city of houston bond issuance, march 8, 2006, official statement

8/14/2019 City of Houston bond issuance, March 8, 2006, official statement

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OFFICIAL STATEMENT DATED AS OF MARCH 8, 2006NEW ISSUES BOOK-ENTRY ONLY RATINGS: See RATINGS herein

The City has taken no action to cause any interest on the Taxable Bonds to be excludable from gross income for the purposes of federal

income taxation and therefore it is assumed that interest on the Taxable Bonds is not excludable from gross income for federal tax purposes under

existing law. See TAX MATTERSTAXABLE BONDS.

In the opinion of Co-Bond Counsel, interest on the Tax Exempt Obligations is excludable from gross income for federal income tax purposes

under existing law, subject to the matters described herein under TAX MATTERSTAX EXEMPT OBLIGATIONS, and is not includable in the

alternative minimum taxable income of individuals. See TAX MATTERSTAX EXEMPT OBLIGATIONS for a discussion of the opinions of Co-

Bond Counsel, including the alternative minimum tax on corporations.

$91,060,000

CITY OF HOUSTON, TEXAS

$63,740,000TAXABLE PENSION OBLIGATION BONDS,

SERIES 2006A

$24,005,000PUBLIC IMPROVEMENT REFUNDING BONDS,

SERIES 2006B

$3,315,000CERTIFICATES OF OBLIGATION,

SERIES 2006C

Interest Accrual Date: Date of Delivery CUSIP Prefix: 442331(Series 2006 Obligations)

ISIN Prefix: US442331(Series 2006A Bonds)

Due: March 1, as shown inside

This Official Statement is provided to furnish information in connection with the offering by the City of Houston, Texas (the City) of its

Taxable Pension Obligation Bonds, Series 2006A (the Series 2006A Bonds or the Taxable Bonds), Public Improvement Refunding Bonds, Series

2006B (the Series 2006B Bonds or the Tax-Exempt Bonds), and Certificates of Obligation, Series 2006C (the Series 2006C Certificates or the Tax

Exempt Certificates, and together with the Series 2006B Bonds, the Tax-Exempt Obligations). Collectively, the Series 2006A Bonds, Series 2006B

Bonds and Series 2006C Certificates are referred to herein as the Series 2006 Obligations. The Series 2006 Obligations are direct obligations of the City,

secured by and payable from the receipts of an annual ad valorem tax levied, within legal limits, on taxable property within the City. See THE

OBLIGATIONS Source of Payment. The Series 2006 Obligations are authorized pursuant to the laws of the State of Texas, the Citys Charter andseparate ordinances adopted by the City Council of the City authorizing the issuance of each respective series of Series 2006 Obligations. See

INTRODUCTION for a detailed discussion of the laws authorizing the issuance of the Series 2006 Obligations.

Proceeds of the sale of the Series 2006A Bonds will be used to fund part of the unfunded liabilities of the pension systems for municipal

employees and classified police officers of the City and to pay costs of issuance relating to the Series 2006A Bonds. Proceeds of the sale of the Series

2006B Bonds will be used to fund the final installment of a legal settlement currently outstanding against the City and pay costs of issuance relating to the

Series 2006B Bonds. Proceeds of the Series 2006C Certificates will be used to fund the demolition of dangerous buildings within the City and pay costs

of issuance relating to the Series 2006C Certificates. See PURPOSE AND PLAN OF FINANCING and THE CITY Employee Pension Funds.

Interest on the Series 2006 Obligations will accrue from their respective dates of delivery and will be payable on each March 1 and September

1, commencing September 1, 2006, until maturity or earlier redemption, and will be calculated on the basis of a 360-day year consisting of twelve 30-day

months. Deutsche Bank Trust Company Americas is the initial paying agent/registrar for the Series 2006 Obligations (the Paying Agent/Registrar).

The Series 2006 Obligations are being issued in fully registered form and, when issued, will be registered in the name of Cede & Co., as

registered owner and nominee for The Depository Trust Company, New York, New York (DTC), which will act as securities depository for the Series

2006 Obligations. Individual purchases will initially be made in book-entry form only in denominations of $5,000 principal amount or any integral

multiple thereof. No physical delivery of the Series 2006 Obligations will be made to the owners thereof. See APPENDIX E which describes DTC andalso discusses the global securities clearance procedures of the Euroclear System and Clearstream.

The Series 2006A Bonds are subject to optional and mandatory redemption prior to maturity, as described herein, and the Series 2006B Bonds

are subject to optional redemption prior to maturity, as described herein. The Series 2006C Certificates are not subject to redemption prior to maturity.

See THE OBLIGATIONSOptional Redemption and THE OBLIGATIONSMandatory Redemption.

Payment of the principal of and interest on the Series 2006B Bonds and Series 2006C Certificates when

due will be insured by a financial guaranty insurance policy to be issued by Ambac Assurance Corporation

simultaneously with the delivery of the Series 2006B Bonds and Series 2006C Certificates. The Series 2006A Bonds

will not be insured.

SEE INSIDE COVER PAGE FOR MATURITY AND PRICING SCHEDULE

This cover page is not intended to be a summary of the terms of, or the security for, the Series 2006 Obligations. Investors are advised to read

the Official Statement in its entirety to obtain information essential to the making of an informed investment decision.

The Series 2006 Obligations are offered when, as and if issued by the City, subject to the approving opinions of the Attorney General of the

State of Texas and the opinions of Vinson & Elkins L.L.P., Houston, Texas, and Law Offices of Francisco G. Medina, Co-Bond Counsel for the City, as tothe validity of the issuance of the Series 2006 Obligations under the Constitution and laws of the State of Texas. Certain legal matters will be passed upon

for the City by its Special Disclosure Co-Counsel Andrews Kurth LLP, Houston, Texas, and Bates & Coleman, P.C. Certain legal matters will be passed

upon for the Underwriters by Greenberg Traurig, LLP, Houston, Texas, Counsel to the Underwriters. The Series 2006A Bonds are expected to be

available for delivery on or about March 29, 2006, and the Series 2006B Bonds and the Series 2006C Certificates are expected to be available for delivery

on or about April 19, 2006, through the facilities of DTC in New York, New York, and through the Euroclear System and Clearstream in Luxembourg in

Europe, as appropriate.

MORGAN STANLEY

JPMORGAN LEHMAN BROTHERS

APEX PRYOR SECURITIES(a division of Rice Financial Products)

RAMIREZ & CO., INC. SIEBERT BRANDFORD SHANK & CO., INC.


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MATURITY AND PRICING SCHEDULE

$91,060,000CITY OF HOUSTON, TEXAS

$63,740,000TAXABLE PENSION OBLIGATION BONDS,

SERIES 2006A

$63,740,000 5.508% Term Bonds due March 1, 2036 Price: 100% CUSIP No.: 442331HW7(1) ISIN No.: US442331HW74(1)

$24,005,000PUBLIC IMPROVEMENT REFUNDING BONDS,

SERIES 2006B(2)

Maturity(March 1)

PrincipalAmount Interest Rate Initial Yield CUSIP No.

