OFFICIAL STATEMENT Dated February 29, 2012

In the opinion of Bond Counsel, interest on the Obligations is excludable from gross income for federal income tax purposes under existing law, subject to the matters described under TAX MATTERS herein, and is not includable in the federal alternative minimum taxable income of individuals. See TAX MATTERS for a discussion of the opinion of Bond Counsel, including the alternative minimum tax consequences for corporations.

NEW ISSUE: BOOK-ENTRY-ONLY

Ratings: S&P ...................................................................... AA Moodys ............................................................. Aa1

$14,925,000 MONTGOMERY COUNTY, TEXAS Certificates of Obligation Series 2012

Dated: March 1, 2012

$30,885,000 MONTGOMERY COUNTY, TEXAS Limited Tax Refunding Bonds, Series 2012
Due: March 1, as shown on the inside cover page hereof

The $14,925,000 Montgomery County, Texas, Certificates of Obligation, Series 2012 (the Certificates) and the $30,885,000 Montgomery County, Texas, Limited Tax Refunding Bonds, Series 2012 (the Bonds, and together with the Certificates, the Obligations), are being issued by the Commissioners Court of Montgomery County (the County) pursuant to the terms of two separate orders adopted by the Commissioners Court of the County in which the Commissioners Court delegated pricing of the Obligations and certain other matters to a Pricing Officer who approved and executed a Pricing Certificate with respect to each series of the Obligations which completed their sale. The Certificates are payable from an annual ad valorem tax levied on all taxable property in the County, within the limits prescribed by law, and by a pledge of a subordinate lien on the net revenues of the Countys park system. The Bonds are payable from an annual ad valorem tax levied on all taxable property in the County, within the limits prescribed by law. See THE OBLIGATIONS Source of Payment and TAXING PROCEDURES AND TAX BASE ANALYSIS Tax Rate Limitations. Interest on the Obligations will accrue from March 1, 2012, and will be payable March 1 and September 1 of each year, commencing September 1, 2012. The Obligations will initially be registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (DTC) pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of and interest on the Obligations will be payable by Regions Bank, Houston, Texas (the Paying Agent/Registrar) to Cede & Co., which will make distribution of the amounts so paid to the beneficial owners of the Obligations. See THE OBLIGATIONS - Book-Entry-Only System herein. Interest on the Obligations is payable to the registered owners (initially Cede & Co.) appearing on the registration books of the Paying Agent/Registrar on the 15th day of the month preceding each interest payment date (the Record Date). See THE OBLIGATIONS - General. The Obligations maturing on March 1, 2022 and thereafter are subject to optional redemption by the County in whole, or from time to time in part, on March 1, 2021 or any date thereafter at a price of par plus accrued interest to the date of redemption. See THE OBLIGATIONS - Optional Redemption. See Principal Amounts, Maturities, Interest Rates and Prices on the Inside Cover Page Proceeds from the sale of the Certificates will be used for (1) renovation and remodeling of the County Courthouse; (2) renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment for various county buildings, facilities and parks, including Precinct 2 and Precinct 4 offices, Precinct 2 and Precinct 4 Community Centers, Spring Creek Greenway, a Precinct 4 concession stand, the County Animal Shelter, the County Jury Assembly Room and a County library; (3) construction and renovation of runway, taxiway and water and sewer improvements at Lone Star Executive Airport; (4) the purchase of land and buildings for a forensic services facility to be located at 201 Hilbig Road, Conroe, Texas and renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment related thereto; (5) energyrelated renovations, remodeling and improvements and the purchase of energy-related furniture, fixtures and equipment at various County buildings; (6) the purchase of land and buildings for County offices to be located 115 Business Park Drive, Willis, Texas; (7) renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment for the County Jail; and (8) for professional services in connection with the above listed projects and costs of issuance of the Certificates. Proceeds from the sale of the Bonds will be used to refund and defease certain outstanding obligations as described on Schedule I - Schedule of Refunded Obligations (the Refunded Obligations) and to pay costs of issuance of the Bonds. See THE OBLIGATIONS Sources and Uses of Funds. See PLAN OF FINANCE Purpose. The Obligations are offered when, as and if issued by the County and accepted by the Underwriters, subject to the approving opinion of the Attorney General of the State of Texas and the opinion of Fulbright & Jaworski L.L.P., Houston, Texas, Bond Counsel. Certain legal matters will be passed upon for the County by Andrews Kurth LLP, Houston, Texas, Disclosure Counsel. Certain legal matters will be passed upon for the Underwriters by Allen Boone Humphries Robinson LLP, Counsel for the Underwriters. It is expected that the Obligations will be delivered through the facilities of DTC on or about March 27, 2012.

FirstSouthwest
Wells Fargo Securities
HOU:3197101.2

Jefferies & Company

PRINCIPAL AMOUNTS, MATURITIES, INTEREST RATES AND PRICES MONTGOMERY COUNTY, TEXAS

$14,925,000 Certificates of Obligation, Series 2012

Maturity (March 1) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022(a) 2023(a) 2024(a) 2025(a) 2026(a) 2027(a) 2028(a) 2029(a) 2030(a) 2031(a) 2032(a) ____________________________

Principal Amount $ 505,000 505,000 520,000 525,000 550,000 555,000 570,000 230,000 255,000 910,000 945,000 970,000 1,030,000 1,080,000 745,000 990,000 945,000 985,000 1,040,000 1,070,000

Interest Initial Rate (%) Yield (%)(b) 2.000 0.330 2.000 0.460 3.000 0.640 3.000 0.780 2.000 0.980 2.000 1.280 2.000 1.580 2.125 1.930 2.375 2.140 3.000 2.300 3.000 2.560 3.000 2.670 5.000 2.620 5.000 2.730 3.000 3.120 3.000 3.190 3.125 3.270 3.125 3.340 4.000 3.380 4.000 3.460

CUSIP(c) Nos. 613681 L78 L86 L94 M28 M36 M44 M51 M69 M77 M85 M93 N27 N35 N43 N50 N68 N76 N84 N92 P25

(a) The Certificates maturing on March 1, 2022, and thereafter are subject to optional redemption by the County in whole, or from time to time in part, on March 1, 2021, or any date thereafter at a price of par plus accrued interest to the date of redemption. See THE OBLIGATIONS - Optional Redemption. (b) The initial reoffering yields of the Certificates are furnished by the Underwriters (as defined herein) and represent the initial offering yields to the public, which may be changed by the Underwriters at any time. (c) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Service, managed by Standard and Poors Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP services Neither the County, the Financial Advisor, nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein.

HOU:3197101.2

$30,885,000 Limited Tax Refunding Bonds, Series 2012

CUSIP(c) Nos. 613681 P33 P41 P58 P66 P74 P82 P90 Q24 Q32 Q99 Q40 Q57 Q65 Q73 Q81

Maturity (March 1) 2013 2014 2015 2016 2017 2018 2019 2020 2021(a)(d) 2021(a)(d) 2022(a) 2023(a) 2024(a) 2025(a) 2026(a) _____________________________

Principal Amount $ 485,000 1,600,000 1,835,000 1,910,000 1,345,000 1,305,000 1,760,000 1,815,000 1,270,000 500,000 1,815,000 625,000 645,000 6,815,000 7,160,000

Interest Rate (%) 2.000 3.000 4.000 4.000 4.000 4.000 5.000 5.000 5.000 3.000 5.000 3.000 3.000 5.000 5.000

Initial Yield (%)(b) 0.330 0.460 0.640 0.780 0.980 1.280 1.580 1.930 2.140 2.140 2.300 2.560 2.670 2.620 2.730

(a) The Bonds maturing on March 1, 2022, and thereafter are subject to optional redemption by the County in whole, or from time to time in part, on March 1, 2021, or any date thereafter at a price of par plus accrued interest to the date of redemption. See THE OBLIGATIONS - Optional Redemption. (b) The initial reoffering yields of the Bonds are furnished by the Underwriters (as defined herein) and represent the initial offering yields to the public, which may be changed by the Underwriters at any time. (c) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Service, managed by Standard and Poors Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP services Neither the County, the Financial Advisor, nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein. (d) Indicates a bifurcated maturity.

HOU:3197101.2

COUNTY OFFICIALS

Elected Officials

Commissioner Alan B. Sadler Mike Meador Craig Doyal Ernest E. Chance Ed Rinehart

Position County Judge Commissioner, Precinct 1 Commissioner, Precinct 2 Commissioner, Precinct 3 Commissioner, Precinct 4

Years Served 22 18 9 25 12

Terms Expire December 31 2014 2012 2014 2012 2014

Other Elected and Appointed Officials Name J. R. Moore, Jr. Martha N. Gustavsen Phyllis L. Martin David Walker Mark Turnbull Position Tax Assessor Collector County Treasurer County Auditor County Attorney County Clerk

Consultants and Advisors

Auditors............................................................................... Hereford, Lynch, Sellars, & Kirkham, PC, CPA Conroe, Texas Bond Counsel ..................................................................................................... Fulbright & Jaworski L.L.P. Houston, Texas Disclosure Counsel......................................................................................................... Andrews Kurth LLP Houston, Texas Financial Advisor ..........................................................................................................................BOSC, Inc. Houston, Texas

HOU:3197101.2

No dealer, broker, salesman or other person has been authorized by the County or the Underwriters to give any information or to make any representation, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the County or the Underwriters. This Official Statement is not to be used in an offer to sell or the solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. NEITHER THE COUNTY, ITS FINANCIAL ADVISOR NOR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY (DTC) OR ITS BOOKENTRY-ONLY SYSTEM. THE OBLIGATIONS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE OBLIGATIONS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE SECURITIES HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OBLIGATIONS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Any information and expressions of opinion herein contained are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the County or other matters described herein since the date hereof. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

HOU:3197101.2

TABLE OF CONTENTS

Page INTRODUCTION........................................................... 1 SALE AND DISTRIBUTION OF THE OBLIGATIONS........................................................ 1 Sale of the Obligations .............................................. 1 Prices and Marketability............................................ 1 Securities Laws.......................................................... 1 Ratings ....................................................................... 2 OFFICIAL STATEMENT SUMMARY ....................... 3 SELECTED FINANCIAL INFORMATION ................ 5 PLAN OF FINANCE...................................................... 6 Purpose ...................................................................... 6 Refunded Obligations................................................ 6 Sources and Uses of Funds ....................................... 7 THE OBLIGATIONS ..................................................... 7 General....................................................................... 7 Record Date for Interest Payment............................. 8 Optional Redemption ................................................ 8 Book-Entry-Only System.......................................... 8 Authority for Issuance............................................. 11 Source of Payment of the Obligations .................... 11 Paying Agent/Registrar ........................................... 11 Transfer, Exchange and Registration...................... 12 Amendments............................................................ 12 Defeasance of Obligations ...................................... 12 Obligation-holders Remedies ................................ 12 Future Borrowing .................................................... 13 Legal Investments.................................................... 13 Investment Policies.................................................. 14 DEBT SERVICE REQUIREMENTS .......................... 16 COUNTY DEBT........................................................... 17 General..................................................................... 17 Indebtedness ............................................................ 17 Estimated Overlapping Debt Statement.................. 17 Other Obligations .................................................... 20 TAXING PROCEDURES AND TAX BASE ANALYSIS ............................................................. 20 General..................................................................... 20 Property Tax Code and County-Wide Appraisal District ............................................................... 20 Property Subject to Taxation by the County........... 21 Residential Homestead Exemptions ....................... 21 Freeport Goods and Goods-in-Transit Exemption . 21 Tax Abatement ........................................................ 21 Tax Increment Reinvestment Zone......................... 22 Pollution Control ..................................................... 22 Valuation of Property for Taxation......................... 22

Page County and Taxpayer Remedies ............................. 23 Levy and Collection of Taxes ................................. 23 Countys Rights in the Event of Tax Delinquencies23 Tax Rate Limitations............................................... 24 Historical Analysis of Tax Collection..................... 25 Delinquent Tax Collection Procedures ................... 26 Top Ten Principal Taxpayers.................................. 27 Tax Adequacy.......................................................... 27 SELECTED FINANCIAL DATA................................ 28 Historical Operations of the Countys General Fund ................................................................... 28 Special Revenue Funds ........................................... 29 Debt Service Funds ................................................. 30 Pension Fund ........................................................... 30 THE COUNTY ............................................................. 31 Administration of the County ................................. 31 Commissioners Court............................................. 31 Consultants .............................................................. 31 TAX MATTERS........................................................... 31 Tax Exemption ........................................................ 31 Tax Accounting Treatment of Discount and Premium on Certain Obligations ...................... 32 CONTINUING DISCLOSURE OF INFORMATION 33 Annual Reports........................................................ 34 Material Event Notices............................................ 34 Limitations and Amendments ................................. 35 Compliance with Prior Undertakings ..................... 35 OTHER CONSIDERATIONS ..................................... 36 Environmental Regulations..................................... 36 Air Quality............................................................... 36 Groundwater Conservation District ........................ 36 GENERAL CONSIDERATIONS................................ 37 Sources and Compilation of Information................ 37 Updating of Official Statement ............................... 37 OTHER INFORMATION ............................................ 37 Litigation ................................................................. 37 Registration and Qualification of Obligations for Sale..................................................................... 37 Legal Investments and Eligibility To Secure Public Funds in Texas................................................... 37 Legal Opinions ........................................................ 38 Financial Advisor .................................................... 38 Forward-Looking Statements Disclaimer............... 38 Miscellaneous .......................................................... 39 Concluding Statement ............................................. 39

Schedule I - Schedule of Refunded Obligations Appendix A - Economic and Demographic Information Appendix B - Excerpts from Comprehensive Annual Financial Report of Montgomery County, Texas for the Fiscal Year Ended September 30, 2010 Appendix C - Form of Legal Opinions

i
HOU:3197101.2

INTRODUCTION This Official Statement, which includes the Appendices hereto, provides certain information regarding the issuance of $14,925,000 Montgomery County, Texas, Certificates of Obligation, Series 2012 (the Certificates) and the $30,885,000 Montgomery County, Texas, Limited Tax Refunding Bonds, Series 2012 (the Bonds, and together with the Certificates, the Obligations). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the orders authorizing the issuance of the Obligations, except as otherwise indicated herein. There follows in this Official Statement descriptions of the Obligations and certain information regarding the County and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the Countys Financial Advisor, BOSC, Inc., Houston, Texas. This Official Statement contains, in part, estimates, assumptions and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates, assumptions or matters of opinion, or as to the likelihood that they will be realized. However, the County has agreed to keep this Official Statement current by amendment or sticker to reflect material changes in the affairs of the County and to the extent that information actually comes to its attention, the other matters described in this Official Statement until delivery of the Obligations to the Underwriters and thereafter only as specified in GENERAL CONSIDERATIONS Updating of Official Statement and CONTINUING DISCLOSURE OF INFORMATION. SALE AND DISTRIBUTION OF THE OBLIGATIONS Sale of the Obligations First Southwest Company, Wells Fargo Bank, N.A. and Jefferies & Company (collectively, the Underwriters) have agreed to purchase the Certificates from the County pursuant to a purchase agreement with the County for a price of $15,521,736.85 (representing the par amount of the Certificates, plus a net premium of $686,286.85, and less an Underwriters discount of $89,550.00) plus accrued interest on the Certificates to the date of delivery. The Underwriters obligation is to purchase all of the Certificates if any are purchased. The Underwriters have agreed to purchase the Bonds from the County pursuant to a purchase agreement with the County for a price of $35,723,134.90 (representing the par amount of the Bonds, plus a premium of $5,023,444.90, less an Underwriters discount of $185,310.00) plus accrued interest on the Bonds to the date of delivery. The Underwriters obligation is to purchase all of the Bonds if any are purchased. Prices and Marketability The delivery of the Obligations is conditioned upon the receipt by the County of a certificate executed and delivered by the Underwriters on or before the date of delivery of the Obligations stating the prices at which a substantial amount of the Obligations of each maturity have been sold to the public. For this purpose, the term public shall not include any person who is a bondhouse, broker or similar person acting in the capacity of underwriter or wholesaler. The County has no control over trading of the Obligations after a bona fide offering of the Obligations is made by the Underwriters at the yields specified on the inside cover page hereof. Information concerning reoffering yields or prices is the responsibility of the Underwriters. The prices and other terms respecting the offering and sale of the Obligations may be changed from time to time by the Underwriters after the Obligations are released for sale, and the Obligations may be offered and sold at prices other than the initial offering prices, including sales to dealers who may sell the Obligations into investment accounts. IN CONNECTION WITH THE OFFERING OF THE OBLIGATIONS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OBLIGATIONS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Securities Laws No registration statement relating to the Obligations has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemptions provided thereunder. The Obligations have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been registered or qualified under the securities laws of any other jurisdiction. The County assumes no responsibility for registration or qualification of the Obligations under the securities laws of any other jurisdiction in which the Obligations may be offered, sold or otherwise transferred.

1
HOU:3197101.2

This disclaimer of responsibility for registration or qualification for sale or other disposition of the Obligations shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such other jurisdictions. Ratings In connection with the sale of the Obligations, the County has made application to Moodys Investors Service, Inc. (Moodys) and Standard & Poors Ratings Group, A Division of the McGraw-Hill Companies, Inc. (S&P) for ratings on the Obligations, and the ratings of Aa1 and AA respectively, have been assigned to the Obligations. An explanation of the significance of such ratings may be obtained from Moodys and S&P. The ratings reflect only the view of Moodys and S&P, and the County makes no representation as to the appropriateness of such ratings. There is no assurance that such ratings will continue for any period of time or that they will not be revised downward or withdrawn entirely if, in the judgment of Moodys or S&P, circumstances so warrant. Any such downward revision or withdrawal of any of the ratings may have an adverse effect on the market price of the Obligations.

2
HOU:3197101.2

OFFICIAL STATEMENT SUMMARY The following material is a summary of certain information contained herein and is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Official Statement. The reader should refer particularly to sections that are indicated for more complete information. The Issuer ...................................................... Montgomery County, Texas (the County), a political subdivision of the State of Texas. See THE COUNTY. The Certificates ............................................. $14,925,000 Montgomery County, Texas Certificates of Obligation, Series 2012 (the Certificates) are dated March 1, 2012 and mature March 1 in each of the years 2013 through 2032, inclusive. See THE OBLIGATIONS General. The Bonds...................................................... $30,885,000 Montgomery County, Texas, Limited Tax Refunding Bonds, Series 2012 (the Bonds, and together with the Certificates, the Obligations) are dated March 1, 2012 and mature March 1 in each of the years 2013 through 2026, inclusive, See THE OBLIGATIONS General Payment of Interest........................................ Interest on the Obligations accrues from March 1, 2012, and is payable September 1, 2012, and each March 1 and September 1 thereafter until maturity or upon prior redemption. See THE OBLIGATIONS General. Optional Redemption..................................... The Obligations maturing on March 1, 2022 and thereafter are subject to optional redemption in whole, or from time to time in part, on March 1, 2021, or any date thereafter at the price of par plus accrued interest to the date of redemption. See THE OBLIGATIONS Optional Redemption. Source of Payment......................................... Principal of and interest on the Certificates are payable from the proceeds of a continuing, direct annual ad valorem tax levied, within the limits prescribed by law, against all taxable property in the County and from the pledge of a subordinate lien on the net revenues of the Countys park system. Principal of and interest on the Bonds are payable from the proceeds of a continuing, direct annual ad valorem tax levied, within the limits prescribed by law against all taxable property in the County. See THE OBLIGATIONS Source of Payment and TAXING PROCEDURES AND TAX BASE ANALYSIS Tax Rate Limitations. Authorization of the Obligations ................... The Certificates are being issued pursuant to Chapter 271, Texas Local Government Code, as amended, Chapter 1371, Texas Government Code, as amended, and an order passed by the Commissioners Court of the County, in which the Commissioners Court delegated pricing of the Certificates and certain other matters to a Pricing Officer who approved and executed a Pricing Certificate which completed the sale of the Certificates (the order authorizing the Certificates and the Pricing Certificate related thereto are jointly referred to as the Certificate Order). The Bonds are being issued pursuant to Chapter 1207, Texas Government Code, as amended, and an order passed by the Commissioners Court of the County, in which the Commissioners Court delegated pricing of the Bonds and certain other matters to a Pricing Officer who approved and executed a Pricing Certificate which completed the sale of the Bonds (the order authorizing the Bonds and the Pricing Certificate related thereto are jointly referred to as the Bond Order). See THE OBLIGATIONS Authority for Issuance.

3
HOU:3197101.2

Use of Proceeds ............................................. Proceeds of the sale of the Certificates will be used for (1) renovation and remodeling of the County Courthouse; (2) renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment for various county buildings, facilities and parks, including Precinct 2 and Precinct 4 offices, Precinct 2 and Precinct 4 Community Centers, Spring Creek Greenway, a Precinct 4 concession stand, the County Animal Shelter, the County Jury Assembly Room and a County library; (3) construction and renovation of runway, taxiway and water and sewer improvements at Lone Star Executive Airport; (4) the purchase of land and buildings for a forensic services facility to be located at 201 Hilbig Road, Conroe, Texas and renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment related thereto; (5) energy-related renovations, remodeling and improvements and the purchase of energy-related furniture, fixtures and equipment at various County buildings; (6) the purchase of land and buildings for County offices to be located 115 Business Park Drive, Willis, Texas; (7) renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment for the County Jail; and (8) for professional services in connection with the above listed projects and costs of issuance of the Certificates. Proceeds from the sale of the Bonds will be used to refund and defease certain outstanding obligations and to pay costs of issuance of the Bonds. See PLAN OF FINANCE Purpose. Tax Exemption .............................................. In the opinion of Bond Counsel, subject to the matters described in TAX MATTERS herein, interest on the Obligations is excludable from gross income for federal income tax purposes under existing law and is not includable in the computation of alternative minimum taxable income for individuals. See TAX MATTERS herein for a discussion of the opinion of Bond Counsel, including the alternative minimum tax consequences for corporations. Book-Entry-Only System .............................. The definitive Obligations will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book-EntryOnly System described herein. Beneficial ownership of the Obligations may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Obligations will be made to the beneficial owners thereof. See THE OBLIGATIONS Book-EntryOnly System. Payment Record............................................. The County has never defaulted on the timely payment of principal of and interest on any of its outstanding debt. Ratings on the Obligations ............................ Moodys Investors Service, Inc. .................................................Aa1 Standard & Poors Ratings Services ............................................AA

[Remainder of page intentionally left blank]

4
HOU:3197101.2

SELECTED FINANCIAL INFORMATION (Unaudited) 2011 Certified Taxable Assessed Valuation (100% of Market Value as of January 1, 2011) See TAXING PROCEDURES AND TAX BASE ANALYSIS Direct Debt: Outstanding Direct Debt (as of January 1, 2012) $ 35,119,747,375(a)

456,800,000(b)

Plus: The Certificates Plus: The Bonds Less: The Refunded Obligations Total Direct Debt Estimated Overlapping Debt Total Direct and Estimated Overlapping Debt Interest & Sinking Fund Balance (as of December 31,2011) Ratio of Direct Debt to..: 2011 Certified Taxable Assessed Valuation ($35,119,747,375) First Quarter 2012 Estimated Population (462,144)(c) $ $ $

14,925,000 30,885,000 34,330,000 468,280,000 2,595,425,076 3,063,705,076 $28,242,694 1.333% 1,013.28

Ratio of Direct and Estimated Overlapping Debt to: 2011 Certified Taxable Assessed Valuation ($35,119,747,375) First Quarter 2012 Estimated Population (462,144)(c) Estimated Annual Debt Service Requirements:

8.724% 6,629.33

Average (2012-2039) $ 25,438,123(d) Maximum (2013) $ 38,928,998(d) _____________________________ (a) Certified by the Montgomery Central Appraisal District (the Appraisal District). (b) The County anticipates that it will use the funds it receives pursuant to a Pass-Through Toll Agreement with the Texas Department of Transportation to make debt service payments on the Countys $34,705,000 Unlimited Tax Adjustable Rate Road Bonds, Series 2008B, $56,190,000 Pass-Through Toll Revenue and Limited Tax Bonds, Series 2009 and $31,390,000 Limited Tax and Pass-Through Toll Revenue Bonds, Series 2010. However, such funds are not pledged to and do not secure the repayment of such bonds and the County is under no obligation to use such funds to pay debt service thereon. Additionally, the Pass-Through Toll Agreement revenues are subject to annual appropriation by the State of Texas. (c) Conroe Chamber of Commerce. (d) Assumes receipt of the Federal Subsidy of 35% on the Countys Certificates of Obligation, Taxable Series 2010B (Direct Subsidy Build America Bond) (Mental Health Treatment Facility) and deposit of such Federal Subsidy into the debt service fund.

[Remainder of page intentionally left blank]

5
HOU:3197101.2

PRELIMINARY OFFICIAL STATEMENT Relating to

$14,925,000 MONTGOMERY COUNTY, TEXAS Certificates of Obligation Series 2012

$30,885,000 MONTGOMERY COUNTY, TEXAS Limited Tax Refunding Bonds, Series 2012

PLAN OF FINANCE Purpose Proceeds of the sale of the Certificates will be used for (1) renovation and remodeling of the County Courthouse; (2) renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment for various county buildings, facilities and parks, including Precinct 2 and Precinct 4 offices, Precinct 2 and Precinct 4 Community Centers, Spring Creek Greenway, a Precinct 4 concession stand, the County Animal Shelter, the County Jury Assembly Room and a County library; (3) construction and renovation of runway, taxiway and water and sewer improvements at Lone Star Executive Airport; (4) the purchase of land and buildings for a forensic services facility to be located at 201 Hilbig Road, Conroe, Texas and renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment related thereto; (5) energy-related renovations, remodeling and improvements and the purchase of energy-related furniture, fixtures and equipment at various County buildings; (6) the purchase of land and buildings for County offices to be located 115 Business Park Drive, Willis, Texas; (7) renovations, remodeling and improvements and the purchase of furniture, fixtures and equipment for the County Jail; and (8) for professional services in connection with the above listed projects and costs of issuance of the Certificates. Proceeds from the sale of the Bonds will be used to refund and defease certain outstanding obligations as described in Schedule I - Schedule of Refunded Obligations (the Refunded Obligations) and to pay costs of issuance of the Bonds. Refunded Obligations The Refunded Obligations and interest due thereon are to be paid on the scheduled interest payment, call or maturity dates of each series of such obligations, as the case may be, from funds to be deposited with Regions Bank, Houston, Texas, authorized to do business in the State of Texas (the Escrow Agent), to the escrow fund (the Escrow Fund) created under the escrow agreement relating to the Refunded Obligations to be entered into by the County and the Escrow Agent (the Escrow Agreement). The Bond Order (as hereinafter defined) provides that from the proceeds of the sale of the Bonds to the Underwriters, the County will deposit with the Escrow Agent the amount necessary to accomplish the discharge and final payment of the Refunded Obligations. Such funds will be held by the Escrow Agent in the Escrow Fund and will be used to purchase a portfolio of securities authorized by Section 1207.062, Texas Government Code, which authorized securities include direct noncallable obligations of the United States and noncallable obligations of an agency or instrumentality of the United States rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent and guaranteed by the full faith and credit of the United States of America (the Federal Securities). The Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Obligations. The County has covenanted to make timely deposits into the Escrow Fund, from lawfully available funds, of additional funds in the amounts required to pay the principal of and interest on the Refunded Obligations should, for any reason, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund be insufficient to make such payments. Grant Thornton, LLP (the Verification Agent) will verify at the time of delivery the Bonds to the Underwriters that the Federal Securities will mature and pay interest in such amounts which, together with uninvested funds, if any, in the Escrow Fund will be sufficient to pay, when due, the principal of and interest on the Refunded Obligations. Such maturing principal of and interest on the Federal Securities will not be available to pay the Bonds. See VERIFICATION OF MATHEMATICAL COMPUTATIONS.

6
HOU:3197101.2

In the opinion of Bond Counsel, by making the escrow deposits required by the Bond Order and the Escrow Agreement, the County will have made firm banking and financial arrangements for the discharge and final payment and/or defeasance of the Refunded Obligations pursuant to the provisions of Chapter 1207, Texas Government Code, as amended. Thereafter, the Refunded Obligations will be deemed to be fully paid and no longer outstanding, except for the purpose of being paid from the funds provided therefore pursuant to the Escrow Agreement. Sources and Uses of Funds The Certificates Sources of Funds Par Amount Net Reoffering Premium Accrued Interest Total Sources Uses of Funds Deposit to Construction Fund Underwriters Discount Costs of Issuance Deposit to Interest and Sinking Fund Rounding Amount Total Uses $ 14,925,000.00 686,286.85 34,883.78 $ 15,646,170.63

$ 15,395,000.00 89,550.00 126,000.00 34,883.78 736.85 $ 15,646,170.63

The Bonds Sources of Funds Par Amount Reoffering Premium Issuer Contribution Accrued Interest Total Sources Uses of Funds Deposit to Escrow Fund Underwriters Discount Costs of Issuance Deposit to Interest and Sinking Fund Rounding Amount Total Uses $ 30,885,000.00 5,023,444.90 220,000.00 100,991.94 $ 36,229,436.84

$ 35,739,474.63 185,310.00 202,500.00 100,991.94 1,160.27 $ 36,229,436.84

THE OBLIGATIONS General The Obligations are dated March 1, 2012, and mature on March 1 in each of the years and in the amounts shown on the inside cover page hereof. The Obligations will bear interest at the respective rates shown on the inside cover page of this Official Statement, which interest will be computed on the basis of a 360-day year of twelve 30-day months, and will be payable on March 1 and September 1 (each an Interest Payment Date), commencing September 1, 2012. The definitive Obligations will be issued only in fully registered form in any integral multiple of $5,000 for any one maturity and will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (DTC) pursuant to the Book-Entry-Only System described herein. No physical delivery of the Obligations will be made to the beneficial owners thereof. Principal of and interest on the Obligations will be payable by Regions Bank, Houston, Texas (the Paying Agent/Registrar) to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Obligations. See Book-Entry-Only System herein.

