Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 10
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Investors' Quality Tax-Exempt Trust, Series 23
(Exact Name of Trust)
Van Kampen Merritt Inc.
(Exact Name of Depositor)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Complete address of Depositor's principal executive offices)
Van Kampen Merritt Inc. Chapman and Cutler
Attention: John C. Merritt 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 February 21, 1994 pursuant to paragraph (b) of Rule 485.
SL23OCT1
QUAL-A 3-93 23-1
SERIES 23
INVESTORS' QUALITY 11,327 Units
TAX-EXEMPT TRUST
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, but may be subject to state and local taxes. Capital
gains, if any, are subject to Federal tax.
THE TRUST
The above-named series of Investors' Quality Tax-Exempt 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 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 under existing law. 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 Return and Estimated Long-Term Return are set
forth in Part Two of this Prosepectus.
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 February 16, 1994
Van Kampen Merritt
Page 1
<PAGE>
SL23OCT2
QUAL 4-10-91 23-2
<TABLE>
INVESTORS' QUALITY TAX-EXEMPT TRUST, SERIES 23
Summary of Essential Financial Information
As of December 8, 1993
Sponsor: Van Kampen Merritt Inc.
Evaluator: American Portfolio Evaluation Services
(A division of a subsidiary of the
Sponsor)
Trustee: The Bank of New York
<CAPTION>
QUAL
<S> <C>
-------------------
General Information
Principal Amount (Par Value) of Securities .............................................................. $ 1,675,000
Number of Units ......................................................................................... 11,327
Fractional Undivided Interest in Trust per Unit ......................................................... 1/ 11,327
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio ...................................................... $ 1,508,426.05
Aggregate Bid Price of Securities per Unit .......................................................... $ 133.17
Sales charge 6.045% (5.7% of Public Offering Price excluding principal cash) ........................ $ 8.02
Principal Cash per Unit ............................................................................. $ (.55)
Public Offering Price per Unit <F1>.................................................................. $ 140.64
Redemption Price per Unit ............................................................................... $ 132.62
Excess of Public Offering Price per Unit over Redemption Price per Unit ................................. $ 8.02
Minimum Value of the Trust under which Trust Agreement may be terminated ................................ $ 2,547,000
Minimum Principal Distribution ...$1.00 per Unit
Date of Deposit ..................January 12, 1983
Mandatory Termination Date .......December 31, 2032
Evaluator's Annual Supervisory Fee Maximum of $0.25 per Unit
Evaluator's Annual Fee <F3>.......$11,093
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>
<TABLE>
Special Information Based on Various Distribution Plans
<CAPTION>
Monthly Quarterly Semi-Annual
<S> <C> <C> <C>
------------- ------------- -------------
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit ...................................... $ 8.56 $ 8.56 $ 8.56
Less: Estimated Annual Expense excluding Insurance ............................. $ 1.83 $ 1.70 $ 1.61
Estimated Net Annual Interest Income per Unit .................................. $ 6.73 $ 6.86 $ 6.95
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income ........................................... $ 6.73 $ 6.86 $ 6.95
Divided by 12, 4 and 2, respectively ........................................... $ .56 $ 1.72 $ 3.48
Estimated Daily Rate of Net Interest Accrual per Unit .............................. $ .01869 $ .01907 $ .01930
Estimated Current Return Based on Public Offering Price <F2>........................ 4.77% 4.86% 4.92%
Estimated Long-Term Return <F2>..................................................... 4.43% 4.52% 4.58%
Record and Computation Dates FIRST day of the month as follows: monthly - each
month; quarterly - January, April, July, and
October; semi-annual - January and July.
Distribution Dates ..........FIFTEENTH day of the month as follows: monthly -
each month; quarterly - January, April, July, and
October; semi-annual - January and July.
Trustee's Annual Fee ........$1.24, $0.98 and $0.69 per $1,000 principal
amount of Bonds respectively, for those portions
of the Trusts 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 $1.28, $2.73 and $8.53 respectively, for those portions of
the Trust under the monthly, quarterly, and semi-annual 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 $5,200 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>
Page 2
<PAGE>
SL23OCT3
QUAL 12-28-88 23-3
PORTFOLIO
In selecting Bonds for the Investors' Quality Tax-Exempt Trust, Series
23, 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 (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 October 31, 1993, the Trust
consists of 6 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 (16%); Multi-Family, 2 (46%) and Single Family, 3 (38%). The
portfolio consists of 6 Bond issues in 5 states. See "Bond Portfolio" herein
and "Description of Securities Ratings" in Part Two.
<TABLE>
PER UNIT INFORMATION
<CAPTION>
1984 1985 1986 1987 1988
<S> <C> <C> <C> <C> <C>
---------- --------- ---------- --------- ---------
Net asset value per
Unit at beginning of
period ........... $ 978.13 $ 974.27 1,039.79 1,137.10 1,030.15
========== ========= ========== ========= =========
Net asset value per
Unit at end of
period ........... $ 974.27 1,039.79 1,137.10 1,030.15 1,042.00
========== ========= ========== ========= =========
Distributions to
Unitholders of
investment income
including accrued
interest to carry
paid on Units
redeemed (average
Units outstanding
for entire period)
<F1>.............. $ 102.11 $ 101.34 $ 101.76 $ 99.76 $ 96.52
========== ========= ========== ========= =========
Distributions to
Unitholders from
Bond redemption
proceeds (average
Units outstanding
for entire period) $ -- $ -- $ -- $ 30.70 $ 7.53
========== ========= ========== ========= =========
Unrealized
appreciation
(depreciation) of
Bonds (per Unit
outstanding at end
of period) ....... $ (5.57) $ 64.35 $ 94.86 $(74.33) $ 19.71
========== ========= ========== ========= =========
Distributions of
investment income by
frequency of payment
<F1>
Monthly ....... $ 100.24 $ 100.32 $ 100.25 $ 98.92 $ 96.05
Quarterly ..... $ 100.58 $ 100.64 $ 100.32 $ 99.31 $ 96.29
Semiannual .... $ 100.85 $ 100.94 $ 100.70 $ 100.22 $ 97.00
Units outstanding at
end of period .... 12,489 12,222 11,710 11,670 11,641
<FN>
<F1>Unitholders may elect to receive distributions on a monthly, quarterly or
semi-annual basis.
</TABLE>
<TABLE>
PER UNIT INFORMATION
<CAPTION>
1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
---------- --------- ---------- --------- ----------
Net asset value per
Unit at beginning of
period ........... 1,042.00 1,018.92 $ 980.14 $ 967.10 $ 821.31
========== ========= ========== ========= ==========
Net asset value per
Unit at end of
period ........... 1,018.92 $ 980.14 $ 967.10 $ 821.31 $ 299.59
========== ========= ========== ========= ==========
Distributions to
Unitholders of
investment income
including accrued
interest to carry
paid on Units
redeemed (average
Units outstanding
for entire period)
<F1>.............. $ 95.99 $ 94.98 $ 94.35 $ 93.13 $ 46.34
========== ========= ========== ========= ==========
Distributions to
Unitholders from
Bond redemption
proceeds (average
Units outstanding
for entire period) $ 4.64 $ 5.07 $ 5.42 $ 109.68 $ 511.59
========== ========= ========== ========= ==========
Unrealized
appreciation
(depreciation) of
Bonds (per Unit
outstanding at end
of period) ....... $(17.69) $(35.43) $ (7.41) $(19.94) $ 21.12
========== ========= ========== ========= ==========
Distributions of
investment income by
frequency of payment
<F1>
Monthly ....... $ 95.55 $ 94.86 $ 94.21 $ 91.71 $ 41.32
Quarterly ..... $ 95.73 $ 95.08 $ 94.46 $ 92.08 $ 41.60
Semiannual .... $ 96.09 $ 95.49 $ 94.93 $ 95.98 $ 56.10
Units outstanding at
end of period .... 11,641 11,638 11,633 11,627 11,404
<FN>
<F1>Unitholders may elect to receive distributions on a monthly, quarterly or
semi-annual basis.
</TABLE>
Page 3
<PAGE>
SL23OCT4
QUAL-D 1-28-91 23-4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Van Kampen Merritt Inc. and the Unitholders of
Investors' Quality Tax-Exempt Trust, Series 23:
We have audited the accompanying statement of condition (including the
analysis of net assets) and the related portfolio of Investors' Quality
Tax-Exempt Trust, Series 23 as of October 31, 1993, and the related statements
of operations and changes in net assets for the three years ended October 31,
1993. 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 October 31,
1993 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' Quality Tax-Exempt
Trust, Series 23 as of October 31, 1993, and the results of operations and
changes in net assets for the three years ended October 31, 1993, in
conformity with generally accepted accounting principles.
GRANT THORNTON
Chicago, Illinois
December 17, 1993
Page 4
<PAGE>
<TABLE>
SL23OCT5
QUAL-D 1-28-91 23-5
INVESTORS' QUALITY TAX-EXEMPT TRUST
SERIES 23
Statement of Condition
October 31, 1993
<CAPTION>
QUAL
<S> <C>
------------------
Trust property
Cash .................................................................................................. $ 1,537,013
Tax-exempt securities at market value, (cost $1,360,678) (note 1) ..................................... 1,852,149
Accrued interest ...................................................................................... 27,358
------------------
$ 3,416,520
==================
Liabilities and interest of Unitholders
Interest to Unitholders ............................................................................... $ 3,416,520
------------------
$ 3,416,520
==================
</TABLE>
<TABLE>
Analysis of Net Assets
<CAPTION>
<S> <C>
Interest of Unitholders (11,404 Units of fractional undivided interest outstanding)
Cost to original investors of 13,073 Units (note 1) ................................................... $ 13,073,000
Less initial underwriting commission (note 3) ................................................... 640,467
------------------
12,432,533
Less redemption of 1,669 Units .................................................................. 1,521,120
------------------
10,911,413
Undistributed net investment income
Net investment income ........................................................................... 11,709,762
Less distributions to Unitholders ............................................................... 11,649,514
------------------
60,248
Realized gain (loss) on Bond sale or redemption ....................................................... (240,802)
Unrealized appreciation (depreciation) of Bonds (note 2) .............................................. 491,471
Distributions to Unitholders of Bond sale or redemption proceeds ...................................... (7,805,810)
------------------
Net asset value to Unitholders ............................................................... $ 3,416,520
==================
Net asset value per Unit (11,404 Units outstanding) ....................................................... $ 299.59
==================
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5
<PAGE>
<TABLE>
SL23OCT6
QUAL 5-30-90 23-6
INVESTORS' QUALITY TAX-EXEMPT TRUST, SERIES 23
Statements of OperationsYears ended October 31,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Investment income
Interest income .................................................. $ 1,119,684 $ 1,059,290 $ 355,247
Expenses
Trustee fees and expenses ..................................... 14,748 14,820 8,413
Evaluator fees ................................................ 4,782 4,570 11,093
Supervisory fees .............................................. 2,232 1,266 4,106
------------------ ----------------- ------------------
Total expenses .......................................... 21,762 20,656 23,612
------------------ ----------------- ------------------
Net Investment Income ......................................... 1,097,922 1,038,634 331,635
Realized gain (loss) from Bond sale or redemption
Proceeds ......................................................... 65,000 1,310,550 7,433,515
Cost ............................................................. 67,438 1,454,217 7,624,265
------------------ ----------------- ------------------
Realized gain (loss) .......................................... (2,438) (143,667) (190,750)
Net change in unrealized appreciation (depreciation)
of Bonds ........................................................... (86,228) (231,813) 240,850
------------------ ----------------- ------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ 1,009,256 $ 663,154 $ 381,735
================== ================= ==================
</TABLE>
<TABLE>
Statements of Changes in Net AssetsYears ended October 31,
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
------------------ ----------------- ------------------
Increase (decrease) in net assets
Operations:
Net investment income ......................................... $ 1,097,922 $ 1,038,634 $ 331,635
Realized gain (loss) on Bond sale or redemption ............... (2,438) (143,667) (190,750)
Net change in unrealized appreciation (depreciation)
of Bonds .................................................... (86,228) (231,813) 240,850
------------------ ----------------- ------------------
Net increase (decrease) in net assets resulting
from operations .......................................... 1,009,256 663,154 381,735
Distributions to Unitholders from:
Net investment income ......................................... (1,098,002) (1,083,312) (535,068)
Bond sale or redemption proceeds .............................. (63,071) (1,275,803) (5,907,323)
Redemption of Units (note 4) ......................................... (4,741) (4,937) (72,183)
------------------ ----------------- ------------------
Total increase (decrease) .................................. (156,558) (1,700,898) (6,132,839)
Net asset value to Unitholders
Beginning of period ........................................... 11,406,815 11,250,257 9,549,359
------------------ ----------------- ------------------
End of period (including undistributed net investment income of
$308,359, $263,681 and $60,248, respectively) ...............
$ 11,250,257 $ 9,549,359 $ 3,416,520
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 6
<PAGE>
<TABLE>
SL23OCT7
QUAL 11-01-85 23-7 jl 12/14/93
INVESTORS' QUALITY TAX-EXEMPT TRUST
PORTFOLIO as of October 31, 1993
SERIES 23
<CAPTION>
_________________________________________________________________________________________________________________________________
October
31, 1993
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Rating Feature Value
Item Principal Maturity Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
- ----------- ---------------- --------------------------------------------- ---------- -------------------------- ----------------
A $ -- 0 -- Akron, Bath and Copley Joint Township $ -- 0 --
Hospital District (Ohio) Hospital Facility
Revenue Bonds, Series 1982 (Akron General
Medical Center Project)
13.125% Due 01/01/99
- ---------------------------------------------------------------------------------------------------------------------------------
B 80,000 County of Cook, Illinois Single Family A* 1994 @ 102 81,974
Mortgage Revenue Bonds 1982 Series A 1994 @ 100 S.F.
