Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 16
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Pennsylvania Investors' Quality Tax-Exempt Trust, Series 4
(Exact Name of Trust)
Van Kampen American Capital Distributors, Inc.
(Exact Name of Depositor)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Complete address of Depositor's principal executive offices)
Van Kampen American Capital Distributors, Inc. Chapman and Cutler
Attention: Don G. Powell Attention: Mark J. Kneedy
One Parkview Plaza 111 West Monroe Street
Oakbrook Terrace, Illinois 60181 Chicago, Illinois 60603
(Name and complete address of agents for service)
( X ) Check if it is proposed that this filing will become effective
on April 24, 1995 pursuant to paragraph (b) of Rule 485.
Series 4
8,896 Units
PROSPECTUS PART ONE
NOTE: Part One of this Prospectus may not be distributed unless accompanied by
Part Two.Please retain both parts of this Prospectus for future reference.
In the opinion of counsel, interest income to the Trust and to Unitholders,
with certain exceptions, is exempt under existing law from all Federal income
taxes and from Pennsylvania state income taxes. Certificates representing
Units are not taxable under presently effective Pennsylvania personal property
tax provisions. Capital gains, if any, are subject to Federal tax.
THE TRUST
The above-named series of Investors' Municipal Pennsylvania Unit Trust (the
"Trust") is a portfolio of interest-bearing obligations (the "
Bonds"or "Securities") issued by or on behalf of municipalities
and other governmental authorities within the Commonwealth of Pennsylvania, or
issued by certain United States territories or possessions and their public
authorities, the interest on which is, in the opinion of recognized bond
counsel to the issuing governmental authority, exempt from all Federal income
taxes and from Pennsylvania state income taxes under existing law.
Certificates representing Units are not taxable under presently effective
Pennsylvania personal property tax provisions. Each Unit represents a
fractional undivided interest in the principal and net income of the Trust
(see "Summary of Essential Information"in this Part One and "
Description of the Fund"in Part Two).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Sponsor in the secondary market or from the
Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Sponsor. No proceeds from
the sale of Units will be received by the Trust.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units of each Trust is equal to the aggregate
bid price of the Bonds in the portfolio of such Trust divided by the number of
Units of such Trust outstanding, plus a sales charge. The sales charge is
based upon the years to average maturity of the Bonds in the portfolio. The
sales charge ranges from 1.5% of the Public Offering Price (1.523% of the
aggregate bid price of the Bonds) for a Trust with a portfolio with less than
two years to average maturity to 5.7% of the Public Offering Price (6.045% of
the aggregate bid price of the Bonds) for a Trust with a portfolio with
sixteen or more years to average maturity. See "Summary of Essential
Information"in this Part One.
ESTIMATED CURRENT AND LONG-TERM RETURNS
Estimated Current and Long-Term Returns to Unitholders are indicated under
"Summary of Essential Information"in this Part One. The methods of
calculating Estimated Current Returns and Estimated Long-Term Return are set
forth in Part Two of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Date of this Prospectus is April 19, 1995
Van Kampen American Capital
INVESTORS' MUNICIPAL PENNSYLVANIA UNIT TRUST, SERIES 4
Summary of Essential Financial Information
As of March 9, 1995
Sponsor: Van Kampen American Capital Distributors, Inc.
Evaluator: American Portfolio Evaluation Services
(A division of a subsidiary of the Sponsor)
Trustee: The United States Trust Company
<TABLE>
<CAPTION>
Q-PA
<S> <C>
General Information
Principal Amount (Par Value) of Securities................................. $ 3,190,000
Number of Units............................................................ 8,896
Fractional Undivided Interest in Trust per Unit............................ 1/8,896
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio............................ $ 3,741,267.80
Aggregate Bid Price of Securities per Unit................................ $ 420.56
Sales charge 4.058% (3.9%
of Public Offering Price excluding principal cash)........................ $ 16.99
Principal Cash per Unit................................................... $ (1.80)
Public Offering Price per Unit <F1>....................................... $ 435.75
Redemption Price per Unit.................................................. $ 418.76
Excess of Public Offering Price per Unit over Redemption Price per Unit.... $ 16.99
Minimum Value of the Trust under which Trust Agreement may be terminated... $ 2,013,000.00
Annual Premium on Portfolio Insurance...................................... $ --
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Minimum Principal Distribution.......$1.00 per Unit
Date of Deposit......................September 26, 1980
Mandatory Termination Date...........December 31, 2029
Evaluator's Annual Supervisory Fee...Maximum of $0.25 per Unit
Evaluator's Annual Fee <F3>..........$5,089
</TABLE>
Evaluations for purpose of sale, purchase or redemption of Units are made as
of 4:00 P.M. Eastern time on days of trading on the New York Stock Exchange
next following receipt of an order for a sale or purchase of Units or receipt
by The Bank of New York of Units tendered for redemption.
<TABLE>
<CAPTION>
Special Information Based On Various Distribution Plans Quarterly
<S> <C>
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit..................... $ 35.97
Less: Estimated Annual Expense excluding Insurance............ $ 1.12
Less: Annual Premium on Portfolio Insurance................... $ --
Estimated Net Annual Interest Income per Unit................. $ 34.85
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income.......................... $ 34.85
Divided by 4 ................................................ $ 8.71
Estimated Daily Rate of Net Interest Accrual per Unit.......... $ .09678
Estimated Current Return Based on Public Offering Price <F2>... 7.96 %
Estimated Long-Term Return <F2>................................ 5.59 %
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Record and Computation Dates...FIRST day of the month as follows: February, May, August and November
Distribution Dates.............FIFTEENTH day of the month as follows: February, May, August and November
Trustee's Annual Fee...........$.89 per $1,000 principal amount of Bonds respectively, for those
portions of the Trust under the monthly, quarterly and semi-annual
distribution plans.
<FN>
<F1>Plus accrued interest to the date of settlement (five business days after
purchase) of $4.34 for those portions of the Trust under the quarterly
distribution plans.
<F2>The Estimated Current Return and Estimated Long-Term Return are increased for
transactions entitled to a reduced sales charge.
<F3>Notwithstanding information to the contrary in Part Two of this Prospectus,
the Trust Indenture provides that as compensation for its services, the
Evaluator shall receive a fee of $2,600.00 per Trust annually. This fee may be
adjusted for increases in consumer prices for services under the category "
All Services Less Rent of Shelter"in the Consumer Price Index.
</TABLE>
PORTFOLIO
In selecting Bonds for the Investors' Municipal Pennsylvania Unit Trust,
Series 4, the following facts, among others, were considered: (i) either the
Standard & Poor's Corporation rating of the Bonds was in no case less than
"A-"or the Moody's Investors Service, Inc. rating of the Bonds was
in no case less than "A", including provisional or conditional
ratings, respectively or, if not rated, the Bonds had, in the opinion of the
Sponsor, credit characteristics sufficiently similar to the credit
characteristics of interest-bearing tax-exempt obligations that were so rated
as to be acceptable for acquisition by the Fund (see "Description of
Securities Ratings"in Part Two), (ii) the prices of the Bonds relative to
other Bonds of comparable quality and maturity and (iii) the diversification
of Bonds as to purpose of issue and location of issuer. Since the date of
deposit the rating of certain Bonds in the portfolio may have been lowered by
the appropriate rating agency. As of December 31, 1994, the Trust consists of
4 issues which are payable from the income of a specific project or authority.
The portfolio is divided by purpose of issue as follows: Escrowed, 1 (23%);
Industrial Revenue, 1 (22%) and Pre-refunded, 2 (55%). See "Bond
Portfolio"herein and "Description of Securities Ratings"in Part
Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989
<S> <C> <C> <C> <C> <C>
Net asset value per Unit at beginning of period.............. $ 932.71 $ 1,010.15 $ 1,061.68 $ 1,012.43 $ 1,015.98
Net asset value per Unit at end of period.................... $ 1,010.15 $ 1,061.68 $ 1,012.43 $ 1,015.98 $ 1,010.95
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed (average
Units outstanding for entire period) <F1>.................... $ 93.88 $ 93.84 $ 88.84 $ 88.66 $ 88.17
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................ $ -- $ 47.88 $ -- $ 5.96 $ 5.54
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period)................................ $ 78.36 $ 98.11 $ (49.90) $ 10.37 $ .78
Units outstanding at end of period........................... 9,927 9,823 9,767 9,756 9,750
<FN>
<F1>Unitholders may elect to receive distributions on a quarterly basis.
</TABLE>
PER UNIT INFORMATION (continued)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C>
Net asset value per Unit at beginning of period................ $ 1,010.95 $ 609.46 $ 603.66 $ 595.13 $ 457.19
Net asset value per Unit at end of period...................... $ 609.46 $ 603.66 $ 595.13 $ 457.19 $ 419.29
Distributions to Unitholders of investment income including
accrued interest to carry paid on Units redeemed
(average Units outstanding for entire
period) <F1>.................................................. $ 79.68 $ 51.21 $ 51.32 $ 48.47 $ 35.91
Distributions to Unitholders from Bond redemption proceeds
(average Units outstanding for entire period)................. $ 380.51 $ 6.51 $ 9.05 $ 144.89 $ 3.26
Unrealized appreciation (depreciation) of Bonds (per Unit
outstanding at end of period)................................. $ (21.65) $ .70 $ .74 $ 5.29 $ (36.75)
Units outstanding at end of period............................. 9,714 9,711 9,672 9,517 8,962
</TABLE>
Unitholders may elect to receive distributions on a quarterly basis.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Van Kampen American Capital Distributors, Inc.
and the Unitholders of the Investors' Municipal Pennsylvania Unit Trust,
Series 4:
We have audited the accompanying statement of condition (including the
analysis of net assets) and the related portfolio of Investors' Municipal
Pennsylvania Unit Trust, Series 4 as of December 31, 1994, and the related
statements of operations and changes in net assets for the three years ended
December 31, 1994. These statements are the responsibility of the Trustee and
the Sponsor. Our responsibility is to express an opinion on such statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of tax-exempt securities owned at December
31, 1994 by correspondence with the Trustee. An audit also includes assessing
the accounting principles used and significant estimates made by the Trustee
and the Sponsor, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the financial position of Investors' Municipal Pennsylvania
Unit Trust, Series 4 as of December 31, 1994, and the results of operations
and changes in net assets for the three years ended December 31, 1994, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Chicago, Illinois
March 10, 1995
<TABLE>
INVESTORS' MUNICIPAL PENNSYLVANIA UNIT TRUST
SERIES 4
Statement of Condition
December 31, 1994
<CAPTION>
Q-PA
<S> <C>
Trust property
Cash................................................................................ $ --
Tax-exempt securities at market value, (cost $3,193,905) (note 1)................... 3,679,332
Accrued interest.................................................................... 120,114
Receivable for securities sold...................................................... --
$ 3,799,446
Liabilities and interest to Unitholders
Cash overdraft...................................................................... $ 41,785
Redemptions payable................................................................. --
Interest to Unitholders............................................................. 3,757,661
$ 3,779,446
Analysis of Net Assets
Interest of Unitholders (8,962 Units of fractional undivided interest outstanding)
Cost to original investors of 10,515 Units (note 1)................................. $ 10,515,000
Less initial underwriting commission (note 3)....................................... 515,137
9,999,863
Less redemption of 1,553 Units...................................................... 1,093,890
8,905,973
Undistributed net investment income
Net investment income............................................................... 11,002,569
Less distributions to Unitholders................................................... 10,920,402
82,167
Realized gain (loss) on Bond sale or redemption..................................... 146,624
Unrealized appreciation (depreciation) of Bonds (note 2)............................ 485,427
Distributions to Unitholders of Bond sale or redemption proceeds.................... (5,862,530)
Net asset value to Unitholders...................................................... $ 3,757,661
Net asset value per Unit (8,962 Units outstanding)................................... $ 419.29
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
INVESTORS' MUNICIPAL PENNSYLVANIA UNIT TRUST, SERIES 4
Statements of Operations
Years ended
December 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Investment income
Interest income................................................ $ 497,610 $ 452,407 $ 336,843
Expenses
Trustee fees and expenses...................................... 6,111 5,644 4,970
Evaluator fees................................................. 4,531 5,220 5,089
Supervisory fees............................................... -- -- --
Total expenses................................................. 10,642 10,864 10,059
Net investment income.......................................... 486,968 441,543 326,784
Realized gain (loss) from Bond sale or redemption
Proceeds....................................................... 105,000 1,477,601 260,638
Cost........................................................... 104,916 1,438,014 251,642
Realized gain (loss)........................................... 84 39,587 8,996
Net change in unrealized appreciation (depreciation) of Bonds... 7,151 50,311 (329,387)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.$ 494,203 $ 531,441 $ 6,393
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended
December 31,
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income............................................................... $ 486,968 $ 441,543 $ 326,784
Realized gain (loss) on Bond sale or redemption..................................... 84 39,587 8,996
Net change in unrealized appreciation (depreciation) of Bonds....................... 7,151 50,311 (329,387)
Net increase (decrease) in net assets resulting from operations..................... 494,203 531,441 6,393
Distributions to Unitholders from:
Net investment income............................................................... (490,547) (465,984) (332,856)
Bonds sale or redemption proceeds................................................... (86,524) (1,392,826) (30,220)
Redemption of Units (23,158) (77,695) (236,727)
Total increase (decrease)........................................................... (106,026) (1,405,064) (593,410)
Net asset value to Unitholders
Beginning of period................................................................. 5,862,161 5,756,135 4,351,071
End of period (including undistributed net investment income of $112,680, $88,239
and $82,167, respectively)........................................................... $ 5,756,135 $ 4,351,071 $ 3,757,661
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
INVESTORS' MUNICIPAL PENNSYLVANIA UNIT TRUST
PORTFOLIO as of December 31, 1994
<CAPTION>
December 31,
1994
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
A $ - 0 - County of Allegheny, Pennsylvania, General Obligation
Bonds, Series C-27 9.700% Due 10/01/99................... $ - 0 -
B - 0 - City of Philadelphia, Pennsylvania, Water and Sewer
Revenue Bonds, Sixth Series 10.250% Due 12/01/99......... - 0 -
C 695,000 Allegheny County Industrial Development Authority,
Pennsylvania Industrial Development Revenue Bonds
(McDonalds Corporation Bellevue, Pennsylvania
Projects) 9.000% Due 09/01/00............................ AA 791,953
D 745,000 Newport School District, Perry County, Pennsylvania,
General Obligation Bonds, Series 1980 9.375% Due
10/01/00**............................................... NR 802,030
E - 0 - City of Philadelphia, Pennsylvania, Gas Works Revenue
Bonds, Sixth Series 9.625% Due 05/15/01.................. - 0 -
F 1,270,000 The Hospitals Authority of Philadelphia, Hospital
Revenue Bonds, Series of 1980 (United Hospitals, Inc.) 2005 @ 100
10.875% Due 07/01/08..................................... AAA* 1995 @ 100 S.F. 1,575,791
G - 0 - Chester County Hospital Authority, Hospital Revenue
Bonds, Series of 1980 (Phoenixville Hospital) 9.375% Due
07/01/10................................................. - 0 -
H - 0 - Wayne County Hospital and Health Facilities Authority
(Pennsylvania) County Guaranteed Hospital Revenue Bonds,
Series 1980 (Wayne County Memorial Hospital) 9.750% Due
07/01/12................................................. - 0 -
I - 0 - City of Pottsville Hospital Authority, Schuylkill
County, Pennsylvania, Hospital Revenue, Series 1980
(Good Samaritan Hospital) 10.000% Due 08/01/12........... - 0 -
J 495,000 Allegheny County Hospital Development Authority Hospital
Revenue Bonds Series O (Magee Womens Hospital) 10.300%
Due 10/01/13............................................. AAA 1995 @ 100 509,558
K - 0 - Pennsylvania Housing Finance Agency Multi-Family Housing
Bonds, Issue 1980 Federal Housing Administration Insured
Mortgage Loans 10.000% Due 04/01/23...................... - 0 -
$ 3,205,000 $ 3,679,332
</TABLE>
The accompanying notes are an integral part of this statement.
** The issuer of these Bonds has placed funds or securities in escrow against
payment of the issue on the date or dates indicated.
INVESTORS' MUNICIPAL PENNSYLVANIA UNIT TRUSTSERIES 4
Notes to Financial Statements
December 31, 1992, 1993 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation - Tax-exempt municipal securities are stated at the value
determined by the Evaluator, American Portfolio Evaluation Services (a
division of a subsidiary of the Sponsor). The Evaluator may determine the
value of the Bonds (1) on the basis of current bid prices of the Bonds
obtained from dealers or brokers who customarily deal in Bonds comparable to
those held by the Trust, (2) on the basis of bid prices for comparable Bonds,
(3) by determining the value of the Bonds by appraisal or (4) by any
combination of the above.
Security Cost - The original cost to the Trust was based on the determination
by Interactive Data Services, Inc. of the offering prices of the Bonds on the
date of deposit (September 26, 1980). Since the valuation is based upon the
bid prices the Trust recognized a downward adjustment of $128,750 on the date
of deposit resulting from the difference between the bid and offering prices.
This downward adjustment was included in the aggregate amount of unrealized
depreciation reported in the financial statements for the period ended
December 31, 1980.
Unit Valuation - The redemption price per Unit is the pro rata share of each
Unit based upon (1) the cash on hand in the Trust or monies in the process of
being collected, (2) the Bonds in the Trust based on the value determined by
the Evaluator and (3) interest accrued thereon, less accrued expenses of the
Trust, if any.
Federal Income Taxes - The Trust is not taxable for Federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust and, accordingly, no provision has been made for Federal income
taxes.
Other - The financial statements are presented on the accrual basis of
accounting. Any realized gains or losses from securities transactions are
reported on an identified cost basis.
NOTE 2 - PORTFOLIO
Ratings - The source of all ratings, exclusive of those designated N/R or * is
Standard & Poor's Ratings Group. Ratings marked * are by Moody's Investors
Service, Inc. as these Bonds are not rated by Standard & Poor's Ratings Group
or Moody's Investors Service, Inc. N/R indicates that the Bond is not rated by
Standard & Poor's Ratings Group or Moody's Investors Service, Inc. The ratings
shown represent the latest published ratings of the Bonds. For a brief
description of rating symbols and their related meanings, see "Description
of Securities Ratings"in Part Two.
Redemption Feature - There is shown under this heading the year in which each
issue of Bonds is initially or currently callable and the call price for that
year. Each issue of Bonds continues to be callable at declining prices
thereafter (but not below par value) except for original issue discount Bonds
which are redeemable at prices based on the issue price plus the amount of
original issue discount accreted to redemption date plus, if applicable, some
premium, the amount of which will decline in subsequent years. "S.F."
indicates a sinking fund is established with respect to an issue of Bonds.
Redemption pursuant to call provisions generally will, and redemption pursuant
to sinking fund provisions may, occur at times when the redeemed Bonds have an
offering side evaluation which represents a premium over par. To the extent
that the Bonds were deposited in the Trust at a price higher than the price at
which they are redeemed, this will represent a loss of capital when compared
with the original Public Offering Price of the Units. Conversely, to the
extent that the Bonds were acquired at a price lower than the redemption
price, this will represent an increase in capital when compared with the
original Public Offering Price of the Units. Distributions will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and there will be distributed to Unitholders the
principal amount in excess of $1 per Unit and any premium received on such
redemption. The Estimated Current Return in this event may be affected by such
redemptions. For the Federal tax effect on Unitholders of such redemptions and
resultant distributions, see paragraph (3) under "Federal Tax Status of
Each Trust"and "Annual Unit Income and Estimated Current Returns"
in Part Two.
NOTE 2 - PORTFOLIO (continued)
Unrealized Appreciation and Depreciation - An analysis of net unrealized
appreciation (depreciation) at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized Appreciation $ 485,427
Unrealized Depreciation --
$ 485,427
</TABLE>
NOTE 3 - OTHER
Marketability - Although it is not obligated to do so, the Sponsor intends to
maintain a market for Units and to continuously offer to purchase Units at
prices, subject to change at any time, based upon the aggregate bid price of
the Bonds in the portfolio of the Trust, plus interest accrued to the date of
settlement. If the supply of Units exceeds demand, or for other business
reasons, the Sponsor may discontinue purchases of Units at such prices. In the
event that a market is not maintained for the Units, a Unitholder desiring to
dispose of his Units may be able to do so only by tendering such Units to the
Trustee for redemption at the redemption price.
Cost to Investors - The cost to original investors was based on the
Evaluator's determination of the aggregate offering price of the Bonds per
Unit on the date of an investor's purchase, plus a sales charge of 4.9% of the
public offering price which is equivalent to 5.152% of the aggregate offering
price of the Bonds. The secondary market cost to investors is based on the
Evaluator's determination of the aggregate bid price of the Bonds per Unit on
the date of an investor's purchase plus a sales charge based upon the years to
average maturity of the Bonds in the portfolio. The sales charge ranges from
1.5% of the public offering price (1.523% of the aggregate bid price of the
Bonds) for a Trust with a portfolio with less than two years to average
maturity to 5.7% of the public offering price (6.045% of the aggregate bid
price of the Bonds) for a Trust with a portfolio with sixteen or more years to
average maturity.
Compensation of Evaluator - The Evaluator receives an annual fee for regularly
evaluating the Trust's portfolio. The fee may be adjusted for increases under
the category "All Services Less Rent of Shelter"in the Consumer Price
Index.
NOTE 4 - REDEMPTION OF UNITS
During the years ended December 31, 1992, 1993 and 1994, 39 Units, 155 Units
and 555 Units, respectively, were presented for redemption.
NATIONAL AND STATE QUALITY TRUSTS
INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS
Part Two
In the opinion of counsel, interest to each Trust and to Unitholders, with
certain exceptions, is excludable under existing law from gross income for
Federal income taxes. In addition, except for the National Trust, the interest
income of each Trust is, in the opinion of counsel, exempt to the extent
indicated from state and local taxes, when held by residents of the state
where the issuers of Bonds in such Trust are located. Capital gains, if any,
are subject to Federal tax.
INTRODUCTION
The Fund. The objectives of the Fund are Federal and, in the case of a State
Trust, state tax-exempt income and conservation of capital through an
investment in a diversified portfolio of tax-exempt bonds. There is, of
course, no guarantee that the Fund's objectives will be achieved.The Fund
consists of a series of separate National and State unit investment trusts,
some of which may be included in various series of Investors' Quality
Tax-Exempt Trust, Multi-State or Multi-Series. The various trusts collectively
are referred to hereinas the "Trusts". The "National Trusts"
include various series of The First National Dual Series Tax-Exempt Bond Trust
(Income Trust), Investors' Municipal-Yield Trust and Investors' Quality
Tax-Exempt Trust and the other Trusts are collectively referred to herein as
the "State Trusts". Each Trust consists of interest-bearing
obligations (the "Bonds"or "Securities") issued by or on
behalf of municipalities and other governmental authorities, the interest on
which is, in the opinion of recognized bond counsel to the issuing
governmental authority, exempt from all Federal income tax under existing law.
In addition, the interest income of each State Trust is, in the opinion of
counsel, exempt to the extent indicated from state and local taxes, when held
by residents of the state where the issuers of Bonds in such Trust are
located. All the Securities deposited in each Trust were rated "A"or
better by Standard & Poor's Ratings Group, ("Standard & Poor's") or
"A"or better by Moody's Investors Service, Inc.
Public Offering Price. Units are offered at the Public Offering Price. The
Public Offering Price for "secondary market"sales will be equal to
the aggregate bid price of the Securities in each Trust and cash, if any, in
the Principal Account held or owned by such Trust plus the sales charge
referred to under "Public Offering"plus an amount equal to the
accrued interest from the most recent record date of the Trust to the date of
settlement (five business days after order) less distributions from the
Interest Account subsequent to the most recent record date, if any. In
addition, for Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series the Public Offering
Price will include Purchased Interest. If the Securities in each Trust were
available for direct purchase by investors, the purchase price of the
Securities would not include the sales charge included in the Public Offering
Price of the Units.
Estimated Current Return and Estimated Long-Term Return. The Estimated Current
Return is calculated by dividing the Estimated Net Annual Interest Income per
Unit by the Public Offering Price. The Estimated Net Annual Interest Income
per Unit will vary with changes in fees and expenses of the Trustee and the
Evaluator and with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with changes in
the bid price of the underlying Securities; therefore, there is no assurance
that the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income and Public
Offering Price. Neither rate reflects the true return to Unitholders which is
lower because neither includes the effect of the delay in the first payment to
Unitholders.
Risk Factors. An investment in the Trust should be made with an understanding
of the risks associated therewith, including, among other factors, the
inability of the issuer to pay the principal of or interest on a bond when
due, volatile interest rates, early call provisions, and changes to the tax
status of the Bonds. See "Risk Factors".
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE
Both parts of this Prospectus should be retained for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Van Kampen American Capital
DESCRIPTION OF THE FUND
Each series of the Fund was created under the laws of the State of New York
pursuant to a Trust Indenture and Agreement (the "Trust Agreement"),
dated the Date of Deposit, between Van Kampen Merritt Inc., as Sponsor,
American Portfolio Evaluation Services, a division of Van Kampen Merritt
Investment Advisory Corp., as Evaluator, and, except for certain Pennsylvania
Trusts (see "The Trustee"), The Bank of New York, as Trustee, or their
respective predecessors.
The Fund consists of the various series of the National Trust and the State
Trusts, each of which contains a portfolio of interest-bearing obligations
issued by or on behalf of states and territories of the United States, and
political subdivisions and authorities thereof, the interest on which is, in
the opinion of recognized bond counsel to the issuing authorities, excludable
from gross income for Federal income tax under existing law but may be subject
to state and local taxes. All issuers of Securities in a State Trust are
located in the state for which such Trust is named or in United States
territories or possessions and their public authorities; consequently, in the
opinion of recognized bond counsel to such issuers, the related interest
earned on such Securities is exempt to the extent indicated from state and
local taxes of such State. Interest on certain Bonds in the National Quality
AMT Trust will be a preference item for purposes of the alternative minimum
tax. Accordingly, the National Quality AMT Trust may be appropriate only for
investors who are not subject to the alternative minimum tax. Unless otherwise
terminated as provided therein, the Trust Agreement for each Trust will
terminate at the end of the calendar year prior to the fiftieth anniversary of
its execution (except for the Short Term Trusts in which case the termination
date is at the end of the calendar year prior to the sixth anniversary of its
execution). The portfolio of any State Trust or National Quality Trust
consists of Bonds maturing approximately 15 to 40 years from the Date of
Deposit.
Certain of the Bonds in certain of the Trusts are "zero coupon"bonds.
Zero coupon bonds are purchased at a deep discount because the buyer receives
only the right to receive a final payment at the maturity of the bond and does
not receive any periodic interest payments. The effect of owning deep discount
bonds which do not make current interest payments (such as the zero coupon
bonds) is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of such obligation.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest the income on such obligation at a rate as high as
the implicit yield on the discount obligation, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this
reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. See note (6) in
"Notes to Portfolio"in Part One of this Prospectus.
Each Unit of each Trust represents a fractional undivided interest in the
principal and net income of such Trust. To the extent that any Units of a
Trust are redeemed by the Trustee, the fractional undivided interest in such
Trust represented by each unredeemed Unit will increase, although the actual
interest in such Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor, or until the termination of the
Trust Agreement.
SECURITIES SELECTION
In selecting Securities for the Trusts the following facts, among others, were
considered by the Sponsor: (a) either the Standard & Poor's Ratings Group
("Standard & Poor's") rating of the Securities was in no case less
than "A"or the Moody's Investors Service, Inc. rating of the
Securities was in no case less than "A"including provisional or
conditional ratings, respectively, or, if not rated, the Securities had, in
the opinion of the Sponsor, credit characteristics sufficiently similar to the
credit characteristics of interest-bearing tax-exempt obligations that were so
rated as to be acceptable for acquisition by a Trust (see "Description of
Securities Ratings"), (b) the prices of the Securities relative to other
bonds of comparable quality and maturity and (c) the diversification of
Securities as to purpose of issue and location of issuer. Subsequent to the
Date of Deposit, a Security may cease to be rated or its rating may be reduced
below the minimum required as of the Date of Deposit. Neither event requires
elimination of such Security from the portfolio of a Trust but may be
considered in the Sponsor's determination as to whether or not to direct the
Trustee to dispose of the Security (see "Portfolio Administration").
To the best knowledge of the Sponsor, there is no litigation pending as of the
Date of Deposit in respect of any Securities which might reasonably be
expected to have a material adverse effect upon the Fund or any of the Trusts.
At any time after the Date of Deposit, litigation may be initiated on a
variety of grounds with respect to Securities in the Fund. Such litigation,
as, for ex ample, suits challenging the issuance of pollution control revenue
bonds under environmental protection statutes, may affect the validity of such
Securities or the tax-free nature of the interest thereon. While the outcome
of litigation of such nature can never be entirely predicted, the Fund has
received or will receive opinions of bond counsel to the issuing authorities
of each Security on the date of issuance to the effect that such Securities
have been validly issued and that the interest thereon is exempt from Federal
income tax. In addition, other factors may arise from time to time which
potentially may impair the ability of issuers to meet obligations undertaken
with respect to the Securities.
RISK FACTORS
Certain of the Bonds in certain of the Trusts may be general obligations of a
governmental entity that are backed by the taxing power of such entity. In
view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. All other Bonds in the Trusts are revenue bonds
payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. There are, of course, variations in the
security of the different Bonds in the Fund, both within a particular
classification and between classifications, depending on numerous factors.
Certain of the Bonds in certain of the Trusts are obligations which derive
their payments from mortgage loans. Certain of such housing bonds may be FHA
insured or may be single family mortgage revenue bonds issued for the purpose
of acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned by
persons of low or moderate income. In view of this an investment in such a
Trust should be made with an understanding of the characteristics of such
issuers and the risks which such an investment may entail. Mortgage loans are
generally partially or completely prepaid prior to their final maturities as a
result of events such as sale of the mortgaged premises, default, condemnation
or casualty loss. Because these bonds are subject to extraordinary mandatory
redemption in whole or in part from such prepayments of mortgage loans, a
substantial portion of such bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates. Extraordinary
mandatory redemption without premium could also result from the failure of the
originating financial institutions to make mortgage loans in sufficient
amounts within a specified time period. Additionally, unusually high rates of
default on the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds. These
bonds were issued under Section 103A of the Internal Revenue Code, which
Section contains certain requirements relating to the use of the proceeds of
such bonds in order for the interest on such bonds to retain its tax-exempt
status. In each case the issuer of the bonds has covenanted to comply with
applicable requirements and bond counsel to such issuer has issued an opinion
that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have
considered various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the housing bonds
held by the Trust, the Sponsor has not had any direct communications with any
of the issuers thereof, but at the Date of Deposit it was not aware that any
of the respective issuers of such Bonds were actively considering the
redemption of such Bonds prior to their respective stated initial call dates.
Certain of the Bonds in certain of the Trusts are health care revenue bonds.
In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Ratings of bonds issued for health care facilities
are often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and conditions
including, among other things, demand for services and the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, competition with other health care
facilities, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, government regulation
and the termination or restriction of governmental financial assistance,
including that associated with Medicare, Medicaid and other similar third
party payor programs. Pursuant to recent Federal legislation, Medicare
reimbursements are currently calculated on a prospective basis utilizing a
single nationwide schedule of rates. Prior to such legislation Medicare
reimbursements were based on the actual costs incurred by the health facility.
The current legislation may adversely affect reimbursements to hospitals and
other facilities for services provided under the Medicare program. Such
adverse changes also may adversely affect the ratings of Securities held in
the portfolios of the Fund.
Certain of the Bonds in certain of the Trusts are obligations of public
utility issuers, including those selling wholesale and retail electric power
and gas. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in
absorbing utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. All of such issuers have been
experiencing certain of these problems in varying degrees. In addition,
Federal, state and municipal governmental authorities may from time to time
review existing, and impose additional, regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely affect
the ability of the issuers of certain of the Bonds in the portfolio to make
payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts are industrial revenue bonds
("IRBs"). In view of this an investment in such a Trust should be made
with an understanding of the characteristics of such issuers and the risks
which such an investment may entail. IRBs have generally been issued under
bond resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from a
corporate restructuring pursuant to a leveraged buy-out, takeover or
otherwise. Such a restructuring may result in the operator of a project
becoming highly leveraged which may impact on such operator's creditworthiness
which in turn would have an adverse impact on the rating and/or market value
of such Bonds. Further, the possibility of such a restructuring may have an
adverse impact on the market for and consequently the value of such Bonds,
even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
whose revenues are derived from the sale of water and/or sewerage services. In
view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Such bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate
rate increases, population decline resulting in decreased user fees, the
difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth"zoning ordinances. All of such issuers have been
experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations that are
secured by lease payments of a governmental entity (hereinafter called "
lease obligations"). In view of this an investment in such a Trust should
be made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Although the lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation lease is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation"clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. A governmental
entity that enters into such a lease agreement cannot obligate future
governments to appropriate for and make lease payments but covenants to take
such action as is necessary to include any lease payments due in its budgets
and to make the appropriations therefor. A governmental entity's failure to
appropriate for and to make payments under its lease obligation could result
in insufficient funds available for payment of the obligations secured
thereby. Although "non- appropriation"lease obligations are secured
by the leased property, disposition of the property in the event of
foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes or
for higher education systems, from tuition, dormitory revenues, grants and
endowments. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which
such an investment may entail. General problems relating to school bonds
include litigation contesting the State constitutionality of financing public
education in part from ad valorem taxes, thereby creating a disparity in
educational funds available to schools in wealthy areas and schools in poor
areas. Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college"age
individuals, possible inability to raise tuitions and fees sufficiently to
cover increased operating costs, the uncertainty of continued receipt of
Federal grants and state funding, and government legislation or regulations
which may adversely affect the revenues or costs of such issuers. All of such
issuers have been experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation
of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers
and the risks which such an investment may entail. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Bonds related to other facilities is dependent
on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Resource recovery facilities are
designed to process solid waste, generate steam and convert steam to
electricity. Resource recovery bonds may be subject to extraordinary optional
redemption at par upon the occurrence of certain circumstances, including but
not limited to: destruction or condemnation of a project; contracts relating
to a project becoming void, unenforceable or impossible to perform; changes in
the economic availability of raw materials, operating supplies or facilities
necessary for the operation of a project or technological or other unavoidable
changes adversely affecting the operation of a project; administrative or
judicial actions which render contracts relating to the projects void,
unenforceable or impossible to perform; or impose unreasonable burdens or
excessive liabilities. The Sponsor cannot predict the causes or likelihood of
the redemption of resource recovery bonds in such a Trust prior to the stated
maturity of the Bonds.
BOND REDEMPTIONS
Because certain of the Bonds in certain of the Trusts may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and because the proceeds from such events will be distributed
to Unitholders and will not be reinvested, no assurance can be given that any
Trust will retain for any length of time its present size and composition.
Neither the Sponsor nor the Trustee shall be liable in any way for any
default, failure or defect in any Bond.
Certain of the Bonds in certain of the Trusts may be subject to redemption
prior to their stated maturity date pursuant to sinking fund provisions, call
provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution
of principal and may result in a reduction in the amount of subsequent
interest distributions; it may also affect the current return on Units of the
Trust involved. Each Trust portfolio contains a listing of the sinking fund
and call provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Bonds or may require the mandatory
redemption of Bonds include, among others: a final determination that the
interest on the Bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the Bonds were
used; an exercise by a local, state or Federal governmental unit of its power
of eminent domain to take all or substantially all of the project for which
the proceeds of the Bonds were used; changes in the economic availability of
raw materials, operating supplies or facilities or technological or other
changes which render the operation of the project for which the proceeds of
the Bonds were used uneconomic; changes in law or an administrative or
judicial decree which renders the performance of the agreement under which the
proceeds of the Bonds were made available to finance the project impossible or
which creates unreasonable burdens or which imposes excessive liabilities,
such as taxes, not imposed on the date the Bonds are issued on the issuer of
the Bonds or the user of the proceeds of the Bonds; an administrative or
judicial decree which requires the cessation of a substantial part of the
operations of the project financed with the proceeds of the Bonds; an
overestimate of the costs of the project to be financed with the proceeds of
the Bonds resulting in excess proceeds of the Bonds which may be applied to
redeem Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Bonds. See "Trust Portfolio"and note (3) in "Notes
to Portfolio"in Part One of this Prospectus. See also the discussion of
single family mortgage and multi-family revenue bonds above for more
information on the call provisions of such bonds.
DISTRIBUTIONS
General. Distributions of interest received by a Trust, pro rated on an annual
basis, will be made semi-annually unless the Unitholder has elected to receive
them monthly or quarterly, if applicable. Distributions of funds from the
Principal Account, if any, will be made on a semi-annual basis, except under
certain special circumstances. See "Distributions of Interest and
Principal"below. Record dates for monthly distributions for each Trust
are the first day of each month and record dates for quarterly and semi-annual
distributions for each Trust are the first day of the months indicated under
"Per Unit Information"in Part One of this Prospectus. Distributions
are made on the fifteenth day of the month subsequent to the respective record
dates. Unitholders of the Short Term Trusts will only receive distributions
semi-annually with record dates being May 1 and November 1 of each year.
Unitholders of Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series will receive
distributions of income and principal, if any, on a monthly basis.
Change of Distribution Option. The plan of distribution selected by a
Unitholder of Insured Municipals Income Trust and Investors' Quality Tax-
Exempt Trust, Multi-Series 212 and prior series remains in effect until
changed. Unitholders purchasing Units in the secondary market will initially
receive distributions in accordance with the election of the prior owner.
Unitholders may change the plan of distribution in which they are
participating. For the convenience of Unitholders, the Trustee will furnish a
card for this purpose; cards may also be obtained upon request from the
Trustee. Unitholders desiring to change their plan of distribution may so
indicate on the card and return it, together with their certificate and such
other documentation that the Trustee may then require, to the Trustee.
Certificates should only be sent by registered or certified mail to minimize
the possibility of their being lost or stolen. If the card and certificate are
properly presented to the Trustee, the change will become effective for all
subsequent distributions.
Distributions of Interest and Principal. Interest received by each Trust,
including that part of the proceeds of any disposition of Securities which
represents Purchased Interest, if any, and/or accrued interest, is credited by
the Trustee to the Interest Account for the appropriate Trust. Other receipts
are credited to the Principal Account for the appropriate Trust. All
distributions will be net of applicable expenses. The pro rata share of cash
in the Principal Account of a Trust will be computed as of the semi-annual
record date and distributions to the Unitholders as of such record date will
be made on or shortly after the fifteenth day of such month. For Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series such computation and distribution will occur
monthly. Proceeds received from the disposition of any of the Securities after
such record date and prior to the following distribution date will be held in
the Principal Account and not distributed until the next distribution date.
The Trustee is not required to pay interest on funds held in any Principal or
Interest Account (but may itself earn interest thereon and therefore benefits
from the use of such funds) nor to make a distribution from the Principal
Account unless the amount available for distribution therein shall equal at
least $1.00 per Unit.
The distribution to the Unitholders of a Trust as of each record date will be
made on the following distribution date or shortly thereafter and shall
consist of an amount substantially equal to such portion of the Unitholder's
prorata share of the Estimated Net Annual Interest Income in the Interest
Account of such Trust after deducting estimated expenses attributable as is
consistent with the distribution plan chosen. Only monthly distributions will
be available for Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213 and subsequent series. Because interest
payments are not received by a Trust at a constant rate throughout the year,
such interest distribution may be more or less than the amount credited to
such Interest Account as of the record date. For the purpose of minimizing
fluctuations in the distributions from an Interest Account, the Trustee is
authorized to advance such amounts as may be necessary to provide interest
distributions of approximately equal amounts. The Trustee shall be reimbursed,
without interest, for any such advances from funds in the applicable Interest
Account on the ensuing record date. Persons who purchase Units between a
record date and a distribution date will receive their first distribution on
the second distribution date after the purchase, under the applicable plan of
distribution. Only monthly distributions will be available for Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series. As of the first day of each month, the Trustee will
deduct from the Interest Account and, to the extent funds are not sufficient
therein, from the Principal Account, amounts necessary to pay the expenses of
each Trust. The Trustee also may withdraw from said accounts such amounts, if
any, as it deems necessary to establish a reserve for any governmental charges
payable out of each Trust. Amounts so withdrawn shall not be considered a part
of each Trust's assets until such time as the Trustee shall return all or any
part of such amounts to the appropriate Accounts. In addition, the Trustee may
withdraw from the Interest and Principal Accounts such amounts as may be
necessary to cover redemptions of Units by the Trustee.