7
HOU:3197101.2

In the event the Book-Entry-Only-System is discontinued, the Obligations may be transferred and exchanged on the bond register kept by the Paying Agent/Registrar upon surrender and reissuance. The Obligations are exchangeable for an equal principal amount of Obligations of the same maturity in any authorized denomination upon surrender of the Obligations to be exchanged at the principal payment office of the Paying Agent/Registrar. No service charge will be made for any transfer, but the County may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. Record Date for Interest Payment The record date (Record Date) for the interest payable on the Obligations on any interest payment date means the close of business on the fifteenth day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a Special Record Date) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the County. Notice of the Special Record Date and of the scheduled payment date of the past due interest (Special Payment Date, which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each holder of a Obligation (Obligation-holder) appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. Optional Redemption The County reserves the right, at its option, to redeem Obligations having stated maturities on or after March 1, 2022 in whole or in part in principal amounts of $5,000 or any integral multiple thereof, on March 1, 2021 or any date thereafter at the par value thereof plus accrued interest to the date of redemption. If less than all of the Certificates or the Bonds are to be redeemed, the County shall determine the principal amount and maturities to be redeemed and shall direct the Paying Agent/Registrar to select by lot or other customary method that results in a random selection, the Certificates or Bonds, as applicable, or portions thereof within a maturity, to be redeemed. Not less than 30 days prior to a redemption date for the Obligations, the County shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the registered owners of the Obligations to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY OBLIGATION OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH OBLIGATION OR PORTION THEREOF SHALL CEASE TO ACCRUE. The Paying Agent/Registrar and the County, so long as a Book-Entry-Only System is used for the Obligations, will send any notice of redemption, notice of proposed amendment to the Orders or other notices with respect to the Obligations only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial owner, shall not affect the validity of the redemption of the Obligations called for redemption or any other action premised on any such notice. Redemption of portions of the Obligations by the County will reduce the outstanding principal amount of such Obligations held by DTC. Book-Entry-Only System This section describes how ownership of the Obligations is to be transferred and how the principal of, premium, if any, and interest on the Obligations are to be paid to and credited by The Depository Trust Company (DTC), New York, New York, while the Obligations are registered in its nominees name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The County and the Underwriters believe the source of such information to be reliable, but take no responsibility for the accuracy or completeness thereof. The County cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Obligations, or redemption or other notices, to DTC Participant, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Obligations), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the 8
HOU:3197101.2

manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Obligations. The Obligations will be issued as fully-registered securities registered in the name of Cede & Co. (DTCs partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each maturity of the Obligations, in the aggregate principal amount of each such maturity, and will be deposited with DTC. DTC, the worlds largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTCs participants (Direct Participants) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized bookentry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (DTCC). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (Indirect Participants). DTC has Standard & Poors rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. Purchases of Obligations under the DTC system must be made by or through Direct Participants, which will receive a credit for the Obligations on DTCs records. The ownership interest of each actual purchaser of each Bond (Beneficial Owner) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Obligations are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Obligations, except in the event that use of the book-entry system for the Obligations is discontinued. To facilitate subsequent transfers, all Obligations deposited by Direct Participants with DTC are registered in the name of DTCs partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Obligations with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Obligations; DTCs records reflect only the identity of the Direct Participants to whose accounts such Obligations are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Obligations may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Obligations, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Obligations may wish to ascertain that the nominee holding the Obligations for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them.

9
HOU:3197101.2

Redemption notices shall be sent to DTC. If less than all of the Obligations within an issue are being redeemed, DTCs practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Obligations unless authorized by a Direct Participant in accordance with DTCs MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Obligations are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds and principal and interest payments on the Obligations will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTCs receipt of funds and corresponding detail information from the District or the Paying Agent/Registrar, on payable dates 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 in the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Paying Agent or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds and principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. A Beneficial Owner shall give notice to elect to have its Obligations purchased or tendered, through its Participant, to the Tender Agent, and shall effect delivery of such Obligations by causing the Direct Participant to transfer the Participants interest in the Obligations, on DTCs records, to the Tender Agent. The requirement for physical delivery of Obligations in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Obligations are transferred by Direct Participants on DTCs records and followed by a book-entry credit of tendered Obligations to the Tender Agents DTC account. DTC may discontinue providing its services as depository with respect to the Obligations at any time by giving reasonable notice to the District or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTCs book-entry system has been obtained from sources that the District believes to be reliable, but the District takes not responsibility for the accuracy thereof. Use of Certain Terms in Other Sections of this Official Statement In reading this Official Statement it should be understood that while the Obligations are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Obligations, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Order will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the County or the Underwriters. Effect of Termination of Book-Entry-Only System In the event that the Book-Entry-Only System is discontinued printed Obligations will be issued to the registered owners and the Obligations will be subject to transfer, exchange and registration provisions as set forth in the Order and summarized under Transfer, Exchange and Registration below.

10
HOU:3197101.2

Authority for Issuance The Certificates are being issued pursuant to Chapter 271, Texas Local Government Code, as amended, Chapter 1371, Texas Government Code, as amended, and an order passed by the Commissioners Court of the County, in which the Commissioners Court delegated pricing of the Certificates and certain other matters to a Pricing Officer who approved and executed a Pricing Certificate which completed the sale of the Certificates (the order authorizing the Certificates and the Pricing Certificate related thereto are jointly referred to as the Certificate Order). The Bonds are being issued pursuant to Chapter 1207, Texas Government Code, as amended, and an order passed by the Commissioners Court of the County, in which the Commissioners Court delegated pricing of the Bonds and certain other matters to a Pricing Officer who approved and executed a Pricing Certificate which completed the sale of the Bonds (the order authorizing the Bonds and the Pricing Certificate related thereto are jointly referred to as the Bond Order). The Certificate Order and the Bond Order are collectively referred to herein as the Orders. Source of Payment of the Obligations The Obligations are payable from the proceeds of a continuing, direct annual ad valorem tax levied, within the limits prescribed by law, against taxable property located within the County. Article VIII, Section 9 of the Texas Constitution imposes a limit of $0.80 per $100 assessed valuation for all purposes of a countys General Fund, Permanent Improvement Fund, Road and Bridge Fund and Jury Fund including debt service on certain bonds, warrants, certificates of obligation or other debt issued against such funds. Administratively, the Attorney General of Texas will not approve limited tax obligations in an amount which produces debt service requirements exceeding that which can be paid from $0.40 of such $0.80 maximum tax rate calculated at 90% collection. The Obligations are limited tax obligations payable from this constitutional tax. The issuance of the Obligation will not exceed the constitutionally authorized taxable rate stated above. See also, TAXING PROCEDURES AND TAX BASE ANALYSIS - Tax Rate Limitations. The Certificates are further payable from a pledge of a subordinate lien on the revenues of the Countys park system after payment of all operation and maintenance expenses thereof (the Net Revenues). The lien on such Net Revenues is junior and subordinate in all respects to the pledge of Net Revenues to the payment of any obligation of the County heretofore or hereafter issued by the County and designated as having a pledge senior to the pledge of the Net Revenues of the Certificates. The County anticipates paying the principal and interest on the Certificates from ad valorem taxes as described above and the County makes no assurances that there will be any Net Revenues of the park system available to pay debt service on the Certificates. In the Certificate Order authorizing the issuance of the Certificates, the County reserves the right to issue additional obligations payable in whole or in part from the Net Revenues. Paying Agent/Registrar The initial Paying Agent/Registrar is Regions Bank, Houston, Texas. In the Orders, the County retains the right to replace the Paying Agent/Registrar. The County covenants to maintain and provide a Paying Agent/Registrar at all times until the Obligations are duly paid and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the State or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Obligations. Upon any change in the Paying Agent/Registrar for the Obligations, the County agrees to promptly cause a written notice thereof to be sent to each registered owner of the Obligations by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. Principal of the Obligations is payable to the registered holder (the Registered Owner) at the designated corporate trust office of the Paying Agent/Registrar upon surrender of the Obligations for payment at maturity or prior redemption. Interest on the Obligations is payable by check or draft, dated as of the interest payment date, and mailed by the Paying Agent/Registrar to the Registered Owners as shown on the records of the Paying Agent/Registrar at the close of business on the Record Date (identified below) or by such other arrangement acceptable to the Paying Agent/Registrar requested by and at the expense and risk of the Registered Owner. If the date for the payment of the principal of or interest on the Obligations shall be a Saturday, Sunday, a legal holiday, or a day when banking institutions in the city where the designated corporate office of the Paying Agent/Registrar is not such a Saturday, Sunday, legal holiday, or day when banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due.

11
HOU:3197101.2

Transfer, Exchange and Registration In the event the Book-Entry-Only System should be discontinued, printed certificates shall be delivered to the registered owner and thereafter the Obligations may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Obligations may be assigned by the execution of an assignment form on the respective Obligations or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. See Book-Entry-Only System herein for a description of the system to be utilized initially in regard to ownership and transferability of the Obligations. Amendments The County may, without the consent of or notice to any Obligations-holders, from time to time and at any time, amend the Orders in any manner not detrimental to the interests of the Obligations-holders, including the curing of any ambiguity, inconsistency, or formal defect or omission herein. In addition, the County may, with the consent of Obligation-holders holding a majority in aggregate principal amount of the Obligations then Outstanding, amend, add to, or rescind any of the provisions of the Orders; provided that, without the consent of all Obligation-holders of Outstanding Obligations, no such amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of, premium, if any, and interest on the Obligations, 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 Obligations, (2) give any preference to any Obligation over any other Obligation, or (3) reduce the aggregate principal amount of Obligations required to be held by Obligation-holders for consent to any such amendment, addition, or rescission. Defeasance of Obligations The Orders provide that the County may defease the provisions thereof and discharge its obligation to the Obligation-holders of any or all of the Obligations to pay principal, interest and redemption premium, if any, thereon in any manner now or hereafter permitted by law, including by depositing with the Registrar, or if authorized by Texas law with any national bank having trust powers and having combined capital and surplus of at least $50 million or with the State Treasurer of the State either: (i) cash in an amount equal to the principal amount and redemption premium, if any, of such Obligations plus interest thereon to the date of maturity or redemption, or (ii) pursuant to an escrow or trust agreement, cash and/or direct obligations of, or obligations the principal of and interest on which are guaranteed by, or, to the extent permitted by law, secured by the pledge of direct obligations of, the United States of America, in principal amounts and maturities and bearing interest at rates sufficient to provide for the timely payment of the principal amount and redemption premium, if any, of such Obligations plus interest thereon to the date of maturity or redemption; provided, however, that if any of such Obligations are to be redeemed prior to their respective dates of stated maturity, provision must have been made for giving notice of redemption as provided in the Orders. Upon such deposit, such Obligations shall no longer be regarded to be outstanding or unpaid. Any surplus amounts not required to accomplish such defeasance shall be returned to the County. Obligation-holders Remedies The Orders do not provide for the appointment of a trustee to represent the interests of the Obligation-holders upon any failure of the County to perform in accordance with the terms of the Orders or upon any other condition and, in the event of any such failure to perform, the Obligations-holders would be responsible for the initiation and cost of any legal action to enforce performance of the Orders. Furthermore, the Orders do not establish specific events of default with respect to the Obligations and, under State law, there is no right to the acceleration of maturity of the Obligations upon the failure of the County to observe any covenant under the Orders. An Obligations-holder of Obligations could seek a judgment against the County if a default occurred in the payment of principal of or interest on any such Obligations; however, such judgment could not be satisfied by execution against any property of the County and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. An Obligationholders only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the County to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Obligations as it becomes due or perform other material terms and covenants contained in the respective Order. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following

12
HOU:3197101.2

their approval by the Attorney General and issuance, the Obligations are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and an Obligation-holder could be required to enforce such remedy on a periodic basis. The County is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (Chapter 9). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Obligationholders of an entity which has sought protection under Chapter 9. Therefore, should the County avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Obligations are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code. Future Borrowing Depending on the rate of development within the County, changes in assessed valuation and the amounts, interest rates, maturities and time of issuance of additional bonds or certificates, increases in the Countys annual ad valorem tax rate may be required to provide for the payment of the principal of and interest on the Countys outstanding debt, including the Obligations and any future bonds or certificates of obligation the County may issue. INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE COUNTY The County invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Commissioners Court of the County. Both State law and the Countys investment policies are subject to change from time to time. Legal Investments Under State law, the County 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 or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) (a) certificates of deposit and share certificates issued by a depository institution that has its main office or a branch office in the State of Texas, that are (i) guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund or their respective successors, or are secured as to principal by obligations described in clauses (1) through (6) above or in any other manner and amount provided by law for County deposits, and (b) certificates of deposit or share certificates issued by a depository institution that has its main office or a branch office in the State of Texas that participate in the Certificate of Account Registry Service; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the County, held in the Countys name and deposited at the time the investment is made with the County or a third party designated by the County; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by

13
HOU:3197101.2

at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (13) noload mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The County may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAA-m or an equivalent by at least one nationally recognized rating service. The County may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the County retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the County must do so by order, ordinance, or resolution. The County is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Investment Policies Under Texas law, the County is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for County funds, the maximum allowable stated maturity of any individual investment, the maximum dollar-weighted average maturity allowed for pooled fund groups and methods to monitor the market price of such authorized investments. All County funds must be invested consistent with a formally adopted Investment Strategy Statement that specifically addresses each funds investment. Each Investment Strategy Statement is required to describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, County 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 persons own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. At least quarterly, the investment officers of the County are required to submit an investment report detailing: (1) the investment position of the County, (2) the beginning market value, any additions and changes to market value and the ending value for each pooled fund group, (3) the book value and market value of each separately invested asset at the beginning and end of the reporting period, by the type of asset and fund type, (4) the maturity date of each separately invested asset having a maturity date, (5) the account or fund or pooled fund group for which each individual investment was acquired, and (6) the compliance of the investment portfolio as it related to: (a) adopted investment strategy statements and (b) the provisions of Chapter 2256, Texas Government Code, as amended. No person may invest County funds without express written authority from the Commissioners Court of the County. Under State law, the County 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 sell securities to the County to disclose the relationship and file a statement with the Texas Ethics Commission and the County, (3) require the registered principal of firms seeking to sell securities to the County to: (a) receive and review the Countys investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to

14
HOU:3197101.2

preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the Countys investment policy, (5) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (6) restrict the investment in non-money market mutual funds in the aggregate to no more than 15% of the Countys monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer. The County has adopted an investment policy in accordance with State law. Under the current County investment policy, the following instruments are the only authorized investments for County funds: Time Deposits; Certificates of Deposit; Money Market Investment Accounts; Negotiable Order of Withdrawal (NOW) Accounts; United States Treasury Bills; United States Government Securities, as defined in Section 2256.009, Texas Government Code, as amended; fully collateralized direct repurchase agreements as defined in as defined in Section 2256.011, Texas Government Code, as amended; Discount Government Agencies, excluding Federal Home Loan Mortgage Corporation (Freddie Mac); and, any Public Funds Pool authorized by State law. No funds of the County will be invested in securities such as reverse repurchase agreements and the County will not trade in options or futures contracts. The Countys investment balances on December 31, 2011 were as follows: Carrying Amount U. S. Treasuries Government Agencies State Treasurers Investment Pool (TEXPOOL) Local Government Investment Pool (LONE-STAR) Local Government Investment Pool (TexSTAR) Money Market Mutual Fund (ICT) Money Market Mutual Fund (AIM) Money Market Mutual Fund (BPIF) Total Investments
$ 18,050,853 5,086,810 10,595,246 11,883,716 11,638,137 26,421,736 28,430,068 16,730,986 $ 128,837,552

Market Value
$ 18,050,853 5,086,810 10,595,246 11,883,716 11,638,137 26,421,736 28,430,068 16,730,986 $ 128,837,552

[Remainder of page intentionally left blank]

15
HOU:3197101.2

DEBT SERVICE REQUIREMENTS The following schedule sets forth the current total debt service requirements of the County less the debt service requirements of the Refunded Bonds plus the principal and interest requirements on the Certificates and the Bonds.
Less: Debt Service on the Refunded Bonds $ 823,039 2,252,129 3,335,751 3,514,608 3,514,259 2,883,325 2,789,431 3,172,025 3,139,168 3,009,793 2,969,606 1,725,750 1,728,500 7,715,250 7,713,125 Total Debt Service $ 36,335,215 38,928,998 38,927,773 38,928,126 38,928,432 38,928,482 38,926,773 38,927,108 38,585,662 30,809,465 30,761,646 30,761,474 30,761,468 30,760,568 30,761,505 30,764,928 30,115,562 30,116,778 30,118,301 23,375,007 22,989,095 1,821,534 1,824,673 1,820,970 1,820,425 1,822,861 1,823,191 1,821,415 $712,267,434

Fiscal Year Current Total Plus: The Bonds Principal Interest Ending (9/30) Debt Service(a) 2012 $ 36,217,577 $ 699,175 2013 38,319,670 $ 485,000 1,393,500 2014 38,326,018 1,600,000 1,364,650 2015 38,328,778 1,835,000 1,303,950 2016 38,339,310 1,910,000 1,229,050 2017 38,326,901 1,345,000 1,163,950 2018 38,330,348 1,305,000 1,110,950 2019 38,324,627 1,760,000 1,040,850 2020 38,332,842 1,815,000 951,475 2021 30,537,367 1,770,000 866,850 2022 29,850,665 1,815,000 782,225 2023 29,844,211 625,000 727,475 2024 29,849,731 645,000 708,425 2025 29,825,931 6,815,000 528,375 2026 29,831,867 7,160,000 179,000 2027 29,834,341 2028 28,965,999 2029 29,041,831 2030 29,033,511 2031 22,271,407 2032 21,897,695 2033 1,821,534 2034 1,824,673 2035 1,820,970 2036 1,820,425 2037 1,822,861 2038 1,823,191 2039 1,821,415 Totals $696,385,693 $50,285,759 $30,885,000 $14,049,900 _______ (a) Assumes the receipt of the Federal Subsidy of 35% on the County's Series 2010B Bonds. Average Annual Debt Service Requirements (2012 - 2039) Maximum Annual Debt Service Requirements (2013)

Plus: The Certificates Principal Interest $ 241,503 $ 505,000 477,956 505,000 467,856 520,000 455,006 525,000 439,331 550,000 425,956 555,000 414,906 570,000 403,656 230,000 395,513 255,000 390,041 910,000 373,363 945,000 345,538 970,000 316,813 1,030,000 276,513 1,080,000 223,763 745,000 185,588 990,000 159,563 945,000 129,947 985,000 99,791 1,040,000 63,600 1,070,000 21,400

$14,925,000

$6,307,600

$ 25,438,123 $ 38,928,998

HOU:3197101.2

16

COUNTY DEBT General The following tables and calculations relate to the Obligations and to all other debt of the County. The County and various other political subdivisions of government which overlap all or a portion of the County are empowered to incur debt to be paid from revenues raised or to be raised by taxation against all or a portion of the property within the County. Indebtedness 2011 Certified Taxable Assessed Valuation ..................................................................................... $ 35,119,747,375 (100% of Market Value as of January 1, 2011) See TAXING PROCEDURES AND TAX BASE ANALYSIS Direct Debt: Outstanding Direct Debt (as of January 1, 2012) Plus: Certificates Plus: Bonds Less: The Refunded Obligations Total Direct Debt 456,800,000(a) 14,925,000 30,885,000 34,330,000 468,280,000 $28,242,694

Interest & Sinking Fund Balance (as of December 31, 2011) .......................................................... $

______________________________ (a) The County anticipates that it will use the funds it receives pursuant to a Pass-Through Toll Agreement with the Texas Department of Transportation to make debt service payments on the Countys $34,705,000 Unlimited Tax Adjustable Rate Road Bonds, Series 2008B, $56,190,000 Pass-Through Toll Revenue and Limited Tax Bonds, Series 2009 and $31,390,000 Limited Tax and Pass-Through Toll Revenue Bonds, Series 2010. However such funds are not pledged to and do not secure the repayment of the such bonds and the County is under no obligation to use such funds to pay debt service thereon. Additionally, the Pass-Through Toll Agreement revenues are subject to annual appropriation. Estimated Overlapping Debt Statement Other governmental entities whose boundaries overlap the County have outstanding bonds or other debt payable from ad valorem taxes levied against property within the County. The following statement of direct and estimated overlapping ad valorem tax debt was developed from information contained in Texas Municipal Reports, published by the Municipal Advisory Council of Texas. Except for the amounts relating to the County, the County has not independently verified the accuracy or completeness of such information, and no person is entitled to rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional debt since the dates stated in this table, and such entities may have programs requiring the issuance of substantial amounts of additional debt, the amount of which cannot be determined. Political subdivisions overlapping with the boundaries of the County are authorized by Texas law to levy and collect ad valorem taxes for operation, maintenance and/or general revenue purposes in addition to taxes for payment of their debt, and some are presently levying and collecting such taxes.
Taxing Jurisdiction Gross Debt February 1, 2012 Percent Overlapping Amount

Cleveland ISD Cleveland, City of Clovercreek MUD Conroe ISD Conroe, City of Corinthian Point MUD #2

$ 39,010,792 10,570,000 1,435,000 903,470,000 105,360,000 505,000

1.74% 0.14% 100.00% 100.00% 100.00% 100.00%

678,788 14,798 1,435,000 903,470,000 105,360,000 505,000

17
HOU:3197101.2

Taxing Jurisdiction

Gross Debt February 1, 2012

Percent

Overlapping Amount

E. Montgomery Co MUD #3 East Plantation UD Far Hills UD Grand Oaks MUD Harris-Montgomery Co MUD # 386 Houston, City of Kings Manor MUD Lazy River Improvement Dist Lone Star College System Magnolia ISD Magnolia, City of Montgomery Co DD # 10 Montgomery Co MUD # 7 Montgomery Co MUD # 9 Montgomery Co MUD # 15 Montgomery Co MUD # 18 Montgomery Co MUD # 24 Montgomery Co MUD # 39 Montgomery Co MUD # 40 Montgomery Co MUD # 42 Montgomery Co MUD # 46 Montgomery Co MUD # 47 Montgomery Co MUD # 56 Montgomery Co MUD # 60 Montgomery Co MUD # 67 Montgomery Co MUD # 83 Montgomery Co MUD # 84 Montgomery Co MUD # 89 Montgomery Co MUD # 90 Montgomery Co MUD # 92 Montgomery Co MUD # 94 Montgomery Co MUD # 98 Montgomery Co MUD # 99 Montgomery Co MUD # 107 Montgomery Co MUD # 112 Montgomery Co MUD # 113 Montgomery Co MUD # 115 Montgomery Co UD # 2 Montgomery Co UD # 3 Montgomery Co UD # 4 Montgomery WC&ID # 1 Montgomery ISD Montgomery, City of New Caney ISD New Caney MUD Oak Ridge N, City of Panorama Village, City of Point Aquarius MUD

7,385,000 3,135,000 2,520,000 1,895,000 71,405,000 3,188,440,000 16,135,000 910,000 523,190,000 162,575,459 1,995,000 9,170,000 6,545,000 8,610,000 10,835,000 26,920,000 105,000 16,360,000 2,875,000 1,475,000 106,480,000 32,550,000 2,308,840 22,350,000 19,185,000 17,070,000 16,045,000 26,765,000 5,510,000 1,785,000 31,615,000 5,315,000 4,560,000 9,275,000 9,275,000 7,290,000 8,315,000 6,355,000 560,000 6,550,000 11,435,000 137,028,671 3,750,000 202,079,257 19,220,000 6,060,000 3,650,000 11,125,000

100.00% 100.00% 100.00% 100.00% 13.14% 0.22% 67.58% 100.00% 25.21% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 97.60% 100.00% 100.00% 100.00% 100.00%

7,385,000 3,135,000 2,520,000 1,895,000 9,382,617 7,014,568 10,904,033 910,000 131,896,199 162,575,459 1,995,000 9,170,000 6,545,000 8,610,000 10,835,000 26,920,000 105,000 16,360,000 2,875,000 1,475,000 106,480,000 32,550,000 2,308,840 22,350,000 19,185,000 17,070,000 16,045,000 26,765,000 5,510,000 1,785,000 31,615,000 5,315,000 4,560,000 9,275,000 9,275,000 7,290,000 8,315,000 6,355,000 560,000 6,550,000 11,435,000 137,028,671 3,750,000 197,229,355 19,220,000 6,060,000 3,650,000 11,125,000

18
HOU:3197101.2

Taxing Jurisdiction

Gross Debt February 1, 2012

Percent

Overlapping Amount

Porter MUD Rayford Rd MUD Richards ISD Roman Forest Cons MUD Roman Forest PUD # 4 Shenandoah, City of Southern Montg Co MUD Splendora ISD Splendora, City of Spring Creek UD Stanley Lake MUD Texas National MUD The Woodlands Metro Ctr ID The Woodlands MUD # 2 The Woodlands RUD # 1 The Woodlands Township Tomball ISD Valley Ranch MUD #1 Willis ISD Willis, City of Woodbranch Village, City

12,245,000 30,565,000 100,000 1,640,000 765,000 29,325,000 10,250,000 43,359,457 3,170,000 30,835,000 10,490,000 955,000 16,525,000 500,000 81,980,000 43,865,000 305,360,000 6,555,000 79,873,926 6,554,080 538,000

100.00% 100.00% 27.58% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 96.06% 8.69% 100.00% 97.46% 100.00% 100.00%

12,245,000 30,565,000 27,580 1,640,000 765,000 29,325,000 10,250,000 43,359,457 3,170,000 30,835,000 10,490,000 955,000 16,525,000 500,000 81,980,000 42,136,719 26,535,784 6,555,000 77,845,128 6,554,080 538,000 $2,595,425,076 468,280,000 $3,063,705,076

Total Estimated Overlapping Debt Montgomery County Direct Debt(1) Total Direct and Estimated Overlapping Debt _________________________ (1) Includes the Obligations and excludes the Refunded Obligations.

Direct Debt 2011 Certified Taxable Assessed Valuation ($35,119,747,375(a)) 1.333% Per Capita First Quarter 2012 Estimated Population (462,144(b)) $1,013.28 _________________________ (a) Certified by the Montgomery County Appraisal District (the Appraisal District). (b) Conroe Chamber of Commerce.

Direct and Estimated Overlapping Debt 8.724% $6,629.33

19
HOU:3197101.2

Other Obligations The County has entered into various lease-purchase agreements for the purchase of heavy road equipment, police vehicles, a community building, computer and audio visual equipment, and a countywide communication system consisting of infrastructure and equipment to effectively upgrade towers and radios for all first responders in the County. Fiscal Year Ending 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total General Fund $ 2,224,698 2,115,181 2,097,977 2,097,977 1,855,679 1,771,416 1,771,416 $13,934,344 Special Revenue Funds $ 592,425 679,169 502,672 407,129 385,977 385,977 385,977 385,977 385,977 $4,111,280 Total All Funds $ 2,817,123 2,794,350 2,600,649 2,505,106 2,241,656 2,157,393 2,157,393 385,977 385,977 $18,045,624

Additionally, in September of 2006, the Montgomery County Jail Financing Corporation (the Corporation) was created by the County to facilitate the construction of a jail facility. The Corporation issued $44,800,000 Lease Revenue Bonds in June of 2007. The jail facility was completed in June of 2008. The County has entered into a lease-purchase agreement with the Corporation to purchase the jail facility and the County will make such lease payments in part from anticipated revenues paid to the County under federal inmate housing contracts between the County and both the U. S. Marshal Service and Immigration and Customs Enforcement (ICE). The lease payments received by the Corporation will be used to pay debt service on the Corporations bonds. The lease payments will be paid over a twenty year term as set forth below. Fiscal Year Ending 2012 2013 2014 2015 2016-2028 Total General Fund $1,721,740 3,443,480 3,443,480 3,443,480 44,765,240 $56,817,420

TAXING PROCEDURES AND TAX BASE ANALYSIS General One of the Countys principal sources of operational revenue and its principal source of funds for debt service payments is the receipts from ad valorem taxation. See COUNTY DEBT and SELECTED FINANCIAL DATA. The following is a recapitulation of (a) the Texas Property Tax Code, including methodology, limitations, remedies and procedures; (b) historical analysis of collection and trends of County tax receipts and provisions for delinquencies; (c) an analysis of the County tax base, including relative property composition, principal taxpayers and adequacy of the County tax base to service debt requirements; and, (d) taxation that may add to the County taxpayers tax costs. Property Tax Code and County-Wide Appraisal District The Texas Property Tax Code (the Property Tax Code) specifies the taxing procedures of all political subdivisions of the State, including the County. Provisions of the Property Tax Code are complex and are not fully summarized here.