11.000% Due 08/01/02
- ---------------------------------------------------------------------------------------------------------------------------------
C -- 0 -- Baltimore County, Maryland Industrial -- 0 --
Development Revenue Bonds (Atlantic Cement
Company, Inc. Project) Port Facilities
Series, 1982
11.000% Due 12/01/02
- ---------------------------------------------------------------------------------------------------------------------------------
D -- 0 -- Regents of the University of Minnesota -- 0 --
University Hospitals and Clinics Bonds
Series 1982
10.625% Due 12/01/02
- ---------------------------------------------------------------------------------------------------------------------------------
E -- 0 -- City of Austin, Texas Combined Utility -- 0 --
System Revenue Bonds, Series 1982
12.800% Due 11/15/05
- ---------------------------------------------------------------------------------------------------------------------------------
F -- 0 -- Pennsylvania Housing Finance Agency -- 0 --
Residential Development Bonds, Issue F
(Sec-tion 8 Assisted)
7.500% Due 11/15/10
- ---------------------------------------------------------------------------------------------------------------------------------
G -- 0 -- Clark County, Nevada Airport Improvement and -- 0 --
Refunding Revenue Bonds Series C,
Subseries August 1, 1982 (McCarran
International Airport Las Vegas, Nevada)
13.375% Due 07/01/12
- ---------------------------------------------------------------------------------------------------------------------------------
H -- 0 -- Lake Charles (Louisiana) Harbor and Terminal -- 0 --
District Port Facilities Revenue Bonds,
Series 1982 A (Trunkline LNG Company
Project)
10.875% Due 11/15/12
- ---------------------------------------------------------------------------------------------------------------------------------
I 350,000 City of Philadelphia, Pennsylvania Gas Works AAA 384,962
Revenue Bonds, Seventh Series
6.000% Due 03/15/13**
- ---------------------------------------------------------------------------------------------------------------------------------
J 500,000 New Jersey Mortgage Finance Agency Statewide AA* 1994 @ 67.373 336,215
Mortgage Purchase Revenue Bonds, 1982 2012 @ 98.095 S.F.
Series 1
6.000% Due 04/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
K 250,000 Alabama Housing Finance Authority Single AA- 2002 @ 74.45 205,592
Family Mortgage Revenue Bonds, 1982 Series 2012 @ 100 S.F.
A
6.000% Due 06/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
L -- 0 -- Maine Health and Higher Educational -- 0 --
Facilities Authority Revenue Bonds Maine
Medical Center Issue, Series A
6.000% Due 10/01/13
- ---------------------------------------------------------------------------------------------------------------------------------
M -- 0 -- New Hampshire Higher Educational and Health -- 0 --
Facilities Authority Revenue Bonds Elliot
Hospital of Manchester Issue, Series 1983
10.500% Due 10/01/13
</TABLE>
Page 7
<PAGE>
SL23OCT8
QUAL 11-01-85 23-8 jl 12/14/93
<TABLE>
INVESTORS' QUALITY TAX-EXEMPT TRUST
PORTFOLIO as of October 31, 1993
(continued)SERIES 23
<CAPTION>
_________________________________________________________________________________________________________________________________
October
31, 1993
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Rating Feature Value
Item Principal Maturity Date (Note 2) (Note 2) (Note 1)
<S> <C> <C> <C> <C> <C>
- ----------- ---------------- --------------------------------------------- ---------- -------------------------- ----------------
N $ -- 0 -- North Carolina Eastern Municipal Power $ -- 0 --
Agen-cy Power System Revenue Bonds, Series
1982 C
11.250% Due 01/01/18
7.500% Due 01/01/19
- ---------------------------------------------------------------------------------------------------------------------------------
O 750,000 Illinois Housing Development Authority A+ 1993 @ 100 667,883
Multi-Family Housing Bonds, 1982 Series C 2015 @ 100 S.F.
5.000% Due 07/01/25
- ---------------------------------------------------------------------------------------------------------------------------------
P 245,000 Colorado Housing Finance Authority AA 1994 @ 102.5 175,523
Multi-Family Housing Insured Mortgage 2020 @ 100 S.F.
Revenue Bonds, 1982 Series B
6.000% Due 10/01/25
---------------- ----------------
$ 2,175,000 $ 1,852,149
================ ================
_________________________________________________________________________________________________________________________________
</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.
Page 8
<PAGE>
SL23OCT9
QUAL-A 5-30-90 23-9
INVESTORS' QUALITY TAX-EXEMPT TRUST
SERIES 23
Notes to Financial Statements
October 31, 1991, 1992 and 1993
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 (January 12, 1983). Since the valuation is based
upon the bid prices the Trust recognized a downward adjustment of $137,908 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 October 31, 1983.
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 Corporation. Ratings marked * are by Moody's
Investors Service, Inc. and ratings marked # are by Fitch 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 semi-annually and any premium
received on such redemption. However, should the amount available for
distribution in the Principal Account exceed $10.00 per Unit, the Trustee will
make a special distribution from the Principal Account on the next succeeding
monthly distribution date to holders of record on the related monthly record
date. 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.
Unrealized Appreciation and Depreciation--An analysis of net unrealized
appreciation (depreciation) at October 31, 1993 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized Appreciation $ 429,497
Unrealized Depreciation (1,026)
-----------------
$ 491,471
=================
Page 9
<PAGE>
SL23OCT10
QUAL-A 6-12-90 23-10 mu 1/6/94
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 a fee for providing
portfolio supervisory services for the Trust ($.25 per Unit, not to exceed the
aggregate cost of the Evaluator for providing such services to all applicable
Trusts). In addition, the Evaluator receives an annual fee for regularly
evaluating the Trust's portfolio. Both fees 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 October 31, 1991, 1992 and 1993, 5 Units, 6 Units
and 223 Units, respectively, were presented for redemption.
NOTE 5--SUBSEQUENT EVENT
On November 15, 1993, The New Jersey Mortgage Finance Agency Statewide
Mortgage Purchase Revenue Bonds in the amount of $500,000 were called at
$68.02.
Page 10
9
NATIONAL AND STATE QUALITY TRUSTS
INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS
Part Two
In the opinion ofcounsel, 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 Corporation or "A" or better by Moody's
Investors Service, Inc.
Public Offering Price. Units are offered at the Public Offering Price plus
accrued undistributed interest to the settlement date. The Public Offering
Price for "secondary market" sales will be equal to the aggregate bid price of
the Securities in each Trust plus the sales charge referred to under "Public
Offering". 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 Eva
luator 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 associatedwith 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.
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE
Both parts of this Prospectus should be retained for future reference.
THESE SECURlTIES 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 Merritt
<PAGE>
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 lawbut 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).
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 payinterest 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 Corporation
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 cannever 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.
PORTFOLIO CONCENTRATIONS
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 proceedsof 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 ofsuch 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 aninflationary 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 ef
fect 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 projectmay
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 consequentlythe 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 theseproblems
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 themunicipality 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 andmake
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 toschool 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. Litigat
ion 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 mayadversely 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 ofsuch 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 theseindustry
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 revenuesfrom 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 understandingof 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.
REPLACEMENT BONDS
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. In the event of a failure to
deliver any Security that has been purchased for the Fund under a contract, in
cluding those Securities purchased on a
"when, as and if issued" basis ("Failed
Bonds"), the Sponsor is authoritzed under the Trust Agreement to direct the
Trustee to acquire other bonds ("Replacement Bonds") to make up the original
corpus of the Fund.
BOND REDEMPTIONS
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. Theexercise 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 onthe 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 sub
stantially 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 redeemBonds; 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 will be made on a
semi-annual basis, except under certain
special circumstances. See "Distributions
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.
Change of Distribution Option. The plan of distribution selected by a
Unitholder remains in effectuntil 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 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. 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. However,should the amount available for
distribution in the Principal Account equal or exceed $10.00 per Unit, the
Trustee will make a special distribution
from the Principal Account on the next
succeeding monthly distribution date to holders of record on the related
monthly record date.
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'spro
rata 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. 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.
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, ifany, 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
amountsto 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 an
officer of a commercial bank or trust company, a member firm of either the New
York, American, Midwest or Pacific Stock Exchange, or in such other manner 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. Certificates for Units will
bear appropriate notations on their face indicating which plan of distribution
has been selected in respect thereof. If a change in plan of distribution is
made, the existing certificate must be surrendered to the Trustee and a new
certificate will be issued, at no charge to the Unitholder, to reflect the
currently effective plan of distribution.
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; 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.
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 Trustis
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.
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. 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.
[CAPTION]
TABLE OF CONTENTS
[S] [C]
TitlePage
Introduction .................................... 1
Description of The Fund ......................... 2
Securities Selection ......................... 2
Portfolio Concentrations ..................... 3
Replacement Bonds ............................ 6
<PAGE>
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>
<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
net amount invested. Expressed as a percent of the Public Offering Price, 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 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 forredemption, 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 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. 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 Merritt 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 Merritt 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 OFUNITS
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,
redemptionof 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.
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, and (iii) 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 sh
all 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, deductions for applicable
taxes and for fees and expenses of such Trust, for redemptions of Units, if
any, and the balance remaining after such distributionsand 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 heldand
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 sothat Unitholders may be informed
regarding the results of such other distribution option or options.
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:
(1) 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. 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 QualityAMT Trust) may be subject to
the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax");
(2) 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 Unitsfor 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
settlementdate 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 Certificateholder. The amount of any such
gain or loss is measured by comparing the Certificateholder's pro rata
share of the total proceeds from such disposition with the
Certificateholder's basis for his or her fractional interest in the
asset disposed of. In the case of a Certificateholder 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 am
ount 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 ofthe 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 onthe 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 issueprice")
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.
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 to 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 eachTrust 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 thereonfrom 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". It should be
noted that under recently proposed legislation, the proportion of Social
Security benefits subject to inclusion
in taxable income would be raised to 55%
for taxable years starting in 1992 and
1993, and 60% for taxable years starting
after 1993. No prediction is made as to
the likelihood that this legislation or
other legislation with substantially similar effect will be enacted. The base
amount is $25,000 for unmarried taxpayers, $32,000for 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.
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 must include fifty percent 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 34%, effective for long-term capital gains realized
after December 31, 1986. 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'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 some rural areas of the
State. A trend towards diversification of the State's economic base and an
expansion of serviceindustries 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 service 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 theissuers 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 substantiallyto the effect that:
(1) The Alabama Trust is not taxable as a
corporation for purposes of the Alabama income tax;
(2) Income of the Alabama Trust, to the
extent it is taxable, will be taxable to the Unitholders, not the
Alabama Trust;
(3) 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;
(4) Interest on obligations held by the
Alabama Trust which is exempt from the Alabama income tax will retain
its tax-exempt character whenthe distributive share thereof is
distributed or deemed distributed to each Unitholder;
(5)
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;
(6) 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; and
(7) 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
Arizona is the nation's sixth largest state in terms of area and ranks
among the leading states in three economic indices of growth. For the ten year
period 1978-88, Arizona ranked second nationally in both population growth and
growth in employment and third in growth of personal income.
According to figures reported by the Arizona Department of Economic
Security, Arizona has been one of the fastest growing states in the nation.
While the United States' population
increased 11 percent between 1970 and 1980,
Arizona realized a 53 percent growth
rate. More recently this growth has slowed
to a more manageable rate. The population of Arizona has grown consistently at
a rate between 2.2% and 2.4% annually during the years 1988 through 1990, and
is predicted to remain in that range through 1992. The 1990 census results
indicate that the population of Arizona rose 35% between 1980 and 1990, a rate
exceeded only in Nevada and Alaska. Nearly 950,000 residents were added during
this period.
Arizona's main economic sectors includeservices, 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 need
to provide services for these visitors has contributed substantially to
employment gains in the State.
In 1988, unemployment in the State was 6.3%. Unemployment in Arizona
decreased to 5.2% in 1989 and increased slightly to 5.3% in 1990. Arizona's
unemployment rates in 1989 and 1990 were very similar to the national rates of
5.3% and 5.4% respectively. Arizona's 5.2% unemployment rate in September of
1991 increased to 6.2% in October and
7.3% in November, surpassing the national
rate in November of 6.8%. The unemployment rate in Arizona for 1991 as a whole
is estimated at 5.5%, compared to a national rate estimated at 6.8%, and is
forecasted to remain relatively constant for the next two years.
On June 27, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West is the sixth largest employer in Maricopa
County, employing approximately 10,000 persons within the county, and 15,000
nationwide. At the first meeting of creditors, representatives of the airline
stated that as many as 1,500 employees might be laid off over the next few
months, most in Phoenix and Las Vegas.
Over 300 employees have received lay-off
notices. The effect of the America West bankruptcy on the state economy and,
more particularly, the Phoenixeconomy, is uncertain.
Similarly, jobs will be lost by the anticipated closing of Williams Air
Force Base in Chandler, Arizona, in 1993. Williams Air Force Base was selected
as one of the military installations to be closed as a cost-cutting measure by
the Defense Base Closureand Realignment Commission, whose recommendations were
subsequently approved by the President and the United States House of
Representatives. Williams Air Force Base injects approximately $340 million in
the local economy annually,and employs 1,851 civilians.
Growth in the number of jobs in Arizona has been consistent for the last
few years at the rate of 2.4% to 2.5%. Job growth for 1991 is estimated at
1.8%, but should improve slightly in 1992. As of September of 1991, only
fifteen states were experiencing job growth greater than one percent, and
several were experiencing job losses at or near a three percent annualized
rate. In Arizona, the two sectors that
have been consistently strong during the
last several years are government and services. Jobs were lost in the
manufacturing sector, for the third straight year, and in the construction
industry, for the fifth consecutive year.
The deterioration of Arizona banks
and savings and loans, apparent in 1988
and especially marked in 1989, continued through 1990. Slower construction and
real estate activity is at the heart of Arizona's financial industry's current
weakness. In the early 1980s, Phoenix and other metropolitan areas of Arizona
began experiencing an economic and population "boom," and Arizona's
institutions aggressively pursued many facets of real estate lending. By 1986,
the metropolitan areas of Arizona were overbuilt in many categories of
construction and were burdened with excessive levels of completed inventory.
The tax law amendments in 1986 exacerbated the financial impact of the
saturated market. The elimination of certain tax benefits associated with
income-producing properties contributed to the decline in growth. Further, the
value of real estate in Arizonabegan a downward spiral, reflective of the
overbuilt market and inventory which
continues today. These problems translated
into a cumulative $488 million loss for Arizona banks and a cumulative $2.329
billion loss for Arizona savings and loans in 1989.
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. Longer-term prospects are brighter, since
population growth is still strong by most standards, and Arizona's climate and
tourist industry still continue to stimulate the State's economy. However, the
previously robust place of growth by
financial institutions is not likely to be
repeated over an extended period.