CERTIFICATES
The Trustee is authorized to treat as the record owner of Units that person
who is registered as such owner on the books of the Trustee. Ownership of
Units of the Trust is evidenced by separate registered certificates executed
by the Trustee and the Sponsor. Certificates are transferable by presentation
and surrender to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer. A Unitholder must sign exactly as his
name appears on the face of the certificate with the signature guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("
STAMP") or such other signature guaranty program in addition to or in
substitution for, STAMP, as may be acceptable to the Trustee. In certain
instances the Trustee may require additional documents such as, but not
limited to, trust instruments, certificates of death, appointments as executor
or administrator or certificates of corporate authority. Certificates will be
issued in denominations of one Unit or any multiple thereof.
Although no such charge is now made or contemplated, the Trustee may require a
Unitholder to pay a reasonable fee for each certificate re-issued (other than
as a result of a change in plan of distribution) or transferred and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity, evidence of
ownership and payment of expenses incurred. Mutilated certificates must be
surrendered to the Trustee for replacement.
ESTIMATED CURRENT RETURNS AND ESTIMATED LONG-TERM RETURNS
As of the opening of business on the date indicated therein, the Estimated
Current Returns, and the Estimated Long-Term Returns for each Trust under the
monthly, quarterly, if applicable, and semi-annual distribution plans were as
set forth under "Per Unit Information"for the applicable Trust in
Part One of this Prospectus. Estimated Current Return is calculated by
dividing the Estimated Net Annual Interest Income per Unit by the Public
Offering Price. The Estimated Net Annual Interest Income per Unit will vary
with changes in fees and expenses of the Trustee and the Evaluator and with
the principal prepayment, redemption, maturity, exchange or sale of Securities
while the Public Offering Price will vary with changes in the offering price
of the underlying Securities and with changes in Purchased Interest for those
series which contain Purchased Interest; therefore, there is no assurance that
the present Estimated Current Return will be realized in the future. Estimated
Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income and Public
Offering Price.
THE FOLLOWING SECTION "ACCRUED INTEREST (ACCRUED INTEREST TO CARRY)"
APPLIES TO INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT
TRUST, MULTI-SERIES 212 AND PRIOR SERIES ONLY.
Accrued Interest (Accrued Interest to Carry) Accrued interest to carry
consists of two elements. The first element arises as a result of accrued
interest which is the accumulation of unpaid interest on a bond from the last
day on which interest thereon was paid. Interest on Securities in each Trust
is actually paid either monthly, quarterly, if applicable, or semi-annually to
such Trust. However, interest on the Securities in each Trust is accounted for
daily on an accrual basis. Because of this, each Trust always has an amount of
interest earned but not yet collected by the Trustee because of coupons that
are not yet due. For this reason, the Public Offering Price will have added to
it the proportionate share of accrued and undistributed interest to the date
of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities
in such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that there
will generally be positive cash balances and since the funds held by the
Trustee may be used by it to earn interest thereon, it benefits thereby. If a
Unitholder sells or redeems all or a portion of his Units or if the Bonds in a
Trust are sold or otherwise removed or if a Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest to carry
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption.
THE FOLLOWING SECTIONS "PURCHASED AND ACCRUED INTEREST"APPLY TO
INSURED MUNICIPALS INCOME TRUST AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI- SERIES 213 AND SUBSEQUENT SERIES ONLY.
Purchased Interest. Purchased Interest is a portion of the unpaid interest
that has accrued on the Securities from the later of the last payment date on
the Securities or the date of issuance thereof through the First Settlement
Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information"in Part One of this Prospectus for the amount of Purchased
Interest per Unit for each Trust. Purchased Interest is an element of the
price Unitholders will receive in connection with the sale or redemption of
Units prior to the termination of a Trust.
Accrued Interest. Accrued Interest is an accumulation of unpaid interest on
securities which generally is paid semi-annually, although a Trust accrues
such interest daily. Because of this, a Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reasons, the Public
Offering Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will receive on the
next distribution date of a Trust the amount, if any, of accrued interest paid
on their Units.
As indicated in "Purchased Interest", accrued interest as of the First
Settlement Date includes Purchased Interest. In an effort to reduce the amount
of Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may advance a portion of such accrued interest to the Sponsor as
the Unitholder of record as of the First Settlement Date. Consequently, the
amount of accrued interest to be added to the Public Offering Price of Units
will include only accrued interest from the First Settlement Date to the date
of settlement (other than the Purchased Interest already included therein),
less any distributions from the Interest Account subsequent to the First
Settlement Date. See "DistributionsDistribution of Interest and
Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the Purchased Interest and accrued interest from
the purchaser of his Units. Since the Trustee has the use of the funds
(including Purchased Interest) held in the Interest Account for distributions
to Unitholders and since such Account is non-interest-bearing to Unitholders,
the Trustee benefits thereby.
PUBLIC OFFERING PRICE
Units are offered at the Public Offering Price plus accrued undistributed
interest to the settlement date. For secondary market sales the Public
Offering Price will be equal to the aggregate bid price of the Securities
determined in accordance with the table set forth below, which is based upon
the dollar weighted average maturity of each Trust. In addition, for Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213 and subsequent series the Public Offering Price will also include
Purchased Interest. For purposes of computation, Bonds will be deemed to
mature on their expressed maturity dates unless: (a) the Bonds have been
called for redemption or funds or securities have been placed in escrow to
redeem them on an earlier call date, in which case such call date will be
deemed to be the date upon which they mature; or (b) such Bonds are subject to
a "mandatory tender", in which case such mandatory tender will be
deemed to be the date upon which they mature.
The effect of this method of sales charge computation will be that different
sales charge rates will be applied to each Trust based upon the dollar
weighted average maturity of such Trust's Portfolio, in accordance with the
following schedule:
<TABLE>
<CAPTION>
Years To Maturity Sales Charge Years To Maturity Sales Charge
<S> <C> <C> <C>
1 .................. 1.523% 9.................. 4.712%
2 .................. 2.041 10.................. 4.932
3 .................. 2.564 11.................. 4.932
4 .................. 3.199 12.................. 4.932
5 .................. 3.842 13.................. 5.374
6 .................. 4.058 14.................. 5.374
7 .................. 4.275 15.................. 5.374
8 .................. 4.493 16 to 30............ 6.045
</TABLE>
The sales charges in the above table are expressed as a percentage of the
aggregate bid prices of the Securities in a Trust. Expressed as a percent of
the Public Offering Price (excluding Purchased Interest for those Trusts which
contain Purchased Interest), the sales charge on a Trust consisting entirely
of a portfolio of Bonds with 15 years to maturity would be 5.10%.
As indicated above, the price of the Units as of the opening of business on
the date of Part One of this Prospectus was determined by adding to the
determination of the aggregate bid price of the Securities an amount equal to
the applicable sales charge expressed as a percentage of the aggregate bid
price of the Securities plus Purchased Interest for those trusts which contain
Purchased Interest and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross commission equal to such sales
charged expressed as a percentage of the Public Offering Price.
For secondary market purposes an appraisal and adjustment with respect to a
Trust will be made by the Evaluator as of 4:00 P.M. Eastern time on days in
which the New York Stock Exchange is open for each day on which any Unit of
such Trust is tendered for redemption, and it shall determine the aggregate
value of any Trust as of 4:00 P.M. Eastern time at such other times as may be
necessary.
The aggregate price of the Securities in each Trust has been and will be
determined on the basis of bid prices as follows: (a) on the basis of current
market prices for the Securities obtained from dealers or brokers who
customarily deal in bonds comparable to those held by the Trust; (b) if such
prices are not available for any particular Securities, on the basis of
current market prices for comparable bonds; (c) by causing the value of the
Securities to be determined by others engaged in the practice of evaluation,
quoting or appraising comparable bonds; or (d) by any combination of the
above. Market prices of the Securities will generally fluctuate with changes
in market interest rates.
Although payment is normally made five business days following the order for
purchase, payment may be made prior thereto. A person will become the owner of
Units on the date of settlement provided payment has been received. Cash, if
any, made available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be deemed to
be a benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. Delivery of certificates representing Units so ordered
will be made five business days following such order or shortly thereafter.
See "Redemption of Units"below for information regarding the ability
to redeem Units ordered for purchase.
MARKET FOR UNITS
Although they are not obligated to do so, the Sponsor intends to, and certain
of the dealers may, maintain a market for the Units offered hereby and to
offer continuously to purchase such Units at prices, subject to change at any
time, based upon the aggregate bid prices of the Securities in the portfolio
of each Trust plus Purchased Interest, if any, plus interest accrued to the
date of settlement and plus any principal cash on hand, less any amounts
representing taxes or other governmental charges payable out of the Trust and
less any accrued Trust expenses. If the supply of Units exceeds demand or if
some other business reason warrants it, the Sponsor and/or the dealers may
either discontinue all purchases of Units or discontinue purchases of Units at
such prices. In the event that a market is not maintained for the Units and
the Unitholder cannot find another purchaser, a Unitholder of any Trust
desiring to dispose of his Units may be able to dispose of such Units only by
tendering them to the Trustee for redemption at the Redemption Price, which is
based upon the aggregate bid price of the Securities in the portfolio of such
Trust plus Purchased Interest, if any, and any accrued interest. The aggregate
bid prices of the underlying Securities in a Trust are expected to be less
than the related aggregate offering prices. See "Redemption of Units"
below. A Unitholder who wishes to dispose of his Units should inquire of his
broker as to current market prices in order to determine whether there is in
existence any price in excess of the Redemption Price and, if so, the amount
thereof.
REINVESTMENT OPTION
Unitholders of the Trust may elect to have each distribution of interest
income, capital gains and/or principal on their Units automatically reinvested
in shares of any of the open-ended mutual funds listed under "The
Sponsor"which are registered in the Unitholder's state of residence. Such
mutual funds are hereinafter collectively referred to as the "Reinvestment
Funds."
Each Reinvestment Fund has investment objectives which differ in certain
respects from those of the Trust. The prospectus relating to each Reinvestment
Fund describes the investment policies of such fund and sets forth the
procedures to follow to commence reinvestment. A Unitholder may obtain a
prospectus for the respective Reinvestment Funds from Van Kampen American
Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Texas residents who desire to reinvest may request that a broker-dealer
registered in Texas send the prospectus relating to the respective fund.
After becoming a participant in a reinvestment plan, each distribution of
interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as
directed by such person, as of such distribution date by the Trustee to
purchase shares (or fractions thereof) of the applicable Reinvestment Fund at
a net asset value as computed as of the close of trading on the New York Stock
Exchange on such date, plus a sales charge of $1.00 per $100 of reinvestment
except if the participant selects the First Investors New York Insured Tax
Free Fund, Inc., in which case the sales charge will be $1.50 per $100 of
reinvestment, or except if the participant selects the Van Kampen Merritt
Money Market Fund or the Van Kampen Merritt Tax Free Money Fund in which case
no sales charge applies. A minimum of one-half of such sales charge would be
paid to Van Kampen American Capital Distributors, Inc. for all Reinvestment
Funds except First Investors New York Insured Tax Free Fund, Inc., in which
case such sales charge would be paid to First Investors Management Company,
Inc.
Confirmations of all reinvestments by a Unitholder into a Reinvestment Fund
will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next succeeding
distribution date, by so notifying the Trustee in writing, elect to terminate
his or her reinvestment plan and receive future distributions on his or her
Units in cash. There will be no charge or other penalty for such termination.
Each Reinvestment Fund, its sponsor and investment adviser shall have the
right to terminate at any time the reinvestment plan relating to such Fund.
REDEMPTION OF UNITS
A Unitholder may redeem all or a portion of his Units by tender to the Trustee
at its Unit Investment Trust Division, 101 Barclay Street, 20th Floor, New
York, New York 10286 of the certificates representing the Units to be
redeemed, duly endorsed or accompanied by proper instruments of transfer with
signature guaranteed (or by providing satisfactory indemnity, as in connection
with lost, stolen or destroyed certificates) and by payment of applicable
governmental charges, if any. Thus, redemption of Units cannot be effected
until certificates representing such Units have been delivered to the person
seeking redemption or satisfactory indemnity provided. No redemption fee will
be charged. On the seventh calendar day following such tender, or if the
seventh calendar day is not a business day, on the first business day prior
thereto, the Unitholder will be entitled to receive in cash an amount for each
Unit equal to the Redemption Price per Unit next computed after receipt by the
Trustee of such tender of Units. The "date of tender"is deemed to be
the date on which Units are received by the Trustee, except that as regards
Units received after 4:00 P.M. Eastern time on days of trading on the New York
Stock Exchange, the date of tender is the next day on which such Exchange is
open for trading and such Units will be deemed to have been tendered to the
Trustee on such day for redemption at the Redemption Price computed on that
day.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold 20% of the principal amount of a Unit redemption if the
Trustee has not been furnished the redeeming Unitholder's tax identification
number in the manner required by such regulations. Any amount so withheld is
transmitted to the Internal Revenue Service and may be recovered by the
Unitholder only when filing a return. Under normal circumstances the Trustee
obtains the Unitholder's tax identification number from the selling broker.
However, at any time a Unitholder elects to tender Units for redemption, such
Unitholder should provide a tax identification number to the Trustee in order
to avoid this possible "back-up withholding"in the event the Trustee
has not been previously provided such number.
Purchased Interest, if any, and accrued interest paid on redemption shall be
withdrawn from the Interest Account of such Trust or, if the balance therein
is insufficient, from the Principal Account of such Trust. All other amounts
will be withdrawn from the Principal Account of such Trust. The Trustee is
empowered to sell underlying Securities of a Trust in order to make funds
available for redemption. Units so redeemed shall be cancelled.
The Redemption Price per Unit will be determined on the basis of the bid price
of the Securities in each Trust as of 4:00 P.M. Eastern time on days of
trading on the New York Stock Exchange on the date such determination is made.
While the Trustee has the power to determine the Redemption Price per Unit
when Units are tendered for redemption, such authority has been delegated to
the Evaluator which determines the price per Unit on a daily basis. The
Redemption Price per Unit is the pro rata share of each Unit in each Trust on
the basis of (i) the cash on hand in such Trust or moneys in the process of
being collected, (ii) the value of the Securities in such Trust based on the
bid prices of the Securities therein, (iii) Purchased Interest, if any,
included in Insured Municipals Income Trust and Investors' Quality Tax- Exempt
Trust, Multi-Series 213 and subsequent series and (iv) interest accrued
thereon, less (a) amounts representing taxes or other governmental charges
payable out of such Trust and (b) the accrued expenses of such Trust. The
Evaluator may determine the value of the Securities in each Trust by employing
any of the methods set forth in "Public Offering Price."
The price at which Units may be redeemed could be less than the price paid by
the Unitholder. As stated above, the Trustee may sell Securities to cover
redemptions. When Securities are sold, the size and diversity of the affected
Trust will be reduced. Such sales may be required at a time when Securities
would not otherwise be sold and might result in lower prices than might
otherwise be realized.
The right of redemption may be suspended and payment postponed for any period
during which the New York Stock Exchange is closed, other than for customary
weekend and holiday closings, or during which the Securities and Exchange
Commission determines that trading on that Exchange is restricted or an
emergency exists, as a result of which disposal or evaluation of the
Securities in a Trust is not reasonably practicable, or for such other periods
as the Securities and Exchange Commission may by order permit. Under certain
extreme circumstances the Sponsor may apply to the Securities and Exchange
Commission for an order permitting a full or partial suspension of the right
of Unitholders to redeem their Units.
REPORTS PROVIDED
The Trustee shall furnish Unitholders of a Trust in connection with each
distribution a statement of the amount of interest and, if any, the amount of
other receipts (received since the preceding distribution) being distributed
expressed in each case as a dollar amount representing the pro rata share of
each Unit of a Trust outstanding. For as long as the Trustee deems it to be in
the best interests of the Unitholders, the accounts of each Trust shall be
audited, not less frequently than annually, by independent certified public
accountants and the report of such accountants shall be furnished by the
Trustee to Unitholders of the respective Trusts upon request. Within a
reasonable period of time after the end of each calendar year, the Trustee
shall furnish to each person who at any time during the calendar year was a
registered Unitholder of a Trust a statement (i) as to the Interest Account:
interest received (including amounts representing interest received upon any
disposition of Securities) and the percentage of such interest by states in
which the issuers of the Securities are located, the amount of Purchased
Interest, if any, deductions for applicable taxes and for fees and expenses of
such Trust, for redemptions of Units, if any, and the balance remaining after
such distributions and deductions, expressed in each case both as a total
dollar amount and as a dollar amount representing the pro rata share of each
Unit outstanding on the last business day of such calendar year; (ii) as to
the Principal Account: the dates of disposition of any Securities and the net
proceeds received therefrom (excluding any portion representing accrued
interest), the amount paid for redemptions of Units, if any, deductions for
payment of applicable taxes and fees and expenses of the Trustee and the
balance remaining after such distributions and deductions expressed both as a
total dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (iii) a
list of the Securities held and the number of Units outstanding on the last
business day of such calendar year; (iv) the Redemption Price per Unit based
upon the last computation thereof made during such calendar year; and (v)
amounts actually distributed during such calendar year from the Interest and
Principal Accounts, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit
outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Securities in the Trust furnished to it by the Evaluator.
Each distribution statement will reflect pertinent information in respect of
the other plan or plans of distribution so that Unitholders may be informed
regarding the results of such other distribution option or options. Only
monthly distributions are available for Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi-Series 213 and subsequent series.
FEDERAL TAX STATUS OF EACH TRUST
At the time of the closing for each Trust, Chapman and Cutler, Counsel for the
Sponsor, rendered an opinion under then existing law, substantially to the
effect that:
Each Trust is not an association taxable as a corporation for Federal income
tax purposes and interest and accrued original issue discount on Bonds which
is excludable from gross income under the Internal Revenue Code of 1986 (the
"Code") will retain its status when distributed to Unitholders subject
to the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax") as noted
below. A Unitholder's share of the interest on certain Bonds in the National
Quality AMT Trust will be included as an item of tax preference for both
individuals and corporations subject to the alternative minimum tax ("AMT
Bonds"). In the case of certain corporations owning Units, interest and
accrued original issue discount with respect to Bonds other than AMT Bonds
held by a Trust (including the National Quality AMT Trust) may be subject to
the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax");
Each Unitholder is considered to be the owner of a pro rata portion of the
respective Trust under subpart E, subchapter J of chapter 1 of the Internal
Revenue Code of 1986 and will have a taxable event when such Trust disposes of
a Security, or when the Unitholder redeems or sells his Units. Unitholders
must reduce the tax basis of their Units for their share of accrued interest
received by the respective Trust, if any, on Securities delivered after the
Unitholders pay for their Units to the extent that such interest accrued on
such Securities during the period from the Unitholder's settlement date to the
date such Securities are delivered to the respective Trust and, consequently,
such Unitholders may have an increase in taxable gain or reduction in capital
loss upon the disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of such sale or
redemption with the adjusted basis of the Units. If the Trustee disposes of
Bonds (whether by sale, payment on maturity, redemption or otherwise), gain or
loss is recognized to the Unitholder. The amount of any such gain or loss is
measured by comparing the Unitholder's pro rata share of the total proceeds
from such disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder who purchases
Units, such basis (before adjustment for earned original issue discount and
amortized bond premium, if any) is determined by apportioning the cost of the
Units among each of the Trust assets ratably according to value as of the date
of acquisition of the Units. The tax cost reduction requirements of said Code
relating to amortization of bond premium may, under some circumstances, result
in the Unitholder realizing a taxable gain when his Units are sold or redeemed
for an amount equal to his original cost.
For purposes of computing the alternative minimum tax for individuals and
corporations and the Superfund Tax for corporations, interest on certain
private activity bonds (which includes most industrial and housing revenue
bonds) issued on or after August 8, 1986 such as the AMT Bonds, is included as
an item of tax preference. With the exception of certain Bonds in the National
Quality AMT Trust, the Trusts do not include any such AMT Bonds.
Sections 1288 and 1272 of the Code provide a complex set of rules governing
the accrual of original issue discount. These rules provide that original
issue discount accrues either on the basis of a constant compound interest
rate or ratably over the term of the Bond, depending on the date the Bond was
issued. In addition, special rules apply if the purchase price of a Bond
exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "
adjusted issue price") to prior owners. The application of these rules
will also vary depending on the value of the Bond on the date a Unitholder
acquires his Units and the price the Unitholder pays for his Units. Investors
with questions regarding these Code sections should consult with their tax
advisers.
"The Revenue Reconciliation Act of 1993"(the "Tax Act")
subjects tax- exempt bonds to the market discount rules of the Code effective
for bonds purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds an
investor's purchase price (except to the extent that such difference, if any,
is attributable to original issue discount not yet accrued). Market discount
can arise based on the price a Trust pays for Bonds or the price a Unitholder
pays for his or her Units. Under the Tax Act, accretion of market discount is
taxable as ordinary income; under prior law the accretion had been treated as
capital gain. Market discount that accretes while a Trust holds a Bond would
be recognized as ordinary income by the Unitholders when principal payments
are received on the Bond, upon sale or at redemption (including early
redemption), or upon the sale or redemption of his or her Units, unless a
Unitholder elects to include market discount in taxable income as it accrues.
The market discount rules are complex and Unitholders should consult their tax
advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depends upon
the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than an S Corporation, Regulated
Investment Company, Real Estate Investment Trust, or REMIC) is an amount equal
to 75% of the excess of such corporation's "adjusted current earnings"
over an amount equal to its alternative minimum taxable income (before such
adjustment item and the alternative tax net operating loss deduction). "
Adjusted current earnings"includes all tax exempt interest, including
interest on all of the Bonds in the Trust. Unitholders are urged to consult
their tax advisers with respect to the particular tax consequences to them,
including the corporate alternative minimum tax, the Superfund Tax and the
branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units of a
Trust is not deductible for Federal income tax purposes. The Internal Revenue
Service has taken the position that such indebtedness need not be directly
traceable to the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred o purchase or improve a
personal residence). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units. Investors with
questions regarding this issue should consult with their tax advisers.
In the case of certain of the Securities in the Fund, the opinions of bond
counsel indicate that interest on such Securities received by a "
substantial user"of the facilities being financed with the proceeds of
these Securities, or persons related thereto, for periods while such
Securities are held by such a user or related person, will not be excludable
from Federal gross income, although interest on such Securities received by
others would be excludable from Federal gross income. "Substantial
user"and "related person"are defined under U.S. Treasury
Regulations. Any person who believes that he or she may be a "substantial
user"or a "related person"as so defined should contact his or
her tax adviser.
At the time of closing for each Trust, Special Counsel to the Fund for New
York tax matters have rendered opinions substantially to the effect that under
then existing law, the Fund and each Trust are not associations taxable as
corporations and the income of each Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other tax purposes are the opinions of counsel and are
to be so construed.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal
gross income are rendered by bond counsel to the respective issuing
authorities. Neither the Sponsor nor Chapman and Cutler has made any special
review for the Fund of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
Section 86 of the Internal Revenue Code provides, in general, that fifty
percent of Social Security benefits are includable in gross income to the
extent that the sum of "modified adjusted gross income"plus fifty
percent of the Social Security benefits received exceeds a "base
amount". The base amount is $25,000 for unmarried taxpayers, $32,000 for
married taxpayers filing a joint return and zero for married taxpayers who do
not live apart at all times during the taxable year and who file separate
returns. Modified adjusted gross income is adjusted gross income determined
without regard to certain otherwise allowable deductions and exclusions from
gross income and by including tax exempt interest. To the extent that Social
Security benefits are includible in gross income, they will be treated as any
other item of gross income.
In addition, under the Tax Act, for taxable years beginning after December 31,
1993, up to 85% of Social Security benefits are includible in gross income to
the extent that the sum of "modified adjusted gross income"plus 50%
of Social Security benefits received exceeds an "adjusted base amount."
The adjusted base amount is $34,000 for unmarried taxpayers, $44,000 for
married taxpayers filing a joint return, and zero for married taxpayers who do
not live apart at all times during the taxable year and who file separate
returns.
Although tax exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income, no tax exempt interest, including
that received from the Fund, will be subject to tax. A taxpayer whose adjusted
gross income already exceeds the base amount or the adjusted base amount must
include fifty percent or eighty-five percent, respectively, of his Social
Security benefits in gross income whether or not he receives any tax exempt
interest. A taxpayer whose modified adjusted gross income (after inclusion of
tax exempt interest) does not exceed the base amount need not include any
Social Security benefits in gross income.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35%, effective for long-term capital gains realized on or
after January 1, 1993. For taxpayers other than corporations, net capital
gains are subject to a maximum marginal tax rate of 28 percent. However, it
should be noted that legislative proposals are introduced from time to time
that affect tax rates and could affect relative differences at which ordinary
income and capital gains are taxed. Under the Code, taxpayers must disclose to
the Internal Revenue Service the amount of tax-exempt interest earned during
the year.
For a discussion of the state tax status of income earned on Units of a State
Trust, see "Tax Status"for the applicable Trust. Except as noted
therein, the exemption of interest on state and local obligations for Federal
income tax purposes discussed above does not necessarily result in exemption
under the income or other tax laws of any State or City. The laws of the
several States vary with respect to the taxation of such obligations.
DESCRIPTION AND STATE TAX STATUS OF STATE TRUSTS
The information below describes some of the more significant events relating
to the various State Trusts and sets forth the tax status of each State Trust
under applicable state law. The Sponsor makes no representation regarding the
accuracy or completion of the information, but believes it to be complete and
has itself relied upon such information. The portfolio of each State Trust
consists of obligations issued by entities located in such state or in the
Commonwealth of Puerto Rico.
Prospective investors should study with care the portfolio of Bonds in a Trust
and should consult with their investment advisors as to the merits of
particular issues in a portfolio.
Alabama Trusts
Alabama Economy. Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990, manufacturing accounted
for 26.7% of Alabama's Real Gross State Product (the total value of goods and
services produced in Alabama). During the 1960s and 1970s the State's
industrial base became more diversified and balanced, moving away from primary
metals into pulp and paper, lumber, furniture, electrical machinery,
transportation equipment, textiles (including apparel), chemicals, rubber and
plastics. Since the early 1980s, modernization of existing facilities and an
increase in direct foreign investments in the State has made the manufacturing
sector more competitive in domestic and international markets.
Among several leading manufacturing industries have been pulp and papers and
chemicals. In recent years Alabama has ranked as the fifth largest producer of
timber in the nation. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper. Mining, oil and gas
production and service industries are also important to Alabama's economy.
Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth potential
include the research and medical training and general health care industries,
most notably represented by the University of Alabama medical complex in
Birmingham and the high technology research and development industries
concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a comprehensive
measure of economic performance for the State of Alabama. Alabama's RGSP is
defined as the total value of all final goods and services produced in the
State in constant dollar terms. Hence, changes in RGSP reflect changes in
final output. From 1984 to 1990 RGSP originating in manufacturing increased by
22.99% whereas RGSP originating in all the non-manufacturing sectors grew by
17.88%.
Those non-manufacturing sectors exhibiting large percentage increases in RGSP
originating between 1984 and 1990 were 1) Services; 2) Trade; 3) Farming; and
4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP originating in
Services increased by 35.07%; Trade grew by 21.53%; Farming increased by
19.78%; and the gain in Finance, Insurance and Real Estate was 19.19%. The
present movement toward diversification of the State's manufacturing base and
a similar present trend toward enlargement and diversification of the service
industries in the State are expected to lead to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979, and
was followed by a decrease in activity. The national economic recession was
principally responsible for this decline. The State's industrial structure is
particularly sensitive to high interest rates and monetary policy, and the
resulting unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited the
State. The economic recovery experienced on the national level since 1982 has
been experienced in Alabama as well, but to a different degree and with a time
lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in certain
other Southeastern states. The national economic recession in the early 1980s
caused a decline in manufacturing activity and natural resource consumption,
and Alabama's unemployment rate was 14.4% in 1982, significantly higher than
the national average. Unemployment remains high in certain rural areas of the
State. A trend towards diversification of the State's economic base and an
expansion of service industries may lead to improved economic stability in the
future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing authority.
In addition, the Alabama Supreme Court has held that a governmental unit may
first use its taxes and other revenues to pay the expenses of providing
governmental services before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions which result in
a proration procedure in the event estimated budget resources in a fiscal year
are insufficient to pay in full all appropriations for that year. Proration
has a materially adverse effect on public entities that are dependent upon
State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and other
governmental revenues, as well as revenues to be used to service various
revenue obligations, such as industrial development obligations. Such
difficulties could affect the market value of the bonds held by the Alabama
Trust and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Alabama Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by
the Alabama Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the Fund
for Alabama tax matters rendered an opinion under then existing Alabama income
tax law applicable to taxpayers whose income is subject to Alabama income
taxation substantially to the effect that:
The Alabama Trust is not taxable as a corporation for purposes of the Alabama
income tax.
Income of the Alabama Trust, to the extent it is taxable, will be taxable to
the Unitholders, not the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trust's net income will be
treated as the income of the Unitholder for purposes of the Alabama income tax.
Interest on obligations held by the Alabama Trust which is exempt from the
Alabama income tax will retain its tax-exempt character when the distributive
share thereof is distributed or deemed distributed to each Unitholder.
Any proceeds paid to the Alabama Trust under insurance policies issued to the
Sponsor or under individual policies obtained by the Sponsor, the issuer or
underwriter of the respective obligations which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from Alabama income
tax if and to the same extent as such interest would be exempt from such taxes
if paid directly by the issuer of such obligations.
Each Unitholder will, for purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders.
Gains realized on the sale or redemption of Units by Unitholders, who are
subject to the Alabama income tax, will be includable in the Alabama income of
such Unitholders.
Arizona Trusts
The following brief summary regarding the economy of Arizona is based upon
information drawn from publicly available sources and is included for the
purpose of providing the information about general economic conditions that
may or may not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic sectors include services, tourism and manufacturing. Mining and
agriculture are also significant, although they tend to be more capital than
labor intensive. Services is the single largest economic sector. Many of these
jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may
be adversely affected by the closing of a major air force base near Phoenix
and the bankruptcy of several major employers, including America West Airlines.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting
surplus of completed inventory. This decline adversely affected both the
construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to experience problems
until the excess inventories of commercial and residential properties are
absorbed. The problems of the financial institutions have adversely affected
employment and economic activity. Longer-term prospects are brighter. Arizona
has been, and is projected to continue to be, one of the fastest growing areas
in the United States. Over the last several decades the State has outpaced
most other regions of the country in virtually every major category of growth,
including population, personal income, gross state product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ended June 30, 1995.
Total General Fund revenues of $4.3 billion are expected during fiscal year
1995. Approximately 44.5% of this budgeted revenue comes from sales and use
taxes, 44.4% from income taxes (both individual and corporate) and 4.4% from
property taxes. All taxes total approximately $4.0 billion, or 93% of General
Fund revenues. Non-tax revenue includes items such as income from the state
lottery, licenses, fees and permits, and interest.
For fiscal year 1994, the budget called for expenditures of approximately $4.1
billion. These expenditures fell into the following major categories:
education (47.4%), health and welfare (26.3%), protection and safety (4.0%),
general government (15.5%) and inspection and regulation, natural resources,
transportation and other (6.8%). The States's general fund expenditures for
fiscal year 1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value or marketability
of any of the Bonds issued by an entity other than the State of Arizona will
be affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded
indebtedness and other matters. For example, the state legislature cannot
appropriate revenues in excess of 7% of the total personal income of the state
in any fiscal year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in Roosevelt
Elementary School District Number 66, et al v. Dianne Bishop, et al (the "
Roosevelt Opinion"). In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the
Arizona School Boards Association, with the approval of the appellants and the
appellees to the Roosevelt Opinion, and certain Arizona school districts,
filed with the Arizona Supreme court motions for clarification of the
Roosevelt Opinion, specifically with respect to seeking prospective
application of the Roosevelt Opinion. On July 29, 1994, the Arizona Supreme
Court clarified the Roosevelt Opinion to hold that such opinion will have
prospective effect only.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona
Trust. The Arizona Legislature has in the past sought to enact health care
cost control legislation. Certain other health care regulatory laws have
expired. It is expected that the Arizona legislature will at future sessions
continue to attempt to adopt legislation concerning health care cost control
and related regulatory matters. The effect of any such legislation or of the
continued absence of any legislation restricting hospital bed increased and
limiting new hospital construction on the ability of Arizona hospitals and
other health care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, Arizona Health Care
Cost Containment System ("AHCCCS"), which provides health care to
indigent persons meeting certain financial eligibility requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed approximately
60% by federal funds, 29% by state funds, and 11% by county funds.
Under state law, hospitals retain the authority to raise with notification and
review by, but not approval from, the Department of Health Services. Hospitals
in Arizona have experienced profitability problems along with those in other
states. At least two Phoenix based hospitals have defaulted on or reported
difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operation costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric")
filed involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to
force Tucson Power to reorganize under the supervision of the bankruptcy
court. On December 31, 1991, the Bankruptcy Court approved the utility's
motion to dismiss the July petition after five months of negotiations between
Tucson Electric and its creditors to restructure the utility's debts and other
obligations. In December 1992, Tucson Electric announced that it had completed
its financial restructuring. In January 1993, Tucson Electric asked the
Arizona Corporation Commission for a 9.3% average rate increase. Tucson
Electric serves approximately 270,000 customers, primarily in the Tucson area.
Inability of any regulated public utility to secure necessary rate increases
could adversely affect, to an indeterminable extent, its ability to pay debt
service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6
million in tax refunds in fiscal year 1994. A combination of tax refunds and
tax credits will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as the owner
of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes.
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for amortization of Bond discount
or premium and other basis adjustments, including any basis reduction that may
be required to reflect a Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust which represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
Arkansas Trusts
The Constitution of Arkansas specifically Prohibits the creation of any State
general obligation debt unless authorized in a Statewide general election.
Although the state of Arkansas defaulted on some of its general obligation
debt during the depression in the later 1930, it has not failed to pay the
principal and interest on any of its general obligations when due since that
time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development Act
of 1981,"("Act 496"), authorizes the issuance of State Water
Resources Development General Obligation Bonds by the State of Arkansas,
acting by and through the Arkansas Soil and Water Conservation Commission. The
issuance of bonds pursuant to Act 496 was approved by the electors of the
State at the general election on November 2,1982. The total principal amount
of bonds issued during any fiscal biennium may not exceed $15,000,000, and the
total principal of all bonds issued under Act 496 may not exceed $100,000,000.
All bonds to be issued under Act 496 shall be direct general obligations of
the State, the principal and interest of which are payable from the general
revenues of the State. The State of Arkansas has outstanding two series of
bonds in the aggregate principal amount of approximately $36,645,000 under Act
496 as of June 30,1993.
Act 686 of 1987, the "Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987"("Act 686"), authorizes the
issuance of Arkansas Waste Disposal and Pollution Abatement Facilities General
Obligation Bonds by the State of Arkansas, acting by and through the Arkansas
Soil and Water Conservation Commission. The issuance of bonds pursuant to Act
686 was approved by the electors of the State at the general election on
November 8,1988. The total principal amount of bonds issued during any fiscal
biennium may not exceed $50,000,000, and the total principal of all bonds
issued under Act 686 may not exceed $250,000,000. All bonds to be issued under
Act 686 shall be direct general obligations of the State, the principal and
interest of which are payable from the general revenues of the State. The
State of Arkansas has outstanding two series of bonds in the aggregate
principal amount of approximately $25,100,000 under Act 686 as of June
30,1993.
Act 683 of 1989, the "Arkansas College Saving Bond Act of 1989" ("Act 683"),
authorizes the issuance of Arkansas College Savings General Obligation Bonds
by the State of Arkansas, acting by and through the Arkansas Development
Finance Authority. The issuance of bonds pursuant to Act 683 was approved by
the electors of the State at the general election on November 6,1990. The
total principal amount of bonds issued during any fiscal biennium may not
exceed $100,000,000, and the total principal of all bonds issued under Act 683
may not exceed $300,000,000. All bonds to be issued under Act 683 shall be
direct general obligations of the State, the principal and interest of which
are payable from the general revenues of the State. The State of Arkansas has
outstanding four series of bonds in the aggregate principal amount of
approximately $161,751,000 under Act 683 as of April 1,1994.
Deficit spending has been prohibited by statute in Arkansas since 1945. The
Revenue Stabilization Law requires that before any State spending can take
place, there must be an appropriation by the General Assembly and there must
be funds available in the fund from which the appropriation has been made. The
State is prohibited from borrowing money to put into any State fund from which
appropriations can be paid.
Information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in Arkansas. The Arkansas economy represents
approximately 2.0% of the total United States' economy. Its small size causes
the Arkansas economy to follow the national economy. Fluctuations in the
national economy are often mirrored by coinciding or delayed fluctuations in
the Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based. Thus, the
State of Arkansas feels the full force of the business cycle and also sees the
growth swing from positive to negative as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas economy regardless of
the phase the business cycle was in. In recent years, agricultural employment
in Arkansas has been on the decline. From 1988 to 1989 and from 1989 to 1990,
agricultural employment declined by 1.6%. Employment in Arkansas' construction
industry decreased by 1.8% from 1989 to 1990 and by 4.4% from 1990 to 1991.
This followed a 2.3% decline from 1988 to 1989.
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. Manufacturing employment in Arkansas grew
by 0.56% from 1990 to 1991 versus -3.7% at the national level. The
diversification of economic interests has lessened Arkansas' cyclical
sensitivity to impact by any single sector. From 1990 to 1991, total
employment decreased by 1.9% and total nonagricultural wage and salary
employment increased by 1.4%. Total employment growth in Arkansas exceeded the
growth rate of total employment in the United States. The average unemployment
rate decreased from 7.2% in 1992 to 6.2% in 1993. Total personal income
increased by 7.2% from 1988 to 1989, 6.7% from 1989 to 1990 and by 5.2% from
1990 to 1991. Per capita personal income increased by 7.1% from 1988 to 1989,
6.4% from 1989 to 1990 and by 4.3% from 1990 to 1991. Retail sales increased
by 1.3% from 1990 to 1991.
Counties and municipalities may issue general obligation bonds (pledging an ad
valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but,
as in all cases of revenue bonds, neither the full faith and credit nor the
taxing power of the State of Arkansas or any municipality or county thereof is
pledged to the repayment of those bonds. Revenue bonds can be issued only for
public purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete description of all adverse conditions to which the
issuers in the Arkansas Trust are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could affect or
could have an adverse impact on the financial condition of the State, various
agencies and political subdivisions and private businesses located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Arkansas Trust to pay interest on or principal of the
Bonds.
At the time of the closing for each Arkansas Trust, Special Counsel to each
Arkansas Trust for Arkansas tax matters rendered an opinion under then
existing Arkansas income tax law applicable to taxpayers whose income is
subject to Arkansas income taxation substantially to the effect that:
The Arkansas Trust is not an association taxable as a corporation or otherwise
for purposes of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata portion of
the Arkansas Trust for Arkansas income tax purposes, and will have a taxable
event when the Arkansas Trust disposes of a Bond or when the Unitholder sells,
exchanges, redeems or otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption or other
disposition of Bonds held by the Arkansas Trust resulting in the distribution
of income to Arkansas Unitholders will be subject to Arkansas income taxation
to the extent that such income would be subject to Arkansas income taxation if
the Bonds were held, sold, exchanged, redeemed or otherwise disposed of by the
Arkansas Unitholders; and
Interest on Bonds, issued by the State of Arkansas, or by or on behalf of
political subdivisions, thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt from
Arkansas income taxation when received by the Arkansas Trust and attributed to
such Arkansas Unitholder and when distributed to such Arkansas Unitholder.
California Trusts
The Trust will invest substantially all of its assets in California Municipal
Obligations. The Trust is therefore susceptible to political, economic or
regulatory factors affecting issuers of California Municipal Obligations.
These include the possible adverse effects of certain California
constitutional amendments, legislative measures, voter initiatives and other
matters that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are
generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any
of the following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of over 30 million represents 12% of the
total United States population and grew by 27% in the 1980s. Total personal
income in the State, at an estimated $662 billion in 1991, accounts for 13% of
all personal income in the nation. Total employment is almost 14 million, the
majority of which is in the service, trade and manufacturing sectors.
Reports issued by the State Department of Finance and other sources indicate
that the State's economy is suffering its worst recession since the 1930s,
with prospects for recovery slower than for the nation as a whole. The State
has lost over 800,000 jobs since the start of the recession in mid 1990 and
additional job losses are expected before an upturn begins. The largest job
losses have been in Southern California, led by declines in the aerospace and
construction industries. Weaknesses statewide occurred in manufacturing,
construction, services and trade and will be hurt in the next few years by
continued cuts in federal defense spending and base closures. Unemployment is
expected to remain well above the national average in 1994. The State's
economy is only expected to pull out of the recession slowly, following the
national recovery which has begun. Delay in recovery will exacerbate
shortfalls in State revenues.
