquencies; B. Non-payment related defaults; C. Unscheduled draws on debt service reserves reflecting financial difficulties; D. Unscheduled draws on credit enhancements reflecting financial difficulties; E. Substitution of credit or liquidity providers, or their failure to perform; F. Adverse tax opinions or events affecting the tax-exempt status of the Notes; G. Modifications to rights of holders of the Notes; H. Redemption calls; I. Defeasances; J. Release, substitution, or sale of property securing repayment of the Notes; and K. Rating changes. The Issuer shall notify the MSRB through EMMA, in a timely manner, of any failure by the Issuer to provide financial information or operating data in accordance with paragraph (b) of this Section by the time required by such paragraph. (d) Limitations Disclaimers, andAmendments. The Issuer shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the Issuer remains an "obligated person" with respect to the Notes within the meaning of the Rule, except that the Issuer in any event will give notice of any deposit made in accordance with Section 10 of this Order that causes Notes no longer to be outstanding. -21- The provisions of this Section are for the sole benefit of the holders and beneficial owners of the Notes, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The Issuer undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the Issuer's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The Issuer does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Notes at any future date. UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANYNOTE OR ANY OTHERPERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING 1N WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. No default by the Issuer in observing or performing its obligations under this Section shall comprise a breach of or default under this Order for purposes of any other provision of this Order. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the Issuer under federal and state securities laws. The provisions of this Section may be amended by the Issuer 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 Issuer, but only if (1) the provisions of this Section, as so amended, would have permitted an underwriter to purchase or sell Notes in the primary offering of the Notes in compliance with the Rule, taking into account any amendments or interpretations ofthe Rule since such offering as well as such changed circumstances and (2) either (a) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Order that authorizes such an amendment) of the Outstanding Notes consent to such amendment or (b) a person that is unaffiliated with the Issuer (such as nationally recognized bond counsel) determined that such amendment will not materially impair the interest of the holders and beneficial owners of the Notes. The Issuer may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Notes in the primary offering of the Notes. If the Issuer so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with paragraph (b) of this Section an explanation, in narrative form, of the reason for the amendment and of the impact of any change in the type of financial information or operating data so provided. -22- SECTION 15. SALE AND DELIVERY OF THE NOTES. The Notes are hereby initially sold and shall be delivered to SOUTHWEST SECURITIES, INC. (the "Underwriter"), at a price of $ (which amount is equal to par, plus/less a net original issue premium/discount of $ ,and less Underwriter's discount of $ ), and no accrued interest, all pursuant to the terms and provisions of a Purchase Agreement in substantially the form attached hereto as Exhibit C which the County Judge of the Issuer is hereby authorized to execute and deliver, and which the County Clerk is hereby authorized to attest. The Issuer will deliver to the Underwriters an Initial Note in the aggregate principal amount of $ payable in principal installments on the dates and in the principal amounts shown in Section 2 hereof, and bearing interest at the rates for each respective maturity as shown in Section 3 hereof. The Initial Note shall be registered in the name of SOUTHWEST SECURITIES, INC. SECTION 16. APPROVAL OF OFFICIAL STATEMENT. The Issuer hereby approves the form and content of the Official Statement relating to the Notes and any addenda, supplement, or amendment thereto, and approves the distribution of the Official Statement in the reoffering of the Notes by the Underwriter in final form, with such changes therein or additions thereto as the officer executing the same may deem advisable, such determination to be conclusively evidenced by his execution thereof. The distribution and use of the Preliminary Official Statement for the Notes, dated January 5, 2010, prior to the date hereof is hereby ratified and confirmed. The Commissioners Court finds and determines that the Preliminary Official Statement and the Official Statement were and are "deemed final" as of each of their respective dates within the meaning, and for the purpose, of Rule 15c2-12 promulgated under authority granted by the Federal Securities and Exchange Act of 1934. SECTION 17. AUTHORITY FOR OFFICERS TO EXECUTE DOCUMENTS AND APPROVE CHANGES. The County Judge, County Clerk, County Auditor, and County Treasurer of the Issuer, and all other officers, employees, and agents of the Issuer, and each of them, shall be and they are hereby expressly authorized, empowered, and directed from time to time and at any time to do and perform all such acts and things and to execute, acknowledge, and deliver in the name and under the corporate seal and on behalf of the Issuer all such instruments, whether or not herein mentioned, as may be necessary or desirable in order to carry out the terms and provisions of this Order, the Notes, the sale of the Notes, the Official Statement, and the Paying Agent/Registrar Agreement. In addition, prior to the initial delivery of the Notes, the County Judge, County Clerk, and Bond Counsel are hereby authorized and directed to approve any technical changes or correction to this Order or to any of the instruments authorized and approved by this Order necessary in order to (i) correct any ambiguity or mistake or properly or more completely document the transactions contemplated and approved by this Order and as described in the Official Statement, (ii) obtain a rating from any of the national bond rating agencies or satisfy any requirements of the provider of a municipal bond insurance policy, if any, or (iii) obtain the approval of the Notes by the Attorney General's office. Incase any officer whose signature shall appear on any Note shall cease to be such officer before the delivery of such Note, such signature shall nevertheless be valid and sufficient for all purposes the same as if such officer had remained in office until such delivery. The County Treasurer and the County Auditor are further authorized to pay to the Attorney General of Texas prior to the delivery of the Notes, for the Attorney General's review of the transcript of proceedings -23- related to the Notes, the amount required pursuant to Section 1202.004, Texas Government Code, as amended. SECTION 18. ORDER A CONTRACT; AMENDMENTS. This Order shall constitute a contract with the Registered Owners of the Notes, binding on the Issuer and its successors and assigns, and shall not be amended or repealed by the Issuer as long as any Note remains outstanding except as permitted in this Section. The Issuer may, without the consent of or notice to any Registered Owners, amend, change, or modify this Order as may be required (i) by the provisions hereof, (ii) for the purpose of curing any ambiguity, inconsistency, or formal defect or omission herein, or (iii) in connection with any other change which is not to the prejudice of the Registered Owners. The Issuer may, with the written consent of the Registered Owners of a majority in aggregate principal amount of the Notes then outstanding affected thereby, amend, change, modify, or rescind any provisions of this Order; provided that without the consent of all of the Registered Owners affected, no such amendment, change, modification, or rescission shall (i) extend the time or times ofpayment of the principal of and interest on the Notes, reduce the principal amount thereof or the rate of interest thereon, (ii) give any preference to any Note over any other Note, (iii) extend any waiver of default to subsequent defaults, or (iv) reduce the aggregate principal amount ofNotes required for consent to any such amendment, change, modification, or rescission. Whenever the Issuer shall desire to make any amendment or addition to or rescission of this Order requiring consent of the Registered Owners, the Issuer shall cause notice of the amendment, addition, or rescission to be sent by first class mail, postage prepaid, to the Registered Owners at the respective addresses shown on the Registration Books. Whenever at any time within one year after the date of the giving of such notice, the Issuer shall receive an instrument or instruments in writing executed by the Registered Owners of a majority in aggregate principal amount of the Notes then outstanding affected by any such amendment, addition, or rescission requiring the consent of the Registered Owners, which instrument or instruments shall refer to the proposed amendment, addition, or rescission described in such notice and shall specifically consent to and approve the adoption thereof in substantially the form of the copy thereof referred to in such notice, thereupon, but not otherwise, the Issuer may adopt such amendment, addition, or rescission in substantially such form, except as herein provided. No Registered Owner may thereafter object to the adoption of such amendment, addition, or rescission, or to any of the provisions thereof, and such amendment, addition, or rescission shall be fully effective for all purposes. SECTION 19. SECURITY INTEREST. Chapter 1208, Texas Government Code, applies to the issuance of the Notes and the pledge of the ad valorem taxes and Surplus Revenues granted by the Issuer under Section 6 of this Order, and is therefore valid, effective, and perfected. If Texas law is amended at any time while the Notes are outstanding and unpaid such that the pledge of the ad valorem taxes or Surplus Revenues granted by the Issuer under Section 6 of this Order is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, then in order to preserve to the registered owners of the Notes the perfection of the security interest in said pledge, the Issuer agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Texas Business & Commerce Code, and enable a filing to perfect the security interest in said pledge to occur. -24- SECTION 20. REMEDIES IN EVENT OF DEFAULT. In addition to all the rights and remedies provided by the laws of the State of Texas, it is specifically covenanted and agreed particularly that in the event the Issuer (i) defaults in the payment of the principal, premium, if any, or interest on the Notes, (ii) defaults in the deposits and credits required to be made to the Interest and Sinking Fund, or (iii) defaults in the observance or performance of any other of the covenants, conditions or obligations set forth in this Order and the continuation thereof for 30 days after the Issuer has received written notice of such defaults, the Holders of any of the Notes shall be entitled to seek a writ of mandamus issued by a court of proper jurisdiction compelling and requiring the governing body of the Issuer and other officers of the Issuer to observe and perform any covenant, condition or obligation prescribed in this Order. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default or acquiescence therein, and every such right and power may be exercised from time to time and as often as maybe deemed expedient. The specific remedy herein provided shall be cumulative of all other existing remedies, and the specification of such remedy shall not be deemed to be exclusive. SECTION 21. INTERESTED PARTIES. Nothing in this Order expressed or implied is intended or shall be construed to confer upon, or to give to, any person or entity, other than the Issuer, the Underwriter and the registered owners of the Notes, any right, remedy or claim under or by reason of this Order or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in this Order contained by and on behalf of the Issuer shall be for the sole and exclusive benefit of the Issuer, the Underwriter and the registered owners of the Notes. SECTION 22. MUNICIPAL BOND INSURANCE POLICY. On the date of delivery of the Notes, the Issuer will obtain from (the "Insurer") a financial guaranty insurance policy in support of the Notes. To that end, for so long as said policy is in effect, the requirements of the Insurer, as a condition to the issuance of said policy, attached hereto as Exhibit D, are incorporated by reference into this Order and made a part hereof for all purposes, notwithstanding any other provision of this Order to the contrary. The Issuer is authorized to use proceeds of the Notes to purchase such policy. SECTION 23. INCORPORATION OF RECITALS. The Issuer hereby finds that the statements set forth in the recitals of this Order are true and correct, and the Issuer hereby incorporates such recitals as a part of this Order. SECTION 2 4. SEVERABILITY. If any provision of this Order or the application thereof to any circumstance shall be held to be invalid, the remainder of this Order and the application thereof to other circumstances shall nevertheless be valid, and this governing body hereby declares that this Order would have been enacted without such invalid provision. -25- SECTION 25. EFFECTIVE DATE. Pursuant to the provisions of Section 1201.028, Texas Government Code, this Order shall become effective immediately after its adoption by the Commissioners Court. [The remainder of this page left blank intentionally) -26- PASSEDANDAPPROVEDBYTHECOMMISSIONERS COURT OFKERR COUNTY, TEXAS AT A REGULAR MEETING ON THE 11TH DAY OF JANUARY, 2010, AT WHICH MEETING A QUORUM WAS PRESENT. County Judge, Kerr County, Texas ATTEST: County Clerk, Kerr County, Texas (SEAL) [SIGNATURE PAGE TO NOTE ORDER] EXHIBIT A FORM OF PAYING AGENT/REGISTRARRGREEMENT THE PAYING AGENT/REGISTRAR AGREEMENT IS OMITTED AT THIS POINT AS IT APPEARS IN EXECUTED FORM ELSEWHERE IN THIS TRANSCRIPT. EXHIBIT B FORM OF PURCHASE AGREEMENT THE PURCHASE AGREEMENT IS OMITTED AT THIS POINT AS IT APPEARS IN EXECUTED FORM ELSEWHERE IN THIS TRANSCRIPT. EXHIBIT C DESCRIPTION OF ANNUAL FINANCIAL INFORMATION The following information is referred to in Section 14 of this Order. Annual Financial Statements and Operating Data The financial information and operating data with respect to the Issuer to be provided annually in accordance with such Section are as specified (and included in the Appendix or under the headings of the Official Statement referred to) below: 1. The annual audited financial statements of the Issuer or the unaudited financial statements of the Issuer in the event audited financial statements are not completed within six months after the end of any fiscal year. 2. All quantitative financial information and operating data with respect to the Issuer of the general type included in the Official Statement under Tables 1 through 7 and 9 through 12. Accounting Principles The accounting principles referred to in such Section are the accounting principles described in the notes to the financial statements referred to in paragraph 1 above. DRAFT DATE: DECEMBER 30, 2009 PAYING AGENT/REGISTRAR AGREEMENT THIS PAYINGAGENT/REGISTRAR AGREEMENT, dated as of January 15, 2010 (this "Agreement"), by and between KERB COUNTY, TEXAS (the "Issuer") and WELLS FARGO BANK, N.A. (the "Bank"), a national bank duly organized and operating under the laws of the United States of America. WHEREAS, the Issuer has duly authorized and provided for the issuance of its KERB COUNTY, TEXAS TAX NOTES, SERIES 2010 (the "Securities"), such Securities to be issued in fully registered form only as to the payment of principal and interest thereon; and WHEREAS, the Securities are scheduled to be delivered to the initial purchasers thereof on or about February 9, 2010; and WHEREAS, the Issuer has selected the Bank to serve as Paying Agent/Registrar in connection with the payment of the principal of, premium, if any, and interest on the Securities and with respect to the registration, transfer, and exchange thereof by the registered owners thereof; and WHEREAS, the Bank has agreed to serve in such capacities for and on behalf of the Issuer and has full power and authority to perform and serve as Paying Agent/Registrar for the Securities; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE ONE APPOINTMENT OF BANK AS PAYING AGENT AND REGISTRAR SECTION 1.01. APPOINTMENT. The Issuer hereby appoints the Bank to serve as Paying Agent with respect to the Securities. As Paying Agent for the Securities, the Bank shall be responsible for paying on behalf of the Issuer the principal, premium (if any), and interest on the Securities as the same become due and payable to the registered owners thereof, all in accordance with this Agreement and the "Order" (hereinafter defined). The Issuer hereby appoints the Bank as Registrar with respect to the Securities. As Registrar for the Securities, the Bank shall keep and maintain for and on behalf of the Issuer books and records as to the ownership of said Securities and with respect to the transfer and exchange thereof as provided herein and in the Order, a copy of which books and records shall be maintained at the office of the Bank located in the State of Texas or shall be available to be accessed from such office located in the State of Texas. The Bank hereby accepts its appointment, and agrees to serve as the Paying Agent and Registrar for the Securities. SECTION 1.02. COMPENSATION. As compensation for the Bank's services as Paying Agent/Registrar, the Issuer hereby agrees to pay the Bank the fees and amounts set forth in Schedule A attached hereto for the first year of this Agreement and thereafter the fees and amounts set forth in the Bank's current fee schedule then in effect for services as Paying AgentlRegistrar for municipalities, which shall be supplied to the Issuer on or before 90 days prior to the close of the Fiscal Year of the Issuer, and shall be effective upon the first day of the following Fiscal Year. In addition, the Issuer agrees to reimburse the Bank upon its request for all reasonable expenses, disbursements and advances incurred or made by the Bank in accordance with any of the provisions hereof (including the reasonable compensation and the expenses and disbursements of its agents and counsel). ARTICLE TWO DEFINITIONS SECTION 2.01. DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Date" on any Security means, if applicable, the date on and after which the principal or any or all installments of interest, or both, are due and payable on any Security which has become accelerated pursuant to the terms of the Security. "Bank Office" means the corporate trust or commercial banking office of the Bank as indicated on the signature page hereof. The Bank will notify the Issuer in writing of any change in location of the Bank Office. "Fiscal Year" means the fiscal year of the Issuer, ending September 30. "Holder" and "Security Holder" each means the Person in whose name a Security is registered in the Security Register. "Legal Holiday" means a day on which the Bank is required or authorized to be closed. "Order" means the resolutions, orders or ordinances of the governing body of the Issuer pursuant to which the Securities are issued, certified by the Secretary or any other officer of the Issuer and delivered to the Bank, together with any pricing certificate executed pursuant thereto. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision of a government. "Predecessor Securities" of any particular Security means every previous Security evidencing all or a portion of the same obligation as that evidenced by such particular Security (and, for the purposes of this definition, any mutilated, lost, destroyed, or stolen Security for which a 2 replacement Security has been registered and delivered in lieu thereof pursuant to Section 4.06 hereof and the Order). "Redemption Date" when used with respect to any Security to be redeemed means the date fixed for such redemption pursuant to the terms of the Order. "Responsible Officer" when used with respect to the Bank means the Chairman or Vice- Chairman of the Board of Directors, the Chairman or Vice-chairman of the Executive Committee of the Board of Directors, the President, any Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, or any other officer of the Bank customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Security Register" means a register maintained by the Bank on behalf of the Issuer providing for the registration and transfer of the Securities. "Stated Maturity" means the date specified in the Order the principal of a Security is scheduled to be due and payable. SECTION 2.02. OTHER DEFINITIONS. The terms "Bank," "Issuer," and "Securities" ("Security") have the meanings assigned to them in the recital paragraphs of this Agreement. The term "Paying Agent/Registrar" refers to the Bank in the performance of the duties and functions of this Agreement. ARTICLE THREE PAYING AGENT SECTION 3.01. DUTIES OF PAYING AGENT. (a) Principal Payments. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the principal of each Security at its Stated Maturity, Redemption Date, or Acceleration Date, to the Holder upon surrender of the Security to the Bank at the Bank Office. (b) Interest Payments. As Paying Agent, the Bank shall, provided adequate collected funds have been provided to it for such purpose by or on behalf of the Issuer, pay on behalf of the Issuer the interest on each Security when due, by computing the amount of interest to be paid each Holder and preparing and sending checks by United States mail, first class postage prepaid, on each payment date, to the Holders of the Securities (or their Predecessor Securities) on the respective Record Date, to the address appearing on the Security Register or by such other method, acceptable to the Bank, requested in writing by the Holder at the Holder's risk and expense. (c) Federal Tax Information Reporting. To the extent required by the Code and the Regulations it shall be the duty of the Bank to report to the owners of the Securities and the Internal Revenue Service (i) the amount of "reportable payments," if any, subject to back up withholding during each year and the amount of tax withheld, if any, with respect to the payments on the Securities, and (ii) the amount of interest or amount treated as interest, such as original issue discount, on the Securities required to be included in the gross income of the owners thereof for federal income tax purposes. SECTION 3.02. PAYMENT DATES. The Issuer hereby instructs the Bank to pay the principal of and interest on the Securities on the dates specified in the Order. ARTICLE FOUR REGISTRAR SECTION 4.01. SECURITYREGISTER -TRANSFERS AND EXCHANGES. The Bank agrees to keep and maintain for and on behalf of the Issuer at the Bank Office books and records (herein sometimes referred to as the "Security Register") for recording the names and addresses of the Holders of the Securities, the transfer, exchange, and replacement of the Securities, and the payment of the principal of and interest on the Securities to the Holders and containing such other information as may be reasonably required by the Issuer and subject to such reasonable regulations as the Issuer and the Bank may prescribe. If the Bank Office is located outside the State of Texas, a copy of the Security Register shall be kept in the State of Texas. All transfers, exchanges, and replacement of Securities shall be noted in the Security Register. Every Security surrendered for transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer, the signature on which has been guaranteed by an officer of a federal or state bank or a member of the Financial Industry Regulatory Authority, in form satisfactory to the Bank, duly executed by the Holder thereof or his agent duly authorized in writing. The Bank may request any supporting documentation it feels necessary to effect a re- registration, transfer, or exchange of the Securities. To the extent possible and under reasonable circumstances, the Bank agrees that, in relation to an exchange or transfer of Securities, the exchange or transfer by the Holders thereof will be completed and new Securities delivered to the Holder or the assignee of the Holder in not more than three business days after the receipt of the Securities to be cancelled in an exchange or transfer and the written instrument of transfer or request for exchange duly executed by the Holder, or his duly authorized agent, in form and manner satisfactory to the Paying Agent/Registrar. SECTION 4.02. SECURITIES. The Issuer shall provide an adequate inventory of printed Securities to facilitate transfers or exchanges thereof. The Bank covenants that the inventory of printed Securities will be kept in safekeeping pending their use, and reasonable care will be exercised by the Bank in maintaining such Securities in safekeeping, which shall be not less than 4 the care maintained by the Bank for debt securities of other political subdivisions or corporations for which it serves as registrar, or that is maintained for its own securities. SECTION 4.03. FORM OF SECURITY