Arizona operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1992 refers to the year ending June 30, 1992.
Total General Fund revenues of $3.5 billion are expected during fiscal
year 1992. Approximately 43.2% of this
budgeted revenue comesfrom sales and use
taxes, 36.0% from income taxes (both individual and corporate) and 5.3% from
property taxes. All taxes total approximately $3.3 billion, or 93% of the
General Fund revenues. Non-tax revenue includes items such as income from the
state lottery, licenses, fees and permits, and interest. Lottery income totals
approximately 34.6% of non-tax revenue.
For fiscal year 1992, the budget calls for expenditures of $3.5 billion.
Major appropriations include $1.3 billion to the Department of Education (for
K-12), $369.9 million for the administration of the Arizona Health Care Cost
Containment System program ("AHCCCS") (the State's alternative to Medicaid),
$357.4 million to the Department of Economic Security, and $255.9 million to
the Department of Corrections. The budget for fiscal year 1991 also totalled
approximately $3.5 billion, and the budget for fiscal year 1990 totalled $3.17
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 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.
Local governments have experienced many of the same fiscal difficulties
for many of the same reasons and, in several cases, have been prevented by
Constitutional limitations on bonded
indebtedness from securing necessary funds
to undertake street, utility and other infrastructure expansions, improvements
and renovations in order to meet the needs of rapidly increasing populations.
In this regard, the voters of the cities of Phoenix and Tucson in 1984
authorized the issuance of general obligation and revenue bonds aggregating
$525 million and $330 million, respectively, and in May 1986, the voters of
Maricopa County, in which the City of Phoenix is located, and Pima County, in
which the City of Tucson is located, authorized the issuance of bonds
aggregating $261 million and $219.4 million, respectively, to finance various
short- and long-term capital projects, including infrastructure expansions,
improvements and replacements. Also, in 1986, the voters in Maricopa and Pima
Counties voted a 1/2% increase in the State sales taxes to pay for highway
construction in those counties. In April
1988 the voters of the City of Phoenix
authorized the issuance of general obligation bonds aggregating $1.1 billion.
Although most of the Bonds in the
Arizona Trust are revenue obligations of
local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions
referred to above will not affect the market
value or marketability of the Bonds or the ability of the respective obligors
to pay principal of and interest on the Bonds when due.
The State of Arizona was recently sued by fifty-four school districts
within the state, claiming that the
State's funding system for school buildings
and equipment is unconstitutional. The lawsuit does not seek damages, but
requests that the court order the State to create a new financing system that
sets minimum standards for buildings and furnishings that apply on a statewide
basis. The complaint alleges that some school districts have sufficient funds
to build outdoor swimming pools, while others have classrooms that leak in the
rain. It is unclear, at this time, what
affect any judgment would have on state
finances or school district budgets.
The U.S. Department of Education recently determined that Arizona's
educational funding system did not meet federal requirements of equity. This
determination could mean a loss in federal funds of approximately $50 million.
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 attempted unsuccessfully in its 1984
regular and special sessions to enact legislation designed to control health
care costs, ultimately adopting three
referenda measures placed on the November
1984 general election ballot which in various ways would have regulated
hospital and health care facility expansions, rates and revenues. At the same
time, a coalition of Arizona employers proposed two initiatives voted on inthe
November 1984 general election which would have created a State agency with
power to regulate hospital and health care facility expansions and rates
generally. All of these referenda and initiative propositions were rejected by
the voters in the November 1984 general election. Pre-existing State
certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium prohibiting
hospital bed increases and new hospital construction projects and a temporary
freeze on hospital rates and charges at June 1984 levels has also expired.
Because of such expirations and increasing health care costs, it is expected
that the Arizona Legislature will at future sessions continue to attempt to
adopt legislation concerning these matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increases 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, AHCCCS, which
provides health care to indigent persons meeting certain financial eligibility
requirements, through managedcare
programs. In fiscal year 1992, AHCCCS will be
financed approximately 52.7% by federal funds, 33.1% by state funds, and 13.6%
by county funds.
Under state law, hospitals retain the authority to raise rates 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 during the past
three years.
Insofar as tax-exempt Arizona public utility pollution control revenue
bonds are concerned, the issuance of such bonds and the periodic rateincreases
needed to cover operating 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 Electric 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. After the dismissal of the bankruptcy petition, the Arizona
Corporation Commission approved a permanent 15% rate hike. The rate increase
had been approved by the Commission on
an interim basis several months earlier,
pending the dismissal or withdrawal of the bankruptcy petitions. 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.
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:
(1) 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;
(2) 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;
(3) 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;
(4) Each Unitholder will receive taxable
gain orloss 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 aredelivered to the Arizona
Trust, if later;
(5) 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; and
(6) 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's, it has not failed to
pay the principal and interest on any of its general obligations when duesince
that time.
Act 496 of 1981, as amended, the
"Arkansas Water Resources Development Act
of 1981," ("Act 496") authorized 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 notexceed $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. Pursuant to Act 496, the State of Arkansas has issued
and outstanding two series of bonds in the aggregate principal amount of
$28,075,000 under Act 496.
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. Only five
states generate a larger proportion of earnings from agriculture, and only 17
states generate a larger proportion of earnings from manufacturing. Similarly,
only 10 states have a larger proportion of employment in agriculture and only
18 states have a larger proportion of employment in manufacturing. 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. In both 1987 and 1988,
agricultural employment declined by 1.6%. Agriculture employment also declined
in 1989 by 1.6%and should continue to
decline according to State forecasters as
labor intensive production is shifted to less labor intensive production.
Employment in Arkansas' construction industry decreased 2.3%in 1988. This
followed a 5.6% decline in 1987. In 1989, State forecasters anticipated a
decline in growth rate of 2.5%. A further decline of 0.7%is expected in 1990.
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. In 1986, Arkansas ranked fifth in the
United States with a 2.1% growth of new
manufacturing jobs. The diversification
of economic interestshas lessened Arkansas' cyclical sensitivity to impact by
any single sector. During 1988, total employment increased by 3.4% and total
nonagricultural wage and salary employment increased by 2.8%. Total employment
growth in Arkansas exceeded the growth rate of total employment in the United
States. The average unemployment rate declined from 8.1% in 1987 to 7.7% in
1988. The increase in earnings along with the rise in employment generated a
6.9% increase in total personal income in 1988.
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.
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 opinion of Chapman and Cutler, counsel for Van Kampen Merritt Inc.,
concludes that each Trust, including the Arkansas Trust, will be governed for
Federal tax purposes by the provisions of Subchapter J of Chapter 1 of the
Code. Although there are no Arkansas income tax statutes similar to Subchapter
J of Chapter 1 of the Code, Arkansas statutory provisions operate to reach the
same result that is reached under theFederal system. Arkansas law defines
Arkansas gross income for residents similarly to the definition of Federal
gross income, and that definition of Arkansas gross income specifically
excludes interest on obligations of the State of Arkansas or any political
subdivision thereof.
Based upon the foregoing and, in reliance upon the opinion of Chapman and
Cutler, counsel to Van Kampen Merritt Inc., the Sponsor, and upon an
examination of such other documents and an investigation of such other matters
of law as we have deemed necessary, it is our opinion that the application of
existing Arkansas income tax law to Arkansas Unitholders would be as follows:
(1)
The Arkansas Trust is not taxable as a
corporation or otherwise for purposes of Arkansas income taxation;
(2) Each Arkansas Unitholder will be
treated as the owner of a pro rata portion of the Arkansas Trust for
Arkansas income tax purposes,
and the income of the Arkansas Trust will
therefore be treated as the income the Arkansas Unitholders under A
rkansas law;
(3)
Interest on bonds, issued by the State
of Arkansas, or by or on behalf of political subdivisions, agencies or
instrumentalities thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt
fromArkansas income taxation when received by the Arkansas Trust and
attributed to such Arkansas Unitholder and when distributed to such
Arkansas Unitholder; and
(4) Distribution of income to Arkansas
Unitholders consisting of gains realizedupon the sale or other
disposition of obligations held by the Arkansas Trust will be subject
to Arkansas income taxation to the extent that such income would be
subject to Arkansas income taxation if the obligations were held or
sold or otherwise disposed of directly by the Arkansas Unitholders.
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 orthe 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 $630 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 the Commission on
State Finance (the "COSF") 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 and additional significant 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. Unemployment was
7.5% for 1991 (compared to 6.7% nationally), and is expected to be higher than
thenational average in the near future.
The State's economy is only expected to
pull out of the recession slowly once
the national recovery has begun. Delay in
recovery will exacerbate shortfalls in State revenues.
Certain California municipal obligationsmay 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 approval to levy any "special tax." However, court
decisions 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
thevoters in November 1990, but such a
proposal may be renewed in the future.
The State 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" excludes most State
subventions to local governments. No limit is imposed on appropriations or
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 more closely follow 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 tofour
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.
Appropriations subject to limitation were under the State limit by $1.2
billion, $259 million, $1.6 million,
$7.5 billion and $5.2 billion for the five
most recent fiscal years ending with
1991-92. State appropriations are expected
to be $5.1 billion under the limit for Fiscal Year 1992-93.
Because of the complex nature of
Articles XIIIA andXIIIB of the California
Constitution (described briefly above), 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 the State or local governments to pay debt
service on such California MunicipalObligations. 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 November 6, 1992, California had approximately $16.7 billion of
general obligation bonds outstanding, and $8.6 billion remained authorized but
unissued. In addition, at June 30, 1992, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $2.9
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 servicepayments). Three
general obligation bond propositions, totalling $3.7 billion were approved by
voters in November 1992. In fiscal year 1991-92, debt service on general
obligation bonds and lease-purchase debt
was approximately 3.2% 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 are the California personal
income tax (45% of total revenues), the sales tax (35%), bank and corporation
taxes (12%), and the gross premium tax
on insurance (3%). The State 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
recentyears, the State has budgeted to
maintain the Economic Uncertainties Fund
at around 3% of General Fund expenditures but essentially no reserve is
budgeted in 1992-93.
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 37%).
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. Revenues declined in
1990-91 over 1989-90, the first time since the 1930s. By June 30, 1992, the
State's General Fund had an accumulated deficit, on a budget basis, of
approximately $2.2 billion.
As the 1990-91 fiscal year ended in the midst of a continuing recession
and very weak revenues, the Governor estimated that a "budget gap" of $14.3
billion would have to be resolved in
order to reconcile the excess of projected
expenditures for existing programs, at currently mandated growth rates, over
expected revenues, the need to repay the 1990-91 budget deficit, and the need
to restore a budget reserve. This budget gap was closed through a combination
of temporary and permanent changes in
laws and one-time budget adjustments. The
major features of the budget compromise were program funding reductions
totalling $5.0 billion; a total of $5.1 billion of increased State revenues;
savings of $2.1 billion from transferring certain health and welfare programs
to counties to be funded by increased sales tax and vehicle license fees to be
given directly to counties; and additional miscellaneous savings and revenue
gains andone time accounting charges totalling $2.1 billion.
The 1991-92 Budget Act was based on economic forecasts that recovery from
the recession would begin in the summer
or fall of 1991, but as the severity of
the recession increased, revenues lagged significantly and continually behind
projections from the start of the fiscal year. As a result, revenues for the
1991-92 Fiscal Year were more than $4 billion lower than originally projected
and expenditures were higher than originally projected.
As a consequence of the large budget imbalances built up over two
consecutive years, the State used up all of its available cash resources. In
late June 1992, the State was required to issue $475 million of short-term
revenue anticipation warrants to cover obligations coming due on June 30 and
July 1. These warrants were repaid on July 24, 1992.
At the outset of the 1992-93 Fiscal Year, the State estimated that
approximately $7.9 billion of budget actions would be required to end the
1992-93 Fiscal Year. 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 Legislature enacted the 1992-93
Budget Bill on August 29, 1992, and it
was signed by the Governor on September 2, 1992. The 1992-93 Budget Act
provides for expenditures of $57.4 billion and consists of General Fund
expenditures of $40.8 billion and Special Fund and Bond Fund expenditures of
$16.6 billion. The Department of Finance estimated there would be a balance in
the Special Fund for Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gapwas closed through a combination of increased
revenues and transfers and expenditure cuts. The principle reductions were in
health and welfare, K-12 schools and community colleges, State aid to local
governments, higher education (partially offset by increased student fees) and
various other programs. In addition,
funds were transferred from special funds,
collections of State revenues were accelerated, and other adjustments were
made.
The 1992-93 Budget was prepared and
the estimate that it will be inbalance
(with a reserve of $28 million at June 30, 1993) was based upon economic
assumptions made by the Department of Finance in May, 1992, which projected,
among other things, gradual recovery beginning in the latter part of 1992. In
October the COSF reported that conditions were worse than the May forecast,
with a stagnant economy now predicted for up to another two years. The COSF
predicted that, if no corrective actions were taken, the 1992-93 Fiscal Year
budget could be approximately $2.4 billion outof balance.
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 toincrease 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 "Aa" by Moody's and
"A+" by S&P. Both of these ratings were recently reduced from "AAA" levels
which the State held until late 1991. 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 issuersmay 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.
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 totaled approximately $33 billion in fiscal year 1991-92
(about 75% of General Fund expenditures)
and has been budgeted at $31.1 billion
for fiscal year 1992-93, including the effect of implementing reductions in
certain aid 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. At least one rural county
(Butte) publicly announced that it might
enter bankruptcy proceedings in August
1990, although such plans were apparently put off after the Governor approved
legislation to provide additional funds for the county. Other counties have
also indicated that their budgetary condition is extremely grave. 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 or Mello-Roos
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 thesebonds 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
causes 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 case is
still in very preliminary stages, and it is not known how it will be resolved.
If the case goes to trial, a judgment against the Trustee 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. Health Care and Hospital Securities 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 (for example, 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 Article XIIIA and Article 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) nolonger 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. Legislationhas 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 topay 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 incomefor 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, fromtaxes 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
sellsUnits. Because of the requirement that tax cost basis be reduced
toreflect 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; and
(5) 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
Special Counsel 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, Special
Counsel has not made any special review for
the California Trusts of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
Colorado Trusts
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 has varied in
recent fiscal years, having been set by 5%
for fiscal year 1986 and fiscal year 1987, 6% for fiscal year 1988 and 4%
thereafter. However, the State reduced theUnappropriated Reserve requirement
for fiscal year 1991 and fiscal year 1992 to 3% to enable it to respond to
prison overcrowding. For fiscal year 1992 and thereafter, General Fund
appropriations are also limited 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 anyGeneral
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 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.