(1)

2014 $ 1,425,000 4.00% 3.91% 442331HX52015 1,480,000 4.00 3.98 442331HY3

2016 1,540,000 4.00 4.05 442331HZ02017 1,600,000 4.00 4.15 442331JA32018 1,665,000 4.20 4.25 442331JB12019 1,735,000 4.25 4.32 442331JC92020 1,810,000 4.25 4.38 442331JD72021 1,885,000 4.25 4.44 442331JE52022 1,965,000 5.00 4.32(3) 442331JF22023 2,065,000 5.00 4.34

(3)442331JG0

2024 2,170,000 5.00 4.36(3)

442331JH82025 2,275,000 5.00 4.37(3) 442331JJ42026 2,390,000 5.00 4.40(3) 442331JK1

$3,315,000CERTIFICATES OF OBLIGATION,

SERIES 2006C(2)

Maturity(March 1)

PrincipalAmount Interest Rate Initial Yield CUSIP No.

(1)

2013 $ 3,315,000 5.00% 3.820% 442331JL9

__________________(1) Copyright 2005, American Bankers Association. CUSIP numbers for the Series 2006 Obligations and ISIN numbers for the Series 2006A Bonds have been

assigned by Standard & Poors CUSIP Service Bureau, a Division of The McGraw-Hill Companies, Inc. and are included solely for the convenience of theowners of the Series 2006 Obligations. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP and ISINService. Neither the City, the Co-Financial Advisors nor the Underwriters are responsible for the selection or correctness of the CUSIP or ISIN numbers setforth herein.

(2) Insured by Ambac Assurance Corporation.

(3)Reflects yield to first optional call date. See "THE OBLIGATIONS Optional RedemptionSeries 2006B Bonds."


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i

City of Houston, Texas

ELECTED OFFICIALS

Bill White, Mayor

Annise D. Parker, City Controller

CITY COUNCILCouncil Member,

District A........................................ Toni Lawrence

Council Member,

District B......................................... Jarvis Johnson

Council Member,

District C.................................... Anne Clutterbuck

Council Member,

District D...........................................Ada Edwards

Council Member,District E .......................................Addie Wiseman

Council Member,

District F ....................................... M.J. Khan, P.E.

Council Member,

District G ................................................Pam Holm

Council Member,

District H................................................Adrian Garcia

Council Member,

District I ...............................................Carol Alvarado

Council Member, At-Large

Position 1.................................................. Peter Brown


Position 2..................................................... Sue Lovell

Council Member, At-LargePosition 3..........................Shelley Sekula-Gibbs, M.D.


Position 4............................................Ronald C. Green


Position 5............................................... Michael Berry

APPOINTED OFFICIALS

Chief Administrative Officer................................................................................................................................Anthony W. Hall, Jr.City Attorney..............................................................................................................................................................Arturo G. Michel

Director, Department of Finance and Administration .............................................................................................Judy Gray JohnsonCity Secretary...................................................................................................................................................................Anna Russell

ADVISORS AND CONSULTANTS

Co-Financial Advisors.................................................................................................................................. First Southwest CompanyEstrada Hinojosa & Company, Inc.

Co-Bond Counsel .............................................................................................................................................Vinson & Elkins L.L.P.Law Offices of Francisco G. Medina

Special Disclosure Co-Counsel .............................................................................................................................Andrews Kurth LLPBates & Coleman, P.C.

FINANCING WORKING GROUP

Office of the City Attorney ..........................................................................................................................................Susan T. TaylorGary L. Wood

Department of Finance & Administration.......................................................................................................................Mel TrammellMichael Shannon

Asha PatnaikOffice of the City Controller .......................................................................................................................................... James Moncur

Sue BaileyShawnell Holman-Smith


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ii

No broker, dealer, sales representative or any other person has been authorized by the City or the Underwriters to give any information orto make any representation other than as contained in this Official Statement in connection with the offering described in it and, if given or made,such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement doesnot constitute an offer to sell or the solicitation of any offer to buy any securities other than those described on the cover page, nor shall there beany offer to sell, solicitation of any offer to buy or sale of such securities by any persons in any jurisdiction in which it is unlawful for such personto make such offer, solicitation or sale.

THE SERIES 2006 OBLIGATIONS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACT. ANY REGISTRATION OR QUALIFICATION OF THE SERIES 2006OBLIGATIONS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAW OF THE STATES IN WHICH THE SERIES2006 OBLIGATIONS MAY HAVE BEEN REGISTERED OR QUALIFIED AND ANY EXEMPTION FROM REGISTRATION ORQUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF.

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE TERMS OFTHIS OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SERIES 2006 OBLIGATIONS HAVE NOT BEENRECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE,THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THISOFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

The information set forth herein has been furnished by the City and includes information obtained from other sources which are believedto be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation, by the Co-Financial Advisors.The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this OfficialStatement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of theCity or the other matters described herein since the date hereof.

Certain statements in this Official Statement, which may be identified by the use of such terms as plan, project, expect,

estimate, budget or other similar words, constitute forward-looking statements. Such forward-looking statements refer to theachievement of certain results or other expectation or performance which involve known and unknown risks, uncertainties and otherfactors. These risks, uncertainties and other factors may cause actual results, performance or achievements to be materially different fromany projected results, performance or achievements described or implied by such forward-looking statements. The City does not plan toissue updates or revisions to such forward-looking statements if or when its expectations, or events, conditions or circumstances on whichsuch statements are based, occur, or if actual results, performance or achievements are materially different from any results, performanceor achievements described or implied by such forward-looking statements.

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

This Official Statement includes descriptions and summaries of certain events, matters and documents. Such descriptions and summariesdo not purport to be complete, and all such descriptions, summaries and references thereto are qualified in their entirety by reference to this OfficialStatement in its entirety and to each such document, copies of which may be obtained from the City or from the Co-Financial Advisors to the City

for this issuance. Any statements made in this Official Statement or the appendices hereto involving matters of opinion or estimates, whether or notso expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of such opinions or estimates willbe realized.

This Official Statement is delivered in connection with the sale of securities referred to herein and may not be produced or used, in wholeor in part, for any other purposes. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there beany sale of the Series 2006 Obligations in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. No dealer, salesman orother person has been authorized by the City to give any information or to make any representation other than those contained herein, and, if givenor made, such other information or representation must not be relied upon as having been authorized by the City or any other person. Theinformation and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any salemade hereunder shall, under any circumstances, create the implication that there has been no change in the matters described herein since the datehereof.

The prices and other terms respecting the offering and sale of the Series 2006 Obligations may be changed from time to time by theUnderwriters after the Series 2006 Obligations are released for sale, and the Series 2006 Obligations may be offered and sold at prices other than

the initial offering prices, including sales to dealers who may sell the Series 2006 Obligations into investment accounts.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THATSTABILIZE OR MAINTAIN THE MARKET PRICES OF THE SERIES 2006 OBLIGATIONS AT A LEVEL ABOVE THAT WHICH MIGHTOTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.