REGISTER. The Bank, as Registrar, will maintain the Security Register relating to the registration, payment, transfer, and exchange of the Securities in accordance with the Bank's general practices and procedures in effect from time to time. The Bank shall not be obligated to maintain such Security Register in any form other than those which the Bank has currently available and currently utilizes at the time. The Security Register may be maintained in written form or in any other form capable of being converted into written form within a reasonable time. SECTION 4.04. LIST OF SECURITY HOLDERS. The Bank will provide the Issuer at any time requested by the Issuer, upon payment of the required fee, a copy of the information contained in the Security Register. The Issuer may also inspect the information contained in the Security Register at any time the Bank is customarily open for business, provided that reasonable time is allowed the Bank to provide an up-to-date listing or to convert the information into written form. Unless required by law, the Bank will not release or disclose the contents of the Security Register to any person other than to, or at the written request of, an authorized officer or employee of the Issuer, except upon receipt of a court order or as otherwise required by law. Upon receipt of a court order and prior to the release or disclosure of the contents of the Security Register, the Bank will notify the Issuer so that the Issuer may contest the court order or such release or disclosure of the contents of the Security Register. SECTION 4.05. RETURN OF CANCELLED SECURITIES. The Bank will, at such reasonable intervals as it determines, surrender Securities to the Issuer in lieu of which or in exchange for which other Securities have been issued, or which have been paid, or will provide a certificate of destruction relating thereto. SECTION 4.06. MUTILATED. DESTROYED. LOST. OR STOLEN SECURITIES. The Issuer hereby instructs the Bank, subject to the applicable provisions of the Order, to deliver and issue Securities in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities as long as the same does not result in an over issuance. In case any Security shall be mutilated, or destroyed, lost, or stolen, the Bank, in its discretion, may execute and deliver a replacement Security of like form and tenor, and in the same denomination and bearing a number not contemporaneously outstanding, in exchange and substitution for such mutilated Security, or in lieu of and in substitution for such destroyed, lost, or stolen Security, only after (i) the filing by the Holder thereof with the Bank of evidence satisfactory to the Bank of the destruction, loss, or theft of such Security, and of the authenticity of the ownership thereof and (ii) the furnishing to the Bank of indemnification in an amount satisfactory to hold the Issuer and the Bank harmless. All expenses and charges associated with such indemnity 5 and with the preparation, execution, and delivery of a replacement Security shall be borne by the Holder of the Security mutilated, or destroyed, lost, or stolen. SECTION 4.07. TRANSACTION INFORMATION TO ISSUER. The Bank will, within a reasonable time after receipt of written request from the Issuer, furnish the Issuer information as to the Securities it has paid pursuant to Section 3.01, Securities it has delivered upon the transfer or exchange of any Securities pursuant to Section 4.01, and Securities it has delivered in exchange for or in lieu of mutilated, destroyed, lost, or stolen Securities pursuant to Section 4.06. ARTICLE FIVE THE BANK SECTION 5.01. DUTIES OF BANK. The Bank undertakes to perform the duties set forth herein and in the Order and agrees to use reasonable care in the performance thereof. The Bank is also authorized to transfer funds relating to the closing and initial delivery of the Securities in the manner disclosed in the closing memorandum as prepared by the Issuer's financial advisor, bond counsel or other agent. The Bank may act on a facsimile or a-mail transmission of the closing memorandum acknowledged by the financial advisor or the Issuer as the final closing memorandum. The Bank shall not be liable for any losses, costs or expenses arising directly or indirectly from the Bank's reliance upon and compliance with such instructions. SECTION 5.02. RELIANCE ON DOCUMENTS, ETC. (a) The Bank may conclusively rely, as to the truth of the statements and correctness of the opinions expressed therein, on certificates or opinions furnished to the Bank. (b) The Bank shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Bank was negligent in ascertaining the pertinent facts. (c) No provisions of this Agreement shall require the Bank to expend or risk its own funds or otherwise incur any financial liability for performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risks or liability is not assured to it. (d) The Bank may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, iristrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. Without limiting the generality of the foregoing statement, the Bank need not examine the ownership of any Securities, but is protected in acting upon receipt of Securities containing an endorsement or instruction of transfer or power of transfer which appears on its face to be signed by the Holder or an agent of the Holder. The Bank shall not be bound to make any investigation into the facts or matters stated in a resolution, certificate, 6 statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note, security, or other paper or document supplied by the Issuer. (e) The Bank may consult with counsel, and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection with respect to any action taken, suffered, or omitted by it hereunder in good faith and in reliance thereon. (f) The Bank may exercise any of the powers hereunder and perform any duties hereunder either directly or by or through agents or attorneys of the Bank. SECTION 5.03. RECITALS OF ISSUER. The recitals contained herein with respect to the Issuer and in the Securities shall be taken as the statements of the Issuer, and the Bank assumes no responsibility for their correctness. The Bank shall in no event be liable to the Issuer, any Holder or Holders of any Security, or any other Person for any amount due on any Security from its own funds. SECTION 5.04. MAY HOLD SECURITIES. The Bank, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Issuer with the same rights it would have if it were not the Paying Agent/Registrar, or any other agent. SECTION 5.05. MONEY HELD BY BANK. The Bank shall deposit any moneys received from the Issuer into an account to be held in a fiduciary capacity for the payment of the Securities, with such moneys in the account that exceed the deposit insurance, available to the Issuer, provided by the Federal Deposit Insurance Corporation to be fully collateralized with securities or obligations that are eligible under the laws of the State of Texas and to the extent practicable under the laws of the United States of America to secure and be pledged as collateral for trust accounts until the principal and interest on such securities have been presented for payment and paid to the owner thereof. Payments made from such trust account shall be make by check drawn on such trust account unless the owner of such Securities shall, at its own expense and risk, request such other medium of payment. Funds held by the Bank hereunder need not be segregated from any other funds provided appropriate accounts are maintained in the name and for the benefit of the Issuer. The Bank shall be under no liability for interest on any money received by it hereunder. Any money deposited with the Bank for the payment on any Security and remaining unclaimed for three years after final maturity of the Security has become due and payable will be held by the Bank and disposed of only in accordance with Title 6 of the Property Code (Unclaimed Property). 7 The Bank will comply with the reporting provisions of Chapter 74 of the Property Code with respect to property that is presumed abandoned under Chapter 72 or Chapter 75 of the Property Code or inactive under Chapter 73 of the Property Code. SECTION 5.06. INDEMNIFICATION. To the extent permitted by law, the Issuer agrees to indemnify the Bank for, and hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on its part, arising out of or in connection with its acceptance or administration of its duties hereunder, including the cost and expense against any claim or liability in connection with the exercise or performance of any of its powers or duties under this Agreement. SECTION 5.07. INTERPLEADER. The Issuer and the Bank agree that the Bank may seek adjudication of any adverse claim, demand, or controversy over its person as well as funds on deposit, in either a Federal or State District Court located in the County in the State of Texas where either the Bank maintains an office or the administrative offices of the Issuer is located, and agree that service ofprocess by certified or registered mail, return receipt requested, to the address referred to in Section 6.03 of this Agreement shall constitute adequate service. The Issuer and the Bank further agree that the Bank has the right to file a Bill of Interpleader in any court of competent jurisdiction located in the State of Texas to determine the rights of any Person claiming any interest herein. SECTION 5.08. DEPOSITORY TRUST COMPANY SERVICES. It is hereby represented and warrantedthat, in the eventthe Securities are otherwise qualified and accepted for "Depository Trust Company" services or equivalent depository trust services by other organizations, the Bank has the capability and, to the extent within its control, will comply with the "Operational Arrangements," effective from time to time, which establishes requirements for securities to be eligible for such type depository trust services, including, but not limited to, requirements for the timeliness of payments and funds availability, transfer turnaround time, and notification of redemptions and calls. ARTICLE 5IX MISCELLANEOUS PROVISIONS SECTION 6.01. AMENDMENT. This Agreement may be amended only by an agreement in writing signed by both of the parties hereto. SECTION 6.02. ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other. SECTION 6.03. NOTICES. Any request, demand, authorization, direction, notice, consent, waiver, or other document provided or permitted hereby to be given or furnished to the Issuer or the Bank shall be mailed or delivered to the Issuer or the Bank, respectively, at the addresses shown on the signature page of this Agreement. SECTION 6.04. EFFECT OF HEADINGS. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. 8 SECTION 6.05. SUCCESSORS AND ASSIGNS. All covenants and agreements herein by the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 6.06. SEVERABILITY. In case any provision herein shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 6.07. BENEFITS OF AGREEMENT. Nothing herein, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any benefit or any legal or equitable right, remedy, or claim hereunder. SECTION 6.08. ENTIRE AGREEMENT. This Agreement and the Order constitute the entire agreement between the parties hereto relative to the Bank acting as Paying Agent/Registrar and if any conflict exists between this Agreement and the Order, the Order shall govern. SECTION 6.09. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Agreement. SECTION 6.10. TERMINATION. This Agreement will terminate on the date of final payment of the principal of and interest on the Securities to the Holders thereof or may be earlier terminated by either party upon 60 days written notice; provided, however, an early termination of this Agreement by either party shall not be effective until (a) a successor Paying Agent/Registrar has been appointed by the Issuer and such appointment accepted and (b) notice has been given to the Holders of the Securities of the appointment of a successor Paying Agent/Registrar. Furthermore, the Bank and Issuer mutually agree that the effective date of an early termination of this Agreement shall not occur at any time which would disrupt, delay, or otherwise adversely affect the payment of the Securities. Upon an early termination of this Agreement, the Bank agrees to promptly transfer and deliver the Security Register (or a copy thereof), together with other pertinent books and records relating to the Securities, to the successor Paying Agent/Registrar designated and appointed by the Issuer. The provisions of Section 1.02 and of Article Five shall survive and remain in full force and effect following the termination of this Agreement. SECTION 6.11. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. [The remainder of this page intentionally left blank] 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. WELLS FARGO BANK, N.A. By: Title: Address: 400 W. 15`h Street, l5t Floor Austin, Texas 78701 Attest: Title: KERR COUNTY, TEXAS By: Title: County Judge Address: 700 Main Street Kerrville, Texas 78028 Attest: Title: County Clerk [SIGNATURE PAGE TO PAYING AGENT/REGISTRARRGREEMENT] SCHEDULE A PAYING AGENT/REGISTRARFEE SCHEDULE ANNUAL ADMINISTRATION FEE (plus out of pocket expenses) v m J m ~ ~y - ov v ~ y ~vC ~c~v fn c1 a- ~ ~ - ~ c~ o.b! ~oo~ O ° Z ~ y ~ Q o>> c2 oo~« t0/ a m d C - o . d ~E 'o~' ! a~ n y D&i m D d tO o ~ m om O ~ ~ 'D ~p K o ~~ _ 3 D ~_.x ~ c ~ -c f , A m ~ 3 ~ o~c ~° ~ o Nim m ~.~ c C d c ~ ~ C C y N y.. ~ O ~ ~ ~a . .r O ^' ~ ~ ~ . + ~ "' O o a > E~ y N N c n ~ y m ; o °° z m w ~ c ~ 4 S ~' F ~ y ~ o a u' ~ ' Z o ,- ~ - m ~1 o ~ ~ f ~ .~ C ... ~, m n ~ m ~. w ° ~~ W _ s . ~ c y ~ c a . vi C a ~ y Q, ~; N. y ~ ~ m y o °c N C~ ~ ~ ~ ~ ° , m '~ = e y V! ~ O O y ~ ~ n C n ~ ~ a_ d N N , c 1 ~ ~ a m ~ ~ O 3 8 ^: o A m a v r ~N N N A A O J A O A ~- N W r O OO R N ~ W O OHO p r- O A ON CA CO O 00 ~ ~tT C)1 OO~O C ON C O O C ~0 N O Ch W O O~ O A IVO 0 Cil ~~C 0 ~ r `~ V K OW 0 O ~ ~ A W W C T CO 0 00 Ot0 W 04.10 A 0 0 ~ W O O ~ O O O O O O O O O O O O CO O m o ~ d ~ ~ ~ m/y~ f1 !f ~r `. ,~c~ c~"~ 3 N '~ a~ d O H W "' ~~ O O o 0 0 0 0 0 0 0 0 p n (7 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ °' " " ~ D -I c~ %1 c~1 %1 cn cr~1 t~1 c~i~1 c~1 t~1 01 ~D7 n'n p NNNNNNNNNNN N O'~? ~; Sl 00000_000000 !~j ~ N dl ~+ O)U1 UlAAW W NNE ~ X ~ I d A N m n yZ "C Z m 0 a t n d 'O 3 A d n A oki a O r 0 0 ~A O tt C1100N p f71 Oi71 U1 CnOpCOOOOOCT ~ O O O 0 0 0 0 0 0 0 0 0 0 0 Efl O O O (T J J ~ rn ~ ~ ~ rn J N w ~~711 ~ N J V N V O O fr N f,11 O f 71 U1 O O ~ O O~ C O~ G O~ C71 O~ v d 11 0 m A m A n 0 Z Z 0 0 '< W C'~ d 'O 3 d n a 3 O d N v O N O 0 C~ .. t 7 > ~ O' ~ O O y '`• aa~ ~ vv ~ N ~ _ F f m ~ N to i o ~ rn ~ ~?? ° ~ o 0 ° a 0 0 0 0 0 0 0 3 ~^p ~ 0000000 0000000 x ~ ~~ N ; % y ~ D ~ ~ G C N ~p G N ~ a ,~ ~ _ ~ C VIA O ry p o 0 0 0 0 0 o N y w C O C C O C O p 0 0 0 0 0 0 0 y K 7 ~ ~~ ~ ~ S O N G C~1 N tp OD t0 '~ 7 C ~ \''. ~ ~ oooooocAii ~' c °c o °o °o °o o °0 0 0 nfl o ~ 0 ~° ~ ~ ~ ~ ~ '~ O A ~ 0 0 0 0 0 0 CJI p p 0 0 0 0 0 0 0 N V1 C ~Te~ ~ ~mRt~ N ~~ n om A ~ m = ~' '~ ~~ oho K 'o a mC a G N O O l m tC m b1 ~1 A n 0 Z Z m 0 0 1 Q !C n obi 3 1D N G n 0 A k H v 0 C _. 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C. Certified Public Accountants P.O. BOX 874. 736 S. WASHINGTON ST. FREDERICKSBURG, TEXAS 78624-0874 (830) 997-3348 MEMBER FAX: (830) 997-3333 MEMBER AMERICAN INSTITUTE OF Email: nkhdQaustin.rr.com TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT Honorable Judge and County Commissioners Kerr County, Texas Kerrville, TX 78028 CERTIFIED PUBLIC ACCOUNTANTS We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Kerr County, Texas, as of and for the year ended September 30, 2008, which collectively comprise the County's basic financial statements as listed in the table of contents. These financial statements are the responsibility of Kerr County, Texas's management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whefher the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of Kerr County, Texas,. as of September 30, 2008, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. The management's discussion and analysis (pages 2 through 8) and budgetary comparison. information (pages 34 and 35) are not a required part of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. In accordance with Government Auditing Standards, we have also issued our report dated April 24, 2009 on our consideration of the County's internal control over financial reporting and on our tests of its compliance with certain. provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. ~l~dQ..u,, ~C4rto~p, lOaA.a .~ Ctnnp amp P ~ . NEFFENDORF, KNOPP, DOSS & COMPANY, P.C. Fredericksburg, Texas April 24, 2009 KERB COUNTY, TEXAS MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEAR ENDED SEPTEMBER 30, 2008 MANAGEMENT'S DISCUSSION AND ANALYSIS As management of Kerr County, Texas, we offer readers of the County's financial statements this narrative overview and analysis of the financial statements of the County for the year ended September 30, 2008. Please read it in conjunction with the independent auditors' report on page 1, and County's Basic Financial Statements which begin on page 9. FINANCIAL HIGHLIGHTS - The assets of the County exceeded its liabilities at the close of the most recent fiscal year by $47,704,943 (net assets). Of this amount, $4,531,929 (unrestricted. net assets) may be used to meet the County's ongoing obligations to citizen's and creditors. - The County's net assets decreased by $282,353; $176,357 as a result of this year's operations and $105,996 as a result of prior period adjustments. - At September 30, 2008, the County's governmental funds reported combined ending fund balances of $5,377,509, an increase of $819,353 in comparison with the prior year. - At September 30, 2008, the unreserved fund balance of the general fund was $2,574,590, or 17.9 percent of total general fund expenditures. - The County issued Tax Anticipation Notes -Series 2008 ($1,780,000) in January 2008 to cover long term capital items such as renovations to the Kerr County Courthouse and the Hill Country Youth Exhibit Center and vehicles and equipment for the Road and Bridge Department, Environmental Health Department and Animal Control Department. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The government-wide financial statements include the Statement of Net Assets and the Statement of Activities (on pages 9 and 10). These provide information about the activities of the County as a whole and present alonger-term view of the County's property and debt obligations and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a business enterprise. Fund financial statements (on pages 1l & 14) report the County's operations in more detail than the government-wide statements by providing information about the County's most significant funds. For governmental activities, these statements tell how services were financed in the short term as well as what resources remain for future spending. They reflect the flow of current financial resources, and supply the basis for tax levies and the appropriations budget. The notes to the financial statements (starting on page 18) provide narrative explanations or additional data needed for full disclosure in the government-wide statements or the fund financial statements. The Budgetary Comparison Schedules (operating fund) are presented as required supplementary information on pages 34 and 35. Reporting the County as a Whole The Statement of Net Assets and the Statement of Activities The analysis of the County's overall financial condition and operations begins on page 9. Its primary purpose is to show whether the County is better off or worse off as a result of the year's activities. The Statement of Net Assets includes all the County's assets and liabilities at the end of the year while the Statement of Activities includes all the revenues and expenses generated by the County's operations during the year. These apply the accrual basis of accounting which is the basis used by private sector companies. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid. All the County's assets are reported whether they serve the current year or future years. Liabilities are considered regardless of whether they must be paid in the current or future years. These two statements report the County's net assets and changes in them. The County's net assets (the difference between assets and liabilities) provide one measure of the County's financial health, or financial position. Over time, increases or decreases in the County's net assets are one indicator of whether its financial health is improving or deteriorating. To fully assess the overall health of the County, however, you should consider other factors as well, such as changes in the County's customers or its property tax base and the condition of the County's facilities. In the Statement of Net Assets and the Statement of Activities, the County has one kind of activity: - Governmental activity -Most of the County's basic services are reported here, including the public safety, streets and highways, justice system, juvenile services, health and human services, culture and recreation, conservation and development and administration. Property taxes, grants, fees of office, automobile registration, sales tax and other taxes finance most of these activities. Reporting the County's Most Significant Funds Fund Financial Statements The fund financial statements on pages 11 & 14 provide detailed information about the most significant funds -not the County as a whole. - Governmental funds -All of the County's basic services are reported in governmental funds. These use modified accrual accounting (a method that measures the receipt and disbursement of cash and all other financial assets that can be readily converted to cash) and report balances that are available for future spending. The governmental fund statements provide a detailed short-term view of the County's general operations and the basic services it provides. We describe the differences between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds in Note 2 to the financial statements. GOVERNMENT-WIDE FINANCIAL ANALYSIS Net assets of the County's governmental activities decreased from $47,987,293 to $47,704,943. Unrestricted net assets -the part of net assets that can be used to finance day-to-day operations without constraints established by debt covenants, enabling legislation, or other legal requirements -was $4,531,929 at September 30, 2008. This decrease in governmental net assets was the result of five factors. First, the County's expenditures exceeded the revenues by $176,357. Second, the County acquired capital assets in the amount of $1,295,578. Third, the County issued long-term debt in the amount of $1,962,441 and paid principal on long-term debt of $1,43],833. Fourth, the County recorded depreciation in the amounts of $1,738,112. Fifth, the County recorded a prior period adjustment of ($105,996) to Machinery & Equipment assets. Table I KERR COUNTY, TEXAS NET ASSETS in thousands Current and Other Assets Receivables Other Noncurrent Assets Capital Assets Total Assets Long-Term Liabilities Accounts Payable Other Liabilities and Deferred Revenue Long-term Debt Total Liabilities Net Assets: Invested in Capital Assets Net of Related Debt Restricted Unrestricted Total Net Assets 2008 2007 Governmental Activities $ 5,826 $ 5,916 2,674 2,263 86 30 46,107 46,680 $ 54,693 $ 54,889 $ 872 $ 1,234 105 516 6,011 5,152 $ 6,988 $ 6,902 $ 40,370 $ 41,473 2,803 2,214 4,532 4,300 $ 47,705 $ 47,987 4 Table II KERB COUNTY, TEXAS CHANGES IN NET ASSETS in thousands Governmental Activities 2008 2007 Revenues: Program Revenue Charges for Services $ 4,086 $ 3,244 Operating Grants and Contributions 162 156 Capital Grants and Contributions - 445 General Revenues Property Taxes 12,778 11,687 Other Taxes 2,981 2,902 Grants and Contributions 644 - Investment Earnings 238 371 Other General Revenues 1,287 1,627 Total Revenue $ 22,176 $ 20,432 Expenses: General Government $ 4,026 $ 3,287 Administration of Justice 4,103 3,930 Public Safety 4,476 4 069 Corrections 3,531 3,048 Health and Human Services 1,647 1,425 Community & Economic Development 1,107 1,022 Infrastruchtre & Environmental Services 3,198 3,342 Long-term Debt Expenditures 264 248 Total Expenses $ 22,352 $ 20,371 Increase (Decrease) in Net Assets $ (176) $ 61 Net Assets -Beginning 47,987 12,740 Prior Period Adjustment (106) 35,186 Net Assets -Ending $ 47,705 $ 47,987 5 The cost of all governmental activities this year was $22,351,999. However, the amount that our taxpayers ultimately financed for these activities through County taxes was only $12,778,127 because the other costs were paid by other taxes ($2,980,794), operating grants and contributions ($806,188), user charges ($4,085,822) investment earnings ($237,507) and other miscellaneous ($1,287,204). THE COUNTY'S FUNDS As the County completed the year, its governmental funds (as presented in the balance sheet on page 11) reported a combined fund balance of $5,377,509, which is less than last year's total of $4,558,156. Included in this year's total change in fund balance is an increase of $230,616 in the County's General Fund. The primary reason for the General Fund's increase is because expenditures were less than budgeted amounts. The Commissioner's Court adopted the General Fund and Road and Bridge Fund budgets. In the General Fund, actual revenues and expenditures were less than the budgeted amounts, resulting in a net positive