Based on the State's December 1991 estimates, the 1991 fiscal year end
fund balance was $16.3 million, and the State estimates a balance of
approximately $56 million at the end of the 1992 fiscal year. For both years,
such fund balances are less than the 3%
Unappropriated Reserve requirement. See
"State Finances" below.
There is 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. Periodic attempts have been made to limit further the
amount of annual increases in taxes that can be levied without voter approval.
Initiated amendments to the State constitution affecting local government
financing were defeated at the general elections in 1986, 1988 and 1990.
Legislation is introduced in the Colorado General Assembly from time to time
providing, in part, for similar limitations. Such initiated or legislative
proposals have contained provisions
limiting increasesin taxes as well as rates
and charges and imposing spending limits on various levels of government.
Although no such proposal has been enacted to date at the State level, it is
possible that if such a proposal were
enacted, there would be an adverse impact
on State or local government financing. It is not possible to predict whether
any such proposals will be enacted in
the future or, if enacted, their possible
impact on State or local government financing.
On January 27, 1992, the Colorado Secretary of State certified initiated
petitions proposing a constitutional amendment (the "Amendment") for inclusion
on the ballot at the general election to be held on November 3, 1992. If
adopted by the voters, the Amendment would, in general, be effective December
31, 1992, and could severely restrict the ability of the State and local
governments to increase revenues and
impose taxes. The Amendment would apply to
the State and all local governments, including home rule entities
("Districts"). Enterprises, definedas
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 would probably require
judicial interpretation if adopted. Among other provisions, beginning November
4, 1992, the Amendment would require voter approval prior to tax increases,
creation of debt, or mill levy or
valuation for assessment ratio increases. The
Amendment would also limit increases in government spending and property tax
revenues to specified percentages. The Amendment would require 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)
changes in assessment rolls. School districts would be allowed to adjust tax
levies for changes in student enrollment. Pursuant to the Amendment, local
government spending would be limited by the same formula, and State spending
would be limited by inflation plus the
percentage change in State population in
the prior calendar year. The bases for future spending and revenue limits are
1992 fiscal year spending and 1991 property taxes collected in 1992. Debt
service changes, reductions and voter-approved revenue changes are excluded
from the calculation bases. The Amendment would also prohibit new or increased
real property transfer tax rates, new State real property taxes and local
District income taxes.
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 taxreductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$4.4 million in fiscal year 1986, $45.1 million in fiscal year 1987, $100.3
million in fiscal year 1988, $134.8 million in fiscal year 1989 and $35.1
million in fiscal year 1990; for fiscal
year 1991, the State had a zero balance
for unrstricted funds in the General Fund.
The adopted budget for fiscal year 1993 projects General Fund revenues of
$3.1 billion and appropriated $3.0 billion. Based upon the estimated fiscal
year 1992 carryover surplus, the State has projected a $135.6 million year end
balance for fiscal year 1993. This amount is greater than the required 3.0%
reserve of $88.6 million. The principal General Fund revenue sources are the
individual income tax (53.8% of total estimated 1992 fiscal year receipts),
excise taxes (33.8%) and the corporate income tax (4.2%).
The State Constitution prohibits the State from incurring debt except for
limited purposes, for limited periods of time and in inconsequential amounts.
The State courts have defined debt to mean any obligation of the State
requiring payment out of futureyears' general revenues. As a consequence, the
State has no outstanding general obligation debt.
The State's economy is reliant upon several significant factors such as
mining, tourism, agriculture, construction, manufacture of high technology
products and durable goods and trade. Activities related to tourism have grown
during the past several years, while sectors of the economy related to mining
and construction have contracted. Employment in manufacturing, transportation,
retail trade, services, government and finance, insurance and real estate have
shown modest gains from 1986 through 1990. Construction of the new
international airport in Denver is expected to have a positive effect on the
State's economy.
The growth of the State economy has historically exceeded that of the
national economy. Statewide, real personal income increased 1.6% between 1989
and 1990. According to the most current
information available from the Colorado
Department of Revenue, retail trade sales increased 6.4% from approximately
$42.6 billion to $45.4 billion from 1989 to 1990. For the first nine months of
1991, retail trade sales totaled $35.7 billion, an increase of 7.8% over sales
during the same time period in 1990.
Figures supplied by the Colorado Division of Employment and Training
indicate that for the years 1986 through 1989 the State's unemployment rate
exceeded the national rate; however,
this trend was reversed for 1990 and 1991.
In 1991, the State's annual average unemployment rate was 5.0% (compared to a
national unemployment rate of 5.5%). The seasonally adjusted unemployment rate
for April 1992 for the State was 5.6% as compared to 7.1% for the United
States.
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:
(1) 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 incomeof the Colorado
Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described;
(2) interest on Bonds that would not be
includable in Colorado adjusted gross income 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;
(3) 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);
(4) 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 foran amount equal to or less than their original
cost; and
(5) 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 1991 manufacturing accounted for only 20.4% of total non-agricultural
employment in Connecticut. Defense-related business represents a relatively h
igh proportion of the manufacturing sector, and reductions in defense spending
could have a substantial adverse effect on Connecticut's economy. Connecticut
is now in a recession, the depth and
duration of which are uncertain. Moreover,
while unemploymentin the State as a whole has generally remained below the
national level, as of September 1992, the estimated rate of unemployment in
Connecticut on a seasonally adjusted basis was 7.2%, and certain geographic
areas in the State have been affected by highunemployment 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 ac
tivity in the State. 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 $4,919,600,000. 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 anticipates 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 are expected to be more than offset by a newgeneral 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
comptroller's annual report for the
1991-92 fiscal year reflects a General Fund
operatingsurplus of $110,000,000. A General Fund budget for the 1992-93 fiscal
year has been adopted anticipating General Fund expenditures of $7,372,062,859
and revenues of $7,372,210,000. In
addition, expenditures of Federal, State and
local funds in the ten years started July 1, 1984 for repair of the State's
roads and bridges now projected at $7,600,000,000 are anticipated, the State's
share of which would be financed by bonds expected to total $3,200,000,000 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. To fund the cumulative General Fund deficit for the 1989-90
and 1990-91 fiscal years, the legislation enacted August 22, 1991, authorizes
the State Treasurer toissue 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
presentone, 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 present one must be 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 $805,610,000 was outstanding as of October
31, 1992.
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 theState'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"); that certain of the Bonds have been issued by or on behalf of the
State of Connecticut or its political subdivisions or other public bodies
created under the laws of the Stateof Connecticut 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 Bonds in the Connecticut Trust
that were issued by the State of Connecticut or governmental authorities
located in Connecticut were issued prior to the enactment of a Connecticut tax
on the interest income of individuals; 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 applicable to individuals, trusts, and estates
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 a Connecticut Trust of an obligation held by it, or upon the
redemption, sale, or other disposition
of a Unit of a Connecticut Trust held by
the Unitholder. However, certain
Connecticut obligations that maybe included in
a Connecticut Trust are issued pursuant to Connecticut statutes that
specifically exempt gains on the sale or other disposition of such obligations
from taxation by Connecticut.
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 taxableyears starting on or after January 1, 1992.
It is not clearwhether this provision
would apply to gain or loss recognized by
a Unitholder upon the maturity or redemption of a Connecticut Bond held by the
Connecticut Trust or, 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 foreach 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:
(1) The Connecticut Trust is not liable
for any tax on or measured by net income imposed by the State of
Connecticut;
(2) Interest income 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 and held by the
Connecticut Trust that would not be taxable
under the Connecticut tax on the Connecticut taxable income of in
dividuals, trusts, and estates if received directly by the Unitholder
from the issuer of the Bond is not taxable under such tax when such
interest is received by the Connecticut Trust or distributed by it to
such a Unitholder, and, while it
may not be entirely clear, income from
other Bonds held by the Connecticut Trust that would not be taxable
under such tax if received directly by the Unitholder from the issuer
of the Bond is not taxable under such tax when such interest is
received by the Connecticut Trust or distributed by it to such a
Unitholder;
(3) 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 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
isexpressed as to the treatment for purposes of such tax of gains and
losses recognized upon the
maturity or redemption of a Connecticut Bond
held by the Connecticut Trust or, to the extent attributable to
Connecticut Bonds, of gains and losses recognized upon the redemption,
sale, or other disposition by a
Unitholder of a Unit of the Connecticut
Trust held by him;
(4) 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; and
(5) 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 reflectsthe 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 mergersand
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 StateConstitution 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 tomeet 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 alsoprovides 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 BudgetaryReserveAccount 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, norare 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 tothe effect that:
(1) 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.;
(2) 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.;
(3) 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 etseq.;
(4) 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;
(5) 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.
(6) 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;
(7) 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
(8)
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 1990 the share had edged downward to sixpercent. 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 10.6% of total U.S. housing starts
in 1990 while the State's population is 5.3% of the U.S. total population.
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, 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 200,000 range annually well into the 1990s. This population trend
should provide plenty of fuel for business and home builders to keep co
nstruction 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 have lengthened depreciation schedules on
investment and commercial properties. Economic growth and existing supplies of
commercial buildings and homes also contribute to the level of construction
activity in the State.
Since 1980, the State's job creation rate is well over 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
absolute number of new jobs created. Since 1980, the State's unemployment rate
has generally been below that of the U.S. Only in the last two years has the
State's unemployment rate moved ahead of
the national average. According to the
Florida Department of Labor and Employment Security and the Florida Consensus
Economic Estimating Conference (together the "Organization") the State's
unemployment rate was 5.9% during 1990. As of August 1991, the Organization
forecasts that when final numbers are
in,the unemployment rate for 1991 will be
7.2% and estimates that it will be 6.7% for 1992. The State's non-farm job
growth rate is expected to mirror the path of employment growth of the nation.
The State's two largest and fastest growing private employment categories are
the service and trade sectors. Together, they are expected to account for more
than 80% of the total non-farm employment growth between 1990-91 and 1992-93.
Employment in these sectors is expected to grow 0.8% and 3.7% in 1991-92 and
3.3% and 5.3% in 1992-93, respectively. The service sector has overtaken the
trade sector and is now the State's largest employment category.
Tourism is one of the State's most important industries. Tourist arrivals
by car and air in the State will experiencedifficulties in 1991-92. By the end
of 1991-92, 38.8 million domestic and international tourists are expected to
have visited the State, a decrease of
4.9% from the 40.8 million who visited in
1990-91. During 1992-93, tourists are expected to approximate40 million.
The State's per capita personal income in 1990 of $18,539 was slightly
below the national average of $18,696 and significantly ahead of that for the
southeast United States, which was $16,514. Growth in real personal income in
the State is expected to follow a course
similar to that of the nation, growing
at 0.3% in 1991-92 and 2.7% in 1992-93. Between 1990-91 and 1992-93, real
personal income per capita in the State is expected to average 0.5% less than
the 1990-91 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 relatively more important
sources of income. For example, Florida's
total wages and salaries and other labor income in 1990 was 54.9% of total
income, while a similar figure for the nation for 1990 was 64.8%. 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 1980, the prime working age population (18-44) has
grown at an average annual rate of 3.6%.
In fiscal year 1990-91, approximately 64% of the State's total direct
revenue to its three operating funds will be 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 66%, 7%
and 5%, respectively, of total receipts by the General Revenue Fund during
fiscal 1990-91. In that same year, expenditures for education, health and
welfare, and public safety amounted to 55%, 27% and 8%, respectively, of total
expenditures from the General Revenue Fund. At the end of fiscal 1990,
approximately $4.45 billion in principal amount of debt secured by the full
faith and credit of the State was
outstanding. In addition, since July 1, 1991,
through August 1992, the State issued
about $965 million in principal amount of
full faith and credit bonds.
On August 24, 1992, the State was hit with a major hurricane, Hurricane
Andrew. Published speculation estimates
total damage to the southern portion of
the State to be $20 billion or more. The
actual economic impact to the State is
unknown at this time, but, in published reports, the director of economic and
demographic research for the Joint Legislative Management Committee of the
State's Legislature estimates that the State's revenues from sales tax
collection will exceed the estimates prior to Andrew. The director said that
the State is expecting $7 to $8 billion of insurance, and $10 billion in
federal disaster assistance, and up to $1 billion from other sources to repair
the damage caused by Andrew. The
director estimates that a substantial portion,
maybe even half, of those monies will be spent over the next year or two on
items subject to the State's sales tax. In addition, the director estimates
that the State will collect documentary stamp taxes in excess of the amount
currently projected. The director foresees property owners using insurance
money to pay off mortgages on buildings that have been destroyed and then
borrowing to rebuild or remodel a home. The director estimates that the
additional spending will more than offset losses from tax revenues as a result
of the decline in sales in areas where businesses have been destroyed and
closed. In addition, a senior advisor to the State's governor in published
reports has said that the State's nearly $30 billion budget may end up having
to absorb an additional $82 million as a result of Andrew.
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 isauthorized to reduce
all State agency budgets and releases by a sufficient amount to prevent a
deficit in any fund.
Estimated fiscal year 1991-92 General Revenue plus Working Capital funds
available total $11,228.1 million. Compared to 1991-92 Estimated General
Revenues of $11,138.6 million, the State
was left with unencumbered reserves of
$89.5 million at the end of its fiscal year. Estimated fiscal year 1992-93
General Revenue plus Working Capital
funds available total $11,980.1 million, a
6.7% increase over 1991-1992. The $11,859.2 million in combined Estimated
Revenues and revenue generating measures represents an increase of 9.5% over
the previous year's Estimated Revenues. In a June 1992 Special Session of the
State Legislature, the Legislature passed a number of tax rate and base
increases to raise an additional $378.5 million in the State's 1992-93 fiscal
year. With effective General Revenue appropriations at $11,861.9 million,
unencumbered reserves at the end of the fiscal year are estimated at $118.2
million. Current estimates make it likely that this figure will increase when
revenue collections for 1991-92 are finalized.