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TABLE OF CONTENTS

INTRODUCTION........................................................................................................................................................................................................... 1PURPOSE AND PLAN OF FINANCING..................................................................................................................................................................... 2

Series 2006A Bonds............................................................................................................................................................................................... 2Series 2006B Bonds ............................................................................................................................................................................................... 2Series 2006C Certificates ....................................................................................................................................................................................... 2

SOURCES AND USES OF FUNDS.............................................................................................................................................................................. 3THE OBLIGATIONS..................................................................................................................................................................................................... 3

Source of Payment ................................................................................................................................................................................................. 3Description .............................................................................................................................................................................................................4Ownership .............................................................................................................................................................................................................. 4Special Record Date............................................................................................................................................................................................... 4Transfers and Exchanges ....................................................................................................................................................................................... 5Optional Redemption .............................................................................................................................................................................................5Mandatory Redemption..........................................................................................................................................................................................6Notice of Redemption of the Series 2006 Obligations .......................................................................................................................................... 7Additional Obligations........................................................................................................................................................................................... 7

PROPERTY TAXES ...................................................................................................................................................................................................... 7Property Subject to Taxation by the City............................................................................................................................................................... 7Constitutional and Statutory Tax Rate Limitations ...............................................................................................................................................8City Charter Tax and Revenue Limitations ........................................................................................................................................................... 8Taxing Procedures................................................................................................................................................................................................ 10Tax Rolls .............................................................................................................................................................................................................. 12

SCHEDULE 1: TAX ROLLS......................................................................................................................................................................................12Ad Valorem Tax Levies and Collections............................................................................................................................................................. 13

SCHEDULE 2: AD VALOREM TAX LEVIES AND COLLECTIONS .................................................................................................................. 13Principal Taxpayers..............................................................................................................................................................................................14SCHEDULE 3: PRINCIPAL TAXPAYERS ..............................................................................................................................................................14AD VALOREM TAX OBLIGATIONS OF THE CITY ............................................................................................................................................. 14

Authority to Issue Bonds and Other Obligations.................................................................................................................................................14Obligations of the City.........................................................................................................................................................................................15

SCHEDULE 4: OUTSTANDING DEBT ................................................................................................................................................................... 16Ad Valorem Tax Obligation Percentages ............................................................................................................................................................ 17

SCHEDULE 5: AD VALOREM TAX OBLIGATION PERCENTAGES ................................................................................................................ 17Principal and Interest Payable from Ad Valorem Taxes ..................................................................................................................................... 18

SCHEDULE 6: PRINCIPAL AND INTEREST PAYABLE FROM AD VALOREM TAXES (EXCLUDING OUTSTANDINGCOMMERCIAL PAPER NOTES)...................................................................................................................................................................... 18

COMPUTATION OF DIRECT AND OVERLAPPING DEBT.................................................................................................................................. 19SCHEDULE 7: DIRECT AND OVERLAPPING DEBT ........................................................................................................................................... 20CAPITAL IMPROVEMENT PLAN............................................................................................................................................................................21SCHEDULE 8: CAPITAL IMPROVEMENT PLAN (NON-ENTERPRISE FUND)...............................................................................................21SCHEDULE 9: VOTER-AUTHORIZED OBLIGATIONS.......................................................................................................................................22

GENERAL OBLIGATION COMMERCIAL PAPER PROGRAMS ......................................................................................................................... 22THE CITY.....................................................................................................................................................................................................................23

Governmental Structure ....................................................................................................................................................................................... 23Home-Rule Charter ..............................................................................................................................................................................................23Redistricting .........................................................................................................................................................................................................23Services Provided by the City.............................................................................................................................................................................. 23City Response to Hurricane Katrina .................................................................................................................................................................... 24Employees ............................................................................................................................................................................................................25

SCHEDULE 10: CITY EMPLOYEES........................................................................................................................................................................ 25SCHEDULE 11: COMPENSATED ABSENCE LIABILITY AND LONG-TERM DISABILITY FUND ............................................................. 26SCHEDULE 11A: COMPENSATED ABSENCE LIABILITY................................................................................................................................. 26SCHEDULE 11B: LONG-TERM DISABILITY FUND............................................................................................................................................ 26

Health Benefits Fund, Medical Plan, Dental Plan and Life Insurance Plans ......................................................................................................26Health Care Benefits for Retired Employees....................................................................................................................................................... 27Employee Pension Funds..................................................................................................................................................................................... 27

SCHEDULE 12: ACTUARIALLY DETERMINED CONTRIBUTION AMOUNTS AND CHANGES IN PENSION PLAN ASSETS .............30

Municipal System Overview and Agreement......................................................................................................................................................31SCHEDULE 12A: MUNICIPAL SYSTEM PENSION PLAN ASSETS, LIABILITIES AND UNFUNDED ACTUARIALACCRUED LIABILITY...................................................................................................................................................................................... 33Police System Overview and Agreement ............................................................................................................................................................ 33

SCHEDULE 12B: POLICE SYSTEM PENSION PLAN ASSETS, LIABILITIES AND UNFUNDED ACTUARIAL ACCRUEDLIABILITY..........................................................................................................................................................................................................35Firefighter Fund Overview................................................................................................................................................................................... 35

SCHEDULE 12C: FIREFIGHTER FUND PENSION PLAN ASSETS, LIABILITIES AND UNFUNDED ACTUARIAL ACCRUEDLIABILITY..........................................................................................................................................................................................................36State Legislation................................................................................................................................................................................................... 36

ANNEXATION PROGRAM AND IN-CITY DISTRICTS.....................................................................................................................................36Annexation Program ............................................................................................................................................................................................36In-City Districts....................................................................................................................................................................................................38


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ACCOUNTING AND BUDGETING PROCEDURES AND GENERAL FUND REVENUES............................................................................... 38Financial Accounting ...........................................................................................................................................................................................38Budgeting Procedures ..........................................................................................................................................................................................39Financial Policies ................................................................................................................................................................................................. 39City Investment Policy.........................................................................................................................................................................................40City Interest Rate Swap Policy ............................................................................................................................................................................ 40General Fund and General Debt Service Fund Budgets for Fiscal Year 2006 ...................................................................................................40

SCHEDULE 13: GENERAL FUND BUDGET FOR FISCAL YEAR 2006.............................................................................................................41SCHEDULE 14: DEBT SERVICE FUND BUDGET ................................................................................................................................................42SCHEDULE 14A: TAX BOND DEBT SERVICE FUND BUDGET FOR FISCAL YEAR 2006 .......................................................................... 42

SCHEDULE 14B: TAX CERTIFICATE DEBT SERVICE FUND BUDGET FOR FISCAL YEAR 2006 ............................................................ 42Summary of General Fund Revenues, Expenditures, Transfers and Changes in Fund Balance ........................................................................43

SCHEDULE 15: SUMMARY OF GENERAL FUND...............................................................................................................................................43SCHEDULE 16: GENERAL FUND UNRESERVED AND UNDESIGNATED FUND BALANCES................................................................... 44

Sales and Use Tax and Franchise Charges and Fees ........................................................................................................................................... 44SCHEDULE 17: SALES AND USE TAX AND FRANCHISE CHARGES AND FEES......................................................................................... 44

Charges to Other City Funds................................................................................................................................................................................ 44SCHEDULE 18: DISCRETIONARY DEBT SERVICE TRANSFERS BY COMBINED UTILITY SYSTEM TO THE DEBT

SERVICE FUND ................................................................................................................................................................................................. 45SCHEDULE 19: GENERAL FUND INDIRECT CHARGES TO OTHER CITY FUNDS...................................................................................... 45SCHEDULE 20: GENERAL FUND DIRECT CHARGES TO OTHER CITY FUNDS.......................................................................................... 45

Industrial District Contracts................................................................................................................................................................................. 45SCHEDULE 21: INDUSTRIAL DISTRICT CONTRACTS .....................................................................................................................................46

Tax Abatement ..................................................................................................................................................................................................... 46Short-Term Financing ..........................................................................................................................................................................................46Special Revenue Funds ........................................................................................................................................................................................ 46

ENTERPRISE SYSTEMS OF THE CITY ..................................................................................................................................................................46Enterprise Funds: Summary of Revenues, Expenses and Changes in Net Fund Assets..................................................................................... 47SCHEDULE 22: ENTERPRISE FUNDS.................................................................................................................................................................... 47LITIGATION AND REGULATION ........................................................................................................................................................................... 48