variance of $724,068. In the Road and Bridge Fund, actual revenues and expenditures were more than the budgeted amounts, resulting in a net positive variance of $96,053. CAPITAL ASSET AND DEBT ADMINISTRATION At September 30, 2008, the County had the following amounts invested in capital assets, net of depreciation: CAPITAL ASSETS in thousands 2008 2007 Land $ 497 $ 497 Buildings & Improvements 15,131 15,081 Machinery & Equipment 9,373 8,313 Infrastructure 38,680 38,680 Total Capital Assets $ 63,681 $ 62,571 Accumulated Depreciation 17,574 15,891 Capital Assets, Net $ 46,107 $ 46,680 6 This year's major additions included: Improvements - Youth Exhibit Center Courthouse -Sidewalk Software Teleconferencing System Security Equipment (3) 2008 Chevrolet Tahoes (2) 2008 Ford Crown Victorias (5) 2008 Ford F150 Crew Cabs (2) 2008 Ford F350 Crew Cabs (2) John Deere Tractors Gradall XL3100 Vermeer Brush Chipper Case Motor Grader 2002 GMC C-7500 Cab with Altec Model LRV56 2007 Chevrolet Dump Truck 2008 Dodge Ram 3500 Other Equipment & Furniture TOTALS 71,545 64,929 28,509 42,381 $ 1,295,578 41,093 8,850 21,925 39,800 196,529 124,242 56,678 92,756 55,706 70,103 206,530 40,642 133,360 More detailed information about the County's capital assets is presented in Note 3.D. to the financial statements. DEBT At September 30, 2008, the County had the following outstanding debt: OUTSTANDING DEBT in thousands 2008 2007 Certificates of Obligation $ 4,515 $ 3,770 Notes Payable 642 786 Capital Leases 525 596 Total Outstanding Debt $ 5,682 $ 5,152 For governmental activities, the County had $5,682,574 in certificates of obligation and other long-term debt outstanding, an increase of 10.3 percent. The County paid $1,431,833 in principal on the outstanding long-term debt, and issued $1,780,000 in Tax Note Certificates of Obligation and $182,441 in capital lease obligations. More detailed information about the County's long-term liabilities is presented in Note 3.F, to the financial statements. 7 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The County's elected and appointed officials considered many factors when setting the fiscal-year 2009 budget and tax rates. The major factors are the economy, population growth, and assessed property valuation. These indicators were taken into account when adopting the General Fund budget for 2009. Amounts available for appropriation in the General Fund budget are $17,171,503 and expenditures are estimated to be $16,979,339. If these estimates are realized, the County's budgetary General fund balance is expected to increase $192,164 by the close of 2009. The total budget for capital expenditures is $163,651 for fiscal-year 2009. The expenditures include equipment for the IT Department, air conditioners for the County Jail, and renovations and vehicles for the Hill Country Youth Exhibit Center. CONTACTING THE COUNTY'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, and investors and creditors with a general overview of the County's finances and to show the County's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the County Auditor or Commissioners' Court at the Kerr County offices in Kerrville, Texas. [This page intentionally left blank] BASIC FINANCIAL S'TA:TEMENTS KERR COUNTY STATEMENT' OF NET ASSETS SEPTEMBER 30, 2008 Primary Uovernment Governmental Activities ASSETS Cash and Cash Equivalents Receivables (net of allowance for uncollectibles) Court Fines and Fees Receivable Due from Others Prepaid Items Capitalized Debt Issuance Costs Capita] Assets: Land. Infrast..ructure, net Buildings, net Machinery and Equipment, not Total Assets LIABILI7'dES Accounts Payable Accrued Interest Payable Deferred Revenges Nonr;urrent Liabilities Due Within One Year Due in Mcre Than Ono Year T'ota) Liabilities NET ASSE"1'S Invested. iti Capital Assets, Net of Related Debt Resh-ir.,ted for: Restricted for Special Revenue Restricted for Debt Service Restricted for Capital Projects Unrestricted Net Assets lbtal Not Assets $ 5,825,359 823,497 1,825,590 25,000 46,824 39,363 497,457 34,282,464 9,253,856 2,073,530 54,692,94G 872,605 104,194 S37 1,310,093 4,700,568 t?,987,997 40,370,095 1,65 1,753 96,3?,0 1,05~~,846 4,53 1,929 $ 47,'704,943 EXHIBIT A-1 The notes to the Financial Statements are an integral part of this statement. 9 KERB COUNTY STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2008 Program Revenues Primary Goves~nment: GOVERNMENTAL ACTIVI'T'IES: General Government Administration of Justice PUb11C Su fety Con•ections Health and Human Services Community and Economic Dev~leprnent Infrastructure and Environmental Debt Interest Fiscal Agent's Fees Issu<.t?ce-Costs Tt>TAL PRIMARY GOVERNTiIEN'1' Net (Expense} Revenue and Changes in Net Assets EXHIBIT B-1 Operating Primary Gov. Charges fcr Grants and Governmental Expenses Services Contributions Activities $ 4,025,604 $ 1,170,485 $ 7.35 $ (:1.,854,884) 4,103,271 2,148,83'l 86,700 (1,867,739) 4,475,732 222,028 45,852 (4,207,852) 3,530,730 414,000 - (3,116,730) 1,646,725 28,783 252 (1,617,690) 1,]07,461 - - (1,107,461] 3,198,049 lOl,b94 28,805 (3,067,550) 241,565 - - (241,565} 3,181 - - (3,181) 19,681 - - (19,681) $ 22,351,999 $ 4,085,8'L2 $ 161,844 (18,104;333) :General Revenues: Taxes: Property Taxes, Levied for General Purposes Property Taxes, Levied far Debt Service Other Taxes Grants and Contributions Nut IZ.estricted Miscellaneous Revenue Investment Earnings 'I'ota] General Revenues Change in 1`1et Assets Net Assets--Beginning Prior Period Adjustment Nei Assets--Ending 11,641,031 1,13'/,096 2,980,794 644,344 1,287,7.04 23'7,50'1 17,927,976 (1'16,357) 47, 937,296 (I OS,996} d'7,704,943 The notes to the Financial Statements are an integral part of this statement. 10 I{ERR COUNTY BALANCE SHEET GOVERNMENTAL, FUNDS SEPTEMBER. 30, 2008 Road and Capital General Bridge Projects Fund Fund Fund ASSETS Cash and Cash Equivalents Taxes Receivable Allowance for Uncollectible Taxes (credit) Intergovernmental Receivables Due f •om Others Prepaid Items Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts Payable Deferred Revenues Total Liabilities Fund Balances: Reserved Per: Prepaid Items Ut~rc,served and Undesignated: Reported in the ~Beneral Fund Reported in the Special Revenue Fund Reported in the Debt Service Fund Reported ire the Capital Projects Fund Total Fttnd Balances $ 2,945,721 $ 533,977 $ 1,025,344 316,614 43,776 _ (15,831) (2,189) _ 333,862 - _ 25,000 - _ 46,424 - _ $ 3,6.51,790 $ 575,564 $ 1,025,344 $ '175,88C $ 36,414 $ _ 301,320 41,587 _ 1,077,200 78,001 - 46,424 - _ 2,528,166 _ _ - 497,563 _ 1,025,344- _ 2,574,590 __ 497,563 _ 1,025,344 Total Liabilities and Fwd Balances 3,651,790 $ 575,564 - $ 1.,025,344 The notes to the Financial Staterr~ents are an integral part of this statement. Il EXHIBIT C-1 Nonma~or Governmental Funds Total Governmental Funds $ 1,320,317 $ 5,825,359 134,378 494,768 (6,719) (24,739) 19,606 353,468 - 25,000 400 46,824 $ 1,467,982 $ 6,720,680 $ 60,311 $ 872,605 127,659 470,566 18"1,970 1,343,171 400 46,824 - 2,.528,.166 1,153,790 1,651,353 96,320 96,320 2n,502 1,0.54,846 1,280,012 5,377,509 $ 1,467,982 $ 6,720,680 12 [This page intentionally left blank] KERR COUNTY RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMF,NT OF NET ASSETS SEPTEMBER 30, 2008 EXHIBIT C-2 Total Fund Balances -Governmental Funds $ 5,377,509 Capital assets used in governmental activities are not financial resources and 41 397 078 therefore are not reported in governmental funds. At the beginning of the year, the cost of these assets was $62,571,298 and the accumulated depreciation was $15,891,385. In addition, long-term liabilities, including bonds payable, are not due and payable in the current period, and, therefore are not reported as liabilities in the farads. The net effect of including the beginning balances for capital assets (net of depreciation) and lone-term debt in the governmental activities is to increase (decrease) net assets. Current year capital outlays and long-term debt principal payments are expenditures 794,249 ir., the fund financial statements,but they should be shown as increases in capital assets and reductions in long-terra debt in the government-wide financial statements. 'The net effect of including the 2008 capital outlays and debt principal payments is to increase (dearcase} net assets. The 2008 depreciation expense increases accurulated depreciation. The net effect (1,738,112,) of the current year's depreciation is to decrease net assets. 'v'arious other. reclassifications and elaminations are neeessar~,~ to convert from tl~e 1 874 219 rni~dified accr~.sal basis of accounting to accrual basis of accounting. These include recognizing defcrre~l rr.venue as revenue, eliminating interfund transactions, reLlassifying the proceeds of bond sales as an increase in bonds pa;~able, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to increase (decrease) net assets. Net Assets oi' Govr:rnrnental Activities ~ 47,704,943 The notes to the Financial Statements are an integral part of this statement, l3 KERR COUNTY STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2008 Road and Capital General Bridge Projects Fund Fund Furid REVENUES: Taxes: Property Taxes Other Taxes, Licenses, Permits Automobile Registration Itttergovernrnental Revenue and Grants .Fees of Office Fines and Forfeitures Investment F,arnings Other Revenue Total Revenues EXPENDITURES: Current: General Government Administration of Justice Public Safety Con'ections Health and Human Services Community and Economic Development Infrastructure and Environmental Debt Sewice: Debt Principal Debt Interest Fisca] Agent's Fees Capital Outlay: General Government Administration of Justice Public Safety Cpmmunity and Economic Development Infiastructure and Environmental Co~rectians Health and Human Services 'I'ota) Expenditures Excess (Deficiency) of Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES): Capital-related Debt Issued (Regular Bonds) Proceeds frorn Capital Leases Debt Issue Costs Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balance -October 1 (Beginning) Fund Balance -September 30 (Ending) $ 8,241,673 $ 1,004,904 $ _ 2,980,791 - _ - 1,041,286 - 336,034 28,805 - 2,009,973 359,964 _ 397,420 3,515 - l 66,132 13,660 17,862 335,236 6,329 _ 14, 467,262 .2,45 3,463 17, 862 3,274,644 _ 3,621,507 - _ 3,472,944 - _ ?.,399,079 - _ 556,566 - _ 512,174 - _ 240,483 2,200,628 87,L37 165,552 _ lental and business-type activities. Governmental activities generally are. financed through taxes, intergovernmental revenues, and other nonexchange revenues. I3rrsiness-type activities are financed in whole or in part by fees. charged to external :parties for goods or services. Fund ~'iraarrciaCStaterraents: Fund financial statements of the reporting entity are organized into fiends, each of which is considered to be separate accounting entities. Each fund is accounted for by providing a separate set of self-balancing accounts that constitute its assets, liabilities, fund equity, revenues, and expenditure/expenses. Funds are organized into three major categories: governmental, proprietary, and fiduciary. An emphasis is placed on major funds within the governmental and proprietary categories. A fiord is considered major if it is the primary operating fund of the County or meets the following criteria. a, Total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent of the corresponding total for all funds of that category or type; and b. Total assets, liabilities, revenues, or expenditure/expenses of the individual governmental fund or enterprise fund are at least 5 percent of the corresponding total for all governmental and enterprise funds cornbined. 18 The funds of the financial reporting entity are described below: Governmental Funds General Fund The General Fund, the primary operating fund of the County, is always classified as a major fund. It is the basic fund of the County and covers all activities for which a separate fund has not been established. ~ecial Revenue Funds Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specific purposes. debt Service Funds The Debt Service Fund accounts for the accumulation of financial resources for and the payment of principal and interest on general long-terni debt of the County other than debt service .payments made by enterprise funds. Ad valorem taxes are used for the payment of principal and interest on the County's debt. Capital Projects Fund The Capital Projects Fund is used to account for proceeds of general long-term debt and other revenues. Expenditures are restricted to the construction and acquisition of major capital facilities. Fiduciary Funds (irlot included in government-wide statements) Agen~-.y Funds Agency fiends account for assets held by the County in a purely custodial capacity. Since Agency fiends are custodial in nature (i.e., assets equal liabilities), they do not involve the measurement of results of operations. Major and Nonmajor Funds The funds are further classified as major or nonmajor. T'he major funds are as follows: , Major Fund Brief Description General See above for description.. Special Revenue Fund: Accounts for all road and bridge construction and Road and Bridge maintenance activity. Capital Projects Fund: Accounts for all Capital Projects activity. Nonmajor funds consist of special revenue funds, debt service funds, and capital project funds. 