Certain California Municipal Obligations may be obligations of issuers which
rely in whole or in part, directly or indirectly, on ad valorem property taxes
as a source of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California Constitution, enacted
by the voters in 1978 and commonly known as "Proposition 13." Briefly,
Article XIIIA limits to 1% of full cash value the rate of ad valorem property
taxes on real property and generally restricts the reassessment of property to
2% per year, except upon new construction or change of ownership (subject to a
number of exemptions). Taxing entities may, however, raise ad valorem taxes
above the 1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special
tax."Court decisions, however, allowed non-voter approved levy of "
general taxes"which were not dedicated to a specific use. In response to
these decisions, the voters of the State in 1986 adopted an initiative statute
which imposed significant new limits on the ability of local entities to raise
or levy general taxes, except by receiving majority local voter approval.
Significant elements of this initiative, "Proposition 62", have been
overturned in recent court cases. An initiative proposed to re-enact the
provisions of Proposition 62 as a constitutional amendment was defeated by the
voters in November 1990, but such a proposal may be renewed in the future.
California and its local governments are subject to an annual "
appropriations limit"imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending "
appropriations subject to limitation"in excess of the appropriations
limit imposed. "Appropriations subject to limitation"are
authorizations to spend "proceeds of taxes,"which consists of tax
revenues and certain other funds, including proceeds from regulatory licenses,
user charges or other fees, to the extent that such proceeds exceed the cost
of providing the product or service, but "proceeds of taxes"excludes
most State subventions to local governments. No limit is imposed on
appropriations of funds which are not "proceeds of taxes,"such as
reasonable user charges or fees and certain other non-tax funds, including
bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, (2) appropriations arising
from certain emergencies declared by the Governor, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to follow more closely
growth in California's economy.
"Excess"revenues are measured over a two-year cycle. Local
governments must return any excess to taxpayers by rate reduction. The State
must refund 50% of any excess, with the other 50% paid to schools and
community colleges. With more liberal annual adjustment factors since 1988,
and depressed revenues since 1990 because of the recession, few governments
are currently operating near their spending limits, but this condition may
change over time. Local governments may by voter approval exceed their
spending limits for up to four years.
During fiscal year 1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers. Since
that year, appropriations subject to limitation have been under the State
limit. State appropriations are expected to be $3.7 billion under the limit
for Fiscal Year 1993-94.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California Municipal Obligations or on the ability of
California or local governments to pay debt service on such California
Municipal Obligations. It is not presently possible to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Future initiative or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
As of April 1, 1994, California had approximately $18.1 billion of general
obligation bonds outstanding, and $5.6 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. Of the State's outstanding general obligation debt, approximately 28%
is presently self-liquidating (for which program revenues are anticipated to
be sufficient to reimburse the General Fund for debt service payments). Four
general obligation bond propositions, totalling $5.9 billion, will be on the
June, 1994 ballot. In Fiscal Year 1992-93, debt service on general obligation
bonds and lease-purchase debt was approximately 4.1% of General Fund revenues.
The State has paid the principal of and interest on its general obligation
bonds, lease-purchase debt and short-term obligations when due.
The principal sources of General Fund revenues in 1992-93 were the California
personal income tax (44% of total revenues), the sales tax (38%), bank and
corporation taxes (12%), and the gross premium tax on insurance (3%).
California maintains a Special Fund for Economic Uncertainties (the "
Economic Uncertainties Fund"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is required to be
replenished as soon as sufficient revenues are available. Year-end balances in
the Economic Uncertainties Fund are included for financial reporting purposes
in the General Fund balance. In most recent years, California has budgeted to
maintain the Economic Uncertainties Fund at around 3% of General Fund
expenditures but essentially no reserve has been budgeted in 1992-93 or
1993-1994 because reserves have been reduced by the recession.
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
34%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. As a result, the State
entered a period of budget imbalance, with expenditures exceeding revenues for
four of the last five fiscal years through 1991-92.
As the State fell into a deep recession in the summer of 1990, the State
budget fell sharply out of balance in the 1990-91 and 1991-92 fiscal years,
despite significant expenditure cuts and tax increases. The State had
accumulated a $2.8 billion budget deficit by June 30, 1992. This deficit also
severely reduced the State's cash resources, so that it had to rely on
external borrowing in the short-term markets to meet its cash needs.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed;
nevertheless, certain obligations (such as debt service, school
apportionments, welfare payments and employee salaries) were payable because
of continuing or special appropriations or court orders. However, the State
Controller did not have enough cash to pay all of these ongoing obligations as
they came due, as well as valid obligations incurred in the prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants"in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants, all
of which were called for redemption by September 4, 1992 following enactment
of the 1992-93 Budget Act and issuance by the State of $3.3 billion of Interim
Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate the
State's accumulated deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of
expenditures. Thus, the State continued to carry its $2.8 billion budget
deficit at June 30, 1993.
The 1993-94 Budget Act was similar to the prior year, in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a
two-year plan to eliminate the accumulated deficit by borrowing into the
1994-95 fiscal year. With the recession still continuing longer than expected,
the 1994-95 Governor's Budget now projects that in the 1993-94 Fiscal Year,
the General Fund will have $900 million less revenue and $800 million higher
expenditures than budgeted. As a result revenues will only exceed expenditures
by about $400 million. If this projection is met, it will be the first
operating surplus in four years; however, some budget analysts outside the
Department of Finance project revenues in the balance of 1993-94 will not even
meet the revised, lower projection. In addition, the General Fund may have
some unplanned costs for relief related to the January, 17, 1994 Northridge
earthquake.
The State has implemented its short-term borrowing as part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap of
around $5 billion by June 30, 1995. Over $3.1 billion of this amount is being
requested from the federal government as increased aid, particularly for costs
associated with incarcerating, educating and providing health and welfare
services to undocumented immigrants. However, President Clinton has not
included these costs in his proposed Fiscal 1995 Budget. The rest of the
budget gap is proposed to be closed with expenditure cuts and projected $600
million of new revenue assuming the State wins a tax case presently pending in
the U.S. Supreme Court. Thus the State will once again face significant
uncertainties and very difficult choices in the 1994-95 budget, as tax
increases are unlikely and many cuts and budget adjustments have been made in
the past three years.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon various local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental
expenditures, there can be no assurance that the State will not face budget
gaps in the future.
State general obligation bonds are currently rated "A1"by Moody's and
"A"by S&P. Both of these ratings were recently reduced from "
Aa"and "A+"levels, respectively. There can be no assurance that
such ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require
the State to make significant future expenditures or may substantially impair
revenues.
On December 7, 1994, Orange County, California (the "County"),
together with its pooled investment fund (the "Fund") filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Fund had suffered significant market losses in its investments which
caused a liquidity crisis for the Fund and the County. Approximately 180 other
public entities, most but not all located in the County, were also depositors
in the Fund. As of December 13, 1994, the County indicated that the Fund had
lost about 27% of its initial deposits of approximately $7.4 billion. The
County may suffer further losses as it sells investments to restructure the
Fund. Many of the entities which kept moneys in the Fund, including the
County, are facing cash flow difficulties because of the bankruptcy filing and
may be required to reduce programs or capital projects. In the opinion of the
Sponsor and based on information publicly available, none of the bonds in this
portfolio have any present known exposure to the aforementioned difficulties
related to Orange County. The Sponsor, however, is unable to predict the
ultimate impact of the circumstances regarding the County described above on
other issuers located in California.
The State of California has no obligations with respect to any bonds or other
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate.
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. Total local assistance from the
State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years, including the effect of implementing reductions
in certain aid programs. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local governments to
transfer $3.9 billion of property tax revenues to school districts,
representing loss of the post-Proposition 13 "bailout"aid. Local
governments have in return received greater revenues and greater flexibility
to operate health and welfare programs. To the extent the State should be
constrained by its Article XIIIB appropriations limit, or its obligation to
conform to Proposition 98, or other fiscal considerations, the absolute level,
or the rate of growth, of State assistance to local governments may be
reduced. Any such reductions in State aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties. The Richmond Unified School District (Contra Costa County) entered
bankruptcy proceedings in May 1991, but the proceedings have been dismissed.
California Municipal Obligations which are assessment bonds may be adversely
affected by a general decline in real estate values or a slowdown in real
estate sales activity. In many cases, such bonds are secured by land which is
undeveloped at the time of issuance but anticipated to be developed within a
few years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed,
the lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds
in the event of delinquency in the payment of assessments or taxes, except
from amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically payable from
the general fund of the municipality, are subject to "abatement"in
the event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not a
default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs.
The most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Several years ago the Richmond Unified School District (the "District"
) entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were
taken over by a State receiver (including a brief period under bankruptcy
court protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The trial
court has upheld the validity of the District's lease, and the case has been
settled. Any judgment in any future case against the position asserted by the
Trustee in the Richmond case may have adverse implications for lease
transactions of a similar nature by other California entities.
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation"bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (e.g., because of a major
natural disaster such as an earthquake), the tax increment revenue may be
insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after the
enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
Issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Any California Municipal Obligation in the Portfolio
could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the Federal
or State government to appropriate sufficient funds within their respective
budget limitations.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
(1)the California Trust is not an association taxable as a corporation and the
income of the California Trust will be treated as the income of the
Unitholders under the income tax laws of California;
(2)amounts treated as interest on the underlying Securities in the California
Trust which are exempt from tax under California personal income tax and
property tax laws when received by the California Trust will, under such laws,
retain their status as tax-exempt interest when distributed to Unitholders.
However, interest on the underlying Securities attributed to a Unitholder
which is a corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its California
franchise tax. Further, certain interest which is attributable to a Unitholder
subject to the California personal income tax and which is treated as an item
of tax preference for purposes of the federal alternative minimum tax pursuant
to Section 57(a)(5) of the Internal Revenue Code of 1986 may also be treated
as an item of tax preference that must be taken into account in computing such
Unitholder's alternative minimum taxable income for purposes of the California
alternative minimum tax enacted by 1987 California Statutes, chapter 1138.
However, because of the provisions of the California Constitution exempting
the interest on bonds issued by the State of California, or by local
governments within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise exempt from
the California personal income tax in some cases may be unclear;
(3)under California income tax law, each Unitholder in the California Trust
will have a taxable event when the California Trust disposes of a Security
(whether by sale, exchange, redemption, or payment at maturity) or when the
Unitholder redeems or sells Units. Because of the requirement that tax cost
basis be reduced to reflect amortization of bond premium, under some
circumstances a Unitholder may realize taxable gains when Units are sold or
redeemed for an amount equal to, or less than, their original cost. The total
cost of each Unit in the California Trust to a Unitholder is allocated among
each of the Bond issues held in the California Trust (in accordance with the
proportion of the California Trust comprised by each Bond issue) in order to
determine his per Unit tax cost for each Bond issue; and the tax cost
reduction requirements relating to amortization of bond premium will apply
separately to the per Unit tax cost of each Bond issue. Unitholders' bases in
their units, and the bases for their fractional interest in each Trust asset,
may have to be adjusted for their pro rata share of accrued interest received,
if any, on Securities delivered after the Unitholders' respective settlement
dates;
(4)under the California personal property tax laws, bonds (including the
Securities in the California Trust) or any interest therein is exempt from
such tax;
(5)any proceeds paid under the insurance policy issued to the California Trust
with respect to the Securities which represent maturing interest on defaulted
obligations held by the Trustee will be exempt from California personal income
tax if, and to the same extent as, such interest would have been so exempt if
paid by the issuer of the defaulted obligations; and
(6)under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units of
the California Trust is not deductible for the purposes of the California
personal income tax. While there presently is no California authority
interpreting this provision, Section 17280(b)(2) directs the California
Franchise Tax Board to prescribe regulations determining the proper allocation
and apportionment of interest costs for this purpose. The Franchise Tax Board
has not yet proposed or prescribed such regulations. In interpreting the
generally similar Federal provision, the Internal Revenue Service has taken
the position that such indebtedness need not be directly traceable to the
purchase or carrying of Units (although the Service has not contended that a
deduction for interest on indebtedness incurred to purchase or improve a
personal residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or other
California authority, the California Franchise Tax Board generally has
interpreted California statutory tax provisions in accord with Internal
Revenue Service interpretations of similar Federal provisions.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Orrick, Herrington & Sutcliffe acted as bond counsel to issuers of Securities,
and as such made a review of proceedings relating to the issuance of certain
Securities at the time of their issuance, Orrick, Herrington & Sutcliffe has
not made any special review for the California Trust of the proceedings
relating to the issuance of the Securities or of the basis for such opinions.
Colorado Trust
The State Constitution requires that expenditures for any fiscal year not
exceed revenues for such fiscal year. By statute, the amount of General Fund
revenues available for appropriation is based upon revenue estimates which,
together with other available resources, must exceed annual appropriations by
the amount of the unappropriated reserve (the "Unappropriated Reserve"
). The Unappropriated Reserve requirement for fiscal year 1991, 1992 and 1993
was set at 3% of total appropriations from the General Fund. For fiscal years
1994 and thereafter, the Unappropriated Reserve requirement is set at 4%. In
addition to the Unappropriated Reserve, a constitutional amendment approved by
Colorado voters in 1992 requires the State and each local government to
reserve a certain percentage of its fiscal year spending (excluding bonded
debt service) for emergency use (the "Emergency Reserve"). The minimum
Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years. For
fiscal year 1992 and thereafter, General Fund appropriations are also limited
by statute to an amount equal to the cost of performing certain required
reappraisals of taxable property plus an amount equal to the lesser of (i)
five percent of Colorado personal income or (ii) 106% of the total General
Fund appropriations for the previous fiscal year. This restriction does not
apply to any General Fund appropriations which are required as a result of a
new federal law, a final state or federal court order or moneys derived from
the increase in the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election. In
addition, the statutory limit on the level of General Fund appropriations may
be exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1992 fiscal General Fund balance was $133.3 million, which was $49.1
million below the Unappropriated Reserve requirement. The 1993 fiscal year
ending General Fund balance was $326.6 million, or $196.7 million over the
required Unappropriated Reserve and Emergency Reserve. Based on June 20, 1994
estimates, the 1994 fiscal year ending General Fund balance is expected to be
$337.7 million, or $224.3 million over the required Unappropriated Reserve and
Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31,
1992, and which could restrict the ability of the State and local governments
to increase revenues and impose taxes. The Amendment applies to the State and
all local governments, including home rule entities ("Districts").
Enterprises, defined as government-owned businesses authorized to issue
revenue bonds and receiving under 10% of annual revenue in grants from all
Colorado state and local governments combined, are excluded from the
provisions of the Amendment.
The provisions of the Amendment are unclear and will probably require judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to
the Amendment, local government spending is to be limited by the same formula
as the limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in State population in the
prior calendar year. The basis for initial spending and revenue limits are
fiscal year 1992 spending and 1991 property taxes collected in 1992. The basis
for spending and revenue limits for fiscal year 1994 and later years will be
the prior fiscal year's spending and property taxes collected in the prior
calendar year. Debt service changes, reductions and voter-approved revenue
changes are excluded from the calculation basis. The Amendment also prohibits
new or increased real property transfer tax rates, new State real property
taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment is pending in
the Colorado courts. The litigation deals with three principal issues: (i)
whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease purchase agreement subject to annual appropriations is an obligation
which requires voter approval prior to execution of the agreement; and (iii)
what constitutes an "enterprise"which is excluded from the provisions
of the Amendment. In September, 1994, the Colorado Supreme Court held that
Districts can increase mill levies to pay levies to pay debt service on
general obligation bonds issued after the effective date of the Amendment;
litigation regarding mill levy increases to pay general obligation bonds
issued prior to the Amendment is still pending. Various cases addressing the
remaining issues are at different stages in the trial and appellate process.
The outcome of such litigation cannot be predicted at this time.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1993-94,
June 20, 1994 (the "Economic Report"), inflation for 1992 was 3.8% and
population grew at the rate of 2.8% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will be
limited to 6.6% over expenditures during the 1993 fiscal year. The 1993 fiscal
year is the base year for calculating the limitation for the 1994 fiscal year.
The limitation for the 1995 fiscal year is projected to be 7.1%, based on
projected inflation of 4.2% for 1993 and projected population growth of 2.9%
during 1993. For the 1993 fiscal year, General Fund revenues totalled $3,443.3
million and program revenues (cash funds) totalled $1,617.6 million, resulting
in total estimated base revenues of $5,060.9 million. Expenditures for the
1994 fiscal year, therefore, cannot exceed $5,394.9 million. However, the 1994
fiscal year General Fund and program revenues (cash funds) are projected to be
only $5,242.8 million, or $152.1 million less than expenditures allowed under
the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$100.3 million in fiscal year 1988, $134.4 million in fiscal year 1989, $116.6
million in fiscal year 1990, $16.3 million in fiscal year 1991 and $133.3
million in fiscal year 1992, and $326.6 million in fiscal year 1993. The
fiscal year 1994 unrestricted General Fund is currently projected to be $337.7
million.
For fiscal year 1993, the following tax categories generated the following
respective revenue percentages of the State's $3,443.3 million total gross
receipts: individual income taxes represented 51.1% of gross fiscal year 1992
receipts; sales, use and excise taxes represented 31.3% of gross fiscal year
1993 receipts; and corporate income taxes represented 4.0% of gross fiscal
year 1992 receipts. The final budget for fiscal year 1994 projects general
fund revenues of approximately $3,570.8 million and appropriations of
approximately $3,556.8 million. The percentages of general fund revenue
generated by type of tax for fiscal year 1994 are not expected to be
significantly different from fiscal year 1993 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of financing
for such local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or enterprise
or from the proceeds of an excise tax, or assessment bonds payable from
special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1993 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the State's
economy and of Denver as a regional economic and transportation hub. The
government and manufacturing sectors followed as the fourth and fifth largest
employment sectors in the State, representing approximately 17.8% and 11.3%,
respectively, of non-agricultural employment in the State in 1993.
According to the Economic Report, the unemployment rate improved slightly from
an average of 5.9% during 1992 to 5.2% during 1993. Total retail sales
increased by 9.7% during 1993. Colorado continued to surpass the job growth
rate of the U.S. with a 3.4% rate of growth projected for Colorado in 1994, as
compared with 2.2% for the nation as a whole. However, the rate of job growth
in Colorado is expected to decline in 1995, primarily due to the completion in
1994 of large public works projects such as Denver International Airport,
Coors Baseball Field, and the Denver public Library renovation project.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In 1992,
Colorado was the twelfth fastest growing state in terms of personal income
growth. However, because of heavy migration into the state and a large
increase in low-paying retail sector jobs, per capita personal income in
Colorado increased by only 3.8% in 1992, 0.1% below the increase in per capita
personal income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the Colorado
Trust is not an association taxable as a corporation for purposes of Colorado
income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
Each Colorado Unitholder will be treated as owning a pro rata share of each
asset of the Colorado Trust for Colorado income tax purposes in the proportion
that the number of Units of such Trust held by the Unitholder bears to the
total number of outstanding Units of the Colorado Trust, and the income of the
Colorado Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described;
Interest on Bonds that would not be includable in income for Colorado income
tax purposes when paid directly to a Colorado Unitholder will be exempt from
Colorado income taxation when received by the Colorado Trust and attributed to
such Colorado Unitholder and when distributed to such Colorado Unitholder;
Any proceeds paid under an insurance policy or policies issued to the Colorado
Trust with respect to the Bonds in the Colorado Trust which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Colorado adjusted gross income if, and to the same extent as, such interest
would have been so excludable if paid in the normal course by the issuer of
the defaulted obligations;
Any proceeds paid under individual policies obtained by issuers of Bonds in
the Colorado Trust which represent maturing interest on defaulted obligations
held by the Trustee will not be includable in income for Colorado income tax
purposes if, and to the same extent as, such interest would not have been so
includable if paid in the normal course by the issuer of the defaulted
obligations;
Each Colorado Unitholder will realize taxable gain or loss when the Colorado
Trust disposes of a Bond (whether by sale, exchange, redemption, or payment at
maturity) or when the Colorado Unitholder redeems or sells Units at a price
that differs from original cost as adjusted for amortization of bond discount
or premium and other basis adjustments (including any basis reduction that may
be required to reflect a Colorado Unitholder's share of interest, if any,
accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado Trust,
if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Colorado Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost; and
If interest on indebtedness incurred or continued by a Colorado Unitholder to
purchase Units in the Colorado Trust is not deductible for federal income tax
purposes, it also will be non-deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property Tax/
Rent/Heat Rebate.
Connecticut Trusts
Investors should be aware that manufacturing was historically the most
important economic activity within the State of Connecticut but, in terms of
number of persons employed, manufacturing has declined in the last ten years
while both trade and service-related industries have become more important,
and in 1993 manufacturing accounted for only 19.2% of total non-agricultural
employment in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing sector; reductions in defense spending
have already had a substantial adverse effect on Connecticut's economy, and
the State's largest defense contractors have announced substantial planned
labor force reductions scheduled to occur over the next four years.
Connecticut is now in a recession, the depth and duration of which are
uncertain. Moreover, while unemployment in the State as a whole has generally
remained below the national level, as of May 1993, the estimated rate of
unemployment in Connecticut on a seasonally adjusted basis was 7.4%, compared
to 6.9% for the United States as a whole, and certain geographic areas in the
State have been affected by high unemployment and poverty. The State derives
over 70% of its revenues from taxes imposed by it, the most important of which
have been the sales and use taxes and the corporation business tax, each of
which is sensitive to changes in the level of economic activity in the State,
but the Connecticut income tax on individuals, trusts, and estates enacted in
1991 is expected to supersede each of them in importance. There can be no
assurance that general economic difficulties or the financial circumstances of
the State or its towns and cities will not adversely affect the market value
of the Bonds in the Connecticut Trust or the ability of the obligors to pay
debt service on such Bonds.
The General Fund budget adopted by Connecticut for the 1986-87 fiscal year
contemplated both revenues and expenditures of $4,300,000,000. The General
Fund ended the 1986-87 fiscal year with a surplus of $365,200,000. The General
Fund budget for the 1987-88 fiscal year contemplated General Fund revenues and
expenditures of $4,915,800,000. However, the General Fund ended the 1987-88
fiscal year with a deficit of $115,600,000. The General Fund budget adopted
for the 1988-89 fiscal year anticipated that General Fund expenditures of
$5,551,000,000 and certain educational expenses of $206,700,000 not previously
paid through the General Fund would be funded in part from surpluses of prior
years and in part from higher tax revenues projected to result from tax laws
in effect for the 1987-88 fiscal year and stricter enforcement thereof; a
substantial deficit was projected during the third quarter of the 1988-89
fiscal year, but largely because of tax law changes that took effect before
the end of the fiscal year, the deficit was kept to $28,000,000. The General
Fund budget adopted for the 1989-90 fiscal year anticipated expenditures of
approximately $6,224,500,000 and, by virtue of tax increase legislation
enacted to take effect generally at the beginning of the fiscal year, revenues
slightly exceeding such amount. However, largely because of tax revenue
shortfalls, the General Fund ended the 1989-90 fiscal year with a deficit for
the year of $259,500,000, wiping out reserves for such events built up in
prior years. The General Fund budget adopted for the 1990-91 fiscal year
anticipated expenditures of $6,433,000,000, but no significant new or
increased taxes were enacted. Primarily because of significant declines in tax
revenues and unanticipated expenditures reflective of economic adversity, the
General Fund ended the 1990-91 fiscal year alone with a further deficit of
$809,000,000.
A General Fund budget for the 1991-92 fiscal year was not enacted until August
22, 1991. This budget anticipated General Fund expenditures of $7,007,861,328
and revenues of $7,426,390,000. Projected decreases in revenues resulting from
a 25% reduction in the sales tax rate effective October 1, 1991, the repeal of
the taxes on the capital gains and interest and dividend income of resident
individuals for years starting after 1991, and the phase-out of the
corporation business tax surcharge over two years commencing with taxable
years starting after 1991 were expected to be more than offset by a new
general income tax imposed at effective rates not to exceed 4.5% on the
Connecticut taxable income of resident and non-resident individuals, trusts,
and estates. The General Fund ended the 1991-92 fiscal year with an operating
surplus of $110,000,000. The General Fund budget for the 1992-93 fiscal year
anticipated General Fund expenditures of $7,372,062,859 and revenues of
$7,372,210,000. The General Fund ended the 1992-93 fiscal year with an
operating surplus of $113,500,000. Balanced General Fund budgets for the
biennium ending June 30, 1995, were adopted in 1993 appropriating expenditures
of $7,828,900,000 for the 1993-94 fiscal year and $8,266,000,000 for the
1994-95 fiscal year. In 1994, the budgeted General Fund appropriations for the
1994-95 fiscal year were increased to $8,567,200,000. In addition,
expenditures of Federal, State and local funds in the twelve years started
July 1, 1984 for repair of the State's roads and bridges now projected at
$9,500,000,000 are anticipated, a portion of the State's $4,100,000,000 share
of which would be financed by bonds expected to total $3,700,000,000 and by
direct payments both of which would be supported by a Special Transportation
Fund first created by the General Assembly for the 1984-85 fiscal year.
To fund operating cash requirements, prior to the 1991-92 fiscal year the
State borrowed up to $750,000,000 pursuant to authorization to issue
commercial paper and on July 29, 1991, it issued $200,000,000 of General
Obligation Temporary Notes, none of which temporary borrowings are currently
outstanding. To fund the cumulative General Fund deficit for the 1989-90 and
1990-91 fiscal years, the legislation enacted August 22, 1991, authorized the
State Treasurer to issue Economic Recovery Notes up to the aggregate amount of
such deficit, which must be payable no later than June 30, 1996; at least
$50,000,000 of such Notes, but not more than a cap amount, is to be retired
each fiscal year commencing with the 1991-92 fiscal year, and any
unappropriated surplus up to $205,000,000 in the General Fund at the end of
each of the three fiscal years commencing with the 1991-92 fiscal year must by
applied to retire such Notes as may remain outstanding at those times. On
September 25, 1991, and October 24, 1991, the State issued $640,710,000 and
$325,002,000, respectively, of such Economic Recovery Notes, of which
$555,610,000 was outstanding as of August 1, 1994.
As a result of the State's budget problems, the ratings of its general
obligation bonds were reduced by Standard & Poor's from AA+ to AA on March 29,
1990, and by Moody's from Aa1 to Aa on April 9, 1990. Moreover, because of
these problems, on September 13, 1991, Standard & Poor's reduced its ratings
of the State's general obligation bonds and certain other obligations that
depend in part on the creditworthiness of the State to AA-. On March 7, 1991,
Moody's downgraded its ratings of the revenue bonds of four Connecticut
hospitals because of the effects of the State's restrictive controlled
reimbursement environment under which they have been operating.
General obligation bonds issued by Connecticut municipalities are payable
primarily only from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits in
recent years. The most notable of these is the City of Bridgeport, which filed
a bankruptcy petition on June 7, 1991. The State opposed the petition. The
United States Bankruptcy Court for the District of Connecticut has held that
Bridgeport has authority to file such a petition but that its petition should
be dismissed on the grounds that Bridgeport was not insolvent when the
petition was filed. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State and
its political subdivisions, authorities, and agencies. Difficulty in payment
of debt service on borrowings could result in declines, possibly severe, in
the value of their outstanding obligations and increases in their future
borrowing costs.
The assets of the Connecticut Trust will consist of obligations (the "
Bonds"); certain of the Bonds have been issued by or on behalf of the
State of Connecticut or its political subdivisions or other public
instrumentalities, state or local authorities, districts, or similar public
entities created under the laws of the State of Connecticut ("Connecticut
Bonds") and the balance of the Bonds have been issued by or on behalf of
entities classified for the relevant purposes as territories or possessions of
the United States, including one or more of Puerto Rico, Guam, or the Virgin
Islands, the interest on the obligations of which Federal law would prohibit
Connecticut from taxing if received directly by the Unitholders. Certain
Connecticut Bonds in the Connecticut Trust were issued prior to the enactment
of the Connecticut income tax on the Connecticut taxable income of
individuals, trusts, and estates (the "Connecticut Income Tax");
therefore, bond counsel to the issuers of such Bonds did not opine as to the
exemption of the interest on such Bonds from such tax. However, the Sponsor
and special counsel to the Trusts for Connecticut tax matters believe that
such interest will be so exempt. Interest on Bonds in the Connecticut Trust
issued by other issuers, if any, is, in the opinion of bond counsel to such
issuers, exempt from state taxation.
The Connecticut Income Tax was enacted in August, 1991. Generally, a
Unitholder recognizes gain or loss for purposes of this tax to the same extent
as he recognizes gain or loss for Federal income tax purposes. Ordinarily this
would mean that gain or loss would be recognized by a Unitholder upon the
maturity, redemption, sale, or other disposition by the Connecticut Trust of a
Bond held by it, or upon the redemption, sale or other disposition of a Unit
of the Connecticut Trust held by the Unitholder.
However, on June 19, 1992, Connecticut legislation was adopted that provides
that gains and losses from the sale or exchange of Connecticut Bonds held as
capital assets will not be taken into account for purposes of the Connecticut
Income Tax for taxable years starting on or after January 1, 1992. Regulations
effective for taxable years starting on or after January 1, 1994, clarify that
this provision also applies to gain or loss recognized by a Unitholder upon
the maturity or redemption of a Connecticut Bond held by the Connecticut
Trust. However, it is not clear whether this provision would apply, to the
extent attributable to Connecticut Bonds held by the Connecticut Trust, to
gain or loss recognized by a Unitholder upon the redemption, sale, or other
disposition of a Unit of the Connecticut Trust held by the Unitholder.
Unitholders are urged to consult their own tax advisors concerning these
matters.
At the time of the closing for each Connecticut Trust, Special Counsel to the
Fund for Connecticut tax matters rendered an opinion under then existing
Connecticut income tax law applicable to taxpayers whose income is subject to
Connecticut income taxation substantially to the effect that:
The Connecticut Trust is not liable for any tax on or measured by net income
imposed by the State of Connecticut.
Interest income of the Connecticut Trust from a Bond issued by or on behalf of
the State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut
Bond"), or from a Bond issued by United States territories or possessions
the interest on which Federal law would prohibit Connecticut from taxing if
received directly by a Unitholder from the issuer thereof, is not taxable
under the Connecticut tax on the Connecticut taxable income of individuals,
trusts, and estates (the "Connecticut Income Tax"), when any such
interest is received by the Connecticut Trust or distributed by it to such a
Unitholder.
Insurance proceeds received by the Connecticut Trust representing maturing
interest on defaulted Bonds held by the Connecticut Trust are not taxable
under the Connecticut Income Tax if, and to the same extent as, such interest
would not be taxable thereunder if paid directly to the Connecticut Trust by
the issuer of such Bonds.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
Trust of a Bond held by the Connecticut Trust or upon the redemption, sale, or
other disposition of a Unit of the Connecticut Trust held by a Unitholder are
taken into account as gains or losses, respectively, for purposes of the
Connecticut Income Tax, except that, in the case of a Unitholder holding a
Unit of the Connecticut Trust as a capital asset, such gains and losses
recognized upon the maturity, redemption, sale or exchange of a Connecticut
Bond held by the Connecticut Trust are excluded from gains and losses taken
into account for purposes of such tax and no opinion is expressed as to the
treatment for purposes of such tax of gains and losses recognized to the
extent attributable to Connecticut Bonds upon the redemption, sale, or other
disposition by a Unitholder of a Unit of the Connecticut Trust held by him.
The portion of any interest income or capital gain of the Connecticut Trust
that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax.
An interest in a Unit of the Connecticut Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable
in his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
Delaware Trusts
The State ended fiscal 1989 with a cumulative cash balance of $185.4 million,
more than 15% of total expenditures for the year. The Budgetary Reserve Fund
was fully funded at the 5% level or $62.5 million during the fiscal year.
General Fund revenue grew by 8.9% during fiscal 1989. General fund
expenditures were $1,092.2 million in fiscal 1989, an increase of 5.1% over
fiscal1988. The increase funded additional spending in welfare programs,
teacher compensation, and a salary increase for State employees.
Projected General Fund revenue of $1,139.4 million for fiscal 1990 is 5.3%
higher than fiscal 1989. This growth reflects the continuing strength of the
Delaware economy, although this estimate, issued March 19, 1990, is $18.7
million less than an estimate issued in December, 1989, reflecting a cooling
of the Delaware economy and decreased franchise taxes because of mergers and
acquisitions. Taken with the unencumbered balance from the previous year,
$1,324.8 million is available for expenditure in fiscal 1990. Projected
General Fund expenditures of $1,176.7 million are 9.7% greater than spending
in fiscal 1989.
The State Constitution was amended in May 1980 to limit tax increases. Any tax
increase or the imposition of any new tax must be passed by a three-fifths
vote of each house of the General Assembly, rather than by a simple majority
vote, except for tax increases to meet debt service on outstanding obligations
of the State for which insufficient revenue is available when such debt
service is due. The intended impact of this amendment is to make it easier to
lower expenditures than to increase taxes. The amendment also provides that
the State shall appropriate, prior to each fiscal year of the State, sums
sufficient to meet debt service in the following fiscal year, a practice the
State has always followed.
The State Constitution limits annual appropriations by majority vote of both
houses of the General Assembly to 98% of estimated General Fund revenue plus
the unencumbered General Fund balance from the previous fiscal year. Any
appropriation exceeding this limit may be made in the event of certain
emergencies with the approval of a three-fifths vote of the members of each
house of the General Assembly, but no appropriation may be made exceeding 100%
of estimated General Fund revenue plus the unencumbered General Fund balance
from the previous fiscal year.
The State Constitution also provides that the excess of any unencumbered
General Fund revenue at the end of a fiscal year must be placed in a reserve
account ("Budgetary Reserve Account") within 45 days following the end of the
fiscal year. The Budgetary Reserve Account is designed to provide a cushion
against unanticipated deficits. The money in the Budgetary Reserve Account
accumulates until the fund reaches a maximum of 5% of the General Fund
estimated revenue (including tax money that may be refunded) for the ensuing
fiscal year. Transfers of $9.2 million were made to fund the Budgetary Reserve
Account for fiscal 1989. Transfers are made in August based on June
projections. Access to these monies is authorized with the approval of the
three-fifths vote of the members of each house of the General Assembly for use
only in the event of the necessity to fund an unanticipated General Fund
deficit or to provide funds required as a result of the enactment of
legislation reducing taxes.
There is no Constitutional debt limit of the State. The Delaware Code
presently provides that the total amount of authorized bonds issued and
unissued for the payment of which the full faith and credit of the State may
be pledged shall not exceed 1.5 times the total gross revenue deposited in the
State's General Fund for the preceding fiscal year. Applying that calculation,
the current debt limit is $1,799 million. As of May 1, 1990, the amount of
general obligation debt outstanding will be $398.4 million, and the amount of
authorized, but unissued general obligation bonds was approximately $72.0
million. Bonds or bond anticipation notes issued by the State to provide the
local share of the cost of school construction are not included in the
calculation of the aforesaid debt limit, no rare revenue anticipation notes of
the State. There is no debt limit applicable to the issuance of revenue
anticipation notes; however there has not been a State issue of revenue notes
since fiscal 1977 and the State does not plan to issue revenue notes in fiscal
1990.
Under Delaware Code, the authorization of general obligation debt of the State
is limited in any State fiscal year to an amount equal to (a) 75% of the
principal retirement of general obligations debt of the State in the prior
State fiscal year plus (b) the amount of previously authorized and unissued
general obligation debt and/or guaranteed debt the authorization for which is
repealed in such fiscal year. This law can be supplemented, amended or
repealed by subsequently enacted legislation.
Since the employment impact of the Financial Center Development Act was
initially felt in 1982, the Delaware unemployment rate has been below the
national and regional average. For calendar 1989, Delaware unemployment was
3.5% compared to 4.4% in the region and 5.3% in the United States. Delaware
per capita personal income has been above the national level since 1980. For
1987, the latest year for which figures are available, Delaware per capita
personal income was 106% of the national average.
General obligation debt of Delaware is rated AA by Moody's and AA+ by Standard
and Poor's.
There is no pending litigation attacking the constitutionality of any Delaware
revenue source or the method of collection from that source.
At the time of the closing for each Delaware Trust, Special Counsel to each
Delaware Trust for Delaware tax matters rendered an opinion under then
existing Delaware income tax law applicable to taxpayers whose income is
subject to Delaware income taxation substantially to the effect that:
Distributions of interest income to Unitholders that would not be taxable if
received directly by a Delaware resident are not subject to personal income
tax under the Delaware personal income tax imposed by 30 Del. C. et seq.;
Distributions of interest income to Unitholders which are estates or trusts
that would not be taxable if received directly by a Delaware resident estate
or trust are not subject to the personal income tax imposed by 30 Del. C. et
seq.;
Distributions of interest income to Unitholders which are corporations that
would not be taxable for Delaware income tax purposes if received directly by
a corporation will not be subject to the Delaware corporate income tax imposed
by 30 Del. C. 1 et seq.;
To the extent that any gain or loss from the sale of obligations held by the
Fund or from the sale of a Unit by a Unitholder is includable or deductible in
the calculation of a resident individual's, estate's or trust's adjusted gross
income for federal income tax purposes, any such gain or loss will be
includable or deductible in the calculation of taxable income for the purposes
of Delaware resident personal income taxes;
To the extent that any gain or loss from the sale of obligations held by the
Fund or from the sale of a Unit by a Unitholder is includable or deductible in
the calculation of taxable income for purposes of federal income tax imposed
upon a corporation, such gain or loss shall not be includable or deductible in
the calculation of taxable income for purposes of the Delaware corporate
income tax since gains or losses from the sale or other disposition of
securities issued by the State of Delaware or political subdivisions thereof
are not included in computing the taxable income of a corporation for Delaware
corporate income tax purposes.
Any proceeds paid under insurance policies issued to the Trustee or obtained
by issuers or underwriters of the Bonds, the Sponsor, or others which
represent interest on defaulted obligations held by the Trustee will be
excludable from Delaware gross income for individuals, trusts and estates, or
corporations, if, and to the same extent as, such proceeds would have been so
excludable from federal income taxation;
Interest income received by a Unitholder is not exempt from the franchise tax
imposed on banking organizations under 5 Del. C. et seq. and the franchise tax
imposed on building and loan associates imposed under 5 Del. C. et seq.; and
The Units are not exempt from Delaware inheritance, estate and gift tax.
Florida Trusts
Florida's economy has in the past been highly dependent on the construction
industry and construction related manufacturing. This dependency has declined
in recent years and continues to do so as a result of continued
diversification of the State's economy. For example, in 1980 total contract
construction employment as a share of total non-farm employment was just over
seven percent and in 1993 the share had edged downward to five percent. This
trend is expected to continue as Florida's economy continues to diversify.
Florida, nevertheless, has a dynamic construction industry with single and
multi-family housing starts accounting for 8.5% of total U.S. housing starts
in 1993 while the State's population is 5.3% of the U.S. total population.
Florida's housing starts since 1980 have represented an average of 11.0% of
the U.S.'s total annual starts, and since 1980 total housing starts have
averaged 156,450 a year.
A driving force behind the State's construction industry has been the State's
rapid rate of population growth. Although Florida currently is the fourth most
populous state (with an estimated population of 13.4 million), its annual
population growth is now projected to decline as the number of people moving
into the State is expected to hover near the mid 250,000 range annually
throughout the 1990s. This population trend should provide fuel for business
and home builders to keep construction activity lively in Florida for some
time to come. However, other factors do influence the level of construction in
the State. For example, Federal tax reform in 1986 and other changes to the
Federal income tax code have eliminated tax deductions for owners of two or
more residential real estate properties and have lengthened depreciation
schedules on investment and commercial properties. Economic growth and
existing supplies of homes also contribute to the level of construction
activity in the State.
Since 1980, the State's job creation rate is almost twice the rate for the
nation as a whole, and its growth rate in new non-agricultural jobs is the
fastest of the 11 most populous states and second only to California in the
total number of new jobs created. Contributing to the State's rapid rate of
growth in employment and income is international trade. Since 1980, the
State's unemployment rate has generally been below that of the U.S. In recent
years, however, as the State's economic growth has slowed from its previous
highs, the State's unemployment rate has tracked above the national average.
The average in Florida since 1980 has been 6.5% while the national average is
7.1%. According to the U.S. Department of Commerce, the Florida Department of
Labor and Employment Security, and the Florida Consensus Economic Estimating
Conference (together the "Organization") the State's unemployment rate
was 8.2% during 1992. As of January, 1994, the Organization estimates that the
unemployment rate will be 6.7% for 1993-94 and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector has exceeded that
of the U.S. From the beginning of 1980 through 1993, the State added over
50,100 new manufacturing jobs, an 11.7% increase. During the same period,
national manufacturing employment declined ten out of the fourteen years, for
a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 2.7% in 1993-94
and rise 3.8% in 1994-95. Trade and services, the two largest figures, account
for more than half of the total non-farm employment. Employment in the service
sectors should experience an increase of 3.9% in 1993-94, while growing 4.9%
in 1994-95. Trade is expected to expand 2.2% in 1994 and 3.4% in 1995. The
service sector is now the State's largest employment category.