General Litigation and Claims .............................................................................................................................................................................48Environmental Regulation ................................................................................................................................................................................... 48Other Environmental Measures ........................................................................................................................................................................... 48Periodic Flooding................................................................................................................................................................................................. 49

REMEDIES................................................................................................................................................................................................................... 49LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS................................................................................... 50BOND INSURANCE.................................................................................................................................................................................................... 50

Payment Pursuant to Financial Guaranty Insurance Policy.................................................................................................................................50Ambac Assurance Corporation............................................................................................................................................................................51Available Information ..........................................................................................................................................................................................51Incorporation of Certain Documents by Reference ............................................................................................................................................. 51

RATINGS...................................................................................................................................................................................................................... 52TAX MATTERSTAXABLE BONDS ..................................................................................................................................................................... 52

In General ............................................................................................................................................................................................................. 52Payments of Interest............................................................................................................................................................................................. 53Disposition or Retirement .................................................................................................................................................................................... 53Information Reporting and Backup Withholding................................................................................................................................................ 53Treasury Circular 230 Disclosure ........................................................................................................................................................................ 53

TAX MATTERSTAX-EXEMPT OBLIGATIONS................................................................................................................................................. 54Tax Exemption ..................................................................................................................................................................................................... 54Additional Federal Income Tax Considerations ..................................................................................................................................................54

LEGAL PROCEEDINGS.............................................................................................................................................................................................56CO-FINANCIAL ADVISORS ..................................................................................................................................................................................... 56FINANCIAL STATEMENTS...................................................................................................................................................................................... 56UNDERWRITING........................................................................................................................................................................................................ 56FORWARD LOOKING STATEMENTS .................................................................................................................................................................... 56REGISTRATION, SALE AND DISTRIBUTION....................................................................................................................................................... 57CONTINUING DISCLOSURE OF INFORMATION ................................................................................................................................................57

Annual Reports..................................................................................................................................................................................................... 57Material Event Notices......................................................................................................................................................................................... 57Availability of Information from NRMSIRs and SID.........................................................................................................................................58Limitations and Amendments ..............................................................................................................................................................................58Compliance with Prior Undertakings .................................................................................................................................................................. 58

GENERAL INFORMATION.......................................................................................................................................................................................58

APPENDICESAPPENDIX A AUDITED BASIC FINANCIAL STATEMENTS

OF THE CITY .........................................................A-1APPENDIX B ECONOMIC AND DEMOGRAPHIC

CHARACTERISTICS.............................................B-1APPENDIX C FORMS OF CO-BOND COUNSEL OPINIONS .....C-1APPENDIX D CONTINUING DISCLOSURE SCHEDULES ..........D-1APPENDIX E SECURITIES DEPOSITORY..................................... E-1APPENDIX F SPECIMEN OF BOND INSURANCE POLICY.........F-1


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OFFICIAL STATEMENT

$91,060,000CITY OF HOUSTON, TEXAS

$63,740,000TAXABLE PENSION

OBLIGATION BONDS,SERIES 2006A

$24,005,000PUBLIC IMPROVEMENT

REFUNDING BONDS,SERIES 2006B

$3,315,000CERTIFICATES OF

OBLIGATION,SERIES 2006C

INTRODUCTION

This Official Statement is provided to furnish information in connection with the offering by the City of Houston,

Texas (the City) of its Taxable Pension Obligation Bonds, Series 2006A (the Series 2006A Bonds or the Taxable Bonds),Public Improvement Refunding Bonds, Series 2006B (the Series 2006B Bonds or the Tax-Exempt Bonds) and Certificates ofObligation, Series 2006C (the Series 2006C Certificates or the Tax-Exempt Certificates, and together with the Tax-Exempt

Bonds, the Tax-Exempt Obligations). Collectively, the Series 2006A Bonds, the Series 2006B Bonds and the Series 2006CCertificates are referred to herein as the Series 2006 Obligations. The Series 2006 Obligations are direct obligations of theCity, secured by and payable from the receipts of an annual ad valorem tax levied, within legal limits, on taxable property within

the City. See THE OBLIGATIONSSource of Payment. The Series 2006A Bonds are authorized pursuant to the generallaws of the State of Texas, particularly Chapter 107, Texas Local Government Code, as amended, Chapter 1201, TexasGovernment Code, as amended, the Citys Charter and a separate ordinance adopted by the City Council of the City (the Series2006A Bond Ordinance). The Series 2006B Bonds are authorized pursuant to the general laws of the State of Texas,particularly Chapters 1201 and 1207, Texas Government Code, as amended, the Citys Charter and a separate ordinance adopted

by the City Council of the City (the Series 2006B Bond Ordinance). The Series 2006C Certificates are authorized pursuant tothe general laws of the State of Texas, particularly Section 271.041 et. seq., Texas Local Government Code, as amended, theCitys Charter and a separate ordinance adopted by the City Council of the City (the Series 2006C Certificate Ordinance, andtogether with the Series 2006A Bond Ordinance and the Series 2006B Bond Ordinance, the Ordinances and each anOrdinance, as appropriate).

The Citys audited basic financial statements for the Fiscal Year ended June 30, 2005 (the Financial Statements) areattached to this Official Statement as APPENDIX A. Attached as APPENDIX B is certain economic and demographicinformation about the City. Attached as APPENDIX C are the respective forms of opinion of Co-Bond Counsel for eachrespective series of Series 2006 Obligations. Attached as APPENDIX D is a listing of continuing disclosure schedules included

in this Official Statement. Attached as APPENDIX E is information relating to the securities clearance procedures applicable tothe Series 2006 Obligations, including a description of The Depository Trust Company (DTC) and the global securitiesclearance procedures of the Euroclear System and Clearstream. Attached as APPENDIX F is a specimen policy with respect tothe financial guaranty insurance obtained by the City for the Series 2006B Bonds and Series 2006C Certificates.

The Financial Statements present information on the general financial condition of the City at the dates and for the

periods described therein. The Series 2006 Obligations are secured by and payable from the receipts of an annual ad valorem taxlevied, within legal limits, on taxable property within the City. See THE OBLIGATIONSSource of Payment andPROPERTY TAXES. The inclusion of the Financial Statements, which are part of the City Controllers ComprehensiveAnnual Financial Report, for the Fiscal Year ended June 30, 2005 (the Controllers Report), and other financial information in

this Official Statement is not intended to imply that any other tax receipts, revenues or moneys of the City are pledged to pay theprincipal of or interest on the Series 2006 Obligations. As used herein, the term Fiscal Year, unless otherwise indicated, meansthe Citys Fiscal Year, which currently is the twelve-month period beginning on July 1 of a calendar year and ending on June 30of the next succeeding calendar year. Each such period may be designated with the number of the calendar year in which such

period ends.

The City is the fourth largest city in the nation and the largest city in Texas. In January 2005, according to the TexasState Data Center, the Citys population was approximately 2.05 million, and in December, 2005, according to the University ofHouston Center for Public Policy, the population of its primary metropolitan statistical area was approximately 4.50 million,which is the ninth largest in the United States. Located on the coastal plain in Southeast Texas, approximately 50 miles from the

Gulf of Mexico, the City is a major corporate and international financial center. Leading industries include energy, engineeringand construction, real estate, aerospace and space, commerce, medicine and health care, transportation, biotechnology andcomputer technology. For additional information about the City, see APPENDIX BEconomic and Demographic

Characteristics. See THE CITY City Response to Hurricane Katrina for information relating to the impact on the City ofHurricanes Katrina and Rita.