19 l .C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING Measurement focus is a term used to describe "which" transactions are recorded within the various financial statements. Basis of accounting refers to "when" transactions are recorded regardless of the measurement focus applied. Measurement Focus On the government-wide Statement of Net Assets and the Statement of Activities, both governmental and business-like activities are presented using the economic resources measurement focus as defined below. In the fund financial statements, the "current financial resources" measurement focus or the "economic resources" measurement focus is used as appropriate: a. .All governmental fiords utilize a "current financial resources" measurement focus. Only current financial assets and liabilities are generally included on their balance sheets. Their operating statements present sources and uses of available spendable financial resources during a given period. These funds use fund balance as their measure of available spendable ..financial resources at the end of the period. b. Agency and Permanent Trust Funds are not involved in the measurement. of results of operations; therefore, measurement focus is not applicable to them. Basis o1'r~ccoeanting Iri the government-wide Statement of Net Assets and statement of'Activities, governmental activities are presented u.;ia~g the accrual basis of accounting. Under the accrual basis of accou;Ming, revenues are recognized when earned and expenses are .recorded when the liability'is incurred_or economic asset usc;d. Revenues, expense, gains, losses, assets, and liabilities resulting froz~i exchange and exchange-life transactions are recognized when the exchange takes place. In the fiinci financial statement, governmental funds and agency funds are presented on the modified accrual basis of accounting. Under this modified accrual basis of accounting, revenues are recognized revenues when both "measurable and available." Measurable means knowing .or being able to reaso;lably estimate the amount. Available means collectable withr, the, current period or within 60 days after year end. .Also under the modified accrual basis of accounti~rg, expendih~res (including capital outlay) are recorded when the related fiord liability is incurred,, except for general obligation bond principal and interest which are reported as expenditures in the yeat• due. l.D. ASSETS, I,IABILITIF,S AND EQUITY Cash and Cash Investments For the purpose of the Statement of Net Assets, "Cash and Cash Equivalents" includes demand deposit accounts and government investment pools. All amounts are considered available upon demand and are considered to be "cash equivalents." Several fields may be invested in an investment account and each fiord has an equity interest therein. Interest earned on the Investment of these monies is allocated based upon relative equity at month end. 20 Receivables and Payables Activity between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either "due to/frorr~ other funds" (i.e., the current portion of interfund loans) or "advances to/from other funds" (i.e., the noncurrent portion of interfund loans). All other outstanding balances between funds are reported as "due to/from other funds." All trade and property tax receivables are shown net of an allowance for uncollectibles. Trade accounts receivable in excess of 60 days comprise the trade accounts receivable allowance for uncollectibles. Ad valorem property taxes attach as enforceable liens as of January 1. Taxes are levied prior to September 30, payable on October 1, and are delinquent on February 1. The majority of the County's property tax collections occur during December and early January each year. To the extent that County property tax revenue results in current receivables as defined by the Governmental Accounting Standards Board (GASB), they are recognized when levied. Capital Assets Goverrrm_ent-wide Statements Capital assets, which include property, plant, equipment and infrastnrcture assets (e.g. roads, bridges, sidewalks and similar items) are reported in the governmental activities column in the government-wide financial statements. The County defines capital assets as assets with an initial, individual cost of more than $1,000 (amount not rounded) and an estimated usefial life in excess of one year, Saach assets are recorded at historical cost or estimated historical cost if purchased or constructed. Do~:ated capital assets are recorded at estimated fair market value at the date of donation. The costs of nornZal maintena-nee and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Property,; plant and equipment is depreciated using the straight-line method .over the following estimated useful lives: Assets Years Buildings and Improvements 2S - SO Improvements 10 - SO Furniture and Equipment 3 -~ 20 Infrastructure 2S - SO Fund Financial Statements In the fund financial statements, fixed assets used in governmental fund operations are accounted for as capital outlay expenditures of the governmental fund upon acquisition. 21 Compensated Absences Full time and regular part time employees who work 20 hours per week or more at•e granted vacation benefits in varying amounts to specified maximums dependitlg on tenure with the County. Sick leave accrues to full time and regular part time employees to specified maximums. Accumulated vacation time may be taken in pay upon termination or retirement up to a maximum of twenty (20) days; however, this policy does not apply to accumulated sick leave. Sick leave accrues to full time employees to specified maximums; however nettlrer the vacation or comp time accrual policy applies to accumulated sick leave. The liability for accrued compensated absences is not accrued in governmental funds using the modified accrual basis of accounting, but is reflected in the Government-Wide Statement of Net Assets. Long-term Obligations In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs during the current period. The face amount of debt issued is reported as other financing sources. Premiums received ot1 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. Equity Classifications Government-wide Statements Equity is classifies as net assets and displayed in three components: a. Invested in capital assets, net of related debt -Consists of capital assets including rf~stricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, .mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or unprovement of those assets. b. Restricted net assets -Consists of net assets with constraints placed on the use either by (1) external groups such as creditors, grantors, or laws or regulations of other governments; or (2) law through constitutional provisions or enabling legislation. c. iJnrestricted net assets -All other net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt." Fund Statements Governmental fund equity is classified as fund balance. Fund balance is further classified as reserved and unreserved, with unreserved further split between designated and undesignated. Use of Estimates The preparation of financial statements, in conforrnit)~ 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 oftlie financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates. 22 l.E. REVENUES, EXPENDITURES AND EXPENSES Property Taxes Property taxes are levied by October 1, in conformity with Subtitle E, Texas Property Tax Code. Faxes are due on receipt of the tax bill and are delinquent if not paid before February 1, of the year following the year in which imposed. On January 1, of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed. For the 2007 tax roll, the total assessed valuation was $3,461,972,469 and the taxes assessed amounted to $13,487,845. The total tax rate was $.3896 per $100 valuation and allocated $.3154 to the General Fund and $.0438 to the Debt Service Funds and .0304 to the Road and Bridge Fund. The maximum tax levy allowed by State law for the above purposes is $.80 per $100 valuation. Irr the fund financial statements, property taxes are recorded as revenue in tl~e period levied to the extent they are collected within 60 days of year-end. Duo to the immaterial amount of additional property taxes receiva.tile after the 60-day period, no additional accrual is made in the government- wide financial statements. Expen ditu res/Expenses In the government-wide financial statements, expenses are classified. by function far governmental activities. In the fund financial statements, expenditures are classified as follows: Governrnerrtal Funds - by Character: Current (further classified by function) Debt Service Capital Outlay lr the h.rnd frnancial statements, governmental funds report expenditures of financial resources. Iuterfund Transfers Permanent reallocation of resources between funds of Ylre reporting entity are classified as interfund transfers. For the purposes of the Statement of Activities, all interfiu~d transfers between. individual governmental funds have been eliminated. NOTE 2 - STEWARDSI-IIrP, COMPLIANCE AND ACCOUNTABILITY Budgetary Information The County Judge and staff prepare the proposed budget, using revenue estimates furnished by the County Auditor. The proposed budget is then submitted to Commissioners Court for a public hearing. Before determining the final budget, Commissioners Court may increase or decrease the arrrounts requested by the various departments. In the final budget, which is usually adopted in September, expenditures for current operating funds cannot exceed the estimated available cash balances in such funds on October 1, plus the estimate of revenues for the ensuing year. At any time during the year, Commissioners Court may increase the budget for unexpected revenues. Commissioners Court may transfer amounts among individua.! budget line items within major c;xpenditure categories during the year, but no such transfer may increase the overall total of the budget. Formal budgetary integration is employed far the General, Special .Revenue, Debt Service and Capital Projects Funds. Budgets for these funds are prepared on a cash basis. Unused appropriations lapse at the end of each year. 23 NOTE 3 -DETAILED NOTES ON ALL FUNDS 3.A. DEPOSITS AND INVESTMENTS The funds of the County must be deposited and invested under the teens of a contract, contents of which are set out in the Depository Contract Law. "The depository bank places approved pledged securities for safekeeping and trust with the County's agent bank in an amount sufficient to protect County funds on a day-to-day basis during the period of the contract. The pledge of approved. securities is waived only to the extent of the depository bank's dollar amount of Federal Deposit Insurance Corporation ("FDIC") insurance. At September 30, 2008, the carrying amount of the County's deposits was $996,429 and the bank balance was $1,747,1 S6. The County's cash deposits held at Security State Bank anal Trust at September 30, 2008 and during the year ended September 30, 2008 were entirely covered by FDIC insurance or by pledged collateral held by the County's agent bank in the County's name. The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. .Among other things, it requires the County to adopt, implement, and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio ,diversification, (3) allowable investments, (4) acceptable risk levels, (5) .expected rates of return,. (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, ($) investment staff quality and capabilities, (9) and bid solicitation preferences for certificates of deposit. Stahrtes authorize thc, County 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, (S) repurchase agreements, (6) bankers acceptances, (7) Mutual funds, (8) Investment pools and guaranteed investment contracts. T'he Act also requit°es the County to have independent auditors perform test procedures related to investment practices as provided by the Act. The County's deposits and temporary investments at September 30, 2008 are shown below: Canying Market FDIC Pledged Fiduciary/Type of Deposit ~ _ Amount _ Value _ _ Coverages Securities ;Security State Batilc & Trust :Depository Bank Demand Deposit Accounts $ 996,429 $ 996,429 $ 200,000 $ 12,698,906 TE:XPOOL Liquid Asset Portfolio 4,828,930 4,828,930 - _ Total Governmental Activities $ S,82S,3S9 $ 5,825,359 $ 200,000 $ 12,698,906 * The investment in Texpool is considered a government pool investment. Government pool investments are not categorized in accordance with GASB Statement No. 3, because they are not evidenced by securities that exist in physical or book entry form. Also, investments in government investment pools are not required to disclose custodial credit risk, concentration of credit risk and interest rate risk in accordance with GASB Statement No. 40. 