Tourism is one of Florida's most important industries. Approximately 41.1
million tourists visited the State in 1993, as reported by the Florida
Department of Commence. In terms of business activities and state tax
revenues, tourists in Florida in 1993 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals are expected to decline by almost two percent
this year, but are expected to recover next year with 5.0% growth. By the end
of the State's current fiscal year, 41.0 million domestic and international
tourists are expected to have visited the State. In 1994-95, tourist arrivals
should approximate 43.0 million.
The State's per capita personal income in 1992 of $19,711 was slightly below
the national average of $20,105 and significantly ahead of that for the
southeast United States, which was $17,296. Real personal income in the State
is estimated to increase 5.5% in 1993-94 and 4.7% in 1994-95. By the end of
1994-95, real personal income per capita in the State is projected to average
6.7% higher than its 1992-93 level.
Compared to other states, Florida has a proportionately greater retirement age
population which comprises 18.3% (as of April 1, 1991) of the State's
population and is forecast to grow at an average annual rate of over 1.96%
through the 1990s. Thus, property income (dividends, interest, and rent) and
transfer payments (Social Security and pension benefits, among other sources
of income) are a relatively more important source of income. For example,
Florida's total wages and salaries and other labor income in 1993 was 62% of
total income, while a similar figure for the nation for 1992 was 72.0%.
Transfer payments are typically less sensitive to the business cycle than
employment income and, therefore, act as stabilizing forces in weak economic
periods. While many of the U.S.'s senior citizens choose the State as their
place of retirement, the State is also recognized as attracting a significant
number of working age people. Since 1982, the prime working age population
(18-44) has grown at an average annual rate of 3.3%.
In fiscal year 1991-92, approximately 64% of the State's total direct revenue
to its three operating funds was derived from State taxes, with federal grants
and other special revenue accounting for the balance. State sales and use tax,
corporate income tax, and beverage tax amounted to 68%, 7% and 5%,
respectively, of total receipts by the General Revenue Fund during fiscal year
1991-92. In that same year, expenditures for education, health and welfare,
and public safety amounted to 53%, 30% and 13.3%, respectively, of total
expenditures from the General Revenue Fund.
Hurricane Andrew left some parts of south Florida devastated. Post-Hurricane
Andrew clean up and rebuilding have changed the outlook for the State's
economy. Single and multi-family housing starts in 1993-94 are projected to
reach a combined level of 118,000, increasing to 134,300 next year. Lingering
recessionary effects on consumers and tight credit are two of the reasons for
relatively slow core construction activity, as well as lingering effects from
the 1986 tax reform legislation discussed above. However, construction is one
of the sectors most severely affected by Hurricane Andrew. Low interest rates
and pent up demand combined with improved consumer confidence should lead to
improved housing starts. The construction figures above include additional
housing starts as a result of destruction by Hurricane Andrew. Total
construction expenditures are forecasted to increase 15.6% this year and
increase 13.3% next year.
The State Constitution and statutes mandate that the State budget, as a whole,
and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believes a deficit will occur in any State fund, by statute, he must certify
his opinion to the Administrative Commission, which then is authorized to
reduce all State agency budgets and releases by a sufficient amount to prevent
a deficit in any fund. Additionally, the State Constitution prohibits issuance
of State obligations to fund State operations.
Estimated fiscal year 1993-94 General Revenue plus Working Capital funds
available total $13,582.7 million, an 8.4% increase over 1992-93. This
reflects a transfer of $190 million, out of an estimated $220.0 million in
non-recurring revenue due to Andrew, to a hurricane relief trust fund. Of the
total General Revenue plus Working Capital funds available to the State,
$12,943.5 million of that is Estimated Revenues (excluding the Andrew impact)
which represents an increase of 7.3% over the previous year's Estimated
Revenues. With effective General Revenues plus Working Capital Fund
appropriations at $13,276.9 million, unencumbered reserves at the end of
1993-94 are estimated at $302.8 million. Estimated, fiscal year 1994-95
General Revenue plus Working Capital and Budget Stabilization funds available
total $14,573.7 million, a 7.3% increase over 1993-94. This amount reflects a
transfer of $159.00 million in non-recurring revenue due to Hurricane Andrew,
to a hurricane relief trust fund. The $13,860.8 million in Estimated Revenues
(excluding the Hurricane Andrew impact) represent an increase of 7.1% over the
previous year's Estimated Revenues. The massive effort to rebuild and replace
destroyed or damaged property in the wake of Andrew is responsible for the
substantial positive revenue impacts shown here. Most of the impact is in the
increase in the State's sales tax.
In fiscal year 1992-93, approximately 62% of the State's total direct revenue
to its three operating funds were derived from State taxes, with Federal
grants and other special revenue accounting for the balance. State sales and
use tax, corporate income tax, intangible personal property tax, and beverage
tax amounted to 68%, 7%, 4%, and 4%, respectively, of total General Revenue
Funds available during fiscal 1992-93. In that same year, expenditures for
education, health and welfare, and public safety amounted to approximately
49%, 30%, and 11%, respectively, of total expenditures from the General
Revenue Fund.
The State's sales and use tax (6%) currently accounts for the State's single
largest source of tax receipts. Slightly less than 10% of the State's sales
and use tax is designated for local governments and is distributed to the
respective counties in which collected for such use by such counties and the
municipalities therein. In addition to this distribution, local governments
may (by referendum) assess a 0.5% or a 1.0% discretionary sales tax within
their county. Proceeds from this local option sales tax are earmarked for
funding local infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided under Florida
law. Certain charter counties have other taxing powers in addition, and
non-consolidated counties with a population in excess of 800,000 may levy a
local option sales tax to fund indigent health care. It alone cannot exceed
0.5% and when combined with the infrastructure surtax cannot exceed 1.0%. For
the fiscal year ended June 30, 1993, sales and use tax receipts (exclusive of
the tax on gasoline and special fuels) totalled $9,426.0 million, an increase
of 12.5% over fiscal year 1991-92.
The second largest source of State tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage wholesale tax (excise tax) on beer,
wine, and liquor. This tax is one of the State's major tax sources, with
revenues totalling $442.2 million in fiscal year ending June 30, 1993.
Alcoholic beverage tax receipts declined 1.6% over the previous year. The
revenues collected from this tax are deposited into the State's General
Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate income
tax are credited to the General Revenue Fund. For the fiscal year ended June
30, 1993, receipts from this source were $846.6 million, an increase of 5.6%
from fiscal year 1991-92.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totaled $639.0 million during fiscal year
1992-93, a 27.0% increase from the previous fiscal year. Beginning in fiscal
year 1992-93, 71.29% of these taxes are to be deposited to the General Revenue
Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax collections are
credited to the State's Public Education Capital Outlay and Debt Service Trust
Fund. In fiscal year 1992-93, this amounted to $447.9 million.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes, governmental
leaseholds, and certain other intangibles not secured by a lien on Florida
real property. The annual rate of tax is 2 mils. Second, the State imposes a
non-recurring 2 mil tax on mortgages and other obligations secured by liens on
Florida real property. In fiscal year 1992-93, total intangible personal
property tax collections were $783.4 million, a 33% increase over the prior
year. Of the tax proceeds, 66.5% are distributed to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38% for use in enhancing
education, and the balance, 12.0% for costs of administering the lottery.
Fiscal year 1992-93 lottery ticket sales totalled $2.13 billion, providing
education with $810.4 million.
The State's severance tax applies to oil, gas, and sulphur production, as well
as the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $64.5 million during fiscal year 1992-93, down 4.0%
from the previous year. Currently, 60.0% of this amount is transferred to the
General Revenue Fund.
The State has continuously been dependent on the highly cyclical construction
and construction related manufacturing industries. While that dependency has
decreased, the State is still somewhat at the mercy of the construction and
construction related manufacturing industries. The construction industry is
driven to a great extent by the State's rapid growth in population. There can
be no assurance that population growth will in fact continue throughout the
1990's in which case there could be an adverse impact on the State's economy
through the loss of construction and construction related manufacturing jobs.
Also, while interest rates remain low currently, an increase in interest rates
could significantly adversely impact the financing of new construction within
the State, thereby adversely impacting unemployment and other economic factors
within the State. In addition, available commercial office space has tended to
remain high over the past few years. So long as this glut of commercial rental
space continues, construction of this type of space will likely continue to
remain slow.
At the end of fiscal 1993, approximately $5.61 billion in principal amount of
debt secured by the full faith and credit of the State was outstanding. In
addition, since July 1, 1993, the State issued about $1.13 billion in
principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget, as a whole,
and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believe a deficit will occur in any State fund, by statute, he must certify
his opinion to the Administrative Commission, which then is authorized to
reduce all State agency budgets and releases by a sufficient amount to prevent
a deficit in any fund. Additionally, the State Constitution prohibits issuance
of State obligations to fund State operations.
Currently under litigation are several issues relating to State actions or
State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse affect on
Florida's financial position.
Florida law provides preferential tax treatment to insurers who maintain a
home office in the State. Certain insurers challenged the constitutionality of
this tax preference and sought a refund of taxes paid. Recently, the State
Supreme Court ruled in favor of the State. This case and others, along with
pending refund claims, total about $150 million.
The State imposes a $295 fee on the issuance of certificates of title for
motor vehicles previously titled outside the State. The State has been sued by
plaintiffs alleging that this fee violates the Commerce Clause of the U.S.
Constitution. The Circuit Court in which the case was filed has granted
summary judgment for the plaintiffs and has enjoined further collection of the
impact fee and has ordered refunds to all those who have paid the fee since
the collection of the fee went into effect. The State has appealed the lower
Court's decision and an automatic stay has been granted to the State allowing
it to continue to collect the fee. The potential refund exposure to the State
if it should lose the case may be in excess of $100 million.
Florida maintains a bond rating of Aa and AA from Moody's Investors Service
and Standard & Poor's, respectively, on the majority of its general obligation
bonds, although the rating of a particular series of revenue bonds relates
primarily to the project, facility, or other revenue sources from which such
series derives funds for repayment. While these ratings and some of the
information presented above indicate that Florida is in satisfactory economic
health, there can be no assurance that there will not be a decline in economic
conditions or that particular Municipal Obligations purchased by the Fund will
not be adversely affected by any such changes.
The sources for the information presented above include official statements
and financial statements of the State of Florida. While the Sponsor has not
independently verified this information, the Sponsor has no reason to believe
that the information is not correct in all material respects.
At the time of the closing for each Florida Trust, Chapman and Cutler, Counsel
to each Florida Trust for Florida tax matters, rendered an opinion under then
existing Florida income tax law applicable to taxpayers whose income is
subject to Florida income taxation substantially to the effect that:
For Florida state income tax purposes, the Florida Trust will not be subject
to the Florida income tax imposed by Chapter 220, Florida Statutes. In
addition, Florida does not impose any income taxes at the local level.
Because Florida does not impose an income tax on individuals, non-corporate
Unitholders residing in Florida will not be subject to any Florida income
taxation on income realized by the Florida Trust. Any amounts paid to the
Florida Trust or to non-corporate Unitholders residing in Florida under an
insurance policy issued to the Florida Trust or the Sponsor which represent
maturing interest on defaulted obligations held by the Trustee will not be
subject to the Florida income tax imposed by Chapter 220, Florida Statutes to
the extent not included in gross income for Federal income tax purposes.
Corporate Unitholders with commercial domiciles in Florida will be subject to
Florida income or franchise taxation on income realized by the Florida Trust
and on payments of interest pursuant to any insurance policy. Other corporate
Unitholders will be subject to Florida income or franchise taxation on income
realized by the Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does not
constitute "non-business income"as defined by Chapter 220.
Units will be subject to Florida estate tax only if held by Florida residents.
However, the Florida estate tax is limited to the amount of the credit for
state death taxes provided for in Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax, the Florida intangibles personal property tax or Florida sales
or use tax.
Georgia Trusts
The following brief summary regarding the economy of Georgia is based upon
information drawn from publicly available sources and is included for purposes
of providing information about general economic conditions that may or may not
affect issuers of the Georgia obligations. The Sponsor has not independently
verified any of the information contained in such publicly available documents.
Constitutional Considerations. The Georgia Constitution permits the issuance
by the State of general obligation debt and of certain guaranteed revenue
debt. The State may in our guaranteed revenue debt by guaranteeing the payment
of certain revenue obligations issued by an instrumentality of the State. The
Georgia Constitution prohibits the incurring of any general obligation debt or
guaranteed revenue debt if the highest aggregate annual debt service
requirement for the then current year or any subsequent fiscal year for
outstanding general obligation debt and guaranteed revenue debt, including the
proposed debt, exceed 10 percent of the total revenue receipts, less refunds,
of the State treasury in the fiscal year immediately preceding the year in
which any such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to supply
a temporary deficit in the State treasury in any fiscal year created by a
delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State
treasury in the fiscal year immediately preceding the year in which such debt
is incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred to supply a temporary deficit in the
State treasury. No such short-term debt has been incurred under this provision
since the inception of the constitutional authority referred to in this
paragraph.
Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other
political subdivisions and public authorities thereof are required by law to
be validated and confirmed in a judicial proceeding prior to issuance. The
legal effect of an approved validation in Georgia is to render incontestable
the validity of the pertinent bond issue and the security therefor.
The State and Its Economy. The State operates on a fiscal year beginning July
1 and ending June 30. Thus, the 1994 fiscal year ended June 30, 1994. Based on
data from the Georgia Department of Revenue, estimated receipts of the State
from income tax and sales tax for the 1992 fiscal year comprised approximately
48.8% and 37.5%, respectively, of the total State tax revenues. Such data
shows that total estimated State treasury receipts for the 1992 fiscal year
increased by approximately 2.16% over such collections in the 1991 fiscal
year. The estimated 1993 fiscal year figures indicate that receipts of the
State from income tax and sales tax for the 1993 fiscal year comprised
approximately 48.1% and 38%, respectively, of the total State tax revenues.
Total estimated State tax revenue collections for the 1993 fiscal year
indicated an increase of approximately 9.89% over such collections in the 1992
fiscal year. The estimated 1994 fiscal year figures indicate that receipts of
the State from income tax and sales tax for the 1994 fiscal year will comprise
approximately 48.8% and 37.9%, respectively, of the total State tax revenues.
Total estimated State tax revenue collections for the 1994 fiscal year
indicate an increase of approximately 9.56% over such collections in the 1993
fiscal year.
Georgia experienced an economic slowdown in the late 1980s that continued into
1992. The 1991 fiscal year ended with a balanced budget, but only because the
State had borrowed approximately $90 million from surpluses maintained for
special uses. In light of weaker. than expected monthly revenue collections in
May and June of 1991, Georgia lawmakers, in a special legislative session, cut
budgeted expenditures for the 1992 fiscal year by $415 million. Georgia ended
its 1992 fiscal year, however, with strong monthly revenue collections. For
the last four months of fiscal year 1992, Georgia's revenues were more than 6%
higher than revenues reported one year earlier for the same time period. By
year-end, revenue collections fell only.1% short of that expected to cover
1992 expenditures. This shortfall was made up from funds allocated to but not
used by state agencies. The authorized 1993 fiscal year budget consists of an
$8.3 billion spending plan and approximately $750 million in new general
obligation debt. On March 23, 1993. The Georgia General Assembly approved an
$8.9 billion budget for the 1994 fiscal year which includes authorization for
$792 million of general obligation borrowing.
The Georgia economy has performed relatively well during recent years and
generally has expanded at a rate greater than the national average during that
period. However, growth in 1988 through 1992 slowed somewhat and was modest
compared to the pace of the early 1980's. Georgia's economy, however, has made
a robust recovery through the 1993 and 1994 fiscal years. Total estimated
State tax revenue collections for the 1994 fiscal year indicate an increase of
approximately 9.56% over such collections in the 1993 fiscal year. The 1992
annual average unemployment rate for Georgia was 6.9% as compared to the 1992
national annual average unemployment rate of 7.4%. The 1993 annual average
unemployment rate for Georgia was 5.7% as compared to the 1993 national annual
average unemployment rate of 6.7%. Throughout 1994, the monthly unemployment
rate for Georgia (not seasonally adjusted) has remained below the national
average monthly unemployment rate (not seasonally adjusted). In April and May
1994, the two most current months for which information is available,
Georgia's unemployment rate of 6.2% and 5.9%. In July, 1994, widespread
flooding in central and southern Georgia caused extensive damage and
destruction of farmland, private residences, businesses and local and state
government facilities. As of July 12, 1994, Governor Zell Miller refused to
estimate the dollar value of the damage but other sources estimate that damage
could exceed $300 million. Thirty-one counties have been declared federal
disaster areas. Moody's Investors Service, Inc. and Standard and Poor's
Corporation are observing the situation in Georgia, but neither rating agency
has expressed any immediate credit concerns.
Bond Ratings. Currently, Moody's Investors Service, Inc. rates Georgia general
obligation bonds Aaa and Standard & Poor's rates such bonds AA+.
Legal Proceedings. Georgia is involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. Several lawsuits have been
filed against Georgia asserting that the decision in Davis v. Michigan
Department of Treasury, 489 U.S. 803 (1989), invalidating Michigan's practice
of taxing retirement benefits paid by the federal government while exempting
state retirement benefits, also invalidates Georgia's tax treatment of Federal
Retirement Benefits for years prior to 1989. Under Georgia's applicable 3 year
statute of limitation the maximum potential liability under these suits
calculated to August 15, 1993 would appear to be no greater than 100 million
dollars. The plaintiffs in these suits, however, have requested refunds for a
period from 1980 to 1988 which could result in a maximum potential liability
in the range of 591 million dollars. Any such liability would be predicated on
a holding by the State of Georgia Supreme Court or the United States Supreme
Court that the Davis decision is applicable to Georgia's prior method of
taxing Federal Retirement Benefits and that the Davis decision is to be given
a retroactive effect, i.e., that the decision affects prior tax years and that
a refund remedy is appropriate. In Georgia's "test case", the Georgia
Supreme Court held that no refunds are due. The plaintiff's petition to the
U.S. Supreme Court for a writ of certiorari was granted on February 22, 1994.
Three suits have been filed against the State of Georgia seeking refunds of
liquor taxes under O.C.G.A. Section 48-2-35, in light of Bacchus Imports, Ltd.
v. Dias, 468 U.S. 263 (1984) under Georgia's pre-Bacchus statute. In the Beam
case, 501 U.S. 529 (decided June 20, 1991) the Supreme Court indicated that
Bacchus was retroactive, but only within the bounds of State statutes of
limitations and procedural bars, and left State courts to determine any remedy
in light of reliance interests, equitable considerations, and other defenses.
Georgia's statute of limitations in O.C.G.A. Section 48-2-35 has run on all
pre-Bacchus claims for refund except five pending claims seeking 31.7 million
dollars in tax plus interest. On remand, the Fulton County Superior Court has
ruled that procedural bars and other defenses bar any recovery by taxpayers on
Beam's claims for refund. The Georgia Supreme Court has affirmed, and Beam has
petitioned the United States Supreme Court for a writ of certiorari.
Two additional suits have been filed with the State of Georgia by foreign
producers of alcoholic beverages seeking $96 million in refunds of alcohol
import taxes imposed under O.C.G.A. Section 3-4-60. These claims constitute
99% of all such taxes paid during the preceding three years.
In Board of Public Education for Savannah/Chatham County v. State of Georgia,
the local school board claimed that the State should finance the major portion
of the costs of its desegregation program. The Savannah Board originally
requested restitution in the amount of $30 million, but the Federal District
Court set forth a formula which would require a State payment in the amount of
approximately $6 million. Both sides have moved for reconsideration. In a
similar complaint, DeKalb County has requested restitution in the amount of
$90 million, and there are approximately five other school districts which
could file similar claims. It is not possible to quantify such potential
claims at this time.
The foregoing information does not purport to be a complete or exhaustive
description of all conditions to which the issuers of Bonds in the Georgia
Insured Trust are subject. Many factors including national economic, social
and environmental policies and conditions, which are not within the control of
the issuers of Bonds could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. Since Georgia Bonds in the Georgia Insured
Trust (other than general obligation bonds issued by the State) are payable
from revenue derived from a specific source or authority, the impact of a
pronounced decline in the national economy or difficulties in significant
industries within the State could result in a decrease in the amount of
revenues realized from such source or by such authority and thus adversely
affect the ability of the respective issuers of the Georgia Bonds in the
Georgia Insured Trust to pay the debt service requirements on the Georgia
Bonds. Similarly, such adverse economic developments could result in a
decrease in tax revenues realized by the State and thus could adversely affect
the ability of the State to pay the debt service requirements of any Georgia
general obligation bonds in the Georgia Insured Trust.
At the time of the closing for each Georgia Trust, Special Counsel to the Fund
for Georgia tax matters rendered an opinion under then existing Georgia income
tax law applicable to taxpayers whose income is subject to Georgia income
taxation substantially to the effect that:
(1)For Georgia income tax purposes, the Georgia Trust is not an association
taxable as a corporation, and the income of the Georgia Trust will be treated
as the income of the Unitholders. Interest on the Georgia Bonds which is
exempt from Georgia income tax when received by the Georgia Trust, and which
would be exempt from Georgia income tax if received directly by a Unitholder,
will retain its status as tax-exempt interest when distributed by the Georgia
Trust and received by the Unitholders.
(2)If the Trustee disposes of a Georgia Bond (whether by sale, exchange,
payment on maturity, retirement or otherwise) or if a Unitholder redeems or
sells his Unit, the Unitholder will recognize gain or loss for Georgia income
tax purposes to the same extent that gain or loss would be recognized for
federal income tax purposes (except in the case of Georgia Bonds issued before
March 11, 1987 issued with original issue discount owned by the Georgia Trust
in which case gain or loss for Georgia income tax purposes would be determined
by accruing said original issue discount on a ratable basis). Due to the
amortization of bond premium and other basis adjustments required by the
Internal Revenue Code, a Unitholder, under some circumstances, may realize
taxable gain when his or her Units are sold or redeemed for an amount equal to
their original cost.
(3)Because obligations or evidences of debt of Georgia, its political
subdivisions and public institutions and bonds issued by the Government of
Puerto Rico are exempt from the Georgia intangible personal property tax, the
Georgia Trust will not be subject to such tax as the result of holding such
obligations, evidences of debt or bonds. Although there currently is no
published administrative interpretation or opinion of the Attorney General of
Georgia dealing with the status of bonds issued by a political subdivision of
Puerto Rico, we have in the past been advised orally by representatives of the
Georgia Department of Revenue that such bonds would also be considered exempt
from such tax. Based on that advice, and in the absence of a published
administrative interpretation to the contrary, we are of the opinion that the
Georgia Trust would not be subject to such tax as the result of holding bonds
issued by a political subdivision of Puerto Rico.
(4)Amounts paid under an insurance policy or policies issued to the Georgia
Trust, if any, with respect to the Georgia Bonds in the Georgia Trust which
represent maturing interest on defaulted obligations held by the Trustee will
be exempt from State income taxes if, and to the extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased the amounts paid for
such policies are reasonable and customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
(5)We express no opinion regarding whether a Unitholder's ownership of an
interest in the Georgia Trust is subject to the Georgia intangible personal
property tax. Although the application of the Georgia intangible property tax
to the ownership of the Units by the Unitholders is not clear, representatives
of the Georgia Department of Revenue have in the past advised us orally that,
for purposes of the intangible property tax, the Department considers a
Unitholder's ownership of an interest in the Georgia Trust as a whole to be
taxable intangible property separate from any ownership interest in the
underlying tax-exempt Georgia Bonds.
(6)Neither the Georgia Bonds nor the Units will be subject to Georgia sales or
use tax.
Hawaii Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Hawaii is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Hawaii.
Hawaii was admitted to the Union on August 21,1959 as the 50th state and is
currently the 41st most populous state. Hawaii's population was 1,115,274 in
1990, as reported by the Census. According to the Census, about 75% of this
population lives on Oahu, the site of the State's capital. Hawaii's population
contains great ethnic diversity, consisting of immigrants from the Far East
and Europe, as well as the mainland U.S.
The Hawaiian economy is based primarily on tourism with most employment
located in the service and retail trade sectors and with tourists paying a
large portion of the General Excise Tax and the Transient Accommodation Tax.
The General Excise and Use Tax made up 53.7% of net receipts without
adjustments for 1992 and the Transient Accommodations Tax were the fourth
largest individual tax of net receipts in 1992. Approximately 6.5 million
tourists came to the State in 1992, spending an estimated $9.6 billion while
in the State. This number of tourists decreased 5.2% from 1991, mostly due to
the U.S. recession as westbound visitors (80% from U.S.) fell from 4.7 million
in 1990, to 4.6 million in 1991, to 4.0 million in 1992. Eastbound visitors,
however, increased from 2.2 million in 1990, to 2.3 million in 1991, to 3.5
million in 1992. Total visitors to the State for the first half of 1993 fell
by 6.5% from those of 1992.
The unemployment rate in the state of Hawaii was 4.8% as of June 1993,
significantly below the national rate of 6.8%.
The State's revised total personal income was an estimated $24.8 billion in
1992 and has increased at a 7.5% average annual rate since 1980, slightly
faster than the national rate over this decade. The State's revised per capita
personal income was $21,218 in 1992, higher than the 1992 U.S. figure of
$19,841. The per capita personal income in the State has increased at a 5.8%
average annual rate since 1980, slightly lower than the 5.9% rate for the
nation. Hawaii's total personal income for the first quarter of 1993 was
$25,571, up 2.9% from $24,844 for the same period last year.
The General Fund revenues in 1992 grew at an actual annual growth rate of
1.5%. In 1993, the Council on Revenues estimates, as of April 1993, that the
General Fund revenues will increase by 3.2%. Any time the General Fund balance
at the close of each two successive fiscal years exceeds 5% of General Fund
Revenues for the two fiscal years, the Iegislature in the next regular session
will provide a credit to state taxpayers credit has been issued from 1981 to
1992, inclusive. As of May 1993, the Department of Budget and Finance projects
the General Fund balance at fiscal year-end to be $314.8 million.
Inflation adjusted single family home construction fell 9.0% in 1992, but is
expected to be offset by increases in alterations and additions. Employment in
the construction industry has declined, but is expected to return to 1991 peak
levels due to repair work from Hurricane Iniki. The hurricane hit island Kuaui
in September 1992 causing an estimated $1.7 billion worth of property,
agricultural, and commercial damage as estimated by the Department of
Business, Economic Development, and Tourism. The State has not experienced any
materially adverse economic or financial impact so far, as the federal
government has provided additional funding to the state in the form of public
assistance, loans, and grants with minimum state matching requirements from
the General Fund.
Currently, Moody's Investors Service rates Hawaii general obligation bonds
"Aa"and Standard & Poor's rates Hawaii general obligation bonds "
AA."Although these ratings indicate that the state of Hawaii is in
relatively good economic health, there can, of course, be no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in state or local economic conditions. Also, it should be
noted that the creditworthiness of obligations issued by local Hawaii issuers
may be unrelated to the creditworthiness of obligations issued by the state of
Hawaii, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Hawaii Trust are subject. Additionally,
many factors including national economic, social and environmental policies
and conditions, which are not within the control of the issuers of the Bonds,
could affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Hawaii Trust to pay interest on or principal on the
Bonds.
At the time of the closing for each Hawaii Trust, Special Counsel to the Fund
for Hawaii tax matters rendered an opinion under then existing Hawaii income
tax law applicable to taxpayers whose income is subject to Hawaii income
taxation substantially to the effect that:
(1)The Hawaii Trust is not an association taxable as a corporation and each
Unitholder of thc Hawaii Trust will be treated as the owner of a pro rata
portion of the Hawaii Trust, and the income of such portion of the Hawaii
Trust will therefore be treated as the income of the Unitholder for Hawaii
Income Tax purposes;
(2)Income on the Bonds which is exempt from the Hawaii Income Tax when
received by a Unitholder of the Hawaii Trust and which would be exempt from
the Hawaii Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the Hawaii Trust and
distributed to such Unitholder;
(3)To the extent that interest on the Bonds, if any, is includible in the
computation of "alternative minimum taxable income"for federal income
tax purposes, such interest will also be includible in the computation of "
alternative minimum taxable income"for purposes of Hawaii's corporate
alternative minimum tax on corporations;
(4)Each Unitholder of the Hawaii Trust will recognize gain or loss for Hawaii
Income Tax purposes if the Trustee disposes of a Bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the Hawaii
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for federal income tax purposes;
(5)Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable gain
for Hawaii Income Tax purposes when their Units are sold or redeemed for an
amount equal to or less than their original cost;
(6)Proceeds, if any, paid under individual insurance policies obtained by
issuers of Bonds or the Trustee which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Hawaii net income if,
and to the same extent as, such interest would have been so excludible if paid
in the normal course by the issuer of the defaulted obligation provided that,
at the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation that
the issuer of the bonds, rather than the insurer, will pay debt service on the
bonds; and
(7)To the extent that interest derived from the Hawaii Trust by a Unitholder
with respect to any Possession Bonds is excludible from gross income for
federal income tax purposes pursuant to 48 U.SC. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will also not be
subject to the Hawaii Income Tax. It should be noted that interest relating to
Possession Bonds is subject to tax in the case of certain banks and financial
institutions subject to the Hawaii's franchise tax and corporations subject to
Hawaii's corporate alternative minimum tax.
We have not examined any of the Bonds to be deposited and held in the Hawaii
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Kansas Trusts
Since the Kansas Trust will invest substantially all of its assets in Kansas
municipal securities, the Kansas Trust is susceptible to political and
economic factors affecting issuers of Kansas municipal securities. As of 1991,
2,494,566 people lived in Kansas, representing a 0.69% increase in population
since the 1990 census. Based on these numbers, Kansas ranked thirty-second in
the nation in population size. According to the Kansas Department of Commerce,
in 1991 Kansas ranked twenty-first in the nation in terms of per capita
income. Historically, agriculture and mining constituted the principal
industries in Kansas. Since the 1950s, however, manufacturing, governmental
services and the services industry have steadily grown, and as of 1993
approximately 15.7% of Kansas workers were in the manufacturing sector, 20.8%
in the government sector and 23.3% in the services sector (not including
transportation, public utilities, trade, finance, insurance, and real estate),
while the farming and mining sectors combined for approximately 5.0% of the
work force. The 1991 unemployment rate was 4.4%, and the seasonally adjusted
rate for December 1992 was 4.2%. By constitutional mandate, Kansas must
operate within a balanced budget and public debt may only be incurred for
extraordinary purposes and then only to a maximum of $1 million. As of
November 12, 1992, Kansas had no general obligation bonds outstanding.
At the time of the closing for each Kansas Trust, Special Counsel to each
Kansas Trust for Kansas tax matters, rendered an opinion under then existing
Kansas income tax law applicable to taxpayers whose income is subject to
Kansas income taxation substantially to the effect that:
The Trust is not an association taxable as a corporation for Kansas income tax
purposes;
Each Unitholder of the Trust will be treated as the owner of a pro rata
portion of the Trust, and the income and deductions of the Trust will
therefore be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas or any
of its political subdivisions will be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) however, interest on
Bonds issued prior to January 1, 1988 by the State of Kansas or any of its
political subdivisions will not be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) unless the laws of
the State of Kansas authorizing the issuance of such Bonds specifically exempt
the interest on the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on insurance companies under
Article 40, Chapter 28 of the Kansas statutes unless the laws of the State of
Kansas authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas; interest on the
Bonds which is exempt from Kansas income taxation when received by the Trust
will continue to be exempt when distributed to a Unitholder (other than a
bank, trust company or savings and loan association);
Each Unitholder of the Trust will recognize gain or loss for Kansas income tax
purposes if the Trustee disposes of a Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such transaction results in a recognized
gain or loss for federal income tax purposes;
Interest received by the Trust on the Bonds is exempt from intangibles
taxation imposed by any counties, cities and townships pursuant to present
Kansas law; and
No opinion is expressed regarding whether the gross earnings derived from the
Units is subject to intangibles taxation imposed by any counties, cities and
townships pursuant to present Kansas law.
Kentucky Trusts
The Commonwealth of Kentucky leads the nation in total tonnage of coal
produced and ranks among the top 10 states in the value of all minerals
produced. Tobacco is the dominant agricultural crop and Kentucky ranks second
among the states in the total cash value of tobacco raised. The manufacturing
mix in the state reflects a significant diversification. In addition to the
traditional concentration of tobacco processing plants and bourbon
distilleries, there is considerable durable goods production, such as
automobiles, heavy machinery, consumer appliances, and office equipment. The
State's parks system and the horse breeding and racing industry, symbolized by
the Kentucky Derby, play an important role in an expanding tourist business in
the state.
Current economic problems, including particularly the continuing high
unemployment rate, have had varying effects on the differing geographic areas
of the State and the political subdivisions located within such geographic
areas. Although revenue obligations of the State or its political subdivisions
may be payable from a specific source or project, there can be no assurance
that further economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value of the Bonds
in the Kentucky Trust or the ability of the respective obligors to pay debt
service of such Bonds.
Prospective investors should study with care the portfolio of Bonds in the
Kentucky Trust and should consult with their investment advisors as to the
merits of particular issues in the portfolio.
At the time of the closing for each Kentucky Trust, Special Counsel to each
Kentucky Trust for Kentucky tax matters rendered an opinion under then
existing Kentucky income tax law applicable to taxpayers whose income is
subject to Kentucky income taxation substantially to the effect that:
Because Kentucky income tax law is based upon the Federal law and in explicit
reliance upon the opinion of Chapman and Cutler referred to above, and in
further reliance on the determination letter to us of the Revenue Cabinet of
Kentucky dated May 10, 1984, it is our opinion that the application of
existing Kentucky income tax law would be as follows:
(1)Each Kentucky Unitholder will be treated as the owner of a pro rata portion
of the Kentucky Trust for Kentucky income tax purposes, and the income of the
Kentucky Trust will therefore be treated as the income of the Kentucky
Unitholders under Kentucky law;
(2)Interest on Bonds that would be exempt from Federal income taxation when
paid directly to a Kentucky Unitholder will be exempt from Kentucky income
taxation when: (i) received by the Kentucky Trust and attributed to such
Kentucky Unitholder; and (ii) when distributed to such Kentucky Unitholder;
(3)Each Kentucky Unitholder will realize taxable gain or loss when the
Kentucky Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when the Kentucky Unitholder redeems or sells Units at
a price that differs from original cost as adjusted for amortization or
accrual, as appropriate, of bond discount or premium and other basis
adjustments (including any basis reduction that may be required to reflect a
Kentucky Unitholder's share of interest, if any, accruing on Bonds during the
interval between the Kentucky Unitholder's settlement date and the date such
Bonds are delivered to the Kentucky Trust, if later);
(4)Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Kentucky Unitholders realizing
taxable gain when their Units are sold or redeemed for an amount equal to or
less than their original cost;
(5)Units of the Kentucky Trust, to the extent the same represent an ownership
in obligations issued by or on behalf of the Commonwealth of Kentucky or
governmental units of the Commonwealth of Kentucky, the interest on which is
exempt from Federal and Kentucky income taxation will not be subject to ad
valorem taxation by the Commonwealth of Kentucky or any political subdivision
thereof; and
(6)If interest or indebtedness incurred or continued by a Kentucky Unitholder
to purchase Units in the Kentucky Trust is not deductible for Federal income
tax purposes, it also will be nondeductible for Kentucky income tax purposes.
Maine
The State of Maine, which includes nearly one-half of the total land area of
the six New England states, currently has a population of 1,213,000. The
structure of the Maine economy is quite similar to that of the nation as a
whole, except that Maine has proportionately more activity in manufacturing
and tourism, and less activity in finance and services.
During the 1980s Maine's economy grew rapidly. However, due largely to an
overheating of the New England construction/real estate markets in 1987-88,
the New England and Maine economies were much softer in 1989 and the first
portion of 1990. The last quarter of strong growth in Maine was the first
quarter in 1988. The Maine Economic Growth Index, a broad measure of overall
growth corrected for inflation, rose only 0.7% in 1989. The United States
Economic Growth Index reflected an increase of 2. 7% during the same period.
During the period 1980 through 1988 state employment increased by 23%,
resulting in an unemployment rate of 3.8% in 1988. The unemployment rate for
1989 rose to 4.1%. Income growth exceeded national averages for the period
1982 through 1986, with per capita income increasing 36010, while the national
average was a 28% increase. The latest information available from the Maine
State Planning Office shows personal income growth remained strong for 1989,
although it was weakened substantially to 79%. Adjusted for inflation, real
income growth in 1989 is approximately 24% which is well below the 1988 figure
of 5.3%.
The regional economic slowdown in the northeast is expected to continue for
the near to intermediate term. Prospects for some of Maine's moor industries
are not optimistic in light of the regional slowdown. The value of Maine
construction contract awards in 1989 was $260,000,000 below the awards for
calendar year 1988, off some 21%. This slowdown diminishes prospects for the
wood products industry, as well as construction employment.
As indicated above, the real estate market continues to be extremely soft.
Data collected by the Maine Real Estate Institute indicated a shrinkage of
roughly $230,000,000 in real estate sales volume for calendar year 1989 from
the previous year. Continued unavailability of credit continues to affect this
sector of the economy.
The economic slowdown has had resulting impact upon consumer spending and the
retail sector. Maine's retail sales declined by 1% in 1989, although that
decline is attributable in its entirety to two retail sectors suffering
significant declines. The building supply sector suffered a decline of 7.6%
and the auto transportation group suffered a decline of 6.5%.
The Constitution of the State of Maine provides that the Legislature shall not
create any debt which exceeds $2,000,000 except to suppress insurrection, to
repel invasion or for purposes of war except when two-thirds of the
Legislature and a minority of the voters authorize the issuance of debt. The
Constitution also provides that tax anticipation loans must be repaid during
the fiscal year of issuance. Constitutional amendments have been adopted which
also allow the Legislature to authorize the issuance of bonds: to insure
payments on revenue bonds of up to $4,800,000 for local public school building
projects; in the amount of up to $4,000,000 to guarantee student loans; to
insure payments on up to $1,000,000 of mortgage loans for Indian housing; to
insure payments on up to $4,000,000 of mortgage loans or small business loans
to war veterans; and to insure payments on up to $90,000,000 of mortgage loans
for industrial, manufacturing, fishing, agricultural, and recreational
enterprises. This last authorization has been limited statutorily to a maximum
of $87,500,000 available for issue through the Finance Authority of Maine.
The State operates under a biennial budget which is formulated in
even-numbered years and presented for approval to the Legislature In
odd-numbered years. The economic strength evidenced during the 1 980s enabled
the State to accumulate high levels of general fund unappropriated surpluses.
As of its fiscal year ended December 51, 1989, the State had an unappropriated
general fund surplus of $161,000,000. In order to balance the fiscal 1990
budget, the State will draw down on the total balance to about $60,000,000 of
general fund expenditures during 1990. Further, the State projects a continued
decrease in sales tax revenues. Since proposal of its 1990-91 budget the State
has reduced estimates for sales tax twice for the biennium. The estimates were
reduced by $89,000,000 in June 1989 and $105,000,000 in January 1990.
Corresponding reductions were made in individual and corporate income tax
projections. The State's revenue and expenditure package established as of the
close of the most recent legislative session closed a $210,000,000 revenue
shortfall projected in January 1990 and allows for a 1% surplus ar fiscal year
end. As of August 1990, State revenues were 0.1% ahead of new budget
estimates.
Maine's outstanding general obligations are currently rated AAA by Standard &
Poor's and Aa1 by Moody's Investors Service, Inc. Maine has currently slowed
its issuance of general obligation debt as a result of the State's fiscal
situation. Maine has $555,500,000 of outstanding general obligation debt and
$155,200,000 in authorized unissued debt. Nevertheless, due in large part to
the State's low debt burden and rapid debt amortization, the public rating
agencies do not consider debt burden a negative factor.
The Portfolio may contain obligations of the Maine Municipal Bond Bank. All
Maine Municipal Bond Bank debt is secured by loan repayments of borrowing
municipalities and the State's moral obligation pledge. The state of the
economy in Maine could impact the ability of municipalities to pay debt
service on their obligations. Maine Municipal Bond Bank debt continues to
carry a AA rating from Standard & Poor's and a Aa rating from Moody's
Investors Service, Inc.
The Portfolio may contain obligations issued by Regional Waste Systems, Inc.,
a quasi-municipal corporation organized pursuant to an interlocal agreement
among approximately 20 Southern Maine communities ("RWS") or other
quasi-municipal solid waste disposal facilities. RWS and other similar solid
waste disposal projects operate regional solid waste disposal facilities and
process the solid waste of the participating municipalities as well as the
solid waste of other non-municipal users. The continued viability of such
facilities is dependent, in part, upon the approach taken by the State of
Maine with respect to solid waste disposal generally. Pursuant to a Public Law
1989 Chapter 585, the newly formed Maine Waste Management Agency is charged
with preparation and adoption by rule of an analysis and a plan for the
management, reduction and recycling of solid waste for the State of Maine. The
plan to be developed by the Maine Waste Management Agency is based on the
waste management priorities and recycling goals established by State law.