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2

PURPOSE AND PLAN OF FINANCING

Series 2006A Bonds

The Houston Municipal Employees Pension System (HMEPS or the Municipal System) and Houston PoliceOfficers Pension System (HPOPS or the Police System) operate under certain statutory authority for the benefit of certainmunicipal employees and classified police officers, respectively, of the City. HMEPS and HPOPS qualify as public pensionfunds within the meaning of state law, and in accordance with Chapter 107, Texas Local Government Code, each respectivepension system has entered into an agreement with the City providing, among other things, the amount of the unfunded liability

of each respective pension system, and, therefore, the City is authorized by Chapter 107, Texas Local Government Code, andother applicable Texas law to issue pension obligation bonds for the purpose of funding all or a portion of such unfunded liabilityof each respective pension system.

For further information regarding the City and the pension systems, see the sections captioned THE CITYEmployee Pension Funds; Municipal System Overview and Agreement; and Police System Overview and Agreement.

The Series 2006A Bonds are being issued to fund a part of the unfunded liability of HMEPS and HPOPS, respectively.Proceeds of the Series 2006A Bonds will also be used to pay costs relating to the issuance of the Series 2006A Bonds.

Series 2006B Bonds

In 1995 and 1999 certain employees of the Citys Fire Department filed suit against the City in federal district courtseeking payment of compensation allegedly owed to such employees for overtime work under federal and state law. In July2004, the federal district court issued an opinion on partial summary judgment ordering that, in addition to compensation forunpaid overtime work, the City also pay liquidated damages in an amount equal to the amount of actual damages (i.e. unpaidovertime compensation). Following the release of such opinion, a settlement agreement was reached among the parties and afinal judgment was entered on November 19, 2004 (the Final Judgment). The Final Judgment required the City to pay thesettlement in three installments. The City paid the first two installments in December 2004 and July 2005, respectively, withproceeds of certain bonds issued by the City. The third and final installment is required to be paid on or before July 15, 2006,and the Series 2006B Bonds are being issued to fund the third and final installment. Proceeds of the sale of the Series 2006BBonds will also be used to pay costs relating to the issuance of the Series 2006B Bonds.

Series 2006C Certificates

The Series 2006C Certificates are being issued to fund the demolition of dangerous buildings within the City. Proceedsof the sale of the Series 2006C Certificates will also be used to pay costs relating to the issuance of the Series 2006C Certificates.

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SOURCES AND USES OF FUNDS

The proceeds from the sale of the Series 2006 Obligations will be applied as follows:

Series 2006A Bonds

Sources of Funds:Principal Amount of the Series 2006A Bonds ............................................................................................. $63,740,000.00

Total Sources of Funds.......................................................................................................................... 63,740,000.00

Uses of Funds:Deposit to HMEPS...................................................................................................................................... $33,000,000.00Deposit to HPOPS....................................................................................................................................... 30,000,000.00Underwriters Discount............................................................................................................................... 296,925.58Issuance Expenses(1) ................................................................................................................................... 443,074.42

Total Uses of Funds .............................................................................................................................. 63,740,000.00

Series 2006B Bonds

Sources of Funds:Principal Amount of the Series 2006B Bonds ............................................................................................. $24,005,000.00Original Issue Premium............................................................................................................................... 452,946.30

Total Sources of Funds.......................................................................................................................... $24,457,946.30

Uses of Funds:Deposit to Judgment Bond Fund ................................................................................................................. $24,075,000.00Underwriters Discount............................................................................................................................... 128,273.33Issuance Expenses(1) ................................................................................................................................... 254,672.97

Total Uses of Funds .............................................................................................................................. $24,457,946.30


Sources of Funds:Principal Amount of the Series 2006C Certificates..................................................................................... $3,315,000.00Original Issue Premium............................................................................................................................... 234,138.45

Total Sources of Funds.......................................................................................................................... $3,549,138.45

Uses of Funds:

Deposit to 2006 Demolition Fund ............................................................................................................... $3,500,000.00Underwriters Discount ............................................................................................................................... 14,613.80Issuance Expenses(1)..................................................................................................................................... 34,524.65

Total Uses of Funds .............................................................................................................................. $3,549,138.45

_______________(1) Includes certain legal fees, fees of the Paying Agent/Registrar, premium for financial guaranty insurance policy (in the case of the Series 2006B

Bonds and Series 2006C Certificates), contingency and other costs of issuance.

THE OBLIGATIONS

Source of Payment

The Series 2006 Obligations are secured by and payable from the receipts of an annual ad valorem tax levied, withinlegal limits, on taxable property within the City. The City has covenanted to assess, levy and collect an ad valorem tax in eachcalendar year (Tax Year), within the applicable limitations described below, sufficient to pay the principal of and interest onthe Series 2006 Obligations. Except for certain exemptions described herein, all property in the City is subject to the ad valoremtax. See PROPERTY TAXES. Under the terms of the Ordinances, prior ordinances, and applicable Texas law, the City isobligated to assess, levy and collect in each Tax Year ad valorem taxes sufficient to pay the principal of and the interest on alloutstanding obligations payable in such Tax Year from ad valorem tax proceeds. Such obligations (referred to herein collectivelyas the Tax Obligations) include the following:

(i) Certain obligations to fund the Citys unfunded actuarially accrued liability (UAAL) to the Citys pensionprograms, which to date the City has issued for HMEPS and HPOPS (collectively, the Pension Obligations), all as more fullydescribed herein. The Series 2006A Bonds are being issued as Pension Obligations, the proceeds of which will be used to fund aportion of the unfunded liabilities of HMEPS and HPOPS. Series 2006A Bond proceeds will not be used to fund a portion of the


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unfunded liability of the Houston Firefighters Relief and Retirement Fund (HFRRF or Firefighter Fund), although the Citymay issue additional Pension Obligations at a later date for such purpose;

(ii) Bonds (Tax Bonds) and notes (Tax Notes) payable from ad valorem taxes, including Tax Bonds, such asthe Series 2006B Bonds, to refund obligations of the City, including non-appealable judgments and legal settlements against theCity;

(iii) Certificates of obligation (Tax Certificates), such as the Series 2006C Certificates;

(iv) General obligation commercial paper notes (Commercial Paper Notes); and

(v) Certain assumed bonds of special districts annexed by the City (Assumed Bonds).

In addition, the City is authorized to enter into tax-supported interest rate swap agreements. The City has entered intoone tax-supported interest rate swap agreement (as described herein) and may enter into additional interest rate swap agreementsthat may be payable in whole or in part from ad valorem taxes if payments become due under any such swap agreements. SeeACCOUNTING AND BUDGETING PROCEDURES AND GENERAL FUND REVENUESCity Interest Rate SwapPolicy. As of January 31, 2006 the outstanding principal amount of Tax Obligations, adjusted to include the Series 2006Obligations, was $2,754,926,000. See AD VALOREM TAX OBLIGATIONS OF THE CITYAuthority to Issue Bonds andOther Obligations; Obligations of the City, SCHEDULE 4: OUTSTANDING DEBT and PROPERTY TAXES CityCharter Tax and Revenue Limitations.

Description

The Series 2006 Obligations will mature in the aggregate principal amounts and on the dates indicated on the insidecover page of this Official Statement. The Series 2006 Obligations will be dated as set forth in the respective Ordinance for eachseries of Series 2006 Obligations and will accrue interest from the dates of delivery for each respective series, which are expectedto be as follows: March 29, 2006, in the case of the Series 2006A Bonds, and April 19, 2006, in the case of the Series 2006BBonds and Series 2006C Certificates. The Series 2006 Obligations will be payable each March 1 and September 1, commencingSeptember 1, 2006, until maturity or earlier redemption. Deutsche Bank Trust Company Americas is the initial payingagent/registrar (the Paying Agent/Registrar) for the Series 2006 Obligations. The Series 2006 Obligations will be issued infully registered form in denominations of $5,000 or any integral multiple thereof.