24 Policies Governin~De osp its and Investments In compliance with the Public Funds investment Act, the County has adopted a deposit and investment policy. That policy does address the following risks: Custodial Credit Risk -Deposits: 'This is the risk that in the event of bank failure, the County's deposits may not be returned to it. The County was not exposed to custodial credit risk since its deposits at year-end were covered by depository insurance or by pledged coUatcra] held by the County's agent bank in the County's name.. Custodial Credit Risk -Investments: This is the risk that, in the event of the failure of the counterparty, t:he County will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The County's investments (certificates of deposit) were secured by FDIC insurance and pledged. securities. Other Credit Risk: There is the risk that an issuer or other counterparty to an investment will not fralfill'its obligations. At September 30, 2008, the Count} was not exposed to concentration of credit rislc,rxterest rata risk or foreign currency risk. For the year ended September 30, 2008, the County complied era all material respects with the requirements of the Public Funds Investment Act and with. local policies. 3.E. RECEIVr'~ ~I,ES It.eceivables as of year-end for the government's individual major funds and nonrriajor fiends in the. aggregate, inc,ludiny the applicable allowances for uncollectible accounts, arc as follows: Receivab lcs: Property T~,?ces Other Gross Receivables Less: Allowance for Uncollectibles Net Total Receivables Governmental Funds _ .~~ ~ Road Other and Goverrrrrrental General __ _ Bridge ~ Y Funds~~• TO'TA.L r $ 316;614 $ 43,776 $ 134,378 $ 49?1,768 358,8.62 - 19,606 378,468 $ 675,4%6 $ 43,776 $ 153,984 $ 873,236 1.5,831 _ 2,189 _ 6,719 _` 24,739 $ 659,645 $ 41,587 $ 147,265 $ 848,497 25 Governmental funds report deferred revenue in connection with receivables for revenue that is not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been. received, but not yet earned. At the end of the current fiscal year, deferred revenues reported in the governmental funds were as follows: General Futld - Delinquent Property Taxes Receivable $ 300,783 Other Receivables 537 Special Road and Bridge Fund - Delinquent Property Taxes Receivable 41,587 Other Governmental Funds - Delinquent Property Taxes Receivable 127,659 TOTAL DEFERRED REVENUES $ 470,566 3.C. COURT FINES AND FEES RECEIVABLE The County has determined the amount of court fines and fees receivable at September 30, 2008 to be $1,825,590 which represents amounts owed and outstanding for the last 10 years. This receivable is included on the government wide statement of net assets and is net of an allowance for uncollectible court fines and fees based on historical collection rates for the various courts. 3.D. CAPITAL ASSETS Capital asset activity for the year ended September 30, 2008, was as follows: Primary Government Governmental.4cttvities: Capital Assets, Not Being Depreciated: Land Capital Assets, Being Depreciated: Buildings and Improvements Furniture and Equipment Infrastructure Total Capital Assets Being Depreciated Less Accumulated Depreciation: Buildings and Improvements Furniture and Equipment Infrastructure Total Accumulated Depreciation Balance Prior Period Balance 10/1/07 Increases Decreases Adjustments 9/30/08 $ 497,457 $ - $ - $ - $ 497 457 , 15,081,321 49,943 - - 15,131,264 8,313,187 1,245,635 79,066 (]05,996) 9,373,760 38,679,333 - - - 38,679,333 62,073,841. 1,295,578 79,066 (105,996) 63,184,357 (5,506,847) (370,561) - - (5,877,408) (6,450,684) (904,536) 54,990 - (7,300,230) (3,933,854) (463,015) - - (4,396,869) (15,891,385) (1,738,112) 54,990 (17,574,507) Total Capital Assets Being Depreciated, Net 46,182,456 (442,534) 24,076 (105,996) 45,609,850 Govei7~mental Activities Capital Assets, Net $ 46,679,913 $ (442,534) $ 24,076 $ (105,996) $ 46,1.07,307 The County recorded a prior period adjustment of $105,996 for the retroactive reductiotl of furniture and equipment assets. 26 Depreciation expense was charged to functions/programs of the County as follows: Governmental Activities: General Government $ 424,1 S4 Public Safety 320,983 Administration of Justice 20,373 Community & Economic Development 23,432 Health and Hurnan Services 13,675 Corrections 208,049 Infrastructure & Environmental 727,446 Total Depreciation Expense - Goverrunental Activities $ 1,738,112 3.E. INTERFtJND RECEIVABLES, PAYABLES AND TR.P.NSFERS Transfers are used to 1) move revenues from the fund with collection authorization to the,. debt service fund as debt service principal and interest payments become due, 2) move restricted amounts from borrowings to the debt service fund to establish mandatory reserve accounts, 3) move unrestricted general fund revenues to finance various programs that the government. must account for in other funds in accordance with budgetary authorizations, including amounts provided as subsidies or tnatehing funds for various grant programs. There were no in'terfund balances as of September 30, 2008. 3.)!. LONG--TERM I_,IABILITIES The following is a summary of the long-term liability transactions of the County fir tire. year ended September 30, 2008. Type of Debt Governmental Activities: Limited T'ax General Obligation Series 1994 Public Property Finance Contractual Oblgation 2001 Certificates of Obligation Series 2005 Tax Notes Series 2008 Bank of America Note Payable Capital Lease Obligations SUBTOTAL Compensated Absences TOTAL Balance Balance Due Within 10/01/07 Issued Retired 9/30/08 Ones Year $ 2,405,000 $ - $ 435,000 $ 1,970,000 $ 4.55,000 160,000 - 160,000 - - 1,205,000 - 440,000 765,000 375,000 - 1,780,000 - 1,780,000 135,000 786,192 - 144,043 642,149 205,681 595,774 182,441 252,790 525,425 139,412 $ 5,151,966 $ 1,962,441 $ 1,431,833 $ 5,682,574 $ 1,310,093 - 328,087 - 328,087 - $ 5,151,966 $ 2,290,528 $ 1,431,833 $ 6,010,661 $ 1,310,093 27 Certificates of Obligation and Notes Payable Limited Tax General Obligation Bonds, Series 1994 Original issue amount $5,900,000, interest rates of 4.25% to 6.2.5%, with final maturity February 15, 2012 Certif cates of Obligation, Series 2005 Original issue amount $2,000,000, interest rates of 3.?.5% to 3.50%, with final mahirity date February 15, 2010 Bank of America Note for purchase of computer software dated May 1, 2006, principal and interest payment of $231,463, interest rate is 4.015%, final maturity date of March 16, 2011 'Tax Notes, Series 2008 Original issue amount $1,780,000, interest rates of 3.30%, With final maturity date February 15, 2013 TOTAL CEI2TIF'ICAxES OF OBLIGATION AND NO'CES PAYABLE Balance at Due Within 9/30/08 One Year $ 1,970,000 $ 455,000 765,000 375,000 642,149 205,681 1,780,000 135,000 $ 5,]57,149 $ 1,170,681 ~l'he annual reytiirements for principal and interest on the outstanding certificates of obligation and notes payable are as ±ollo;~s: Year Ending Annual ~epteznber 30, ^ _ Principal Interest Iteyuirements 200r1 $ , 1,170,681 $ 189,433 $^ 1,360,114 2fl l fl 1,283,939 129,03 5 1,412,974 2011 1,002,529 85,339 1,087,568 2012 82,0,000 45,087 865,087 .2013 880,000 14,520 894,520 TO"TAI, $ 5,157,149 $ 463,414 $ 5,620,563 28 Balance at Due Within Capital Lease Obligations 9/30/08 One Year Securi State Bank & Trust: Capital lease obligation for (2) Motor Graders and (1) Wheel Loader dated December 27, 2006, principal and interest of $45,637 paid yearly, interest rate of 4.82%, final maturity date December 27, 2013. $ 231,132 $ 34,055 Caterpillar Financial Services: Capital lease obligation for a Caterpillar Backhoe Loader dated June 15, 2004, principal and interest of $786 paid monthly, interest rate of 4.73%, final payment August 1, 2009. 27,204 5,504 Capital lease obligation for (2) Caterpillar 420D Backhoe Loaders dated April 28, 2006, annual principal and interest payments of $23,368, interest rate of 5.35%, final maturity April, 20 ] 1. 104,012,. 18,259 Ford Motor Credit Corporation: Capital lease obligation for four (4) 2007 Crown Victoria Police Sedans dated March 9, 2007, annual principal and interest payments of $37,332, interest rate of 6.60%, final maturity date March 9, 2009. 35,021 35,021 Capital lease obligation for three (3) 2008 Chevrolet Tahoes Sheriff Vehicles dated January 24, 2008, annual principal and interest payments of $34,02,7, interest rate of 6.10%, fmal maturity date January 24, 2011. 90,786 28,489 Capital lease obligation for two (2) 2008 Crown Victoria Police Sedans dated February 5, 2008, annual principal and interest payments of $23,357, interest rate of 6.10%, final maturity date February 5, 2010. 37,270 18,084 TOTAL CAPITAL LEASE OBLIGATIONS $ 525,425 $ 139,412 A summary of the future minimum lease payments under the lease along with the present value of the minimum lease payments as of September 30, 2008 follows: Year Ended September 30 2009 $ 167,009 2010 145,089 2011 91,348 2012 102,108 2013 45,637 2014 45,637 Total Minimum Lease Payments $ 596,828 Less Amount Representing Interest 71,403 Present Value of Lease Payments $ 525,425 29 3.G. EMPLOYEE RETIREMENT PLAN Plan Description Kerr County provides retirement, disability, and death benefits for all of its full-time employees through a nontraditional defined benefit pension plan in the statewide Texas County and District Retirement System (TCDRS). The Board of Trustees of TCDRS is responsible for the administration of the statewide agent multiple-employer public employee retirement system consisting of 5'74 nontraditional defined benefit pension plans. TCDRS in the aggregate issues a comprehensive annual financial report (CAFR) on a calendar year basis. The CAFR is available upon written request from the TCDRS Board of Trustees at P.O. Box 2034, Austin, Texas 78768-• 2034. The plan provisions are adopted by the governing body of the employer, within the options avail~.ble in the Texas state statutes governing TCDRS (TCDRS Act). Members can retire at ages 60 and. above with 8 or more years of service, with 30 years of service regardless of age, or when the sum of their age and years of service equals 75 or more. Members are vested after 8 years of service. but must leave their accumulated contributions in the plan to receive any employer-financed benefit. Members who withdraw their personal contributions in a lump sum prior to retirement ar•e not entitled to any amounts contributed by their employer. Partial lump sum distributions are allowed at retirement. l3ene.fit amounts are determined by the sum of the employee's contributions to the plan, with interest, and employer-fnanced monetary credits. The Ieve1 of these monetary credi#s is adopted by the governing body of the employer within the actuarial constraints imposed by the TCDRS Act so that the resulting benefits can be expected to be adequately financed by the employer's commitment to contribute. At retirement, death, or disability, the benefit is calculated by corvc;r-ting the sum of the employee's accumulated contributions and the employer-financed monetary credits to a monthly amruity using annuity purchase rates prescribed by the 1't=;DRS Act:: Funding Policy The County has elected the annually determined contribution rate (variable rate) plan. provisions of the TCDRS Act. The plan is funded by monthly contributions from both ernplayee metnl~ers and the employer based on the covered payroll of employee members. Ilncler the TCDRS Act, the contribution rate of the employer is actuarially determined annually. The County contributed using the actuarially determined rate of 9.08% for the months of the accounting. year in 2008 and. 8.51% for the months of the accounting year in 2007. The contribution rate payable by the employee members for calendar year 2008 is the rate of 7%, as adopted by the County. For calendar year 2007, the employee contribution rate was also 7%. The employes and the employer contribution rate may be changed by the governing body of the County within the options available in the'I'CDRS Act. Annual Pension Cost For the County's accounting year ended September 30, 2008, the annual pension cost for the TCDRS plan for its employees was $821,096, and the actual contributions were $8'L1,096. The annual required contributions were actuarially determined as a percent of the covered payroll of the participating employees, and was in compliance with the GASB Statement No. 27 parameters based orr the actuarial valuation as of December 31, 2005 and December 31, 2006, the basis fbr determining the contribution rate for calendar years 2007 & 2008. The December 31, 2007 actuarial valuation is the most recent valuation. 