Lone Star College District $149.78 million Limited Tax General Obligation Bonds official statement, 2008

8/14/2019 Lone Star College District $149.78 million Limited Tax General Obligation Bonds official statement, 2008

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$149,780,000

LONE STAR COLLEGE SYSTEM

(HARRIS AND MONTGOMERY COUNTIES, TEXAS)

LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 2008

CUSIP Prefix: 542264(c

Current Interest Bonds

Price o r CUSIP(c)

Price or CUSIP(c

Yield(b)

Suffix Yield(b)

Suffix

10,655,000$ 8/15/2009 4.000% 2.090% AA4 3,720,000$ 8/15/2020 5.000% 4.360% AK2

2,665,000 8/15/2010 4.000% 2.300% AB2 3,905,000 8/15/2021 5.000% 4.470% AL0

2,775,000 8/15/2013 3.500% 3.230% AC0 4,100,000 8/15/2022 5.000% 4.550% AM8

2,870,000 8/15/2014 3.750% 3.430% AD8 4,305,000 8/15/2023 5.250% 4.550% AN6

2,975,000 8/15/2015 3.750% 3.610% AE6 4,530,000 8/15/2024 5.250% 4.610% AP1

3,090,000 8/15/2016 4.000% 3.770% AF3 4,770,000 8/15/2025 5.250% 4.660% AQ9

3,210,000 8/15/2017 5.000% 3.930% AG1 5,020,000 8/15/2026 5.250% 4.720% AR7

3,375,000 8/15/2018 5.000% 4.060% AH9 5,285,000 8/15/2027 5.250% 4.770% AS5

3,540,000 8/15/2019 5.000% 4.230% AJ5

Amount Maturity(a)

RateAmount Maturity(a)

Rate

)

(Accrued interest from September 1, 2008 to be added)

$11,400,000 Term Bonds Maturing August 15, 2029 (a) at 5.00% to yield 5.00%(b) CUSIP 542264AU0 (c)

$26,420,000 Term Bonds Maturing August 15, 2033 (a) at 5.00% to yield 5.110%(b) CUSIP 542264AY2 (c)

$41,170,000 Term Bonds Maturing August 15, 2038 (a) at 5.00% to yield 5.150%(b) CUSIP 542264BD7(c)

(Interest to accrue from September 1, 2008)

_______________________

a) The Bonds maturing on August 15, 2019 and thereafter are subject to redemption, at the option of the System, on orafter August 15, 2018 at the price of par plus accrued interest. (see BOND INFORMATION OPTIONALREDEMPTION OF BONDS and MANDATORY SINKING FUND REDEMPTION OF BONDS).

b) The price or yield represents the initial offering price or yield to the public which has been established by theUnderwriters for offers to the public, and which may subsequently be changed by the Underwriters in the solediscretion of the Underwriters.

c) CUSIP numbers have been assigned to the Bonds by Standard & Poors CUSIP services Bureau, a Division of theMcGraw Hill Companies, Inc., and are included solely for the convenience of the owners of the Bonds. Neither theSystem nor Underwriters are responsible for the selection or correctness of the CUSIP numbers herein. This data isnot intended to create a database and does not serve in any way as a substitute for the CUSIP services numbersherein.

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TABLE OF CONTENTS

OFFICIAL STATEMENT SUMMARY..................viValuation And Tax-Supported Debt History ..........viiiTax Rate, Levy And Collection History ............ .....viiiSYSTEM ADMINISTRATION...............................ixAdministration of the System ........... ............ ........... .ixElected Officials .......................................................ixAppointed Officials ..................................................ixConsultants and Advisors .........................................ixOFFICIAL STATEMENT.........................................1INTRODUCTION.....................................................1Description Of The System .......................................1THE BONDS.............................................................1Description Of The Bonds.........................................1Purpose Of The Bonds...............................................2Authority For Issuance ..............................................2Security For Bonds....................................................2Tax Rate Limitation...................................................2Optional Redemption.................................................2Mandatory Sinking Fund Redemption.......................3Defeasance of Bonds .................................................3Amendments..............................................................3Book-Entry-Only System ..........................................3Paying Agent/Registrar..............................................5Transfer, Exchange And Registration........................6Record Date For Interest Payment.............................6Limitation on Transfer of Bonds ...............................6Replacement Bonds...................................................6Bondholders Remedies.............................................7Use Of Bond Proceeds...............................................7

TAX INFORMATION..............................................8Ad Valorem Tax Law................................................8Effective Tax Rate and Rollback Tax Rate................9Property Assessment and Tax Payment...................10Penalties And Interest..............................................10FINANCIAL INFORMATION...............................11Financial Policies.....................................................11Net Assets................................................................11Investments..............................................................12Classification of Revenues ......................................12Investments..............................................................12Investment Authority And Investment Practices ofthe System ...............................................................12

Additional Provisions ..............................................14Current Investments.................................................14EMPLOYEES RETIREMENT SYSTEM...............14TAX MATTERS .....................................................14Tax Exemption ........................................................14ADDITIONAL FEDERAL INCOME TAXCONSIDERATIONS...............................................15Collateral Tax Consequences ..................................15Tax Accounting Treatment of Original IssuePremium ..................................................................16

Tax Accounting Treatment of Original IssueDiscount Bonds .......................................................16CONTINUING DISCLOSURE OF INFORMATION.................................................................................17Annual Reports ........................................................17Material Event Notices ............................................17Availability Of Information From NRMSIRS AndSIDS ........................................................................18Limitations And Amendments.................................18Compliance With Prior Undertakings......................18OTHER INFORMATION.......................................19Ratings.....................................................................19Financial Guaranty Industry Recent Events ......... 19Litigation .................................................................19Registration And Qualification Of Bonds For Sale .19Legal Investments and Eligibility to Secure Public

Funds in Texas.........................................................19Legal Matters...........................................................20Validation ................................................................20Authenticity Of Financial Data And OtherInformation ..............................................................20Financial Advisor ....................................................21Underwriting............................................................21Forward-Looking Statements Disclaimer................21Miscellaneous..........................................................21

APPENDICESINFORMATION REGARDING THE SYSTEM........................AINFORMATION REGARDING THE SYSTEMS

STUDENTS, TUITIONS, & FEES.............................................. BFORM OF BOND COUNSELS OPINION................................CEXCERPT FROM THE SYSTEMS ANNUAL REPORT ........DThe cover page hereof, this page, the schedules and the appendicesincluded herein and any addenda, supplement or amendmenthereto, are part of the Official Statement.


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THIS OFFICIAL STATEMENT, WHICH

INCLUDES THE COVER PAGE AND THE

APPENDICES AND SCHEDULES HERETO,

DOES NOT CONSTITUTE AN OFFER TO SELL

OR THE SOLICITATION OF AN OFFER TO

BUY IN ANY JURISDICTION TO ANY PERSON

TO WHOM IT IS UNLAWFUL TO MAKE SUCH

OFFER, SOLICITATION OR SALE.

No dealer, broker, salesperson or other person hasbeen authorized to give information or to make anyrepresentation other than those contained in thisOfficial Statement, and, if given or made, such otherinformation or representations must not be reliedupon.