20
HOU:3197101.2

The Property Tax Code requires, among other matters, county-wide appraisal and equalization of taxable property values and establishes in each county of the State an appraisal district with the responsibility for recording and appraising property for all taxing units within a county and an appraisal review board with responsibility for reviewing and equalizing the values established by the appraisal district. The Montgomery Central Appraisal District (the Appraisal District) has the responsibility for appraising property for all taxing units within Montgomery County, including the County. Such appraisal values are subject to review, change and approval by the Montgomery Central Districts Appraisal Review Board (the Appraisal Review Board). Property Subject to Taxation by the County Except for certain exemptions provided by Texas law, all real property, tangible personal property held or used for the production of income, mobile homes and certain categories of intangible personal property with a tax situs in the County are subject to taxation by the County. Principal categories of exempt property include, but are not limited to: property owned by the State or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law; certain household goods, family supplies, and personal effects; certain goods, wares and merchandise in transit; farm products owned by the producer; certain property of charitable organizations, youth development associations, religious organizations, and qualified schools; designated historical sites; and, most individually owned automobiles. In addition, the County may, by its own action, or shall, if required by voters at an election, exempt residential homesteads of persons sixty-five (65) years or older and of certain disabled persons to the extent deemed advisable by the Commissioners Court. The County is authorized by statute to disregard exemptions for the disabled and elderly if granting the exemption would impair the Countys obligation to pay tax supported debt incurred prior to adoption of the exemption by the County. Furthermore, the County must grant certain exemptions to disabled veterans or certain surviving dependents of disabled veterans. Such disabled veterans exemptions resulted in a loss of approximately $94,181,792 of the 2011 assessed value. Residential Homestead Exemptions The Property Tax Code authorizes the governing body of each political subdivision in the State to exempt up to twenty percent (20%) of the market value of residential homesteads from ad valorem taxation. Where ad valorem taxes have previously been pledged for the payment of debt, the governing body of a political subdivision may continue to levy and collect taxes against the exempt value of the homesteads until the debt is discharged, if the cessation of the levy would impair the obligations of the contract by which the debt was created. The adoption of a homestead exemption may be considered each year, but must be adopted by May 1. The County, in addition to the aforementioned mandatory veterans exemption, does give a flat $35,000 reduction to the appraised market value on residential homesteads of persons 65 years and older. Such homestead exemptions resulted in a loss of approximately $904,517,808 of the 2011 assessed value. The County does not grant any other exemptions to residential property. Freeport Goods and Goods-in-Transit Exemption Article VIII, Section 1-j of the Texas Constitution provides that goods, wares, merchandise, other tangible property and ores, other than oil, natural gas and other petroleum products, which have been acquired or brought into the State for assembling, storing, manufacturing, processing or fabricating and shipped out of the State within 175 days (freeport goods) are exempt from taxation unless action to tax was taken by the governing body of the political subdivision prior to April 1, 1990. Decisions to tax may be reversed in the future while decisions to exempt freeport property are not subject to reversal. Such freeport exemptions resulted in a loss of approximately $284,982,036 of the 2011 assessed value. Effective January 1, 2008, a Goods-in-Transit Exemption may apply to certain tangible personal property that is acquired in or imported into Texas for assembling, storing, manufacturing or fabricating purposes which are destined to be forwarded to another location in Texas not later than 175 days after acquisition or importation, so long as the location where said goods are detained is not directly or indirectly owned by the owner of the goods. The County, prior to January 1, 2008 (or in any year thereafter) may take action to allow taxation of goods-in-transit in which event the exemption would not be available. On September 10, 2007, the Commissioners Court adopted a resolution allowing the taxation of goods-in-transit and denying the Goods-in-Transit Exemption. Tax Abatement The County and other tax entities may enter into tax abatements agreements to encourage economic development. Prior to entering into a tax abatement agreement, each entity must adopt guidelines and criteria for establishing tax abatement, which each entity will follow in granting tax abatement to owners of property. The tax abatement

21
HOU:3197101.2

agreements may exempt from ad valorem taxation by each of the applicable taxing jurisdictions, including the County, for a period of up to ten (10) years, all or any part of any increase in the assessed valuation of property covered by the agreement over its assessed valuation in the year in which the agreement is executed, on the condition that the property owner make specified improvements or repairs to the property in conformity with the terms of the tax abatement. As of September 30, 2005, each taxing jurisdiction has discretion to determine terms for its tax abatement agreements without regard to the terms approved by other taxing jurisdictions. The County currently has entered into 22 tax abatement agreements with various companies covering a total of $331,769,090 of abated assessed value. Tax Increment Reinvestment Zone The County may agree to participate in one or more tax increment reinvestment zones ("TIRZ") established by a city for the purpose of financing the costs of specific public improvements with a TIRZ. The County and other taxing units levying taxes on property in a TIRZ may agree to contribute all or part of the taxes collected on the increased value of property within the TIRZ over its base value. The "base value" is the value of all property in the TIRZ in the year the TIRZ is established. Taxes received on the base value continue as revenue to the taxing entities general fund. Taxes received on the increment, or value in excess of the base value, are deposited into a special TIRZ fund for financing of public projects within the TIRZ and are not available for general County use. The County is participating in one TIRZ created by the City of Conroe (the Conroe TIRZ) and anticipates participation in another TIRZ created by the City of Willis. Under the Countys TIRZ participation agreement with the City of Conroe, the County has agreed to pay $0.30 of its tax rate on the incremental value created in the Conroe TIRZ. Since the inception of the Conroe TIRZ, the County has paid approximately $5,000,000 to the Conroe TIRZ. The Countys most recent annual payment was approximately $860,000. The County has approved a resolution indicating the Countys intent to participate in a TIRZ with the City of Willis; however, the County has thus far made no payments to such TIRZ. Pollution Control The Property Code also provides for an exemption from ad valorem taxation for certain pollution control property. Such pollution control exemption resulted in a loss of approximately $32,315,106 of assessed value on the 2011 tax roll. Valuation of Property for Taxation Generally, property in the County must be appraised by the Appraisal District at market value as of January 1 of each year. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the County in establishing its tax rolls and tax rate. Appraisals under the Property Tax Code are to be based on one hundred percent (100%) of market value, as such is defined in the Property Tax Code. The Property Tax Code permits land designated for agricultural use, open space or timberland to be appraised at its value based on the lands capacity to produce agricultural or timber products rather than at its fair market value. The Property Tax Code permits under certain circumstances that residential real property inventory held by a person in the trade or business be valued at the price all such property would bring if sold as a unit to a purchaser who would continue the business. Landowners wishing to avail themselves of the agricultural use, open space or timberland designation or residential real property inventory designation must apply for the designation and the appraiser is required by the Property Tax Code to act on each claimants right to the designation individually. A claimant may waive the special valuation as to taxation by some political subdivisions while claiming its valuation as to another. If a claimant receives the agricultural use designation and later loses it by changing the use of the property or selling it to an unqualified owner, the County can collect taxes based on the new use, including taxes for the previous three (3) years for agricultural use and taxes for the previous five (5) years for open space land and timberland. The total loss in value due to grants of agricultural use and open-space land appraisal from the 2011 tax roll was approximately $1,060,009,046. The Property Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three (3) years. It is not known what frequency of reappraisal will be utilized by the Appraisal District or whether reappraisals will be conducted on a zone or county-wide basis. The County does receive yearly a preliminary estimate of values to be used in its budget process, which provides both the value of new improvements as well as value of increase of current property. While such yearly estimates of appraised values may serve to

22
HOU:3197101.2

indicate the rate and extent of growth of taxable values within the County, they cannot be used for establishing a tax rate within the County until such time as the Appraisal District formally by certification includes such values on its appraisal roll. County and Taxpayer Remedies Under certain circumstances taxpayers and taxing units (such as the County) may appeal the orders of the Appraisal Review Board by filing a petition for review in State district court. In such event, the value of the property in question will be determined by the court or by a jury if requested by any party. Additionally, taxing units may bring suit against the Appraisal District to compel compliance with the Property Tax Code. The Property Tax Code sets forth notice and hearing procedures for certain tax rate increases which could result in the repeal of certain tax increases. The Property Tax Code also establishes a procedure for notice to property owners of reappraisals reflecting increased property value, appraisals which are higher than renditions, and appraisals of property not previously on an appraisal roll. Levy and Collection of Taxes The County is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the County, the rate of taxation is set by the Commissioners Court based upon the valuation of property within the County as of the preceding January 1 and the amount required to be raised for debt service, maintenance purposes and authorized contractual obligations. The Commissioners Court may under certain circumstances be required to advertise and hold a public hearing within the County on a proposed tax rate before the Commissioners Court can hold a public meeting to vote on the tax rate. If the tax rate adopted exceeds by more than 8% the rate needed to pay debt service and certain contractual obligations and to produce, when applied to the property which was on the prior years roll, the prior years total taxes levied for purposes other than debt service and such contractual obligations (the rollback rate), such excess portion of the levy may, subject to constitutional restrictions on the impairment of existing obligations, be repealed at an election within the County held upon petition of 10% of the Countys qualified voters and the tax rate adopted for the current year be reduced to the rollback rate. The County is prohibited from adopting a tax rate that exceeds the lower of the rollback tax rate or the effective tax rate until it has held two (2) public hearing on the proposed tax rate and has otherwise complied with the Property Tax Code. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. Taxes are due on receipt of the tax bill, and become delinquent after January 31 of the following year, or on the first day of the calendar month next following the expiration of twenty-one (21) days after mailing of the tax bills, whichever occurs later. A delinquent tax account incurs an initial penalty of six percent (6%) of the amount of the tax and accrues an additional penalty of one percent (1%) per month up to July 1, at which time the total penalty becomes twelve percent (12%). In addition, delinquent taxes accrue interest at one percent (1%) per month. If the tax is not paid by April 1 (on business personal property) and by July 1 (on real property), an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the County. The Property Tax Code also makes provision for the split payment of taxes, discounts for early payments, partial payments of taxes and the postponement of the delinquency date of taxes under certain circumstances. The County does not permit such payments, except for those property owners who are over the age of 65 as provided in the Property Tax Code. Countys Rights in the Event of Tax Delinquencies Taxes levied by the County are a personal obligation of the owner of the property. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the County, having power to tax the property. The Countys tax lien is on a parity with tax liens of such other taxing units (see COUNTY DEBT Estimated Overlapping Debt Statement). A tax lien on real property takes priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien, however, whether a lien of the United States is on a parity with or takes priority over a tax lien of the County is determined by applicable federal law. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest.

23
HOU:3197101.2

At any time after taxes on property become delinquent, the County 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 County must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption right (a taxpayer may redeem property within six months for non-homestead property and within two years of foreclosure for homestead) or by bankruptcy proceedings which restrict the collection of taxpayer debts. Tax Rate Limitations General Operation; Limited Tax Bonds, Time Warrants and Certificates of Obligation . . . The Texas Constitution (Article VIII, Section 9) imposes a limit of $0.80 per $100 assessed valuation for all purposes of a countys General Fund, Permanent Improvement Fund, Road and Bridge Fund and Jury Fund, including debt service on bonds, warrants, certificates of obligation or other debt issued against such funds. Administratively, the Attorney General of Texas will not approve limited tax obligations in an amount which produces debt service requirements exceeding that which can be paid from $0.40 of the foregoing $0.80 maximum tax rate calculated at 90% collection. The Obligations are issued as limited tax obligations payable from this Constitutional tax. Road Bonds . . . Unlimited tax rate authorized for debt service by Article III, Section 52 of the Texas Constitution; however, total debt cannot exceed 25% of assessed valuation. The Road Bonds are unlimited tax road bonds. Road Maintenance (Special Road and Bridge Tax) . . . Tax rate imposed by Article VIII, Section 9 of the Texas Constitution and by statute as $0.15 per $100 assessed valuation, no part of which may be used for debt service. The County currently does not levy a tax under this provision. Farm-To-Market and Flood Control Purposes . . . Tax rate imposed by Article VIII, Section 1-a of the Texas Constitution and by statute as $0.30 per $100 assessed valuation after the mandatory $3,000 homestead exemption, no allocation prescribed by statutes between debt service and maintenance. The County currently does not levy a tax under this provision.

[Remainder of page intentionally left blank]

24
HOU:3197101.2

Historical Analysis of Tax Collection Source: For Tax Years 2001 through 2009, Montgomery County, Texas Comprehensive Annual Financial Report Fiscal Year Ended September 30, 2010. For Tax Year 2010 and 2011, unaudited estimates provided by the County. Tax Rate Per $100 of Assessed Valuation 0.4710 0.4710 0.4828 0.4963 0.4963 0.4913 0.4888 0.4838 0.4838 0.4838 0.4838

Tax Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Adjusted Taxable Assessed Valuation $14,282,028,148 16,289,381,371 17,592,455,375 18,968,230,832 19,150,202,773 23,371,824,109 26,780,335,911 30,282,116,745 32,645,245,355 33,746,741,734 35,119,747,375

Total Tax Levy $67,447,935 77,043,931 85,764,910 94,513,506 104,074,236 114,138,148 129,601,440 144,971,850 155,635,330 160,613,960 166,759,322

Current Tax Collections(a) $65,714,723 75,232,037 83,960,577 92,527,246 102,113,249 112,640,155 127,903,113 142,781,596 153,508,163 158,449,175 90,137,754(c)

Percent of Levy Collected 97.4 97.6 97.9 97.9 98.1 98.7 98.7 98.5 98.6 98.7 54.1(c)

Delinquent Tax Collections $1,608,717 1,784,876 1,839,076 1,856,421 1,788,843 1,771,160 1,840,224 2,059,087 1,627,672 1,630,879 767,914

Total Tax Collections $67,323,440 77,016,913 85,799,653 94,383,667 103,902,092 114,411,315 129,743,337 144,840,683 155,135,835 160,080,054 90,875,668(c)

Percent of Total Tax Collections to Tax Levy 99.8 100.0 100.0 99.9 99.8 100.2 100.1 99.9 99.7 99.7 54.5(c)

Percent of Outstanding Delinquent Delinquent Taxes to Taxes Tax Levy $6,471,525 9.6 6,587,183 8.5 6,109,116 7.1 6,043,917 6.4 5,840,603 5.6 5,578,532 4.9 6,054,333 4.7 5,920,754 4.1 6,240,058 4.1 6,668,723 4.2
(c) (c)

Fiscal Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(a) Taxes levied in any year which are collected from October 1 through June 30 are shown as current collections. Such amounts include collections of the current levy after February 1, which is the date taxes become legally delinquent. (b) Value may differ from that shown in the Countys financial statements and elsewhere in this Official Statement due to subsequent adjustments. (c) Collections in process. Partial year collections through December 31, 2011.

25
HOU:3197101.2

Delinquent Tax Collection Procedures In addition to the legal procedures and penalties described under Countys Rights in the Event of Tax Delinquencies, the County has retained a Delinquent Tax Attorney on a contract basis to file suit to collect delinquent taxes due the County. The fees due such attorney for acting as Delinquent Tax Attorney are payable from an additional penalty imposed upon the delinquent taxpayer, not to exceed 20% of the tax due. Tax Rate Distribution Tax Years General Fund Special Revenue Fund Debt Service Fund 2011 $0.3629 0.0464 0.0745 $0.4838 2010 $0.3576 0.0464 0.0798 $0.4838 2009 $0.3647 0.0464 0.0727 $0.4838 2008 $0.3566 0.0495 0.0777 $0.4838 2007 $0.3630 0.0478 0.0780 $0.4888

Analysis of Tax Base - Tax Base Distribution 2011 Tax Roll Amount $25,849,071,284 2,733,613,988 548,771,708 4,399,809,073 316,109,650 581,087,547 3,028,697,002 193,701,598 139,780,770 2,535,174,002 $40,325,816,622 5,206,069,247 $35,119,747,375 2010 Tax Roll Amount $25,111,558,913 2,786,383,931 502,283,240 4,284,316,647 321,940,500 560,032,268 2,820,592,739 197,570,942 132,023,399 2,445,647,226 $39,162,349,805 5,415,608,071 $33,746,741,734 2009 Tax Roll Amount $23,886,272,622 2,884,574,449 454,277,104 4,125,702,424 159,485,720 536,632,850 3,076,214,597 182,733,235 128,065,618 2,108,191,541 $37,542,150,160 4,896,904,805 $32,645,245,355

Type of Property Residential Acreage, Lots & Tracts Farm & Ranch Industrial & Commercial Oil, Gas, Minerals Utilities Business Personal Special Inventory Other Personal Exempt Property Total Assessed Value Less Exemption Total Taxable Value (a)

% 64.12% 7.11% 1.28% 10.94% 0.82% 1.43% 7.20% 0.50% 0.34% 6.24% 100.00%

% 63.63% 7.68% 1.21% 10.99% 0.42% 1.43% 8.19% 0.49% 0.34% 5.62% 100.00%

64.10% 6.78% 1.36% 10.91% 0.78% 1.44% 7.51% 0.48% 0.35% 6.29% 100.00%

______________________________ (a) Represents values initially certified by the Montgomery Central Appraisal District; may have been subsequently adjusted.

[Remainder of page intentionally left blank]

26
HOU:3197101.2

Top Ten Principal Taxpayers Provided by the Montgomery Central Appraisal District. Certain of the top ten principal taxpayers may own additional property that is not included in the assessed value figures shown in this table as a result of the way such property is accounted for on the Appraisal District tax rolls.
2011 Tax Roll $608,224,510 246,294,238 209,837,020 185,768,780 (a) 145,237,860 137,104,330 126,194,400 108,303,960 106,393,551 187,889,850 (a) (a) (a) (a) (a) (a) (a) $2,061,248,499 5.87% 2010 Tax Roll $201,313,780 184,498,658 78,352,940 176,376,860 58,159,755 (a) 137,104,330 (a) (a) (a) 174,964,256 120,287,730 55,634,110 74,406,380 (a) (a) (a) (a) (a) $1,261,098,799 3.74% 2009 Tax Roll $185,446,743 193,731,273 77,999,490 (a) 61,956,137 (a) (a) (a) (a) (a) 155,411,116 146,262,620 64,095,700 59,619,970 57,864,730 54,712,691 (a) (a) (a) $1,057,100,470 3.23%

Taxpayer Entergy Texas Inc. Wal-Mart Real Estate Trust/Sams Club Consolidated Communications of Texas Co. Denbury Onshore LLC The Woodlands Mall Associates Centerpoint Energy Houston Electric Anadarko Realty Co. Southwestern Bell Telephone Co. BSNF Railway Company McKesson Corporation The Woodlands Land Development L.P. Columbia Conroe Regional Medical Center/Kingwood Medical Plaza Huntsman Petrochemical Corp. Canrig Drilling Technologies Wapiti Operating LLC Hughes Christensen Co. Devon Energy Operating Company Inland American Lodging Woodlands L.P. Total Percentage of Respective Certified Taxable Valuation

Type of Property Electric Utility Retail Communications/Utility Oil and Gas Retail Electric Utility Real Estate Telephone Utility Transportation Manufacturing Land Development Medical Industrial Oil/Gas Exploration Oil/Gas Exploration Oil/Gas Exploration Oil/Gas Exploration Hotel/Conference Center

______________________________ (a) Not a top ten taxpayer in such year.

Tax Adequacy Average Annual Debt Service Requirements (2012-2039) ................................................... $0.077 Tax Rate on the 2011 Certified Taxable Assessed Valuation @ 95% collection produces.............................................................................................. Maximum Annual Debt Service Requirement (2013) ........................................................... $0.118 Tax Rate on the 2011 Certified Taxable Assessed Valuation @ 95% collection produces.............................................................................................. $25,438,123 $25,690,095 $38,928,998 $39,369,237

27
HOU:3197101.2

SELECTED FINANCIAL DATA Historical Operations of the Countys General Fund The following is a condensed statement of revenues and expenditures of the Countys General Fund for the past five fiscal years. The inclusion of the following table is not intended to imply that any revenues of the County, other than receipts from ad valorem taxes provided in the Orders, are pledged to pay principal and interest on the Obligations. General Fund Fiscal Year Ended September 30,
2011(a) REVENUES: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous Total Revenues EXPENDITURES: Current: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Culture and Recreation Conservation Public Transportation Miscellaneous Total Expenditures Excess/(Deficiency) Revenues Over Expenditures OTHER FINANCING SOURCES (USES) Transfers In Transfers Out Capital Lease Financing Total Other Financing Sources (Uses) Net Changes in Fund Balance Fund Balance, October 1 Change in Accounting Principle Fund Balance, September 30 $120,637,981 1,645,839 14,044,338 10,304,476 1,794,972 423,585 15,339,390 18,958,951 94,106 1,422,321 184,665,959 2010 $119,050,409 1,359,468 13,285,843 10,382,612 521,482 431,308 13,410,617 21,085,088 84,296 2,208,455 181,819,578 2009 $ 9,089,627 1,364,234 12,444,656 6,521,185 486,253 567,010 11,806,882 23,895,939 186,594 1,808,654 168,171,034 2008 $ 8,955,742 1,375,221 13,376,504 5,533,821 449,802 2,149,826 10,968,433 3,566,886 125,152 1,390,327 137,891,714 2007 $86,721,116 1,363,580 14,529,676 4,052,777 282,712 2,293,789 10,237,033 1,607,241 100,719 1,420,777 122,609,420

25,521,382 15,951,287 2,570,490 1,344,669 5,983,660 42,038,979 61,288,392 8,750,570 8,389,181 542,138 531,937 659,650 173,572,333

14,909,262 14,791,453 2,260,429 1,410,441 5,877,896 43,495,733 57,954,496 5,760,072 531,627 1,683,887 148,675,296

16,216,725 13,675,907 2,131,350 1,258,713 5,624,961 44,144,809 52,813,275 5,757,396 511,141 1,156,114 143,290,391

12,905,900 12,020,750 1,985,918 1,606,046 5,251,827 25,448,843 61,944,932 6,369,418 481,849 1,070,696 129,086,179

12,178,369 10,958,487 1,864,419 1,373,213 4,966,523 22,477,341 43,108,422 4,755,954 449,468 2,846,822 104,979,018

11,093,626

33,144,282

24,880,643

8,805,535

17,630,402

11,234,219 (20,074,838) 1,084,046 (7,756,573) 3,337,053 43,940,508 9,104,764 $56,382,325

918,898 (25,262,082) 125,403 (24,217,781) 8,926,501 35,014,007

4,261,744 (20,404,477) 428,465 (15,714,268) 9,166,375 25,847,632

1,032,407 (17,281,134) 16,515,427 266,700 9,072,235 20,763,060 (3,987,663) $25,847,632

7,653,868 (21,940,546) 567,596 (13,719,082) 3,911,320 16,851,740

$43,940,508

$35,014,007

$20,763,060

_______________________________
Source: The Countys audited financial statements (a) Unaudited. The County expects delivery of its 2011 audited financial statements on or about March 31, 2012.

28
HOU:3197101.2

Special Revenue Funds The Special Revenue Funds are the funding source for annual road and bridge construction and maintenance. The County is divided into four precincts, each of which is provided with a separate, annual Road and Bridge Fund Budget. Each precinct Road and Bridge Budget is administered by the County Commissioner elected from that precinct, subject to approval of the Commissioners Court. The primary sources of revenues for the Special Revenue Funds include ad valorem taxes and auto registration licenses and grants. The table below summarizes the revenues and expenditures of the Special Revenue Funds for the past five fiscal years, including the Road and Bridge Fund, as reported in the Countys Annual Financial Reports. The Special Revenue Funds are not available to pay debt service on the Obligations.
Fiscal Year Ended September 30, 2011 REVENUES: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Fines and Forfeitures Miscellaneous Total Revenues EXPENDITURES: CURRENT OPERATING General Administration Judicial Legal Services Public Safety Health and Welfare Culture and Recreation Conservation Public Transportation Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES) Transfers In Transfers Out Capital Lease Financing Total Other Financing Sources Net Change in Fund Balance Fund Balance, October 1 Change in Accounting Principle
(a)

2010 $15,188,608 6,192,752 1,639,178 9,416,042 1,647,124 42,054 3,096,212 2,963,259 1,360,491 41,545,720

2009 $15,140,793 6,752,702 1,582,833 27,557,653 1,608,201 49,183 319,772 3,005,625 932,691 56,949,453

2008 $13,013,191 6,438,708 1,326,060 19,643,062 1,478,107 242,843 169,827 1,901,412 2,187,468 46,400,678

2007 $11,471,034 6,539,568 389,963 12,229,811 1,400,351 159,366 148,852 1,832,655 664,126 34,835,726

$15,671,736 5,797,396 2,279,052 21,957,813 134,502 29,823 357,992 3,408,916 3,632,860 53,270,091

582,624, 9,561,301 453,920 3,800,534 14,823,040 90,868 418,345 33,214,547 62,945,178 (9,675,087)

848,796 8,865,700 455,788 500,000 3,450,850 6,760,293 8,393,594 368,022 25,913,519 55,556,562 (14,010,842)

831,646 8,119,808 418,861 2,996,076 24,479,241 8,008,564 334,147 20,469,397 65,657,740 (8,708,287)

626,519 6,483,955 411,911 2,539,767 11,482,218 7,314,312 321,959 18,991,837 48,172,478 (1,771,800)

115,045 6,221,345 363,820 2,076,202 4,127,271 7,812,017 296,299 17,161,732 38,173,731 (3,338,005)

6,179,269 (646,248) 113,756 5,646,777 (4,028,310) 32,990,267 (9,104,764)

18,293,585 (1,308,623) 3,000,000 19,984,962 5,974,120 27,016,147 -

15,785,356 (3,435,321) 704,683 13,054,718 4,346,431 22,669,716

16,969,998 (2,758,501) 83,594 14,295,091 12,523,291 6,158,762 3,987,663

21,890,020 (21,543,946) 3,386,301 3,732,375 394,370 5,764,392

Fund Balance, September 30 $19,857,193 $32,990,267 $27,016,147 $22,669,716 __________________________________________ Source: The Countys audited financial statements. (a) Unaudited. The County expects delivery of its 2011 audited financial statements on or about March 31, 2012.

$6,158,762

29
HOU:3197101.2

Debt Service Funds The Debt Service Funds are the funding source for annual payments of principal and interest on the Countys outstanding debt. The primary source of revenue for the Debt Service Funds is ad valorem taxes. The table below summarizes the revenues and expenditures of the Debt Service Funds, as reported in the year-end financial statements for the past five years. Fiscal Year Ended September 30,
2011 REVENUES: Taxes Intergovernmental Interest Total Revenue EXPENDITURES: Debt Service: Principal Retirement Interest and Fiscal Charges Issuance Costs Total Expenditures Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES) Transfers In Issuance of Debt Issuance of Refunding Bonds Premium on Debt Issuance Payment to Refunded Bond Escrow Agent Discount on Debt Issuance Total Other Financing Sources (Uses) Net Change in Fund Balance Fund Balances, October 1 3,706,583 3,477,716 10,761,380 4,305,956 (1,445,276) 12,206,656 10,007,391 7,645,466 4,561,190 1,983,202 1,927,590 2,633,600 1,119,335 386,836 2,246,764 $2,633,600
(a)

2010 $23,302,590 270,461 23,573,051

2009 $23,262,487 173,329 23,435,816

2008 $20,683,280 96,163 20,779,443

2007 $19,111,318 44,437 $19,155,755

$26,407,239 7,962,395 62,162 34,431,796

11,304,862 23,355,552 250 34,660,663 (228,868)

7,916,899 20,511,040 896,344 29,324,283 (5,751,232)

6,557,918 18,713,749 526,074 25,797,741 (2,361,925)

4,598,741 16,021,976 214,338 20,835,055 (55,612)

5,305,000 13,989,627 593,627 19,888,254 (732,499)

3,443,480 263,103

3,885,758 1,167,562 43,380,000 1,117,534 (44,643,876) (601,022)

3,074,923 6,364,713 567,755

1,939,219 9,855,000 400,427 (10,211,444)

510,395 41,495,000 940,880 (41,706,307) (120,633)

Fund Balances, September 30 $14,239,096 $10,761,380 $12,206,656 $4,561,190 ________________________ Source: The Countys audited financial statements. (a) Unaudited. The County expects delivery of its 2011 audited financial statements on or about March 31, 2012.

Pension Fund The County provides pension, disability and death benefits for all of its full-time and part time regular employees through a non traditional, joint contributory, defined benefit plan in the statewide Texas County and District Retirement System (TCDRS). Under the State law governing TCDRS, the contribution rate of the County is adopted annually based on an actuarially determined rate. The contribution rate for the county was 10.94% for the calendar year 2011. For the accounting year ended September 30, 2011, both the pension cost of the TCDRS plan and the Countys actual contributions to the plan were $15,659,116. The deposit rate payable by employee members was 6% for the calendar year 2011. For more information refer to Note 13 of Appendix B Excerpts from Montgomery Countys Audited Financial Statements for the Fiscal Year ended September 30, 2010. 30
HOU:3197101.2

THE COUNTY Administration of the County The officials having responsibility for the administration of the County are the County Judge and the four County Commissioners who comprise the Commissioners Court. Among its duties as the governing body of the County, Commissioners Court approves the Countys budget, determines the Countys tax rates, approves contracts, calls elections, and determines when to issue bonds or other obligations. Each Commissioner represents one of the four precincts into which the County is divided and is elected by the voters of such precinct for a four-year term. The County Judge is the presiding officer of the Commissioners Court and is elected for a four-year term by the voters of the County. Judge Alan B. Sadler has served as County Judge since 1990. Other officials having responsibility for the financial administration of the County are the County Tax AssessorCollector, County Treasurer and County Auditor. The County Tax Assessor/Collector, J. R. Moore, Jr., was appointed County Tax Assessor/Collector in April 1987, and elected to such post in 1988, 1992, 1996, 2000, 2004 and again in 2008 to serve a four-year term. Mr. Moore attended North Texas State University and the University of Houston, majoring in Political Science/Government. Mr. Moore received his state certification as a Professional Tax-Assessor Collector in 1991. The County Treasurer, Martha N. Gustavsen, was elected County Treasurer in 2007 and again in 2011 to serve a four-year term. Ms. Gustavsen has served as County Treasurer since 1987. She attended Alvin Junior College, majoring in Accounting. The County Auditor, Phyllis L. Martin, was appointed County Auditor on January 1, 2007, after serving as an assistant county auditor since 2003 and was reappointed County Auditor in 2009 and 2011 for two year terms. Ms. Martin earned a B.B.A. in Accounting and a Masters in Accountancy from the University of Houston. Commissioners Court Commissioner Alan B. Sadler Mike Meador Craig Doyal Ernest E. Chance Ed Rinehart Consultants Bond Counsel ........................................................................................... Fulbright & Jaworski L.L.P. Houston, Texas Financial Advisor ................................................................................................................ BOSC, Inc. Houston, Texas Auditors (Certified Public Accountants) ............................. Hereford, Lynch, Sellars, & Kirkham, PC Conroe, Texas Disclosure Counsel................................................................................................Andrews Kurth LLP Houston, Texas TAX MATTERS Tax Exemption The delivery of the Obligations is subject to the opinions of Bond Counsel to the effect that interest on the Obligations for federal income tax purposes (1) will be excludable from gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date of such opinion (the Code), pursuant to section 103 of the Code and existing regulations, published rulings, and court decisions, and (2) will not be included in computing Position County Judge Commissioner - Precinct 1 Commissioner - Precinct 2 Commissioner - Precinct 3 Commissioner - Precinct 4 Years Served 22 18 9 25 12 Terms Expire December 31 2014 2012 2014 2012 2014

31
HOU:3197101.2

the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations. The statutes, regulations, rulings, and court decisions on which such opinions are based are subject to change. Interest on the Obligations owned by a corporation will be included in such corporation's adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a qualified mutual fund, a real estate investment trust, a real estate mortgage investment conduit, or a financial asset securitization investment trust (FASIT). A corporation's alternative minimum taxable income is the basis on which the alternative minimum tax imposed by Section 55 of the Code will be computed. In rendering the foregoing opinions, Bond Counsel will rely upon representations and certifications of the County made in a certificate dated the date of delivery of the Obligations pertaining to the use, expenditure, and investment of the proceeds of the Obligations and will assume continuing compliance by the County with the provisions of the Orders subsequent to the issuance of the Obligations. The Orders contain covenants by the County with respect to, among other matters, the use of the proceeds of the Obligations and the facilities financed therewith by persons other than state or local governmental units, the manner in which the proceeds of the Obligations are to be invested, the periodic calculation and payment to the United States Treasury of arbitrage profits from the investment of proceeds, and the reporting of certain information to the United States Treasury. Failure to comply with any of these covenants may cause interest on the Obligations to be includable in the gross income of the owners thereof from the date of the issuance of the Obligations. Bond Counsels opinions are not a guarantee of a result, but represent its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the County described above. No ruling has been sought from the Internal Revenue Service (the IRS) with respect to the matters addressed in the opinions of Bond Counsel, and Bond Counsels opinions are not binding on the IRS. The IRS has an ongoing program of auditing the tax-exempt status of the interest on tax-exempt obligations. If an audit of the Obligations is commenced, under current procedures the IRS is likely to treat the County as the taxpayer, and the owners of the Obligations would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Obligations, the County may have different or conflicting interests from the owners of the Obligations. Public awareness of any future audit of the Obligations could adversely affect the value and liquidity of the Obligations during the pendency of the audit, regardless of its ultimate outcome. Except as described above, Bond Counsel expresses no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Obligations. Prospective purchasers of the Obligations should be aware that the ownership of tax-exempt obligations such as the Obligations may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Prospective purchasers should consult their own tax advisors as to the applicability of these consequences to their particular circumstances. Existing law may change to reduce or eliminate the benefit to bondholders of the exclusion of interest on the Obligations from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Obligations. Prospective purchasers of the Obligations should consult with their own tax advisors with respect to any proposed or future changes in tax law. Tax Accounting Treatment of Discount and Premium on Certain Obligations The initial public offering price of certain Obligations (the "Discount Obligations") may be less than the amount payable on such Obligations at maturity. An amount equal to the difference between the initial public offering price of a Discount Obligations (assuming that a substantial amount of the Discount Obligations of that maturity and same stated interest rate are sold to the public at such price) and the amount payable at maturity constitutes original issue discount to the initial purchaser of such Discount Obligation. A portion of such original issue discount allocable to the holding period of such Discount Obligation by the initial purchaser will, upon the disposition of such Discount Obligation (including by reason of its payment at maturity), be treated as interest excludable from gross income,

32
HOU:3197101.2

rather than as taxable gain, for federal income tax purposes, on the same terms and conditions as those for other interest on the Obligations described above under "Tax Exemption." Such interest is considered to be accrued actuarially in accordance with the constant interest method over the life of a Discount Obligation, taking into account the semiannual compounding of accrued interest, at the yield to maturity on such Discount Obligation and generally will be allocated to an initial purchaser in a different amount from the amount of the payment denominated as interest actually received by the initial purchaser during the tax year. However, such interest may be required to be taken into account in determining the alternative minimum taxable income of a corporation, for purposes of calculating a corporation's alternative minimum tax imposed by Section 55 of the Code, and the amount of the branch profits tax applicable to certain foreign corporations doing business in the United States, even though there will not be a corresponding cash payment. In addition, the accrual of such interest may result in certain other collateral federal income tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, S corporations with subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, individuals otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, taxexempt obligations. Moreover, in the event of the redemption, sale or other taxable disposition of a Discount Obligation by the initial owner prior to maturity, the amount realized by such owner in excess of the basis of such Discount Obligation in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Discount Obligation was held) is includable in gross income. Owners of Discount Obligations should consult with their own tax advisors with respect to the determination of accrued original issue discount on Discount Obligations for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Discount Obligations. It is possible that, under applicable provisions governing determination of state and local income taxes, accrued interest on Discount Obligations may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment. The initial public offering price of certain Obligations (the "Premium Obligations") may be greater than the amount payable on such Obligations at maturity. An amount equal to the difference between the initial public offering price of a Premium Obligation (assuming that a substantial amount of the Premium Obligations of that maturity and same stated interest rate are sold to the public at such price) and the amount payable at maturity constitutes premium to the initial purchaser of such Premium Obligations. The basis for federal income tax purposes of a Premium Obligation in the hands of such initial purchaser must be reduced each year by the amortizable bond premium, although no federal income tax deduction is allowed as a result of such reduction in basis for amortizable bond premium. Such reduction in basis will increase the amount of any gain (or decrease the amount of any loss) to be recognized for federal income tax purposes upon a sale or other taxable disposition of a Premium Obligation. The amount of premium which is amortizable each year by an initial purchaser is determined by using such purchaser's yield to maturity. Purchasers of the Premium Obligations should consult with their own tax advisors with respect to the determination of amortizable bond premium on Premium Obligations for federal income tax purposes and with respect to the state and local tax consequences of owning and disposing of Premium Obligations. CONTINUING DISCLOSURE OF INFORMATION In the Orders, the County has made the following agreements for the benefit of the holders and beneficial owners of the Obligations. The County is required to observe the agreements for so long as it remains obligated to advance funds to pay the Obligations. Under the agreement, the County will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rule Making Board (MSRB). This information will be available free of charge from the MSRB via the Electronic Municipal Market Access (EMMA) system at www.emma.msrb.org.