Principal of the Series 2006 Obligations is payable upon presentation and surrender thereof at the principal paymentoffice of the Paying Agent/Registrar, which is currently located in New York, New York. Interest on the Series 2006 Obligationswill be payable to the registered owner whose name appears in the registration books for the Series 2006 Obligations (theRegister) maintained by the Paying Agent/Registrar at the close of business on the 15th day of the calendar month immediatelypreceding the applicable interest payment date (the Record Date) and shall be payable by the Paying Agent/Registrar (i) bycheck sent by United States Mail, first class postage prepaid, to the address of the registered owner recorded in the Register or (ii)by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registeredowner. Accrued interest payable at maturity of the Series 2006 Obligations will be paid upon presentation and surrender of suchSeries 2006 Obligations at the principal payment office of the Paying Agent/Registrar.

All references in this Official Statement to the Series 2006 Obligations are subject to the specific provisions of theSeries 2006A Bond Ordinance, the Series 2006B Bond Ordinance or the Series 2006C Certificate Ordinance, as appropriate.

Ownership

The City, the Paying Agent/Registrar, and any other person may treat the person in whose name any Series 2006Obligation is registered (the Registered Owner) as the absolute owner of such Series 2006 Obligation for the purpose ofmaking and receiving payment of the principal thereof and the interest thereon and for all other purposes, whether or not suchSeries 2006 Obligation is overdue. Neither the City nor the Paying Agent/Registrar will be bound by any notice or knowledge tothe contrary. All payments made to the person deemed to be the Registered Owner of any Series 2006 Obligation in accordance

with the Series 2006A Bond Ordinance, the Series 2006B Bond Ordinance or the Series 2006C Certificate Ordinance, asappropriate, will be valid and effectual and will discharge the liability of the City and the Paying Agent/Registrar for such Series2006 Obligation to the extent of the sums paid. With respect to the Series 2006B Bonds and the Series 2006C Certificates, solong as the Bond Insurer shall not have defaulted in its payment obligations under the bond insurance policy insuring the Series2006B Bonds and Series 2006C Certificates, it shall have all rights granted to the Owners of such Series 2006B Bonds and Series2006C Certificates in the applicable Ordinance.

Special Record Date

If interest on any Series 2006 Obligation is not paid on an interest payment date and continues unpaid for thirty (30)days thereafter, the Paying Agent/Registrar will establish a new record date for the payment of such interest, to be known as aSpecial Record Date. The Paying Agent/Registrar will establish a Special Record Date when funds to make such interest


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payment are received from or on behalf of the City. Such Special Record Date will be fifteen (15) days prior to the date fixed forpayment of such past due interest, and notice of the date of payment and the Special Record Date will be sent by United Statesmail, first class postage prepaid, not later than five (5) days prior to the Special Record Date, to each affected Registered Ownerof record as of the close of business on the day prior to the mailing of such notice.

Transfers and Exchanges

Beneficial ownership of Series 2006 Obligations registered in the name of The Depository Trust Company, New York,New York (DTC) will be initially transferred as described under APPENDIX E SECURITIES DEPOSITORY

Depository Trust Company. With respect to the Series 2006A Bonds, APPENDIX E also describes the global clearanceprocedures of the Euroclear and Clearstream systems.

So long as any Series 2006 Obligations remain outstanding, the Paying Agent/Registrar shall keep the Register at itsprincipal payment office in which, subject to such reasonable regulations as it may prescribe, the Paying Agent/Registrar shallprovide for the registration and transfer of the Series 2006 Obligations in accordance with the terms of the applicable Ordinance.

The Series 2006 Obligations shall be transferable only upon the presentation and surrender thereof by Cede & Co., asDTCs nominee or any subsequent Registered Owner, at the principal payment office of the Paying Agent/Registrar, dulyendorsed for transfer, or accompanied by an assignment duly executed by Cede & Co., as DTCs nominee, or any subsequentRegistered Owner or the authorized representative thereof in a form satisfactory to the Paying Agent/Registrar. Upon duepresentation and surrender of a Series 2006 Obligation for transfer, the Paying Agent/Registrar is required to authenticate anddeliver in exchange therefor, in a timely fashion after such presentation and surrender, a new Series 2006 Obligation or Series2006 Obligations, registered in the name of Cede & Co., as DTCs nominee, or such other transferee, in authorizeddenominations, of the same series, maturity and interest rate, in the same aggregate principal amount as the Series 2006Obligation or Series 2006 Obligations so presented and surrendered.

In the event the Series 2006 Obligations are not held in a book-entry registration system, all Series 2006 Obligationsshall be exchangeable upon the presentation and surrender thereof at the designated office of the Paying Agent/Registrar, initiallyin New York, New York, for a Series 2006 Obligation or Series 2006 Obligations of the same series, maturity and interest rate, inany authorized denomination and in an aggregate principal amount equal to the Series 2006 Obligation or Series 2006Obligations presented for exchange. Series 2006 Obligations issued in exchange for other Series 2006 Obligations shall beentitled to the benefits and security of the applicable Ordinance to the same extent as the Series 2006 Obligation or Series 2006Obligations in lieu of which such Series 2006 Obligation is delivered.

The City or the Paying Agent/Registrar may require DTC or any subsequent Registered Owner of any Series 2006Obligation to pay a sum sufficient to cover any tax, fee, or other governmental charge that may be imposed in connection withthe transfer or exchange of such Series 2006 Obligation. Any fee or charge of the Paying Agent/Registrar for such transfer orexchange shall be paid by the City.

The Paying Agent/Registrar shall not be required to transfer or exchange any Series 2006 Obligation called forredemption during any period beginning 15 calendar days prior to, and ending on the mailing date of, the mailing of any notice ofredemption, nor shall the Paying Agent/Registrar be required to transfer or exchange any Series 2006 Obligation selected forredemption, in whole or in part, when such redemption date is scheduled to occur within 30 calendar days; provided, however,that such restriction shall not apply to the transfer or exchange by Cede & Co. as DTCs nominee or any subsequent RegisteredOwner of the unredeemed portion of a Series 2006 Obligation called for redemption in part.

Optional Redemption

Series 2006A Bonds. The Series 2006A Bonds are subject to optional redemption prior to their maturity at the optionof the City, in whole or in part (and, if in part, on a Pro Rata basis as described below in Mandatory RedemptionSeries2006A Bonds) on any date, at a redemption price equal to the greater of:

(a) 100 percent of the principal amount of the Series 2006A Bonds to be redeemed; or

(b) the sum of the present values of the remaining scheduled payments of principal of and interest on the Series2006A Bonds to be redeemed (exclusive of interest accrued to the date fixed for redemption) discounted tothe date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months)at the Treasury Rate plus 12.5 basis points;

plus, in each case, accrued and unpaid interest on the Series 2006A Bonds being redeemed to the date fixed for redemption.

For the purposes of determining the Treasury Rate, the following definitions shall apply:

Comparable Treasury Issue means, with respect to any redemption date for a particular Series 2006A Bond, theUnited States Treasury security or securities selected by the Designated Investment Banker which has an actual or interpolated


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maturity comparable to the remaining average life of the applicable Series 2006A Bonds to be redeemed, and that would beutilized in accordance with customary financial practice in pricing new issues of debt securities of comparable maturity to theremaining average life of the applicable Series 2006A Bonds to be redeemed.