The Underwriters have provided the followingsentence for inclusion in this Official Statement: TheUnderwriters have reviewed the information in thisOfficial Statement in accordance with, and as part of,

their responsibilities to investors under the federalsecurities laws as applied to the facts andcircumstances of this transaction, but theUnderwriters do not guarantee the accuracy orcompleteness of such information.

The information set forth herein has been obtained from the System and other sources believed to bereliable, but such information is not guaranteed as toaccuracy or completeness and is not to be construedas the promise or guarantee of the System or theFinancial Advisor. This Official Statement contains,in part, estimates and matters of opinion which are

not intended as statements of fact, and norepresentation is made as to the correctness of suchestimates and opinions, or that they will be realized.

The information and expressions of opinioncontained herein are subject to change withoutnotice, and neither the delivery of this OfficialStatement nor any sale made hereunder shall, underany circumstances, create any implication that therehas been no change in the affairs of the System orother matters described. See CONTINUINGDISCLOSURE OF INFORMATION for adescription of the Systems undertaking to provide

certain information on a continuing basis.

NEITHER THE SYSTEM, ITS FINANCIAL ADVISOR, OR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT THE INFORMATION CONTAINED INTHIS OFFICIAL STATEMENT REGARDING THE

DEPOSITORY TRUST COMPANY OR ITS BOOK- ENTRY-ONLY SYSTEM OR REGARDING ITSMUNICIPAL BOND GUARANTEE POLICY IF ANY

THE BONDS HAVE NOT BEEN REGISTEREDUNDER THE SECURITIES ACT OF 1933, AS

AMENDED, INRELIANCE UPON EXEMPTIONCONTAINED IN SUCH ACT. THE REGISTRATIONOR QUALIFICATION OF THE OBLIGATIONS IN

ACCORDANCE WITH APPLICABLE PROVISIONSOF SECURITIES LAW OF THE STATES IN WHICHTHE BONDS HAVE BEEN REGISTERED ORQUALIFIED AND THE EXEMPTION FROM

REGISTRATION OR QUALIFICATION IN OTHERSTATES CANNOT BE REGARDED AS A

RECOMMENDATION THEROF

THIS OFFICIAL STATEMENT CONTAINSFORWARD-LOOKING STATEMENTS WITHINTHE MEANING OF SECTION 21E OF THESECURITIES AND EXCHANGE ACT OF 1934, AS

AMENDED. SUCH STATEMENTS MAY INVOLVEKNOWN AND UNKNOWN RISKS,UNCERTAINTIES AND OTHER FACTORS WHICH

MAY CAUSE THE ACTUAL RESULTS,PERFORMANCE AND ACHIEVEMENTS TO BE

DIFFERENT FROM THE FUTURE RESULTS,PERFORMANCE AND ACHIEVEMENTS

EXPRESSED OR IMPLIED BY SUCH FORWARD- LOOKING STATEMENTS. INVESTORS ARECAUTIONED THAT THE ACTUAL RESULTSCOULD DIFFER MATERIALLY FROM THOSE SETFORTH IN THE FORWARD-LOOKINGSTATEMENTS.

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OFFICIAL STATEMENT SUMMARY

This summary is subject in all respects to the more complete information and definitions contained or incorporatedin this Official Statement. The offering of the Bonds to potential investors is made only by means of this entireOfficial Statement. No person is authorized to detach this summary from this Official Statement or to otherwise useit without the entire Official Statement.

THE SYSTEM.......... ........... ........... .......... ........... . The Lone Star College System (the System) (formerly NorthHarris Montgomery Community College District) is a juniorcollege system and political subdivision of the State of Texas.The System is located in the northern portion of Harris Countyand the southern portion of Montgomery County, Texas. TheSystem encompasses the Aldine, Conroe, Cypress-Fairbanks,Humble, Klein, Magnolia, New Caney, Splendora, Spring,Tomball and Willis Independent School Systems. The System isa comprehensive, public, two-year institution offering academic,general occupational, developmental, and continuing adulteducation programs through a network of colleges. Presently, theSystem includes North Harris, Kingwood, Tomball, Montgomery,the Cypress-Fairbanks colleges and the University Center.

The System is approximately 1,462 square miles in area (seeAppendix A Information Regarding the System andAppendix B General Information Regarding Harris County).

THE BONDS ........... ........... ........... ........... .......... . The $149,780,000 Limited Tax General Obligation Bonds, Series2008 (the Bonds) are issued as Current Interest Bonds(CIBs) maturing on August 15 in the years 2009 through 2038inclusive and paying interest and maturity value at the rates asshown on the inside cover page of this Official Statement.

PAYMENT OF INTEREST.......... ........... ............ .... Interest on the CIBs will accrue from the dated date shown on theinside cover page hereof and will be payable February 15 and

August 15 of each year, commencing February 15, 2009, and willbe calculated on the basis of a 360 day year of twelve 30 daymonths. See THE BONDS DESCRIPTION OF THEBONDS herein.

AUTHORITY FOR ISSUANCE........... ............ ........ The Bonds are being issued pursuant to the Constitution andgeneral laws of the State of Texas, including particularly Section130.122, Texas Education Code, as amended, an order (theOrder) adopted by the Board of Trustees of the System (theBoard), and an election, held on May 10, 2008. (See THEBONDS AUTHORITY FOR ISSUANCE).

SECURITY FOR THE BONDS ............ ........... ........ The Bonds are direct obligations of the System and are payable

from a continuing direct annual ad valorem tax levied by theSystem, within the limits prescribed by law, on all taxableproperty located within the System (see THE BONDS SECURITY FOR BONDS).

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OPTIONAL REDEMPTION........... ........... ........... ... The CIBs maturing on August 15, 2019 and thereafter are subjectto redemption at the option of the System, on or after August 15,2018 at the price of par plus accrued interest. See THE BONDS OPTIONAL REDEMPTION herein.

MANDATORY SINKING FUND REDEMPTION....... Term Bonds maturing on August 15 in the years 2029, 2033 and2038 are subject to mandatory sinking fund redemption prior tomaturity at a price of par plus accrued interest to the redemptiondate (see THE BONDS MANDATORY SINKING FUNDREDEMPTION).

TAX EXEMPTION .......... ........... ........... ........... .... In the opinion of Bond Counsel, interest on the Bonds isexcludable from gross income for federal income tax purposesunder existing law, and the Bonds are not private activity bonds.See TAX MATTERS TAX EXEMPTION herein.

USE OF THE BONDS .......... ........... ........... .......... Proceeds from the sale of the Bonds will be used to (i) constructand equip school buildings in the System, including instructionalfacilities, academic support facilities, administrative supportfacilities, plant system replacements and technologyinfrastructure, and the purchase of necessary sites therefore, and(ii) pay costs of issuing the Bonds. See THE BONDS USEOF BOND PROCEEDS herein.

RATINGS.......... ........... ........... ........... ........... ...... The Bonds are rated Aa2 by Moodys Investors Service, Inc.(Moodys) and AA+ by Standard & Poors RatingCorporation (S&P). The presently outstanding tax supporteduninsured debt of the System is rated Aa2 by Moodys andAA+ by S&P. The System also has other issues outstandingwhich are rated Aaa by Moodys and AAA by S&P throughinsurance by various commercial insurance companies. (seeOTHER INFORMATION RATINGS).

PAYMENT RECORD .......... ........... ........... ........... . The System has never defaulted in payment of its generalobligation debt.