In order to provide certain continuing disclosure with respect to the Obligations in accordance with Rule 15c2-12 of the United States Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time (Rule 15c2-12), the County has entered into a Disclosure Dissemination Agent Agreement (Disclosure Dissemination Agreement) for the benefit of the Holders of the Obligations with Digital Assurance Certification, L.L.C. (DAC), under which the County has designated DAC as Disclosure Dissemination Agent. 33
HOU:3197101.2

The Disclosure Dissemination Agent has only the duties specifically set forth in the Disclosure Dissemination Agreement. The Disclosure Dissemination Agents obligation to deliver the information at the times and with the contents described in the Disclosure Dissemination Agreement is limited to the extent the County has provided such information to the Disclosure Dissemination Agent as required by this Disclosure Dissemination Agreement. The Disclosure Dissemination Agent has no duty with respect to the content of any disclosures or notice made pursuant to the terms of the Disclosure Dissemination Agreement. The Disclosure Dissemination Agent has no duty or obligation to review or verify any information in the Annual Report, Audited Financial Statements, notice of Notice Event or Voluntary Report, or any other information, disclosures or notices provided to it by the County and shall not be deemed to be acting in any fiduciary capacity for the County, the Holders of the Obligations or any other party. The Disclosure Dissemination Agent has no responsibility for the Countys failure to report to the Disclosure Dissemination Agent a Notice Event or a duty to determine the materiality thereof. The Disclosure Dissemination Agent shall have no duty to determine or liability for failing to determine whether the County has complied with the Disclosure Dissemination Agreement. The Disclosure Dissemination Agent may conclusively rely upon certifications of the County at all times. Annual Reports The County will annually provide certain updated financial information and operating data to the MSRB annually in electronic format as prescribed by the MSRB. The information to be updated includes all quantitative financial information and operating data with respect to the County as follows: (i) annual audited financial statements of the County set forth in APPENDIX B of this Official Statement and (ii) information of the general type included in this Official Statement under the headings INVESTMENT AUTHORITY AND INVESTMENT OBJECTIVES OF THE COUNTY, DEBT SERVICE REQUIREMENTS, COUNTY DEBT (except Estimated Overlapping Debt Statement), TAXING PROCEDURES AND TAX BASE ANALYSIS and SELECTED FINANCIAL DATA. The County will update and provide this information within six months after the end of each fiscal year. The County may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12 (the Rule). The updated information will include audited financial statements, if the County commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the County will provide unaudited financial statements by the required time, and will provide audited financial statements when and if the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix B or such other accounting principles as the County may be required to employ from time to time pursuant to state law or regulation. The Countys current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 of each year thereafter, unless the County changes its fiscal year. If the County changes its fiscal year, it will notify the MSRB. Material Event Notices The County shall notify the MSRB, in a timely manner not in excess of ten business days after the occurrence of the event, of any of the following events with respect to the Obligations: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Obligations; (7) modifications to rights of holders of the Obligations, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Obligations, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the County; (13) the consummation of a merger, consolidation, or acquisition involving the County or the sale of all or substantially all of the assets of the County, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of trustee, if material. The County shall notify the MSRB in an electronic format prescribed by the MSRB, in a timely manner, of any failure by the County to provide financial information or operating data in accordance with the Rule.

34
HOU:3197101.2

For these purposes, any event described in (12) in the immediately preceding paragraph is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the County in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the County, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the County. In addition, the County will provide timely notice of any failure by the County to provide information, data or financial statements in accordance with its agreement described above under - Annual Reports. The County will provide each notice described in this paragraph to the MSRB. Limitations and Amendments The County has agreed to update information and to provide notices of material events only as described above. The County has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition or prospects or agreed to update any information that is provided, except as described above. The County makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Obligations at any future date. The County disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Obligations may seek a writ of mandamus to compel the County to comply with its agreement. The continuing disclosure agreement may be amended by the County from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law or a change in the identity, nature, status or type of operations of the County, but only if (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell Obligations in the primary offering of the Obligations in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (a) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of the Orders that authorizes such an amendment) of the outstanding Obligations consent to such amendment or (b) a person that is unaffiliated with the County (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interest of the holders and beneficial owners of the Obligations. The County may also amend or repeal the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Obligations in the primary offering of the Obligations. If the County amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under Annual Reports an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and operating data provided. Compliance with Prior Undertakings The County has complied in all material respects with its previous continuing disclosure agreements made in accordance with the Rule. The County expects delivery of its 2011 audited financial statements on or about March 31, 2012.

VERIFICATION OF ARITHMETICAL COMPUTATIONS The arithmetical accuracy of certain computations included in the schedules provided by BOSC, Inc. on behalf of the County relating to (a) computation of the sufficiency of the anticipated receipts from the Federal Securities, together with the initial cash deposit, if any, to pay, when due, the principal, interest and early redemption premium requirements, if any, of the Refunded Obligations, and (b) computation of the yields on Federal Securities and the Bonds were verified by Grant Thornton LLP, certified public accountants. Such computations were completed using certain assumptions and information provided by BOSC, Inc. on behalf of the County. Grant Thornton LLP has restricted its procedures to recalculating the arithmetical accuracy of certain computations and has not made any

35
HOU:3197101.2

study or evaluation of the assumptions and information on which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. The report will be relied upon by Bond Counsel in rendering its opinions with respect to the excludability from federal income taxation of interest on the Obligations and with respect to the defeasance of the Refunded Obligations.

OTHER CONSIDERATIONS Environmental Regulations The County is subject to the environmental regulations of the State and the United States. These regulations are subject to change, and the County may be required to expend substantial funds to meet the requirements of such regulatory authorities. Air Quality Air quality control measures required by the United States Environmental Protection Agency (the EPA and the Texas Commission on Environmental Quality (TCEQ) may impact new industrial, commercial and residential development in Houston and adjacent areas. Under the Clean Air Act (CAA) Amendments of 1990, the eight county Houston-Galveston area (HGB area) Harris, Galveston, Brazoria, Chambers, Fort Bend, Waller, Montgomery and Liberty counties was designated by the EPA in 2008 as a severe ozone nonattainment area. Such areas are required to demonstrate progress in reducing ozone concentrations each year until the EPA 8-hour ozone standards are met. Both the TCEQ and EPA took comments on the submission of a new State Implementation Plan (SIP) which would account for the severe classification of the HGB area, and on March 10, 2010, the Commission adopted a series of SIP revisions and associated rule revisions for the HGB nonattainment area for the 1997 eighthour ozone standard. New designation submittals to comply with the newly lowered EPA ozone standard are expected to keep the HGB area in severe nonattainment. To provide for reductions in ozone concentrations to reach the newly lowered ozone standard, the EPA and the TCEQ will continue to impose increasingly stringent limits on sources of air emissions and require any new source of significant air emissions to provide for a net reduction of air emissions. If the HGB area fails to demonstrate progress in reducing ozone concentrations or fails to meet EPAs standards, EPA may impose a moratorium on the awarding of federal highway construction grants and other federal grants for certain public works construction projects, as well as severe emissions offset requirements on new major sources of air emissions for which construction has not already commenced. Furthermore, after significant legal and political wrangling, in September 2011 the EPA announced it would proceed with area designations under the new 2008 eight-hour ozone standards, starting with the recommendations made by the states back in 2009. Therefore, since the Governor recommended that the HGB Area be re-designated as non-attainment under the 2008 eight-hour ozone standard, it is unclear how the EPA will rule on the HGBs non-attainment status under the updated standard. The current designation as severe non-attainment and uncertainty over the final EPA designation could negatively impact the economy and communities in the greater Houston area. Groundwater Conservation District In 2001, the Texas Legislature created the Lone Star Groundwater Conservation District (the Conservation District), with boundaries that are co-terminus with the boundaries of the County, to regulate the withdrawal of groundwater within the Conservation District in order to provide for the conservation, preservation, protection, recharging, and prevention of waste of Conservation District groundwater. Conservation District regulations that require conversion to surface water can be costly to industries, municipalities and other groundwater well operators since the process of converting from a groundwater supply to a surface water supply can result in substantial capital expenditures. As a result, the per unit cost of supplying surface water is substantially higher due to the cost of treatment. As a result of the measures implemented by the Conservation District, the cost of development and ongoing operations in the County may be more expensive as compared to other geographic areas.

36
HOU:3197101.2

GENERAL CONSIDERATIONS Sources and Compilation of Information The information contained in this Official Statement has been obtained primarily from the County and from other sources believed to be reliable. No representation is made as to the accuracy or completeness of the information derived from sources other than the County. The summaries of the statutes, orders, policies, and other related documents are included herein subject to all of the provisions of such documents. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Updating of Official Statement The County will keep the Official Statement current by amendment or sticker to reflect material changes in the affairs of the County and, to the extent that information comes to its attention, to the other matters described in the Official Statement, until the delivery of the Obligations to the Underwriters. All changes in the affairs of the County and other matters described in the Official Statement subsequent to the delivery of the Obligations to the Underwriters and all information with respect to the resale of the Obligations shall be the responsibility of the Underwriters except as described herein under CONTINUING DISCLOSURE OF INFORMATION. This Official Statement was duly authorized and approved by the Commissioners Court of Montgomery County, as of the date specified on the first page hereof. OTHER INFORMATION Litigation According to the County, there are currently a number of lawsuits pending against the County, but none of such actions are expected to result in recovery against the County for an amount outside the applicable insurance policy limits and County-held reserves. The County believes that none of the currently outstanding lawsuits, if decided adversely to the County, would have a material adverse effect on the financial condition of the County. Registration and Qualification of Obligations for Sale The sale of the Obligations has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Obligations have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Obligations been qualified under the securities acts of any jurisdiction. The County assumes no responsibility for qualification of the Obligations under the securities laws of any jurisdiction in which the Obligations may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Obligations shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. Legal Investments and Eligibility To Secure Public Funds in Texas Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Obligations are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Obligations by municipalities or other political subdivisions or public agencies of the State, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Obligations be assigned a rating of A or its equivalent as to investment quality by a national rating agency. See OTHER INFORMATION - Ratings herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Obligations are legal investments for state banks, savings banks, trust companies with a capital of one million dollars or more, and savings and loan associations. The Obligations are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the County has been made of the laws in other states to determine whether the Obligations are legal investments for various institutions in those states.

37
HOU:3197101.2

Legal Opinions The County will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Obligations, including the unqualified approving legal opinion of the Attorney General of Texas approving the Initial Obligation and to the effect that the Obligations are valid and legally binding obligations of the County, and based upon examination of such transcript of proceedings, the approving legal opinion of Bond Counsel, to like effect and to the effect that the interest on the Obligations will be excludable from gross income for federal income tax purposes under Section 103(a) of the Code, subject to the matters described under TAX MATTERS herein, including the alternative minimum tax on corporations. Bond Counsel has reviewed the information appearing in this Official Statement under THE OBLIGATIONS (except for Book-Entry-Only System, Obligation-holders Remedies and Future Borrowing), OTHER INFORMATION Legal Opinions, TAX MATTERS, and CONTINUING DISCLOSURE OF INFORMATION (except Compliance with Prior Undertakings), OTHER INFORMATION - Legal Investments and Eligibility To Secure Public Funds in Texas, OTHER INFORMATION Legal Opinions, solely to determine whether such information fairly summarizes matters of law and the provisions of the documents referred to therein. Bond Counsel has not, however, independently verified any of the factual information contained in this Official Statement nor has it conducted an investigation of the affairs of the County for the purpose of passing upon the accuracy or completeness of this Official Statement. No person or entity is entitled to rely upon Bond Counsels limited participation as an assumption of responsibility for or an expression of opinion of any kind with regard to the accuracy or completeness of any information contained herein. The legal fees to be paid to Bond Counsel for services rendered in connection with the issuance of the Obligations is contingent on the sale and delivery of the Obligations. The legal opinion of Bond Counsel will accompany the Obligations deposited with DTC or will be printed on the Obligations in the event of the discontinuance of the Book-Entry-Only System. Certain legal matters will be passed upon for the County by Andrews Kurth LLP, Houston, Texas, Disclosure Counsel. Certain legal matters will be passed upon for the Underwriters by Allen Boone Humphries Robinson LLP, Counsel to the Underwriters. The legal fees to be paid to Disclosure Counsel and Counsel to the Underwriters for services rendered in connection with the issuance of the Obligations is contingent on the sale and delivery of the Obligations. The legal opinion to be delivered concurrently with the delivery of the Obligations express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. Financial Advisor BOSC, Inc. is employed as Financial Advisor to the County in connection with the issuance of the Obligations. The Financial Advisors fee for services rendered with respect to the sale of the Obligations is contingent upon the issuance and delivery of the Obligations. Forward-Looking Statements Disclaimer The statements contained in this Official Statement and in any other information provided by the County that are not purely historical are forward-looking statements, including statements regarding the Countys expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this Official Statement are based on information available to the County on the date hereof, and the County assumes no obligation to update any such forward-looking statements. The Countys actual results could differ materially from those discussed in such forward-looking statements. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal, and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial, and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the County. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate.

38
HOU:3197101.2

Miscellaneous The financial data and other information contained herein have been obtained from the Countys records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and orders contained in this Official Statement are made subject to all of the provisions of such statutes, documents and orders. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. The Order authorizing the issuance of the Obligations has also approved the form and content of this Official Statement and any addenda, supplement or amendment thereto and authorized its further use in the reoffering of the Obligations by the Underwriters. Concluding Statement To the extent that any statements made in this Official Statement involve matters of opinion or estimates, whether or not expressly stated to be such, they are made as such and not as representations of fact or certainty and no representation is made that any of these statements have been or will be realized. Information in this Official Statement has been derived by the County from official and other sources and is believed by the County to be accurate and reliable. Information other than that obtained from official records of the County has not been independently confirmed or verified by the County and its accuracy is not guaranteed. Neither this Official Statement nor any statement that may have been made orally or in writing is to be construed as or as part of a contract with the original purchasers or subsequent owners of the Obligations.

/s/ Alan B. Sadler County Judge Montgomery County, Texas ATTEST:

/s/ Mark Turnbull County Clerk Montgomery County, Texas

39
HOU:3197101.2

Schedule I - Schedule of Refunded Obligations

Original Maturity 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017 3/1/2018 3/1/2019 3/1/2020 3/1/2021 3/1/2022 3/1/2026 (a) Interest Rate 4.500% 4.700% 4.750% 4.800% 5.000% 5.000% 5.625% 5.625% 5.200% 5.125% 5.000% Principal Amount $ 620,000 665,000 690,000 735,000 115,000 120,000 520,000 520,000 650,000 650,000 12,595,000 Call Date/Price 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 4/2/2012 @ 100 3/01/2013 @ 100 Remaining Outstanding -0-0-0-0-0-0-0-0-0-0-0-

Series Unlimited Tax Road Bonds, Series 2002A

Unlimited Tax Road Bonds, Series 2003A Limited Tax Library Bonds, Series 2003B

3/1/2014 3/1/2015 3/1/2016 3/1/2017 3/1/2018 3/1/2019 3/1/2020 3/1/2021 3/1/2022 3/1/2026 (a) 3/1/2014 3/1/2015 3/1/2016 3/1/2017 3/1/2018 3/1/2019 3/1/2020 3/1/2021 3/1/2022 3/1/2026 (a) 3/1/2015 3/1/2016 3/1/2017 3/1/2018 3/1/2019 3/1/2020

4.000% 4.125% 4.250% 4.375% 4.500% 4.500% 4.600% 4.700% 4.750% 5.000% 4.000% 4.125% 4.250% 4.375% 4.500% 4.500% 4.600% 4.700% 4.750% 5.000% 4.125% 4.125% 4.300% 4.375% 4.500% 4.600%

425,000 445,000 460,000 485,000 505,000 530,000 550,000 580,000 605,000 2,750,000 665,000 695,000 720,000 755,000 695,000 725,000 760,000 800,000 835,000 1,230,000 185,000 190,000 200,000 210,000 220,000 230,000 $34,330,000

3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2013 @ 100 3/01/2014 @ 100 3/01/2014 @ 100 3/01/2014 @ 100 3/01/2014 @ 100 3/01/2014 @ 100 3/01/2014 @ 100

-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-0-

Certificates of Obligation, Series 2003

Certificates of Obligation, Series 2004

Totals _____________ (a) Represents a Term Bond.

HOU:3197101.2

Schedule I

APPENDIX A ECONOMIC AND DEMOGRAPHIC INFORMATION The following information has been derived from various sources, including Texas Municipal Reports, the South Montgomery County Woodlands Economic Development Partnership, U.S. Census data, Greater Conroe Economic Development Council, Conroe Chamber of Commerce, and City and County officials. While such sources are believed to be reliable, no representation is made as to the accuracy thereof. - General Montgomery County, Texas (the County), a component of the Houston Metropolitan Area, has an economy based on mineral production (oil, gas, sand, and gravel), agriculture (horses, ratite bird, cattle, hay, swine, greenhouse nurseries, and also blueberries and peaches), and lumbering (timber products). The County was created and organized in 1837 and consists of approximately 1,044 square miles of rolling, densely forested land. Many residents of the County work in the City of Houston. According to the U.S. Census Bureau, the County had a population in 1970 of 49,479, in 1980 of 127,722, in 1990 of 182,201, and in 2000 of 293,768 and in 2010 of 455,746, representing an increase of 55.14% from 2000 to 2010. Cities within the County are Chateau Woods, Conroe, Cut n Shoot, Magnolia, Montgomery, New Caney, Oak Ridge North, Panorama Village, Patton Village, Pinehurst, Porter, Porter Heights, Roman Forest, Shenandoah, Splendora, Stagecoach, Willis, Woodbranch Village, Woodloch and the planned residential and business community called The Woodlands. School districts within the County are Conroe ISD, Magnolia ISD, Montgomery ISD, New Caney ISD, Splendora ISD and Willis ISD. The largest school district is Conroe ISD, comprising approximately 333 square miles, located in south central Montgomery County adjacent to the northern boundary of Harris County, and includes such communities as the City of Conroe, The Woodlands, Timber Lakes, Cut and Shoot, Woodloch, Chateau Woods, and Oak Ridge North. Conroe ISD operates 5 high schools, 2 ninth grade schools, 6 junior high schools, 9 intermediate schools, and 30 elementary schools and has a 2011-2012 school year enrollment of approximately 52,600 students. A satellite campus of North Harris Montgomery County College (the College) is located in Montgomery County. The County owns and operates the Lone Star Executive Airport which is a full-service facility located four miles from Conroe. Houstons Intercontinental Airport, located nearby in Harris County, offers international travel for passengers and cargo. The following is a list of some of the firms in Montgomery County with a total number of employees in excess of 500. Such industry and employment data was provided by the Greater Conroe Economic Development Council. Ball Corporation Byrne Medical Capro, Inc. Conroe ISD Consolidated Communications CVS Pharmacy Halliburton Huntsman Petrochemical McKesson Pharmaceutical Montgomery ISD New Caney ISD Reed Hycalog Sawyer Splendora ISD Tenaris Borden Milk Products Canrig Drilling Technology Conroe Regional Medical Center Conservatek Crown Beverage Packaging Entergy Texas Hughes Christensen Company Magnolia ISD Montgomery County National Oilwell Varco/Texas Oil Tolls R&M Energy Systems Sadler Clinic Sigma Genosys Startex Chemical, Inc. Tetra Technologies

A-1
HOU:3197101.2

CITY OF CONROE The City of Conroe (the City), the county seat of Montgomery County, is located in southeast Texas and is approximately 35 miles north of Houston. Conroe is serviced by Interstate 45, Texas 75 (north-south), Texas 105 (east-west) and Loop 336 which encircles Greater Conroe. The City is the principal center of commerce in Montgomery County. The Citys population has increased from 27,610 in 1990 to 36,811 in 2000 representing a 33% growth rate. In 1973, Lake Conroe was completed, forming a 21,000 acre reservoir which is owned by the San Jacinto River Authority and the City of Houston. The recreational and development opportunities afforded by the lake have had economic impact on the Conroe and Montgomery County economies. THE WOODLANDS The Woodlands is a community being developed approximately 27-32 miles north of downtown Houston. Located within a 28,000-acre tract of densely forested land, the community is generally situated adjacent to and west of Interstate Highway 45, south of FM 1488, and north of Spring Creek, the boundary line between Montgomery and Harris Counties. Additional acreage, known as The Woodlands Trade Center (Trade Center), is adjacent to and east of Interstate Highway 45 between Texas State Highway 242 and FM 1488. The Woodlands is located in a market sector of the greater Houston metropolitan area containing approximately 150 residential developments. Residential developments located in the market sector offer a variety of housing ranging in price generally from $70,000 to in excess of $2 million. The majority of these subdivisions offer some recreational facilities (e.g., swimming pools and clubhouses) and a few provide golf and tennis facilities. In some cases, schools are located within the subdivisions. Formal opening of The Woodlands occurred in October, 1974. Substantial development, as more fully described herein, has occurred in the Village of Grogans Mill, the Village of Panther Creek, the Village of Cochrans Crossing, the Village of Indian Springs, the Village of Alden Bridge, Carlton Woods, the Village of Sterling Ridge, and College Park, which are eight of the nine residential villages planned for The Woodlands; parts of the Town Center, Research Forest, College Park; and the Trade Center. The ninth residential village, Creekside Park, is undergoing its initial phase of development with lots available in Carlton Woods Creekside Park. These areas currently have a population of approximately 97,023 people, and 1,712 employers provide employment for approximately 47,100 people. ECONOMIC AND GROWTH INDICATORS U.S. Census of Population (a) Montgomery County Number % Change 14,588 -15.84 23,055 +58.04 24,504 +6.28 26,839 +9.53 49,479 +84.35 127,722 +158.04 182,201 +42.65 293,768 +61.23 455,746 +55.14 City of Conroe, TX Number % Change 2,457 +32.24 4,624 +88.20 7,298 +57.83 9,192 +25.95 11,969 +30.21 20,447 +70.83 27,610 +35.03 36,811 +33.32 56,201 +52.69

1930 1940 1950 1960 1970 1980 1990 2000 2010

______________________________ (a) 2000 Census of Population and Housing, U.S. Dept. of Commerce, Bureau of the Census.

A-2

HOU:3197101.2

Summary of Montgomery County Building Permit Activity Fiscal Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Commercial Permits 395 373 495 437 507 291 300 353 290 175 116 160 Estimated Value (000) 920,414 194,996 207,333 508,691 242,667 242,817 212,823 279,659 482,159 674,173 128,299 83,556 Residential Permits 3,209 3,419 4,252 5,132 6,062 5,274 6,292 4,951 3,409 2,280 2,482 2,280 Estimated Value (000) 483,754 501,635 610,797 774,983 906,083 845,354 1,064,136 923,000 724,714 411,390 591,418 492,202

______________________________ Source: Montgomery County Engineer. Employment Statistics Montgomery County 2011(a) Labor Force Employed Unemployed Rate ____________ (a) As of December 31, 2011. 230,682 216,023 14,659 6.4% 2010 223,875 206,907 16,968 7.6% 2009 217,384 202,227 15,157 7.0% 2008 211,730 202,574 9,156 4.3% 2007 202,521 194,629 7,892 3.9%

A-3

HOU:3197101.2

APPENDIX B

EXCERPTS FROM COMPREHENSIVE ANNUAL FINANCIAL REPORT OF MONTGOMERY COUNTY, TEXAS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010

B-1
HOU:3197101.2

MONTGOMERY COUNTY TEXAS

Comprehensive Annual Financial Report

For the Fiscal Year Ended September 30, 2010

MONTGOMERY COUNTY, TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010

Prepared by THE MONTGOMERY COUNTY AUDITOR'S OFFICE Phyllis L. Martin County Auditor

INTRODUCTORY SECTION

Montgomery County, Texas

Office of the County Auditor
501 North Thompson, Suite 205, Conroe, Texas 77301 P. O. Box 539, Conroe, Texas 77305

Phyllis L. Martin County Auditor Peggie Rushing st 1 Assistant County Auditor

March 30, 2011

The Board of District Judges The Commissioners Court Montgomery County, Texas Honorable Judges and Commissioners: The Comprehensive Annual Financial Report of Montgomery September 30, 2010, is submitted herewith. This report was accordance with generally accepted accounting principles as Accounting Standards Board, and is in compliance with Chapter Local Government Code. County, Texas, for the year ended prepared by the County Auditor in promulgated by the Governmental 114.025 and Chapter 115.045 of the

Responsibility for both the accuracy of the presented data and the completeness and fairness of the presentation, including all disclosures, rests with the County. To provide a reasonable basis for making this representation, Montgomery County management has established a comprehensive internal control framework designed both to protect governmental assets from loss, theft, or misuse, and to compile sufficient reliable information for the preparation of the countys financial statements in conformity with Generally Accepted Accounting Principles (GAAP). Montgomery Countys comprehensive framework, because the cost of internal controls should not outweigh their benefits, has been designed to provide reasonable, rather than absolute, assurance that the financial statements will be free from material misstatement. We believe the data as presented is accurate in all material aspects; that it is presented in a manner designed to fairly set forth the financial position and results of operations of Montgomery County as measured by the financial activity of its various funds; and that all disclosures necessary to enable the reader to gain the maximum understanding of the Countys financial activity have been included. Montgomery Countys financial statements have been audited by Hereford, Lynch, Sellars & Kirkham, P.C., a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the County for the fiscal year ended September 30, 2010 are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial presentation. The independent auditor concluded, based on the audit, that there was a reasonable basis for rendering an unqualified opinion that the financial statements of Montgomery County for the year ended September 30, 2010 are fairly presented in conformity with GAAP. The independent auditors report is presented as the first component of the financial section of this report. The independent audit of the financial statements of Montgomery County was a part of a broader, federally mandated Single Audit designed to meet the special needs of federal grantor agencies. The Tele: (936) 539-7820Fax (936) 788-8390Email: Phyllis.Martin@mctx.org
1

standards governing Single Audit engagements require the independent auditor to report not only on the fair presentation of the financial statements, but also on the governments internal controls and compliance with legal requirements. Specific emphasis was placed on internal controls and compliance with laws and regulations involving the administration of federal awards. This Single Audit Report is available as a separate report from Montgomery County. GAAP require that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Managements Discussion and Analysis (MD&A). This letter of transmittal is designed to compliment MD&A and should be read in conjunction with it. Montgomery Countys MD&A can be found immediately following the report of the independent auditors. Profile of Montgomery County Montgomery County was created in 1837, and is located on Interstate 45, approximately forty miles north of downtown Houston. The County provides a full range of services, including police protection, legal and judicial services, construction and maintenance of roads and bridges, public health service, and facilities for recreational and cultural use. The County operates a full service airport as a reliever to nearby Bush Intercontinental Airport. Three major rail lines intersect in the county seat of Conroe. The Lone Star College System offers both 2- and 4-year degree plans in partnership with several universities throughout the state. Scenic Lake Conroe sits among some 1,090 square miles of rolling hills and grassy meadows to create an atmosphere of rural America nestled securely beside its urban neighbors. The County operates as specified under the Constitution of the State of Texas, and in accordance with the provisions of the State Statutes of Texas, which provide for a Commissioners Court consisting of the County Judge and four Commissioners, each of whom is elected from four geographical precincts. The County Judge is elected for a four-year term, and the Commissioners for four-year staggered terms. The U.S. Census Bureau reported the 1990 population for Montgomery County to be 180,394, and the year 2000 population to be 293,768. At September 30, 2010 the new census population was 455,746. This 55% growth in the last decade was evident in the increased demand for service at the county level. The main impetus for growth in the past two decades has come from the expansion of nearby metropolitan Houston. Many Montgomery County residents now work in Houston, and the spread of the citys suburbs into the county has led to a rapid rise in population. In recent years Montgomery County has become a recreation destination for many Houston residents. The area, with its abundant lakes and the Sam Houston National Forest, offers numerous opportunities for hunting, boating, fishing, and hiking. Montgomery County maintains strict budgetary controls to ensure compliance with legal provisions in the annual appropriated budget approved by the governing body. Activities of the General Fund, the Special Revenue Funds, and the Debt Service Funds are included in the annual appropriated budget. Budget to actual comparisons are provided in this report for all funds for which an annual appropriated budget is adopted. According to the budget laws of the State of Texas, expenditures may not exceed the amount appropriated for each fund. The County Auditor is responsible for compiling and presenting a budget to Commissioners Court for their consideration and approval, adhering to a calendar established by the statutes of the State of Texas. In keeping with those statutes, the ad valorem tax levy cannot be established until the budget is adopted. In Montgomery County, the budget is adopted by September 1 of each year. Once adopted, the budget is enforced by the County Auditor, as provided by statute. Factors Affecting Financial Condition The information presented in the financial statements of Montgomery County is best understood when it is considered from the broader perspective of the specific environment within which Montgomery County operates.