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. Italone cannot exceed 0.5%
and when combined with the infrastructure surtax cannot exceed 1.0%. For the
fiscal year ended June 30, 1991, sales and use tax receipts (exclusive of the
tax on gasoline and special fuels) totalled $8,152.0 million, a decline of0.9%
over fiscal year 1989-90.
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 $445.4 million in fiscal year ending June 30, 1991. A
lcoholic beverage tax receipts declined 1.0% over the previous year. The
revenues collected from this tax are
deposited into the State's General Revenue
Fund.
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 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, 1990, receipts from this source were $701.6 million, a decrease of
13.2% from fiscal year 1989-90.
The State also imposes a 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 $470.0 million during fiscal year 1990-91, a 9.4% increase
from the previous fiscal year. For the fiscal year 1990-91, 70.4%of the
documentary stamp tax revenues were deposited to the General Revenue Fund.
Beginning in fiscal year 1991-92, 76.21% of these taxes are to be deposited to
the General Revenue Fund.
On January 12, 1988, the State began its own lottery. 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 1990-91 lottery commissions for ticket sales totalled
$2.19 billion, providing education with $833.5 million.
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.
In the wake of the U.S. Supreme Court decision holding that a Hawaii law
unfairly discriminated against out-of-state liquor producers, suitshave been
filed in the State's courts contesting a similar State law (in effect prior to
1985), that seek $384 million in tax refunds. A trial court, in a ruling that
was subsequently upheld by the State's Supreme Court, found the State law in
question to be unconstitutional but made its ruling operate prospectively,
thereby denying any tax refunds. The issue of whether the unconstitutionality
of the tax should be applied retroactively was recently decided by the United
States Supreme Court. The Supreme Court found in favor of the taxpayers. On
remand from the U.S. Supreme Court, the Florida Supreme Court, on January 15,
1991, mandated further proceedings to fashion a "clear and certain remedy"
consistent with constitutional restrictions and the opinion ofthe U.S. Supreme
Court. The Florida Department of Revenue has proposed to the Florida Supreme
Court that the Department be allowed to collect back tax from those who
received a tax preference under the prior law. If the Department's proposal is
rejected and tax refunds are ordered to
all potential claimants, a liability of
approximately $298 million could result. The case is now before the Florida
Circuit Court, Second Judicial District. That court will hear the affected
parties' response to the Department's proposed collection of the tax at the
higher rate charged to out-of-staters.
Florida law provides preferential
tax treatment to insurers who maintain a
home office in the State. Certain insurers challenged the constitutionality of
this tax preferenceand sought a refund of taxes paid. Recently, the State
Supreme Court ruled in favor of the State. Similar issues have been raised in
other cases where insurers have challenged taxes imposed on premiums received
for certain motor vehicle service agreements. These four cases and pending
refund claims total about $200 million.
Florida maintains a bond rating of Aa and AA from Moody's Investors
Service and Standard & Poor's
Corporation, 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 forthe information 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:
(1)
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;
(2) 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;
(3) 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;
(4) 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; and
(5) Neither the Bonds nor the Units will
be subject to the Florida ad valorem property tax, the Florida
intangible personal property tax or Florida sales or use tax.
Georgia Trusts
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 and 1989 has slowed somewhat and was modest
compared to the robust pace earlier in the decade. Georgia's leading economic
indicators currently suggest that the rate of growth of the Georgia economy
will continue at the pace of 1988 and 1991 and more closely match the national
economy. According to December 1991 figures, the seasonably adjusted
unemployment rate in Georgia, 3.9%, is
well below the national rate of 7.1% for
the same period. Population growth and increases in personal income flattened
in 1989 and have maintained that pattern through 1991. Georgia was the
tenth-fastest growing state in the
nation during the period from 1980-1988; the
population increased by 16.9%. Between
1990 and 1991 Georgia experienced a 1.5%
growth in population, slightly above the 1.1% National average growth rate for
the same period. Although many areas of
the economy are expected to continue to
perform strongly, some areas such as the primary metals, carpet and apparel
industries are still experiencing periods of weakness, and others, such as
construction and construction-related manufacturing activities (e.g., lumber,
furniture and stone/clay products), currently show signs of weakening. In
addition, aircraft manufacturers located within the State are in a tenuous
position due to reductions in the Federal Defense budget. Port activity
remained strong during 1989, and business revenues and retail sales (except
auto sales) sustained solid growth. Also, Georgia farmers experienced strong
markets in 1989 and 1990 and are expected to do well in 1991. Presently,
Georgia continues to lead the nation in the production ofpulp, pulpwood and
paper. Other industries show potential for great expansion, but policy
considerations, tax reform laws, foreign competition, and other factors may
render these industries less productive. Since Bonds in the Georgia 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 Bonds in a Georgia Trust to pay the debt service
requirements on the 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 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 purposeswould 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 IM-IT Trust would not
be subject to such tax as the result of holding bonds issued by a poli
tical 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 inc
ome taxes if, and to the extent as, such interest would have been so
exempt if paid by the issuer of the defaulted 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
inthe underlying tax-exempt Bonds; and
(6) Neither the Georgia Bonds nor the
Units will be subject to Georgia sales or use tax.
Kansas Trusts
According to the 1990 census, 2,477,574 people lived in Kansas,
representing a 4.8% increase over the 1980 census. Based on these numbers,
Kansas ranked thirty-second in the nation in population size. Based on
statistics provided by the Kansas Departmentof Commerce, in 1990 Kansas ranked
twenty-first in the nation in terms of per capita income. Historically, a
griculture 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 1991
approximately 14% of Kansas workers were in
the manufacturing sector, 17% in the government sector and 19% in the services
sector, while the farming and mining
sectors combined for approximately 5.5% 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:
(1) The Trust is not an association
taxable as a corporation for Kansas income tax purposes;
(2) Each Unitholder of the Trust will be
treated as the owner of a pro rataportion of the Trust, and the income
and deductions of the Trust will therefore be treated as income of the
Unitholder under Kansas law;
(3) 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 individua
ls, 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;
(4) 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;
(5) 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);
(6) 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;
(7) 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
(8) 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 a 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 Quality 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 (w
hether by sale, exchange, redemption or payment of 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 on 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 Trusts
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 reflectedan 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 36%, 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 7
9%. Adjusted for inflation, real income growth in 1989 is approximately 2
4%, which is well below the 1988 figure of 5.3%.
The regional economic slowdown in
the northeast isexpected to continue for
the near to intermediate term. Prospects for some of Maine's major 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 cal
endar year 1988, off some 21%. This slowdwon 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 majority 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 paymentson 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 1980s enabled
the State to accumulate high levels of general fund unappropriated surpluses.
As of its fiscal year ended December 31, 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. Corre
sponding 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 Corporation 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 $355,500,000 of outstanding general
obligation debt and $135,200,000 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 Corporation 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 planto 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 shortgages 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 andthird-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 Quality
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 ofPuerto
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 addr
ess 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:
(1) 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 rata 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;
(2) 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 and distributed to the Unitholder;
(3) 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. S 745, 48 U.S.C. S1423a and 48 U.S.C. S1403, such
interest will
not be subject to the Maine Income Tax;
(4) each
Unitholderof 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
(5)
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 imposedon 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:
(1) For Maryland State and local income
tax purposes, the Maryland Trust will not be recognized as an associa
tion taxable as a corporation, but rather as a fiduciary whose income
will not be subject to Maryland State and local income taxation;
(2) 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 franchisetax on
financial institutions;
(3) 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; and
(4) Capital gain, including gain realized
by a Unitholder from the redemption, sale or other dispostion 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 Fede
ral 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
Between 1982 and 1988, the Massachusetts economy generally outperformed
the national economy. More recently, however, the Massachusetts economy has
been experiencing a slowdown. While
Massachusetts has 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 1989 and
4.0% in 1990. A comparison of total, nonagricultural employment in January,
1991 with that in January, 1992
indicates a decline of 2.5%. The Commonwealth's
unemployment rate continues to exceed the national unemployment rate. Per
capita personal income growth has slowed, after several years during which the
per capita personal income growth rate in Massachusetts was among the highest
in the nation. Between the third quarter
of 1990 and the third quarter of 1991,
aggregate personal income in Massachusetts increased 0.2%, as compared to 2.8%
for the nation as a whole.
In part due to the onset of this slowdown, the Commonwealth's tax revenue
forecasting proved to be substantially more optimistic than the actual results
during each of fiscal years 1988 through 1991. This revenue shortfall combined
with steadily escalating costs during the same period 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 may have contributed to higher interest rates on debt
obligations recently issued.
While more conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and a reduction is
budged program expenditures for fiscal 1992 have moderated these difficulties,
the continuation, or worsening, of the present slowdown 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 a 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 ofthe respective
issuers of the Bonds acquired by a 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,
a 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)
A 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 a
Massachusetts Trust in their Massachusetts gross income to the extent
that such earnings or distributions represent tax-exempt interest for
Federal income taxpurposes received by a 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 a 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) A 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 Unitholder's
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 orredemption 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 a Massachusetts Trust; and
(8)
The Units of a 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 Corporation
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 has announced the scheduled closing of several
of its plants in Michigan in 1993 and
1994. The impact these closures will 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 reportednegative year-end General Fund
Balances of $310.4 million and $169.4 million, respectively. A positive cash
balance in the combined General Fund/School Aid Fund was recorded at September
30, 1990. Since 1991 the State has experienced deteriorating cash balances
which have necessitated short term borrowing and the deferral of certain
scheduled cash payments. The State
borrowed $700 million for cash flow purposes
in the 1992 fiscal year. The State has a
Budget Stabilization Fund which, after
a transfer of$230 million to the General Fund for the 1991 State fiscal year,
had an accrued balance of $182 million as of September 30, 1991.
In the 1991-92 State fiscal year, mid-year actions were taken to avoid a
State general fund budget deficit, including expenditure reductions, deferrals
of scheduled payment dates of various
types of State aid into the 1992-93 state
fiscal year, a $150 million transfer from the State's Budget Stabilization
Fund, and accounting and retirement funding changes. While current estimates
indicate the State may have ended the 1991-92 fiscal year with a general fund
deficit in the range of $50 million to $100 million, the State has not yet
produced its year-end financial reports and the actual results are not known.
While the 1992-93 State budget has been adopted, current projections
indicate a deficit may occur without additional actions being taken, and
ongoing reviews of spending patterns will be conducted in departments (such as
Corrections, Social Services and
Military Affairs) that have been identified as
possibly underfunded. If later estimates match the initial assessments,
additional actions will be required to be taken to address any projected
negative balance in the 1992-93 fiscal year.
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.
In April 1991, the State enacted legislation which temporarily froze
assessed values on existing real property in 1992 by requiring that the
assessment as equalized for the 1991 tax year be used on the 1992 assessment
roll and be adjusted only to
reflectadditions, losses, splits and combinations.
Additional property tax relief measures
have been proposed, some of which could
adversely affect either the amount or timing of the receipt of property tax
revenue by local units of government.
Although all or most of the Bonds in each 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 ofthe 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,
universitiesand 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 and $34.4 million in
the 1992 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
operating 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:
(1) A 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 Chapman and Cutler as
to the applicability of Federal income tax under the Internal Revenue
Code of 1986 to a Michigan Trust and the Holders of Units;
(2)
Under the income tax laws of the State
of Michigan, a Michigan Trust is not an association taxable as a
corporation; the income of a Michigan Trust will be treated as the
income of the Unitholders and be deemed to have been received by them
when received by a Michigan Trust. Interest on the underlying Bonds
which is exempt from tax under these laws when received by a Michigan
Trust will retain its status as
tax exempt interest to the Unitholders;
(3)
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 a Michigan Trust,
and each Unitholder will have a taxable event when a 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;
(4) Under the Michigan Intangibles Tax, a
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;
(5) 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 whichwould 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 a Michigan Trust on the
underlying Bonds and any amount distributed from a 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 a Michigan Trust
or the Unitholders. If a Michigan Trust or the Unitholders have a
taxable event for Federal income tax purposes when a 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;
(6) Any proceeds paid under an insurance policy issued to the Trustee of
a 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; and
(7) 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 Unit Holder will be increased
accordingly tothe extent such capital gains are realized when the
MichiganTrust disposes of a Bond or when the Unit Holder redeems or
sells a Unit, to the extent such transaction constitutes a taxable
event for Federal income tax purposes.
Minnesota Trusts
In the early 1980s, 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 appropriationsfor 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 Corporation
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 theState'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 and
1991, legislation was required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aid to political
subdivisions and higher education, and making other budgetary adjustments. A
budget forecast released by the Minnesota Department of Financeon February 27,
1992 projected a $569 million budget shortfall, primarily attributable to
reduced income tax receipts, for the biennium ending June 30, 1993. Planning
estimates for the 1994-95 biennium projected a budget shortfall of $1.75
million (less a $300 million reserve). (The projections generally do not
include increases for inflation or operating costs, except where Minnesota law
requires them.) The State responded by enacting legislation that made
substantial accounting changes, reduced the budget reserve by $160 million to
$240 million, reduced appropriations for state agencies and higher education,
and imposed a sales tax on purchases by local governmental units. A revised
forecast released by the Department of Finance on November 24, 1992 reflects
these legislative changes and projects a $217 million General Fund surplus at
the end of the current biennium, June 30, 1993, plus a $240 million cash flow
account, against a total budget for the biennium of approximately $14.6
billion, and planning estimates for the 1994-95 biennium project a budget
shortfall of $986 million (less the $217 million balance carried forward and
the $240 million cash flow account). Although Standard & Poor's affirmed its
rating on the State's general obligation bonds in connection with a July 1992
issue, it revised its outlook for the rating to "negative."
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 thatare revenue obligations and
not general obligations of the issuer,
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 a Minnesota Trust will have no income other than (i)
interest income on bonds issued by
the State of Minnesota and its political
and governmental subdivisions,
municipalities and governmental agencies and
instrumentalities and on 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 (and the term "Bonds" as used
herein refers only to such 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.
"Taxable income" for Minnesota
income tax purposes is the same as "taxable
income" for Federal income tax purposes with certain modifications that (with
one exception) do not apply to the
present circumstances. The exception is that
corporations must add to Federal taxable income the amount of any interest
received on the obligations of states
and their agencies and instrumentalities,
political and governmental subdivisions, and municipalities. The terms "trust"
and "corporation" have the same meanings for Minnesota income tax purposes, as
relevant to the Minnesota tax status of a Minnesota Trust, as for Federal
income tax purposes.