Pursuant to State law, Maine has established minimum goals for recycling and
composting requiring that a minimum of 25% of the municipal solid waste stream
be recycled or composted by 1992 and 50% be recycled or composted by 1994.
Although RWS may participate in the mandated recycling activities, its
principal existing facility consists of a mass burn 250 ton per day furnace
boiler with associated equipment for production of electric energy. Thus, the
source material for the RWS' primary facility could be substantially reduced
as a result of implementation of the State's recycling goals. Other mass burn
solid waste disposal facilities in the State have experienced seasonal
shortages in waste fuel.
Revenue bonds are issued by the Maine Health and Higher Education Facilities
Authority to finance hospitals and other health care facilities. The revenues
of such facilities consist, in varying but typically material amounts, of
payment from insurers and third-party reimbursement programs, including
Medicaid, Medicare and Blue Cross. The health care industry in Maine is
becoming increasingly competitive. The utilization of new programs and
modified benefits by third-party reimbursement programs and the advent of
alternative health care delivery systems such as health maintenance
organizations contribute to the increasingly competitive nature of the health
care industry. This increase in competition could adversely impact the ability
of health care facilities in Maine to satisfy their financial obligations.
Further, health care providers are subject to regulatory actions, changes in
law and policy changes by agencies that administer third-party reimbursement
programs and regulate the health care industry. Any such changes could
adversely impact the financial condition of such facilities.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Maine Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by
the Maine Trust to pay interest on or principal of the Bonds.
The assets of the Maine Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Maine (the "State) or counties,
municipalities, authorities or political subdivisions thereof (the "Maine
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Maine Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for Federal income tax purposes, (iii) interest on the Maine Bonds, if
received directly by a Unitholder, would be exempt from the Maine income tax
applicable to individuals, trusts and estates and corporations ("Maine Income
Tax"), and (iv) interest on the Bonds will not be taken into account by
individuals and corporations in computing an additional tax ("Maine Minimum
Tax") or in the case of corporations, a surcharge ("Maine Corporate Income Tax
Surcharge") imposed under the Maine Income Tax. The opinion set forth below
does not address the taxation of persons other than full time residents of
Maine.
In the opinion of Chapman and Cutler, Special Counsel to the Fund for Maine
tax matters, under existing law as of the date of this prospectus and based
upon the assumptions set forth above:
the Maine Trust is not an association taxable as a corporation, thus each
Unitholder of the Trust will be essentially treated as the owner of a pro rag
portion of the Maine Trust and the income of such portion of the Maine Trust
will be treated as the income of the Unitholder for Maine Income Tax purposes;
interest on the Bonds which is exempt from the Maine Income Tax when received
by the Maine Trust, and which would be exempt from the Maine Income Tax and
the Maine Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Maine Income Tax and the Maine Minimum Tax when
received by the Maine Trust \xd4 and distributed to the Unitholder;
to the extent that interest derived from the Maine Trust by a Unitholder with
respect to the Possession Bonds is excludible from gross income for Federal
income tax purposes pursuant to 48 U.S.C. \xa7 745, 48 U.S.C. \xa7 1423a and
48 U.S.C. \xa7 1403, such interest will not be subject to the Maine Income
Tax;
each Unitholder of the Maine ~ Trust will recognize gain or loss for Maine
Income Tax purposes if the Trustee disposes of a bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the Maine
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for Federal income tax purposes; and
the Maine Income Tax does not permit a deduction of interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units in the Maine
Trust, the interest on which is exempt from the Tax.
Prospective Purchasers subject to the Maine Franchise Tax should be advised
that for purposes of the Maine Franchise Tax, interest on the Bonds received
by the Trust and distributed to a Unitholder subject to such tax will be added
to the Unitholder's Federal taxable income and therefore will be taxable.
Maryland Trusts
The public indebtedness of the State of Maryland, its instrumentalities and
its local governments is divided into three basic types. The State, and the
counties and municipalities of the State, issue general obligation bonds for
capital improvements and for various projects to the payment of which an ad
valorem property tax is exclusively pledged.
Certain authorities of the State and certain local governments issue
obligations payable solely from specific non-tax, enterprise fund revenues and
for which the issuer has no liability and has given no moral obligation
assurance. The principal of and interest on bonds issued by these bodies are
payable solely from various sources, principally fees generated from use of
the facilities or enterprises financed by the bonds.
The special authorities of the State and local government entities have
outstanding bonds backed exclusively by revenues derived from projects and
facilities financed by the bond issue. The holders of these bonds have no
claim against the general credit of the State or any governmental unit for the
payment of those bonds.
There is no general debt limit imposed on the State of Maryland by the State
Constitution or public general laws, but a special committee created by
statute annually makes an estimate of the maximum amount of new general
obligation debt that the State may prudently authorize.
There can be no assurance that particular bond issues may not be adversely
affected by changes in State or local economic or political conditions.
Investors are, therefore, advised to study with care the Portfolio for the
Maryland Trust appearing elsewhere in this Prospectus and consult their own
investment advisers as to the merits of particular issues in that Portfolio.
At the time of the closing for each Maryland Trust, Special Counsel to each
Maryland Trust for Maryland tax matters rendered an opinion under then
existing Maryland income tax law applicable to taxpayers whose income is
subject to Maryland income taxation substantially to the effect that:
For Maryland State and local income tax purposes, the Maryland Trust will not
be recognized as an association taxable as a corporation, but rather as a
fiduciary whose income will not be subject to Maryland State and local income
taxation.
To the extent that interest derived from the Maryland Trust by a Unitholder
with respect to the obligations of the State of Maryland and its political
subdivisions is excludable from Federal gross income, such interest will not
be subject to Maryland State or local income taxes. Interest paid to a "
financial institution"will be subject to the Maryland State franchise tax
on financial institutions.
In the case of taxpayers who are individuals, Maryland presently imposes an
income tax on items of tax preference with reference to such items as defined
in the Internal Revenue Code, as amended from time to time, for purposes of
calculating the federal alternative minimum tax. Interest paid on certain
private activity bonds constitutes a tax preference item for the purpose of
calculating the federal alternative minimum tax. Accordingly, if the Maryland
Trust holds such bonds, 50% of the interest on such bonds in excess of a
threshold amount is taxable in Maryland.
Capital gain, including gain realized by a Unitholder from the redemption,
sale or other disposition of a Unit, will be included in the Maryland taxable
base of Unitholders for Maryland State and local income taxation purposes.
However, Maryland defines the taxable net income of individuals as Federal
adjusted gross income with certain modifications. Likewise, the Maryland
taxable net income of corporations is Federal taxable income with certain
modifications. There is available to Maryland income taxpayers a modification
which allows those taxpayers to subtract from the Maryland taxable base the
gain included in Federal adjusted gross income or Federal taxable income, as
the case may be, which is realized from the disposition of Securities by the
Maryland Trust. Consequently, by making that modification, a Unitholder who is
entitled to make the subtraction modification will not be subject to Maryland
State or local income tax with respect to gain realized upon the disposition
of Securities by the Maryland Trust. Profit realized by a "financial
institution"from the sale or exchange of Bonds will be subject to the
Maryland Franchise Tax.
These opinions relate only to the treatment of the Maryland Trust and the
Units under the Maryland State and local income tax laws and Maryland
franchise tax laws. Unitholders should consult tax counsel as to other
Maryland tax consequences not specifically considered in these opinions. For
example, no opinion is expressed as to the treatment of the Units under the
Maryland inheritance and estate tax laws.
Massachusetts Trusts
As described above, the Massachusetts Trust will invest substantially all of
its net assets in obligations issued by or on behalf of the Commonwealth of
Massachusetts, political subdivisions thereof, or agencies or
instrumentalities of the Commonwealth or its political subdivisions (the "
Bonds"). The Massachusetts Trust is therefore susceptible to general or
particular political, economic, or regulatory factors that may affect issuers
of such Massachusetts Investments. The following information constitutes only
a brief summary of some of the many complex factors that may have an effect.
The information may not be applicable to "conduit"obligations on
which the public issuer itself has no financial responsibility. This
information is derived from official statements of the Commonwealth and
certain of its agencies or instrumentalities in connection with the issuance
of securities, and from other publicly available documents, and is believed to
be accurate. No independent verification has been made of any of the following
information.
The Massachusetts Economy. After declining since 1987, Massachusetts
employment in 1993 has shown positive annual growth. While Massachusetts had
benefitted from an annual job growth rate of approximately 2% since the early
1980's, by 1989, employment had started to decline. Nonagricultural employment
declined 0.7% in fiscal 1989, 4.0% in fiscal 1990, 5.5% in fiscal 1991, 1.5%
in fiscal 1992, and 0.8% in fiscal 1993. A comparison of total,
nonagricultural employment in November 1992 with that in November 1993
indicates an increase of 0.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly lower
than the national average. By 1990, however, unemployment reached 6.0%,
exceeding the national average for the first time since 1977. The
Massachusetts unemployment rate peaked in 1991 at 9.0% and dropped to 6.9% in
1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. Between the second quarter of fiscal 1992 and the second quarter of
fiscal 1993, aggregate personal income in Massachusetts increased 4% as
compared to 5.5% for the nation as a whole.
The Commonwealth, while the third most densely populated state according to
the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to approximately one-half the rate of increase in
the United States population as a whole.
Massachusetts possesses a diversified economic base which includes traditional
manufacturing, high technology and service industries, served by an extensive
transportation system and related facilities. The Massachusetts service
sector, at approximately 34.2% of the state work force in May of 1994, is the
largest sector in the Massachusetts economy. Government employment is below
the national average, representing less than 14% of the Massachusetts work
force. In recent years, the construction, manufacturing and trade sectors have
experienced the greatest decreases in employment in Massachusetts, with more
modest declines taking place in the government, finance, insurance and real
estate, and service sectors. From 1990 to November of 1994, manufacturing
employment in Massachusetts declined by some 15.5%. At the same time, there
has occurred a reversal of the dramatic growth which occurred during the
1980's in the finance, insurance and real estate sector and in the
construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction agenda
which is expected not only to improve mobility, but to provide a substantial
number of construction and related employment opportunities, including the six
billion dollar Central Artery/Tunnel project involving the construction of a
third tunnel under Boston Harbor linking the MassPike and downtown Boston with
Logan International Airport, and the depression into tunnels of the Central
Artery that traverses the City of Boston. Federal funds are expected to cover
approximately 90% of the cost of this project. The Central Artery/Tunnel
project is expected to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the mid-1990's.
State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories--Medicaid,
debt service, public assistance, group health insurance and transit
subsidies--grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall combined
with steadily escalating costs contributed to serious budgetary and financial
difficulties which have affected the credit standing and borrowing abilities
of Massachusetts and certain of its public bodies and municipalities, and
which may have contributed to higher interest rates on debt obligations issued
by them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budgeted program expenditures for fiscal 1992 and fiscal 1993 and fiscal 1994
have moderated these difficulties, and the Commonwealth has shown significant
surpluses of revenues and other sources over expenditures and other uses in
the Commonwealth's budgeted operating funds for those years. Notwithstanding
these actions, a worsening of the present and its effect on the financial
condition of the Commonwealth and its public authorities and municipalities
could result in a decline in the market values of, or default on existing
obligations including the Bonds deposited in the Massachusetts Trust.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Massachusetts Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Massachusetts Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust, Special Counsel to
each Massachusetts Trust for Massachusetts tax matters rendered an opinion
under then existing Massachusetts income tax law applicable to taxpayers whose
income is subject to Massachusetts income taxation substantially to the effect
that:
(1)For Massachusetts income tax purposes, the Massachusetts Trust will be
treated as a corporate trust under Section 8 of Chapter 62 of the
Massachusetts General Laws and not as a grantor trust under Section 10(e) of
Chapter 62 of the Massachusetts General Laws.
(2)The Massachusetts Trust will not be held to be engaging in business in
Massachusetts within the meaning of said Section 8 and will, therefore, not be
subject to Massachusetts income tax.
(3)Massachusetts Unitholders who are subject to Massachusetts income taxation
under Chapter 62 of Massachusetts General Laws will not be required to include
their respective shares of the earnings of or distributions from the
Massachusetts Trust in their Massachusetts gross income to the extent that
such earnings or distributions represent tax-exempt interest for federal
income tax purposes received by the Massachusetts Trust on obligations issued
by Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States territories or
possessions.
(4)Any proceeds of insurance obtained by the Trustee of the Trust or by the
issuer of a Bond held by the Massachusetts Trust which are paid to
Massachusetts Unitholders and which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Massachusetts gross
income of a Massachusetts Unitholder if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
Bond.
(5)The Massachusetts Trust's capital gains and/or capital losses realized upon
disposition of Bonds held by it will be includable pro rata in the federal
gross income of Massachusetts Unitholders who are subject to Massachusetts
income taxation under Chapter 62 of the Massachusetts General Laws, and such
gains and/or losses will be included as capital gains and/or losses in the
Massachusetts Unitholders' Massachusetts gross income, except where capital
gain is specifically exempted from income taxation under acts authorizing
issuance of said Bonds.
(6)Gains or losses realized upon sale or redemption of Units by Massachusetts
Unitholders who are subject to Massachusetts income taxation under Chapter 62
of the Massachusetts General Laws will be includable in their Massachusetts
gross income.
(7)In determining such gain or loss Massachusetts Unitholders will, to the
same extent required for Federal tax purposes, have to adjust their tax bases
for their Units for accrued interest received, if any, on Bonds delivered to
the Trustee after the Unitholders pay for their Units and for amortization of
premiums, if any, on obligations held by the Massachusetts Trust.
(8)The Units of the Massachusetts Trust are not subject to any property tax
levied by Massachusetts or any political subdivision thereof, nor to any
income tax levied by any such political subdivision. They are includable in
the gross estate of a deceased Massachusetts Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
Michigan Trusts
Investors should be aware that the economy of the State of Michigan has, in
the past, proven to be cyclical, due primarily to the fact that the leading
sector of the State's economy is the manufacturing of durable goods. While the
State's efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable goods
sector has fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable
goods manufacturing still represents a sizable portion of the State's economy.
As a result, any substantial national economic downturn is likely to have an
adverse effect on the economy of the State and on the revenues of the State
and some of its local governmental units.
In May 1986, Moody's Investors Service raised the State's general obligation
bond rating to "A1". In October 1989, Standard & Poor's raised its
rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
General Motors Corporation announced the scheduled closing of several of its
plants in Michigan in 1993 and 1994. Some of these closings have occurred and
some have been deferred. The ultimate impact these closures may have on the
State's revenues and expenditures is not currently known. The impact on the
financial condition of the municipalities in which the plants are located may
be more severe than the impact on the State itself.
In recent years, the State has reported its financial results in accordance
with generally accepted accounting principles. For each of the five fiscal
years ending with the fiscal year ended September 30, 1989, the State reported
positive year-end General Fund balances and positive cash balances in the
combined General Fund/School Aid Fund. For the fiscal years ending September
30, 1990 and 1991, the State reported negative year-end General Fund Balances
of $310.4 million and $169.4 million, respectively, but ended the 1992 fiscal
year with its general fund in balance and ended the 1993 fiscal year with a
small general fund surplus. A positive cash balance in the combined General
Fund/School Aid Fund was recorded at September 30, 1990. In the 1991 through
1993 fiscal years the State experienced deteriorating cash balances which
necessitated short term borrowing and the deferral of certain scheduled cash
payments. The State borrowed $900 million for cash flow purposes in the 1993
fiscal year, which was repaid on September 30, 1993. The State's Budget
Stabilization Fund received a $283 million transfer from the General Fund in
the 1993 State fiscal year, bringing the fund balance to $303 million at
September 30, 1993.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the prior
calendar year. In the event that the State's total revenues exceeds the limit
by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increased the State
sales tax rate from 4% to 6% and placed a cap on property assessment increases
for all property taxes. Concurrent legislation cut the State's income tax rate
from 4.6% to 4.4%, reduced some property taxes and altered local school
funding sources to a combination of property taxes and state revenues, some of
which is provided from other new or increased State taxes. The legislation
also contained other provisions that alter (and, in some cases, may reduce)
the revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted,
investors should be alert to the potential effect of such measures upon the
operations and revenues of Michigan local units of government.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet
debt service requirements upon such bonds. In the 1991 fiscal year, the State
deferred certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact
on the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year, up $34.4 million in
the 1992 fiscal year, $45.5 million in the 1993 fiscal year and $64.6 million
(budgeted) in the 1994 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the
local unit, are payable from property taxes levied without limitation as to
rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of the
local unit for debt service purposes is subject to constitutional, statutory
and charter tax rate limitations. In addition, several major industrial
corporations have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State. If successful,
such challenges could have an adverse impact on the ad valorem tax bases of
such units which could adversely affect their ability to raise funds for
operation and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust for Michigan tax matters rendered an opinion under then
existing Michigan income tax law applicable to taxpayers whose income is
subject to Michigan income taxation substantially to the effect that:
The Michigan Trust and the owners of Units will be treated for purposes of the
Michigan income tax laws and the Single Business Tax in substantially the same
manner as they are for purposes of the Federal income tax laws, as currently
enacted. Accordingly, we have relied upon the opinion of Messrs. Chapman and
Cutler as to the applicability of Federal income tax under the Internal
Revenue Code of 1986 to the Michigan Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan Trust is not
an association taxable as a corporation; the income of the Michigan Trust will
be treated as the income of the Unitholders and be deemed to have been
received by them when received by the Michigan Trust. Interest on the
underlying Bonds which is exempt from tax under these laws when received by
Michigan Trust will retain its status as tax exempt interest to the
Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable event
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells his
Certificate to the extent the transaction constitutes a taxable event for
Federal income tax purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in the same
manner as such cost is established and allocated for Federal income tax
purposes.
Under the Michigan Intangibles Tax, the Michigan Trust is not taxable and the
pro rata ownership of the underlying Bonds, as well as the interest thereon,
will be exempt to the Unitholders to the extent the Michigan Trust consists of
obligations of the State of Michigan or its political subdivisions or
municipalities, or of obligations of possessions of the United States.
The Michigan Single Business Tax replaced the tax on corporate and financial
institution income under the Michigan Income Tax, and the Intangible Tax with
respect to those intangibles of persons subject to the Single Business Tax the
income from which would be considered in computing the Single Business Tax.
Persons are subject to the Single Business Tax only if they are engaged in
"business activity", as defined in the Act. Under the Single Business
Tax, both interest received by the Michigan Trust on the underlying Bonds and
any amount distributed from the Michigan Trust to a Unitholder, if not
included in determining taxable income for Federal income tax purposes, is
also not included in the adjusted tax base upon which the Single Business Tax
is computed, of either the Michigan Trust or the Unitholders. If the Michigan
Trust or the Unitholders have a taxable event for Federal income tax purposes
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unitholder redeems or sells his
Certificate, an amount equal to any gain realized from such taxable event
which was included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual realized
in connection with such event but excluded in computing that individual's
Federal taxable income) will be included in the tax base against which, after
allocation, apportionment and other adjustments, the Single Business Tax is
computed. The tax base will be reduced by an amount equal to any capital loss
realized from such a taxable event, whether or not the capital loss was
deducted in computing Federal taxable income in the year the loss occurred.
Unitholders should consult their tax advisor as to their status under Michigan
law.
Any proceeds paid under an insurance policy issued to the Trustee of the
Trust, or paid under individual policies obtained by issuers of Bonds, which,
when received by the Unitholders, represent maturing interest on defaulted
obligations held by the Trustee, will be excludable from the Michigan income
tax laws and the Single Business Tax if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax is not
premised upon the characterization of such proceeds under the Internal Revenue
Code, the Michigan Department of Treasury should adopt the same approach as
under the Michigan income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for tax
years beginning after December 31, 1986, the federal adjusted gross income,
the computation base for the Michigan Income Tax, of a Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan Trust disposes of a Bond or when the Unitholder redeems or sells a
Unit, to the extent such transaction constitutes a taxable event for Federal
income tax purposes.
Minnesota Trusts
In the early 1980's the State of Minnesota experienced financial difficulties
due to a downturn in the State's economy resulting from the national
recession. As a consequence, the State's revenues were significantly lower
than anticipated in the July 1, 1979 to June 30, 1981 biennium and the July 1,
1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and increased the
State sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local government, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases, revenues of
local governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's reduced its rating
on the State's outstanding general obligation bonds from AAA to AA+ in August
1981 and to AA in March 1982. Moody's Investors Service, Inc. lowered its
rating on the State's outstanding general obligation bonds from Aaa to Aa in
April 1982. The State's economy recovered in the July 1, 1983 to June 30, 1985
biennium, and substantial reductions in the individual income tax were enacted
in 1984 and 1985. Standard & Poor's raised its rating on the State's
outstanding general obligation bonds to AA+ in January 1985. In 1986, 1987,
1991, 1992 and 1993, legislation was required to eliminate projected budget
deficits by raising additional revenue, reducing expenditures, including aids
to political subdivisions and higher education, reducing the State's budget
reserve (cash flow account), imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments. A budget forecast
released by the Minnesota Department of Finance on March 1, 1994 projects a
balanced General Fund at the end of the current biennium, June 30, 1995, plus
an increase in the State's cash flow account from $360 million to $500
million. Total projected expenditures and transfers for the biennium are $17.0
billion. The forecast also projects, however, a shortage of $29.5 million in
the Local Government Trust Fund at June 30, 1995, against total projected
expenditures from the Fund of $1.8 billion for the biennium.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect
to Bonds that are revenue obligations of the issuer and not general
obligations of the State, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability
of the Bonds or the ability of the respective obligors to pay interest on and
principal of the Bonds.
At the time of the closing for each Minnesota Trust, Special Counsel to each
Minnesota Trust for Minnesota tax matters rendered an opinion under then
existing Minnesota income tax law applicable to taxpayers whose income is
subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting of (i)
interest from bonds issued by the State of Minnesota and its political and
governmental subdivisions, municipalities and governmental agencies and
instrumentalities and bonds issued by possessions of the United States which
would be exempt from federal and Minnesota income taxation when paid directly
to an individual, trust or estate (the "Bonds"), (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held by the
Trustee.
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Minnesota that is applicable to individuals, trusts and
estates (the "Minnesota Income Tax"). It should be noted that interest
on the Bonds is subject to tax in the case of corporations subject to the
Minnesota Corporate Franchise Tax or the Corporate Alternative Minimum Tax and
is a factor in the computation of the Minimum Fee applicable to financial
institutions. The opinion set forth below does not address the taxation of
persons other than full time residents of Minnesota.
(1)The Minnesota Trust is not an association taxable as a corporation and each
Unitholder of the Minnesota Trust will be treated as the owner of a pro rata
portion of the Minnesota Trust, and the income of such portion of the
Minnesota Trust will therefore be treated as the income of the Unitholder for
Minnesota Income Tax purposes;
(2)Income on the Bonds which is exempt from the Minnesota Income Tax when
received by a Unitholder of the Minnesota Trust and which would be exempt from
the Minnesota Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the Minnesota Trust and
distributed to such Unitholder;
(3)To the extent that interest on the Bonds, if any, which is includible in
the computation of "alternative minimum taxable income"for federal
income tax purposes, such interest will also be includible in the computation
of "alternative minimum taxable income"for purposes of the Minnesota
Alternative Minimum Tax imposed on individuals, estates and trusts and on
corporations;
(4)Each Unitholder of the Minnesota Trust will recognize gain or loss for
Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Minnesota Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax purposes;
(5)Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable gain
for Minnesota Income Tax purposes when their Units are sold or redeemed for an
amount equal to or less than their original cost;
(6)Proceeds, if any, paid under individual insurance policies obtained by
issuers of Bonds or the Trustee which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Minnesota net income
if, and to the same extent as, such interest would have been so excludible
from Minnesota net income if, and to the same extent as, such interest would
have been so excludible if paid in the normal course by the issuer of the
defaulted obligation provided that, at the time such policies are purchased,
the amounts paid for such policies are reasonable, customary and consistent
with the reasonable expectation that the issuer of the bonds, rather than the
insurer, will pay debt service on the bonds; and
(7)To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is excludible from gross
income for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a and 48 U.S.C. Section 1403, such interest will not be
subject to either the Minnesota Income Tax or the Minnesota alternative
minimum tax imposed on individuals, estates and trusts. It should be noted
that interest relating to Possession Bonds is subject to tax in the case of
corporations subject to the Minnesota Corporate Franchise Tax or the Corporate
Alternative Minimum Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Missouri Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation amendment to
the constitution of the State of Missouri (the "Amendment"). The
Amendment prohibits increases in local taxes, licenses, or fees by political
subdivisions without approval of the voters of such political subdivision. The
Amendment also limits the growth in revenues and expenditures of the State to
the rate of growth in the total personal income of the citizens of Missouri.
The limitation may be exceeded if the General Assembly declares an emergency
by a two-thirds vote.
Although the June 1993 revenue estimate had been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due primarily
to delayed spending for desegregation capital projects. The downward revision
in revenues was considered necessary because of weak economic performance, and
more importantly an economic outlook for the second half of Fiscal Year 1993
which projected slower growth than was anticipated in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri will
be obtained from individual income taxes (53.1%), sales and use taxes (30.0%),
corporate income taxes (5.9%) and county foreign insurance taxes (3.0%). Major
expenditures for Fiscal Year 1994 include elementary and secondary education
(30.6%), human services (25.4%), higher education (14.8%) and desegregation
(8.9%).
The Fiscal Year 1994 budget balances resources and obligations based on the
consensus revenue and refund estimate and an opening balance resulting from
continued withholdings and delayed spending for desegregation capital
projects. The total general revenue operating budget for Fiscal Year 1994
exclusive of desegregation is $3,844.6 million. The court-ordered
desegregation estimate in $377.7 million, an increase of $30.7 million over
the revised Fiscal Year 1993 estimate.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade had offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the United
States Bureau of Labor Statistics, the 1992 unemployment rate in Missouri was
5.7% and the 1993 rate was 6.4%. Although not strictly comparable, the
preliminary seasonally adjusted rate for May of 1994 was 5.0%. There can be no
assurance that the general economic conditions or the financial circumstances
of Missouri or its political subdivisions will not adversely affect the market
value of the Bonds or the ability of the obligor to pay debt service on such
Bonds.
Currently, Moody's Investors Service rates Missouri general obligation bonds
"Aaa"and Standard & Poor's rates Missouri general obligation bonds
"AAA". Although these ratings indicate that the State of Missouri is
in relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay interest
on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "
Missouri Bonds") or by the Commonwealth of Puerto Rico, Guam and the
United States Virgin Islands (the "Possession Bonds") (collectively,
the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for Federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income
tax applicable to individuals and corporations ("Missouri state income
tax"). The opinion set forth below does not address the taxation of
persons other than full time residents of Missouri.
(1)The Missouri Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Missouri Trust will
be treated as the owner of a pro rata portion of the Missouri Trust and the
income of such portion of the Missouri Trust will be treated as the income of
the Unitholder for Missouri state income tax purposes.
(2)Interest paid and original issue discount, if any, on the Bonds which would
be exempt from the Missouri state income tax if received directly by a
Unitholder will be exempt from the Missouri state income tax when received by
the Missouri Trust and distributed to such Unitholder; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed
to Unitholders under any other tax imposed pursuant to Missouri law, including
but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(3)To the extent that interest paid and original issue discount, if any,
derived from the Missouri Trust by a Unitholder with respect to Possession
Bonds is excludable from gross income for Federal income tax purposes pursuant
to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a, and 48 U.S.C. Section 1403,
such interest paid and original issue discount, if any, will not be subject to
the Missouri state income tax; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if any, on
the Bonds received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not limited to
the franchise tax imposed on financial institutions pursuant to Chapter 148 of
the Missouri Statutes.
(4)Each Unitholder of the Missouri Trust will recognize gain or loss for
Missouri state income tax purposes if the Trustee disposes of a bond (whether
by redemption, sale, or otherwise) or if the Unitholder redeems or sells Units
of the Missouri Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an amount
equal to their original cost.
(5)Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
Federal income tax purposes will be excludable from the Missouri state income
tax to the same extent as such interest would have been paid by the issuer of
such Bonds held by the Missouri Trust; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if any, on
the Bonds received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not limited to
the franchise tax imposed on financial institutions pursuant to Chapter 148 of
the Missouri Statutes.
(6)The Missouri state income tax does not permit a deduction of interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units
in the Trust, the interest on which is exempt from such Tax.
(7)The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the Bonds
held by the Missouri Trust will not generally be subject to the Kansas City,
Missouri Earnings and Profits Tax or the City of St. Louis Earnings Tax
(except in the case of certain Unitholders, including corporations, otherwise
subject to the St. Louis City Earning
Nebraska Trusts
The assets of the Nebraska Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Nebraska (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Nebraska
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds
to be deposited in and held in the Nebraska Trust. With respect to certain
Nebraska Bonds which may be held by the Nebraska Trust, the opinions of bond
counsel to the issuing authorities for such Bonds have indicated that the
interest on such Bonds is included in computing the Nebraska Alternative
Minimum Tax imposed by Section 77-2715 (2) of the Revised Nebraska Statutes
(the "Nebraska Minimum Tax") (the "Nebraska AMT Bonds"). However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludible from
gross income for Federal income tax purposes, (iii) none of the Bonds (other
than the Nebraska AMT Bonds, if any) are "specified private activity bonds"
the interest on which is included as an item of tax preference in the
computation of the Alternative Minimum Tax for federal income tax purposes,
(iv) interest on the Nebraska Bonds (other than the Nebraska AMT Bonds, if
any), if received directly by a Unitholder, would be exempt from both the
Nebraska income tax, imposed by Section 77-2714 et. seq. of the Revised
Nebraska Statutes (other than the Nebraska Minimum Tax) (the "Nebraska State
Income Tax") and the Nebraska Minimum Tax imposed by Section 77-2715 (2) of
the Revised Nebraska Statutes (the "Nebraska Minimum Tax"), and (v) interest
on the Nebraska AMT Bonds, if any, if received directly by a Unitholder, would
be exempt from the Nebraska State Income Tax. The opinion set forth below does
not address the taxation of persons other than full time residents of Nebraska.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under
existing law as of the date of this prospectus and based upon the assumptions
set forth above:
(1)The Nebraska Trust is not an association taxable as a corporation, each
Unitholder of the Nebraska Trust will be treated as the owner of a pro rata
portion of the Nebraska Trust, and the income of such portion of the Nebraska
Trust will therefore be treated as the income of the Unitholder for both
Nebraska State Income Tax and the Nebraska Minimum Tax purposes;
(2)Interest on the Bonds which is exempt from both the Nebraska State Income
Tax and the Nebraska Minimum Tax when received by the Nebraska Trust, and
which would be exempt from both the Nebraska State Income Tax and the Nebraska
Minimum Tax if received directly by a Unitholder, will retain its status as
exempt from such taxes when received by the Nebraska Trust and distributed to
a Unitholder;
(3)Interest on the Nebraska AMT Bonds, if any, which is exempt from the
Nebraska State Income Tax but is included in the computation of the Nebraska
Minimum Tax when received by the Nebraska Trust, and which would be exempt
from the Nebraska State Income Tax but would be included in the computation of
the Nebraska Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Nebraska State Income Tax but included in the
computation of the Nebraska Minimum Tax when received by the Nebraska Trust
and distributed to a Unitholder;
(4)To the extent that interest derived from the Nebraska Trust by a Unitholder
with respect to the Possession Bonds is excludable from gross income for
Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
either the Nebraska State Income Tax or the Nebraska Minimum Tax;
(5)Each Unitholder of the Nebraska Trust will recognize gain or loss for both
Nebraska State Income Tax and Nebraska Minimum Tax purposes if the Trustee
disposes of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Nebraska Trust to the extent that
such a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes;
(6)The Nebraska State Income Tax does not permit a deduction for interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units
in the Nebraska Trust, the interest on which is exempt from such Tax; and
(7)In the case of a Unitholder subject to the State financial institutions
franchise tax, the income derived by such Unitholder from his pro rata portion
of the Bonds held by the Nebraska Trust may affect the determination of such
Unitholder's maximum franchise tax.
We have not examined any of the Bonds to be deposited and held in the Nebraska
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from either the Nebraska State Income Tax or the Nebraska Minimum
Tax of interest on the Nebraska Bonds if received directly by a Unitholder.
New Jersey Trusts
As described above, the New Jersey Trust consists of a portfolio of Bonds. The
Trust is therefore susceptible to political, economic or regulatory factors
affecting issuers of the Bonds. The following information provides only a
brief summary of some of the complex factors affecting the financial situation
in New Jersey (the "State") and is derived from sources that are
generally available to investors and is believed to be accurate. It is based
in part on information obtained from various State and local agencies in New
Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 people per square mile, it is the most
densely populated of all the states. The state's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
Historically, New Jersey's average per capita income has been well above the
national average, and in 1993 the State ranked second among states in per
capita personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and
1989 employment in New Jersey's manufacturing sector failed to benefit from
the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum. In
the meantime, the prolonged fast growth in the State in the mid 1980s resulted
in a tight labor market situation, which has led to relatively high wages and
housing prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an estimated 6.6%
in November 1994, which is higher than the national average of 5.6% in
November 1994. Economic recovery is likely to be slow and uneven in New
Jersey, with unemployment receding at a correspondingly slow pace, due to the
fact that some sectors may lag due to continued excess capacity. In addition,
employers even in rebounding sectors can be expected to remain cautious about
hiring until they become convinced that improved business will be sustained.
Also, certain firms will continue to merge or downsize to increase
profitability.
Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1993, there was a total authorized bond indebtedness of
approximately $8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.38 billion
was unissued. The appropriation for the debt service obligation on such
outstanding indebtedness was $103.5 million for fiscal year 1994.
New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. At the end of fiscal year 1989,
there was a surplus in the State's general fund (the fund into which all State
revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal year 1990,
there was a surplus in the general fund of $1 million. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus of $760.8 million. It is estimated
that New Jersey closed its fiscal year 1993 with a surplus of $937.4 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the increase
in the State's sales and use tax rate from 6% to 7% and the elimination of
exemptions for certain products and services not previously subject to the
tax, such as telephone calls, paper products (which has since been
reinstated), soaps and detergents, janitorial services, alcoholic beverages
and cigarettes. At the time of enactment, it was projected that these taxes
would raise approximately $1.5 billion in additional revenue. Projections and
estimates of receipts from sales and use taxes, however, have been subject to
variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the form of
an increased state income tax on individuals. At the time of enactment, it was
projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead
rebate program and state assumption of welfare and social services costs.
Projections and estimates of receipts from income taxes, however, have also
been subject to variance in recent fiscal years. Under the legislation, income
tax rates increased from their previous range of 2% to 3.5% to a new range of
2% to 7%, with the higher rates applying to married couples with incomes
exceeding $70,000 who file joint returns, and to individuals filing single
returns with incomes of more than $35,000.
The Florio administration had contended that the income tax package will help
reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion was
proposed to be sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from 7%
to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates will take effect.
On June 30, 1994, Governor Whitman signed the New Jersey Legislature's $15.7
billion budget for Fiscal Year 1995. The balanced budget, which includes $455
million in surplus, is $141 million less than the 1994 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are cases challenging the following: the
formula relating to State aid to public schools, the method by which the State
shares with its counties maintenance recoveries and costs for residents in
State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, various provisions,
and the constitutionality of the Fair Automobile Insurance Reform Act of 1990,
the State's role in a consent order concerning the construction of a resource
facility in Passaic County, actions taken by the New Jersey Bureau of
Securities against an individual, the State's actions regarding alleged
chromium contamination of State-owned property in Hudson County, the issuance
of emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters could have
the potential for either a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure for
these claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds "
Aaa"and "AAA", respectively. On July 3, 1991, however, Standard
and Poor's Corporation downgraded New Jersey general obligation bonds to "
AA+."On June 4, 1992, Standard and Poor's Corporation placed New Jersey
general obligation bonds on CreditWatch with negative implications, citing as
its principal reason for its caution the unexpected denial by the federal
government of New Jersey's request for $450 million in retroactive Medicaid
payments for psychiatric hospitals. These funds were critical to closing a $1
billion gap in the State's $15 billion budget for fiscal year 1992 which ended
on June 30, 1992. Under New Jersey state law, the gap in the budget was
required to be closed before the new budget year began on July 1, 1992.
Standard and Poor's suggested the State could close fiscal 1992's budget gap
and help fill fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. However, on July
27, 1994, Standard and Poor's announced that it was changing the State's
outlook from negative to stable due to a brightening of the State's prospects
as a result of Governor Whitman's effort to trim spending and cut taxes,
coupled with an improving economy. Standard and Poor's reaffirmed its "
AA+"rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aa1,"stating that the reduction
reflected a developing pattern of reliance on nonrecurring measures to achieve
budgetary balance, four years of financial operations marked by revenue
shortfalls and operating deficits, and the likelihood that serious financial
pressures will persist. On August 5, 1994, Moody's reaffirmed its "Aa1"
rating, citing on the positive side New Jersey's broad-based economy, high
income levels, history of maintaining a positive financial position and
moderate (albeit rising) debt ratios, and on the negative side, a continued
reliance on one-time revenue and a dependence on pension-related savings to
achieve budgetary balance.
At the time of the closing for each New Jersey Trust, Special Counsel to each
New Jersey Trust for New Jersey tax matters rendered an opinion under then
existing New Jersey income tax law applicable to taxpayers whose income is
subject to New Jersey income taxation substantially to the effect that:
(1)The New Jersey Trust will be recognized as a trust and not an association
taxable as a corporation. The New Jersey Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation Income Tax.
(2)With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of the New Jersey Trust which is allocable to each such
Unitholder will be treated as the income of such Unitholder under the New
Jersey Gross Income Tax. Interest on the underlying Bonds which would be
exempt from New Jersey Gross Income Tax if directly received by such
Unitholder will retain its status as tax-exempt interest when received by the
New Jersey Trust and distributed to such Unitholder. Any proceeds paid under
the insurance policy issued to the Trustee of the New Jersey Trust with
respect to the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing interest on defaulted obligations held by the Trustee
will be exempt from New Jersey Gross Income Tax if, and to the same extent as,
such interest would have been so exempt if paid by the issuer of the defaulted
obligations.
(3)A non-corporate Unitholder will not be subject to the New Jersey Gross
Income Tax on any gain realized either when the New Jersey Trust disposes of a
Bond (whether by sale, exchange, redemption, or payment at maturity), when the
Unitholder redeems or sells his Units or upon payment of any proceeds under
the insurance policy issued to the Trustee of the New Jersey Trust with
respect to the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by the
Trustee. Any loss realized on such disposition may not be utilized to offset
gains realized by such Unitholder on the disposition of assets the gain on
which is subject to the New Jersey Gross Income Tax.
(4)Units of the New Jersey Trust may be taxable on the death of a Unitholder
under the New Jersey Transfer Inheritance Tax Law or the New Jersey Estate Tax
Law.
(5)If a Unitholder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from the Bonds in
the New Jersey Trust which is allocable to such corporation will be includable
in its entire net income for purposes of the New Jersey Corporation Business
Tax or New Jersey Corporation Income Tax, less any interest expense incurred
to carry such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by such
corporation on the disposition of the Bonds by the New Jersey Trust or on the
disposition of its Units will be included in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax. Any proceeds paid under the insurance policy issued to the Trustee
of the New Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or maturing
principal on defaulted obligations held by the Trustee will be included in its
entire net income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax if, and to the same extent as, such interest
or proceeds would have been so included if paid by the issuer of the defaulted
obligations.
New York Trusts
A resident of New York State (or New York City) will be subject to New York
State (or New York City) personal income tax with respect to gains realized
when New York Obligations held in the New York Trust are sold, redeemed or
paid at maturity or when his Units are sold or redeemed, such gain will equal
the proceeds of sale, redemption or payment less the tax basis of the New York
Obligation or Unit (adjusted to reflect (a) the amortization of premium or
discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at
the time the New York Obligation was issued had original issue discount, and
(c) the deposit of New York Obligations with accrued interest in the Trust
after the Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is not a
resident of New York State (or New York City) will not be subject to New York
State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amounts paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will be
excludable from income for New York State and New York City income tax
purposes, if and to the same extent as, such interest would have been
excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State
and New York City tax purposes. The purchase of Units may be considered to
have been made with borrowed funds even though such funds are not directly
traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued by New York
State (the "State"), by its various public bodies (the "
Agencies"), and/or by other entities located within the State, including
the City of New York (the "City").