30 ACTUARIAL VALUATION INFORMATION Actuarial valuation date 12/31/07 12/31/06 12/31/05 Actuarial cost method entry age entry age entry age Amortization method level percentage level percentage level percentage of payroll, closed of payroll, closed of payroll, open Amortization period 15 15 20 Asset valuation method SAF: 10-yr SAF: ]0-yr long-term smoothed value smoothed value appreciation ESF: Fund value ESF: Fund value with adjustment Actuarial Assumptions; Investment return 8% 8% 8% Projected salary increases[ 5.3% 5.3% 5.3% Inflatirn, 3.5% 3.S% 3.5% Lost-of-living adjustments 0.0% 0.0°'o OA% tIncli~des inflation at the stated rate TREND INFORMATION FOit THE RETIRI;,MI.NT PLAN FOR TIIE EMPLO YEES OF KERR COUNTY Accounting Annual Percentage Net Fear Fension of APC Pension Ending Cost (.APC) Contributed ~ ~ ~C>bligation 9/30/06 $ 741,520 100% ~0- 9/30/0'7 800,621 100% -0•• 9;3()/08 821,096 100% •~0- SCHIi.DULE OF FUNDING PROGRESS FOR TI~[E RETIREMENT PLAN FOR THE EMPLOYEES OF KERR CUIJNTY Actuarial I1AAL as a Actuarial Value Accrued Annuai Covered Percentage of Actuarial of Assets Liability (AAL) Unfunded AAL Funded Ratio Payroll Covered Payroll (a) Valuation Date {b) (LIAAL) (b-a) (a/b} _ (c) Y [(b-a)/c] _ 12/31/03 $ 13,000,396 $ 15,187,317 $ 2,186,921 85.60% 8,020,926 $ ?.7.27% 12/31/04 14,260,964 16,668,16(1 2,407,202 85.56% 8,870,350 '17.14% 12/31/05 16,152,206 18,786,439 2,634,233 85.98% 9,247,537 28,49% 12/31/06 18,402,681 20,642,315 2,239,639 89.15% 9,320,152 24.03% 12/31/07 19,612,015 21,996,008 2,383,993 89.16% 9,954,080 23.95% ~ The annual covered payroll is based on the employee contributions received by TCDRS for th e year ending with the valuation date. z Revised economic and demographic assumptions due to an experience review were refl ected in this valuation. 31 3.H. INV:ESTMENT IN JOINT VENTURE The County and the City of Kerrville (the "partici i t t t E h i i pants") operate a municipal airport under a fi jo n ven ure agreemen . ac part cipan t prov d es nancial support and is entitled to an undivided 50% interest in the physical property. Separate financial statements of the joint venture are not available. Following is a financial summary for the airport as of and for the year ended September 30, 2008: ASSETS REVENUES Cash $ 133,785 Charges for Services $ 570,901 Investments 182,707 Capital Grants & Contributions 1,435,043 Prepaid Expenses 505,598 Total Revenues 2,005,944 Nondepreciable Property Land 2,849,809 EXPENSES Construction in Progress 1,217,548 Airport Operations 484,] 58 Depreciable Property (Net) Terminal 19,362 Buildings 1,339,256 Depreciation 76,405 Improvements 221,703 Total Expenses 579,925 Vehicles 19,941 Machinery & Equipment 7,962 OPERATING INCOME 1,426,019 Total Assets 6,478,309 GENERAL REVENUES LIABILITIES Unrestricted Investment Earnings 6,404 Accounts Payable 9,887 1,432,423 Customer Deposits 4,200 Unearned Revenue 17,530 Net Assets -Beginning (Restated) 5,348,353 Total Liabilities 31,617 Net Assets -Ending $ 6,780,776 NET ASSETS Invested in Capital Assets 5,656,2 ] 9 Restricted for Capital Projects 912,637 Unrestricted 211,920 Total Net Assets $ 6,780,776 3.I. RISK 1VIANAGEMENT Workers Compensation, Unemployment, and Property and Liability Coverage The County is exposed to various risks of loss related to torts; damage to and theft or destruction of assets; errors and. omissions; injuries to employees; automobile liability and natural disasters. To reduce the risk of exposure in these areas, the County contracts in the form of interlocal agreements with risk pools created by the Texas Association of Counties (TAC). The County is a member of workers compensation, unemployment, and property and liability risk pools. The pools are public entity risk pools and were created based on the general objectives of formulating, developing and administering a program of self-insurance for the membership and obtaining lower costs for coverage. The pools have the power to establish fees, contributions and. methods for establishing rates. Under contract with the pools, the TAC provides for such services as claims administration and management, underwriting, loss control services and. training, and financial reporting for its members. The pools are governed by a board of directors made up of employees or officials of counties which are members of the pool. Member counties make contributions to the pools, and the pools provide insurance coverage and applicable reinsurance or stop loss coverage. Contributions are set annually and the interlocal agreements carry various deductibles and aggregate maximum loss totals. Liability by the County is generally limited to the amounts calculated by the County interlocal agreements. The by-laws and audited financial statements of the pools are detailed in separate documents and can be obtained from the Texas Association of Counties, 1210 San Antonio Street, Austin, TX 78701. The County has had no significant reduction in insurance coverage from prior years and the County has had no settlements which exceeded insurance coverage in the current or prior years. 32 Self Insured Group Medical Insurance The County has elected to provide group medical benefits to their employees on a partially self- funded basis. They have contracted with an outside plan supervisor to administer all claims payments. The County sets a specific amount of money aside each month and as claims are submitted to the plan supervisor the County reimburses them when notified. Under this plan, the County is limited to $50,000 per employee per calendar year with an aggregate amount of $2,000,000 per year. After the deductible and aggregate amount, the balance is paid by a third party carrier. 3.J. COMMITMENTS AND CONTINGENCIES Operating Leases The reporting entity has entered into a number of operating leases, which contain cancellation provisions and are subject to annual appropriations. For the year ended September 30, 2008, rent expenditures approximated $73,714 for all types of operating leases. These expenditures were made primarily from the General :Fund. Commitments under operating (non-capitalized) lease agreements for equipment provide for minimum future rental payments as of September 30, 2008, as follows: Year Ended September 30 2009 $ 59,896 2010 47,077 2011 39,319 2012 27,114 2013 11,342 Total Minimum Rentals $ 184,748 Grant Program Involvement In the normal course of operations, the County participates in various federal or state grant programs. The grant programs are often subject to additional audits by agents of the granting or funding agency, the purpose of which is to ensure compliance with the specific conditions of the grant. Any liability for reimbursement that may arise as a result of these audits cannot be reasonably determined at this time, although it is believed the amount, if any, would not be material. 3.K. RESTRICTED NET ASSETS Net assets restricted for debt service include the excess of assets over certain liabilities restricted for the debt service on revenue bonds. Net assets of governmental funds restricted by enabling legislation for the specific purpose of debt service total $96,320 at September 30, 2008. 3.L. PRIOR PERIOD ADJUSTMENT The Government Wide Statement of Net Assets and the Government Wide Statement of Activities shows a net prior period adjustment of $105,996. This decrease in Net Assets was due to a prior period adjustment made to furniture, machinery and equipment for $105,996 in order to reclassify assets to expendable inventory. 33 [This page intentionally left blank] APPENDIX D FORM OF BOND COUNSEL'S LEGAL OPINION [This page intentionally left blank] LAW OFFICES M-CALL, PARKHURST & NORTON L.L.P. 717 NORTH HARWOOD 700 N. ST. MARY'S STREET 600 CONGRESS AVENUE NINTH FLOOR 1525 ONE RIVERWALK PLACE 1800 ONE AMERICAN CENTER DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 AUSTIN, TEXAS 78701-3248 TELEPHONE: 214754-9200 TELEPHONE: 210225-2800 TELEPHONE: 512478-3805 FACSIMILE: 214 754-9250 FACSIMILE: 210225-2984 FACSIMILE: 572472-0871 February _, 2010 KERR COUNTY, TEXAS TAX NOTES, SERIES 2010 DATED AS OF JANUARY 15, 2010 IN THE AGGREGATE PRINCIPAL AMOUNT OF $4,350,000 AS BOND COUNSEL FOR KERR COUNTY, TEXAS (the "County") in connection with the issuance of the obligations described above (the "Tax Notes"), we have examined into the legality and validity of the Tax Notes, which bear interest from the dates specified in the text of the Tax Notes until stated maturity at the rates, and payable on the dates, as stated in the text of the Tax Notes, all in accordance with the terms and conditions stated in the text of the Tax Notes. 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 County, and other pertinent instruments authorizing and relating to the issuance of the Tax Notes including (i) the order authorizing the issuance of the Tax Notes (the "Order"), (ii) one of the executed Tax Notes (Note No. T-1), and (iii) the County's Federal Tax Certificate of even date herewith. BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Tax Notes have been authorized, issued and delivered in accordance with law; that the Tax Notes constitute valid and legally binding general obligations of the County in accordance with their terms except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws now or hereafter enacted relating to creditors' rights generally or by general principles of equity which permit the exercise of judicial discretion; that the County has the legal authority to issue the Tax Notes and to repay the Tax Notes; and that ad valorem taxes sufficient to provide for the payment of the principal of and interest on the Tax Notes, as such principal and interest comes due, have been levied and ordered to be levied against all taxable property in the County, and have been pledged for such payment, within the limits prescribed by law. IT IS FURTHER OUR OPINION, except as discussed below, under the statutes, regulations, published rulings and court decisions existing on the date of this opinion, for federal income tax purposes, the interest on the Tax Notes (i) is excludable from the gross income of the owners thereof, and (ii) is not includable in an owner's alternative minimum taxable income under section 55 of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on and assumed compliance by the County with, certain representations and covenants regarding the use and investment of the proceeds of the Tax Notes. We call your attention to the fact that failure by the County to comply with such representations and covenants may cause the interest on the Tax Notes to become includable in gross income retroactively to the date of issuance of the Tax Notes. Kerr County, Texas Tax Notes, Series 2010 February _, 2010 Page 2 EXCEPTASSTATEDABOYE, weexpress noopinion as toany other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Tax Notes. In particular, but not by way of limitation, we express no opinion with respect to the federal, state or local tax consequences arising from the enactment of any pending or future legislation. WE EXPRESS NO OPINION as to insurance policies issued with respect to the payments due for the principal of and interest on the Tax Notes, if any, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Tax Notes is as Bond Counsel for the County, and, in that capacity, we have been engaged by the County for the sole purpose of rendering an opinion with respect to the legality and validity of the Tax Notes under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Tax Notes, if any, 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 County, or the disclosure thereof in connection with the sale of the Tax Notes, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Tax Notes and we have relied solely on certificates executed by officials of the County as to the current outstanding indebtedness of, and assessed valuation of taxable property within, the County. Our role in connection with the County's Official Statement prepared for use in connection with the sale of the Tax Notes 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 a 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 or not the Service will commence an audit of the Tax Notes. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the County as the taxpayer. We observe that the County 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 Tax Notes, if any, as includable in gross income for federal income tax purposes. Respectfully, - RBC Capital Markets® •:; .: '~