In view of the relationship between
Federal and Minnesota law described in
the preceding paragraph and the opinion of Chapman and Cutler with
respect to Federal tax treatment of a Minnesota Trust and its
Unitholders: (1) a Minnesota Trust will be treated as a trust rather
than a corporation for Minnesota income tax purposes and will not be
deemed the recipient of any Minnesota taxable income; (2) each
Unitholder of a Minnesota Trust will be treated as the owner of a pro
rata portion of a Minnesota
Trust for Minnesota income tax purposes and
the income of a Minnesota Trust
will therefore be treated as the income
of the Unitholders under Minnesota law; (3) interest on the Bonds will
be exempt from Minnesota income taxation of Unitholders who are
individuals, trusts and estates when received by a Minnesota Trust and
attributed to such Unitholders
and when distributed to such Unitholders
(except as hereinafter provided
with respect to "industrial development
bonds" and "private activity bonds" held by "substantial users"); (4)
interest on the Bonds will be includible in the Minnesota taxable
income (subject to allocation and apportionment) of Unitholders that
are corporations; (5) each
Unitholder will realize taxable gain or loss
when a Minnesota Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or
sells Units at a price which
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'sshare of interest, if any, accruing on Bonds during the
interval between the Unitholder's settlement date and the date such
Bonds are delivered to a Minnesota Trust, if later); (6) tax cost
reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Unitholders realizing taxable gain
when their Units are sold or redeemed for an amount equal to or less
than their original cost; (7) any proceeds paid under the insurance
policy issued to the Trustee with respect tothe Bonds which represent
maturing interest on defaulted obligations held by the Trustee will be
excludible from Minnesota gross income if, and to the same extent as,
such interest would have been so excludible if paid by the issuer of
the defaulted obligations; (8) any proceeds paid under individual
insurance policies obtained by issuers of Bonds which represent
maturing interest on defaulted obligations held by the Trustee will be
excludible from Minnesota gross income if, and to the same extent as,
suchinterest would have been so
excludible if paid in the normal course
by the issuer of the defaulted obligations; (9) net capital gains of
Unitholders attributable to the Bonds will be fully includible in the
Minnesota taxable income of Unitholders (subject to allocation and
apportionment in the case of corporate Unitholders); and (10) interest
on Bonds includible in the computation of "alternative minimum taxable
income" for Federal income tax purposes will also be includible in the
computation of "alternative minimum taxable income" for Minnesota
income tax purposes.
Interest income attributable to Bonds that are "industrial development
bonds" or "private activity bonds," as those terms are defined in the Internal
Revenue Code, will be taxable under Minnesota law to a Unitholder who is a
"substantial user" of the facilities
financed by the proceeds of such Bonds (or
a "related person" to such a "substantial user") to the same extent as if such
Bonds were held by such 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. The Amendment did not limit revenue growth at the State
level in fiscal 1982 through 1988 with
the exception of fiscal 1984. Management
Report No. 85-20, which was issued on March 5, 1985 by State Auditor Margaret
Kelly, indicates that state revenues exceeded the allowable increase by $30.52
million in fiscal 1984, and a taxpayer lawsuit has been filed pursuant to the
Amendment seeking a refund of the revenues in excess of the limit.
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 has offset the more slowly growing
manufacturing and agricultural sectors of the economy. In 1991, the
unemployment rate in Missouri was 6.6%,
and according to preliminary seasonally
adjusted figures, the rate dropped to 5.4% in December 1992. There can be no
assurance that 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
Corporation 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 otherfactors 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 ofthe 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. No opinion is expressed regarding whether the
gross earnings derived from the Units is
subject to intangible taxation imposed
by counties, cities and townships pursuant to present Kansas law.
In the opinion of Chapman and Cutler, counsel to the Sponsor under
existing law:
(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
portionof 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 IM-IT 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. S745,
48 U.S.C. S1423a, and 48 U.S.C. S1403, 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 IM-IT 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 tothe 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 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; and
(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 Earnings Tax).
Nebraska Trusts
Atthe time of closing for each Nebraska Trust, Special Counsel to each
Nebraska Trust for Nebraska tax matters, rendered an opinion under then
existing Nebraska income tax law applicable to taxpayers whose income is
subject to Nebraska income taxation substantially to the effect that:
(1) 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");
(2) 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 includedas
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;
(3) 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 rataportion 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;
(4) 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;
(5)
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
IncomeTax 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;
(6) 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;
(7) 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;
(8)
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;
(9)
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; and
(10) No opinion is expressed 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
Each 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 factorsaffecting 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 1,046 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 1991 the State ranked second among States in per
capita personal income ($25,372).
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 hasbecome more vulnerable to
competitive pressures. New Jersey is
currently experiencing a recession and, as
a result of the factors described above, such recession could last longer than
the national recession, although signs of a slow recovery both on the national
and State level have been reported.
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
rosefrom a low of 3.6% during the first quarter of 1989 to an estimated 8% in
December 1992, which is below the national average of 7.3% in December 1992.
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, 1992, there was a total authorized bond indebtedness of
approximately $6.96 billion, of which
$3.32 billion was issued and outstanding,
$2.6 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.04 billion
was unissued. The debt service obligation for such outstanding indebtedness is
$444.3 million for fiscal year 1993.
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, t
here was a surplus in the general fund of $1 million. It is estimated that New
Jersey closed its fiscal year 1992 with a surplus of $762.9 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 has 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 is 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%.
On June 30, 1992, the New Jersey
Legislature adopted a $14.9 billion State
budget for fiscal year 1993 by overriding Governor Florio's veto of the
spending plan. The budget reflected a $1.1 billion cut from Governor Florio's
proposed $16 billion budget, including a $385 million reduction in the State
homestead rebate program and $421 million in cuts in salaries and other
spending by the State bureaucracy and including the prospect of 1,400 to 6,300
layoffs of State employees. The budget also reflects the loss of revenue, pr
ojected at $608 million, as a result of the reduction in the sales and use tax
rate from 7% to 6% effective July 1, 1992 and the use of $1.3 billion in
pension savings to balance the budget, with $770 million available only in
fiscal 1993 and $569 millionthat will recur annually in the future.
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
formularelating 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, the various provisions,
and the constitutionality, of the Fair
Automobile Insurance Reform Act of 1990,
the State'smethod of funding the judicial system, certain provisions of New
Jersey's hospital rate-setting system,
recently enacted legislation calling for
a revaluation of several New Jersey public employee pension funds in order to
provide additional revenues forthe State's general fund, and the exercise of
discretion by State agencies in making certain personnel reductions. Adverse
judgments in these and other matters could have the potential for either a
significant loss of revenue or a significant unanticipatedexpenditure by the
State. 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 andcases 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. Currently, Moody's Investors Service, Inc. rates New
Jersey general obligation bonds Aaa. 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 ofNew 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 must be
closed before the new budget year begins 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 is negative. Standard and Poor's Corporation is concerned that the
State is entering fiscal 1993 with a slim $26 million surplus and remains
concerned about whether the sagging State economy will recovery quickly enough
to meet lawmakers' revenue projections. It also remains concerned about the
recent federal ruling leaving in doubt
how much the State is 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. There can be no
assurance that these ratings will continue or that particular bond issues may
not be adversely affected by changes in the State or local economic or politi
cal conditions.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aa1," stating that the reduction reflects 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.
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) Each New Jersey Trust will be
recognized as a trust and not an association taxable as a corporation.
Each 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 a 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 IncomeTax 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 a 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 a 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 an insurance
policy issued to the Trustee of a 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 a 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; and
(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 a 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 a 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 an insurance
policyissued to the Trustee of a 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
The portfolio includes certain Bonds 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 New York 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
successthat 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
traditionaly 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 1991 calendar year. After
a period of modest growth in the first
half of calendar 1992, the Division of the Budget projects slower growth
thereafter in the 1992 calendar year and the first half of the 1993 calendar
year. The State has suffered a more severe economic downturn. 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.
On January 21, 1992, the Governor released the recommended 1992-93
Executive Budget which included the revised 1991-92 State Financial Plan (the
"Revised 1991-92 State Financial Plan") indicating a projected $531 million
General Fund cash basis operatingdeficit in the 1991-92 fiscal year. The
projected $531 million deficit was met through tax and revenue anticipation
notes (the "1992 Deficit Notes") which were issued on March 30, 1992 and are
required by law to be repaid in the State's 1992-93 fiscal year. The $531
million projected deficit follows $407million in administrative actions taken
by the Governor intended to reduce 1991-92 disbursements and to increase
revenues.
The recommended 1992-93 Executive Budget contains projections for the
1992-93 State fiscal year which began on April 1, 1992. TheGovernor indicated
that, for the 1992-93 fiscal year, the State faced a $4.8 billion budget gap,
including the $531 million needed in the 1992-93 fiscal year to repay the 1992
Deficit Notes. The recommended 1992-93 Executive Budget reflects efforts to ac
hieve budgetary balance by reducing disbursements by $3.5 billion and
increasing revenues by $1.3 billion from levels previously anticipated.
The 1992-93 State budget was enacted by the Legislature on April 2, 1992
and was balanced through a variety of spending cuts and revenue increases, as
reflected in the State Financial Plan
for the 1992-93 fiscal year (the "1992-93
State Financial Plan") announced on
April 13, 1992. The 1992-93 State Financial
Plan projects that General Fund receipts and transfers from other funds will
total $31.382 billion, after provision to repay the 1992 Deficit Notes. The
1992-93 State Financial Plan includes increased taxes and other revenues,
deferral of scheduled personal income
and corporate tax reductions, significant
reductions from previously projected levels in aid to localities and State
operations and other budgetary actions that limit the growth in General Fund
disbursements.
Pursuant to statute, the State updates the State Financial Plan at least
on a quarterly basis. The first quarterly revision to the State Financial Plan
for the State's 1992-93 fiscal year was issued on July 30, 1992 (the "Revised
1992-93 State Financial Plan"). Although the Revised 1992-93 State Financial
Plan is based on an economic projectionthat the State's economy will perform
more poorly than the nation as a whole, there can be no assurance that the
State economy will not experience worse-than-predicted results in the 1992-93
fiscal year, with corresponding material and adverse effects onthe State's
projections of receipts and disbursements. This, in turn, could adversely
affect the State's ability to achieve a balanced budget on a cash basis for
such fiscal year.
In addition, the State's projections are subject to certain risks, inclu
ding adverse decisions in pending litigations, particularly those involving
Federal Medicaid reimbursements and payments by hospitals and health
maintenance organizations, potential changes in the timing of Federally
mandated estimated tax payments that would require parallel changes at the
State level, and further deterioration in the national economy.
The 1992-93 State Financial Plan
results in sharp reductions in aid to all
levels of local governmental units from amounts expected. There can be no ass
urance, 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 future years 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.
For a number of years the State has encountered difficulties in achieving
a balance of expenditures and revenues. The 1991-92 fiscal year was the fourth
consecutive year in which the State incurred a cash-basis operating deficit in
the General Fund and issued deficit notes. There can be no assurance that the
State will not continue to face budgetary difficulties in the future, due to a
number of factors including economic, fiscal and political factors, and that
such difficulties will not lead to further adverse consequences for the State.
As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members of the State
Legislature, and their respective staffs, as well as others involved in the
budget negotiation process from time to time. Those statements or reports may
contain predictions, projections or other items of information relating to the
State's financial condition as reflected in the 1992-93 State Financial Plan,
that may vary materially and adversely from the information provided herein.
As of June 30, 1992, the total amount of long-term State general
obligation debt authorized but unissued stood at $3.0 billion, of which
approximately $1.5 billion was part of a general obligation bond authorization
for highway and bridge construction and rehabilitation. As of the same date,
the State had approximately $5.0 billion in general obligation bonds and $224
million in bond anticipation notes outstanding. The State issued $3.9 billion
in tax and revenue anticipation notes ("TRANS") on June 21, 1991, $531 million
in 1992 Deficit Notes on March 30, 1992 and $2.3 billion in TRANS on April 28,
1992.
The State anticipates that its borrowings for capital purposes in 1992-93
will consist of approximately $863 million in general obligation bonds. The
State also expects to issue approximately $178 million in general obligation
bonds for the purpose of redeeming outstanding bond anticipation notes. The
Legislature has also authorized the issuance of up to $105 million in
certificates of participation for equipment purchases and real property
purposes during the State's 1992-93 fiscal year. The projection of the State
regarding its borrowings for the 1992-93 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 publicbenefit 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 $2.75 billion. LG
AC has been authorized to issue additional bonds to provide net proceeds of
$975 million during the State's 1992-93 fiscal year, of which $350 million has
been issued to date.
The $2.3 billion in TRANs issued by the State in April 1992 were rated
SP-1 by S&P and MIG-2 by Moody's. The
$3.9 billion in TRANs issued by the State
in June, 1991 were rated the same. S&P in so doing stated that the outlook is
changed to "negative" from "stable." The $4.1 billion in TRANs issued by the
State in June, 1990 and the $775 million
in TRANs issued by the State in March,
1990 were rated the same. In contrast, the $3.9 billion of TRANs issued by the
State in May, 1989 had been rated SP-1+ by S&P and MIG-1 by Moody's.
As of the date of this prospectus, Moody's rating of the State general
obligation bonds stood at A, but under review for possible downgrade and S&P's
rating stood at A-
with a negative outlook. Moody's placed the bonds under review on January 6,
1992. 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.
On September 18, 1992, Moody's in placing the bonds under review for
possible downgrade stated:
Chronic financial problems weigh most heavily in the evaluation of New
York State's credit. In the past five years, the State has been unable to
maintain a balanced budget and has had to issue deficit notes in each of the
past four years. The budget for the fiscal year which began April 1, 1992 was
adopted nearly on time, relies somewhat less on non-recurring actions, and
provides for some expenditure reductions, mainly due to a planned reduction in
the size of the State workforce.
However, although growth in major aid programs
to local governments is modest, major
structural reform of State programs which
would provide enduring budget relief has not been enacted. The State budget is
still narrowly balanced and the State could face additional fiscal pressure if
the economy performs worse than anticipated or cost-reduction programs fail to
generate anticipated savings.