Comparable Treasury Price means, with respect to any redemption date for a particular Series 2006A Bond, (1) theaverage of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest ReferenceTreasury Dealer Quotations, or (2) if the Designated Investment Banker obtains fewer than four such Reference Treasury DealerQuotations, the average of all such quotations.

Designated Investment Banker means one of the Reference Treasury Dealers appointed by the City.

Reference Treasury Dealer means Morgan Stanley & Co. Incorporated and its successors and three other firms,specified by the City from time to time, that are primary U.S. Government securities dealers in the City of New York, New York(each a Primary Treasury Dealer); provided, however, that if any of them ceases to be a Primary Treasury Dealer, the City shallsubstitute another Primary Treasury Dealer.

Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer and any redemptiondate for a particular Bond, the average, as determined by the Designated Investment Banker, of the bid and asked prices for theComparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the DesignatedInvestment Banker by such Reference Treasury Dealer at 3:30 p.m., New York City time, on the third business day precedingsuch redemption date.

Treasury Rate means, with respect to any redemption date for a particular Series 2006A Bond, the rate per annum,expressed as a percentage of the principal amount, equal to the semiannual equivalent yield to maturity or interpolated maturityof the Comparable Treasury Issue, assuming that the Comparable Treasury Issue is purchased on the redemption date for a priceequal to the Comparable Treasury Price, as calculated by the Designated Investment Banker.

If less than all of the Series 2006A Bonds are to be redeemed pursuant to an optional redemption, the City shalldetermine the maturity or maturities and the amounts thereof to be redeemed, and if less than the entire maturity is redeemed, theCity shall direct the Paying Agent/Registrar to redeem the Series 2006A Bonds of such maturity on a Pro Rata (as defined below)basis to each Owner in whose name such Series 2006A Bonds are registered on the Record Date immediately preceding theredemption date.

Series 2006B Bonds. The Series 2006B Bonds maturing on and after March 1, 2017, are subject to optionalredemption prior to maturity, in whole or in part, on March 1, 2016, or any date thereafter, at 100% of the principal amountthereof, plus accrued interest to the redemption date.

Series 2006C Certificates. The Series 2006C Certificates are not subject to optional redemption prior to maturity.

Mandatory Redemption

Series 2006A Bonds. The Series 2006A Bonds are being issued as term bonds, maturing on March 1, 2036 (theSeries 2006A Term Bonds), and are subject to mandatory sinking fund redemption, prior to their scheduled maturity, and willbe redeemed by the City at a redemption price equal to the principal amount thereof, plus interest accrued thereon to the date ofredemption, on the dates and in the principal amounts shown in the following schedule:

$63,740,000 Term Bonddue March 1, 2036

Mandatory Sinking FundRedemption Date (March 1)

Mandatory Sinking FundRedemption Amount

2031 $ 11,415,000

2032 12,045,000

2033 12,710,000

*** ***2035 13,415,000

2036 (maturity) 14,155,000

Mandatory redemptions of the Series 2006A Term Bonds will be made on a Pro Rata (as defined in below) basis toeach Owner in whose name the Series 2006A Term Bonds are registered on the Record Date immediately preceding themandatory sinking fund redemption date.

If less than all of the Outstanding Series 2006A Term Bonds of a maturity are optionally redeemed as provided above,then following the Pro Rata reduction of the redeemed bonds among the bondholders, the City shall direct the PayingAgent/Registrar to proportionately reduce the principal amount of each of the remaining mandatory sinking amounts for suchmandatory sinking fund redemption dates.


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Pro Rata is determined in connection with any partial optional redemption or mandatory redemption of Series 2006ABonds by multiplying the principal amount of such maturity to be redeemed on the applicable redemption date by a fraction, thenumerator of which is equal to the principal amount of such maturity owned by an Owner, and the denominator of which is equalto the amount of such maturity then Outstanding immediately prior to such redemption date, and then rounding the product downto the next lower integral of $5,000, provided that the portions being redeemed are required to be in multiples of $5,000, and allSeries 2006A Bonds of a maturity to remain outstanding following any redemption are required to be in multiples of $5,000.

Series 2006B Bonds

The Series 2006B Bonds are not subject to mandatory redemption prior to maturity.


The Series 2006C Certificates are not subject to mandatory redemption prior to maturity.

Notice of Redemption of the Series 2006 Obligations

At least thirty (30) days prior to the date fixed for any such redemption, a written notice of such redemption shall begiven to the Registered Owners of the Series 2006A Bonds or Series 2006B Bonds, as applicable, or portions thereof being calledfor redemption by depositing such notice in the United States mail, first-class, postage prepaid, addressed to each such RegisteredOwner at their address shown on the registration books of the Paying Agent/Registrar; provided, however, that so long as DTC isthe securities depository for the Series 2006A Bonds and Series 2006B Bonds, as applicable, such notice shall be given only toDTC. The failure to send, mail or receive any notice of redemption shall not affect the validity or effectiveness of theproceedings for the redemption of any Series 2006A Bonds or Series 2006B Bonds, as applicable. By the date fixed for any suchredemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price forthe Series 2006A Bonds or Series 2006B Bonds, as applicable, or the portions thereof which are to be so redeemed, plus accruedinterest to the date fixed for redemption. If a portion of any such Series 2006A Bonds or Series 2006B Bonds, as applicable,shall be redeemed, a substitute Series 2006A Bond or Series 2006B Bond having the same maturity date, bearing interest at thesame rate, and in an aggregate principal amount equal to the unredeemed portion thereof, will be issued to the Registered Ownerupon the surrender of the Series 2006A Bonds or Series 2006B Bonds, as applicable, being redeemed, all as provided for in theSeries 2006A Ordinance or the Series 2006B Ordinance, as applicable.

Additional Obligations

The City expects to issue additional Tax Obligations payable (in whole or in part) from ad valorem taxes. Such TaxObligations may be issued as Pension Obligations, Tax Bonds, Tax Notes, Tax Certificates or Commercial Paper Notes and/orAssumed Bonds, all of which may be payable at such time or times and under such other terms, conditions and details asdetermined and approved by City Council. For additional information about possible future issuances of Pension Obligations,

see THE CITY Employee Pension Funds. See also SCHEDULE 4: OUTSTANDING DEBT.

As part of the Citys debt management program, the City has entered into a tax-supported interest rate swap agreement(as described herein), and may enter into additional interest rate swap agreements which may be payable in whole or in part fromad valorem taxes if payments by the City become due under any such swap agreements. See AD VALOREM TAXOBLIGATIONS OF THE CITYInterest Rate Swaps. The City may also annex additional districts and thereby createadditional Assumed Bonds. See ANNEXATION PROGRAM AND IN-CITY DISTRICTS Annexation Program andSCHEDULE 9: VOTER-AUTHORIZED OBLIGATIONS.

PROPERTY TAXES

Property Subject to Taxation by the City

Except for certain exemptions provided by federal law and the Texas Tax Code (the Tax Code), all property in theCity is subject to ad valorem taxation from which the Citys general purpose expenditures and debt service expenditures on Tax

Obligations are paid. Categories of exemptions applicable to the City include: (i) property used for public purposes and ownedby the State or political subdivisions thereof; (ii) property exempted from ad valorem taxation by federal law; (iii) certainhousehold goods, family supplies and personal effects; (iv) farm products owned by producers; (v) certain property affiliated withcharitable organizations, youth development associations, religious organizations and qualified schools; (vi) designated historicalsites; (vii) solar and wind powered energy devices; and (viii) most individually owned automobiles. For information relating tocertain tax and revenue limitations applicable to the City, see Constitutional and Statutory Tax Rate Limitations and CityCharter Tax and Revenue Limitations. See also AD VALOREM TAX OBLIGATIONS OF THE CITYAuthority to IssueBonds and Other Obligations.