Tele: (936) 539-7820Fax (936) 788-8390Email: Phyllis.Martin@mctx.org

2

Local economy- The Countys economy has historically been based on mineral production (oil, gas, sand, and gravel), agriculture (horses, cattle, greenhouse nurseries), and lumbering (timber products). In recent years, the largest industry has been education, health and social services, with retail trade and manufacturing following. Investments made in Texas highways recently have assisted in attracting new and diverse businesses to the County. The Woodlands, a planned community in south Montgomery County, is home to energy, biomedical, and technology businesses, causing ever-continued growth in the southern part of the County. Long-term financial planning- The Commissioners Court continues to be very active in infrastructure development, specifically road improvements, to help insure economic growth. In the second half of calendar year 2005, the County executed an agreement with the Texas Department of Transportation that is facilitating the improvement of five separate state-owned roads. This pass-thru toll agreement provides for the County to pledge local funds to improve these roads, with a partial reimbursement from highway funds at a later date. The County pledged $100 million of the Series 2006 $160 million voterapproved road bonds, as well as an additional $88 million of future bonds to leverage the federal funds for the projects in the hopes of gaining an estimated $232 million in improvements for the citizens of Montgomery County. As part of this future planning, the Commissioners Court created the Montgomery County Toll Road Authority (MCTRA) in August 2006. The MCTRA will be charged with the task of collecting tolls from vehicles traveling on that portion of State Highway 242 which connects with Interstate 45 in southern Montgomery County. This project will improve one of the specific roads listed in the agreement with the Texas Department of Transportation, and is expected to commence in early 2011. Revenues generated by the authority are anticipated to be used to either retire a portion of the debt related to the construction or to fund future improvements. In an effort to combat the increasing inflationary cost on medical claims and to control utilization of plan benefits by participants, the County has opened a wellness clinic, which will allow the County to pay for minor medical services at substantially reduced pricing. The clinic will also be modeled to offer Health Risk Assessments (HRA) which will allow for identification and education for the prevention of medical conditions by the employee/retiree population. With proper maintenance of certain medical conditions, the employer sponsored medical plan will be less apt to incur large claims. In addition to traditional medical claims, the Clinic will offer immediate medical services for workers compensation injuries. A large percentage of workers compensation claims could be resolved at the clinic and the employee would be released back to work. This method of service would allow for a reduction of workers compensation claim cost and workers compensation indemnity payments for the County. If all components of the medical clinic are implemented, including a pharmacy, the County should achieve substantial savings now and in the future. Cash management policies and practices- The Countys investment function operates within the guidelines of a written policy as required by the Public Funds Investment Act. An investment committee comprised of the County Treasurer, Tax Assessor-Collector, District Clerk, and a member of Commissioners Court oversees the investment activities for the County. The County Auditor and County Attorney are advisors to the committee. Commissioners Court has designated the County Treasurer the investment officer for the County. Specific investment strategies have been identified for each group of funds. Strategies emphasize safety of principal as well as liquidity. Demand deposits are covered by pledged collateral maintained in joint safekeeping accounts at Compass Bank. Special attention is paid to timing maturities to be consistent with construction project draws and regular operating expenditures.

Tele: (936) 539-7820Fax (936) 788-8390Email: Phyllis.Martin@mctx.org

3

Risk Management- The County retains various levels of risk, and accounts for the associated expenditures in the General Fund. The portions of risk that are not transferred to third party coverage are self-funded by the County under formal arrangements. Additional information concerning the Countys risk management activities is included in the notes to the financial statements. Pension and other post-employment benefits- The County provides retirement, disability, and death benefits for all of its full-time regular employees through a nontraditional defined benefit pension plan in the statewide Texas County and District Retirement System (TCDRS). Detailed information on the retirement plan and other post-employment benefits can be found in the notes to the financial statements. Energy innovations- Various energy saving ventures have been planned for county owned facilities. Lighting retrofits and solar charging panels will be installed in the countys parking garages to recycle energy produced back into the countys building grid. Infrastructure projects to replace outdated windows and air conditioning units in the Montgomery County Courthouse and old Administration Building are expected to greatly reduce energy consumption. These projects are part of the $3.2 million U.S. Department of Energy efficiency and conservation grant. Awards and Acknowledgments The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to Montgomery County for its Comprehensive Annual Financial Report (CAFR) for the fiscal year ended September 30, 2009. This was the twenty-second consecutive year that the County has achieved this prestigious award. In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Programs requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate. The preparation of this report would not have been possible without the efficient and dedicated services of all County departments. I want to express my appreciation to the entire staff of the Office of County Auditor for their continued efforts. I also wish to commend the members of the Commissioners Court for conducting the financial operations of Montgomery County in a responsible manner, while meeting the increasing demands for public service. Respectfully submitted,

Phyllis L. Martin Montgomery County Auditor /s

Tele: (936) 539-7820Fax (936) 788-8390Email: Phyllis.Martin@mctx.org

4

MONTGOMERY COUNTY, TEXAS ORGANIZATION CHART

VOTERS

SHERIFF

COUNTY ATTORNEY DISTRICT ATTORNEY COUNTY COURT JUDGES (5) TAX ASSESSOR COLLECTOR COUNTY TREASURER

JUSTICES OF THE PEACE (5)

DISTRICT JUDGES (7)

CONSTABLES (5) COUNTY JUDGE

COUNTY CLERK

DISTRICT CLERK

COMMISSIONER S (4)

ADULT PROBATION

COMMISSIONERS' COURT

COUNTY AUDITOR

AIRPORT MAINTENANCE COMMUNITY DEVELOPMENT

ANIMAL CONTROL & SHELTER BUILDING MAINTENANCE CIVIC CENTER

DIRECTOR OF INFRASTRUCTURE

INTERGOVERNMENTAL:

6
CUSTODIAL SERVICES ELECTIONS ENVIRONMENTAL HEALTH HUMAN RESOURCES INFORMATION TECHNOLOGY PURCHASING PARKS RISK MANAGEMENT

COLLECTIONS

COUNTY ENGINEER

CHILD WELFARE CRIME STOPPERS DISPUTE RESOLUTION D.P.S. SECRETARY POOL EXTENSION AGENTS LAW LIBRARY

EMERGENCY MANAGEMENT

FIRE MARSHAL

JUVENILE BOARD

LIBRARY

MENTAL HLTH. TRTM'T FAC.

COUNTY JUDGE

COUNTY COURT JUDGES (5)

DISTRICT JUDGES (7)

VETERAN SERVICES

JUVENILE PROBATION

MONTGOMERY COUNTY, TEXAS DIRECTORY OF OFFICIALS SEPTEMBER 30, 2010 COMMISSIONERS COURT: Alan B. Sadler Mike Meador Craig Doyal Ernest E. Chance Ed Rinehart DISTRICT COURTS: Fred Edwards Lisa Michalk Cara Wood Kathleen Hamilton K. Michael Mayes Tracy Gilbert Michael T. Seiler Brett Ligon Barbara G. Adamick COUNTY COURTS AT LAW: Dennis Watson Luther J. Winfree Patrice McDonald Mary Ann Turner Keith Stewart David Walker Mark Turnbull JUSTICE COURTS: Lanny Moriarty Grady Trey Spikes Mary E. Connelly James Metts Matthew Masden LAW ENFORCEMENT: Tommy Gage Donnie O. Chumley Gene DeForest Tim Holifield Kenneth Rowdy Hayden David H. Hill FINANCIAL ADMINISTRATION: J.R. Moore, Jr. Martha N. Gustavsen Phyllis L. Martin Carolyn Hooper2
1 2

County Judge Commissioner, Precinct #1 Commissioner, Precinct #2 Commissioner, Precinct #3 Commissioner, Precinct #4 Judge, 9th Judicial District Judge 221st Judicial District Judge 284th Judicial District Judge 359th Judicial District Judge, 410th Judicial District Judge, 418th Judicial District Judge, 435th Judicial District District Attorney District Clerk Judge, County Court at Law #1 Judge, County Court at Law #2 Judge, County Court at Law #3 Judge, County Court at Law #4 Judge, County Court at Law #5 County Attorney County Clerk Justice of Peace, Precinct #1 Justice of Peace, Precinct #2 Justice of Peace, Precinct #3 Justice of Peace, Precinct #4 Justice of Peace, Precinct #5 Sheriff Constable, Precinct #1 Constable, Precinct #2 Constable, Precinct #3 Constable, Precinct #4 Constable, Precinct #5 Tax Assessor-Collector County Treasurer County Auditor1 Purchasing Agent1

Designates appointed official. All others are elected. New Purchasing Agent appointed during FY2011 Darlou Zenor 7

FINANCIAL SECTION

MANAGEMENTS DISCUSSION AND ANALYSIS

This discussion and analysis provides readers of the financial statements of Montgomery County, Texas (the County) with a narrative overview and analysis of the Countys financial activities for the fiscal year ended September 30, 2010. The intent of this discussion and analysis is to evaluate the current activities, resulting changes, and currently known facts of the County as a whole. Readers of this discussion and analysis should consider the information presented here in conjunction with additional information that is furnished in the accompanying letter of transmittal, which can be found on pages 1-4 of this report. This discussion should also be read in conjunction with the basic financial statements and the notes to those financial statements (which immediately follow this discussion). The discussion and analysis includes comparative data for the prior year. FINANCIAL HIGHLIGHTS The assets of the County exceeded its liabilities at the close of the fiscal year by $330,180,459 (net assets). Of this amount, $8,839,721 is restricted for specific purposes. With the presentation of the investment in capital assets, unrestricted net assets becomes a negative $32,066,403. Analysis of the negative unrestricted net assets reveals that a large portion of debt was used to purchase land for road expansion projects that are a joint undertaking with the State. In these instances of expansion of State-owned roads, the County will report the debt at this time, but not the asset. The revenues of the Countys government-wide activities were $301,394,128 and expenses were $311,300,556. Rapid growth in the county brought about uncommon infrastructure contributions, adding to a decrease in net assets of $9,906,428. At September 30, 2010, the Countys governmental funds reported combined ending fund balances of $122,985,517, a decrease of $42,326,832 in comparison with the prior year. From the ending fund balance, $46,764,804 is reserved for specific purposes. Approximately 62% of the ending balance, $76,220,713, is available for spending at the governments discretion. At September 30, 2010, unreserved, undesignated fund balance for the General Fund was $30,325,544, or 24.7% of total General Fund expenditures. The Countys total bonded debt increased by $24,358,100 (5.4%) during the current fiscal year. This increase was brought about by the issuance of $43,380,000 in Refunding Bonds and $32,450,000 in certificates of obligation. As of fiscal year 2010, the County reported other post-employment benefit obligations (OPEB) of $12,811,130 as a result of implementing GASB Statement No. 45 Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions.

OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction to Montgomery Countys basic financial statements, which are comprised of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report also contains additional supplementary information to the financial statements themselves. Government-Wide Financial Statements The Statement of Net Assets and the Statement of Activities, the two government-wide financial statements, are designed to provide readers with a broad overview of Montgomery Countys finances, similar to the financial statements of a private-sector business. Both of these statements are presented using the full accrual basis of accounting; therefore, revenues are reported when they are earned and expenses are reported when the goods and services are received, regardless of the timing of cash being received or disbursed. These statements include capital assets of the County (including infrastructure added since implementing GASB 34 in fiscal year 2003 and the portion of GASB 34 as it pertains to

11

retroactive infrastructure reporting) as well as all liabilities (including long-term debt). Additionally, certain eliminations have occurred as prescribed by GASB 34 in regards to interfund activity, payables and receivables. The Statement of Net Assets presents information on all of Montgomery Countys assets and liabilities, with the difference between the two being reported as net assets. This statement is similar to that of the balance sheet of a private-sector business (with primary sections in a business balance sheet being assets, liabilities, and equity). The GASB believes that, over time, increases or decreases in the net assets may serve as a useful indicator of whether the financial position of the County is improving or deteriorating. The Statement of Activities presents the Countys revenues and expenses for the year, with the difference between the two resulting in the change in net assets for the fiscal year ended September 30, 2010. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). Because the statement of activities separates program revenue (revenue generated by specific programs through fees, fines, forfeitures, charges for services, or grants received) from general revenue (revenue provided by taxes and other sources not tied to a particular program), it shows to what extent each function has to rely on general revenues for funding. The governmental functions of the County include general administration, judicial, legal services, elections, financial administration, public facilities, public safety, health and welfare, culture and recreation, conservation, public transportation, miscellaneous, and debt service. Government-wide financial statements include not only the activities of the County itself (known as the primary government), but also those of a legally separate component unit: the Montgomery County Jail Financing Corporation. The County Commissioners Court acts as the Board of Directors for the component unit whose activities are blended with those of the primary government because they function as part of the County government. The government-wide financial statements can be found on pages 28-29 of this report. Fund Financial Statements The fund financial statements focus on the Countys most significant funds (major funds) rather than fund types, or the County as a whole. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. Montgomery County, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the County can be divided into two categories: governmental funds and fiduciary funds. 1) 2) Governmental funds are maintained to account for the governments operating and financing activities. The measurement focus is on available resources. Fiduciary funds are used to account for resources that are held by the government as a trustee or agent for parties outside of the government. The resources of fiduciary funds cannot be used to support the governments own programs.

Governmental funds are used to account for those functions reported as governmental activities in the government-wide financial statements. As mentioned earlier, government-wide financial statements are reported using full accrual accounting; governmental fund financial statements focus on near-term inflows and outflows of expendable resources, as well as balances of available resources. In other words, revenue is reported when earned, provided it is collectible within the reporting period or soon enough afterward to be used to pay liabilities of the current period. Likewise, liabilities are recognized as expenditures only when payment is due since they must be liquidated with available cash. Such information is useful in comparing a governments near-term financing requirements to near-term resources available.

12

The focus of governmental funds is narrower than that of the government-wide financial statements; therefore it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers should better understand the results and long-term impact of the governments near-term financing decisions. The user is assisted in this comparison between the two bases of accounting by way of a reconciliation statement between the governmental fund balance sheet and the government-wide statement of net assets, as well as a reconciliation statement between the governmental fund statement of revenues, expenditures, and changes in fund balances and the government-wide statement of activities. Montgomery County maintained 38 individual governmental funds during the fiscal year ended September 30, 2010. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the General Fund, the Road and Bridge Fund, the Capital Projects Revenue/Tax Bonds Series 2009 Fund, all of which are considered to be major funds. Data from the remaining governmental funds (i.e., nonmajor funds) is combined into a single, aggregated presentation. Individual fund data for each nonmajor governmental fund is provided in the form of combining schedules, which are included in the Other Supplementary Information section following the notes to the financial statements. Montgomery County utilizes and maintains budgetary controls over its operating funds. Budgetary controls are used to ensure compliance with legal provisions required under state statute governing the annual appropriated budget. Budgets for governmental funds are established in accordance with state law, and by County policy are adopted at the department level for the General Fund, all Special Revenue Funds, and the Debt Service Fund using the primary categories of salaries, benefits, supplies, services, and capital outlay. A budgetary comparison statement is provided in the financial section for the General Fund and the Road and Bridge Special Revenue Fund. Budgetary comparison schedules for the Debt Service Fund and all nonmajor special revenue funds are provided as supplementary information. These budgetary comparisons can be used to demonstrate compliance with the budget both in its original and final forms. The basic governmental fund financial statements can be found on pages 30-40 of this report. Fiduciary funds are used to account for resources held for the benefit of parties other than the County itself. Agency funds are the only fiduciary fund type used by Montgomery County, and they are not reflected in the government-wide financial statements because the resources of those funds are not available to support the programs and expenses of the County. The basis of accounting used for fiduciary funds is the full accrual basis, much like that of the government-wide statements. The basic fiduciary fund financial statements can be found on page 41 of this report. Notes to the financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. As such, the notes are an integral part of the basic financial statements. They focus on the primary governments governmental activities, major funds, and nonmajor funds in the aggregate. The notes to the financial statements can be found on pages 42-66 of this report. Additional supplementary information is comprised of the General Fund final budget versus actual at the department level. This comparative data can be found on pages 68-80 of this report. Other supplementary information includes combining financial statements for nonmajor governmental and fiduciary funds. These funds are totaled by fund type and presented in a single column in the basic financial statements. They are not reported individually, as with major funds, on the governmental fund financial statements.

13

Other supplementary information can be found on pages 82-135 of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS As noted earlier, the GASB believes that net assets may serve over time as a useful indicator of a governments financial position. Montgomery Countys assets exceeded liabilities by $330,180,459 at September 30, 2010, as shown in the table below. This amount represents a decrease through governmental activities of $9,906,428 from the net assets at September 30, 2009.
Montgomery County, Texas Net Assets - Governmental Activities

FY 2010 Current and other assets Capital assets Total assets Long-term liabilities outstanding Other liabilities Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted Total net assets $ 197,818,608 697,161,850 894,980,458

FY 2009 $ 238,561,124 637,534,650 876,095,774

532,075,714 32,724,285 564,799,999

498,777,660 37,231,227 536,008,887

353,407,141 8,839,721 (32,066,403) $ 330,180,459

377,016,683 8,311,363 (45,241,159) $ 340,086,887

The Countys total assets of $894,980,458 are largely comprised of investments of $106,167,521, or 11.9%, and capital assets net of accumulated depreciation of $697,161,850, or 77.9%. The capital assets of the County include land, buildings, improvements other than buildings, equipment, and infrastructure (roads, bridges, signs, etc.). Capital assets are non-liquid assets that provide services to citizens; as a result, these assets cannot be utilized to satisfy County obligations. As in last year, long-term debt of $532,075,714 comprises the largest portion of the Countys total liabilities of $564,799,999, at 94.2%. Of total long-term liabilities, $23,732,856 is due within one year, with the remainder of $508,342,858 being due over a period of time greater than one year. A more indepth discussion of long-term debt can be found in the notes to the financial statements. The Countys assets exceeded its liabilities by $330,180,459 (net assets) as of September 30, 2010. Roughly 2.7%, or $8,839,721, of the Countys net assets represents restricted net assets. These resources are subject to external restrictions on how they may be used. Restrictions include statutory requirements, bond covenants, and granting conditions. Of those restricted net assets, $45,673 is restricted for capital projects and $8,794,048 is restricted for debt service of compensated absences. The most significant portion ($353,407,141) of the Countys net assets reflects its investment in capital assets, net of related debt. Although unrestricted net assets is negative for government-wide net assets, it should be noted that the Countys budgeted fund financial statements continue to reflect positive unreserved fund balances. Montgomery Countys governmental activities decreased net assets by $9,906,428. The key components of this decrease are detailed on the following page.

14

Montgomery County, Texas Governmental Activities

FY 2010 Revenues: Program revenues: Fees, fines, forfeitures, and charges for services $ Operating grants and contributions: Federal State Other Capital grants and contributions: Federal State Other General revenues: Property taxes Other taxes Other general revenues Total revenues Expenses: General administration Judicial Legal services Elections Financial administration Public facilities Public safety Health and welfare Culture and recreation Conservation Public transportation Miscellaneous Debt service interest and fiscal charges Total expenses Change in net assets Net assets - beginning Net assets - ending $ FY 2009

73,627,993 4,603,480 5,236,419 1,606,591 6,825,965 1,119,253 48,354,855 156,397,865 1,824,262 1,797,445 301,394,128 15,339,911 24,893,295 2,824,360 1,827,247 6,358,514 43,618,780 62,650,758 9,085,174 7,456,924 986,843 111,627,910 1,683,887 22,946,953 311,300,556 (9,906,428) 340,086,887 330,180,459

69,002,276 24,040,424 4,592,044 807,457 3,960,185 383,198 51,505,298 145,696,133 1,719,903 2,131,544 303,838,462 22,046,369 22,794,440 2,678,359 1,694,067 5,917,962 41,255,267 55,941,218 29,039,919 9,981,330 341,910 95,536,899 1,156,114 21,121,081 309,504,935 (5,666,473) 345,753,360

340,086,887

The Countys total revenues of $301,394,128 were all from governmental activities. Property tax revenue accounts for $156,397,865, or 52%, and is an increase over last year of $10,701,732. Despite difficult economic times, Montgomery County continues to see increased appraisal values and subsequent tax collections. Program revenues of fees, fines, forfeitures, and charges for services comprise $73,627,993, or 24.5%; and grants and contributions encompass $67,746,563, or 22.5% of total government-wide revenues. This represents a decrease in program revenues of $12,916,326. Federal Operating Grants and Contributions decreased to $4,603,480 from 2009. This is a decrease of 19,436,944. This unusual decrease is due to FEMA disaster grants that boosted revenues substantially during 2009 due to Hurricane Ike. Federal Capital Grants increased in 2010 largely due to the amount of grants received by federal agencies in connection with the American Recovery and Reinvestment Act.

15

Expenses for the year totaled $311,300,556. The Public Transportation function accounted for $111,627,910, or 35.8% of the total government-wide expenses. The increase in spending in the public transportation function ($16,091,011) continues to be due to the several large road construction projects the County has undertaken. These projects are primarily for the widening and improvement of Stateowned roads, creating inflated expenditures in the public transportation function, with no offsetting asset capitalization. The General Administration function expenses decreased to $15,339,911. This significant decrease of $6,706,458 was due to the ongoing construction of the new Alan B. Sadler Commissioners Court Building and the accompanying parking garage during fiscal year 2009. Expenses in the Health and Welfare function decreased to $9,085,174, a $19,954,745 reduction from 2009. This was primarily due to FEMA Costs which were incurred during 2009 in response to the Countys efforts to recover from the destruction that Hurricane Ike caused. The governments ending net assets of $330,180,459 represent a decrease of $9,906,428 from the prior years $340,086,887 in net assets. The Countys change in net assets is summarized by the following chart:
Montgomery County, Texas Change in Net Assets

FY 2010 Governmental funds activity: Total revenues Total expenditures Excess (Deficiency) of revenues over expenditures Capital lease financing Issuance of certificates of obligation Issuance of refunding bonds Payment to refunded bond escrow agent Premiums on obligations, net Net change in fund balance Government-wide activity: Difference between current year's capital outlay expenditures and depreciation expense Net effect of capital asset sales, donations, trade-ins, etc. Revenues not reported in funds because they do not provide current-period financial resources Long-term debt not reported in funds because it does not affect the current period Expenses not reported in the funds because they do not use current-period financial resources Total change in net assets $ 246,984,808 325,097,604 (78,112,796) 3,125,403 32,450,000 43,380,000 (44,643,876) 1,474,437 (42,326,832)

FY 2009 $ 249,079,005 306,697,975 (57,618,970) 1,133,148 56,190,000 3,513,538 3,217,716

11,557,171 48,070,031 6,339,288 (24,133,460) (9,412,626) $ (9,906,428)

(4,283,101) 51,414,149 3,345,305 (49,986,219) (9,374,323) $ (5,666,473)

This change in net assets begins with the current years differences between governmental revenues and expenditures ($78,112,796), along with other financing sources and uses ($35,785,964). Differences between capital assets added during the year and the depreciation related to all capital assets recorded, along with the effect of various capital assets transactions, such as dispositions and donations ($59,627,202) also affect this change. Other factors influencing the change in net assets are those revenues and expenses that do not provide or require the use of current financial resources ($3,073,337). GASB 34 dictates that the County record an

16

allowance for accounts that are unlikely to be collected. These allowances for doubtful accounts combine with items, such as deferrals of long-term balances not being paid in the current year, to constitute further changes in net assets. Additionally, long-term debt, whether being issued or retired, has an effect on the change in net assets ($24,133,460). During the fiscal year, the County issued new debt and paid off a portion of its existing debt. These financings represent further changes in the net assets of the County. The overall financial position of the County has improved over the last year. As mentioned earlier, there is a decrease in net assets of $9,906,428. However, the increase of $11,552,610 in the combined fund balance of Montgomery Countys two major operating funds would indicate an improvement in overall financial position. Despite this progress, total operating fund balance is neither where management desires nor intends for it to be. As part of long-range planning, management has pledged to continue increasing the level of the operating funds fund balances until such time as they represent between 20 and 25 percent of annual operating costs. The following chart depicts expenses and program revenues for the fiscal year ending September 30, 2010 for governmental activities.

* See note below

* Public Transportation expenses and revenues have each been decreased by $21million, for the purpose of a more easily read chart. No other expenses or revenues have been altered in any way and are accurate as shown.

Key elements of the analysis of government-wide program revenues and expenses as they relate to each function reflect the following: Program revenues of $141,374,556 are comprised in large part (41.1%) of public transportations revenues of $58,055,788 and public safetys revenues of $29,474,481 (20.9%). The public facilities function comprises 16.2% of program revenues with $22,817,450, the judicial function makes up 9.7% of program revenues with $13,725,368, and the general administration function

17

covers 4.4% of program revenues with $6,142,559. The expenses of these functions account for 35.9%, 20.1%, 14%, 7.9%, and 4.9%, respectively. As expected, general revenues provided the required support and coverage in areas where expenses exceeded revenues. The public transportation function experienced an increase in expenses of $16,091,011 while realizing a decrease in revenues of $3,024,759. The increase in expenses is the result of an aggressive effort on the part of commissioners to improve and expand roads, many of which are state-owned, located in the County. These roads, because they are not owned by the County, cannot be shown as capital assets in the government-wide analysis; this creates a large expense, with no corresponding asset.

The following chart depicts revenues of the governmental activities for the fiscal year ended September 30, 2010.

GOVERNMENTAL FUND FINANCIAL ANALYSIS Montgomery County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. Governmental funds are a means of providing information on near-term inflows, outflows, and balances of usable resources. Such information is useful in assessing Montgomery Countys financing requirements. In particular, unreserved, undesignated fund balance may serve as a useful measure of a governments net resources available for spending at the end of the fiscal year. As of September 30, 2010, the Countys governmental funds reported combined ending unreserved, undesignated fund balances of $63,120,251, an increase of $8,730,252 in comparison with the prior year. This unreserved, undesignated fund balance is available for spending at the Countys discretion. The remainder of fund balance is reserved or designated to indicate that it is not available for new spending because it has already been committed. These commitments can be to fund capital projects ($35,255,056), pay debt service ($10,761,380), reflect inventories ($91,503), and reflect prepaid items ($656,865). Commitments also come in the form of designations that will fund encumbrances from the prior year ($289,332) and the OPEB obligation ($12,811,130). On September 30, 2010, the total fund

18

balance of the General Fund (the chief operating fund of the County) was $43,940,508. Of that amount, $30,325,544 was available for spending at the Countys discretion, $189,731 was designated for encumbrances, $12,811,130 was designated for the OPEB liability, and $614,103 was reserved for prepaid items. Total assets in the General Fund amounted to $84,502,538, accounting for 46% of total governmental fund assets. The total assets of other major funds include Road and Bridge Special Revenue Fund ($14,543,356) and Capital Projects Revenue/Tax Bonds Series 2009 Fund ($19,423,660). Together, all major funds account for $118,469,554 (64.5%) of the Countys $183,621,591 in total assets. The fund balance of the Countys General Fund increased by $8,926,501 during the current fiscal year. Key factors in this increase are as follows: The Commissioners Court, as part of long-range planning, budgeted a $2,000,000 fund balance increase. An increase in the appraised value of real and personal property boosted ad valorem tax revenues $9,900,963. The County has multiple contracts with outside entities for security services through the offices of the Sheriff and the Constables. Increases in the number of contracts generated larger than expected reimbursements from these organizations, resulting in an increase to contract reimbursements of $1,603,735 over the past year.

The Road and Bridge Special Revenue Fund has a total fund balance of $11,288,361 which is reported as $91,503 reserved for inventory, $1,176 designated for encumbrances, and $11,195,682 unreserved, undesignated. The unreserved, undesignated portion of the fund balance increased $2,620,563 during the current year due to focus by the Commissioners for various capital projects that were paid through the capital projects funds. The Revenue/Tax Bonds Series 2009 Fund has a fund balance of $17,525,980 at the end of the fiscal year, a decrease of $26,772,376. This considerable decrease reflects the swift progress of road construction projects throughout the county. GENERAL FUND BUDGETARY HIGHLIGHTS The published budget of Montgomery County for fiscal 2010 was prepared on a modified accrual basis, and includes all elements required by Texas Local Government Code Section 111.034, applicable to counties of population more than 225,000 that do not have an appointed County Budget Officer. The original adopted budget of the General Fund includes revenues of $161,223,203 and expenditures of $143,281,115. The General Funds final budget, as amended, contains revenues of $178,320,514 and expenditures of $171,675,366.

19

The following table presents the changes between the original adopted budget and the final budget for the General Fund as of September 30, 2010.
General Fund Budget Variances Year Ended September 30, 2010
Variance with Original Budget Positive (Negative) $ 13,220 205,157 11,941,220 69,656 14,207 6,594,253 (2,164,000) 423,598 17,097,311 (7,847,798) (426,344) (81,444) (398,531) (42,350) 1,812,819 (17,113,227) (1,733,000) (7,793) (2,556,583) (28,394,251) (11,296,940) 842,325 (1,186,517) 125,403 (218,789) (11,515,729) (11,515,729)

Original Budget Revenues: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous Total Revenues Expenditures: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Conservation Miscellaneous Total Expenditures Excess Revenues Over Expenditures Other Financing Sources/(Uses): Transfers In Transfers Out Capital Lease Financing Total Other Financing Sources/(Uses) Net Change in Fund Balances Fund Balance - Beginning Change in accounting principle Fund Balance - Ending $ 117,369,100 1,124,936 10,920,002 140,561 458,000 530,930 6,612,586 23,249,788 140,000 677,300 161,223,203 19,756,791 14,696,318 2,235,004 1,035,353 6,086,679 46,064,943 46,031,540 4,394,462 532,262 2,447,763 143,281,115 17,942,088 17,942,088 35,014,007 52,956,095

Final Budget $ 117,369,100 1,138,156 11,125,159 12,081,781 527,656 545,137 13,206,839 21,085,788 140,000 1,100,898 178,320,514 27,604,589 15,122,662 2,316,448 1,433,884 6,129,029 44,252,124 63,144,767 6,127,462 540,055 5,004,346 171,675,366 6,645,148 842,325 (1,186,517) 125,403 (218,789) 6,426,359 35,014,007 41,440,366

Final budgeted revenues were higher than originally planned by $17,097,311. Intergovernmental revenue contained $11,941,220 more in the final budget than in the original budget. This increase is largely due to

20

the receipt of several large federal and state grants during the year that were not foreseen at the time the original budget was adopted. The final budget for contract reimbursements was $6,594,253 more than the original budget. The increase in the anticipated revenue was primarily due to a $4,738,555 budgeted contract reimbursement for the Community Supervision and Corrections Departments salary and fringe benefits. During the original budget process, Commissioners Court does not budget for funds that are not at the discretion of the County to spend. Since this contract reimbursement is earmarked for specific purposes, it is not included in the original budget. During the course of the fiscal year, the County entered into several contracts for law enforcement services with local agencies. These contracts were also contributing factors to the increase in the budget. The originally unanticipated revenue partially offset the expenditure differences of $28,394,251 between the original budget and the final amended budget. The general administration function had a final expenditure budget that is $7,847,798 higher than the original budget. This increase was due in large part to employee health coverage in the Countys self-insured benefit plan. Estimated reserves are required for self-insurance programs, which are recorded as they become available. At the time of the original budget process, these amounts were not readily identifiable. Also contributing to this increase in budgeted expenditures is a 3 year Energy Efficiency Block Grant received from the Department of Energy in the amount of $3,259,800. The Inmate Housing revenue final budget was $2,164,000 less than the original budget. Originally the Commissioners anticipated a higher number of prisoners to be housed at the facility, therefore budgeted for additional funds. The final budget decreased due to a lesser amount of prisoners at the facility. Funds that were originally scheduled in prior fiscal years were not included in the original budget for fiscal year 2010. This practice reflects the Countys policy of letting encumbrances lapse at year-end and re-appropriating them in the current year. This policy created increases in the amended budget for carryovers from the prior year in the general administration, judicial, legal services, elections, public facilities, health and welfare, culture and recreation, conservation, public safety, and miscellaneous functions. A $17,113,227 increase in the final budget over the original budget for expenditures in the public safety function was the result of several factors, including encumbrance carryovers as mentioned above. Included in the public safety function is the Community Supervision and Corrections Department (CSCD), which is not a County department. However, the County has entered into a contract with the CSCD that enables those employees to participate in the Countys employee benefit plan. CSCD reimburses the County 100% of the costs associated with said participation. Management believes inclusion of 100% reimbursed contracts in the original budget would unnecessarily inflate revenues and expenditures because the revenues will always be sufficient to cover the expenditures. The County has elected not to include these amounts in the original, adopted budget each year. Also contributing to the budgeted variances for the public safety function is the Countys participation in several contracts with local agencies for law enforcement services. During the course of the fiscal year, additional interlocal agreements were created with local agencies for the performance of security services. These additional contracts created increased expenditures for the County, but also created an increase in the revenue line supporting the associated expenditure. The final budget in the miscellaneous category increased by $2,556,583. This was due to sub-recipient agreements made after the original budget had been adopted.