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VALUATION AND TAX-SUPPORTED DEBT HISTORY

Ratio of Tax

Tax Supported Per Tax

Fiscal Supported Debt to Capita Supported

Year Taxable Debt Taxable Estimated Taxable Debt

Ended Assessed Outstanding at Assessed System Assessed Per

8/31 Valuation Amount Percent FYE Valuation Population Valuation Capita

1998 20,877,459,329$ 77,583,759$ 0.372% 656,111 31,820$ 118$

1999 23,655,850,537 2,778,391,208 13.308% 103,806,436 0.439% 673,774 35,109 154

2000 29,318,674,811 5,662,824,274 23.938% 103,198,089 0.352% 844,839 34,703 122

2001 31,297,100,802 1,978,425,991 6.748% 145,613,731 0.465% 867,582 36,074 168

2002 58,509,951,482 27,212,850,680 86.950% 232,747,123 0.398% 1,298,518 45,059 179

2003 63,838,636,037 5,328,684,555 9.107% 231,339,997 0.362% 1,333,474 47,874 173

2004 69,598,292,568 5,759,656,531 9.022% 234,403,656 0.337% 1,369,371 50,825 171

2005 75,289,889,250 5,691,596,682 8.178% 213,294,083 0.283% 1,406,234 53,540 152

2006 75,969,405,661 679,516,411 0.903% 190,336,613 0.251% 1,440,000 52,757 132

2007 87,674,701,064 11,705,295,403 15.408% 173,001,413 0.197% 1,480,000 59,240 117(a)

Change From Prior Year

2008 102,375,607,090 14,700,906,026 16.768% 298,820,000 0.292% 1,500,000 68,250 199

Source: The System & Harris County and Montgomery County Appraisal Districts

(a) Includes "The Bonds.

TAX RATE,LEVY AND COLLECTION HISTORY

Fiscal Year Local Interest & Current Total

For additional information regarding the System, please contact:

Cynthia Gilliam, CPA, ViceChancellor for BusinessAffairs and Chief Financial OfficerLone Star College System5000 Research Forest DriveThe Woodlands, TX 77381(832) 813-6500 Phone(832) 813-6618 Fax

or

David TiffinClarence GrierRBC Capital Markets2411 N Haskell Ave Suite 2500Dallas, TX 75204(214) 989-1777 Phone(214) 989-1650 Fax

Tax Levy(1)(2)

Ended 8/31 Tax Rate Maintenance Sinking Fund Collections Collections

1998 0.11980$ $ 0.06800 $ 0.05180 $ 26,544,907 97.5% 101.3%1999 0.11980 0.08070 0.03910 28,539,979 97.3% 101.5%2000 0.11740 0.07770 0.03970 36,343,512 97.0% 101.1%2001 0.11000 0.07500 0.03500 38,098,610 96.3% 100.0%2002 0.11000 0.07600 0.03400 64,360,946 95.6% 100.0%2003 0.10550 0.07420 0.03130 67,349,761 97.2% 100.0%2004 0.11450 0.07980 0.03470 79,690,045 97.0% 102.0%2005 0.11450 0.07980 0.03470 85,862,441 97.0% 100.0%2006 0.12070 0.08600 0.03470 91,695,013 96.7% 100.0%2007 0.11670 0.08200 0.03470 102,316,376 96.6% 102.2%2008 0.11440 0.08090 0.03350 - In Process of Collection

(1) Excludes Penalty & Interest.(2) Based on taxable value as of January 1.

Distribution

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SYSTEM ADMINISTRATION

ADMINISTRATION OF THE SYSTEM

Policy making functions are the responsibility of, and are vested in, a nine-member board of trustees who serve six-year staggered terms with elections being held in May of even-numbered years. The Board delegates administrativeresponsibilities to the chancellor who is the Chief Executive Officer of the System. Independent consultants andadvisors provide various supporting services.

ELECTED OFFICIALS

Length Term

Board of Trustees of Service Expires Occupation

Randy Bates, J.D., Chair 17 Years 2012 Attorney, Bates & Coleman, P.C.

David Holsey, D.D.S., Vice Chair 1 1/2 Years 2012 Dentist

Priscilla Kelly, Secretary 13 Years 2014 Counselor, Klein Intermediate School

Chris Daniel, Assistant Secretary 1 1/2 Years 2012 Kellogg Brown & Root

David Vogt, Member 11 Years 2010 President, Vogt Engineering, Inc

Stephanie Marquard, Member 13 Years 2014 Owner, Kingwood Air Conditioning & Heating

Richard Campbell, Ph.D., Member 4 Years 2010 Retired Minister

Robert J. Adam, Member 3 Months 2014 Attorney

Robert Wolfe, Member 3 Months 2010 Attorney, CPA

APPOINTED OFFICIALS

Name Position Length of Service at Syste

Richard Carpenter, Ed.D. Chancellor 1 YearRand W. Key, J.D., M.B.A. Senior Vice Chancellor & Chief Operating Officer 8 MonthsCynthia Gilliam, CPA Vice Chancellor for Administration & Finance & Chief Financial Officer 7 1/2 YearsRay Laughter, M.B.A. Vice Chancellor for External Affairs 20 1/2 Years

Penny Westerfeld President, Lone Star College InterimKatherine Persson, Ph.D. President, Kingwood College 21 1/2 YearsRaymond Hawkins, Ph.D. President, Tomball College 9 1/2 YearsOpen Position President, Montgomery CollegeDiane K. Troyer, Ph.D. President, Cy-Fair College 12 Years

CONSULTANTS AND ADVISORS

Bond Counsel ..............................................................................................................................................Vinson & Elkins L.L.P.Houston, Texas

Auditors ....................................................................................................................................................McConnell & Jones, LLPHouston, Texas

Financial Advisor........................................................................................................................RBC Capital Markets CorporationDallas, Texas


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OFFICIAL STATEMENT

RELATING TO

$149,780,000LONE STAR COLLEGE SYSTEM

LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 2008

INTRODUCTION

This Official Statement provides certain information regarding the issuance by the Lone Star College System (theSystem) of its $149,780,000 Limited Tax General Obligation Bonds, Series 2008 (the Bonds). Capitalizedterms used in this Official Statement have the same meanings assigned to such terms in the order adopted by theBoard of Trustees of the System (the Board) which authorizes the issuance of the Bonds (the Order), except asotherwise indicated herein.

There follows in this Official Statement descriptions of the Bonds and certain information regarding the System andits finances. All descriptions of documents contained herein are only summaries and are qualified in their entiretyby reference to each such document. Copies of such documents may be obtained from the Systems FinancialAdvisor, RBC Capital Markets Corporation, Dallas, Texas.

All financial and other information presented in this Official Statement has been provided by the System from itsrecords, except for information expressly attributed to other sources. The presentation of information, includingtables of receipts from taxes and other sources, is intended to show recent historic information and is not intended toindicate future or continuing trends in the financial position or other affairs of the System. No representation ismade that past experience, as is shown by that financial and other information, will necessarily continue or berepeated in the future (see FORWARD LOOKING STATEMENTS).

This Official Statement speaks only as of the date and the information contained herein is subject to change. Copiesof the Official Statement will be deposited with the Municipal Securities Rulemaking Board, 1900 Duke Street,Suite 600, Alexandria, Virginia 22314. See CONTINUING DISCLOSURE OF INFORMATION for adescription of the Systems undertaking to provide certain information on a continuing basis.