On November 16, 1992, S&P, in affirming its A-
rating and negative outlook of the State's general obligation bonds, stated:
The rating reflects ongoing economic weakness, four years of operating
deficits and a large accumulated deficit position.
The ratings outlook is 'negative,' as budget balance remains fragile.
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 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 the Municipal Assistance Corporation ("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 five-year
financial plan assumes, a continuation
of the recession in the New York City region in the 1992 calendar years with 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.
For each of the 1981 through 1991
fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP") and expects to achieve balanced operating results for the
1992 fiscal year. During its 1991 fiscal year, as a result of the recession,
the City experienced significant shortfalls from its July 1990 projections in
virtually every major category of tax revenues. The City was required to close
substantial budget gaps in its 1990 and 1991 fiscal years in order to maintain
balanced operating results. Therecan 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. The City
Comptroller has issued reports that have warned of the adverse effects on the
City's economy of the tax increases that were imposed during fiscal years 1991
and 1992.
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 financing
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 fiscalyears 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 spendingincreases 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 beadopted 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 the 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 mandaterelief, 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. The financial plan submitted to the Control Board on June 11,
1992 contains substantial proposed expenditure cuts for the 1993 through 1996
fiscal years. The 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
$13.3 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make
primarily 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 p
rojected 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 addit
ion, 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.
The City achieved balanced operating results as reported in accordance
with GAAP for the 1991 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 increasesand substantial expenditure
reductions.
The most recent quarterly modification to the City's financial plan
submitted to the Control Board on May 7, 1992 (the "1992 Modification")
projects 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 June 11, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which relates to the City, the
Board of Education ("BOE") and the City University of New York ("CUNY") and is
based on the City's expenseand capital
budgets for the City's 1993 fiscal year.
The 1993-1996 Financial Plan projects revenues and expenditures for the 1993
fiscal year balancedin accordance with GAAP.
The 1993-1996 Financial Plan sets forth actions to close a previously
projected gap of approximately $1.2 billion in the 1993 fiscal year. The
gap-closing actions for the 1993 fiscal year include $489 million of
discretionary transfers from a City surplus in the 1992 fiscal year.
The 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. On August 26, 1992, the City modified the 1993-96 Financial Plan.
As modified, the Financial Plan projects
a balanced budget for fiscal year 1993
based upon revenues of $29.6 billion but projects budget gaps of $1.3 billion,
$1.2 billion and $1.7 billion, respectively, in the 1994 through 1996 fiscal
years.
Various actions proposed in the 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. In
addition, MAC has set conditions upon
its cooperation in the City's realization
of the proposed transitional funding contained in the Financial Plan for the
1994 fiscal year. If these actions cannot be implemented, the City will be
required to take other actions todecrease expenditures or increase revenues to
maintain a balanced financial plan.
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 determination 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, 1991, legal claims in excess of
$322 billion were outstanding against
the City for which the City estimated its
potential future liability to be $2.1 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 lowered its rating from A.
On October 19, 1992, in confirming its Baa1 rating, Moody's noted that:
Financial operations continue to be satisfactorily maintained. . . .
Nevertheless, significant gaps in the later years of the [four year financial]
plan remain and have not changed from prior projections. The ability of the
City to successfully close those gaps,
as well as fully implement all currently
planned gap closing measures without slippage will be a politically and
financially complex task.
On October 19, 1992, S&P affirmed its A-
rating with a negative outlook, stating that:
Per capita debt remains high, and debt service as a portion of total
spending will continue to grow above 10%
as the City issues $3-4 billion of new
bonds for the next several years. Economically, the City is in one of its
deepest recessions, with additional job losses this year expected to approach
130,000 before moderating in 1993.
Long-term job growth is expected to be slow.
City financial plans will continue
to be burdened by weak economic factors
and continued risks to State and federal
actions that the City is relying on to
balance future budgets.
The outlook remains negative. Labor negotiations also present some risk,
given City assumptions of no wage increase in 1993-1994.
The City projected balanced fiscal 1992 financial operations in the
financial plan presented to the Financial Control Board on November 6,
1991. Modification to the 1992-1996 plan fell short of establishing
structural balance over the plan period. It focused more on finding
additional monies to support current spending levels than on aligning the
scope of government services within the constraints of what is affordable
from ongoing revenues. City officials are revising and expandingdetails of
the plan to be revealed in the preliminary budget submission scheduled for
January 16, 1992. S&P expects the plan to provide substantial details on
how the City will bring recurring expenditures more in line with recurring
revenues.
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
rasied 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, $15.6 billion
and $5.2 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 orto 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 satisified 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, 1991, 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 $57.1 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $23.6 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 contract and tort 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.
Adverse developments in the
foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the 1992-93 fiscal
year or thereafter.
Certain localities in addition to New York City could have financial
problems leading to requests for
additional State assistance. The 1992-93 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 revenues and expenditures in the State's 1992-93 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 1990, the total indebtedness of all localities in
the State was approximately $26.9 billion, of which $13.5 billion was debt of
New York City (excluding $7.1 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. Seventeen localities had outstanding indebtedness for State
financing at the close of their fiscal year ending in 1990. 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 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 certain 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:
(1) Each New York Trust is not an
association taxable as a
corporation and the income of a New York Trust
will be treated as the income of the Unitholders under the income tax
laws of the State and the 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
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 suchprivate 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.
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.
Lower than anticipated revenues coupled with increases in State spending
requirements imposed by the federal
government led to projected budget deficits
for fiscal 1989-1990 and fiscal 1990-1991. Consequently, the Governor ordered
cutsin budgeted State expenditures for both fiscal years.
When similar budget deficits were
projected for the next two fiscal years,
the General Assembly addressed the problem through a broad array of State
spending reductions in existing programs or previously budgeted increases and
tax increases. The taxes include a one-cent increase in the sales tax, a
three-cent increase in the excise tax on cigarettes, an increase in the
corporate tax rate (from 7 to 7.75 percent, as well as a four-year surtax,
starting at 4% of the regular income tax for tax year 1991 and reducing by 1%
for each of the following three years), an increase in the individual income
tax rate for married couples with income of more than $100,000 and individuals
with income over $60,000, andother taxes.
The effect of the budget reductions and tax increases resulted in a small
budget surplus (approximately $160 million) for the 1991-1992 fiscal year
(ended June 30, 1992). The revised $8.3 billion budget for fiscal 1992-1993
adopted by the General Assembly did not include any new tax measures and
assumed that the tax increases established in 1990 will generate about $740
million of revenue (up from about $657 million in fiscal 1991-1992). The
Governor's budget office has reported that theseprojections were on target as
of February 1993.
Both the nation and the State have experienced a modest economic recovery
in recent months. However, it is unclear what effect these developments, as
well as the reduction in government spending or increase in taxes may have on
the value of the Debt Obligations in the North Carolina Trust. No clear upward
trend has developed, and both the State and the national economies must be
watched carefully.
The fiscal condition of the State might be affected adversely by
litigation concerning the legality of certain State tax provisions following
the decision of the United States Supreme Court in Davis v. Michigan Dept. of
Treasury (decided March 28, 1989). In Davis, the United States Supreme Court
held unconstitutional a Michigan statute exempting from state income taxation
retirement benefits paid by the state of
Michigan or its local governments, but
not exempting retirement benefits paid by the federal government.
Subsequent to Davis, certain federal retirees and federal military
personnel plaintiffs brought an action in federal court in 1989 against the
North Carolina Department of Revenue and certain officials of the State
alleging the unconstitutionality of taxes collected under the prior North
Carolina statutes and seeking damages
for 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. Power, et al.
(United States District Court for the Eastern District of North Carolina,
89-282-CIV-5-H) ("Swanson Federal").
The individual plaintiffs in Swanson Federalbrought an action in North
Carolina state court seeking refund 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 amount of refunds claimed by federal retirees in the Swansonactions
has not been calculated. Plaintiffs have asserted that the plantiff class
contains about 100,000 taxpayers; the State has asserted that the claims would
aggregate at least $140 million (which might not include interest). In a 4-3
decision, the North Carolina Supreme Court found for the defendants, declaring
the State would not be required to refund taxes illegally collected prior to
the decision in Davis.Because of this determination, the Court did not need to
decide what remedies would be available if Daviswere held to apply
retroactively. The Court recently reaffirmed its decision following
reconsideration.
Plaintiffs in Swanson Statehave applied for review by the U.S. Supreme
Court, but a decision has not been made on whether review will be granted. In
May 1992, the U.S. Supreme Court granted review to a Virginia Case which also
involves disparate treatment of retired
state and federal employees of the type
declared unconstitutional in Davis, Harper v. Virginia Dept. of Taxation(No.
91-794) ("Harper"). In reviewing Harper,
the U.S. Supreme Court apparently will
decide whether the rule of Davismust be
applied retroactively. The U.S. Supreme
Court's decision in Harperis not expected until later this year. Such decision
could have implications for the refund claims in Swanson State.
The population of the State has
increased 13% from 1980, from 5,880,095 to
6,657,631 as reported by the 1990 federal census. Although North Carolina is
the tenth largest State in population, it 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. 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 1990, the State labor force grew about 19% (from2,855,200 to
3,401,000), and per capita income grew from $7,999 to $16,203, an increase of
102.6%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of May 1991, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment
indicators have fluctuated somewhat in the
annual periods since June of 1989. The following table reflects the
fluctuations in certain key employmentcategories.
<TABLE>
<CAPTION>
Category (all seasonally adjusted) June 1989 June 1990 June 1991 June 1992
<S> <C> <C> <C> <C>
Civilian Labor Force 3,286,000 3,312,000 3,228,000 3,275,000
Nonagricultural Employment 3,088,000 3,129,000 3,059,000 3,077,000
Goods Producing Occupations (mining,
construction and manufacturing) 1,042,200 1,023,100 973,600 974,600
Service Occupations 2,045,800 2,106,300 2,085,400 2,103,100
Wholesale/Retail Occupations 713,900 732,500 704,100 694,700
Government Employees 482,200 496,400 496,700 502,000
Miscellaneous Services 563,900 587,300 596,300 615,300
Agricultural Employment 54,900 58,900 88,700 102,800
</TABLE>
The adjusted unemployment rate in June 1992 was 6.5% of the labor force,
as compared with an unemployment rate of 7.8% nationwide.
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.
Gross agricultural income in 1991 was $4.98 billion, including
approximately $4,924,071,000 income from
commodities. As of 1991, the State was
tenth in the nation in gross agricultural income. Tobacco production is a
leading source of agricultural incomein the State, accounting for 21.4% 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. Eggs and poultry products
accounted for revenues of approximately $1.5 billion in 1991.
According to the State Commissioner
of Agriculture, based on 1991 figures,
the State ranked first in the nation in the production of flue-cured tobacco,
total tobacco, turkeys, and sweet potatoes; second in the production of
cucumbers for pickles; third in the
value of poultry products and trout; fourth
in commercial broilers and peanuts; sixth in burley tobacco, greenhouse and
nursery receipts, hogs and strawberries; and seventh in the number of chickens
(excluding broilers), peaches and apples. The number of farms has been
decreasing; in 1992 there were approximately 60,000 farms in the State (down
from approximately 72,000 in 1987, a decrease of about 17% in five 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 Economic and Community Development, Travel and
Tourism Division, has reported that in 1990 approximately $7 billion was spent
on tourism in the State (up slightly from approximately $6.5 billion in 1989)
with two-thirds of that amount derived from out-of-state travelers. The
Department also reports 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
placed North Carolina general obligation bonds on "credit watch" in June of
1990 and continued to monitor the State's economy closely through 1990 and
1991.
In June of 1992 Standard & Poor's revised its outlook on the State's
AAA-rated general obligation bonds to stable from negative. Among the reasons
for the revision were the revenue spending measures adopted since 1991.
The rating agencies presumably will
monitor the results of the legislative
approach to the fiscal difficulties.
Thus, although both rating agencies have reaffirmed the AAA rating of
North Carolina's outstanding general obligation bonds for the present time,
there can be no assurance that these ratings will continue, that local
government bond ratingswill not decline or that particular bond issues may not
be adversely affected by changes in economic, political or other conditions
that do not affect the ratings.
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 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 Carolinaincome 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; and
(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 theBonds 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 Special Counsel is based, in part, on the opinion of
Chapman and Cutler regarding Federal tax status.
Ohio Trusts
The Ohio Trust will invest substantially all of its net assets in
obligations (or in certificates of participation in obligations) issued by or
on behalf of the State of Ohio, political subdivisions thereof, or agencies or
instrumentalities of the State or its political subdivisions (Ohio
Obligations). The Ohio Trust is
therefore susceptible to political, economic or
regulatory factors that may affect issuers of Ohio Obligations. (The timely
payment of principal of, and interest on, certain Ohio Obligations in the Ohio
Trust has been guaranteed by bond insurance purchased by the issuers, the Ohio
Trust or other parties. The timely payment of debt service on Ohio Obligations
that are so insured may not be subject to the factors referred to in this
section of the Prospectus.) The following information constitutes only a brief
summary of some of the complex factors that may affect the financial situation
of issuers in Ohio, and is not applicableto "conduit" obligations on which the
public issuer itself has no financial responsibility. This information is
derived from official statements published in connection with the issuance of
securities of certain Ohio issuers 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 creditworthiness of Ohio Obligations of local Ohio issuers is
generally unrelated to that of obligations issued by the State itself, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be
specific factors that are from time to
time applicable in connection with
investment in particular Ohio Obligations or
in those obligations of particular Ohio issuers, and it is possible the
investment will be in particular Ohio Obligations or in those Obligations of
particular issuers as to which those factors apply. However, the information
set forth below is intended onlyas a
general summary and not as a discussion of
any specific factors that may affect any particular issue or issuer of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census count of
10,847,000 indicating a 0.5% population increase from 1980.
The Ohio economy, while diversifying more into the service and other
non-manufacturing areas, 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 in Ohio, 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 also is an important segment of the economy, with over half the
State's area devoted to farming and
approximately 20% of total employment is in
agribusiness.