Some of the more significant events relating to the financial situation in New
York are summarized below. This section provides only a brief summary of the
complex factors affecting the financial situation in New York and is based in
part on Official Statements issued by, and on other information reported by
the State, the City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued throughout
the State's 1990-91 fiscal year and was followed by a period of weak economic
growth during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow faster
than 1992, but still at a very moderate rate, as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry,
cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approved a $32.08
billion budget. Following enactment of the budget the 1993-94 State Financial
Plan was formulated on April 16, 1993. This Plan projects General Fund
receipts and transfers from other funds at $32.367 billion and disbursements
and transfers to other funds at $32.300 billion. In comparison to the
Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
While a portion of the increased receipts was the result of a $487 million
increase in the State's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 1993-94 State Financial
Plan contains a package of mandate relief, cost containment and other
proposals to reduce the costs of many programs for which local governments
provide funding. There can be no assurance, however, that localities that
suffer cuts will not be adversely affected, leading to further requests for
State financial assistance.
There can be no assurance that the State will not face substantial potential
budget gaps in the future resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions
to align recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit to the
refund reserve account of $671 million, General Fund receipts in 1992-93 would
have been $716 million higher than originally projected. This year-end deposit
effectively reduced 1992-93 receipts by $671 million and made those receipts
available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS") on April 28, 1993. The State does not project the need to
issue additional TRANS during the State's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds
and $140 million in new commercial paper issuances. In addition, the State
expects to issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has authorized the
issuance of up to $85 million in certificates of participation during the
State's 1993-94 fiscal year for personal and real property acquisitions during
the State's 1993-94 fiscal year. The projection of the State regarding its
borrowings for the 1993-94 fiscal year may change if actual receipts fall
short of State projections or if other circumstances require.
In June 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation"("LGAC"), a public benefit
corporation empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's annual seasonal
borrowing. To date, LGAC has issued its bonds to provide net proceeds of $3.28
billion. LGAC has been authorized to issue additional bonds to provide net
proceeds of $703 million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April 23,
1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993, an
improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having been A1
since May 27, 1986. S&P lowered its rating from A to A- on January 13, 1992.
S&P's previous ratings were A from March 1990 to January 1992, AA- from August
1987 to March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board") to
review and approve the City's budgets and City four-year financial plans (the
financial plans also apply to certain City-related public agencies (the "
Covered Organizations").
In February 1975, the New York State Urban Development Corporation ("
UDC"), which had approximately $1 billion of outstanding debt, defaulted
on certain of its short-term notes. Shortly after the UDC default, the City
entered a period of financial crisis. Both the State Legislature and the
United States Congress enacted legislation in response to this crisis. During
1975, the State Legislature (i) created MAC to assist with long-term financing
for the City's short-term debt and other cash requirements and (ii) created
the State Financial Control Board (the "Control Board") to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations")).
Over the past three years, the rate of economic growth in the City has slowed
substantially, and the City's economy is currently in recession. The City
projects, and its current four-year financial plan assumes, a recovery early
in the 1993 calendar year. The Mayor is responsible for preparing the City's
four-year financial plan, including the City's current financial plan. The
City Comptroller has issued reports concluding that the recession of the
City's economy will be more severe and last longer than is assumed in the
financial plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close
substantial budget gaps in its 1990, 1991 and 1992 fiscal years in order to
maintain balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of the
State Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make progress
towards establishing a balanced budget process. The Control Board's report
identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and
$2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-1994 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on "recurring revenues that fund recurring
expenditures."Given the foregoing factors, there can be no assurance that
the City will continue to maintain a balanced budget, or that it can maintain
a balanced budget without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's economic
base.
Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the occurrence
of an annual operating deficit of more than $100 million or the loss of access
to the public credit markets to satisfy the City's capital and seasonal
financial requirements, the Control Board would be required by State law to
exercise certain powers, including prior approval of City financial plans,
proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. As a result of the national and
regional economic recession, the State's projections of tax revenues for its
1991 and 1992 fiscal years were substantially reduced. For its 1993 fiscal
year, the State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992 reported a potential
budget deficit of $4.8 billion. If the State experiences revenue shortfalls or
spending increases beyond its projections during its 1993 fiscal year or
subsequent years, such developments could also result in reductions in
projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow
and additional City expenditures as a result of such delays.
The City's projections set forth in its financial plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor or the
State Legislature and the cooperation of MAC with respect to various other
actions proposed in such financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to reimburse
the City's general fund for capital expenditures already incurred. In
addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public bond
and note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs and
other issues may affect the market for outstanding City general obligation
bonds and notes. If the City were unable to sell its general obligation bonds
and notes, it would be prevented from meeting its planned operating and
capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the State
Deputy Comptroller for the City of New York (the "OSDC") and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and
future expenditures may be greater than those forecast in the financial plan.
In addition, the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet
the costs of its expenditure increases and to provide necessary services. It
is reasonable to expect that such reports and statements will continue to be
issued and to engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating results
as reported in accordance with GAAP for the 1992 fiscal year. During the 1990
and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines in City revenue sources and increased public assistance
needs due to the recession. Such actions included $822 million of tax
increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification") projected a
balanced budget in accordance with GAAP for the 1992 fiscal year after taking
into account a discretionary transfer of $455 million to the 1993 fiscal year
as the result of a 1992 fiscal year surplus. In order to achieve a balanced
budget for the 1992 fiscal year, during the 1991 fiscal year, the City
proposed various actions for the 1992 fiscal year to close a projected gap of
$3.3 billion in the 1992 fiscal year.
On November 19, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The
1993-1996 Financial Plan projects revenues and expenditures of $29.9 billion
each for the 1993 fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for fiscal
years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other actions
to decrease expenditures or increase revenues to maintain a balanced financial
plan.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted against
the City arising out of alleged constitutional violations, torts, breaches of
contracts, and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the proceedings and claims are
not currently predictable, adverse determinations in certain of them might
have a material adverse effect upon the City's ability to carry out its
financial plan. As of June 30, 1992, legal claims in excess of $341 billion
were outstanding against the City for which the City estimated its potential
future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baa1 and S&P's rating stood at A-. On February 11,
1991, Moody's had lowered its rating from A.
On March 30, 1993, in confirming its Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year
budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget is
offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy
is broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New York City's
single-'A-' rating.
Previously, Moody's had raised its rating to A in May, 1988, to Baa1 in
December, 1985, to Baa in November, 1983 and to Ba1 in November, 1981. S&P had
raised its rating to A- in November, 1987, to BBB+ in July, 1985 and to BBB in
March, 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25
billion in notes then being sold. On April 29, 1991, S&P revised downward its
rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial difficulties
which could adversely affect the ability of such Agencies to make payments of
interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under so-called "
moral obligation"provisions which are non-binding statutory provisions
for State appropriations to maintain various debt service reserve funds) to
appropriate funds on behalf of the Agencies. Moreover, it is expected that the
problems faced by these Agencies will continue and will require increasing
amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur,
would be likely to have a significant adverse effect on investor confidence
in, and therefore the market price of, obligations of the defaulting Agencies.
In addition, any default in payment on any general obligation of any Agency
whose bonds contain a moral obligation provision could constitute a failure of
certain conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen Agencies
that each had outstanding debt of $100 million or more. These eighteen
Agencies had an aggregate of $62.2 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of
significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the
future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages in an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"
), petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised
1992-1993 State Financial Plan and the recommended 1993-94 State Financial
Plan includes a significant reduction in State aid to localities in such
programs as revenue sharing and aid to education from projected base-line
growth in such programs. It is expected that such reductions will result in
the need for localities to reduce their spending or increase their revenues.
The potential impact on the State of such actions by localities is not
included in projections of State receipts and expenditures in the State's
1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board
is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1991, the total indebtedness of all localities in the
State was approximately $31.6 billion, of which $16.8 billion was debt of New
York City (excluding $6.7 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Fifteen localities had outstanding indebtedness for state
financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, New York City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State, including notes or bonds in the New York Trust, could be adversely
affected. Localities also face anticipated and potential problems resulting
from certain pending litigation, judicial decisions, and long-range economic
trends. The longer-range potential problems of declining urban population,
increasing expenditures, and other economic trends could adversely affect
localities and require increasing State assistance in the future.
At the time of the closing for each New York Trust, Special Counsel to each
New York Trust for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be subject to New
York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
North Carolina Trust
The portions of the following discussion regarding the financial condition of
the State government may not be relevant to general obligation or revenue
bonds issued by political subdivisions of the State. Those portions and the
sections which follow regarding the economy of the State, are included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of the North Carolina obligations.
General obligations of a city, town or county in North Carolina are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds"
which are essentially non-governmental debt issues and which are payable
exclusively by private entities such as non-profit organizations and business
concerns of all sizes. State and local governments have no obligation to
provide for payment of such private activity bonds and in many cases would be
legally prohibited from doing so. The value of such private activity bonds may
be affected by a wide variety of factors relevant to particular localities or
industries, including economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself
of the provisions of Chapter 9 of the United States Bankruptcy Code, but only
with the consent of the Local Government Commission of the State and of the
holders of such percentage or percentages of the indebtedness of the issuer as
may be required by the Bankruptcy Code (if any such consent is required).
Thus, although limitations apply, in certain circumstances political
subdivisions might be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution requires that
the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the
surplus remaining in the State Treasury at the beginning of the period. The
State's fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections. The
General Assembly responded by enacting a number of new taxes and fees to
generate additional revenue and reduced allowable departmental operating
expenditures and continuation funding. The spending reductions were based on
recommendations from the Governor, the Government Performance Audit Committee
and selected reductions identified by the General Assembly.
The State, like the nation, has experienced economic recovery since 1991.
Apparently due to both increased tax and fee revenue and the previously
enacted spending reductions, the State had a budget surplus of approximately
$887 million at the end of fiscal 1993-94. After review of the 1994-95
continuation budget adopted in 1993, the General Assembly approved spending
expansion funds, in part to restore certain employee salaries to budgeted
levels, which amounts had been deferred to balance the budgets in 1989-1993,
and to authorize funding for new initiatives for economic development,
education, human services and environmental programs. (The cutback in funding
for infrastructure and social development projects had been cited by agencies
rating State obligations, following the 1991 reductions, as cause for concern
about the long-term consequences of those reductions on the economy of the
State and the State's fiscal prospects).
Based on projected growth in State tax and fee revenues, the General Fund
balance forecast for the end of the 1994-95 fiscal year is approximately $310
million.
It is unclear what effect these developments at the State level may have on
the value of the Debt Obligations in the North Carolina Trust.
The State is subject to claims by classes of plaintiffs asserting a right to a
refund of taxes paid under State statutes that allegedly discriminated against
federal retirees and armed services personnel in a manner that was
unconstitutional based on the decision by the United States Supreme Court in a
1989 Michigan case involving a similar law, Davis v. Michigan Department of
Treasury ("Davis"). At the time of that decision, State income tax law
exempted retirement income paid by North Carolina State and local governments
but did not exempt retirement income paid by the federal government to its
former employees. Also, State tax law at the time provided a deduction for
certain income earned by members of the North Carolina National Guard, but did
not provide a similar deduction for members of the federal armed services.
Following the Davis decision the North Carolina legislature amended the tax
laws to provide identical retirement income exclusions for former state and
federal employees (effective for 1989), and repealed the deduction given to
members of the State National Guard. In addition, the amendments authorized a
special tax credit for federal retirees equal to the taxes paid on their
nonexcluded federal pensions in 1988 (to be taken over a three year period
beginning with returns for 1990).
Subsequent to Davis, the North Carolina plaintiffs brought an action in
federal court against the North Carolina Department of Revenue and certain
officials of the State alleging that the collection of the taxes under the
prior North Carolina tax statutes was prohibited by the state and federal
constitutions, and also violated civil rights protections under 42 U.S.C. \xa4
1983, a federal statute prohibiting discriminatory taxation of the
compensation of certain federal employees (4 U.S.C. \xa4 111), and the
principle of intergovernmental tax immunity. The plaintiffs sought injunctive
relief requiring the State to provide refunds of the illegally collected taxes
paid on federal retirement or military pay for the years 1985-88 (covering the
asserted 3 year limitations period), plus interest. Swanson, et al. v. Powers,
et al. (United States District Court for the Eastern District of North
Carolina, No. 89-282-CIV-5-H) ("Swanson Federal"). The individual
plaintiffs in Swanson Federal also brought an action in North Carolina state
court seeking refunds of the illegal taxes. Swanson, et al. v. State of North
Carolina, et al. (Wake County, North Carolina Superior Court, No. 90 CVS 3127)
("Swanson State").
The amounts claimed by federal retirees in the Swanson actions have not been
precisely calculated. Plaintiffs have asserted that the plaintiff class
contains about 100,000 taxpayers; the State estimated that as of June 30,
1994, the claims (including interest) would then aggregate approximately $280
million.
In 1991, the North Carolina Supreme Court in Swanson State affirmed a decision
in favor of the State, holding that the U.S. Supreme Court decision in Davis
was not to have retroactive effect. Review was granted by the United States
supreme Court and the case subsequently was remanded to the North Carolina
Supreme Court for reconsideration in light of the U.S. Supreme Court's 1993
holding in Harper v. Virginia Dept. of Taxation ("Harper"). In Harper,
which also involved the disparate income tax treatment of retired state and
federal employees and the question of retroactive application of Davis, the
U.S. Supreme Court held that the Commonwealth of Virginia must provide "
meaningful backward-looking relief"to the plaintiffs if the Commonwealth
did not have a predeprivation process adequate to satisfy due process
requirements. Harper was remanded to the Supreme Court of Virginia to
determine whether a remedy was required and, if so, what form it would take.
Similarly, Swanson State was remanded for reconsideration of whether the North
Carolina tax laws satisfied the due process requirements of the federal
constitution and, if not, what remedy was to be provided by the State.
On remand, the North Carolina Supreme Court held in early 1994 that the
plaintiffs in Swanson State were procedurally barred from recovering refunds
because they did not comply with the State's statutory postpayment refund
demand procedure. The plaintiffs contended unsuccessfully that the postpayment
demand requirement did not meet the requirements of the federal constitution,
in light of the Harper decision, for "meaningful backward-looking
relief". Plaintiffs in Swanson State have petitioned the U.S. Supreme
Court for review of the most recent North Carolina Supreme Court decision.
Following Harper, the plaintiffs in Swanson Federal again requested an
injunction requiring refunds. (Although the federal and state cases are
independent, the refund claims apparently would lead to only a single recovery
of taxes deemed unlawfully collected.) In May 1994, the U.S. District Court
granted the State's motion to dismiss all but one claim made by the
plaintiffs, declaring that those claims were precluded by the 1994 North
Carolina Supreme Court decision in Swanson State. Plaintiffs in Swanson
Federal asserted that relief should have been granted because of the effect of
the federal District Court's 1990 opinion in Swanson Federal denying the
defendants' motion that the federal Tax Injunction Act precluded the
plaintiffs' claims, in which the court found that the statutory post-payment
remedy for refund of unlawful taxes was no "plain, speedy and
efficient", as required by that law, Swanson Federal, 1990 WL 545, 761
(E.D.N.C.), rev'd, 937 F.2d 965 (1991), cert. denied, U.S., 112 S. Ct. 871
(1992). In its May 1994 decision, the federal court rejected that assertion
and held that its finding regarding the federal Tax Injunction Act was
jurisdictional only and was not a determination that the statutory remedy
violated the due process clause.
The plaintiffs' claim that was not dismissed with prejudice in the recent
District Court order asserts that the State continued an unlawful
discrimination, contrary to the requirements of 4 U.S.C. \xa4 111 and the
doctrine of intergovernmental tax immunity, by increasing benefits to State
retirees (in order to offset the effect of the deletion of the preferential
State retirement income exemption) as part of the bill that equalized the
income exclusion of State and federal retirement payments. The claim is based
on a holding of similar effect in Sheehy v. Public Employees Retirement Div.,
864 P. 2d 762 (Mont. 1993). In its May 1994 order, the District Court allowed
the plaintiffs to dismiss the Sheehy claim without prejudice. Therefore,
plaintiffs could assert those claims in another action; apparently, the relief
would require providing federal retirees with tax refunds or other payments
equal to the allegedly discriminatory payments made to State retirees since
1989.The court noted that those claims will be subject to the statutory
post-deprivation procedural requirements, and that a challenge to the legality
of the remedial statute would be precluded under the scope of the court's
order dismissing the other claims. However, the court granted plaintiffs'
motion to dismiss the Sheehy claims without prejudice because the record did
not show whether the plaintiffs had complied with statutory requirements. The
plaintiffs in Swanson State have appealed the District Court decision to the
United States Court of Appeals.
Several states involved in similar suits have reached settlements.
Expressions of interest in settlement of the claims in Swanson by both the
plaintiffs and State officials have been reported in the press, but no
prediction can be made of the likelihood or amount of settlement. Although the
recent improvements in the economy and fiscal condition of the State might
better enable the State to satisfy an adverse decision without significant
consequences to the State's fiscal condition or governmental functions,
because the amount of the potential liability has not been fixed and because
of the potential that adverse fiscal or economic developments could cause a
more negative result on the State if a large amount must be paid, no assurance
can be given that the impact of the Swanson cases, if the plaintiffs
ultimately succeed, will not have an adverse impact on the Debt Obligations.
State and local government retirees also filed a class action suit in
1990 as a result of the repeal of the income tax exemptions for state and
local government retirement benefits. The original suit was dismissed after
the North Carolina Supreme Court ruled in 1991 that the plaintiffs had failed
to comply with state law requirements for challenging unconstitutional taxes
and the United States Supreme Court denied review. In 1992, many of the same
plaintiffs filed a new lawsuit alleging essentially the same claims, including
breach of contract, unconstitutional impairment of contract rights by the
State in taxing benefits that were allegedly promised to be tax-exempt and
violation of several state constitutional provisions. The North Carolina
Attorney General's office estimates that the amount in controversy is
approximately $40-45 million annually for the tax years 1989 through 1992. The
case is now pending in state court.
Other litigation against the State include the following. None of the cases,
in the reported opinion of the Department of the Treasurer, would have a
material adverse affect on the State's ability to meet its obligations.
Leandro et al. v. State of North Carolina and State Board of Education - In
May, 1994 students and boards of education in five counties in the State filed
suit in state court requesting a declaration that the public education system
of North Carolina, including its system of funding, violates the State
constitution by failing to provide adequate or substantially equal educational
opportunities and denying due process of law and violates various statutes
relating to public education. The suit is similar to a number of suits in
other states, some of which resulted in holdings that the respective systems
of public education funding were unconstitutional under the applicable state
law. The defendants in such suit have filed a motion to dismiss, but no answer
to the complaint, and no pretrial discovery has taken place.
Francisco Case - In August, 1994 a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and
has failed to supervise local school systems in administering programs for
them. The complaint does not allege an amount in controversy, but asks the
Court to order the defendants to fund a comprehensive program to ensure equal
educational opportunities for children with limited English proficiency.
Faulkenburg v. Teachers' and State Employees' Retirement System, Peeve v.
Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System - Plaintiffs are disability retirees
who brought class actions in state court challenging changes in the formula
for payment of disability retirement benefits and claiming impairment of
contract rights, breach of fiduciary duty, violation of other federal
constitutional rights, and violation of state constitutional and statutory
rights. The State estimates that the cost in damages and higher prospective
benefit payments to plaintiffs and class members would probably amount to $50
million or more in Faulkenburg, $50 million or more in Peele, and $15 million
or more in Woodward, all ultimately payable, at least initially, from the
retirement system funds. Upon review in Faulkenburg, the North Carolina Court
of Appeals and Supreme Court have held that claims made in Faulkenburg
substantially similar to those in Peele and Woodward, for breach of fiduciary
duty and violation of federal constitutional rights brought under the federal
Civil Rights Act either do not state a cause of action or are otherwise barred
by the statute of limitations. In 1994 plaintiffs took voluntary dismissals of
their claims for impairment of contract rights in violation of the United
States Constitution and filed new actions in federal court asserting the same
claims along with claims for violation of constitutional rights in the
taxation of retirement benefits. The remaining state court claims in all cases
are scheduled to be heard in North Carolina in October, 1994.
Fulton Case - The State's intangible personal property tax levied on certain
shares of stock has been challenged by the plaintiff on grounds that it
violates the Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all or part of
their business outside the State. The plaintiff in the action is a North
Carolina corporation that does all or part of its business outside the State.
The plaintiff seeks to invalidate the tax in its entirety and to recover tax
paid on the value of its shares in other corporations. The North Carolina
Court of Appeals invalidated the taxable percentage deduction and excised it
from the statute beginning with the 1994 tax year. The effect of this ruling
is to increase collections by rendering all stock taxable on 100% of its
value. The State and the plaintiff have sought further appellate review, and
the case is pending before the North Carolina Supreme Court. Net collections
from the tax for the fiscal year ended June 30, 1993 amounted to $120.6
million.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,647,351 as reported by the 1990 federal census and the State
rose from twelfth to tenth in population. The State's estimate of population
as of June 30, 1994 is 7,023,663. Notwithstanding its rank in population size,
North Carolina is primarily a rural state, having only five municipalities
with populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
State has moved from an agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1993, the State labor force grew about 25% (from 2,855,200 to
3,556,000). Per capita income during the period 1980 to 1993 grew from $7,999
to $18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June 1994, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1989, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories.
<TABLE>
<CAPTION>
Category (All Seasonally Adjusted) June 1989 June 1990 June 1991 June 1992 June 1993
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,286,000 3,312,000 3,228,000 3,495,000 3,504,000
Nonagricultural Employment 3,088,000 3,129,000 3,059,000 3,135,000 3,203,400
Goods Producing Occupations (mining,
construction and manufacturing) 1,042,200 1,023,100 973,600 980,800 993,600
Service Occupations 2,045,800 2,106,300 2,085,400 2,154,200 2,209,800
Wholesale/Retail Occupations 713,900 732,500 704,100 715,100 723,200
Government Employees 482,200 496,400 496,700 513,400 515,400
Miscellaneous Services 563,900 587,300 596,300 638,300 676,900
Agricultural Employment 54,900 58,900 88,700 102,800 88,400
</TABLE>
The seasonally adjusted unemployment rate in June 1994 was estimated to be
3.7% of the labor force (down from 5.4% in June 1993), as compared with an
unemployment rate of 6.0% nationwide (down from 7.0% in June 1993).
As of 1993, the State was tenth in the nation in gross agricultural income of
which nearly the entire amount (approximately $5.3 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1993, the
State ranked first in the nation in the production of flue-cured tobacco,
total tobacco, turkeys and sweet potatoes; second in the value of poultry and
eggs, hog production, trout and the production of cucumbers for pickles;
fourth in commercial broilers, blueberries and peanuts; sixth in burley
tobacco and net farm income.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production is the leading source of agricultural income in the State,
accounting for 20% of gross agricultural income. Tobacco farming in North
Carolina has been and is expected to continue to be affected by major Federal
legislation and regulatory measures regarding tobacco production and marketing
and by international competition. Measures adverse to tobacco farming could
have negative effects on farm income and the North Carolina economy generally.
The poultry industry provides nearly 34% of gross agricultural income. The
pork industry has been expanding and accounted for 17% of gross agricultural
income in 1993.
The number of farms has been decreasing; in 1993 there were approximately
59,000 farms in the State (down from approximately 72,000 in 1987, a decrease
of about 18% in six years). However, a strong agribusiness sector also
supports farmers with farm inputs (fertilizer, insecticide, pesticide and farm
machinery) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing).
The State Department of Commerce, Travel and Tourism Division reports that in
1993 more than $8 billion was spent on tourism in the State. The Department
estimates that two-thirds of total expenditures came from out-of-state
travelers, and that approximately 250,000 people were employed in
tourism-related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation bonds
as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's also
reaffirmed its stable outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects the State's
strong economic characteristics, sound financial performance, and low debt
levels.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and statements by, or news reports of statements by State officials
and employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any matters contained in this
Prospectus other than the tax opinions set forth below under North Carolina
Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel to
each North Carolina Trust for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers
whose income is subject to North Carolina income taxation substantially to the
effect that.
Upon the establishing of the North Carolina Trust and the Units thereunder:
(1)The North Carolina Trust is not an "association"taxable as a
corporation under North Carolina law with the result that income of the North
Carolina Trust will be deemed to be income of the Unitholders.
(2)Interest on the Bonds that is exempt from North Carolina income tax when
received by the North Carolina Trust will retain its tax-exempt status when
received by the Unitholders.
(3)Unitholders will realize a taxable event when the North Carolina Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when a Unitholder redeems or sells his Units (or any of them),
and taxable gains for Federal income tax purposes may result in gain taxable
as ordinary income for North Carolina income tax purposes. However, when a
Bond has been issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit made from the
sale thereof, shall be free from all taxation by the State of North Carolina,
any such profit received by the North Carolina Trust will retain its
tax-exempt status in the hands of the Unitholders.
(4)Unitholders must amortize their proportionate shares of any premium on a
Bond. Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against gross
income for the year.
(5)The Units are exempt from the North Carolina tax on intangible personal
property so long as the corpus of the North Carolina Trust remains composed
entirely of Bonds or, pending distribution, amounts received on the sale,
redemption or maturity of the Bonds and the Trustee periodically supplies to
the North Carolina Department of Revenue at such times as required by the
Department of Revenue a complete description of the North Carolina Trust and
also the name, description and value of the obligations held in the corpus of
the North Carolina Trust.
The opinion of Hunton & Williams is based, in part, on the opinion of Chapman
and Cutler regarding Federal tax status.
Ohio Trusts
The Ohio will invest most of its net assets in securities issued by or on
behalf of (or in certificates of participation in lease-purchase obligations
of) the State of Ohio, political subdivisions of the State, or agencies or
instrumentalities of the State or its political subdivisions ("Ohio
Obligations"). The Ohio is therefore susceptible to general or particular
political, economic or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary of
some of the many complex factors that may have an effect. The information does
not apply to "conduit"obligations on which the public issuer itself
has no financial responsibility. This information is derived from official
statements of certain Ohio issuers published in connection with their issuance
of securities and from other publicly available information, and is believed
to be accurate. No independent verification has been made of any of the
following information.
Generally, creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary,
and is not intended as a discussion of any specific factors that may affect
any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by bond insurance purchased by the issuers, the Ohio or other
parties. Ohio Obligations may not be subject to the factors referred to in
this section of the Prospectus.
Ohio is the seventh most populous state; the 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1993
is 11,091,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products
and household appliances. As a result, general economic activity, as in many
other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However,
for the last four years the State rates were below the national rates (6.5%
versus 6.8% in 1993). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund ("GRF"
), for which personal income and sales-use taxes are the major sources. Growth
and depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF", a cash
and budgetary management fund). In the next two fiscal years, necessary
corrective steps were taken to respond to lower receipts and higher
expenditures in certain categories than earlier estimated. Those steps
included, selected reductions in appropriations spending and the transfer of
$64 million from the BSF to the GRF. Reported June 30, 1991 ending fund
balances were $135.3 million (GRF) and $300 million (BSF).
To allow time to resolve certain budget differences for the latest complete
biennium, an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium, passed on
July 11, 1991, $200 million was transferred from the BSF to the GRF in FY
1992.
Based on updated results and forecasts in the course of FY 1992, both in light
of a continuing uncertain nationwide economic situation, there was projected
and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales, use and
personal income taxes. Higher expenditure levels came in certain areas,
particularly human services including Medicaid. The Governor ordered most
State agencies to reduce GRF spending in the last six months of FY 1992 by a
total of approximately $184 million. As authorized by the General Assembly the
$100.4 million BSF balance, and additional amounts from certain other funds
were transferred late in the FY to the GRF, and adjustments made in the timing
of certain tax payments. Other administrative revenue and spending actions
resolved the remaining imbalance.
A significant GRF shortfall (approximately $520 million) was then projected
for the next year, FY 1993. It was addressed by appropriate legislative and
administrative actions. The Governor ordered, effective July 1, 1992, $300
million in selected GRF spending reductions. Subsequent executive and
legislative action in December 1992--a combination of tax revisions and
additional spending reductions--resulted in a balance of GRF resources and
expenditures for the 1992-93 biennium. The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF. (Based on June 30, 1994
balances, an additional $260 million has been deposited in the BSF, which has
a current balance of $281 million.)
No spending reductions were applied to appropriations needed for debt service
on or lease rentals relating to any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It included all necessary GRF
appropriations for State debt service and lease rental payments then projected
for the biennium.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt and the pledge to taxes or excises to
its payment. At January 25, 1995, $794.4 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding
or awaiting delivery. The only such State debt then still authorized to be
incurred are portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($38.9 million outstanding); (b) $360 million of obligations
authorized for local infrastructure improvements, no more than $120 million of
which may be issued in any calendar year ($728 million outstanding or awaiting
delivery); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time (no more than $50 million to be issued in any one year).
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building
Authority, and certain obligations issued by the State Treasurer, over $4.5
billion of which were outstanding or awaiting delivery at January 25, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has
never been implemented, apart from a "guarantee fund"approach funded
especially from program revenues.)
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt"within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued)
are limited in duration to the agency's fiscal period, and are renewable only
upon appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
in the range of 46% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 107 districts
from voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial court recently
concluded that aspects of the system (including basic operating assistance)
are unconstitutional and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State has appealed. A small number
of the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion
of State subsidy distributions to repayment if needed. Borrowings under this
program totalled $68.6 million for 44 districts (including $46.6 million for
one district) in FY 1992,. $94.5 million for 27 districts (including $75
million for one) in FY 1993, and $15.6 million for 28 districts in FY 1994.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed
valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
Commencing in 1985, Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to
income taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Council to each Ohio
Trust for Ohio tax matters rendered an opinion under then existing Ohio income
tax law applicable to taxpayers whose income is subject to Ohio income
taxation substantially to the effect that:
The Ohio Trust is not taxable as a corporation or otherwise for purposes of
the Ohio personal income tax, school district income taxes in Ohio, the Ohio
corporation franchise tax, or the Ohio dealers in intangibles tax.
Distributions with respect to Units of the Ohio Trust ("Distributions"
) will be treated as the income of the Unitholders for purposes of the Ohio
personal income tax, and school district and municipal income taxes in Ohio
and the Ohio corporation franchise tax in proportion to the respective
interest therein of each Unitholder.
Distributions properly attributable to interest on obligations issued by or on
behalf of the State of Ohio, political subdivisions thereof, or agencies or
instrumentalities thereof ("Ohio Obligations"), or by the governments
of Puerto Rico, the Virgin Islands or Guam ("Territorial Obligations")
held by the Trust are exempt from the Ohio personal income tax, school
district and municipal income taxes, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed distributed
to Unitholders.
Distributions properly attributable to proceeds of insurance paid to the Ohio
Trust that represent maturing or matured interest on defaulted obligations
held by the Ohio Trust and that are excluded from gross income for federal
income tax purposes will be exempt from Ohio personal income tax, and school
district and municipal income taxes in Ohio and the net income base of the
Ohio corporation franchise tax.
Distributions of profit made on the sale, exchange or other disposition by the
Ohio Trust of Ohio Obligations including Distributions of "capital gain
dividends"as defined in Section 852(b)(3)(C) of the Code, properly
attributable to the sale, exchange or other disposition of Ohio Obligations
are exempt from Ohio personal income tax, and school district and municipal
income taxes in Ohio, and are excluded from the net income base of the Ohio
corporation franchise tax
Oregon Trusts
Oregon's nonagricultural employment growth in 1988 exceeded the United States'
rate for the third consecutive year. While the decade of 1970 to 1980 marked a
time of rapid growth, the early years of the 1980s were a period of
retrenchment and job losses. Oregon finally regained pre-recessionary
nonagricultural employment levels (compared to 1979) in 1986, and continued
growing quickly through 1988.
The service and retail and wholesale trade sectors have contributed most of
the job gains. In 1979, services comprised 18 percent and retail and wholesale
trade 24 percent of total nonagricultural employment. Manufacturing
contributed 22 percent. By 1988, services grew to 23 percent, retail and
wholesale trade rose to 25 percent, but manufacturing shrank to 19 percent.
During the period 1979 to 1988, services and retail and wholesale trade added
110,000 jobs while manufacturing jobs dropped by 14,000.
Total state population and personal income followed similar trends. From 1975
to 1980, both population and personal income exceeded national growth rates.
In the late 1970s, Oregon's populaton grew at a rate of two to three times the
national average. The early 1980s marked a reversal of this trend, and
population and personal income growth slowed to rates below the national
average.
Recent economic trends have been favorable. In early 1987, the State's
unemployment rate dipped below the national rate, and State employment growth
exceeded the national average. Increased demand for wood products, primary
metals, and machinery and rapidly growing nonmanufacturing sectors helped push
the growth rates upward.
A mild climate, varied topography and rich soil support the nearly 100
agricultural commodities grown in Oregon and valued in terms of gross farm
sales at over $2.3 billion in 1988. Much of this agricultural activity occurs
in the Willamette River Valley in the western portion of the State. This
valley also contains most of the State's population and much of the
manufacturing activity.
Portland, located at the confluence of the Columbia and Willamette Rivers,
remains Oregon's largest city and the hub of economic activity. The greater
Portland area is a highly diversified manufacturing center. It is also the
home of the Port of Portland, a significant seaport for trade between the
western United States and the Pacific Rim nations.
Outside the Willamette Valley, those areas not devoted primarily to
agriculture rely on the wood products industry and tourism. Although the wood
products industry is still sensitive to economic fluctuations, increased
automation and improved management are enabling the industry to reach all-time
high production levels with fewer workers.
Oregon's economy grew moderately in the two decades immediately following
World War II. From 1950 to 1970, nonagricultural employment growth averaged
2.7 percent per year. In the 1970s, however, the State experienced rapid
growth as population increased and economic diversification continued.
Oregon's growth significantly outpaced the national average: from 1975 to 1980
nonagricultural employment growth averaged 6.1 percent per year and per capita
income rose above the U.S. average.
The early 1980s recessions hit Oregon hard. In 1982, nonagricultural
employment fell by 5.7 percent with much of the loss from the wood products
industry. Oregon remains slightly more sensitive to economic cycles than the
national average due to the forest products component of its economy. Although
recessionary periods continue to be somewhat more pronounced in Oregon than in
the nation as a whole, the higher proportion of nonmanufacturing jobs and
restructuring of the lumber and wood industry has provided more stability.
While the high technology industries added a significant number of jobs in the
late 1970s and early 1980s, the State has followed national trends and lost
jobs as a result of a slump in the semi-conductor, electronics and instruments
industries. In recent years, these industries have stabilized and started
adding workers.
The high interest rates experienced early in the 1980s had a significant
impact on certain sectors of the Oregon economy. The recession-sensitive wood
products, housing, and construction industries were particularly hard hit.
Rural counties of eastern and southern Oregon which depend on one or a
combination of these industries experienced the greatest impact. Many of these
counties have since diversified more and have benefited significantly from
improved tourism traffic. In urban areas generally, and in Portland in
particular, the diverse economic base has given a measure of insulation from
the impacts of the recession.
By 1984, the State began to recover and experienced a higher employment growth
rate at 4.2 percent, but this rate was still lower than the U.S. rate. The
State finally surpassed prerecessionary employment levels in 1986 and has
recently been growing faster than the U.S. average.
Tourism has been strong throughout the 1980s, due in part to the plentiful
supplies of relatively low-cost automobile fuel and improved national economy.
Oregon's wood products industry is undergoing a permanent restructuring, as
many mills have automated and improved their productivity greatly. The State
has committed itself to greater diversification of the economy by pursuing
more foreign trade in the considerable markets of the Pacific Rim countries.
Between 1979 and 1988, total nonagricultural wage and salary employment in
Oregon rose from 1,056,200 to 1,152,300, an increase of 9.1 percent. During
this period, however, employment exhibited three different trends.
In 1979, a dramatic rise in interest rates severely hurt credit-sensitive
industries such as construction and lumber and wood products and plunged the
Nation into the worst recession since the 1930s. Oregon's housing-dependent
economy was especially hard hit. Between 1979 and 1982, wage and salary
employment plummeted by 9 percent to 960,000, a loss of 95,400 jobs.
While the severity of the recession eliminated many jobs, both in
manufacturing (42,800) and non-manufacturing (52,600), it also caused interest
rates and the inflation rate eventually to drop significantly. This
improvement, plus more stimulative federal monetary and fiscal policies, set
the stage for another period of economic expansion beginning in early 1983. In
the six year period between 1982 and 1988, Oregon's wage and salary employment
increased by 20 percent to reach a new all-time high of 1,152,300, a gain of
191,500 jobs.
The current expansion differs from previous recovery periods. During the last
six years, manufacturing employment has risen by 28,600 jobs but is still
about 14,200 below its 1979 pre-recession peak of 228,500. This slow rate of
recovery largely reflects increased competition from foreign imports,
automation and increased productivity. In the first half of the 1980s, the
rising foreign exchange value of the dollar made U.S. exported goods more
expensive overseas, while foreign imports became cheaper to U.S. consumers.
Although the dollar's exchange value has been falling since 1985, imports have
captured a greater share of U.S. markets. Manufacturing firms in Oregon and
the Nation have responded by reducing their costs, restructuring their
operations and automating production processes wherever possible. In some
cases, these efficiencies have resulted in few jobs even though production
volumes have recovered and reached new all-time highs. Oregon's primary
industry, lumber and wood products, is one such example.
About 85 percent of the 191,500 new wage and salary jobs added in the
1982-1988 period came in non-manufacturing. Although every non-manufacturing
industrial category except mining, communications and utilities increased
employment, the service and trade industries accounted for eight out of every
ten new non-manufacturing jobs. Job growth was especially strong in food
stores, eating and drinking places, health care and business services.
In its 1989 Regular Session, the Oregon Legislature approved General Fund
appropriations totaling $4,585,476,617 for the 1989-1991 biennium. This is a
22 percent increase compared to estimated 1987-1989 expenditures.
A complete analysis of State General Fund finances for 1989-1991 will not be
available until after the impact of all legislative actions affecting
expenditures are compiled. The following is a summary of the September 1, 1989
quarterly Economic and Revenue Forecast required by ORS 291.342.
The much heralded "soft landing" scenario appears the most likely course for
the U.S. economy over the short term. Such a scenario implies an extended
period of lower growth, an easing of inflationary pressures, and little
improvement in the unemployment rate. The greatest short-term risk to the soft
landing is overreaction by the Federal Reserve in easing credit. Easing would
stimulate growth and a rise in inflation in the short-run, which would later
induce Federal tightening and plunge the economy into a recession.
In late 1989 and early 1990, the anticipated soft landing will reduce
employment growth in Oregon and the U.S. Overall, Oregon employment is
expected to increase by 13,600 over the next year (second quarter to second
quarter), and 7,700 over the following year. This means that, relative to the
May forecast, 3,100 fewer jobs will be generated in the next year. Still,
employment growth in Oregon is expected to exceed gains nation-wide in 1989.
The primary reasons for the slowdown in Oregon are: (1) expected timber supply
reductions, which will directly reduce lumber and wood products and
transportation employment; (2) a gradual slowdown in construction, as
apartment vacancy rates begin to rise and Oregon's population growth rate
begins to slow; and (3) the ending of Oregon's retail trade boom, which
brought increased competition in the form of many new retail chains and stores
to Oregon.
Total Oregon employment increased by 8,400 in the second quarter, 1,200 less
than anticipated in the May 1989 forecast. Manufacturing employment increased
by 700, while nonmanufacturing employment increased by 7,700.
Total General Fund collections in 1987-1989 were $49.4 million above the May
15 forecast and $211.4 million above the estimate made at the close of the
1987 Regular session. Both Corporate Excise and income tax receipts and all
other General Fund revenues exceeded the close of Regular Session estimate by
more than two percent. Therefore, ORS 291.349 (known as the "two percent
kicker" law) requires that all unanticipated revenues be returned to the
taxpayers. Corporate income taxpayers will receive a 19.7 percent credit on
their tax year 1989 liabilities to return the $36.2 million in unanticipated
Corporate Excise and Income Tax revenues. Personal income taxpayers will
receive a 9.8 percent credit on their tax year 1989 liabilities to return
unanticipated receipts of $175.2 million from all noncorporate General Fund
revenue sources.
More than 40 bills passed by the 1989 Legislature changed expected General
Fund revenue receipts. Altogether, these bills raised expected 1989-1991
receipts by $25.4 million, with expected Personal Income Taxes increasing
$29.9 million. Corporate Excise and Income taxes increasing by $4.9 million,
and all other General Fund revenues decreasing by $9.4 million. The
Legislature appropriated $4,585.5 million for the 1989-1991 period, leaving an
ending balance of $121.7 million.
The September General Fund revenue forecast anticipates that the state will
receive $9.6 million more during 1989-1991 than was anticipated at the close
of the 1989 Regular Session. This, combined with the surge in 1987-1989
revenues, pushes the expected 1989-1991 ending balance to $181.0 million.