DESCRIPTION OF THE SYSTEM

The System is a junior college system and political subdivision of the State of Texas located in Harris andMontgomery Counties, Texas. The System is governed by a nine-member Board of Trustees who serve staggeredsix-year terms with elections being held in May of each even-numbered year. Policy-making and supervisoryfunctions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilitiesto the Chancellor who is the chief executive officer of the System (see SYSTEM ADMINISTRATION). TheSystem is approximately 1,462 square miles in area. (For more information regarding the System, see Appendix A Information Regarding the System and Appendix B General Information Regarding Harris County).

THE BONDS

DESCRIPTION OF THE BONDS

The Bonds will be issued as Current Interest Bonds (the CIBs). Interest on the CIBs will accrue from the dateddate and will be payable February 15 and August 15 of each year, commencing February 15, 2009, and will becalculated on the basis of a 360 day year of twelve 30-day months. The CIBs will mature on the dates and in theprincipal amounts set forth on the inside front cover page of this Official Statement. The Bonds will be issued onlyin fully registered form. The CIBs will be issued in denominations of $5,000 of principal amount or in any integralmultiple of $5,000 within a maturity. The Bonds will be initially registered and delivered only to Cede & Co., thenominee of The Depository Trust Company (DTC) pursuant to the Book-Entry-Only System described herein.

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No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any,maturity value accrued interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., whichwill make distribution of the amounts so paid to the beneficial owners of the Bonds. See THE BONDS BOOK-ENTRY-ONLY SYSTEM herein.

PURPOSE OF THE BONDS

The Bonds are being issued to construct and equip school buildings in the System, including instructional facilities,academic support facilities, administrative support facilities, plant system replacements and technologyinfrastructure, and the purchase of necessary sites therefore and to pay costs of issuing the Bonds. See THEBONDS USE OF BOND PROCEEDS.

AUTHORITY FOR ISSUANCE

The Bonds are issued pursuant to the Constitution and the laws of the State of Texas, including particularly Section130.122, Texas Education Code, as amended, the Order and the Election.

SECURITY FOR BONDS

The Bonds are direct obligations of the System and are payable from a continuing direct annual ad valorem taxlevied by the System, within the limits prescribed by law, on all taxable property located within the System, asprovided in the Order. See TAX RATE LIMITATION below.

TAX RATE LIMITATION

Pursuant to Chapter 130, Texas Education Code, as amended, and an election held within the System, the System isauthorized to levy annual ad valorem taxes for maintenance and operations at a rate not to exceed $0.30 per $100assessed valuation of taxable property in the System and the annual ad valorem taxes for debt service purposes,including payment of principal and interest on the Bonds, may not exceed $0.50 per $100 assessed valuation oftaxable property in the System. (Total tax rate is limited to $0.80 per $100.) Currently the System leviesmaintenance taxes at $0.0809 per $100 valuation and $0.03350 per $100 assessed value for debt service.

OPTIONAL REDEMPTION

The Bonds maturing on or after August 15, 2019 are subject to optional redemption in whole or in part on August15, 2018 or any date thereafter, at a price equal to the principal amount thereof, plus accrued interest to the date ofredemption. If less than all of the CIBs are to be redeemed, the System shall determine the amounts and maturitiesthereof to be redeemed. Not less than 30 days prior to a redemption date for the CIBs, the System shall cause anotice of redemption to be sent by United States mail, first class, postage prepaid, to each registered owner of a CIBto be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of thePaying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice.ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVENIRRESPECTIVE OF WHETHER RECEIVED BY THE BONDHOLDER, AND, SUBJECT TO PROVISION FORPAYMENT OF THE REDEMPTION PRICE HAVING BEEN MADE, INTEREST ON THE REDEEMEDBONDS SHALL CEASE TO ACCRUE FROM AND AFTER SUCH REDEMPTION DATENOTHWITHSTANDING THAT A BOND HAS NOT BEEN PRESENTED FOR PAYMENT. If a CIB is subject

by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given,such CIBs (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable,and on the redemption date designated in such notice, interest on said CIBs (or the principal amount thereof to beredeemed) so called for redemption shall become due and payable and on the redemption date designated in suchnotice, interest on said CIBs (or principal amount thereof to be redeemed) called for redemption shall cease toaccrue and such CIBs shall not be deemed to be Outstanding.

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MANDATORY SINKING FUND REDEMPTION

The Bonds maturing on August 15 in the years 2029, 2033 and 2038 (the Term Bonds) are subject to mandatoryredemption in part prior to maturity at a price of par plus accrued interest to the redemption date as follows:

Redemption Redemption RedemptionDate Date Date

8/15/2028 5,560,000$ 8/15/2030 6,130,000$ 8/15/2034 7,450,000$

8/15/2029* 5,840,000 8/15/2031 6,435,000 8/15/2035 7,825,000

8/15/2032 6,760,000 8/15/2036 8,215,000

8/15/2033* 7,095,000 8/15/2037 8,625,000

8/15/2038* 9,055,000

Bonds Maturing August 15, 2029 Bonds Maturing August 15, 2033 Bonds Maturing August 15, 2038

Amount AmountAmount

*Maturity Date

The particular Term Bonds to be redeemed shall be chosen by the Paying Agent/Registrar (or DTC while the Bondsare in Book-Entry-Only form) at random by lot or other customary method; provided, however, that the principalamount of the Term Bonds required to be redeemed pursuant to the operation of the mandatory redemptionprovisions shall be reduced, at the option of the District, by the principal amount of said Term Bonds which, at least45 days prior to the mandatory redemption date, (1) shall have been acquired by the District and delivered to the

Paying Agent/Registrar for cancellation or (2) shall have been redeemed pursuant to the optional redemptionprovisions and not theretofore credited against a mandatory redemption requirement.

DEFEASANCE OF BONDS

The System reserves the right to defease the Bonds in any manner now or hereafter permitted by law.

AMENDMENTS

The System may amend the Order without the consent of or notice to any registered owner in any manner notdetrimental to the interests of the registered owners, including the curing of any ambiguity, inconsistency, or formaldefector omission therein. In addition, the System may with the written consent of the holders of a majority of

aggregate principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of theprovisions of the Order; except that, without the consent of the registered owners of the Bonds affected, no suchamendment, addition or rescission may (1) extend the time or times of payment of the principal of, premium, if any,and interest on the Bonds, reduce the principal amount thereof, the redemption price, or the rate of interest thereon,or in any other way modify the terms of payment of the principal of, premium, if any, or interest on the Bonds, (2)give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of the Bondsrequired to be held by holders for consent to any such amendment, addition, or rescission.

BOOK-ENTRY-ONLY SYSTEM

This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any,and interest on the Bonds are to be paid to and credited by The Depository Trust Company (DTC), New York,

New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and

the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this OfficialStatement. The System believes the source of such information to be reliable, but takes no responsibility for theaccuracy or completeness thereof.

The System cannot and does not give any assurance that (1) DTC will distribute payment of debt service on theBonds, or redemption or other notices to DTC Participants, (2) DTC Participants or others will distribute debtservice payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices,to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the mannerdescribed in this Official Statement. The current rules applicable to DTC are on file with the Securities and

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Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are onfile with DTC.