21

The health and welfare function had final budgeted expenditures $1,733,000 higher than the original budget for expenditures. This function includes a grant that is managed by the Montgomery County Hospital District for the County. The grant is pass-through in nature, ultimately resulting in a corresponding revenue for the expense incurred. To prevent any increase in taxes for the constituents of the County for this grant-funded cost, the expense is not budgeted until the revenue is budgeted, which was after the original budget process. The increase of expenditures in the final amended budget over the original budget that was not covered by the revenues increase was reported as a decrease in the final amended budgeted net change in fund balances. This amount was a total variance of $11,515,729. The following table presents the differences between the final amended budget and actual expenditures for the General Fund as of September 30, 2010.
General Fund Budget Variances Year Ended September 30, 2010
Variance with Final Budget Positive (Negative) $ 1,681,309 221,312 2,160,684 (1,699,169) (6,174) (113,829) 203,778 (700) (55,704) 1,107,557 3,499,064 12,695,327 331,209 56,019 23,443 251,133 756,391 5,190,271 367,390 8,428 3,320,459 23,000,070 26,499,134 76,573 (24,075,565) (23,998,992) 2,500,142 $ 2,500,142

Final Budget Revenues: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous Total Revenues Expenditures: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Conservation Miscellaneous Total Expenditures Excess Revenues Over Expenditures Other Financing Sources/(Uses): Transfers In Transfers Out Capital Lease Financing Total Other Financing Sources/(Uses) Net Change in Fund Balances Fund Balance - Beginning Fund Balance - Ending $ 117,369,100 1,138,156 11,125,159 12,081,781 527,656 545,137 13,206,839 21,085,788 140,000 1,100,898 178,320,514 27,604,589 15,122,662 2,316,448 1,433,884 6,129,029 44,252,124 63,144,767 6,127,462 540,055 5,004,346 171,675,366 6,645,148 842,325 (1,186,517) 125,403 (218,789) 6,426,359 35,014,007 $ 41,440,366 $

Actual $ 119,050,409 1,359,468 13,285,843 10,382,612 521,482 431,308 13,410,617 21,085,088 84,296 2,208,455 181,819,578 14,909,262 14,791,453 2,260,429 1,410,441 5,877,896 43,495,733 57,954,496 5,760,072 531,627 1,683,887 148,675,296 33,144,282 918,898 (25,262,082) 125,403 (24,217,781) 8,926,501 35,014,007 43,940,508

22

Actual revenues exceeded budgeted revenues by $3,499,064. Fee increases approved by the state legislature comprise a share of the increase ($2,160,684) and serve to offset the shortfall in intergovernmental revenue ($1,699,169). Actual expenditures were $23,000,070 lower than final budgeted expenditures. The general administration function contributed $12,695,327 toward that amount. The risk management department of the County is charged with recording costs of various liability and property claims and settlements. During the fiscal year, costs of those claims were significantly lower than had been anticipated at the time of the budget process. The Countys policy for multiple year grants is to budget the entire grant in the year in which it is awarded. As mentioned previously, Montgomery County received a grant from Department of Energy through the ARRA which spans multiple County fiscal years (3), $3,259,800 was budgeted, of which $193,824 was spent during the fiscal year. All departments in the public safety function of the General Fund expended less than was approved in the final amended budget by $5,190,271. The difference is primarily due to the fact that grants that span multiple County fiscal years or are awarded late in the fiscal year contain monies that are spent in subsequent years. However, the Sheriffs departments continued difficulty retaining qualified staff also caused public safety to expend less than anticipated. The miscellaneous function showed actual expenditures less than the final budget by $3,320,459. This was due in large part to the funding of anticipated salary increases. At the time an increase is approved, the funds are transferred to the appropriate department or function. Therefore, actual expenditures in the miscellaneous function were far less than originally budgeted. The actual net change in fund balance was $2,500,142 greater than anticipated with the final budget. This is the result of a reduction in actual expenditures that included sufficient amounts to cover transfers to other funds as well as the decrease in actual revenues. The Jury Special Revenue Fund and the Memorial Library Special Revenue Fund received $7,089,522 and $8,000,000, respectively, more than shown in the final budget. In both of these funds, the emphasis is on providing a service. In the case of the Jury Special Revenue Fund, that service is in the form of a court system. The Memorial Library Special Revenue Funds emphasis is on culture and recreation. These funds are not expected in any year to provide enough revenues to adequately fund their own services. Therefore, it is anticipated that the General Fund will service the expenditures of those funds every year. Transfers in and out simply provide a mechanism to move funds from one self-balancing set of accounts (a fund) to another selfbalancing set of accounts. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets Montgomery Countys investment in capital assets for its governmental activities as of September 30, 2010 amounted to $697,161,850 (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements, equipment, infrastructure that was purchased, completed or donated since the fiscal year ending September 30, 1981, and construction in progress. Major capital asset events during the current fiscal year included the following: Additions to land (less deletions) totaled $17,277,064 and included purchases of land for the Spring Creek Greenway. Also included in the additions were donations of land for the runway 1432 extension and taxiway reconstruction. Expansion plans include the extension of runway 14-32 to 7,500 feet and the construction of a full parallel taxiway for runway 14-32. Additions to the buildings category (less deletions) of $11,171,882 included various building improvements on the new administration building and an accompanying parking garage. During 2010, the county completed construction of the Spring Creek Greenway Nature Center at a cost of

23

$2,064,443. Additionally, the construction of the Montgomery County Wellness Center was completed in 2010 for a total of $945,575. Vehicles, vehicle modifications, and other various equipment items were purchased at a cost of $6,471,750. In order to reduce communication and infrastructure costs, the county has implemented a new voice over internet protocol (VOIP) system. This new county-wide phone system totaled $1,053,451. A variety of projects for both new infrastructure construction and for expansion or updating of existing infrastructure were ongoing during the year. Infrastructure projects completed in 2010 amounted to $48,816,050. Montgomery County is the 24th fastest growing county in the United States and the fourth fastest growing in Texas1. This brisk growth brings with it a need for vast improvements to a rural infrastructure system. Development frequently comes with donations in the form of roads. Infrastructure donations for the year totaled $47,495,239. Projects that were capitalized from ongoing construction throughout the year, including a nature center and a new west county annex building, totaled $10,986,672. Additional expenditures of $35,432,181 were incurred for construction that was in progress throughout the year. Increases in assets were offset by depreciation expense of $50,796,683.
Montgomery County, Texas Capital Assets (net of depreciation) September 30, 2010 with Comparative Totals for September 30, 2009
Value of Capital Asset Net of Accumulated Depreciation FY 2010 FY 2009 31,035,433 $ 13,758,369 154,398,947 $ 148,142,034 15,334,094 $ 14,363,211 26,439,647 $ 29,123,885 442,245,976 $ 428,884,907 27,707,753 $ 697,161,850 $ 3,262,244

Land Buildings Improvements Equipment Infrastructure Construction in Progress Total

Increase (Decrease) $ 17,277,064 6,256,913 970,883 (2,684,238) 13,361,069 24,445,509 $ 59,627,200

$ 637,534,650

Montgomery County is in the process of constructing a new forensic mental health residential treatment facility. This new facility will be equipped with over 100 beds and will treat those patients who are determined by the court system to be incompetent to proceed with trial. This facility will be designed to restore those individuals to competency as quickly as possible so that they may be returned to court. By September 30, 2010, $26,726,179 had been spent on the construction of the new facility. Efforts to assist constituents in obtaining services and the Countys obligation to provide those services in a rapidly growing county come with many challenges. In 2010, the Commissioners Court has met some of those challenges by completing the Spring Creek Greenway Nature Center, the New West County Annex building, the Montgomery County Wellness Center and an expansion of the jail. The Spring Creek Greenway Nature Center is situated on 11.6 acres at Spring Creek, adjacent to the Peckinpaugh Preserve. The project was funded with monies from the sale of the Rayford Road Community Center and a Texas Parks & Wildlife Grant. The New West County Annex building is located in Magnolia and will house the operations of a JP and Constable office of the County. The expansion of the jail will allow for additional beds and space for inmates.
1

http://www.census.gov

24

The County has committed to multiple road construction projects in fiscal year 2010. In 2005, the voters of Montgomery County approved $160,000,000 in road bonds to fund road improvements throughout the county. The bonds will be issued in phases to fund road construction as the need arises. The final portion of the original authorized road bonds were issued in the second half of fiscal year 2008. However, there is a continued financial need to achieve completion of the activities. Additional information on the Countys capital assets can be found in Note 7 starting on page 53 of this report. Long-Term Debt At September 30, 2010, Montgomery County had total bonded debt outstanding of $477,401,701. Commissioners Court keeps maturity dates confined to no more than 30 years. Despite turbulent economic conditions, the County was able to maintain an underlying rating by Standard and Poors Corporation during the current fiscal year of AA. The County issues three types of debt; general obligation bonds are approved by the voters of the County while revenue bonds and certificates of obligation are approved by Commissioners Court. Of the Countys total debt, $276,375,000 corresponds to general obligation debt, $98,446,701 is in the form of revenue bonds and $102,580,000 represents certificates of obligation. Montgomery Countys total bonded debt had a increase of $25,860,000 during 2010. The following table represents the entire long-term debt of the County at September 30, 2010 on a comparative basis.
Montgomery County, Texas Governmental Activities Outstanding Long-Term Debt
FY 2010 $ 276,375,000 98,446,701 102,580,000 17,164,115 11,787,129 8,794,048 3,242,652 874,939 12,811,130 $ 532,075,714 FY 2009 $ 337,600,000 43,758,601 71,685,000 17,409,156 12,051,322 8,305,224 3,446,666 960,523 7,968,357 $ 503,184,849

General obligation bonds Revenue bonds Certificates of obligation Capital Leases Premiums, net of discounts Compensated absences Medical Obligation Workers Comp Obligation OPEB Liability Total

Debt activity in 2010 included an issue of Refunding Bonds in the amount of $43,380,000. This issue refunded a series of Road Bonds. In addition, the County issued Certificates of Obligation in the Amount of 32,450,000 to build a new mental health facility. The County retired $7,916,900 in debt through scheduled principal payments made during the year. The County is authorized under Article III, Section 52 of the State Constitution to issue bonds payable from ad valorem taxes for the construction and maintenance of roads. There is no constitutional or statutory limit as to rate on bonds issued pursuant to such constitutional provision. However, the amount of bonds that may be issued is limited to 25% of the assessed valuation of real property in the County. The current debt limitation for the County is $9,065,993,000, which is significantly in excess of the Countys outstanding debt obligation, despite the increases in debt issuance during 2010. Additional information on Montgomery Countys long-term debt can be found in Note 9 beginning on page 54 of this report.

25

ECONOMIC FACTORS AND NEXT YEARS BUDGET AND RATES The unemployment rate for the County is currently 7.9%2, which is an increase from a rate of 7.6% a year ago. This compares favorably to the States average unemployment rate of 8.3%3 and the national average rate of 9.6%4. The Commissioners Court enacted a small reduction in operating expenses in most departments in response to the depressed economic environment. Commissioners Court approved allocating a 2% cost of living adjustment and a 2% merit increase in salary in fiscal year 2011. The Commissioners Court approved budgeted revenues and expenditures of $7,500,000 for operating a new Mental Health Facility for fiscal year 2011. The estimated debt service obligation increased by $5,659,130 in fiscal year 2011 to $28,850,831.

All of these factors were considered in preparing the Adopted Budget of Montgomery County, Texas for the fiscal year ending September 30, 2010. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of Montgomery Countys finances for all those with an interest in the governments finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Montgomery County Auditor, P. O. Box 539, Conroe, Texas 77305-0539.

2 3

The Work Source. http://www.wrksolutions.com/employer/lmi/unemploymentrates/LAUSHISTORY.pdf. The Work Source. http://www.wrksolutions.com/employer/lmi/unemploymentrates/LAUSHISTORY.pdf. 4 U.S. Department of Labor, Bureau of Labor Statistics. http://data.bls.gov/PDQ/servlet/SurveyOutputServlet.

26

BASIC FINANCIAL STATEMENTS

27

MONTGOMERY COUNTY, TEXAS Statement of Net Assets September 30, 2010 EXHIBIT I ASSETS: Cash Investments, at Fair Value Cash, Restricted Cash, Restricted for Retainage Receivables: Taxes (net) Accounts (net) Due from Other Governments Inventory, at Cost Deferred Charges Prepaid Items Capital Assets, net of accumulated depreciation Land Buildings Improvements Equipment Infrastructure Construction in Progress Total Assets LIABILITIES: Accounts Payable Retainage Payable Accrued Interest Payable Due to Other Governments Unearned Revenue Noncurrent Liabilities: Due within one year Due in more than one year Total Liabilities NET ASSETS: Invested in Capital Assets, net of related debt Restricted for: Capital Projects Debt Service Unrestricted Total Net Assets Governmental Activities $ 22,478,072 106,167,521 2,059,967 833,266 6,115,257 27,273,576 16,725,713 91,503 15,387,708 686,025 31,035,433 154,398,947 15,334,094 26,439,647 442,245,976 27,707,753 894,980,458 24,024,473 1,419,817 2,894,870 1,692,186 2,692,939 23,732,856 508,342,858 564,799,999 353,407,141 45,673 8,794,048 (32,066,403) 330,180,459

See accompanying notes to the financial statements.

28

MONTGOMERY COUNTY, TEXAS Statement of Activities Year Ended September 30, 2010 EXHIBIT II Program Revenues Fees, Fines, Forfeitures, Operating Capital and Charges Grants and Grants and for Services Contributions Contributions Net (Expense) Revenue and Changes in Net Assets

Functions/Programs Expenses Primary Government: Governmental Activities: Current: General Administration $ 15,339,911 Judicial 24,893,295 Legal Services 2,824,360 Elections 1,827,247 Financial Administration 6,358,514 Public Facilities 43,618,780 Public Safety 62,650,758 Health and Welfare 9,085,174 Culture and Recreation 7,456,924 Conservation 986,843 Public Transportation 111,627,910 Miscellaneous 1,683,887 Debt Service Interest and Fiscal Charges 22,946,953 Total Governmental Activities $311,300,556

$ 5,948,735 12,702,190 518,257 103,831 2,244,114 21,800,561 19,139,564 1,735,047 316,855 9,118,839 $73,627,993

193,824 1,023,178 9,537 743,724 16,889 3,852,111 4,918,321 254,232 1,025 433,649 -

966 1,000,000 6,482,806 313,001 48,503,300 -

(9,197,352) (11,167,927) (2,296,566) (978,726) (4,114,400) (20,801,330) (33,176,277) (2,118,805) (6,885,837) (985,818) (53,572,122) (1,683,887) (22,946,953) (169,926,000)

$11,446,490

$56,300,073

General Revenues: Property Taxes Other Taxes Mixed Beverage Taxes Bingo Taxes Vehicle Weight Tax Unrestricted Investment Earnings Gain on Sale of Capital Assets Insurance Recoveries for Prior Year Losses Total General Revenues Change in Net Assets Net Assets - Beginning Net Assets - Ending

156,397,865 260,187 1,252,290 153,557 158,228 790,693 717,806 288,946 160,019,572 (9,906,428) 340,086,887 $ 330,180,459

See accompanying notes to the financial statements.

29

MONTGOMERY COUNTY, TEXAS Balance Sheet Governmental Funds September 30, 2010 EXHIBIT III General ASSETS: Cash Investments, at Fair Value Cash, Restricted Cash, Restricted for Retainage Receivables: Taxes (net) Accounts (net) Due from Other Funds Due from Other Governments Inventory, at Cost Prepaid Items TOTAL ASSETS LIABILITIES AND FUND BALANCES: Liabilities: Accounts Payable Retainage Payable Due to Other Funds Due to Other Governments Deferred Revenue Total liabilities Fund Balances: Reserved for: Prepaid Items Capital Projects Inventory Debt Service Unreserved, designated for: General Fund Encumbrances Special Revenue Fund Encumbrances Capital Project Fund Encumbrances OPEB Obligation Unreserved, undesignated, reported in: General Fund Special Revenue Funds Total Fund Balances TOTAL LIABILITIES AND FUND BALANCES
See accompanying notes to the financial statements.
30

Road and Bridge $ 2,923,015 7,132,781 586,418 220,557 2,895,627 693,455 91,503 14,543,356

15,808,924 47,434,669 4,603,380 3,181,762 3,966,754 8,892,946 614,103 84,502,538

14,339,231 17,795,270 1,692,186 6,735,343 40,562,030

2,017,799 630,734 606,462 3,254,995

614,103 189,731 12,811,130 30,325,544 43,940,508 $ 84,502,538 $

91,503 1,176 11,195,682 11,288,361 14,543,356

Revenue/Tax Bonds Series 2009 $ 1,546 19,422,114 19,423,660 $

Other Governmental Funds 3,744,587 32,177,957 2,059,967 833,266 925,459 242,493 17,957,074 7,139,312 71,922 65,152,037 $

Total Governmental Funds 22,478,072 106,167,521 2,059,967 833,266 6,115,257 3,644,812 24,819,455 16,725,713 91,503 686,025 183,621,591

1,865,361 32,319 1,897,680

5,802,082 1,419,817 6,361,132 1,338,338 14,921,369

24,024,473 1,419,817 24,819,455 1,692,186 8,680,143 60,636,074

17,525,980 17,525,980 $ 19,423,660 $

31

42,762 17,729,076 10,761,380 60,119 38,306 21,599,025 50,230,668 65,152,037 $

656,865 35,255,056 91,503 10,761,380 189,731 61,295 38,306 12,811,130 30,325,544 32,794,707 122,985,517 183,621,591

32

MONTGOMERY COUNTY, TEXAS Reconciliation of the Balance Sheet of the Governmental Funds to the Statement of Net Assets September 30, 2010 Total fund balances - governmental funds (page 31) Amounts reported for governmental activities in the statement of net assets are different because: Bond issuance costs are expenditures in the funds but are amortized over the life of the bonds in government-wide statements. Capital assets used in governmental activities are not financial resources and therefore are not reported in the funds. These capital assets (net of accumulated depreciation) consist of: Land Buildings Improvements Equipment Infrastructure Construction in Progress Total Capital Assets Other long term assets that were not available to pay for current-period expenditures were deferred in the funds. These assets consist of fines and fees receivable, net of allowance. Property taxes earned that are not available to pay for current-period expenditures are deferred in the funds. Some liabilities are not due and payable in the current period and therefore are not reported in the funds. Those liabilities consist of: Interest payable Bonds and capital leases payable OPEB Liability Medical Obligation Worker's Comp Obligation Arbitrage payable Compensated absences Total future period liabilities Net assets of governmental activities
See accompanying notes to the financial statements.
33

122,985,517

15,387,708

31,035,433 154,398,947 15,334,094 26,439,647 442,245,976 27,707,753 697,161,850

23,628,764

5,987,204

(2,894,870) (506,352,945) (12,811,130) (3,242,652) (874,939) (8,794,048) (534,970,584) $ 330,180,459

MONTGOMERY COUNTY, TEXAS Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds Year Ended September 30, 2010
EXHIBIT IV Road and Bridge 15,188,608 5,778,652 308,054 1,629,672 22,456 2,797,225 1,752,708 1,134,121 28,611,496

REVENUES: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous TOTAL REVENUES EXPENDITURES: Current: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Culture and Recreation Conservation Public Transportation Miscellaneous Capital Projects Debt Service: Principal Retirement Interest and Fiscal Charges Issuance Costs TOTAL EXPENDITURES Excess (Deficiency) Revenues Over Expenditures OTHER FINANCING SOURCES/(USES): Transfers In Transfers Out Capital Lease Financing Issuance of Refunding Bonds Proceeds from Certificate of Obligation Premium on Debt Issuance Payment to Refunded Bonds Escrow Agent Discounts on Debt Issuance TOTAL OTHER FINANCING SOURCES/(USES) Net Change in Fund Balances Fund Balances at Beginning of Year FUND BALANCES AT END OF YEAR
See accompanying notes to the financial statements.

General 119,050,409 1,359,468 13,285,843 10,382,612 521,482 431,308 13,410,617 21,085,088 84,296 2,208,455 181,819,578

14,909,262 14,791,453 2,260,429 1,410,441 5,877,896 43,495,733 57,954,496 5,760,072 531,627 1,683,887 148,675,296 33,144,282 918,898 (25,262,082) 125,403 (24,217,781) 8,926,501 35,014,007 $ 43,940,508 $

500,000 53,157 368,022 25,153,875 26,075,054 2,536,442 722,189 (632,522) 89,667 2,626,109 8,662,252 11,288,361

34

Revenue/Tax Bonds Series 2009 $ 21,663 21,663 $

Other Governmental Funds 23,302,590 414,100 1,331,124 7,786,370 1,647,124 314,855 298,987 1,210,551 226,370 36,532,071

Total Governmental Funds 157,541,607 7,552,220 14,925,021 19,798,654 2,168,606 790,282 16,506,829 21,085,088 3,047,555 3,568,946 246,984,808

26,793,852 187 26,794,039 (26,772,376) (26,772,376) 44,298,356 $ 17,525,980 $

848,796 8,865,700 455,788 3,450,850 6,707,136 8,393,594 759,644 64,307,116 7,916,899 20,511,040 1,336,652 123,553,215 (87,021,144) 25,371,896 (1,118,379) 3,000,000 43,380,000 32,450,000 2,075,459 (44,643,876) (601,022) 59,914,078 (27,107,066) 77,337,734 50,230,668 $

15,758,058 23,657,153 2,716,217 1,410,441 5,877,896 43,995,733 61,405,346 12,520,365 8,393,594 899,649 25,913,519 1,683,887 91,100,968 7,916,899 20,511,040 1,336,839 325,097,604 (78,112,796) 27,012,983 (27,012,983) 3,125,403 43,380,000 32,450,000 2,075,459 (44,643,876) (601,022) 35,785,964 (42,326,832) 165,312,349 122,985,517

35

36

MONTGOMERY COUNTY, TEXAS Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of the Governmental Funds to the Statement of Activities Year Ended September 30, 2010

Amounts reported for governmental activities in the statement of activities (page 29) are different because: Net change in fund balances - total governmental funds (page 35) Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins, seizures, and donations) is to increase net assets. Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. The changes in these expenditures are as follows: Compensated absences Bond interest owed but not yet paid Amortization of debt service Agency fund receivables Medical Obligation Worker's Comp Obligation OPEB Obligation $ (42,326,832)

11,557,171

48,070,031

6,339,288

(24,133,460)

(488,824) 527,798 (522,396) 31,160 (3,242,652) (874,939) (4,842,773) (9,412,626)

Change in net assets of governmental activities (page 29)

See accompanying notes to the financial statements.

(9,906,428)

37

MONTGOMERY COUNTY, TEXAS Statement of Revenues, Expenditures, and Changes in Fund Balances Budget (GAAP Basis) and Actual Major Governmental Funds Year Ended September 30, 2010
EXHIBIT V Page 1 of 3 General Fund Original Budget REVENUES: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous TOTAL REVENUES EXPENDITURES: Current: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Conservation Public Transportation Miscellaneous TOTAL EXPENDITURES Excess (Deficiency) Revenues Over Expenditures OTHER FINANCING SOURCES/ (USES): Transfers In Transfers Out Capital Lease Financing TOTAL OTHER FINANCING SOURCES Net Change in Fund Balances Fund Balances at Beginning of Year FUND BALANCES AT END OF YEAR $ 117,369,100 1,124,936 10,920,002 140,561 458,000 530,930 6,612,586 23,249,788 140,000 677,300 161,223,203 Final Budget $117,369,100 1,138,156 11,125,159 12,081,781 527,656 545,137 13,206,839 21,085,788 140,000 1,100,898 178,320,514 Variance with Final Budget Positive (Negative) $ 1,681,309 221,312 2,160,684 (1,699,169) (6,174) (113,829) 203,778 (700) (55,704) 1,107,557 3,499,064

Actual $ 119,050,409 1,359,468 13,285,843 10,382,612 521,482 431,308 13,410,617 21,085,088 84,296 2,208,455 181,819,578

19,756,791 14,696,318 2,235,004 1,035,353 6,086,679 46,064,943 46,031,540 4,394,462 532,262 2,447,763 143,281,115 17,942,088

27,604,589 15,122,662 2,316,448 1,433,884 6,129,029 44,252,124 63,144,767 6,127,462 540,055 5,004,346 171,675,366 6,645,148

14,909,262 14,791,453 2,260,429 1,410,441 5,877,896 43,495,733 57,954,496 5,760,072 531,627 1,683,887 148,675,296 33,144,282

12,695,327 331,209 56,019 23,443 251,133 756,391 5,190,271 367,390 8,428 3,320,459 23,000,070 26,499,134

17,942,088 35,014,007 $ 52,956,095

842,325 (1,186,517) 125,403 (218,789) 6,426,359 35,014,007 $ 41,440,366

918,898 (25,262,082) 125,403 (24,217,781) 8,926,501 35,014,007 $ 43,940,508

76,573 (24,075,565) (23,998,992) 2,500,142 2,500,142

See accompanying notes to the financial statements.

38

MONTGOMERY COUNTY, TEXAS Statement of Revenues, Expenditures, and Changes in Fund Balances Budget (GAAP Basis) and Actual Major Governmental Funds Year Ended September 30, 2010
EXHIBIT V Page 2 of 3 Road and Bridge Fund Original Budget REVENUES: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous TOTAL REVENUES EXPENDITURES: Current: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Conservation Public Transportation Miscellaneous TOTAL EXPENDITURES Excess (Deficiency) Revenues Over Expenditures OTHER FINANCING SOURCES/ (USES): Transfers In Transfers Out Capital Lease Financing TOTAL OTHER FINANCING SOURCES Net Change in Fund Balances Fund Balances at Beginning of Year FUND BALANCES AT END OF YEAR
See accompanying notes to the financial statements.

Final Budget $ 15,182,300 6,033,500 308,054 3,183,355 17,000 1,000,000 6,415,105 32,139,314

Actual $ 15,188,608 5,778,652 308,054 1,629,672 22,456 2,797,225 1,752,708 1,134,121 28,611,496

Variance with Final Budget Positive (Negative) $ 6,308 (254,848) (1,553,683) 5,456 2,797,225 752,708 (5,280,984) (3,527,818)

$ 15,182,300 6,033,500 140,000 17,000 1,000,000 22,372,800

19,565,183 19,565,183 2,807,617

3,248,190 288,839 506,928 32,891,560 36,935,517 (4,796,203)

500,000 53,157 368,022 25,153,875 26,075,054 2,536,442

2,748,190 235,682 138,906 7,737,685 10,860,463 7,332,645

2,807,617 8,662,252 $ 11,469,869

722,189 722,189 (4,074,014) 8,662,252 $ 4,588,238

722,189 (632,522) 89,667 2,626,109 8,662,252 $ 11,288,361

(632,522) (632,522) 6,700,123 6,700,123

39

MONTGOMERY COUNTY, TEXAS Statement of Revenues, Expenditures, and Changes in Fund Balances Budget (GAAP Basis) and Actual Major Governmental Funds Year Ended September 30, 2010
EXHIBIT V Page 3 of 3 Totals Original Budget REVENUES: Taxes Licenses and Permits Fees Intergovernmental Charges for Services Interest Contract Reimbursements Inmate Housing Fines and Forfeitures Miscellaneous TOTAL REVENUES EXPENDITURES: Current: General Administration Judicial Legal Services Elections Financial Administration Public Facilities Public Safety Health and Welfare Conservation Public Transportation Miscellaneous TOTAL EXPENDITURES Excess (Deficiency) Revenues Over Expenditures OTHER FINANCING SOURCES/ (USES): Transfers In Transfers Out Capital Lease Financing TOTAL OTHER FINANCING SOURCES Net Change in Fund Balances Fund Balances at Beginning of Year FUND BALANCES AT END OF YEAR $ 132,551,400 7,158,436 10,920,002 280,561 458,000 547,930 6,612,586 23,249,788 1,140,000 677,300 183,596,003 Final Budget $ 132,551,400 7,171,656 11,433,213 15,265,136 527,656 562,137 13,206,839 21,085,788 1,140,000 7,516,003 210,459,828 Variance with Final Budget Positive (Negative) $ 1,687,617 (33,536) 2,160,684 (3,252,852) (6,174) (108,373) 3,001,003 (700) 697,004 (4,173,427) (28,754)

Actual $134,239,017 7,138,120 13,593,897 12,012,284 521,482 453,764 16,207,842 21,085,088 1,837,004 3,342,576 210,431,074

19,756,791 14,696,318 2,235,004 1,035,353 6,086,679 46,064,943 46,031,540 4,394,462 532,262 19,565,183 2,447,763 162,846,298 20,749,705

27,604,589 15,122,662 2,316,448 1,433,884 6,129,029 47,500,314 63,144,767 6,416,301 1,046,983 32,891,560 5,004,346 208,610,883 1,848,945

14,909,262 14,791,453 2,260,429 1,410,441 5,877,896 43,995,733 57,954,496 5,813,229 899,649 25,153,875 1,683,887 174,750,350 35,680,724

12,695,327 331,209 56,019 23,443 251,133 3,504,581 5,190,271 603,072 147,334 7,737,685 3,320,459 33,860,533 33,831,779

20,749,705 43,676,259 $ 64,425,964

1,564,514 (1,186,517) 125,403 503,400 2,352,345 43,676,259 $ 46,028,604

1,641,087 (25,894,604) 125,403 (24,128,114) 11,552,610 43,676,259 $ 55,228,869

76,573 (24,708,087) (24,631,514) 9,200,265 9,200,265

See accompanying notes to the financial statements.

40

MONTGOMERY COUNTY, TEXAS Statement of Assets and Liabilities Fiduciary Funds As of September 30, 2010

EXHIBIT VI

Agency Funds ASSETS: Cash Investments, at Fair Value Accounts Receivable TOTAL ASSETS LIABILITIES: Accounts Payable Due to Other Governments TOTAL LIABILITIES

9,942,177 656,594 26,729 10,625,500

5,341,864 5,283,636 10,625,500

See accompanying notes to the financial statements.