The September Personal Income Tax forecast for 1989-1991 has been increased by
$39.8 million because the high final payments individuals made during the 1989
filing season are expected to continue. The Corporate Excise and Income Tax
forecast has been lowered by $10.2 million, again reflecting receipts during
the critical April filing season. Expected Insurance Tax receipts have been
decreased by $21.4 million because of an unanticipated weakening in commercial
insurance premiums.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Oregon Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by
the Oregon Trust to pay interest on or principal of the Bonds.
The assets of the Oregon Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Oregon (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Oregon
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds"). Neither
the Sponsor nor its counsel have independently examined the Bonds to be
deposited in and held in the Oregon Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued; (ii) the interest thereon is excludible from gross income
for federal income tax purposes; and (iii) interest on the Bonds, if received
directly by an Oregon Unitholder, would be exempt from the Oregon income tax
applicable to individuals (the "Oregon Personal Income Tax").
At the time of the closing for each Oregon Trust, Special Counsel to each
Oregon Trust for Oregon tax matters rendered an opinion under then existing
Oregon income tax law applicable to taxpayers whose income is subject to
Oregon income taxation substantially to the effect that:
The Oregon Trust is not an association taxable as a corporation and based upon
an administrative rule of the Oregon State Department of Revenue, each Oregon
Unitholder of the Oregon Trust will be essentially treated as the owner of a
pro rata portion of the Oregon Trust and the income of such portion of the
Oregon Trust will be treated as the income of the Oregon Unitholder for Oregon
Personal Income Tax purposes;
Interest on the Bonds which is exempt from the Oregon Personal Income Tax when
received by the Oregon Trust, and which would be exempt from the Oregon
Personal Income Tax if received directly by an Oregon Unitholder, will retain
its status as exempt from such tax when received by the Oregon Trust and
distributed to an Oregon Unitholder;
To the extent that interest derived from the Oregon Trust by an Oregon
Unitholder with respect to the Possession Bonds is excludable from gross
income for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a and 48 U.S.C. Section 1403, such interest will not be
subject to the Oregon Personal Income Tax. Each Oregon Unitholder of the
Oregon Trust will recognize gain or loss for Oregon Personal Income Tax
purposes if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Oregon Unitholder redeems or sells Units of the Oregon
Trust to the extent that such a transaction results in a recognized gain or
loss to such Oregon Unitholder for Federal income tax purposes; and
The Oregon Personal Income Tax does not permit a deduction of interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Oregon Trust, the interest on which is exempt from such Tax.
Investors should consult their tax advisors regarding collateral tax
consequences under Oregon law relating to the ownership of the Units,
including, but not limited to, the calculation of "net pension income" tax
credits for retirees and the applicability of other Oregon taxes.
We have not examined any of the Bonds to be deposited and held in the Oregon
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto and therefore express no opinion as to the
exemption from the Oregon Personal Income Tax of interest on the Bonds if
received directly by an Oregon Unitholder. In addition, prospective purchasers
subject to the Oregon corporate income tax should be advised that for purposes
of the Oregon Corporate Income (Excise) Tax, interest on the Bonds received by
the Oregon Trust and distributed to an Oregon Unitholder subject to such tax
will be added to the corporate Oregon Unitholder's federal taxable income and
therefore will be taxable.
Pennsylvania Trusts
Investors should be aware of certain factors that might affect the financial
conditions of the Commonwealth of Pennsylvania. Pennsylvania historically has
been identified as a heavy industry state although that reputation has changed
recently as the industrial composition of the Commonwealth diversified when
the coal, steel and railroad industries began to decline. A more diversified
economy was necessary as the traditionally strong industries in the
Commonwealth declined due to a long-term shift in jobs, investment and workers
away from the northeast part of the nation. The major sources of growth in
Pennsylvania are in the service sector, including trade, medical and the
health services, education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the Commonwealth's
economic structure, accounting for more than $3.6 billion in crop and
livestock products annually, while agribusiness and food related industries
support $39 billion in economic activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1 percent during
the recessionary period from 1980 to 1983. In 1984, the declining trend was
reversed as employment grew by 2.9 percent over 1983 levels. From 1983 to
1990, Commonwealth employment continued to grow each year, increasing an
additional 14.3 percent. For the last three years, unemployment in the
Commonwealth has declined 1.2 percent. The growth in employment experienced in
Pennsylvania is comparable to the growth in employment in the Middle Atlantic
Region which has occurred during this period.
Back to back recessions in the early 1980s reduced the manufacturing sector's
employment levels moderately during 1980 and 1981, sharply during 1982, and
even further in 1983. Non-manufacturing employment has increased steadily
since 1980 to its 1993 level of 81.6 percent of total Commonwealth employment.
Consequently, manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 18.4 percent
of 1993 non-agricultural employment, has fallen behind both the services
sector and the trade sector as the largest single source of employment within
the Commonwealth. In 1993 the services sector accounted for 29.9 percent of
all non-agricultural employment while the trade sector accounted for 22.4
percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise to 6.9 percent
in 1991 and 7.5 percent in 1992. The resumption of faster economic growth
resulted in a decrease in the Commonwealth's unemployment rate to 7.1 percent
in 1993. As of July 1994, the seasonally adjusted unemployment rate for the
Commonwealth was 6.5 percent compared to 6.1 percent for the United States.
The five year period from fiscal 1989 through fiscal 1993 was marked by public
health and welfare costs growing at a rate double the growth rate for all the
state expenditures. Rising caseloads, increased utilization of services and
rising prices joined to produce the rapid rise of public health and welfare
costs at a time when a national recession caused tax revenues to stagnate and
even decline. During the period from fiscal 1989 through fiscal 1993, public
health and welfare costs rose by an average annual rate of 10.9 percent while
tax revenues were growing at an average annual rate of 5.5 percent.
Consequently, spending on other budget programs was restrained to a growth
rate below 5.0 percent and sources of revenues other than taxes became larger
components of fund revenues. Among those sources are transfers from other
funds and hospital and nursing home pooling of contributions to use as federal
matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase enacted for fiscal 1992 brought financial
stability to the General Fund. That tax increase included several taxes with
retroactive effective dates which generated some one-time revenues during
fiscal 1992. The absence of those revenues in fiscal 1993 contributed to the
decline in tax revenues shown for fiscal 1993.
It should be noted that the creditworthiness of obligations issued by local
Pennsylvania issuers may be unrelated to the creditworthiness of obligations
issued by the Commonwealth of Pennsylvania, and there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the
event of default.
Financial information for the principal operating funds of the Commonwealth is
maintained on a budgetary basis of accounting. A budgetary basis of accounting
is used for the purpose of ensuring compliance with the enacted operating
budget and is governed by applicable statutes of the Commonwealth and by
administrative procedures. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting principles ("
GAAP"). The budgetary basis financial information maintained by the
Commonwealth to monitor and enforce budgetary control is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
Fiscal 1991 Financial Results. GAAP Basis: During fiscal 1991 the General Fund
experienced an $861.2 million operating deficit resulting in a fund balance
deficit of $980.9 million at June 30, 1991. The operating deficit was a
consequence of the effect of a national recession that restrained budget
revenues and pushed expenditures above budgeted levels. At June 30, 1991, a
negative unreserved-undesignated balance of $1,146.2 million was reported.
During fiscal 1991 the balance then available in the Tax Stabilization Reserve
Fund was used to maintain vital state spending.
Budgetary Basis: A deficit of $453.6 million was recorded by the General Fund
at June 30, 1991. The deficit was a consequence of higher-than-budgeted
expenditures and lower-than-estimated revenues during the fiscal year brought
about by the national economic recession that began during the fiscal year.
The budgetary basis deficit at June 30, 1991 was carried into the 1992 fiscal
year and funded in the fiscal 1992 budget. A number of actions were taken
throughout the fiscal year by the Commonwealth to mitigate the effects of the
recession on budget revenues and expenditures. Actions taken, together with
normal appropriation lapses, produced $871 million in expenditure reductions
and increases in revenues and other transfers for the fiscal year. The most
significant of these actions were a $214 million transfer from the
Pennsylvania Industrial Development Authority, a $134 million transfer from
the Tax Stabilization Reserve Fund, and a pooled financing program to match
federal Medicaid funds replacing $145 million of state funds.
Fiscal 1992 Financial Results. GAAP Basis: During fiscal 1992 the General Fund
reported a $1.1 billion operating surplus. This operating surplus was achieved
through legislated tax rate increases and tax base broadening measures enacted
in August 1991 and by controlling expenditures through numerous cost reduction
measures implemented throughout the fiscal year. As a result of the fiscal
1992 operating surplus, the fund balance increased to $87.5 million and the
unreserved-undesignated deficit dropped to $138.6 million from its fiscal 1991
level of $1,146.2 million.
Budgetary Basis: Eliminating the budget deficit carried into fiscal 1992 from
fiscal 1991 and providing revenues for fiscal 1992 budgeted expenditures
required tax revisions that were estimated to have increased receipts for the
1992 fiscal year by over $2.7 billion. Total revenues for the fiscal year were
$14,516.8 million, a $2,654.5 million increase over cash revenues during
fiscal 1991. Originally based on forecasts for an economic recovery, the
budget revenue estimates were revised downward during the fiscal year to
reflect continued recessionary economic activity. Largely due to the tax
revisions enacted for the budget, corporate tax receipts totalled $3,761.2
million, up from $2,656.3 million in fiscal 1991, sales tax receipts increased
by $302 million to $4,499.7 million, and personal income tax receipts totalled
$4,807.4 million, an increase of $1,443.8 million over receipts in fiscal
1991.
As a result of the lowered revenue estimate during the fiscal year, increased
emphasis was placed on restraining expenditure growth and reducing expenditure
levels. A number of cost reductions were implemented during the fiscal year
that contributed to $296.8 million of appropriation lapses. These
appropriation lapses were responsible for the $8.8 million surplus at fiscal
year-end, after accounting for the required ten percent transfer of the
surplus to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely accounted for by
increases for education, social services and corrections programs.
Commonwealth funds for the support of public schools were increased by 9.8
percent to provide a $438 million increase to $4.9 billion for fiscal 1992.
The fiscal 1992 budget provided additional funds for basic and special
education and included provisions designed to help restrain the annual
increase of special education costs, an area of recent rapid cost increases.
Child welfare appropriations supporting county operated child welfare programs
were increased $67 million, more than 31.5 percent over fiscal 1991. Other
social service areas such as medical and cash assistance also received
significant funding increases as costs rose quickly as a result of the
economic recession and high inflation rates of medical care costs. The costs
of corrections programs, reflecting the marked increase in the prisoner
population, increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with General Fund
appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing transactions.
These pooling transactions replaced $135 million of Commonwealth funds,
allowing total spending under the budget to increase by an equal amount.
Fiscal 1993 Financial Results. GAAP Basis: The fund balance of the General
Fund increased by $611.4 million during the fiscal year, led by an increase in
the unreserved balance of $576.8 million over the prior fiscal year balance.
At June 30, 1993, the fund balance totalled $698.9 and the
unreserved/undesignated balance totalled $64.4 million. A continuing recovery
of the Commonwealth's financial condition from the effects of the national
economic recession of 1990 and 1991 is demonstrated by this increase in the
balance and a return to a positive unreserved/undesignated balance. The
previous positive unreserved/undesignated balance was recorded in fiscal 1987.
For the second consecutive fiscal year the increase in the
unreserved/undesignated balance exceeded the increase recorded in the
budgetary basis unappropriated surplus during the fiscal year.
Budgetary Basis: The 1993 fiscal year closed with revenues higher than
anticipated and expenditures about as projected, resulting in an ending
unappropriated balance surplus (prior to the ten percent transfer to the Tax
Stabilization Reserve Fund) of $242.3 million, slightly higher than estimated
in May 1993. Cash revenues were $41.5 million above the budget estimate and
totalled $14.633 billion representing less than a one percent increase over
revenues for the 1992 fiscal year. A reduction in the personal income tax rate
in July 1992 and the one-time receipt of revenues from retroactive corporate
tax increases in fiscal 1992 were responsible, in part, for the low revenue
growth in fiscal 1993.
Appropriations less lapses totalled $13.870 billion representing a 1.1 percent
increase over expenditures during fiscal 1992. The low growth in spending is a
consequence of a low rate of revenue growth, significant one-time expenses
during fiscal 1992, increased tax refund reserves to cushion against adverse
decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds.
By state statute, ten percent of the budgetary basis unappropriated surplus at
the end of a fiscal year is to be transferred to the Tax Stabilization Reserve
Fund. The transfer for the fiscal 1993 balance was $24.2 million. The
remaining unappropriated surplus of $218.0 million was carried forward into
the 1994 fiscal year.
Fiscal 1994 Financial Results (Budgetary Basis). Commonwealth revenues during
the fiscal year totalled $15,210.7 million, $38.6 million above the fiscal
year estimate, and 3.9 percent over Commonwealth revenues during the previous
fiscal year. The sales tax was an important contributor to the higher than
estimated revenues. Collections from the sales tax were $5.124 billion, a 6.1
percent increase from the prior fiscal year and $81.3 million above estimate.
The strength of collections from the sales tax offset the lower than budgeted
performance of the personal income tax which ended the fiscal year $74.4
million below estimate. The shortfall in the personal income tax was largely
due to shortfalls in income not subject to withholding such as interest,
dividends and other income. Tax refunds in fiscal 1994 were reduced
substantially below the $530 million amount provided in fiscal 1993. The
higher fiscal 1993 amount and the reduced fiscal 1994 amount occurred because
reserves of approximately $160 million were added to fiscal 1993 tax refunds
to cover potential payments if the Commonwealth lost litigation known as
Philadelphia Suburban Corp v. Commonwealth. Those reserves were carried into
fiscal 1994 until the litigation was decided in the Commonwealth's favor in
December 1993 and $147.3 million of reserves for tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of all fiscal
1994 appropriation lapses, totalled $14,934.4 million representing a 7.2
percent increase over fiscal 1993 expenditures. Medical assistance and
corrections spending contributed to the rate of spending growth for the fiscal
year.
The Commonwealth maintained an operating balance on a budgetary basis for
fiscal 1994 producing a fiscal year ending unappropriated surplus of $335.8
million. By state statute, ten percent ($33.6 million) of that surplus will be
transferred to the Tax Stabilization Reserve Fund and the remaining balance
will be carried over into the fiscal 1995 fiscal year.
Fiscal 1995 Budget. The fiscal 1995 budget was approved by the Governor on
June 16, 1994 and provided for $15,652.9 million of appropriations from
Commonwealth funds, an increase of 3.9 percent over appropriations, including
supplemental appropriations, for fiscal 1994. Medical assistance expenditures
represent the largest single increase in the budget ($221 million)
representing a nine percent increase over the prior fiscal year. The budget
includes a reform of the state-funded public assistance program that added
certain categories of eligibility to the program but also limited the
availability of such assistance to other eligible persons. Education subsidies
to local school districts were increased by $132.2 million to continue the
increased funding for the poorest school districts in the state.
The budget also includes tax reductions totalling an estimated $166.4 million.
Low income working families will benefit from an increase of the dependent
exemption to $3,000 from $1,500 for the first dependent and from $1,000 for
all additional dependents. A reduction to the corporate net income tax rate
from 12.25 percent to 9.99 percent to be phased in over a period of four years
was enacted. A net operating loss provision has been added to the corporate
net income tax and will be phased in over three years with a $500,000 per firm
annual cap on losses used to offset profits. Several other tax changes to the
sales tax, the inheritance tax and the capital stock and franchise tax were
also enacted.
The fiscal 1995 budget projects a $4 million fiscal year-end unappropriated
surplus. No assumption as to appropriation lapses in fiscal 1995 has been made.
All outstanding general obligation bonds of the Commonwealth are rated AA- by
S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must be obtained
from the rating agencies. There is no assurance that any ratings will continue
for any period of time or that they will not be revised or withdrawn.
The City of Philadelphia ("Philadelphia") is the largest city in the
Commonwealth, with an estimated population of 1,585,577 according to the 1990
Census. Philadelphia functions both as a city of the first class and a county
for the purpose of administering various governmental programs.
For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. The audit findings
for the fiscal year ending June 30, 1992, place the Cumulative General Fund
balance deficit at $224.9.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class
cities in remedying fiscal emergencies was enacted by the General Assembly and
approved by the Governor in June, 1991. PICA is designed to provide assistance
through the issuance of funding debt to liquidate budget deficits and to make
factual findings and recommendations to the assisted city concerning its
budgetary and fiscal affairs. An intergovernmental cooperation agreement
between Philadelphia and PICA was approved by City Council on January 3, 1992,
and approved by the PICA Board and signed by the Mayor on January 8, 1992. At
this time, Philadelphia is operating under a five year fiscal plan approved by
PICA on April 6, 1992. Full implementation of the five year plan was delayed
due to labor negotiations that were not completed until October 1992, three
months after the expiration of the old labor contracts. The terms of the new
labor contracts are estimated to cost approximately $144.0 million more than
what was budgeted in the original five year plan. An amended five year plan
was approved by PICA in May 1993. The audit findings show a surplus of
approximately $3 million for the fiscal year ending June 30, 1993. The fiscal
1994 budget projects no deficit and a balanced budget for the year ending June
30, 1994. The Mayor's latest update of the five year financial plan was
approved by PICA on May 2, 1994.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. PICA issued $643,430,000 in July 1993 and
$178,675,000 in August 1993 of Special Tax Revenue Bonds to refund certain
general obligation bonds of the City and to fund additional capital projects.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated Ba by Moody's and
BB by S&P. Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any ratings will
continue for any period of time or that they will not be revised or withdrawn.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of the Bonds in the Pennsylvania Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Pennsylvania Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion under
then existing Pennsylvania income tax law applicable to taxpayers whose income
is subject to Pennsylvania income taxation substantially to the effect that:
(1)Units evidencing fractional undivided interest in the Pennsylvania Trust,
which are represented by obligations issued by the Commonwealth of
Pennsylvania, any public authority, commission, board or other agency created
by the Commonwealth of Pennsylvania, any political subdivision of the
Commonwealth of Pennsylvania or any public authority created by any such
political subdivision are not taxable under any of the personal property taxes
presently in effect in Pennsylvania;
(2)distributions of interest income to Unitholders that would not be taxable
it received directly by a Pennsylvania resident are not subject to personal
income tax under the Pennsylvania Tax Reform Code of 1971; nor will such
interest be taxable under the Philadelphia School District Investment Income
Tax imposed on Philadelphia resident individuals;
(3)a Unitholder will have a taxable event under the Pennsylvania state and
local income taxes referred to in the preceding paragraph upon the redemption
or sale of his Units. Units will be taxable under the Pennsylvania inheritance
and estate taxes;
(4)a Unitholder which is a corporation will have a taxable event under the
Pennsylvania Corporate Net Income Tax when it redeems or sells its Units.
Interest income distributed to Unitholders which are corporations is not
subject to Pennsylvania Corporate Net Income Tax or Mutual Thrift Institutions
Tax. However, banks, title insurance companies and trust companies may be
required to take the value of the Units into account in determining the
taxable value of their shares subject to the Shares Tax;
(5)under Act No. 68 of December 3, 1993, gains derived by the Fund from the
sale, exchange or other disposition of Bonds may be subject to Pennsylvania
personal or corporate income taxes. Those gains which are distributed by the
Fund to Unitholders who are individuals may be subject to Pennsylvania
Personal Income Tax. For Unitholders which are corporations, the distributed
gains may be subject to Corporate Net Income Tax or Mutual Thrift Institutions
Tax. Gains which are not distributed by the Fund may nevertheless be taxable
to Unitholders if derived by the Fund from the sale, exchange or other
disposition of Bonds issued on or after February 1, 1994. Gains which are not
distributed by the Fund will remain nontaxable to Unitholders if derived by
the Fund from the sale, exchange or other disposition of Bonds issued prior to
February 1, 1994;
(6)any proceeds paid under insurance policies issued to the Trustee or
obtained by the issuers of the Bonds with respect to the Bonds which represent
maturing interest on defaulted obligations held by the Trustee will be
excludable from Pennsylvania gross income if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligations; and
(7)the Fund is not taxable as a corporation under Pennsylvania tax laws
applicable to corporations.
On December 3, 1993, changes to Pennsylvania laws affecting taxation of income
and gains from the sale of Commonwealth of Pennsylvania and local obligations
were enacted. Among these changes was the repeal of the exemption from tax of
gains realized upon the sale or other disposition of such obligations. The
Pennsylvania Department of Revenue has issued proposed regulations concerning
these changes. The opinions expressed above are based on our analysis of the
law and proposed regulations but are subject to modification upon review of
final regulations or other guidance that may be issued by the Department of
Revenue or future court decisions.
In rendering its opinion, Special Counsel has not, for timing reasons, made an
independent review of proceedings related to the issuance of the Bonds. It has
relied on Van Kampen Merritt Inc. for assurance that the Bonds have been
issued by the Commonwealth of Pennsylvania or by or on behalf of
municipalities or other governmental agencies within the Commonwealth.
South Carolina Trusts
Although all of the Bonds in the South Carolina Trust are revenue obligations
or general obligations of local governments or authorities rather than general
obligations of the State of South Carolina itself, there can be no assurance
that any financial difficulties the State may experience will not adversely
affect the market value or marketability of the Bonds or the ability of the
respective obligors to pay interest on or principal of the Bonds. The
information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in South Carolina.
From the early 1920's to the present time, the State's economy has been
dominated by the textile industry with over one out of every three
manufacturing workers directly or indirectly related to the textile industry.
While the textile industry is still the major industrial employer in the
State, since 1950 the State's economy has undergone a gradual transition. The
economic base of the State has diversified as the trade and service sectors
developed and with the added development of the durable goods manufacturing
industries, South Carolina's economy now resembles more closely that of the
United States.
In South Carolina in 1992, personal income grew at an average annual rate of
5.9%. During the same period the nation's income grew 6.1% and the Southeast
grew 6.5%. Over the last five (5) years (1987-1992) personal income in South
Carolina rose at a compounded annual rate of 7.0%, outpacing the nation and
the Southeast with income growth rates of 6.2% and 6.8%, respectively, in the
same period. During the first nine months in 1993, personal income in South
Carolina rose 5.7% while the rate of increase in the U.S. for the same period
was 5.2%.
Monthly unemployment rates in the State have equalled or been below comparable
national rates for the nation during 1993. The rate for December, 1993, was 7%
compared to the 6.4% national rate.
The State Constitution requires the General Assembly to provide a balanced
budget and requires that if there be a deficit, such deficit shall be provided
for in the succeeding fiscal year. The State Constitution also provides that
the State Budget and Control Board may, if a deficit appears likely, effect
such reductions in appropriations as may be necessary to prevent a deficit. At
the November 6, 1984 general election there was approved a constitutional
amendment providing that annual increases in State appropriations may not
exceed the average growth rate of the economy of the State and that the annual
increase in the number of State employees may not exceed the average growth of
population of the State. The State Constitution also establishes a General
Reserve Fund to be maintained in an amount equal to 4% of General Fund revenue
for the latest fiscal year. Despite the efforts of the State Budget and
Control Board, deficits were experienced in each of the fiscal years ended
June 30, 1981, June 30, 1982, June 30, 1985 and June 30, 1986. All deficits
have been funded out of the General Reserve Fund. For the fiscal years ending
June 30, 1983 and 1984, the State had cash surpluses. As of June 30, 1985 the
balance in the General Reserve Fund was $89,100,000.
In 1993 the General Assembly provided that beginning with appropriations for
fiscal year 1994-1995, appropriations in the annual general appropriations act
may not exceed the base revenue estimate. The base revenue estimate is defined
as the lesser of (i) the total of recurring general fund revenues collected in
the latest completed fiscal year before the General Assembly first considers
the annual general appropriations bill plus an increase of seventy-five
percent of the difference between the general fund revenue estimate of the
Board of Economic Advisors for the upcoming fiscal year and the actual revenue
collections from the latest completed fiscal year; or (ii) the Board of
Economic Advisors general fund revenue estimate for the upcoming fiscal year.
At its July, 1985 meeting the State Budget and Control Board, acting upon
advice that a shortfall in General Fund revenues for the fiscal year ending
June 30, 1985 might develop, froze all supplemental appropriations pending the
final accounting of the General Fund for fiscal year 1985. On August 8, 1985,
the Office of the Comptroller General advised the State Budget and Control
Board that General Fund expenditures for the fiscal year ended June 30, 1985
did exceed General Fund revenues by $11,936,636. Obedient to the
constitutional mandate that a casual deficit shall be provided for in the
succeeding fiscal year, the State Budget and Control Board delayed certain
hiring and capital improvements scheduled to be made in fiscal year 1986 in an
amount sufficient to meet the fiscal year 1985 budget shortfall. In January of
the fiscal year ended June 30, 1986 the State Budget and Control Board was
advised of a possible shortfall of $46,346,968. The Board immediately reduced
State agency appropriations by the amount of the anticipated shortfall.
Notwithstanding this action, at the end of fiscal year 1986, it became
apparent that a shortfall would result. In August of 1986, the State Budget
and Control Board voted to fund the deficit by transferring $37,353,272 from
the General Reserve Fund to the General Fund, bringing the balance in the
General Reserve Fund to $51.8 million.
At the November 5, 1986 meeting of the Budget and Control Board, the Board of
Economic Advisors advised that it had reduced its revenue estimate for the
current fiscal year by $87,434,452. As required by the provisions of the
Capital Expenditure Fund, the Board applied $27,714,661 budgeted for this fund
to the anticipated shortfall. This action left a remaining shortfall of
$59,719,791 which the Budget and Control Board funded by imposing a 2.6% cut
in expenditures. In a February, 1987 meeting of the Board, a further cut in
expenditures of 0.8% was ordered.
After net downward revisions of $122 million in estimated revenues during the
year, the actual revenue collections exceeded the final estimate of $37
million, resulting in a surplus for the fiscal year ending June 30, 1987, of
$20.5 million. The General Reserve Fund received $6.6 million during the year
in accordance with the Appropriation Act, and $17 million of the year-end
surplus was transferred to the General Reserve Fund, bringing the balance in
the General Reserve Fund to $75.4 million at June 30, 1987.
On August 5, 1988, it was announced that for the fiscal year ending June 30,
1988, the Budgetary General Fund had a surplus of $107.5 million. The surplus
resulted from a $117.3 million excess of revenues over expenditures. The State
will use $52.6 million of the surplus to fund supplemental appropriations,
$28.3 million to fund the Capital Reserve, and $20.5 million for an early
buy-out of a school bus lease agreement. The General Assembly will decide how
the State will spend the remaining $6.1 million.
The General Reserve Fund received $25.1 million during the 1987-88 fiscal year
in accordance with the Appropriation Act. During the year, the General
Assembly reduced the required funding of the General Reserve Fund from 4% to
3% of the latest completed fiscal year's actual revenue. The General Assembly
used $14.4 million of the resulting excess to fund the 1987-1988 Supplemental
Appropriation Act, leaving $86.1 million in the General Reserve Fund at June
30, 1988. The full-funding amount at that date, however, was only $80.8
million. In accordance with the 1988-1989 Appropriation Act, the excess of
$5.3 million will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was approved a constitutional
amendment reducing from 4% to 3% the amount of General Fund revenue which must
be kept in the General Reserve Fund, and removing the provisions requiring a
special vote to adjust this percentage. The amendment also created a Capital
Reserve Fund equal to 2% of General Fund revenue. Before March 1 of each year,
the Capital Reserve Fund must be used to offset mid-year budget reductions
before mandating cuts in operating appropriations, and after March 1, the
Capital Reserve Fund may be appropriated by a special vote in separate
legislation by the General Assembly to finance in cash previously authorized
capital improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the
Capital Reserve Fund not appropriated or any appropriation for a particular
project or item which has been reduced due to application of the monies to
year-end deficit, must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Reserve Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year 1989-1990, the
State Budget and Control Board committed $42.4 million of the $58.7 million
Capital Reserve Fund in April, 1990. Lack of sufficient funding at year end
resulted in an additional use of $4.5 million from the Capital Reserve Fund.
After the above reductions, the State had a fiscal year 1989-1990 surplus of
$13,159,892 which was used to fund supplemental appropriations of $1,325,000
and the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in
the General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control Board has approved
mid-year budget changes in November of 1990 and again in February of 1991, to
offset lower revenue estimates. Those changes included committing the Capital
Reserve Fund appropriation ($62,742,901) and reducing agency appropriations in
an additional amount necessary to offset (together with automatic expenditure
reductions that are tied to revenue levels) what would otherwise be a
projected deficit of approximately $132.6 million. On May 14 and May 21, 1991,
the Budget and Control Board, responding to April revenue figures and
unofficial estimates indicating an additional shortfall of $30 to $50 million,
ordered an immediate freeze on all personnel activities, from hiring to
promotions; a freeze on purchasing, with limited exceptions; and an indefinite
halt to new contracts and contract renewals. The Board also asked the General
Assembly for the power to furlough government workers periodically during the
next fiscal year.
In the past, the State's budgetary accounting principles allowed revenue to be
recorded only when the State received the related cash. On July 30, 1991, the
Budget and Control Board approved a change in this principle for sales tax
revenue beginning with the fiscal year ended June 30, 1991. The Board's
resolution requires that sales taxes collected by merchants in June and
received by the State in July be reported as revenue in June rather than in
July. This change resulted in a $5.2 million decrease in reported 1990-91
sales tax revenue and a one-time $83.1 million addition to fund balance. The
one-time adjustment increases the fund balance to the level it would be if the
new principle had been in effect in years before 1990-91. Following such
action, the year-end balance in the General Reserve Fund was $33.4 million.
At its July 30, 1991, meeting the Budget and Control Board also took action
with respect to the 1991-92 fiscal year. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected a
revenue shortfall of $148 million for the fiscal year 1991-92 budget of $3.581
billion. In response, the Budget and Control Board eliminated the two percent
(2%) Capital Reserve Fund appropriation of $65.9 million and reduced other
expenditures across the board by three percent (3%). On February 10, 1992, the
Board of Economic Advisers advised the Budget and Control Board that it had
revised its estimate of revenues for the current fiscal year downward by an
additional $55 million. At its February 11, 1992 meeting, the Budget and
Control Board responded by imposing an additional one percent (1%) across the
board reduction of expenditures (except with respect to approximately $10
million for certain agencies). At its February 13, 1992 meeting, the Budget
and Control Board restored a portion of the one percent (1%) reduction to four
(4) education-related agencies totalling approximately $5.7 million. These
expenditure reduction measures, when coupled with revenue increases projected
by the Budget and Control Board, resulted in an estimated balance of
approximately $1.4 million in the General Fund for the fiscal year 1991-92.
Despite such actions, expenditures exceeded revenues by $38.2 million and, as
required by the South Carolina Constitution, such amount was withdrawn from
the General Reserve Fund to cover the shortfall.
Responding to these recurrent operating deficits, Standard & Poor's Corp. has
placed the State's AAA-rated general obligation debt on its CreditWatch, and
on January 29, 1993, this rating was reduced to AA+.
On August 22, 1992, the Budget and Control Board adopted a plan to reduce
appropriations under the 1992 Appropriations Act because of revenue shortfall
projections of approximately $200 million for the 1992-93 fiscal year. These
reductions were based on the rate of growth in each agency's budget over the
past year. On September 15, 1992, the Supreme Court of South Carolina enjoined
the Budget and Control Board from implementing its proposed plan for budget
reductions on the grounds that the Board had authority to make budget
reductions only across the board based on total appropriations. In response to
this decision, the Board instituted a 4% across the board reduction. On
November 10, 1992, the Budget and Control Board permanently reduced the $88.1
million in appropriations which were set aside on September 15, 1992. This
action along with improved actual revenue collections created a budgetary
surplus of approximately $101 million.
Prospective investors should study with care the portfolio of Bonds in the
South Carolina Trust and should consult with their investment advisers as to
the merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special Counsel for
each South Carolina Trust for South Carolina tax matters rendered an opinion
under then existing South Carolina income tax law applicable to taxpayers
whose income is subject to South Carolina income taxation substantially to the
effect that:
(1)By the provision of paragraph (j) of Section 3 of Article 10 of the South
Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation.
(2)Pursuant to the provisions of Section 12-1-60 the interest of all bonds,
notes or certificates of indebtedness issued by or on behalf of the State of
South Carolina and any authority, agency, department or institution of the
State and all counties, school districts, municipalities, divisions and
subdivisions of the State and all agencies thereof are exempt from income
taxes and that the exemption so granted extends to all recipients of interest
paid thereon through the Trust. (This opinion does not extend to so-called
63-20 obligations.)
(3)The income of the Trust would be treated as income to each Unitholder of
the Trust in the proportion that the number of Units of the Trust held by the
Unitholder bears to the total number of Units of the Trust outstanding. For
this reason, interest derived by the Trust that would not be includable in
income for South Carolina income tax purposes when paid directly to a South
Carolina Unitholder will be exempt from South Carolina income taxation when
received by the Trust and attributed to such South Carolina Unitholder.
(4)Each Unitholder will recognize gain or loss for South Carolina state income
tax purposes if the Trustee disposes of a Bond (whether by sale, payment on
maturity, retirement or otherwise) or if the Unitholder redeems or sells his
Unit.
(5)The Trust would be regarded, under South Carolina law, as a common trust
fund and therefore not subject to taxation under any income tax law of South
Carolina.
The above described opinion of Sinkler & Boyd has been concurred in by an
informal ruling of the South Carolina Tax Commission pursuant to Section
12-3-170 of the South Carolina Code.
Virginia Trusts
The Commonwealth's financial condition is supported by a broad-based economy,
including manufacturing, tourism, agriculture, ports, mining and fisheries.
Manufacturing continues to be a major source of employment, ranking behind
only services, wholesale and retail trade, and government (Federal, state and
local). The Federal government is a major employer in Virginia due to the
heavy concentration of Federal employees in the metropolitan Washington, D.C.
segment of Northern Virginia and the military employment in the Hampton Roads
area, which houses the nation's largest concentration of military
installations. However, the expected retrenchment of the military sector as a
consequence of the end of the Cold War remains a cloud on the economic
horizon.
In recent years per capita personal income in Virginia has consistently been
above the national average. However, while total personal income has continued
to rise during the current recession, it has not always kept pace with both
inflation and the population, either nationally or in Virginia. Real personal
income in Virginia fell for seven consecutive quarters, ending with the last
quarter of 1991, with a slow recovery being evidenced in 1992. The annualized
rate of growth in real personal income in Virginia for the second quarter of
1992 was 0.5 percent compared to a national rate of 0.3 percent. Virginia's
real per capita income has exceeded that for both the nation and the southeast
region since the early 1980's, although the differentials have decreased since
1989. Virginia's nonagricultural employment figures mirror the national
economy although the recent recession has hit Virginia harder than the nation
as a whole with employment declining at an average annual rate of 1.6 percent
since 1990 in Virginia, compared to 0.7 percent nationally. With respect to
unemployment, Virginia's unemployment rate has consistently been below that of
the nation. For the decade of 1980 to 1990, the differential has been two
percentage points, although it decreased to below one percentage point in 1991
and the first six months of 1992.
Employment trends in Virginia have varied from sector to sector and from
region to region. For example, manufacturing and trade sectors in 1980 each
employed more workers than the service sector. Now the service sector is the
largest employer in Virginia and mining and manufacturing are now at lower
levels than in 1980. Highest rates of unemployment are concentrated in
southwest Virginia where mining jobs have been lost and the lowest
unemployment rates are seen in Northern Virginia where much federally related
employment is concentrated. Not surprisingly, there is great overlap between
areas of lowest unemployment and those of highest per capita income. Economic
recovery from the recent recession is expected to be long and slow in
Virginia, although in the long term, a growing and more diversified export
sector holds promise that should mitigate current concerns.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1992, fiscal year, the General
Fund had an ending fund balance computed on a budgetary cash basis of $195.2
million, of which $15 million was in required reserve; $142.3 million thereof
was designated for expenditure during the next fiscal year, leaving an
undesignated, unreserved fund balance of $52.8 million, the first such
undesignated fund balance since 1988. Computed on a modified accrual basis in
accordance with generally accepted accounting principles, the General Fund
balance at the end of the fiscal year ended June 30, 1992, was minus $121.8
million, compared with a General Fund balance at the end of the fiscal year
ended June 30, 1991, of minus $265.1 million. Contributing to the reduction
were $256.4 million in deferred credits, representing estimated tax refunds
associated with income taxes withheld for the period January through June,
1992, and an accrual for estimated medicaid claims of $155.8 million.
As of June 30, 1992, total debt of the Commonwealth aggregated $7.3 billion.
Of that amount, $1.5 billion was tax-supported. Outstanding general obligation
debt backed by the full faith and credit of the Commonwealth was $582.7
million at June 30, 1992. Of that amount, $544.4 million was also secured by
revenue producing capital projects. Debt service on the balance equaled 0.2%
of total General Fund expenditures in fiscal year 1992.
The Virginia Constitution contains limits on the amount of general obligation
bonds which the Commonwealth can issue. These limits are substantially in
excess of current levels of outstanding bonds, and at June 30, 1992 would
permit an additional total of approximately $5.00 billion of bonds secured by
revenue-producing projects and approximately $5.50 billion of unsecured
general obligation bonds, with not more than approximately $1.39 billion of
the latter to be issued in any four-year period. Bonds which are not secured
by revenue-producing projects must be approved in a state-wide election.
In November of 1992 the Constitution of Virginia was amended to establish a
permanent Revenue Stabilization Fund. This Fund will go into effect in the
1994-96 biennium. In anticipation of the first required deposit ($40.5
million) to the fund, the Governor included, and the General Assembly
approved, a $30.0 million down payment.
The current biennium started on July 1, 1992 and will end on June 30, 1994.
The amended biennial budget appropriated a total of $29,090.6 million:
$6,416.0 million in general funds and $7,907.1 million in nongeneral funds in
fiscal 1993, and $6,852.1 million in general funds and $7,915.3 million in
nongeneral funds in fiscal 1994.
The amended Appropriations Act assumed that general fund revenues would
increase by 7.1 percent in fiscal 1993 and 6.0 percent in fiscal 1994.
Currently, year-to-date general fund growth for the 11 months of fiscal 1993
is 9.7 percent. When general fund revenues are adjusted for one-time corporate
payments, the year-to-date growth declines to 7.9 percent.
The Commonwealth of Virginia maintains ratings of AAA by Standard & Poor's and
Aaa by Moody's on its general obligation indebtedness, reflecting in part its
sound fiscal management, diversified economic base and low debt ratios. There
can be no assurance that these conditions will continue. Nor are these same
conditions necessarily applicable to securities which are not general
obligations of the Commonwealth. Securities issued by specific municipalities,
governmental authorities or similar issuers may be subject to economic risks
or uncertainties peculiar to the issuers of such securities or the sources
from which they are to be paid.
At the time of the closing for each Virginia Trust, Special Counsel to each
Virginia Trust for Virginia tax matters rendered an opinion under then
existing Virginia income tax law applicable to taxpayers whose income is
subject to Virginia income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations issued by
or on behalf of the Commonwealth of Virginia ("Virginia") or counties,
municipalities, authorities or political subdivisions thereof (the "
Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Virginia that is applicable to individuals and
corporations (the "Virginia Income Tax"). The opinion set forth below
does not address the taxation of persons other than full time residents of
Virginia.
The Virginia Trust is not an association taxable as a corporation for purposes
of the Virginia Income Tax and each Unitholder of the Trust will be treated as
the owner of a pro rata portion of the assets held by the Trust and the income
of such portion of the Virginia Trust will be treated as income of the
Unitholder for purposes of the Virginia Income Tax.
Income on the Bonds which is exempt from Virginia Income Tax when received by
the Virginia Trust, and which would be exempt from Virginia Income Tax if
received directly by a Unitholder, will retain its status as exempt from such
tax when received by the Trust and distributed to such Unitholder.
Each Unitholder will recognize gain or loss for purposes of the Virginia
Income Tax if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Unitholder redeems or sells Units of the Trust to the
extent that such a transaction results in a recognized gain or loss to such
Unitholder for federal income tax purposes, except as described in this
paragraph. Virginia has by law provided that all income from certain
tax-exempt obligations issued under the laws of Virginia, including any
profits made from the sale of such Bonds, shall be exempt from all taxation by
Virginia. Although we express no opinion, the Virginia Department of Taxation
has indicated that the gain on the sale of such tax-exempt obligations,
recognized for federal income tax purposes, would not be subject to Virginia
income taxation. Accordingly, any such gain relating to the disposition of any
Bond that would not be subject to Virginia Income Tax if the Bond was held
directly by a Unitholder will retain its tax-exempt status for purposes of the
Virginia Income Tax when the Bond is disposed of by the Virginia Trust or when
the Unitholder is deemed to have disposed of his pro rata portion of such Bond
upon the disposition of his Unit, provided that such gain can be determined
with reasonable certainty and substantiated.