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities in thename of Cede & Co. (DTCs partnership nominee) or such other name as may be requested by an authorizedrepresentative of DTC. One fully-registered certificate will be issued for the Bonds, in the aggregate principalamount of such issue, and will be deposited with DTC.

DTC, the worlds largest securities depository, is a limited-purpose trust company organized under the New YorkBanking Law, a banking organization within the meaning of the New York Banking Law, a member of theFederal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code,and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate andmunicipal debt issues, and money market instruments (from over 100 countries) that DTCs participants (DirectIssues Participants) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants ofsales and other securities transactions in deposited securities, through electronic computerized book-entry transfersand pledges between Direct Participants accounts. This eliminates the need for physical movement of securitiescertificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trustcompanies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of TheDepository Trust & Clearing Corporation (DTCC). DTCC is the holding company for DTC, the National

Securities Clearing Corporation, and Fixed Income Clearing Corporation, all of which are registered clearingagencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available toothers such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearingcompanies that clear through or maintain a custodial relationship with a Direct Participant, either directly orindirectly (Indirect Participants). DTC has Standard & Poors highest rating: AAA. The DTC Rules applicableto its Participants are on file with the Securities and Exchange Commission. More information about DTC can befound at www.dtcc.com and www.dtc.org.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive acredit for the Bonds on DTCs records. The ownership interest of each actual purchaser of each Bond (BeneficialOwner) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receivewritten confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive writtenconfirmation providing details of the transaction, as well as periodic statements of their holdings from the Direct orIndirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership

interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants actingon behalf of Beneficial Owners. Beneficial Owners will not receive physical certificates representing theirownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name ofDTCs partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative ofDTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee,do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of theBonds; DTCs records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited,which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible forkeeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect

Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed byarrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices ofsignificant events with respect to the Bonds, such as redemptions, tenders, defaults and proposed amendments to theBond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding theBonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, BeneficialOwners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies ofnotices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds withinan issue are being redeemed, DTCs practice is to determine by lot the amount of the interest of each DirectParticipant in such issue to be redeemed.

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Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unlessauthorized by a Direct Participant in accordance with DTCs Procedures. Under its usual procedures, DTC mails anOmnibus Proxy to the System as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.sconsenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date(identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, principal, and interest payments on the Bonds will be made to Cede & Co., or such other

nominee as may be requested by an authorized representative of DTC. DTCs practice is to credit DirectParticipants accounts upon DTCs receipt of funds and corresponding detail information from the System or thePaying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTCs records.Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices,as is the case with securities held for the accounts of customers in bearer form or registered in street name, andwill be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or theSystem, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment ofredemption proceeds, principal, and interest payments to Cede & Co. (or such other nominee as may be requested byan authorized representative of DTC) is the responsibility of the System or the Paying Agent/Registrar.Disbursement of such payments to Direct Participants will be the responsibility of DTC, and reimbursement of suchpayments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving

reasonable notice to the System or the Paying Agent/Registrar. Under such circumstances, in the event that asuccessor depository is not obtained, Bond certificates are required to be printed and delivered. Discontinuance bythe District of use of the system of book-entry transfers through DTC may require compliance with DTC operationalarrangements.

The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successorsecurities depository). Discontinuance of the system of book-entry transfers by the District may require the consentof Participants under DTCs Operational Arrangements. In that event, Bond certificates will be printed anddelivered.

The information in this section concerning DTC and DTCs book-entry system has been obtained from sources thatthe District believes to be reliable, but neither the District, the Financial Advisor nor the Underwriters takeresponsibility for the accuracy thereof.

Use of Certain Terms in Other Sections of this Official Statement.

In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System,references in other sections of this Official Statement to registered owners should be read to include the person forwhich the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised throughDTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registeredowners under the Order will be given only to DTC.

Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is notguaranteed as to accuracy or completeness by, and is not to be construed as a representation by the System,the Financial Advisor or the Underwriters.

PAYING AGENT/REGISTRAR

The initial Paying Agent/Registrar is Wells Fargo, N.A. In the Order, the System retains the right to replace thePaying Agent/Registrar. The System covenants to maintain and provide a Paying Agent/Registrar at all times whilethe Bonds are outstanding and any successor Paying Agent/Registrar shall be a commercial bank or trust companyorganized under the laws of the United States or any State duly qualified and legally authorized to serve as andperform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the PayingAgent/Registrar for the Bonds, the System agrees to promptly cause a written notice thereof to be sent to eachregistered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give theaddress of the new Paying Agent/Registrar.

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TRANSFER,EXCHANGE AND REGISTRATION

In the event that the Book-Entry-Only System should be discontinued, printed certificates will be issued to theholders, or owners of the Bonds and thereafter, the Bonds may be transferred and exchanged on the registrationbooks of the Paying Agent/Registrar only upon presentation and surrender thereof to the Paying Agent/Registrar andsuch transfer or exchange shall be without expense or service charge to the registered owner, except for any tax orother governmental charges required to be paid with respect to such registration, exchange and transfer. A Bondmay be assigned by the execution of an assignment form on the Bond or by other instrument of transfer andassignment acceptable to the Paying Agent/Registrar. A new Bond or Bonds will be delivered by the PayingAgent/Registrar, in lieu of the Bond being transferred or exchanged, at the principal office of the PayingAgent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or hisdesignee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to theregistered owner or assignee of the registered owner in not more than three business days after the receipt of theBonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registeredowner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered anddelivered in an exchange or transfer shall be in any integral multiple of $5,000 of principal amount for the Bonds forany one maturity and for a like aggregate principal as the Bond or Bonds surrendered for exchange or transfer. SeeTHE BONDS-BOOK-ENTRY-ONLY SYSTEM herein for a description of the System to be utilized initially inregard to ownership and transferability of the Bonds.

RECORD DATE FOR INTEREST PAYMENT

The record date (Record Date) for the interest payable on any interest payment date means the close of businesson the last business day of the preceding month.

In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record datefor such interest payment (a Special Record Date) will be established by the Paying Agent/Registrar, if and whenfunds for the payment of such interest have been received by or on behalf of the System. Notice of the SpecialRecord Date and of the scheduled payment date of the past due interest (Special Payment Date, which shall be 15days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date byUnited States mail, first class postage prepaid, to the address of each holder of a Bond appearing on the registrationbooks of the Paying Agent/Registrar at the close of business on the last business day next preceding the date ofmailing of such notice.

LIMITATION ON TRANSFER OF BONDS

Neither the System nor the Paying Agent/Registrar shall be required to issue, transfer or exchange any Bond duringthe period beginning at the close of business on any Record Date and ending with the next interest payment date, orwith respect to any Bonds or portion thereof called for redemption prior to maturity, within 45 days prior to itsredemption date.

REPLACEMENT BONDS

If any Bond is mutilated, destroyed, stolen or lost, a new Bond in the same principal amount or Maturity Value, asthe case may be, as the Bond so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Bond,such new Bond will be delivered only upon surrender and cancellation of such mutilated Bond. In the case of any

Bond issued in lieu of an substitution for a Bond which has been destroyed, stolen or lost, such new Bond will bedelivered only (a) upon filing with the System and the Paying Agent/Registrar a certificate to the effect that suchBond has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the System andthe Paying Agent/Registrar with indemnity satisfactory to them. The person requesting the authentication anddelivery of a new Bond must pay such expenses as the Paying Agent/Registrar may incur in connection therewith.