41

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements of Montgomery County, Texas have been prepared in conformity with generally accepted accounting principles (GAAP) as applied to local government units in the United States of America. The Governmental Accounting Standards Board (GASB) is the accepted standardsetting body for establishing governmental accounting and financial reporting principles. Following is a summary of the more significant policies. A) REPORTING ENTITY: Montgomery County, Texas (the County) was created in 1837. The County is a political subdivision of the State of Texas. The Commissioners Court, composed of the County Judge and four Commissioners, governs the County. The following services are provided for the citizens: public safety, road and bridge construction and maintenance, health and social services, culture and recreation, public improvements, environmental protection, and administrative services. In 1991, GASB issued Statement No. 14, The Financial Reporting Entity, which established standards for defining and reporting on the financial reporting entity. The discussion that follows sets forth the guidelines for an entitys inclusion in the Countys financial statements. The definition of the reporting entity is based primarily on the notion of financial accountability. The elected officials governing Montgomery County are accountable to their constituents for their public policy decisions, regardless of whether those decisions are carried out directly through the operations of the County or by their appointees through the operations of a separate entity. Therefore, the County is not only financially accountable for the organizations that make up its legal entity, it is also financially accountable for legally separate organizations if its officials appoint a voting majority of an organizations governing body and either, it is able to impose its will on that organization or, there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the County. Depending upon the significance of the Countys financial and operational relationships with various separate entities, the organizations are classified as blended or discrete component units, related organizations, joint ventures, or jointly governed organizations, and the financial disclosure is treated accordingly. Blended Component Units - Legally separate entities that either a) have the same governing body as the governing body of the primary government or b) provide services entirely, or almost entirely, to the primary government must be reported in the financial statements of the primary government as blended component units. Montgomery County Jail Financing Corporation: The Montgomery County Jail Financing Corporation was created by the Commissioners Court of the County in September 2006 as a 501(c)2 Title Holding Entity. The Corporations Board of Directors and Officers are comprised of the members of Commissioners Court. The Corporations stated purpose is to provide financing for the construction of an 1,100-bed detention facility, which will subsequently be sold to the County in a lease-purchase transaction. The Corporations financial transactions have been reported in the Debt Service Funds and the Capital Project Funds of the County. Montgomery County does not issue separate financial statements for the Jail Financing Coporation. Related Organizations - Where the Commissioners Court is responsible for appointing a majority of the members of a board of another organization, but the Countys accountability does not extend beyond making such appointments, disclosure is made in the form of the relation between the County and such organization.
42

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Montgomery County Emergency Service Districts No. 1-14: The emergency service districts are organized under the statutes of the State of Texas as political subdivisions of the State to provide protection from fire for life and property. Commissioners Court appoints a five-member board for each district, and must approve the issuance of any longterm debt for each. Individual boards retain authority to levy taxes and approve or modify annual appropriation budgets. Inasmuch as each district is required by state law to have audited financial statements prepared, and because the exercise of authority by Commissioners Court is of a compliant nature rather than substantive, these entities are not included in the Countys financial statements. Montgomery County Housing Authority: The Montgomery County Housing Authority is organized as a public corporation pursuant to Chapter 392 of the Statutes of the State of Texas, Local Government Code. Its stated mission is the development, acquisition, leasing and administration of federally assisted housing programs under the direction of the U.S. Department of Housing and Urban Development. Commissioners Court appoints a five-member board for the corporation, but may not remove a member at-will. There is also no financial interdependence between the corporation and the County. The corporation issues a separate financial report, which may be obtained from its offices at 521 N. Thompson Street, Conroe, Texas, 77301. B) IMPLEMENTATION OF NEW STANDARD: In the current year, the County implemented the following new standards: GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, which established accounting and financial reporting requirements for intangible assets to reduce inconsistencies, thereby enhancing the comparability of the accounting and financial reporting of such assets among state and local governments. GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, establishes accounting and reporting standards for derivative instruments. C) FINANCIAL STATEMENT PRESENTATION, MEASUREMENT FOCUS AND BASIS OF ACCOUNTING: Government-wide Statements Government-wide financial statements consist of the Statement of Net Assets and the Statement of Activities. These statements report information on all of the non-fiduciary activities of the primary government and its blended component unit. The effect of inter-fund transfers has been removed from these statements, but continues to be reflected on the fund statements. Governmental activities are supported mainly by taxes and intergovernmental revenues. The Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include 1) charges to customers or applicants who purchase, use or directly benefit from goods, services or privileges provided by a given function, and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included in program revenues are reported as general revenues. The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Major revenue types, which have been accrued, are district and county clerk fees, justice of the peace fines,
43

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 revenue from investments, intergovernmental revenue and charges for services. recognized as revenue when all applicable eligibility requirements are met. Grants are

Fund-level Statements Separate fund financial statements are provided for governmental funds and fiduciary funds even though the latter are excluded from the government-wide financial statements. Major individual governmental funds are reported in separate columns in the fund financial statements. Non-major funds are aggregated into a single column in the fund financial statements. Detailed statements for non-major funds are presented within the Combining and Individual Fund Statements and Schedules. Governmental fund level financial statements are reported using current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. Measurable and available revenues include revenues expected to be received within 60 days after the fiscal year ends. Receivables which are measurable but not collectible within 60 days after the end of the fiscal year are reported as deferred revenue. Property taxes levied prior to September 30, 2009 that were due October 1, 2009, have been assessed to finance the budget of the fiscal year ending September 30, 2010. In accordance with the modified accrual basis of accounting, the balances outstanding at September 30, 2010, and beyond the 60 days after year end have been reflected as deferred revenue and taxes receivable in the fund financial statements. Property taxes and interest earned as of September 30 and received within 60 days of year end are accrued as income in the current period. Expenditures generally are recorded when a liability is incurred; however, debt service expenditures, claims and judgments, and compensated absences are recorded only when payment is made. Fiduciary fund level financial statements include fiduciary funds which are classified into private purpose trust and agency funds. The County has only agency funds which are used to account for assets held by the County as an agent for individuals, private organizations, other governments and other funds. Agency funds do not involve a formal trust agreement. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement of results of operations. The County reports the following major governmental funds: The General Fund is the general operating fund of the County and is always classified as a major fund. The General Fund is used to account for all financial resources except those required to be accounted for in another fund. Major revenue sources include property taxes, charges for services, and intergovernmental revenues. Primary expenditures are for general and financial administration, public safety, judicial operations, health and welfare, and capital acquisition. The Road and Bridge Special Revenue Fund is used to account for rehabilitation, repair and maintenance of the Countys roadways and bridges. The Road and Bridge Fund is financed by a designated part of the annual property tax levy, as well as certain statutory fees. The Capital Projects-Revenue/Tax Bonds, Series 2009 Fund is used to account for fixed rate road construction bonds approved in 2009 by the voters of the County. The $56,190,000 in proceeds will be used to satisfy the Countys obligation under a pass-through toll agreement with the State of Texas to improve four specific state-owned roads in the County as well as direct connectors to two additional roads of the state highway system. The County reports the following nonmajor governmental funds:
44

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Special Revenue Funds are used to account for specific revenue sources (other than capital projects) that are restricted to expenditures for specified purposes. These restrictions exist both externally (by agreement with other entities or by statute) and internally (by policy of Commissioners Court). Debt Service Funds are used to account for the receipt and disbursement of funds to retire debt resulting from the issuance of general obligation bonds, certificates of obligation and lease revenue bonds. Financing is provided by a specific annual property tax levy, the investment interest earned thereon and lease payments to the Jail Financing Corporation for the lease purchase of the Joe Corley Detention Facility. Capital Project Funds are used to account for financial resources to be used for the acquisition or construction of major capital assets and infrastructure. Existing projects include construction of an administration building, parking garage, road construction, airport improvements, and various remodeling plans. The County reports the following fiduciary funds: Agency Funds are used to account for assets held by the County as custodian for individuals and other governmental units, such as officials fee accounts, inmate funds, cash bail bonds, and other similar arrangements. D) ASSETS, LIABILITIES, AND FUND EQUITY: 1. Cash and Investment Cash and cash equivalents include amounts in demand deposits as well as bank certificates with a maturity date within three months of the date acquired by the County. The County is authorized by the Public Funds Investment Act of 1987 to invest idle funds in a) obligations of the United States and its agencies or instrumentalities, b) obligations of the State of Texas, c) obligations of states, agencies, political subdivisions, and municipalities having a rating of not less than A, and d) fully collateralized direct repurchase agreements. The County reports its investments as required by GASB Statement No. 31 Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Investments with a maturity of less than a year at acquisition are reported at amortized cost. Investments in open-end mutual funds are reported at fair value, as determined by the funds current share prices. This value also approximates cost. Additionally, the Countys investments in the states public funds investment pool are reported at fair value based on the value per share of the pools underlying portfolio. Historically, the value per share in this public fund investment pool has approximated cost; therefore, the Countys investments in this pool are reported at amortized cost. 2. Receivables Property taxes are recognized as revenues in the period for which they are levied, regardless of the lien date. Property taxes for the County are levied based on taxable value on the lien date of January 1 prior to September 30 of the same year. They become due October 1 of that same year and delinquent after January 31 of the following year. Accordingly, receivables and revenues for prior-year levies delinquent at year end are reflected on the governmentwide statement based on the full accrual method of accounting and under the modified accrual method in the fund statements. Accounts receivable from other governments include amounts due from grantors in regards to approved grants for specific programs and reimbursements for services performed by the County. Program grants are recorded as receivables and revenues at the time all eligibility requirements have been met and reimbursable costs are incurred.
45

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Reimbursements for services performed are recorded as receivables and revenues when they become eligible for accrual in the government-wide statements. Included are fines and costs assessed by court action and billable services for certain contracts. Receivables are shown net of an allowance for uncollectibles. 3. Inter-fund Transactions Outstanding balances of lending and borrowing type activities between funds are classified as due from other funds and due to other funds, respectively, on the fund financial statements. Inter-fund activity has been eliminated for the government-wide statements. 4. Inventories and Prepaid Items Inventory is valued at cost using the first-in, first-out (FIFO) method. Inventory in the Road and Bridge Fund consists of expendable paving materials held for consumption in accordance with several contracts. The cost is recorded as an expenditure at the time individual inventory items are consumed. Certain payments to vendors reflect costs applicable to future accounting periods and recorded as prepaid items in both government-wide and fund financial statements. In the fund financial statements, reported inventories and prepaid items are offset by a reservation of fund balance, which indicates they do not represent available spendable resources even though they are a component of current assets. 5. Capital Assets Capital assets, which include land, buildings, improvements, equipment, infrastructure, and construction in progress, are reported in the government-wide financial statements. By policy of the Commissioners Court, acquisitions are capitalized when they cost at least $1,000 and have a useful life in excess of five years. Buildings and building improvements require a cost of at least $5,000 and a useful life in excess of 5 years. The policy applied to infrastructure acquisitions requires a cost of at least $10,000 and a useful life in excess of five years. Infrastructure assets include county-owned roads, drainage improvements, bridges, signals, and runways. Capital assets are recorded at historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value on the date of donation. The costs of normal maintenance and repair that do not add to the value of the asset or materially extend the assets life are expensed rather than capitalized. Capital assets, including infrastructure, are depreciated using the straight-line method over the following estimated useful lives (in years): Assets Buildings Improvements Equipment Infrastructure Years 5-50 5-30 5-15 5-50

6. Payables Amounts due to suppliers for trade purchases and amounts due to employees for salaries and benefits are presented on both the government-wide statements and the fund statements as accounts payable. Amounts due to various contractors for funds previously deducted from construction draws are presented as retainage payable. Both categories represent current liabilities. 7. Deferred Revenue
46

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 The County records deferred revenue for uncollected taxes, received but unearned grant revenues and other miscellaneous fee revenues in the fund financial statements. In the government-wide statements, tax revenues are not deferred, but are recognized in the year of levy. 8. Long-term Obligations In the government-wide financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the straight-line method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 9. Compensated Absences A liability for unused vacation and compensatory time for all full-time regular employees is calculated and reported in the government-wide financial statements. For financial reporting purposes, the following criteria have been applied in considering the accrual of the liability associated with compensated absences: a) leave or compensation is attributable to services already rendered, and b) leave or compensation is not contingent on a specific event (such as illness). GASB Interpretation No. 6 indicates that liabilities for compensated absences should only be recognized in the fund statements to the extent the liabilities have matured and are payable out of current available resources. Compensated absences are accrued in the governmentwide statements. Each full-time regular employee earns ten days of excused leave per year, and from ten to twenty-five days of vacation time may be earned per year. A maximum of sixty days for excused leave may be accrued, and for those employees hired prior to September 1987, the number of days of excused leave accrued at September 30, 1987, may be paid only upon retirement. A maximum of twenty-five days of vacation may be accrued, and is paid upon retirement, resignation, or discharge from the County. Compensatory time is earned in accordance with the provisions of the Fair Labor Standards Act, as it applies to government employees. 10. Arbitrage Rebate The Tax Reform Act of 1986 established regulations for the rebate to the federal government of arbitrage earnings on local government bonds. Issuing governments must calculate any rebate due and remit the amount due at least every five years. There were no arbitrage rebate payments made during fiscal year 2010. 11. Net Assets/Fund Balance (reserved, restricted) For the government-wide financial statements, restricted net assets represent externally imposed restrictions by creditors, grantors, contributors or laws or regulations of other governments. They may also represent restrictions imposed by law through constitutional provisions or enabling legislation.
47

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 For the fund financial statements, reserved fund balances represent those portions of fund equity not available for appropriation or that are legally segregated for a specific future use. Fund reservations include debt service, capital projects, prepaid items, and inventories. Generally, resources that are reserved in the fund financial statements are broader in scope than resources that are restricted. However, in some instances, there may be some resources that would be considered restricted in the government-wide financial statements, but not considered reserved in the fund financial statements. 12. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2- RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS: The governmental fund statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net changes in fund balances total governmental funds and changes in net assets of governmental activities as reported in the government-wide statement of activities. Several of the elements of that reconciliation are more fully explained below. Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. The details of this difference are as follows: Capital outlay Depreciation expense Net adjustment to increase net changes in fund balancestotal governmental funds to arrive at changes in net assets of governmental activities
$

62,353,854 (50,796,683)

11,557,171

The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins, seizures, and donations) is to increase net assets. The details of this difference are as follows: In the statement of activities, only the gain on the sale of capital assets is reported. However, in the governmental funds, the proceeds from the sale increase financial resources. Thus, the change in net assets differs from the change in fund balance by the cost of the capital assets sold. The acquisition of capital assets by seizure and by donations increase net assets in the statement of activities, but do not appear in the governmental funds because they are not financial resources. Net adjustment to increase net changes in fund balances-total governmental funds to arrive at changes in net assets of governmental activities $ 209,892

47,860,139 $ 48,070,031

The issuance of long-term debt (e.g., bonds, leases) provides current financial resources to governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net
48

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. The details of this difference are as follows:
Debt issued or incurred: Issuance of refunding bonds Issuance of certificates of obligation Premium on bonds issues, net Capital lease financing Issuance Costs for new debt Payment to Bond Escrow Agent for refunding debt Principal repayments: General obligation debt Certificates of obligation debt Capital leases Net adjustment to increase net changes in fund balances-total governmental funds to arrive at changes in net assets of governmental activities $ (43,380,000) (32,450,000) (1,474,437) (3,125,403) 365,160 44,643,876 6,361,900 1,555,000 3,370,444

(24,133,460)

Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in governmental funds. The details of this difference are as follows: Compensated absences Accrued interest Amortization of gain on refunding bonds Amortization of accrued interest on refunding bonds Amortization of issuance costs Amortization of bond discounts Amortization of bond premiums Increase of receivable for reimbursement of county expenditures Claims and judgements Increase of Other Post Employment Benefits Net adjustment to decrease net changes in fund balancestotal governmental funds to arrive at changes in net assets of governmental activities $ (488,824) 527,798 196,162 (692,545) (475,088) (53,425) 502,500 31,160 (4,117,591) (4,842,773)

(9,412,626)

NOTE 3- STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY: A) BUDGETS AND BUDGETARY ACCOUNTING: The budget law of the State of Texas provides that the amounts budgeted for the current expenditures from the various funds of the County shall not exceed the balances in said funds plus the anticipated revenues for the current year for which the budget is made as estimated by the County Auditor. In addition, the law states that the Commissioners Court may, upon proper application, transfer an existing budget surplus during the year to a budget of like kind and fund, but no such transfer shall increase the total of the budget.

49

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 The budget is prepared by the County Auditor and adopted by the Commissioners Court following departmental budget reviews and a public hearing. A copy of the budget must be filed with the Clerk of the County Court and made available to the public. The Commissioners Court must provide for a public hearing on the budget on some date within ten calendar days after the filing of the budget and prior to its adoption. The budget is legally adopted by an order of the Commissioners Court on a basis consistent with generally accepted accounting principles. The legal level of control (as set forth by statute) is total resources as appropriated to each fund. Any expenditure that alters the total budgeted amounts of a fund must be approved by Commissioners Court, and the budget amended. The annual budget is monitored and reported in the financial statements at the function level, as management believes that this provides for a more thorough disclosure of the Countys operations. In addition, management files notice of all line item transfers for public record. For fiscal year 2010, formal budgets were adopted for the General Fund, the Special Revenue Funds, and the Debt Service Fund. Formal budgetary integration is not employed for Capital Project Funds, and legal budgets are not adopted, because budgetary control is achieved through legally binding construction contracts. All appropriations lapse at fiscal year end with the exception of grant awards and certain ongoing projects. The Commissioners Court may approve expenditures as an amendment to the budget to meet an unusual and unforeseen condition that could not have been included in the original budget through the use of reasonably diligent thought and attention. Such expenditures would include the re-appropriation of approved but unexpended amounts for encumbrances, grants, and certain projects from the previous fiscal year. In fiscal 2010, budget amendments totaling $28,299,230 were approved that met these criteria. The Commissioners Court may also adopt a supplemental budget for the limited purpose of spending proceeds that become available for disbursement in a fiscal year, but are not included in the budget for that budget year. Included in this category are public or private grants or aid money, revenue from intergovernmental contracts, and proceeds from the issuance of debt. In fiscal 2010, supplemental appropriations were approved in the amounts of $28,843,945, $10,594,252, and $3,125,403 for grants received, intergovernmental contracts executed, and capital leases approved, respectively. B) DEFICIT FUND EQUITY: At September 30, 2010, the Attorney Administration Special Revenue Fund had deficit fund balance of $1,627. Management anticipates that future revenues will replenish the Attorney Administration Special Revenue Fund.

50

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 NOTE 4- DEPOSITS AND INVESTMENTS: A) DEPOSITS: Custodial Credit Risk deposits. In the case of deposits, this is the risk that in the event of a bank failure, the governments deposits may not be returned to it. The County does not have a policy for custodial credit risk. As of September 30, 2010, the Countys bank balance (collected funds) was $36,998,050. At that same date, none of the Countys bank balance was exposed to custodial credit risk since the Countys deposits were insured and collateralized by securities pledged by the depository and held by third party agents of the County in the Countys name.
B) INVESTMENTS:

As of September 30, 2010, the County had the following investments: Investment Type Chase Business High Yield Savings TexSTAR Investment Pool States Investment Pool (TEXPOOL) Lone Star Investment Pool Money Market Mutual Fund (ICT) Money Market Mutual Fund (BPIF) Money Market Mutual Fund (AIM) Total Investments
Fair Value Weighted Average Maturity (in years)

5,011,850 11,022,178 16,701,530 12,867,345 29,033,106 3,445,837 28,742,269 $106,824,115

0.13 0.21 0.24 0.12 0.10 0.11

The County invested idle funds in a) the Government Portfolio of Investors Cash Trust, b) the Trust for Federal Securities - FedFund with BlackRock Provident Institutional Funds, c) the Short-Term Investments Trust (STIT) Government and Agency Portfolio with AIM Funds, and d) a Chase business high yield savings account. These mutual funds share several characteristics that have a positive effect on the safety of the Countys funds, including: SEC registration and regulation, AAAm rating by Standard and Poors, Limitations on investments to direct obligations of the US Treasury, US agencies, and its instrumentalities, and repurchase agreements collateralized by same, An average weighted maturity that is less than 90 days (0.25 years), and A portfolio valuation of net assets that is maintained at $1 per share.

Additionally, funds were invested in the Texas Local Government Investment Pool (TexPool) and Lone Star Investment Pool. These external investment pools were created in conformity with certain acts in the Government Code of the Texas Civil Statutes. The financial operations of the pools are managed by third-party investment services and oversight is provided by separate advisory boards. Additional financial oversight for TexPool is provided by the Comptroller of Public Accounts of the State of Texas. Although these pools are not SEC-registered, they adhere to the same standards as money market mutual funds for limitations on its investments, the length of its average weighted maturity, and the valuation of its net assets. Custodial credit risk investments. For an investment, this is the risk that, in the event of the failure of the counterparty, the government will not be able to recover the value of its investments or collateral securities that are in possession of an outside party. While the County does not have an investment policy for custodial credit risk, there is no need for such policy because of the nature of the Countys investments. A third party institution is required to hold the insured,
51

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 registered securities underlying the countys investments in a safekeeping account in the Countys name. Interest rate risk. In accordance with its written investment policy, the county manages its exposures to declines in fair value by limiting the maturity of its investments to less than one year at the time of purchase. Credit risk. While state statutes allow for additional investments, the Countys formal investment policy authorizes the County to only invest in the following: Obligations of the U.S. Treasury and Governmental Agencies, Time deposits, Negotiable Order of Withdrawal (NOW) Accounts, Investment Pools rated AAA or AAAm by at least 1 nationally recognized rating service, Certificates of Deposit, and Money Market mutual funds.

As stated above, Standard and Poors has rated the three investment pools and the three mutual funds AAAm. Concentration of credit risk. The Countys investment policy does not have any provisions regarding the amount that may be invested in any one issuer. However, the Investment Committee regularly reviews that saturation for anything in excess of 25%. At September 30, 2010, none of the Countys total direct invested amounts were in Federal National Mortgage Association, Federal Farm Credit Bank, or Federal Home Loan Bank. NOTE 5PROPERTY TAXES: The County Tax Assessor-Collector bills and collects property taxes. Revenues are recognized in the Governmental Funds when levied to the extent that they result in current receivables. Property taxes are levied (assessed) and payable on October 1. They attach as an enforceable lien on property as of January 1 of the following year and become delinquent on February 1. The County is permitted by the Texas State Constitution (Article VIII, Section 9) and statutes to levy taxes of up to $0.80 per $100 of assessed valuation for general governmental services and the payment of long-term debt. The combined current tax rate for the year end was $0.4838 per $100, which means that the County has a tax margin of $0.3162 per $100, and could raise up to $111,937,803 in additional taxes from the present assessed valuation of $35,400,949,559 before the limit is reached. The thirty years property taxes receivable at September 30, 2010, as reported by the Tax AssessorCollector are presented as follows:
Taxes Receivable Less: Allowance for Uncollectibles Net Taxes Receivable

General Fund Road & Bridge Fund Debt Service Funds Total Receivable

$4,697,327 598,386 944,346 $6,240,059

$ 93,947 11,968 18,887 $124,802

$4,603,380 586,418 925,459 $6,115,257

NOTE 6- DUE FROM OTHER GOVERNMENTS: Amounts due from other governments arise from funding received from federal and state grants, as well as interlocal agreements with local governments.
52

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 At September 30, 2010, the following amounts were recorded as due to the County: General Fund Special Revenue Funds Capital Project Funds Total Due from Governments NOTE 7Federal $6,836,294 6,412,291 $13,248,585 State $ 667,335 956,116 9,876 $1,633,327 Local $1,389,317 454,484 $1,843,801 Total $8,892,946 7,822,891 9,876 $16,725,713

CAPITAL ASSETS: A) CHANGES IN CAPITAL ASSETS FOR YEAR ENDED SEPTEMBER 30, 2010:
Governmental Activities Beginning Balance $ 13,758,369 3,262,244 17,020,613 186,169,398 21,634,823 73,854,481 1,032,964,579 1,314,623,281 Additions
(1)

Deletions
(1)
(2)

Ending Balance $ 31,035,433 27,707,753 58,743,186 197,341,280 24,154,914 72,492,863 1,081,780,629 1,375,769,686

Land Construction in Progress Total Capital Assets not being depreciated Buildings Improvements Equipment Infrastructure Total Capital Assets being depreciated Less accumulated depreciation for: Buildings Improvements Equipment Infrastructure Total Depreciation Total Capital Assets, net of Accumulated depreciation

$ 17,677,276 $ (400,212) 35,465,902 (11,020,393) 53,143,178 11,407,663 2,522,845 8,669,672 53,144,638 75,744,818 (11,420,605) (235,781) (2,754) (10,031,290) (4,328,588) (14,598,413)

(38,027,364) (7,271,612) (44,730,596) (604,079,672) (694,109,244)

(4,808,853) (1,549,392) (8,684,380) (35,754,058) (50,796,683)

(106,116) 184 7,361,760 299,077 7,554,905

(42,942,333) (8,820,820) (46,053,216) (639,534,653) (737,351,022)

$637,534,650

$ 78,091,313

$(18,464,113)

$697,161,850

(1) Amounts representing transfers between categories are included in the columns for both additions and deletions. (2) As required by GASB 51, a new class of capital assets (intangibles) has been recorded beginning in FY2010. For Montgomery County, this classification consists exclusively of easements and is included with land.

B) DEPRECIATION EXPENSE: Depreciation expense on capital assets is recorded in the Government-wide financial statements, but not in the Fund financial statements. For the year ended September 30, 2010, the County charged depreciation expense to functions/programs as follows: Governmental activities: General Administration Judicial Legal Services Elections
53

2,574,680 174,352 93,715 401,412

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Financial Administration Public Facilities Public Safety Health and Welfare Culture and Recreation Conservation Public Transportation Total depreciation expense-governmental activities 26,516 3,347,886 6,005,256 315,885 1,095,971 27,647 36,733,363 $50,796,683

C) CONSTRUCTION COMMITMENTS: The County has entered into contracts for the construction, renovation, and improvement of real property. The following projects were in progress at September 30, 2010:
Project Status Commitment Paid to Date

Various Road Projects Forensic Center Park Improvements Building Remodels Mental Health Facility Alan B. Sadler Administration Building Parking Garage

Under construction Under construction Under construction Underway Under construction Substantially complete Substantially complete Total

$344,393,109 1,770,281 14,169,825 14,801,566 31,800,000 12,372,120 9,500,000 $428,806,901

$239,220,442 993,864 13,617,518 13,645,458 26,285,871 12,153,285 9,290,018 $315,206,456

NOTE 8- DISAGGREGATION OF PAYABLE BALANCES: A) DUE TO OTHER GOVERNMENTS: The County records certain amounts due to other governments as a result of operating contracts and overpayment of certain grant funds. At September 30, 2010, the following amounts were due to other governments:
Fund Local Total

General

$1,692,186

$ 1,692,186

B) DEFERRED REVENUES: The County reports deferred revenues in the governmental funds that consist of two categories: a) receivables for revenues that are not considered to be available to liquidate liabilities of the current period, and b) resources that have been received, but not yet earned. At the end of September 2010, deferred revenues were presented as follows:
Fund Property Taxes Unearned Fees Total Deferred Revenues

General Road & Bridge Other Nonmajor Total

$ 4,493,658 605,834 887,712 $ 5,987,204

2,241,685 628 450,626 $ 2,692,939

6,735,343 606,462 1,338,338 8,680,143

54

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 NOTE 9- LONG-TERM DEBT: General long-term debt consists of general obligation bonds, lease-revenue bonds, certificates of obligation, the Countys accrued liability for compensated absences and compensatory time, capital leases, workers compensation and medical claims and judgments, other post-employment benefit liability, and arbitrage due the federal government. Principal and interest payments on the Countys bonded debt, in general, are secured by ad valorem property taxes levied on all taxable property within the County. The lease-revenue bonds are secured by a pledge of future revenues to be earned under an agreement between the County and the Montgomery County Jail Financing Corporation. Payments are recorded in the appropriate Debt Service Funds. A) BONDED DEBT: A summary of the long-term bonded debt, at September 30, 2010 is presented:
Interest Rate (%) GENERAL OBLIGATION BONDS: Road Bonds, Series 2002A 4.37-5.63 Refunding Bonds, Series 2002B 4.375 Road Bonds, Series 2003A 5.00 Library Bonds, Series 2003B 4.00-5.00 Refunding Bonds, Series 2005 5.00 Road Bonds Fixed Rate, Series 2006A 4.00-5.00 Road Bonds Fixed Rate, Series 2006B 4.75 Refunding Bonds, Series 2007 4.00-5.50 Road Bonds Fixed Rate, Series 2008A 3.50-5.25 Refunding Bonds, Series 2008 3.50-5.00 Road Bonds Fixed Rate, Series 2008B 5.12-5.25 Refunding Bonds, Series 2010 4.00-5.00 TOTAL GENERAL OBLIGATION BONDS REVENUE BONDS: Lease Revenue Bonds, Series 2007 Pass Through Toll Revenue and Limited Tax Bonds, Series 2009 TOTAL REVENUE BONDS Issue Date 2002 2002 2003 2003 2005 2006 2006 2007 2008 2008 2008 2010 Maturity Date 2022 2011 2026 2026 2020 2027 2028 2026 2030 2018 2032 2030 Bonds Outstanding $ 6,120,000 510,000 12,595,000 8,515,000 41,035,000 46,850,000 20,195,000 41,495,000 11,825,000 9,150,000 34,705,000 43,380,000 $276,375,000

4.475 3.00-5.00

2007 2009

2028 2032

$ 42,256,701 56,190,000 $ 98,446,701

CERTIFICATES OF OBLIGATION: Series 2001 4.65 Series 2003 4.00-5.00 Series 2004 3.75-4.60 Series 2006 4.00-5.00 Series 2007 4.00-4.63 Series 2008 3.50-5.25 Series 2010 3.00-5.40 TOTAL CERTIFICATES OF OBLIGATION TOTAL BONDED DEBT

2001 2003 2004 2006 2008 2008 2010

2011 2026 2020 2027 2027 2027 2039

305,000 9,730,000 1,895,000 25,345,000 9,110,000 23,745,000 32,450,000 $102,580,000 $477,401,701

All of the Countys outstanding bonded debt is assigned a fixed rate of interest.

55

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 B) CHANGES IN LONG-TERM DEBT: The following schedule illustrates changes in long-term debt for the year ended September 30, 2010. For each category, management has presented the portion that will be due within one year.
Beginning Governmental Activities: Bonds payable: General Obligation Revenue Bonds Certificates of Obligation Less deferred amounts: Issuance discounts Unamort. Premiums (1) Total bonds payable Balance $281,410,000 99,948,601 71,685,000 (356,272) 11,118,039 463,805,368 Additions $43,380,000 32,450,000 (601,022) 2,075,459 77,304,437 Reductions $(48,415,000) (1,501,900) (1,555,000) 53,425 (502,500) (51,920,975) Ending Balance $276,375,000 98,446,701 102,580,000 (903,869) 12,690,998 489,188,830 Due Within One Year $6,345,000 1,569,862 3,390,000 (50,529) 830,377 12,084,710

Capital leases Workers Comp Obligation Medical Obligation OPEB Obligation Compensated absences Total Long-term Liabilities
(1)

17,409,156 960,523 3,446,666 7,968,357 8,305,224 $501,895,294

3,125,403 578,636 15,554,201 6,823,018 5,030,797 $108,416,492

(3,370,444) (664,220) (15,758,215) (1,980,245) (4,541,973) $(78,236,072)

17,164,115 874,939 3,242,652 12,811,130 8,794,048 $532,075,714

2,791,490 874,939 3,242,652 4,739,065 $23,732,856

Beginning Balance for Unamortized premiums does not equal ending balance for prior year due to current year defeasance of debt.