Taxable property in the City is required to be valued for tax purposes at 100% of the market value (with certain limitedexceptions) as of January 1 of each calendar year (Tax Year). Pursuant to the Tax Code, which authorizes residentialhomestead exemptions of up to 20% of the appraised value, City Council has authorized the full amount of such residential


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homestead exemptions since Tax Year 1988 and thereafter. The residential homestead exemption can be rescinded or changedby the City Council at any time. City Council also authorized a senior citizen exemption and a disabled citizen exemption(Additional Exemptions) in an amount up to $53,240 of appraised value per household. A household may claim one but notboth Additional Exemptions. In Tax Year 2005, approximately 93,900 households claimed one of the Additional Exemptions,with an average Additional Exemption claim of $46,587 for each such household. On November 2, 2004, the voters of the Cityapproved a charter amendment that provides for a minimum annual exemption increase of 10% for Tax Year 2005 through TaxYear 2008 for such persons. See City Charter Tax and Revenue LimitationsProposition 1. In addition, the Tax Codeprovides for an exemption of up to $12,000 for real or personal property of disabled veterans or the surviving spouse or childrenof a deceased veteran who died while on active duty in the armed forces.

The Tax Code also gives the City the authority to place a cap on the ad valorem tax imposed on the residencehomesteads of disabled persons and persons 65 years of age or older. If the City were to provide for such a cap, the City wouldbe prohibited from increasing the total ad valorem tax on the residence homestead of such persons above the amount of taximposed in the year such residence first qualified for an exemption based on the age or disability status of the owner. The freezeon ad valorem taxes on the homesteads of such persons is also transferable to a different residence homestead.

As of December 16, 2005, exemptions totaling $30,714,135,810 of appraised value have been claimed by taxpayersand subtracted from the total appraised value for Tax Year 2005 of $143,240,222,415, resulting in a net appraised value of$112,208,628,252. Compared to previous years, the exemptions are substantially higher but such increase is attributable to achange in the method of reporting governmental, religious and charitable properties. Because these values are added to the taxrolls and then deducted as exemptions the effect of this change is neutral. Since Texas law allows taxpayers one year from theearlier of payment or delinquency date to claim residential homestead exemptions, the City estimates that approximately$317,458,353 in additional residential homestead exemptions might be claimed, approved and subtracted from the final tax rollfor Tax Year 2005. See Tax Rolls.

Constitutional and Statutory Tax Rate Limitations

The Constitution of the State of Texas (the State or Texas) limits the maximum ad valorem tax rate to $2.50 (per$100 of assessed valuation) for home-rule cities such as the City. However, as discussed below, the City Charter has tax ratelimitations that are more restrictive than those imposed under the Texas Constitution. See City Charter Tax and RevenueLimitations. The Citys tax rate for Tax Year 2004 (Fiscal Year 2005) was $0.650 (per $100 assessed valuation), whichconsisted of $0.46573 for general purposes and $0.18427 for debt service. See SCHEDULE 2: AD VALOREM TAX LEVIESAND COLLECTIONS. The City has adopted a tax rate for Tax Year 2005 (Fiscal Year 2006) of $0.6475 (per $100 assessedvaluation), which consists of $0.46359 for general purposes and $0.18391 for debt service. The City Charter provides that, inpreparing the Citys budget, provision shall first be made for the payment of debt service on the Citys outstanding bondindebtedness, with the remaining revenues to be apportioned among the Citys respective departments. See ACCOUNTINGAND BUDGETING PROCEDURES AND GENERAL FUND REVENUES Budgeting Procedures. As described below, infuture Fiscal Years the amount of the tax levy allocated to debt service may need to be increased, reducing the amount allocable

for the delivery of essential governmental services if there is no corresponding increase in the overall tax levy.

The Tax Code provides certain limitations on annual tax rate increases based on a complex formula. These limitationsare not applicable to tax levy increases to pay debt service on specified debt, including Tax Obligations. Generally, theselimitations require two public hearings if the proposed annual increase exceeds the lower of the effective tax rate or therollback tax rate as such terms are defined in the Tax Code, and an election (upon petition of 7% of the qualified voters of theCity) to limit to 8% any proposed increase which would otherwise exceed 8%. In addition, before City Council can adopt a taxrate that produces tax revenues that exceed the previous years tax revenues, it must first conduct public hearings on the proposedtax rate.

City Charter Tax and Revenue Limitations

In 2004, voters approved initiatives proposing to reduce, cap or otherwise limit ad valorem tax revenues or otherrevenues of the City. One initiative (Proposition 1) was placed on the ballot by City Council in response to a citizen initiative(Proposition 2) that was placed on the ballot as a result of a petition submitted by voters of the City to the City Secretary. In an

election held in November 2004, a majority of the voters voted for both Proposition 1 and Proposition 2, but Proposition 1received more favorable votes than Proposition 2. Below there is a discussion of a lawsuit that was filed relating to Proposition 2(the Proposition 2 Lawsuit). For a discussion of the ongoing litigation regarding Proposition 2, see Proposition Litigation,below.

Proposition 1. Proposition 1 took effect in Fiscal Year 2006 and amended the City Charter by placing a limitation onincreases in revenues received by the City. In particular, Proposition 1 limits increases in (i) the Citys ad valorem tax revenuesby requiring voter approval for increases in ad valorem taxes in future years above a limit equal to the lesser of the actualrevenues in the preceding Fiscal Year, plus 4.5%, or the revenues received in the preceding Fiscal Year, plus the cumulativecombined rates of inflation and the Citys population growth (based on the published estimates of the U.S. Census Bureau for themost recently available 12 month period), but not less than zero, excluding ad valorem tax revenues required by state law to bedeposited into a tax increment fund and adding ad valorem tax revenue attributable to each annexation occurring after July 1,


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2005, for the first year after such annexation; and (ii) water and sewer rates by limiting increases to the combined increases in therates of inflation and population growth, excluding rate increases required by certain bond covenants and rates established bycontract, unless approved by the voters. For certain historic demographic information about the City, see APPENDIX B Economic and Demographic Characteristics. Not yet reflected in the demographic information included as APPENDIX B is thelarge influx of displaced residents from Louisiana, Mississippi and Alabama as a result of Hurricane Katrina, estimated at135,000 to 150,000 residents. See THE CITYCity Response to Hurricane Katrina.

Proposition 1 also provides for minimum annual increases of 10% in the disabled and senior exemption for all residentswho are 65 or older or who qualify for the disability exemption in Tax Years 2005 through 2008, and provides that the exemption

in Tax Year 2008 shall thereafter be maintained unless increased by City Council. See Constitutional and Statutory Tax RateLimitations for a discussion of the effect of Proposition 1 on Tax Year 2005 (Fiscal Year 2006) tax rates. Proposition 1 furtherprovides that City Council has full authority to assess and collect all revenues of the City without limitation, except as to advalorem taxes and water and sewer rates.

Proposition 2. Proposition 2 would limit increases in the Citys combined revenues. The term combined revenuesas defined in Proposition 2 includes all revenues of the City, including the general fund, special revenue funds and enterprisefunds, excluding only grant monies and revenues from other go