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BONDHOLDERSREMEDIES

The Order does not provide for the appointment of a trustee to represent the interests of the Bond holders upon anyfailure of the System to perform in accordance with the terms of the Order or upon any other condition and, in theevent of any such failure to perform, the registered owners would be responsible for the initiation and cost of anylegal action to enforce performance of the Order. Furthermore, the Order does not establish specific events ofdefault with respect to the Bonds and, under State law, there is no right to the acceleration of maturity of the Bondsupon the failure of the System to observe any covenant under the Order. A registered owner of Bonds could seek a judgment against the System if a default occurred in the payment of principal of or interest on any such Bonds;however, such judgment could not be satisfied by execution against any property of the System and a suit formonetary damages could be vulnerable to the defense of sovereign immunity. A registered owners only practicalremedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the System to levy, assessand collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds as it becomes due orperform other material terms and covenants contained in the Order. In general, Texas courts have held that a writ ofmandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for theperformance of a valid contract, and Texas law provides that, following their approval by the Attorney General andissuance, the Bonds are valid and binding obligations for all purposes according to their terms. However, theenforcement of any such remedy may be difficult and time consuming and a registered owner could be required toenforce such remedy on a periodic basis.

The System is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (Chapter9). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledgedsource of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specificallyrecognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that wouldprohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bond holdersof an entity which has sought protection under Chapter 9. Therefore, should the System avail itself of Chapter 9protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (whichcould require that the action be heard in Bankruptcy Court instead of other federal or state court); and theBankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceedingbrought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Orderand the Bonds are qualified with respect to the customary rights of debtors relative to their creditors, including rightsafforded to creditors under the Bankruptcy Code.

USE OF BOND PROCEEDS

Sources Of Funds

Par Amount of Bonds 149,780,000.00

Reoffering Premium 181,749.69

Accrued Interest 1,409,377.55

Total Sources 151,371,127.24

Uses Of Funds

Total Underwriter's Discount 748,849.36

Costs of Issuance 440,000.00

Deposit to Debt Service Fund 182,277.88

Deposit to Project Fund 150,000,000.00

Total Uses 151,371,127.24

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TAXINFORMATION

AD VALOREM TAX LAW

The appraisal of property within the System is the responsibility of the Harris and Montgomery County AppraisalSystems (the Appraisal Systems). Excluding agricultural and open-space land, which may be taxed on the basis of

productive capacity, the Appraisal System is required under the Property Tax Code to appraise all property withinthe Appraisal System on the basis of 100% of its market value and is prohibited from applying any assessmentratios. In determining market value of property, different methods of appraisal may be used, including the costmethod of appraisal, the income method of appraisal and market data comparison method of appraisal, and themethod considered most appropriate by the chief appraiser is to be used. State law further limits the appraised valueof a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property,or (2) 110% of the appraised value of the residence homestead for the preceding tax year plus the market value of allnew improvements to the property. The value placed upon property within the Appraisal System is subject to reviewby an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the AppraisalSystem. The Appraisal System is required to review the value of property within the Appraisal System at least everythree years. The System may require annual review at its own expense, and is entitled to challenge the determinationof appraised value of property within the System by petition filed with the Appraisal Review Board.

Reference is made to the Property Tax Code, for identification of property subject to taxation; property exempt orwhich may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; andthe procedures and limitations applicable to the levy and collection of ad valorem taxes.

Article VIII of the State Constitution (Article VIII) and State law provide for certain exemptions from propertytaxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personalproperty from ad valorem taxation.

Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, maygrant: (1) an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 yearsof age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; and (2) anexemption of up to 20% of the market value of residence homesteads. The minimum exemption under this provisionis $5,000.

State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or thesurviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemptionapplies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to amaximum of $12,000.

Effective January 1, 2004, under Article VIII and State law, the governing body of a county, municipality or juniorcollege district, may freeze the total amount of ad valorem taxes levied on the residence homestead of a disabledperson or person 65 years of age or older to the amount of taxes imposed in the year such residence qualified forsuch exemption. Also, upon receipt of a petition signed by five percent of the registered voters of the county,municipality or junior college district, an election must be held to determine by majority vote whether to establishsuch a limitation on taxes paid on residence homesteads of persons 65 years of age or who are disabled. Uponproviding for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead andto a surviving spouse living in such homestead who is disabled or is at least 55 years of age. If improvements (other

than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then current taxrate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount oftaxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may notbe repeated or rescinded.

Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timberproduction, may elect to have such property appraised for property taxation on the basis of its productive capacity.The same land may not be qualified under both Section 1-d and 1-d-1.

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Nonbusiness personal property, such as automobiles or light trucks, is exempt from ad valorem taxation unless thegoverning body of a political subdivision elects to tax this property. Boats owned as nonbusiness property areexempt from ad valorem taxation.

Article VIII, Section 1-j, provides for freeport property to be exempted from ad valorem taxation. Freeportproperty is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage,manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions toexempt freeport property are not subject to reversal.

Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of goods-in-transit.Goods-in-transit is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, aspersonal property acquired or imported into Texas and transported to another location in the State or outside of theState within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil,natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor,heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities,on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a publichearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeportexemptions or the goods-in-transit exemptions for items of personal property. The System does not grant theFreeport exemption.

A city or county may create a tax increment financing district (TIF) within the city or county with definedboundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxingunits, including the System, may agree with the city or county to contribute all or part of future ad valorem taxeslevied and collected against the incremental value (taxable value in excess of the base value) of taxable realproperty in the TIF to pay or finance the costs of certain public improvements in the TIF. Depending on theSystems level of participation in a tax increment reinvestment zone, if any, the systems ability to retain ad valoremtaxes collected on the increased assessed valuation of real property in the tax increment reinvestment zone in excessof the tax increment base value established for the zone would be limited by the provisions of its participation in thezone.

The System may also enter into tax abatement agreement to encourage economic development. Under theagreements, a property owner agrees to construct certain improvements on its property. The System in tern agreesnot to levy a tax on all or pert of the increased value attributable to the improvements until the expiration of the

agreement. The abatement agreement could last for a period of up to 10 years.

EFFECTIVE TAX RATE AND ROLLBACK TAX RATE

By each September 1 or as soon thereafter as practicable, the Board of Trustees adopts a tax rate per $100 taxablevalue for the current year. The tax rate consists of two components: (1) a rate for funding of maintenance andoperation expenditures, and (2) a rate for debt service.

Under the Property Tax Code, the System must annually calculate and publicize its effective tax rate and rollbacktax rate. The Board of Trustees may not adopt a tax rate that exceeds the prior years levy until it has held twopublic hearings on the proposed increase following notice to the taxpayers and otherwise complied with the PropertyTax Code. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the System by petition may

require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to therollback tax rate.

Effective tax rate means the rate that will produce last years total tax levy (adjusted) from this years total taxablevalues (adjusted).

Adjusted means lost values are not included in the calculation of last years taxes and new values are not includedin this years taxable values.

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Rollback tax rate means the rate that will produce last years maintenance and operation tax levy (adjusted) fromthis years values (adjusted) multiplied by 1.08 plus a rate that will produce this years debt service from this yearsvalues (unadjusted) divided by the anticipated tax collection rate.