The Virginia Income Tax does not permit a deduction of interest paid on
indebtedness incurred or continued to purchase or carry Units in the Virginia
Trust to the extent that interest income related to the ownership of Units is
exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax, the
income derived by such a Unitholder from his pro rata portion of the Bonds
held by the Virginia Trust may affect the determination of such Unitholder's
Bank Franchise Tax. Prospective investors subject to the Virginia Bank
Franchise Tax should consult their tax advisors.
THE SPONSOR
Sponsor. Van Kampen American Capital Distributors, Inc., a Delaware
corporation, is the Sponsor of the Trust. Van Kampen American Capital
Distributors, Inc. is primarily owned by Clayton, Dubilier & Rice, Inc., a New
York-based private investment firm. Van Kampen American Capital Distributors,
Inc. management owns a significant minority equity position. Effective
December 20, 1994, the parent of Van Kampen Merritt Inc. acquired American
Capital Management & Research, Inc. As a result, Van Kampen Merritt Inc., has
changed its name to Van Kampen American Capital Distributors, Inc. Van Kampen
American Capital Distributors, Inc. specializes in the underwriting and
distribution of unit investment trusts and mutual funds. The Sponsor is a
member of the National Association of Securities Dealers, Inc. and has offices
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 and
2800 Post Oak Boulevard, Houston, Texas, 77056, (713) 993-0500. It maintains a
branch office in Philadelphia and has regional representatives in Atlanta,
Dallas, Los Angeles, New York, San Francisco, Seattle and Tampa. As of
December 31, 1993 the total stockholders' equity of Van Kampen Merritt Inc.
was $122,167,000 (audited). (This paragraph relates only to the Sponsor and
not to the Insured Municipals Income Trust and Investors' Quality Tax-Exempt
Trust or to any Multi-Series thereof or to any other Underwriter. The
information is included herein only for the purpose of informing investors as
to the financial responsibility of the Sponsor and its ability to carry out
its contractual obligations. More detailed financial information will be made
available by the Sponsor upon request.)
As of September 30, 1994, and without giving effect to the merger, the Sponsor
and its affiliates managed or supervised approximately $35.4 billion of
investment products, of which over $23 billion is invested in municipal
securities. The Sponsor and its affiliates managed $22 billion of assets,
consisting of $7.7 billion for 20 open end mutual funds, $8.0 billion for 34
closed-end funds and $6.1 billion for 65 institutional accounts. The Sponsor
has also deposited approximately $24.5 billion of unit investment trusts.
Based on cumulative assets deposited, the Sponsor believes that it is the
largest sponsor of insured municipal unit investment trusts, primarily through
the success of its Insured Municipals Income Trust(R)or the IM-IT(R)
trust. The Sponsor also provides surveillance and evaluation services at cost
for approximately $13 billion of unit investment trust assets outstanding.
Since 1976, the Sponsor has serviced over one million retail investor
accounts, opened through retail distribution firms. Van Kampen American
Capital Distributors, Inc. is the sponsor of the various series of the trusts
listed below and the distributor of the mutual funds and closed-end funds
listed below. Unitholders may only invest in the trusts, mutual funds and
closed-end funds which are registered for sale in the state of residence of
such Unitholder. In order for a Unitholder to invest in the trusts, mutual
funds and closed-end funds listed below, such Unitholder must obtain a
prospectus relating to the trust or fund involved. A prospectus is the only
means by which an offer can be delivered to investors.
<TABLE>
Name of Trust Trust Investment Objective
<CAPTION>
<S> <C>
Insured Municipals Income Trust..................................... Tax-exempt income by investing in insured municipal securities
Double tax-exemption for California residents by investing in
California Insured Municipals Income Trust.......................... insured California municipal securities
Double and in certain cases triple tax-exemption for New York
residents by investing in insured New York municipal
New York Insured Municipals Income Trust............................ securities
Double and in certain cases triple tax-exemption for
Pennsylvania residents by investing in insured Pennsylvania
Pennsylvania Insured Municipals Income Trust........................ municipal securities
Insured Municipals Income Trust, Insured Multi-Series
(Premium Bond Series, National, Limited Maturity, Intermediate,
Short Intermediate, Discount, Alabama, Arizona, Arkansas,
California, California Intermediate, California Intermediate
Laddered Maturity, California Premium, Colorado, Connecticut,
Florida, Florida Intermediate, Florida Intermediate Laddered
Maturity, Georgia, Louisiana, Massachusetts, Massachusetts
Premium, Michigan, Michigan Intermediate, Michigan
Intermediate Laddered Maturity, Michigan Premium, Minnesota,
Missouri, Missouri Intermediate Laddered Maturity, Missouri
Premium, New Jersey, New Jersey Intermediate Laddered
Maturity, New Mexico, New York, New York Intermediate, New Tax-exempt income by investing in insured municipal
York Intermediate Laddered Maturity, New York Limited securities; all issuers of bonds in a state trust are located
Maturity, Ohio, Ohio Intermediate, Ohio Intermediate Laddered in such state or in territories or possessions of the United
Maturity, Ohio Premium, Oklahoma, Pennsylvania, Pennsylvania States-- providing exemptions from all state income tax for
Intermediate, Pennsylvania Intermediate Laddered Maturity, residents of such state (except for the Oklahoma IM-IT Trust
Pennsylvania Premium, Tennessee, Texas, Texas Intermediate where a portion of the income of the Trust may be subject to
Laddered Maturity, Washington, West Virginia)...................... the Oklahoma state income tax)
Insured Tax Free Bond Trust......................................... Tax-exempt income by investing in insured municipal securities
Tax-exempt income by investing in insured municipal
securities; all issuers of bonds in a state trust are located
Insured Tax Free Bond Trust, Insured Multi-Series in such state--providing exemptions from state income tax for
(National Limited Maturity, New York).............................. residents of such state
Investors' Quality Tax-Exempt Trust................................. Tax-exempt income by investing in municipal securities
Investors' Quality Tax-Exempt Trust, Multi-Series
(National, National AMT, Intermediate, Alabama, Arizona,
Arkansas, California, Colorado, Connecticut, Delaware, Tax-exempt income by investing in municipal securities; all
Florida, Georgia, Hawaii, Kansas, Kentucky, Maine, Maryland, issuers of bonds in a state trust are located in such state
Massachusetts, Michigan, Minnesota, Missouri, Nebraska, or in territories or possessions of the United
New Jersey, New York, North Carolina, Ohio, Oregon, States--providing exemptions from state income tax for
Pennsylvania, South Carolina, Virginia)............................ residents of such state
Tax-exempt income for investors not subject to the
alternative minimum tax by investing in municipal securities,
some or all of which are subject to the Federal alternative
Investors' Quality Municipals Trust, AMT Series......................minimum tax
Investors' Corporate Income Trust....................................Taxable income by investing in corporate bonds
Taxable income by investing in government-backed GNMA
Investors' Governmental Securities--Income Trust.................... securities
High current income through an investment in a diversified
portfolio of foreign currency denominated corporate debt
Van Kampen Merritt International Bond Income Trust...................obligations
High current income consistent with preservation of capital
through a diversified investment in a fixed portfolio of
insured, long-term or intermediate-term corporate debt
Van Kampen Merritt Insured Income Trust..............................securities
High current income consistent with preservation of capital
through a diversified investment in a fixed portfolio of
insured, long-term or intermediate-term corporate debt
Van Kampen American Capital Insured Income Trust.....................securities
High dividend income and capital appreciation by investing in
Van Kampen Merritt Utility Income Trust..............................common stock of electric utilities
Provide the potential for capital appreciation and income by
investing in a portfolio of actively traded, New York Stock
Exchange listed equity securities which are components of the
Van Kampen Merritt Select Equity Trust...............................Dow Jones Industrial Average*
Protect Unitholders' capital and provide the potential for
capital appreciation and income by investing a portion of its
portfolio in "zero coupon"U.S. Treasury obligations
and the remainder of the trust's portfolio in the identical
Van Kampen Merritt Select Equity and Treasury Trust..................equity securities which comprise the Select Equity Trust
Provide the potential for capital appreciation and income by
investing in a portfolio of actively traded, New York Stock
Exchange listed equity securities which are components of the
Van Kampen Merritt Blue Chip Opportunity Trust.......................Dow Jones Industrial Average*
Protect Unitholders' capital and provide the potential for
capital appreciation and income by investing a portion of its
portfolio in "zero coupon"U.S. Treasury obligations
and the remainder of the trust's portfolio in actively
traded, New York Stock Exchange listed equity securities
Van Kampen Merritt Blue Chip Opportunity and which at the time of the creation of the trust were
Treasury Trust......................................................components of the Dow Jones Industrial Average*
High current income consistent with preservation of capital
through a diversified investment in a fixed portfolio
primarily consisting of Brady Bonds of emerging market
countries that have restructured sovereign debt pursuant to
Van Kampen Merritt Emerging Markets Income Trust.....................the framework of the Brady Plan
Provide the potential for capital appreciation and income
consistent with the preservation of invested capital, by
investing in a portfolio of equity securities which provide
Van Kampen Merritt Global Telecommunications Trust...................equipment for or services to the telecommunications industry
Provide the potential for capital appreciation and income
consistent with the preservation of invested capital, by
investing in a portfolio of equity securities diversified
Van Kampen Merritt Global Energy Trust...............................within the energy industry
Provide an above average total return through a combination
of potential capital appreciation and dividend income,
consistent with preservation of invested capital, by
investing in a portfolio of common stocks of the ten
Strategic Ten Trust companies in a recognized stock exchange index having the
(United States, United Kingdom, and Hong Kong Portfolios)...........highest dividend yields
Provide the potential for capital appreciation and income
consistent with the preservation of invested capital, by
investing in a portfolio of equity securities diversified
Van Kampen Merritt Brand Name Equity Trust...........................within the non-durable consumer products industry
</TABLE>
*The Dow Jones Industrial Average is the property of Dow Jones & Company, Inc.
Dow Jones & Company, Inc. has not granted to the Trust or the Sponsor a
license to use the Dow Jones Industrial Average.
<TABLE>
Name of Mutual Fund Fund Investment Objective
<CAPTION>
<S> <C>
Van Kampen Merritt U.S. Government Fund....................High current income by investing in U.S. Government securities
High current income exempt from Federal income taxes by investing in
Van Kampen Merritt Insured Tax Free Income Fund............insured municipal securities
High level of current income exempt from Federal income tax, consistent
Van Kampen Merritt Municipal Income Fund...................with preservation of capital
High current income exempt from Federal income taxes by investing in
Van Kampen Merritt Tax Free High Income Fund...............medium and lower grade municipal securities
High current income exempt from Federal and California income taxes by
Van Kampen Merritt California Insured Tax Free Fund........investing in insured California municipal securities
Provide a high level of current income by investing in medium and lower
grade domestic and foreign government and corporate debt securities.
Van Kampen Merritt High Yield Fund.........................The Fund will seek capital appreciation as a secondary objective
Long-term growth of both capital and dividend income by investing in
Van Kampen Merritt Growth and Income Fund..................dividend paying common stocks
High current income exempt from Federal and Pennsylvania state and
local income taxes by investing in medium and lower grade Pennsylvania
Van Kampen Merritt Pennsylvania Tax Free Income Fund.......municipal securities
High current income by investing in a broad range of money market
Van Kampen Merritt Money Market Fund.......................instruments that will mature within twelve months
High current income exempt from Federal income taxes by investing in a
broad range of municipal securities that will mature within twelve
Van Kampen Merritt Tax Free Money Fund.....................months
High current income by investing in a global portfolio of high quality
debt securities denominated in various currencies having remaining
Van Kampen Merritt Short-Term Global Income Fund...........maturities of not more than three years
High level of current income with a relatively stable net asset value
Van Kampen Merritt Adjustable Rate U.S. Government Fund....investing in U.S. Government securities
High level of current income exempt from Federal income tax, consistent
Van Kampen Merritt Limited Term Municipal Income Fund......with preservation of capital
Provide capital appreciation and current income by investing in a
diversified portfolio of common stocks and income securities issued by
Van Kampen Merritt Utility Fund............................companies engaged in the utilities industry
Provide shareholders with high current income. The Fund will seek
Van Kampen Merritt Strategic Income Fund...................capital appreciation as a secondary objective
High level of current income exempt from Federal income tax and Florida
intangible personal property taxes consistent with preservation of
Van Kampen Merritt Florida Insured Tax Free Income Fund....capital
High level of current income exempt from Federal income tax and New
Van Kampen Merritt New Jersey Tax Free Income Fund.........Jersey gross income tax consistent with preservation of capital
High level of current income exempt from Federal as well as New York
State and New York City income taxes, consistent with preservation of
Van Kampen Merritt New York Tax Free Income Fund...........capital
To provide shareholders current income while also seeking to provide
Van Kampen Merritt Balanced Fund...........................capital growth
</TABLE>
<TABLE>
Name of Closed-end Fund Fund Investment Objective
<CAPTION>
<S> <C>
High current income exempt from Federal income taxes with safety of
principal by investing in a diversified portfolio of investment grade
Van Kampen Merritt Municipal Income Trust...................municipal securities
High current income exempt from Federal and California income taxes
with safety of principal by investing in a diversified portfolio of
Van Kampen Merritt California Municipal Trust...............investment grade California municipal securities
High current income while seeking to preserve shareholders' capital by
investing in a diversified portfolio of high yield fixed income
Van Kampen Merritt Intermediate Term High Income Trust......securities
High current income while seeking to preserve shareholders' capital by
investing in a diversified portfolio of high yield fixed income
Van Kampen Merritt Limited Term High Income Trust...........securities
High current income, consistent with preservation of capital by
Van Kampen Merritt Prime Rate Income Trust..................investing in interests in floating or variable rate senior loans
High current income exempt from Federal income tax, consistent with
Van Kampen Merritt Investment Grade Municipal Trust.........preservation of capital
High level of current income exempt from Federal income tax,
Van Kampen Merritt Municipal Trust..........................consistent with preservation of capital
High current income exempt from Federal and California income taxes
with safety of principal by investing in a diversified portfolio of
Van Kampen Merritt California Quality Municipal Trust.......investment grade California municipal securities
High current income exempt from Federal income taxes and Florida
intangible personal property taxes with safety of principal by
investing in a diversified portfolio of investment grade Florida
Van Kampen Merritt Florida Quality Municipal Trust..........municipal securities
High current income exempt from Federal as well as New York State and
New York City income taxes with safety of principal by investing in a
Van Kampen Merritt New York Quality Municipal Trust.........diversified portfolio of investment grade New York municipal securities
High current income exempt from Federal and Ohio income taxes with
safety of principal by investing in a diversified portfolio of
Van Kampen Merritt Ohio Quality Municipal Trust.............investment grade Ohio municipal securities
High current income exempt from Federal and Pennsylvania income taxes
with safety of principal by investing in a diversified portfolio of
Van Kampen Merritt Pennsylvania Quality Municipal Trust.....investment grade Pennsylvania municipal securities
High level of current income exempt from Federal income tax,
Van Kampen Merritt Trust for Investment Grade Municipals....consistent with preservation of capital
High level of current income exempt from Federal income tax,
consistent with preservation of capital by investing in a diversified
portfolio of municipal securities which are covered by insurance with
Van Kampen Merritt Trust for Insured Municipals.............respect to timely payment of principal and interest
High level of current income exempt from Federal and California income
Van Kampen Merritt Trust for Investment Grade CA taxes, consistent with preservation of capital by investing in a
Municipals.................................................diversified portfolio of California municipal securities
High level of current income exempt from Federal income taxes,
consistent with preservation of capital. The Fund also seeks to offer
Van Kampen Merritt Trust for Investment Grade FL its Shareholders the opportunity to own securities exempt from Florida
Municipals.................................................intangible personal property taxes
Van Kampen Merritt Trust for Investment Grade NJ
Municipals High level of current income exempt from Federal income taxes and New
..........................................................Jersey gross income taxes, consistent with preservation of capital
High level of current income exempt from Federal as well as from New
Van Kampen Merritt Trust for Investment Grade NY York State and New York City income taxes, consistent with
Municipals.................................................preservation of capital
High level of current income exempt from Federal and Pennsylvania
Van Kampen Merritt Trust for Investment Grade PA income taxes and, where possible under local law, local income and
Municipals.................................................property taxes, consistent with preservation of capital
High level of current income exempt from Federal income tax,
consistent with preservation of capital by investing in a diversified
Van Kampen Merritt Municipal Opportunity Trust..............portfolio of municipal securities
High level of current income exempt from Federal income tax,
consistent with preservation of capital by investing in a diversified
Van Kampen Merritt Advantage Municipal Income Trust.........portfolio of municipal securities
High level of current income exempt from Federal and Pennsylvania
Van Kampen Merritt Advantage Pennsylvania Municipal income taxes and, where possible under local law, local income and
Income Trust...............................................property taxes, consistent with preservation of capital
Provide common shareholders with a high level of current income exempt
Van Kampen Merritt Strategic Sector Municipal Trust.........from Federal income taxes, consistent with preservation of capital
High level of current income exempt from Federal income taxes,
Van Kampen Merritt Value Municipal Income Trust.............consistent with preservation of capital
Van Kampen Merritt California Value Municipal High level of current income exempt from Federal and California income
Income Trust...............................................taxes, consistent with preservation of capital
High level of current income exempt from Federal income taxes and
Van Kampen Merritt Massachusetts Value Municipal Massachusetts personal income taxes, consistent with preservation of
Income Trust..............................................capital
Van Kampen Merritt New Jersey Value Municipal High level of current income exempt from Federal income taxes and New
Income Trust...............................................Jersey gross income tax, consistent with preservation of capital
High level of current income exempt from Federal as well as New York
Van Kampen Merritt New York Value Municipal State and New York City income taxes, consistent with preservation of
Income Trust...............................................capital
Van Kampen Merritt Ohio Value Municipal Income High level of current income exempt from Federal and Ohio income
Trust......................................................taxes, consistent with preservation of capital
Van Kampen Merritt Pennsylvania Value Municipal High level of current income exempt from Federal and Pennsylvania
Income Trust..............................................income taxes, consistent with preservation of capital
High level of current income exempt from Federal income tax,
Van Kampen Merritt Municipal Opportunity Trust II...........consistent with preservation of capital
High level of current income exempt from Federal income tax,
consistent with preservation of capital. The Fund seeks to offer its
common shareholders the opportunity to own securities exempt from
Van Kampen Merritt Florida Municipal Opportunity Trust .....Florida intangible personal property taxes
Provide common shareholders with a high level of current income exempt
Van Kampen Merritt Advantage Municipal Income Trust II......from Federal income tax, consistent with preservation of capital
To provide common shareholders with a high level of current income
Van Kampen Merritt Select Sector Municipal Trust............exempt from Federal income tax, consistent with preservation of capital
</TABLE>
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and
not exceeding amounts prescribed by the Securities and Exchange Commission,
(ii) terminate the Trust Agreement and liquidate the Trust as provided therein
or (iii) continue to act as Trustee without terminating the Trust Agreement.
All costs and expenses incurred in creating and establishing the Fund,
including the cost of the initial preparation, printing and execution of the
Trust Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses have been borne by the Sponsor at no
cost to the Fund.
THE TRUSTEE
Except for the various series of the Pennsylvania Trusts referred to in the
next paragraph, the Trustee is The Bank of New York, a trust company organized
under the laws of New York. The Bank of New York has its offices at 101
Barclay Street, New York, New York 10286 (800-221-7668). The Bank of New York
is subject to supervision and examination by the Superintendent of Banks of
the State of New York and the Board of Governors of the Federal Reserve
System, and its deposits are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law. The Trustee commenced operations
on February 3, 1986 when it acquired the unit investment trust division of
Fidata Trust Company, New York. The duties of the Trustee are primarily
ministerial in nature. It did not participate in the selection of Bonds for
the portfolios of any of the Trusts.
In the case of the various series of Investors' Municipal Pennsylvania Unit
Trusts and Tax-Exempt Trusts for Pennsylvania Residents, First Combined Series
(Investors' Municipal Pennsylvania Unit Trust, 3rd Series), the Trustee is
United States Trust Company of New York, with its principal place of business
at 45 Wall Street, New York, New York 10005 and its corporate trust office at
770 Broadway, New York, New York 10003. United States Trust Company of New
York, established in 1853, has, since its organization, engaged primarily in
the management of trust and agency accounts for individuals and corporations.
The Trustee is a member of the New York Clearing Housing Association and is
subject to supervision and examination by the Superintendent of Banks of the
State of New York, the Federal Deposit Insurance Corporation and the Board of
Governors of the Federal Reserve System.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Trust. Such
records shall include the name and address of, and the certificates issued by
the Trust to, every Unitholder of the Trust. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may
from time to time be required under any applicable state or Federal statute,
rule or regulation (see "Unitholder Explanations-Public Offering Reports
Provided"). The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the Securities held in the Trust.
Under the Trust Agreement, the Trustee or any successor trustee may resign and
be discharged of the Trusts created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all Fund
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon the Trustee's resignation, no successor trustee has
been appointed and has accepted the appointment within 30 days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The Sponsor may remove the
Trustee and appoint a successor trustee as provided in the Trust Agreement at
any time with or without cause. Notice of such removal and appointment shall
be mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by such successor trustee, all the rights,
powers, duties and obligations of the original trustee shall vesting the
successor. The resignation or removal of a Trustee becomes effective only when
the successor trustee accepts its appointment as such or when a court of
competent jurisdiction appoints a successor trustee.
Any corporation into which a Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a banking corporation organized under the laws of the United States or
any state and having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
EXPENSES OF THE TRUST
The Sponsor will not receive any fees in connection with its activities
relating to a Trust. However, in connection with certain series of the Trusts
American Portfolio Evaluation Services, a division of Van Kampen American
Capital Investment Advisory Corp., a wholly-owned subsidiary corporation of
the Sponsor, will receive an annual supervisory fee as indicated under
"Summary of Essential Financial Information" in Part One of this Prospectus
for providing portfolio supervisory services for such series of such Trusts.
Such fee (which is based on the number of Units outstanding on January 1 of
each year) may exceed the actual costs of providing such supervisory services
for such series of such Trust, but at no time will the total amount received
for portfolio supervisory services rendered to all such series of such Trusts
in any calendar year exceed the aggregate cost to the Evaluator of supplying
such services in such year. In addition, for regularly evaluating Trust
portfolios, the Evaluator shall receive an annual evaluation fee as also
indicated under "Summary of Essential Financial Information". For its services
the Trustee receives a fee based on the aggregate outstanding principal amount
of Securities in each Trust as of the opening of business on January 2 and
July 2 of each year as set forth under "Per Unit Information" in Part I of
this Prospectus. The Trustee's fees are payable monthly on or before the
fifteenth day of each month from the Interest Account of each Trust to the
extent funds are available and then from the Principal Account of each Trust,
with such payments being based on each Trust's portion of such expenses. The
Trustee's fees will not be increased in future years in order to make up for
any reduction in the Trustee's fees described in Part I of this Prospectus
under "Per Unit Information" for the applicable Trust. Since the Trustee has
the use of the funds being held in the Principal and Interest Accounts for
future distributions, payment of expenses and redemptions and since such
Accounts are non-interest bearing to Unitholders, the Trustee benefits
thereby. Part of the Trustee's compensation for its services to each Trust is
expected to result from the use of these funds. For a discussion of the
services rendered by the Trustee pursuant to its obligations under the Trust
Agreement, see "Public Offering Reports Provided" and "Trust Administration
and Expenses".
Both the Evaluator's fees and the Trustee's fees may be increased without
approval of the Unitholders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer Price
Index published by the United States Department of Labor or, if such category
is no longer published, in a comparable category. The Sponsor and the dealers
will receive sales commissions and may realize other profits (or losses) in
connection with the sale of Units as described under "Public Offering".
The following additional charges may be incurred by the Trusts: (a) fees of
the Trustee for extraordinary services, (b) expenses of the Trustee (including
legal and auditing expenses) and of counsel designated by the Sponsor, (c)
various governmental charges, (d) expenses and costs of any action taken by
the Trustee to protect the Trusts and the rights and interests of Unitholders,
(e) indemnification of the Trustee for any loss, liability or expenses
incurred by it in the administration of the Fund without negligence, bad faith
or willful misconduct on its part and (f) expenditures incurred in contacting
Unitholders upon termination of the Trust.
The fees and expenses set forth herein are payable out of the respective
Trusts. When such fees and expenses are paid by or owing to the Trustee, they
are secured by a lien on the portfolio of the applicable Trust. If the
balances in the Interest and Principal Accounts are insufficient to provide
for amounts payable by a Trust, the Trustee has the power to sell Securities
to pay such amounts.
PORTFOLIO ADMINISTRATION
The Trustee is empowered to sell, for the purpose of redeeming Units tendered
by any Unitholder, and for the payment of expenses for which funds may not be
available, such of the Bonds designated by the Evaluator as the Trustee in its
sole discretion may deem necessary. The Evaluator, in designating such
Securities, will consider a variety of factors, including (a)interest rates,
(b) market value and (c) marketability. The Sponsor, in connection with the
respective Trusts, may direct the Trustee to dispose of Bonds upon default in
payment of principal or interest, institution of certain legal proceedings,
default under other documents adversely affecting debt service, default in
payment of principal or interest on other obligations of the same issuer,
decline in projected income pledged for debt service on revenue bonds or
decline in price or the occurrence of other market or credit factors,
including advance refunding (i.e., the issuance of refunding securities and
the deposit of the proceeds thereof in trust or escrow to retire the refunded
securities on their respective redemption dates), so that in the opinion of
the Sponsor the retention of such Bonds would be detrimental to the interest
of the Unitholders. Because of such restrictions on the Trustee under certain
circumstances the Sponsor may seek a full or partial suspension of the right
of Unitholders to redeem their Units. See "Public Offering Redemption of
Units". The Sponsor is empowered, but not obligated, to direct the Trustee to
dispose of Bonds in the event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of any of the Securities to issue new obligations in exchange or
substitution for any Security pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the Sponsor may deem
proper if (1) the issuer is in default with respect to such Security or (2) in
the written opinion of the Sponsor the issuer will probably default with
respect to such Security in the reasonably foreseeable future. Any obligation
so received in exchange or substitution will be held by the Trustee subject to
the terms and conditions of the Trust Agreement to the same extent as
Securities originally deposited thereunder. Within five days after the deposit
of obligations in exchange or substitution for underlying Securities, the
Trustee is required to give notice thereof to each Unitholder of the Trust
thereby affected, identifying the Securities eliminated and the Securities
substituted therefor. Except as provided herein, the acquisition by a Trust of
any securities other than the Securities initially deposited is not permitted.
If any default in the payment of principal or interest on any Security occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Security within 30 days after notification by
the Trustee to the Sponsor of such default, the Trustee may in its discretion
sell the defaulted Security and not be liable for any depreciation or loss
thereby incurred.
PURCHASE OF UNITS BY THE SPONSOR
The Trustee shall notify the Sponsor of any tender of Units for redemption. If
the Sponsor's bid in the secondary market at that time equals or exceeds the
Redemption Price per Unit, it may purchase such Units by notifying the Trustee
before the close of business on the second succeeding business day and by
making payment therefor to the Unitholder not later than the day on which the
Units would otherwise have been redeemed by the Trustee. Units held by the
Sponsor may be tendered to the Trustee for redemption as any other Units.
The offering price of any Units acquired by the Sponsor will be in accord with
the Public Offering Price described in the then currently effective prospectus
describing such Units. Any profit resulting from the resale of such Units will
belong to the Sponsor which likewise will bear any loss resulting from a lower
offering or Redemption Price subsequent to its acquisition of such Units.
AMENDMENT OR TERMINATION
The Sponsor and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unitholders when such an amendment is (a) to
cure an ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein or (b) to make such other provisions as shall not adversely
affect the interest of the Unitholders (as determined in good faith by the
Sponsor and the Trustee), provided that the Trust Agreement may not be amended
to increase the number of Units issuable thereunder or to permit the deposit
or acquisition of securities either in addition to or in substitution for any
of the Securities initially deposited in a Trust, except for the substitution
of certain refunding securities for such Securities. In the event of any
amendment, the Trustee is obligated to notify promptly all Unitholders of the
substance of such amendment.
A Trust may be terminated by the Trustee when the value of such Trust, as
shown by any semi-annual evaluation, is less than that indicated under
"Summary of Essential Financial Information" in Part One of this Prospectus.
In addition, all Trusts other than those indicated in the next sentence may be
terminated at any time by the consent of the holders representing 100% of the
Units of such Trust then outstanding. Each Trust in Investors' Quality Tax-
Exempt Trust, 6th Multi-State, 7th Multi-State, 8th Multi-Series and
subsequent series may be terminated at any time by consent of the holders
representing 51% of the Units of such Trust then outstanding. The Trust
Agreement provides that each Trust shall terminate upon the redemption, sale
or other disposition of the last Security held in such Trust, but in no event
shall it continue beyond the end of the year preceding the fiftieth
anniversary of the Trust Agreement. In the event of termination of the Fund or
any Trust, written notice thereof will be sent by the Trustee to each
Unitholder of such Trust at his address appearing on the registration books of
the Fund maintained by the Trustee. Within a reasonable time thereafter, the
Trustee shall liquidate any Securities then held in such Trust and shall
deduct from the funds of such Trust any accrued costs, expenses or indemnities
provided by the Trust Agreement, including estimated compensation of the
Trustee and costs of liquidation and any amounts required as a reserve to
provide for payment of any applicable taxes or other governmental charges. The
sale of Securities in the Trust upon termination may result in a lower amount
than might otherwise be realized if such sale were not required at such time.
For this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount of Securities represented by
the Units held by such Unitholder. The Trustee shall then distribute to each
Unitholder his share of the balance of the Interest and Principal Accounts.
With such distribution, the Unitholder shall be furnished a final distribution
statement of the amount distributable. At such time as the Trustee in its sole
discretion shall determine that any amounts held in reserve are no longer
necessary, it shall make distribution thereof to Unitholders in the same
manner.
LIMITATION ON LIABILITIES
The Sponsor, the Evaluator and the Trustee shall be under no liability to
Unitholders for taking any action or for refraining from taking any action in
good faith pursuant to the Trust Agreement, or for errors in judgment, but
shall be liable only for their own willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of their reckless
disregard of their obligations and duties hereunder. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by the Trustee
of any of the Securities. In the event of the failure of the Sponsor to act
under the Trust Agreement, the Trustee may act thereunder and shall not be
liable for any action taken by it in good faith under the Trust Agreement.
The Trustee shall not be liable for any taxes or other governmental charges
imposed upon or in respect of the Securities or upon the interest thereon or
upon it as Trustee under the Trust Agreement or upon or in respect of a Trust
which the Trustee may be required to pay under any present or future law of
the United States of America or of any other taxing authority having
jurisdiction. In addition, the Trust Agreement contains other customary
provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Trust Agreement shall be made in
good faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee,
Sponsor or Unitholders for errors in judgment. This provision shall not
protect the Evaluator in any case of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
UNIT DISTRIBUTION
Units repurchased in the secondary market, if any, may be offered by this
Prospectus at the secondary Public Offering Price (which includes Purchased
Interest in those Trusts which contain Purchased Interest) plus accrued
undistributed interest to the settlement date. Broker-dealers or others will
be allowed a concession or agency commission in connection with secondary
market transactions in the amount of70% of the applicable sales charge as
determined using the table found in "Public Offering". Certain commercial
banks are making Units of the Trust available to their customers on an agency
basis. A portion of the sale charge (equal to the agency commission referred
to above) is retained by or remitted to the banks. Under the Glass-Steagall
Act, banks are prohibited from underwriting Trust Units; however, the Glass-
Steagall Act does permit certain agency transactions and the banking
regulators have not indicated that these particular agency transactions are
not permitted under such Act. In addition, state securities laws on this issue
may differ from the interpretations of federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law. The minimum purchase in the secondary market will be one Unit.
Broker-dealers of the Trust may be eligible to participate in a program in
which such firms receive from the Sponsor a nominal award for each of their
registered representatives who have sold a minimum number of units of unit
investment trusts created by the Sponsor during a specified time period. In
addition, at various times the Sponsor may implement other programs under
which the sales force of a broker or dealer may be eligible to win other
nominal awards for certain sales efforts, or under which the Sponsor will
reallow to any such broker or dealer that sponsors sales contests or
recognition programs conforming to criteria established by the Sponsor, or
participates in sales programs sponsored by the Sponsor, an amount not
exceeding the total applicable sales charges on the sales generated by such
person at the public offering price during such programs. Also, the Sponsor in
its discretion may from time to time pursuant to objective criteria
established by the Sponsor pay fees to qualifying brokers or dealers for
certain services or activities which are primarily intended to result in sales
of Units of the Trust. Such payments are made by the Sponsor out of its own
assets, and not out of the assets of the Trust. These programs will not change
the price Unitholders pay for their Units or the amount that the Trust will
receive from the Units sold.
The Sponsor reserves the right to reject, in whole or in part, any order for
the purchase of Units and to change the amount of the concession or agency
commission to dealers and others from time to time.
SPONSOR AND DEALER COMPENSATION
Dealers will receive the gross sales commission as described under "Public
Offering Price".
As stated under "Market for Units", the Sponsor intends to, and certain of the
dealers may, maintain a secondary market for the Units of the Trust. In so
maintaining a market, such person or persons will realize profits or sustain
losses in the amount of any difference between the price at which Units are
purchased and the price at which Units are resold (which price is based on the
bid prices of the Securities in such Trust and includes a sales charge). In
addition, such person or persons will also realize profits or sustain losses
resulting from a redemption of such repurchased Units at a price above or
below the purchase price for such Units, respectively.
LEGAL OPINIONS
The legality of the Units offered hereby has been passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor. The counsel which has provided a state tax opinion to the respective
State Trust under "Description and State Tax Status of State Trusts" has acted
as special counsel to the Fund for the tax matters of such State. Various
Counsel have acted as counsel for the Trustee and as special counsel for the
Fund for New York tax matters. None of the special counsel for the Fund has
expressed any opinion regarding the completeness or materiality of any matters
contained in this Prospectus other than the tax opinion set forth by such
special counsel.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The statements of condition and the related securities portfolio for each
Trust included in Part One of this Prospectus have been audited at the date
indicated therein by Grant Thornton LLP, independent certified public
accountants, as set forth in their report in Part One of this Prospectus, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's Ratings Group ("Standard
& Poor's") corporate or municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation.
This assessment of creditworthiness may take into consideration obligors such
as guarantors, insurers or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangements under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA
This is the highest rating assigned by Standard & Poor's to a debt obligation
and indicates an extremely strong capacity to pay principal and interest.
AA
Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A
Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit quality,
the ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
As published by the rating companies.
Provisional Ratings: A provisional rating "p" assumes the successful
completion of the project being financed by the issuance of the bonds being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to
completion, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk. Moody's Investors Service,
Inc. A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings follow:
Aaa
Bonds which are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by
money market fluctuations.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of
oversupply in a few specific instances.
A
Bonds which are rated A possess many favorable investment attributes and are
to be considered as higher medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. The
market value of A-rated bonds maybe influenced to some degree by credit
circumstances during a sustained period of depressed business conditions.
During periods of normalcy, bonds of this quality frequently move in parallel
with Aaa and Aa obligations, with the occasional exception of oversupply in a
few specific instances.
Baa
Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the
high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Con
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are bonds secured
by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when facilities
are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
No person is authorized to give any information or to make any representations
not contained in this Prospectus, and any information or representation not
contained herein must not be relied upon as having been authorized by the
Fund, the Sponsor or any dealer. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Introduction...................................... 1
Description of The Funds.......................... 2
Securities Selection.............................. 2
Risk Factors...................................... 2
Bond Redemptions ................................. 4
Distributions .................................... 5
Certificates ..................................... 6
Estimated Current Returns and.....................
Estimated Long-Term Returns ...................... 6
Accrued Interest (Accrued Interest To Carry)...... 6
Purchased Interest ............................... 6
Public Offering Price ............................ 7
Market for Units ................................. 8
Reinvestment Option .............................. 8
Redemption of Units .............................. 8
Reports Provided ................................. 9
Federal Tax Status of Each Trust ................. 9
Description and State Tax Status of State Trust... 11
Alabama Trusts ................................... 11
Arizona Trusts ................................... 13
Arkansas Trusts .................................. 14
California Trusts ................................ 16
Colorado Trusts .................................. 20
Connecticut Trusts ............................... 22
Delaware Trusts .................................. 24
Florida Trusts ................................... 26
Georgia Trusts ................................... 29
Hawaii............................................ 31
Kansas Trusts .................................... 32
Kentucky Trusts .................................. 33
Maine Trusts ..................................... 34
Maryland Trusts .................................. 36
Massachusetts Trusts ............................. 37
Michigan Trusts .................................. 38
Minnesota Trusts ................................. 40
Missouri Trusts .................................. 41
Nebraska Trusts .................................. 43
New Jersey Trusts ................................ 43
New York Trusts .................................. 46
North Carolina Trusts ............................ 52
Ohio Trusts ...................................... 56
Oregon Trusts .................................... 58
Pennsylvania Trusts .............................. 61
South Carolina Trusts ............................ 64
Virginia Trusts .................................. 67
The Sponsor ...................................... 68
The Trustee ...................................... 72
Expenses of the Trust ............................ 72
Portfolio Administration ......................... 73
Purchase of Units by the Sponsor ................. 73
Amendment or Termination ......................... 74
Limitation on Liabilities ........................ 74
Unit Distribution ................................ 74
Sponsor and Dealer Compensation .................. 75
Legal Opinions ................................... 75
Independent Certified Public Accounts............. 75
Description of Securities Ratings ................ 75
</TABLE>
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of the information set forth in the registration
statements and exhibits relating thereto, which the Fund has filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Act
of 1933 and the Investment Company Act of 1940, and to which reference is
hereby made.
National and State Quality Trusts
INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS
PART TWO
Note: This Prospectus May Be Used Only When Accompanied by Part One. Both
Parts of this Prospectus should be retained for future reference.
Dated as of the date of the Prospectus Part I accompanying this Prospectus
Part II.
Sponsor: VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
A Wealth of Knowledge A Knowledge of Wealth(sm)
VAN KAMPEN AMERICAN CAPITAL
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
2800 Post Oak Boulevard
Houston, Texas 77056
Contents of Post-Effective Amendment
to Registration Statement
This Post-Effective Amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Pennsylvania Investors' Quality Tax-Exempt Trust, Series 4,
certifies that it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to its
Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal to be hereunto affixed and
attested, all in the City of Chicago and State of Illinois on the
24th day of April, 1995.
Pennsylvania Investors' Quality Tax-Exempt
Trust, Series 4
(Registrant)
By Van Kampen American Capital Distributors,
Inc.
(Depositor)
By Sandra A. Waterworth
Vice President
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this
Post Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities on April 24, 1995:
Signature Title
Don G. Powell Chairman and Chief )
Executive Officer )
)
William R. Molinari President and Chief )
Operating Officer )
)
Ronald A. Nyberg Executive Vice President )
and General Counsel )
)
William R. Rybak Executive Vice President and )
Chief Financial Officer
Sandra A. Waterworth
Attorney in Fact)*
____________________
* An executed copy of each of the related powers of attorney was filed
with the Securities and Exchange Commission in connection with the
Registration Statement on Form S-6 of Insured Municipals Income
Trust, 113th Insured Multi-Series (File No. 33-46036) and the same
are hereby incorporated herein by this reference.
Consent of Independent Certified Public Accountants
We have issued our report dated March 10, 1995 accompanying the
financial statements of Pennsylvania Investors' Quality Tax-Exempt Trust,
Series 4 as of December 31, 1994, and for the period then ended,
contained in this Post-Effective Amendment No. 16 to Form S-6.
We consent to the use of the aforementioned report in the Post-
Effective Amendment and to the use of our name as it appears under the
caption "Auditors".
Grant Thornton LLP
Chicago, Illinois
April 24, 1995
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<NAME> Q-PA
<CAPTION>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 3193905
<INVESTMENTS-AT-VALUE> 3679332
<RECEIVABLES> 0
<ASSETS-OTHER> 120114
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<TOTAL-LIABILITIES> 41785
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3757661
<SHARES-COMMON-STOCK> 8962
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<INTEREST-INCOME> 336843
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<EXPENSES-NET> 10059
<NET-INVESTMENT-INCOME> 326784
<REALIZED-GAINS-CURRENT> 8996
<APPREC-INCREASE-CURRENT> (329387)
<NET-CHANGE-FROM-OPS> 6393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (332856)
<DISTRIBUTIONS-OF-GAINS> (30220)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 555
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (593410)
<ACCUMULATED-NII-PRIOR> 88239
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 0
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<GROSS-EXPENSE> 10059
<AVERAGE-NET-ASSETS> 4054366
<PER-SHARE-NAV-BEGIN> 457.19
<PER-SHARE-NII> 36.463
<PER-SHARE-GAIN-APPREC> (35.75)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 3.372
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