At year end, $1,254,799 of special revenue funds compensated absences are included in the above amounts. The remaining balance ($7,539,249) will be liquidated by the general fund along with all medical/workers compensation claims and judgments. This follows the prior year allocation of liability between operating funds. C) ANNUAL DEBT SERVICE REQUIREMENTS TO MATURITY: The following table lists the amounts required to amortize bonded debt, by debt type.
Maturity 2011 2012 2013 2014 2015 2016-2020 2021-2025 2026-2030 2031-2035 2036-2039 Total General Obligation Bonds Principal Interest $ 6,345,000 $ 13,254,053 6,965,000 12,794,698 7,280,000 12,477,466 7,610,000 12,150,333 7,965,000 11,794,074 46,520,000 52,558,715 62,720,000 39,435,267 96,265,000 20,984,847 34,705,000 1,825,113 $276,375,000 $177,274,566 Revenue Bonds Principal Interest $ 1,569,862 $ 4,401,907 4,160,899 4,280,470 5,485,150 4,099,268 5,717,762 3,866,981 5,968,886 3,617,158 34,305,739 13,619,576 19,816,021 7,390,103 17,617,383 2,712,886 3,805,000 192,625 $ 98,446,702 $ 44,180,974 Certificates of Obligation Principal Interest $ 3,390,000 $ 3,998,792 3,880,000 4,194,941 4,035,000 4,051,566 4,195,000 3,894,572 4,370,000 3,724,716 24,700,000 15,550,975 27,960,000 9,212,965 15,990,000 3,467,874 7,260,000 1,848,542 6,800,000 487,890 $102,580,000 $ 50,432,833

D) ADVANCE REFUNDING: On August 31, 2010, to take advantage of lower interest rates and convert to a fixed rate on the 2006B Road Bonds, the County issued $43,380,000 Unlimited Tax Refunding Bonds, Series 2010 with interest rates ranging from 4.0 percent to 5.0 percent to partially advance refund the following bond: Series Unlimited Tax Road Bonds, Series 2006B
56

Interest Rate (%) 5.00

Amount $43,555,000

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 The proceeds of this refunding were used to purchase U.S. government securities. Those securities were deposited in an irrevocable trust with an escrow agent to provide for all future debt service payments on the prior debt. As a result, that debt is considered to be defeased and the liability for the old debt has been removed from the Statement of Net Assets. The County advance refunded the above debt to reduce its total debt service payments over the next twenty years by $5,171,450, and to obtain an economic gain (the difference between the present value of the debt service payments on the old and new debt) of $3,455,657. E) PRIOR YEAR DEFEASANCE OF DEBT: In prior years, the County defeased multiple debt issues by creating separate irrevocable trust funds. New debt was issued and the proceeds were used to purchase U.S. government securities that were placed in the trust funds. The investments and fixed earnings from the investments are sufficient to fully service the defeased debt until it is called or matures. For financial reporting purposes, the debt has been considered defeased and therefore removed from the governmentwide financial statements. As of September 30, 2010, defeased but outstanding debt from prior year refunding transactions consisted of the following: Series Library and Refunding Bonds, Series 1992 Certificates of Obligation, 1996 Certificates of Obligation, 1997 Refunding Bonds, 1997 Certificates of Obligation, 1997A Certificates of Obligation, 1998 Permanent Improvement Bonds, Series 2000 Road Bonds, Series 2002A Road Bonds, Series 2003A Road Bonds, Series 2004 Total Defeased but Outstanding Amount 825,000 670,000 1,790,000 3,700,588 5,765,000 12,785,000 12,300,000 17,245,000 11,405,000 10,205,000 $ 76,690,588 $

F) FUTURE BORROWING: During the Budget Workshops for fiscal year ending September 30, 2011, the Commissioners Court approved several renovation and construction projects with the understanding that funding for these projects would be provided by a future issuance of certificates of obligation. The projects included the purchase of land and improvements for use as a forensic services facility, remodel of the main courthouse to enhance energy savings, and an extension of one of the airports runways. The funding needed for these projects is estimated at greater than $6million, and certificates are anticipated to be issued in late 2011. G) CONDUIT DEBT OBLIGATIONS: Montgomery County Industrial Development Corporation and Harris County Health Facilities Development Corporation issued bonds to provide financial assistance to private and public sector entities engaged in activities that are deemed to be in the public interest. These bonds are obligations of the issuing entities payable solely from the proceeds of the underlying financing agreements and, in the opinion of legal counsel, do not represent indebtedness or liability to the issuing entity, to Montgomery County, Texas, to the State of Texas, or to any political subdivision; therefore, they are not reported as liabilities in the Countys financial statements.
57

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Montgomery County Industrial Development Corporation- The corporation issues industrial revenue bonds that promote and encourage employment and public welfare. As of September 30, 2010, there were fourteen series of bonds outstanding. The aggregate principal amount payable for the bonds issued prior to December 15, 1995, could not be determined; however, the original issues totaled $44,895,000. The bonds will be repaid from sources defined in underlying financing agreements between the corporation and the entities for whose benefit the bonds were issued. Harris County Health Facilities Development Corporation- The corporation issues bonds if there is a public benefit or purpose that is necessary or convenient for health care, research, or education. Its activity is included in this disclosure because its bonds have been issued for the benefit of organizations located in Montgomery County. As of September 30, 2010, there were forty (40) series of bonds outstanding with an aggregate principal payable of $3,381,295,000. The bonds will be repaid from sources defined in the various underlying financing agreements between the corporation and the entities for whose benefit the bonds were issued. H) CAPITAL LEASES: The County has entered into capital lease agreements for the lease/purchase/construction of certain heavy road equipment, vehicles, and buildings. Acquisition of equipment with a value of $125,403 and the construction of a building with a value of $3,000,000 were financed during the current fiscal year under capital leases and recorded in the Capital Assets portion of the government-wide financial statements. Depreciation expense for these assets is included as part of the depreciation expense detailed in Note 7. The lease agreements are classified as capital leases because title passes to the County at the end of the lease term, and are included as leases payable in the Long-Term Debt portion of the government-wide statements. The present value of future minimum capital lease payments at September 30, 2010 and the funds from which they will be paid are as shown below:
Year Ending General Fund Special Revenue Funds

2011 2012 2013 2014 2015 2016-2020

Total Minimum Lease Payments Less: amount representing interest Present value-minimum lease payments

$2,694,551 1,908,513 1,798,997 1,798,997 1,798,997 5,314,248 15,314,303 2,141,696 $13,172,607

762,972 728,149 641,794 482,172 386,629 1,933,146 4,934,862 943,354 3,991,508

NOTE 10- INTER-FUND RECEIVABLES, PAYABLES, AND TRANSFERS: A) DUE FROM/DUE TO OTHER FUNDS: Activity between funds that represents the current portion of lending/borrowing and inter-fund charges for goods and services arrangements outstanding at fiscal year end are referred to as due from/due to other funds. Inter-fund balances are expected to be repaid within one year from the date of the financial statements, and are routine in nature.

58

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 The composition of inter-fund balances as of September 30, 2010 was as follows: General Fund Road and Bridge Fund Revenue/Tax Bonds, 2009 Non-major Governmental Funds Total Receivables $ 3,966,754 2,895,627 17,957,074 $ 24,819,455 Payables $ 17,795,270 630,734 32,319 6,361,132 $ 24,819,455

B) TRANSFERS: Transfers are used to a) move revenues from the fund that the statute or budget requires to collect them to the fund that the statute or budget requires to expend them, b) move receipts from bond refundings and residual balances from capital project funds to the Debt Service Fund to pay debt obligations, and c) use unrestricted revenues collected in the General Fund to finance various programs accounted for in other funds in accordance with budgetary authorizations. Inter-fund transfers for the year ended September 30, 2010 were: Transfers In $ 918,898 722,189 25,371,896 $ 27,012,983 Transfers Out $ 25,262,082 632,522 1,118,379 $ 27,012,983

General Fund Road and Bridge Fund Nonmajor Governmental Funds Total

Although inter-fund activity is reported in the fund financial statements, it has been eliminated in the government-wide financial statements. NOTE 11- OPERATING LEASES: The County is a party to several lease agreements. Significant terms are discussed below: Office Space- The County leases 2,777 square feet of office space at the Montgomery County Annex Building to the Lone Star Groundwater Conservation District for a period of sixty months with two six-month extensions. The lessee has opted to exercise both available extensions setting the term of this lease to January 1, 2005 through December 31, 2010. Both parties have agreed to extend the lease on a month to month basis in anticipation of the District constructing a new building. The monthly rent of $618 is recorded in the General Fund. The County also leases office space at the East Montgomery County Community Development Building to Lakewood Family Practice and/or Dr. N. K. Karimjee, M.D. for a period of seventy-two months. The term of this lease is July 23, 2007 through July 1, 2014. The monthly rent of $2,500 is recorded in the Community Development Fund. The building is recorded as a Capital Asset in the Countys government-wide financial statements at a cost of $2,075,610, less accumulated depreciation of $333,510.

59

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Following is a schedule of lease payments receivable on office space leases through the ending dates of the agreements: Year Ending September 30, 2011 2012 2013 2014 Total Lease Payments Receivable

$ 30,000 30,000 30,000 22,500 $112,500

NOTE 12- RISK MANAGEMENT: A) EMPLOYEE HEALTH BENEFITS: Effective January, 1989, the County established a partially self-funded trust plan which offers medical, dental, vision, and life insurance coverage to employees and their dependents. The County maintains excess loss insurance, which limits annual claims paid from the plan to a maximum of $175,000 per plan participant. This excess loss reinsurance policy includes a contract provision that eliminates a large claim run off liability. A third party administrator is employed by the plan to administer claims. A trustee has been engaged to receive employer and employee contributions and to disburse payments to the providers of the plan. Costs relating to the plan are recorded as expenditures in the General Fund. Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. The plan is funded to discharge liabilities as they become due. Claims incurred and reported, but not paid at September 30, 2010, were $344,811. Claims incurred but not reported (IBNR) at September 30, 2010, are estimated to be $2,897,840. Estimates are not based on actuarial calculations, but rather on historical trends. Both amounts have been recorded as expenditures in the General Fund and a liability has been established. Changes in the health claims liability for the two fiscal years ended September 30, 2010 and September 30, 2009 are as follows:
2010 2009

Unpaid claims, beginning of year Incurred claims (including IBNR) Claim payments Unpaid claims, end of year

3,446,666 18,075,086 (18,279,100) $ 3,242,652

3,630,989 15,033,617 (15,217,940) $ 3,446,666

During the year ended September 30, 2010, the plan received contributions in the amounts of $19,142,643 and $1,892,610 from the employer and employees, respectively. The contributions made by employees included contributions by qualified retirees and certain former employees covered by the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). Through the American Recovery and Reinvestment Act of 2009, $12,098 was also received from the federal government as plan contributions. In addition to the claim payments made, the plan also expended $724,209 in administrative costs and $1,932,989 for reinsurance and insurance premiums. B) WORKERS COMPENSATION AND EMPLOYERS LIABILITY: As of January 1, 2003, the County established a partially self-funded program to cover claims by employees arising from job related injuries. The program offers coverage at the statutorily required limits required by the State of Texas. A third party administrator has been engaged by the County to adjudicate claims, provide nurse case management, per-certification and bill
60

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 review. Excess loss insurance was purchased to limit the claims loss to the County to no more than $250,000 per individual claim in 2010. Costs associated with this program are recorded as expenditures in the General Fund. Liabilities are recorded when it is probable that a loss has occurred and when an amount can be reasonably estimated. During the year ended September 30, 2010, the County expended $46,450 for administrative costs and $220,411 for excess loss insurance premiums. Changes in the workers compensation liability for the two fiscal years ended September 30, 2010 and September 30, 2009 are detailed on the following page.
2010 2009

Unpaid claims, beginning of year Incurred claims (including IBNR) Claim payments Unpaid claims, end of year

$ 960,523 587,818 (673,402) $ 874,939

$1,138,992 212,916 (391,385) $960,523

C) PROPERTY, CASUALTY AND BOILER COVERAGE: The County purchased reinsurance coverage for certain property including vehicle, equipment and contents coverage for the fiscal year. Deductibles are maintained at the following levels: Buildings and Contents Boats and Heavy Equip. with less than 6 wheels Vehicles above 6 wheels Boilers and HVAC systems Total insured values exceed $295,000,000 for the first three additional $50,000,000 for boilers and HVAC systems. $100,000 $ 10,000 $ 25,000 $ 1,500 coverages listed above and an

The County paid $437,483 in premiums in fiscal 2010, and recorded the expenditure in the General Fund. Settled claims have not exceeded commercial coverage in any of the past two fiscal years. D) GENERAL AND OTHER LIABILITY COVERAGES: The County purchased reinsurance coverage for General Liability, Auto Liability, Public Officials Liability, Law Enforcement Liability, Marine Liability, Crime Coverage, Employee Benefits Liability and Airport Operators Liability. Deductibles are maintained at the $100,000 level per occurrence by the type of coverage with the exception of the Airport Operators Liability, which has no deductible. The Public Officials Liability and Employee Benefits Liability are written on a claims-made basis. Coverage limits are set at $1,000,000 per claim by type of coverage. The Airport Operators Liability was increased to $10,000,000 effective March 19, 2009 with the addition of the new tower. Effective December 1, 2003, the County began participating in an individual public entity risk pool, for the coverages listed in subsections B, C, and D above, to transfer certain risks associated with property, casualty, liability and workers compensation. In addition to those coverages, the County purchased an additional aggregate reinsurance policy. The aggregate coverage loss fund is written on a claims-made basis and is capped at $1,795,000 for the fiscal year. Note 15 describes the Countys obligation under liability claims for 2010.

61

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 NOTE 13- EMPLOYEE RETIREMENT PLAN: A) PLAN DESCRIPTION: The County provides retirement, disability, and death benefits for all of its full-time employees through a nontraditional defined benefit pension plan in the statewide Texas County and District Retirement System (TCDRS). The TCDRS Board of Trustees is responsible for the administration of the statewide agent multiple-employer public employee retirement system consisting of 602 nontraditional defined benefit pension plans. TCDRS in the aggregate issues a comprehensive annual financial report (CAFR) on a calendar year basis. The CAFR is available upon written request from the TCDRS Board of Trustees at P. O. Box 2034, Austin, TX, 78768. The plan provisions are adopted by the governing body of the County, within the options available in the Texas state statutes governing TCDRS (TCDRS Act). Members can retire at ages 60 and above with 8 or more years of service, with 30 years regardless of age, or when the sum of their age and years of service equals 75 or more. Members are vested after 8 years of service, but must leave their accumulated contributions in the plan to receive any employer-financed benefit. Members who withdraw their personal contributions in a lump sum are not entitled to any amounts contributed by the County. Benefit amounts are determined by the sum of the employees deposits to the plan, with interest, and employer-financed monetary credits. The level of these monetary credits is adopted by the Commissioners Court of the County within the actuarial constraints imposed by the TCDRS Act so that the resulting benefits can be expected to be adequately financed by the employers commitment to contribute. At retirement, death, or disability, the benefit is calculated by converting the sum of the employees accumulated deposits and the employer-financed monetary credits to a monthly annuity using annuity purchase rates prescribed by the TCDRS Act. B) FUNDING POLICY: Montgomery County has elected the annually determined contribution rate (Variable Rate) plan provisions of the TCDRS Act. The plan is funded by monthly contributions from both employee members and the employer based on the covered payroll of employee members. Under the TCDRS Act, the contribution rate of the employer is actuarially determined annually. The County contributed using the actuarially determined rate of 9.69% for the months of the accounting year in 2009, and 10.94% for the months of the accounting year in 2010. The deposit rate payable by the employee members for calendar year 2010 was 6.0% as adopted by the Commissioners Court. The employee deposit rate and the employer contribution rate may be changed by the Commissioners Court within the options available in the TCDRS Act. C) ANNUAL PENSION COST: For Montgomery Countys accounting year ended September 30, 2010, the pension cost for the TCDRS plan was $9,297,946, and the actual contributions were $9,297,946. The annual required contributions were actuarially determined as a percent of the covered payroll of the participating employees, and were in compliance with GASB Statement No. 27 parameters based on the actuarial valuations as of December 31, 2007, and December 31, 2008, the basis for determining the contributions rates for calendar years 2008 and 2009. The December 31, 2009 actuarial valuation is the most recent valuation.

62

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 D) ACTUARIAL VALUATION INFORMATION:
Actuarial valuation date Actuarial cost method Amortization method Amortization period Asset valuation method
(2)

12/31/2007 Entry age Level percentage of payroll, closed 15 SAF : 10-year smoothed value ESF(3): Fund value 8.00% 5.30% 3.50% 0.00%

12/31/2008 Entry age Level percentage of payroll, closed 15.4 SAF : 10-year smoothed value ESF(3): Fund value 8.00% 5.30% 3.50% 0.00%
(2)

12/31/2009 Entry age Level percentage of payroll, closed 14.9 SAF(2): 10-year smoothed value ESF(3): Fund value 8.00% 5.40% 3.50% 0.00%

Actuarial assumptions: Investment return (1) Projected salary increase (1) Inflation Cost-of-living adjustments
(1)

Includes inflation at the stated rate. Subdivision Accumulation Fund. (3) Employee Savings Fund.
(2)

E) TREND INFORMATION:
Accounting Year Ended 9/30/08 9/30/09 9/30/10 Annual Pension Cost (APC) $ 7,582,703 8,227,056 9,297,946 Percentage of APC Contributed 100% 100% 100% Net Pension Obligation -

F) SCHEDULE OF FUNDING PROGRESS FOR THE RETIREMENT PLAN FOR EMPLOYEES OF MONTGOMERY COUNTY: (Amounts expressed in thousands)
Actuarial Valuation Date Actuarial Value of Assets (a) $157,544 158,924 182,655 Actuarial Accrued Liability (AAL) (b) $175,693 191,861 216,302 Unfunded AAL (UAAL) (b-a) $18,150 32,936 33,647 Funded Ratio Annual Covered Payroll(1) (c) $72,914 79,617 89,010 UAAL as a Percentage of Covered Payroll ((b-a)/c) 24.89% 41.37% 37.80%

12/31/07 12/31/08 12/31/09

(1)

(a/b) 89.67% 82.83% 84.44%

The annual covered payroll is based on the employee contributions received by TCDRS for the year ended with the valuation date.

NOTE 14- OTHER POST-EMPLOYMENT BENEFITS (OPEB): A) PLAN DESCRIPTION: Effective January 1, 2000, Commissioners Court adopted a plan to pay for health benefit coverage for qualified retirees under a single-employer defined benefit plan. To qualify for inclusion in the coverage, an individual must currently attain 15 continuous years of full-time employment with the County and be eligible for a retirement annuity from the Texas County and District Retirement System. The employee can elect to waive health benefit coverage. The County is under no obligation to provide this benefit, and the decision to do so is made by the Commissioners Court on a year-to-year basis. Additionally, the County offers an employee-funded health benefit to those who do not meet the above criteria. The County is obligated to provide this benefit subject to requirements of Chapter 175 of the Texas Local Government Code. Contribution levels are determined by
63

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 Commissioners Court on a year-to-year basis. The benefit level is the same as that for a full time regular employee, as further disclosed in Note 12-A. B) FUNDING POLICY: Montgomery Countys optional post-retirement benefit liability is recorded on a full accrual basis in the government-wide statements. An actuarial study was performed in fiscal year 2008 to prepare for disclosure of this liability in accordance with GASB 45. The projected liability accrual for fiscal year 2010 has been recorded net of premium contributions received from retired employees as required in the plan. Management funds this benefit on a pay-as-you-go basis. A new actuarial study was completed in 2010 for use in the fiscal year 2011 statements. Montgomery County records the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. During the year, the County incurred $1,980,245 in health care claims for retirees and their dependents. For the year ended September 30, 2010, twenty-eight employees retired from service with the County. Eighteen of those retirees met the qualifications stated in Part A above. Currently, there are 154 retirees covered by this benefit. The actual cost recorded by the County is included in Note 12. Retiree contributions for 2010 were $187,782, and the County paid the remaining amount of claims. The current ARC is 10.7 percent of annual covered payroll. C) SCHEDULE OF ACTUARIAL LIABILITIES AND FUNDING PROGRESS: Actuarial valuations involve the use of estimates and assumptions about length of employee service, mortality rates, and future costs of health care in order to provide a long-term perspective of the OPEB plan. Assumptions made are as follows: Projected employee salary increases of 3.25% per annum Discount rate of 5.0% Age-neutral actual medical claim costs trended to valuation date and adjusted for risk characteristics of the group Stop-Loss premiums of average premium per enrollee per month based on actual premiums as of January 1, 2008. Expenses averaged as of January 1, 2008 Contributions increase at the same rate as medical claims Retirement rates based on TCDRS pension plan retirement tables, adjusted to be consistent with expected first fiscal year retirements Turnover rates based on 2003 SOA Pension Turnover Study, adjusted to be consistent with recent County experience Mortality: UP-1994 (Male and Female) 67% participation of future eligible retirees Dependent status of current retirees persists 41% male/22% female future retirees to have covered spouses (two years younger than retiree)

The valuation will be updated every two years and actual results will be compared with past expectations. As a result of these comparisons, new estimates and assumptions will be made about future results of the plan. Valuations are made based on the benefits provided under the terms of the substantive plan in place at the time of the valuation and on the pattern of sharing of costs between the employer and plan members to that point. Any changes in the benefits offered
64

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 or the contribution rates would impact future valuations. Montgomery County does not prepare a separate financial report for the post-employment benefit plan. For 2010, the Countys net annual OPEB cost (expense) is $4,842,773. The following table shows the calculation of the Net OPEB obligation:
September 30, 2009 Annual OPEB Cost: Annual required contribution (ARC) ARC Adjustment Interest Adjustment to Net OPEB Obligation Other Adjustment to ARC Annual OPEB cost Claims Paid Net OPEB obligation Net OPEB obligation beginning of year Net OPEB obligation end of year Percentage of annual OPEB cost contributed $ 6,759,947 2,695,245 9,455,192 (1,486,835) 7,968,357 $ 7,968,357 16% September 30, 2010 $ 6,759,948 (335,372) 398,442 6,823,018 (1,980,245) 4,842,773 7,968,357 $12,811,130 29%

Funding Progress: Actuarial valuation date Actuarial value of assets Actuarial accrued liability (AAL) Funded ratio Unfunded AAL (UAAL) Actuarial Cost Method Amortization Method Annual covered payroll UAAL as a percentage of covered payroll Amortization Period

October 1, 2008 $ 6,000,000 $86,252,694 7% $80,252,694 Entry-Age Normal Level % of Payroll $62,670,379 128.1% 30 Years - Closed

NOTE 15- CONTINGENT LIABILITIES: A) GENERAL LIABILITIES: For fiscal year 2010, the County participated in a public entity risk pool, to which certain losses arising from liability claims were transferred. The premium for this coverage, $303,247, was recorded in the General Fund. In addition, the County expended $112,071 for damages in connection with twenty-six claims, for which the deductible had not been satisfied. B) GRANTS: The County receives various grant moneys that are subject to audit and adjustment by the grantor agencies. Any disallowed expenditure will become a liability of the County. The amount, if any, of expenditures that may be disallowed by the grantor cannot be determined at this time, although the County expects such amounts, if any, to be immaterial. C) LITIGATION: The County is a defendant in a number of lawsuits with claims for damages in excess of $5,000,000. These claims result primarily from assertions by former employees that they were wrongfully discharged, allegations by jail inmates that their rights were violated while incarcerated in the County jail, and claims by individuals arising from property damages. The County paid $117,751 for legal counsel to defend existing claims. The County intends to
65

MONTGOMERY COUNTY, TEXAS Notes to the Financial Statements September 30, 2010 vigorously contest all the cases, and legal counsel is of the opinion that the County will prevail in all cases which may have a material effect on the financial position of the County. For additional information on the Countys coverage amounts see Note 12-D. NOTE 16- NEW ACCOUNTING PRONOUNCEMENTS: The Governmental Accounting Standards Board (GASB) has recently issued several new statements. A listing follows of those that apply to the County. These statements will be implemented in subsequent years, as required by the GASB. GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, enhances balance sheet in formation and clarifies existing governmental fund type definitions. This statement will be effective for the County for the fiscal year ending September 30, 2011. NOTE 17- SUBSEQUENT EVENTS: Retrofit of Montgomery Countys forensic center near the Criminal Justice Complex began in early 2011. The estimated $800,000 for remodeling and various equipment needs will be funded through certificates of obligation to be issued in 2011. Also in early 2011, Montgomery County opened a new mental health treatment facility designed to treat patients who are determined by the court system to be incompetent to proceed with trial. The County has entered into a contract with the State of Texas for the housing of a mental health forensic population with a bi-annual reimbursement of $30,000,000. The County has also signed a management contract with GEO Care effective through August 31, 2011 with unlimited two-year renewal option periods. The Lone Star Executive Airport expects to enter into an agreement in mid-2011 to lease fifteen acres of Montgomery County land to an aviation development company. The lease contract will require prepayment of the forty year lease in the amount of $3.1 million during 2011. Funds received through this arrangement will be reserved for the expansion and upkeep of airport facilities.

66

APPENDIX C FORM OF LEGAL OPINION

C-1
HOU:3197101.2

Fulbright Tower 1301 McKinney, Suite 5100 Houston, Texas 77010-3095

Telephone: 713 651 5151 Facsimile: 713 651 5246

March 27, 2012 We have acted as bond counsel in connection with the issuance by Montgomery County, Texas (the Issuer) of its Certificates of Obligation, Series 2012 (the Certificates) in the aggregate principal amount of $14,925,000. In rendering the opinions herein we have examined and relied upon: (1) an executed Certificate; (2) original or certified copies of the proceedings had in connection with issuance of the Certificates, including the Order of the governing body of the Issuer which authorizes issuance of the Certificates (the Order); (3) customary certifications and opinions of officials of the Issuer; (4) certificates of officers of the Issuer related to the expected use and investment of proceeds of the sale of the Certificates and certain other funds of the Issuer, which are within its sole knowledge and control; and (5) such other material and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements contained in such certificates. Based upon such examination, we are of the opinion that, under applicable law of the United States of America and the State of Texas in force and effect on the date hereof: 1. The Certificates are valid and legally binding obligations of the Issuer payable from the sources, and enforceable in accordance with the terms and conditions, described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity. 2. The Certificates are payable from and equally and ratably secured solely by a lien on and pledge of taxes, within the limits prescribed by law, upon taxable property within the Issuer, and are further payable from and secured by a pledge of and lien on certain revenues from the operation of the Issuers park system. 3. Pursuant to the Internal Revenue Code of 1986, as amended and in force on the date hereof (the Code), and existing regulations, published rulings, and court decisions thereunder, assuming continuing compliance with the provisions of the Order relating to sections 141 through 150 of the Code, interest on the Certificates is excludable from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes pursuant to section 103 of the Code, and such interest will not be included for federal income tax purposes in computing the alternative minimum taxable income of the owners thereof.
AUSTIN BEIJING DALLAS DENVER DUBAI HONG KONG HOUSTON LONDON LOS ANGELES MINNEAPOLIS MUNICH NEW YORK PITTSBURG SOUTHPOINTE RIYADH SAN ANTONIO ST. LOUIS WASHINGTON DC

77691188.1

www.fulbright.com

March 27, 2012 Page 2 We call to your attention that interest on the Certificates owned by a corporation (other than an S corporation or a qualified mutual fund, real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT) or real estate investment trust (REIT)) is includable in its adjusted current earnings for purposes of calculating its alternative minimum taxable income. A corporations alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code is computed. We express no other opinion with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Certificates. Ownership of tax-exempt obligations such as the Certificates may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, S corporations with subchapter C earnings and profits, certain foreign corporations doing business in the United States, individual recipients of Social Security or Railroad Retirement benefits, taxpayers otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any change in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service or any court; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

77691188.1

Fulbright Tower 1301 McKinney, Suite 5100 Houston, Texas 77010-3095

Telephone: 713 651 5151 Facsimile: 713 651 5246

March 27, 2012 We have acted as bond counsel in connection with the issuance by Montgomery County, Texas (the Issuer) of its Limited Tax Refunding Bonds, Series 2012 (the Bonds) in the aggregate principal amount of $30,885,000. In rendering the opinions herein we have examined and relied upon: (1) an executed Bond; (2) original or certified copies of the proceedings had in connection with issuance of the Bonds, including the Order of the governing body of the Issuer which authorizes issuance of the Bonds (the Order), the Escrow Agreement (the Escrow Agreement) between the Issuer and Regions Bank, Houston, Texas (the Escrow Agent), and a special report (the Report) of Grant Thornton LLP, Minneapolis, Minnesota (the Accountants); (3) customary certifications and opinions of officials of the Issuer; (4) certificates of officers of the Issuer related to the expected use and investment of proceeds of the sale of the Bonds and certain other funds of the Issuer, which are within its sole knowledge and control; and (5) such other material and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements contained in such certificates. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements and information contained in such certificates. We express no opinion concerning any effect on the following opinions which may result from changes in law effected after the date hereof. Based upon such examination, we are of the opinion, that, under applicable law of the United States of America and the State of Texas in force and effect on the date hereof: 1. The Bonds are valid and legally binding obligations of the Issuer payable from the sources, and enforceable in accordance with the terms and conditions, described therein, except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity. 2. The Bonds are payable from and equally and ratably secured solely by a lien on and pledge of receipts of an annual ad valorem tax levied, within the limits prescribed by law, upon taxable property within the Issuer. 3. The Escrow Agreement has been duly authorized, executed, and delivered by the Issuer and, assuming due authorization, execution, and delivery thereof by the
77691189.1
austin Beijing Dallas Denver Dubai Hong Kong Houston London Los Angeles Minneapolis Munich New York PITTSBURG SOUTHPOINTE Riyadh San Antonio St. Louis Washington DC

www.fulbright.com

March 27, 2012 Page 2 Escrow Agent, is a valid and binding obligation, enforceable in accordance with its terms (except to the extent that the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting creditors rights or the exercise of judicial discretion in accordance with general principles of equity), and, in reliance on the the Report of the Accountants of the sufficiency of cash and investments deposited with the Escrow Agent pursuant to the Escrow Agreement for the purposes of paying the outstanding obligations refunded and to be retired with the proceeds of the Bonds and the interest thereon, that the outstanding obligations refunded, discharged, paid, and retired with the proceeds of the Bonds have been defeased and are regarded as being outstanding only for the purpose of receiving payment from the funds held in trust with the Escrow Agent, pursuant to the Escrow Agreement, the respective orders authorizing their issuance, and in accordance with the provisions of Chapter 1207, as amended, Texas Government Code. 4. Pursuant to the Internal Revenue Code of 1986, as amended and in force on the date hereof (the Code), and existing regulations, published rulings, and court decisions thereunder, assuming continuing compliance with the provisions of the Order relating to sections 141 through 150 of the Code, interest on the Bonds is excludable from the gross income, as defined in section 61 of the Code, of the owners thereof for federal income tax purposes pursuant to section 103 of the Code, and such interest will not be included for federal income tax purposes in computing the alternative minimum taxable income of the owners thereof. We call to your attention that interest on the Bonds owned by a corporation (other than an S corporation or a qualified mutual fund, real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT), or real estate investment trust (REIT)) is includable in its adjusted current earnings for purposes of calculating its alternative minimum taxable income. A corporations alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code is computed. We express no other opinion with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, S corporations with subchapter C earnings and profits, certain foreign corporations doing business in the United States, individual recipients of Social Security or Railroad Retirement benefits, taxpayers otherwise qualifying for the earned income tax credit, owners of an interest in a FASIT, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations. Our opinions are based on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any change in any law that may thereafter occur or become effective.
77691189.1

March 27, 2012 Page 3 Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service or any court; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

77691189.1