The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the votersto authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, theeffective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generatedby the sales tax in the current year.

Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valoremtaxes and the calculation of the various defined tax rates.

PROPERTY ASSESSMENT AND TAX PAYMENT

Property within the System is generally assessed as of January 1 of each year. Business inventory may, at the optionof the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation processwhich uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the sameyear, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted byState law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the finalinstallment due on August 1.

PENALTIES AND INTEREST

Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows:

MonthCumulative

PenaltyCumulative

Interest Total

February 6% 1% 7%March 7% 2% 9%April 8% 3% 11%May 9% 4% 13%June 10% 5% 15%July 11% 6% 18%

After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account isdelinquent in July, a 15% attorneys collection fee is added to the total tax penalty and interest charge.

Taxes levied by the System are a personal obligation of the owner of the property. On January 1 of each year, a taxlien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year onthe property. The lien exists in favor of the State and each taxing unit, including the System, having the power totax the property. The Systems tax lien is on a parity with tax liens of all other such taxing units. A tax lien on realproperty has priority over the claim of most creditors and other holders of liens on the property encumbered by thetax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property under certaincircumstances is subject to seizure and sale for the payment of delinquent taxes, penalty and interest. At any timeafter taxes on property become delinquent, the System may file suit to foreclose the lien securing payment of the tax,to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the System

must join other taxing units that have claims for delinquent taxes against all or part of the same property. The abilityof the System to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed toother taxing units, adverse market conditions, taxpayer redemption rights, or bankruptcy proceedings which restrainthe collection of a taxpayers debt. Federal bankruptcy law provides that an automatic stay of actions bycreditors and other entities, including governmental units, goes into effect with the filing of any petition inbankruptcy. The automatic stay prevents governmental units from foreclosing on property and preventsliens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in eithercase, an order lifting the stay is obtained from the bankruptcy court. In many cases post petition taxes arepaid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court.

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Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valoremtaxes. For more particular tax information regarding the System, see Appendix A Information Regarding theSystem.

FINANCIAL INFORMATION

FINANCIAL POLICIES

The following description of financial and accounting policies is based on implementation of accounting standardsunder Governmental Accounting Standards Board (GASB) Statement No. 34 and No. 35, and is applicable tofinancial reports for fiscal year 2002 and thereafter (as reflected in Changes in Net Assets General FundConsolidated Statement Summary in Appendix E of the Systems 2004 Audit).

The significant accounting policies followed by the System in preparing financial statements are in accordance withthe Texas Higher Education Coordinating Boards Annual Financial Reporting Requirements for Texas PublicCommunity and Junior Colleges. These requirements are in substantial conformity with the AICPA Industry AuditGuide, Audits of Colleges and Universities, 1973 and as modified by applicable FASB pronouncements issuedthrough November 1989 and as modified by all applicable GASB pronouncements cited in Codification SectionCo5, Colleges and Universities. In June 1999, GASB issued Statement No. 34, Basic Financial Statements - andManagement Discussion and Analysis - for State and Local Governments. This was followed in November 1999by GASB Statement No. 35, Basic Financial Statements - and Managements Discussion and Analysis - for PublicColleges and Universities. The financial statement presentation required by GASB No. 34 and No. 35 provides acomprehensive, entity-wide perspective of the Systems assets, liabilities, net assets, revenues, expenses, changes innet assets, cash flows, and replaces the fund-group perspective previously required. For financial statementpurposes, the System is considered a special-purpose government engaged only in business-type activities.Accordingly, the financial statements of the System are presented using the economic measurement focus and theaccrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned, andexpenses are recorded when an obligation has been incurred. All significant intra-agency transactions have beeneliminated. Encumbrance accounting, under which purchase order, contracts, and other commitments forexpenditures of funds are recorded in order to reserve that portion of the applicable appropriation, is employed as anextension of formal budgetary integration in the financial statements. Under Texas law, appropriations lapse at

August 31, and encumbrances outstanding at that time are to be either canceled or appropriately provided for in thesubsequent years budget. Encumbrances outstanding at year-end that were provided for in the subsequent yearsbudget are reported as reservations of net assets since they do not constitute expenditures or liabilities.

NET ASSETS

The Systems net assets are classified as follows:

Investment in Capital Assets, Net of Related Debt. This represents the Systems total investment incapital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurredbut not yet expended for capital assets, such amounts are not included as a component of investment in capitalassets, net of related debt.

Restricted Net Assets - Expendable. Restricted expendable net assets include resources in whichthe System is legally or contractually obligated to spend resources in accordance with restrictions imposed byexternal third parties.

Restricted Net Assets - Nonexpendable. Nonexpendable restricted net assets consist of endowmentand similar type funds in which donors or other outside sources have stipulated, as condition of the gift instrument,that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing presentand future income, which may either be expended or added to principal.

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Unrestricted Net Assets. Unrestricted net assets represent resources derived from student tuitionand fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. Theseresources are used for transactions relating to the educational and general operations of the System, and may be usedat the discretion of the governing board to meet the current expenses for any purpose. These resources also includeauxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty andstaff.

INVESTMENTS

The System accounts for its investments at fair value in accordance with GASB Statement No. 31, Accounting andFinancial Reporting for Certain Investments and for External Investment Pools. Changes in unrealized gain (loss) onthe carrying values of investments are reported as a component of investment income in the statements of revenue,expenses, and changes in net assets.

CLASSIFICATION OF REVENUES

The System has classified its revenues as either operating or non-operating revenues according to the followingcriteria:

Operating Revenues: Operating revenues include activities that have the characteristics of exchange transactions,such as (1) student tuition and fees, net of scholarship discounts and allowances, (2) sales and services of auxiliaryenterprises, net of scholarship discounts and allowances, (3) most federal, state and local grants and contracts andfederal appropriations, and (4) interest on institutional student loans.

Nonoperating Revenues: Nonoperating revenues include activities that have the characteristics of nonexchangetransactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenuesunder GASB No. 9, Reporting Cash Flows of Propriety and Nonexpendable Trust Funds and Governmental EntitiesThat Use Proprietary Fund Accounting, and GASB No. 34, such as state appropriations and investment income.Scholarship Discounts and Allowances Student tuition and fee revenues, and certain other revenue from students,are reported net scholarship discounts and allowances in the statements of revenues, expenses, and changes in netassets. Scholarship discounts and allowances are the difference between the stated charge for goods and servicesprovided by the System, and the amount that is paid by students and/or third parties making payments on thestudents behalf. Certain governmental grants, such as Pell grants, and other federal, state or nongovernmental

programs, are recorded as either operating or nonoperating revenues in the Systems financial statements. To theextent that revenues from such programs are used to satisfy tuition and fees and other student charges, the Systemhas recorded a scholarship discount and allowance.

INVESTMENTS

The System invests its investable funds in investments authorized by Texas law in accordance with investmentpolicies approved by the Board of Trustees of the System. Both state law and the Systems investment policies aresubject to change.

INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE SYSTEM

Under Texas law, the System is authorized to invest in (1) obligations of the United States or its agencies and

instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies andinstrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of theUnited States, the underlying security for which is guaranteed by an agency or instrumentality of the United States;(4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith andcredit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations ofstates, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by anationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed orguaranteed by the State of Israel; (7) certificates of deposit that are issued by or through an institution that either hasits main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or

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the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses(1) through (6) or in any other manner and amount provided by law for System deposits; (8) fully collateralizedrepurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1),and are placed through a primary government securities dealer or a financial institution doing business in the Stateof Texas, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, aloan made under the program allows for termination at any time and a loan made under the program is either securedby (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by astate or national bank that is continuously rated by a nationally recognized investment rating firm at not less than Aor its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through(13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to theSystem, held in the System's name and deposited at the time the investment is made with the System or a third partydesignated by the System; (iii) a loan made under the program is placed through either a primary governmentsecurities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lendsecurities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days orless, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent byat least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days orless that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or(b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of creditissued by a U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by theSecurities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and

include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (13) no-load mutual funds registered with the Securities and Exchange Commission that have an average weighted maturityof less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated asto investment quality by at least one nationally recognized investment rating firm of not less than AAA or itsequivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a definedtermination date and are secured by obligations, including letters of credit, of the United States or its agencies andinstrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other thanthe prohibited obligations described in the next succeeding paragraph.

The System may invest in such obligations directly or through government investment pools that invest solely insuch obligations provided that the pools are rated no lower than AAA or Aaa or an equivalent by at least onenationally recognized rating service. The System may also contract with an investment management firm registeredunder the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to

provide for the investment and management of its public funds or other funds under its control for a term up to twoyears, but the System retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such acontract, the System must do so by order, ordinance, or resolution. The System is specifically prohibited frominvesting in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance ofthe underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment representsthe principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3)collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralizedmortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in amarket index.

Under Texas law, the System is required to invest its funds under written investment policies that primarilyemphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the qualityand capability of investment management; and that include a list of authorized investments for System funds, the

maximum allowable stated maturity of any individual investment and the maximum average dollar-weightedmaturity allowed for pooled fund groups. All System funds must be invested consistent with a formally adopted"Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment StrategyStatement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety ofprincipal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield.

Under Texas law, the System's investments must be made "with judgment and care, under prevailing circumstances,that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs,not for speculation, but for investment considering the probable safety of capital and the probable income to bederived." At least quarterly the System's investment officers must submit an investment report to the Board of

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Trustees detailing: (1) the investment position of the System, (2) that all investment officers jointly prepared andsigned the report, (3) the beginning market value, and any additions and changes to market value and the endingvalue of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginningand end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund orpooled fund group for which each individual investment was acquired, and (7) the compliance of the investmentportfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest System fundswithout express written authority from the Board of Trustees.

ADDITIONAL PROVISIONS

Under Texas law, the System is additionally required to: (1) annually review its adopted policies and strategies, (2)require any investment officers with personal business relationships or family relationships with firms seeking to sellsecurities to the System to disclose the relationship and file a statement with the Texas Ethics Commission and theSystem, (3) require the registered principal of firms seeking to sell securities to the System to: (a) receive and reviewthe Systems investment policy, (b) acknowledge that reasonable controls and procedures have been implemented topreclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) inconjunction with its annual financial audit, perform a compliance audit of the management controls on investmentsand adherence to the Systems investment policy, (5) restrict reverse repurchase agreements to not more than 90days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverserepurchase agreement, (6) restrict the investment in nonmoney market mutual funds in the aggregate to no more than

15% of the Systems monthly average fund balance, excluding bond proceeds and reserves and other funds held fordebt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value,yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, thechief financial officer (if not the Treasurer) and the investment officer.

CURRENT INVESTMENTS

See APPENDIX A Information Regarding the System - Current Investments for information concerning thecomposition of the Systems investment portfolio as of the date indicated therein.

EMPLOYEES RETIREMENT SYSTEM

The System employees are required by State law to participate in either the Teacher Retirement System of Texas or

an optional retirement program. In both systems the State of Texas sets contribution levels for employees and theState. The System has no pension fund expenditures or liabilities, however, the System contributes funds on astatutory basis on its employees behalf through the State or directly to carriers for matching Optional RetirementPlan contributions.

For more information regarding the Systems retirement plan, see the Systems audited financial statements, notes tothe financial statements, Note 13.

TAX MATTERS

TAX EXEMPTION

In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on Bonds is excludable from gross income for

federal income tax purposes under existing law and (ii) the Bonds are not private activity bonds under the InternalRevenue Code of 1986, as amended (the Code) and interest on the Bonds is not subject to the alternativeminimum tax on individuals and corporations, except as described below in the discussion regarding the adjustedcurrent earnings adjustment for corporations.

The Code, imposes a number of requirements that must be satisfied for interest on state or local obligations, such asthe Bonds, to be excludable from gross income for federal income tax purposes. These requirements includelimitations on the use of bond proceeds and the source of repayment of bonds, limitations on the investment of bondproceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of bond proceeds be paid

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periodically to the United States and a requirement that the issuer file an information report with the InternalRevenue Service (the Service). The System has covenanted in the Order that it will comply with theserequirements.

Bond Counsels opinion will assume continuing compliance with the covenants of the Order pertaining to thosesections of the Code that affect the exclusion from gross income of interest on the Bonds for federal income taxpurposes and, in addition, will rely on representations by the System, the Systems Financial Advisor and theUnderwriters with respect to matters solely within the knowledge of the System, the Systems Financial Advisor andthe Underwriters, respectively, which Bond Counsel has not independently verified. If the System should fail tocomply with the covenants in the Order or if the foregoing representations or report should be determined to beinaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds,regardless of the date on which the event causing such taxability occurs.

The Code also imposes a 20% alternative minimum tax on the alternative minimum taxable income of acorporation if the amount of such alternative minimum tax is greater than the amount of the corporations regularincome tax. Generally, the alternative minimum taxable income of a corporation (other than any S corporation,regulated investment company, REIT, REMIC or FASIT), includes 75% of the amount by which its adjustedcurrent earnings exceeds its other alternative minimum taxable income. Because interest on tax-exemptobligations, such as the Bonds, is included in a corporations adjusted current earnings, ownership of the Bondscould subject a corporation to alternative minimum tax consequences.

Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequencesresulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Bonds.

Bond Counsels opinions are based on existing law, which is subject to change. Such opinions are further based onBond Counsels knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplementits opinions to reflect any facts or circumstances that may thereafter come to Bond Counsels attention or to reflectany changes in any law that may thereafter occur or become effective. Moreover, Bond Counsels opinions are not aguarantee of result and are not binding on the Service; rather, such opinions represent Bond Counsels legaljudgment based upon its review of existing law and in reliance upon the representations and covenants referencedabove that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliancewith rules that relate to whether interest on state or local obligations is includable in gross income for federal incometax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an

audit is commenced, in accordance with its current published procedures, the Service is likely to treat the System asthe taxpayer and the Owners may not have a right to participate in such audit. Public awareness of any future auditof the Bonds could adversely affect the value and liquidity of the Bonds regardless of the ultimate outcome of theaudit.

ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS

COLLATERAL TAX CONSEQUENCES

Prospective purchasers of the Bonds should be aware that the ownership of tax exempt obligations may result incollateral federal income tax consequences to financial institutions, life insurance and property and casualtyinsurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Soci

Lone Star College District $149.78 million Limited Tax General Obligation Bonds official statement, 2008

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