The State's overall unemployment
rate is commonly somewhat higher than the
national figure (for example, the reported 1990 average monthly rate was 5.7%,
compared to the national figure of 5.5%; however, for both 1991 and 1992 that
State rate was below the national rate,
the State rates were 6.4% and 7.2%, and
the national rates 6.7% and 7.4%). The
unemployment rate, and its effects, vary
among particular geographic areas of the State.
There can be no assurance that future state-wide or regional 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 portfolio of the OhioTrust or the ability of the 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 approp
riations and expenditures, and is precluded by law from completing a fiscal
year ending June 30 (FY) or 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 FY-ending balance reduced during less favorable
national economic periods and increased
during more favorable economic periods.
The State has established procedures for, and has timely taken, necessary
actions to ensure a resource/expenditure
balance during less favorable economic
periods. These include general and selected reductions in appropriations
spending; none have been applied to appropriations needed for debt service or
lease rentals on any State obligations.
Key end of biennium fund balances at June 30, 1989 were $475.1 million
(GRF) and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). In the latest complete biennium, necessary
corrective steps were taken in FY 1991 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. The State reported 1991 biennium-ending fund balances
of $135.3 million (GRF) and $300 million (BSF).
To allow time to complete the resolution of certain Senate and House d
ifferences in the budget and
appropriations for the current biennium (beginning
July 1, 1991), an interim appropriations act was enacted, effective July 1,
1991; it included debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most
other appropriations for 31 days at 97%
of FY 1991 monthly levels. The general appropriations act for the entire
biennium was passed on July 11, 1991 and
signed by the Governor. It authorized
the transfer, which has been made, of $200 million from the BSF to the GRF and
provided for transfers in FY 1993 back to the BSF if revenues are sufficient
for the purpose (which the State Office of Budget and Management, OBM, at
present thinks unlikely).
Based on updated FY financial results and the economic forecast for the
State, both in light of the continuing
uncertain nationwide economic situation,
OBM projected, and there was timely addressed, an FY 1992 imbalance in GRF
resources and expenditures.GRF receipts were significantly below original
forecasts, a shortfall resulting primarily from lower collections of certain
taxes, particularly sales and use taxes. Higher than earlier projected
expenditure levels resulted from higher
spending in certain areas, particularly
human services including Medicaid. As an initial action, the Governor ordered
most State agencies to reduce GRF appropriations spending in the final six
months of the FY 1992 by a total of approximately $196 million (debt service
and lease rental obligations were not affected). The General Assembly
authorized the transfer, made late in
the FY, to the GRF the $100.4 million BSF
balance and additional amounts from certain other funds, and made adjustments
in the timing of certain tax payments. Other administrative revenue and spen
ding actions resolved the remaining GRF imbalance. The administration and the
General Assembly are reviewing the longer term fiscal situation, particularly
that through the June 30, 1993 end of the current biennium; a significant
shortfall is currently projected for FY 1993, to be addressed by appropriate
legislative and administrative actions. As a first step the Governor ordered,
effective July 1, 1992, selected GRF appropriations spending reductions
totalling $315.6 million.
The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception in both cases is
for any debt incurred to repel invasion, suppress insurrection or defend the
State in war.)
By 12 constitutional amendments (the last adopted in 1987), Ohio voters
have authorized the incurrence of State debt to which taxes or excises were
pledged for payment. At October 21, 1992, $396 million (excluding certain
highway bonds payable primarily from highway use charges) of this debt was
outstanding, with the only such State
debt then still authorized to be incurred
being portions of the highway bonds, and the following: (a) up to $100 million
of obligations for coal research anddevelopment may be outstanding at any one
time ($38.6 million outstanding); and (b) of $1.2 billion of obligations for
local infrastructure improvements, no more than $120 million may be issued in
any calendar year ($312.5 million outstanding, $840 millionremaining to be
issued.)
The Constitution also authorizes the issuance of State obligations for
certain purposes the owners of which are
not given the right to have excises or
taxes levied to pay debt service. Those special obligations include bonds and
notes issued by, among others, the Ohio Public Facilities Commission and the
Ohio Building Authority; $3.7 billion of those obligations were outstanding at
January 2, 1993.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation in the provision of individual and family housing,
including borrowing for that purpose.
The General Assembly may for that purpose
authorize the issuance of State obligations secured by a pledge of all or such
portion as it authorizesof State
revenues or receipts, although the obligations
may not be supported by the State's full faith and credit.
State and local agencies issue revenue obligations that are payable from
revenues from or relating to certain facilities, which obligations are not
"debt" within constitutional provisions or payable from taxes. 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 issuer'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 (on a state-wide
basis, recently approximately 46%) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 88 districts
income taxes, for significant portions of their budgets. Litigation has
recently been filed, similar to that in other states, questioning the
constitutionality of Ohio's system of school funding. 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; in FY 1991 under this program 26
districts borrowed a total of $41.8 million (including over $27 million by one
district, and in FY 1992 borrowings totaled $61.9 million (including $46.6 mil
lion for one district). FY 1993 loan
approvals (through January 19, 1993) total
$92 million for 22 districts (including $75 million for one district).
Ohio's 943 incorporated cities and
villages rely primarily on property and
municipal income taxes for their
operations, and, with other local governments,
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, established procedures provide for a joint State/local
commission to monitor the municipality's
fiscal affairs, and for development of
a financial plan developed to eliminate deficits and cure any defaults. Since
inception in 1979, these procedures have been applied to 22 cities and
villages, in 16 of which the fiscal situation has been resolved and the
procedures terminated.
At present the State itself does not levy any 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 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, to 1% of true value in money, 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 unlimited as to
amount or rate.
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:
(1) An Ohio Trust is not
taxable as a corporation or
otherwise for purposes of the Ohio personal
income tax, the Ohio corporation franchise tax or the Ohio dealers in
intangibles tax;
(2)
Income of an Ohio Trust
will be treated as the income of the Unitholders for purposes of the
Ohio personal income tax, Ohio municipal income taxes and the Ohio
corporation franchise tax in proportion to the respective interest
therein of each Unitholder;
(3)
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 is exempt from the Ohio
personal income tax and Ohio school district income taxes, and is
excluded from the net income
base of the Ohio corporation franchise tax
when distributed or deemed distributed to Unitholders;
(4) Proceedspaid to an Ohio Trust
under insurance policies representing maturing interest on defaulted
obligations held by the Ohio
Trust will be exempt from Ohio income tax,
Ohio municipal income taxes and the net income base of the Ohio
corporation franchise 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; and
(5) Gains and losses
realized on the sale, exchange
or other disposition by an Ohio Trust of
Ohio Obligations are excludedin determining adjusted gross and taxable
income for purposes of the Ohio personal income tax, Ohio municipal
income taxes and Ohio school district income taxes, and are excluded
from the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
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 prerecessionary
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 whol
esale 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 population 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
hascommitted 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
191,500jobs.
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 onesuch 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 expecially 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 unemploymentrate. 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 nationwide 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 riseand 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 non-manufacturing 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
receivea9.8 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 expected1989-1991 ending balance to $181.0 million.
The September Personal Income Tax forecast for 1989-1991 has been
increasedby $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.
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:
(1) The Trust is not an
association taxable as a corporation and based upon an administrative
rule of the Oregon State Department Revenue, each Unitholder of the
Trust will be essentially treated as the owner of a pro rataportion of
the Trust and the income of such portion of the Trust will be treated
as the income of the Unitholder for Oregon Personal Income Tax
purposes;
(2) Interest on the Bonds
which is exempt from the Oregon
PersonalIncome Tax when received by the
Trust, and which would be exempt
from the Oregon Personal 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 a
Unitholder;
(3) To the extent that
interest derived from the 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 the Oregon
Personal Income Tax. Each Unitholder of the 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 Unith
older 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; and
(4) 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
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. Inaddition, 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 Trust and distributed to a Unitholder subject to such tax will be added to
the corporate 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. The major new 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 $38 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. Since 1984,
Commonwealth employment has continued to grow each year, increasing an
additional 9.1 percent from 1984 to 1991. 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. As a percentage of total
non-agricultural employment within the Commonwealth, non-manufacturing
employment has increased steadily since 1980 to its 1991 level of 80.8 percent
of total employment. Consequently, manufacturing employment constitutes a
diminished share of total employment within the Commonwealth. In 1991, the
service sector accounted for 28.6 percent of all non-agricultural employment
while the trade sector accounted for 22.8 percent.
While economic indicators in Pennsylvania have generally matched or
exceeded national averages since 1983, the Commonwealth is currently facing a
slowdown in its economy. Moreover, economic strengths and weaknesses vary in
different parts of the Commonwealth. In November 1992 the seasonally adjusted
unemployment rate for the Commonwealth was 7.1 percent and 7.2 percent for the
United States.
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 General Fund 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 restrainedbudget
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 in the Tax Stabilization Reserve Fund was used
to maintain vital state spending and only a minimal balance remains in that
fund.
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. 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 revenue increases 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 has increased to $87.5 million
and the unreserved-undesignated deficit has 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 are 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 and 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 have risen 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.
Fiscal1993 Budget.The adopted fiscal 1993 budget is balanced within the
official revenue estimate and a planned
draw-down of the $8.8 million beginning
budgetary basis surplus carried forward from fiscal 1992. The budget
appropriates $14.046 billion for spending during fiscal 1993, an increase of
$32.1 million, or less than one-quarter of one percent over total
appropriations for fiscal 1992. This small increase in expenditures was the
result of revenues being constrained by a personal income tax rate reduction
effective July 1, 1992, a low rate of economic growth, higher tax refund
reserves to cushion against adverse decisions on pending tax litigations, and
$71.3 million of appropriation line-item vetoes by the Governor. The
appropriation line-item vetoes made by the Governor prior to approving the
fiscal 1993 budget were made to meet the constitutional requirement for a
balanced budget by reducing spending in several programs from amounts
authorized by the General Assembly to amounts the Governor originally re
commended in his budget proposal, and by eliminating certain grants that could
not be funded within available resources. In approving the fiscal 1993 budget,
the Governor indicated that authorized spending approved by the General
Assembly for some programs was below his
recommendation and may be insufficient
to carry costs for the full fiscal year. Several of the Governor's cost
containment proposals, particularly those to contain expenditure increases in
the medical assistance and cash assistance programs were not enacted by the
General Assembly. Many of the cost containment efforts now are being
implemented through the regulatory process potentially reducing budgeted
current fiscal year savings.
The adopted fiscal 1993 budget eliminated funding for a number of private
educational institutions that normally receive state appropriations. Also
eliminated were certain grants to the counties to help pay operating costs of
the local judicial system. The counties will need to replace these grant funds
with other revenue sources in order to pay judicial system costs. Any
restoration of these appropriations for
the fiscal year or funding increases to
cover program cost shortfalls require action by the General Assembly.
In December 1992, the Governor gave the General Assembly preliminary
estimates of projected fiscal 1993 supplemental appropriations and proposed
restorations of selective appropriations
vetoed when the fiscal 1993 budget was
adopted. The projected supplemental appropriations generally represent budget
adjustments necessary to offset amounts of savings included in the budget but
not enacted when the budget was adopted
and to restore operating appropriations
to full year funding. These potential supplemental appropriations and
restorations total approximately $149 million and would be funded, when
enacted, by lapses of current and prior appropriation balances and reductions
of reserves for refunds due to revisions to estimated refunds payable.
Commonwealth revenue sources are estimated for the fiscal 1993 budget to
total $14.587 billion, a $69.9 million increase over actual fiscal 1992
revenues, representing less than one-half of one percent increase. The
projected low revenue growth for fiscal 1993 is caused by the Commonwealth's
expectation that current weak growth in
employment, consumer income, and retail
sales will continue, and by the reduction in the personal income tax rate from
3.1% to 2.8% on July 1, 1992. In addition, tax refund reserves were increased
by $209 million to $548 million for fiscal 1993 to allow for potential tax
refunds that might be payable from any
adverse judicial decision in a number of
pending tax litigations. Some of those
reserves are believed to be in excess of
amounts that will be paid during fiscal 1993 and may be used to fund
supplemental appropriations for the fiscal year described above. Through
November 1992, total General Fund collections of revenue were below estimated
revenues by one-third of one percent ($16.6 million). Small revenue shortages
were recordedfrom the sales tax and from the personal income tax, but were
mostly offset by higher collections from corporation and liquor taxes and by
higher miscellaneous revenue
collections. The Commonwealth believes its current
fiscal 1993 General Fund revenue
estimate is appropriate and does not expect to
substantially revise its estimate based on economic factors.
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 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 and a first-class County for the purpose of
administering various governmental programs.
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 PICAwas approved by City Counsel 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 revised five-year plan approved by
PICA on May 18, 1992. The five year plan is designed to produce a balanced
budget over a five-year period through a combination of personnel and budget
initiatives, productivity improvements, cost containments and revenue
enhancements. Full implementation of the five-year plan was delayed due to
labornegotiations 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.
Philadelphia is presently amending the
plan to bring it back in balance.
Philadelphia experienced a series of operating deficits in its General
Fund beginning in fiscal year 1987. For the fiscal year ended June 30, 1991,
Philadelphia experienced a cumulative General Fund balance deficit of $153.5
million. Philadelphia received a grant from PICA in June 1992 which eliminated
the deficit through June 30, 1991. Philadelphia experienced a deficit through
June 30, 1992 of $71.4 million (unaudited). Philadelphia is receiving
additional grants from PICA to eliminate the General Fund balance deficit at
June 30, 1992. $64.3 million, which is
ninety percent of the $71.4 million, was
paid to Philadelphia on October 30, 1992, and the remaining ten percent is
expected to be paid to Philadelphia once the final audit for the fiscal year
ended June 30, 1992 has been completed. Philadelphia is projecting a budget
deficit for fiscal year 1993 of $1.8 million.
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 B by Moody's and B
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 othe
r 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 a 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 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 may 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 but not upon the disposition of any of the Securities in a
Pennsylvania Trust to which the Unitholder's Units relate; Units will
be taxable under the Pennsylvania inheritance and estate taxes;
(4) Units are subject to
Pennsylvania inheritance and estate taxes;
(5) a Unitholder which is a corporation may 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 Shares Tax;
(6) any proceeds paid under the insurance policy issued to the Trustee or
obtained by 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.
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 othergovernmental agencies within the Commonwealth.
South Carolina Trusts
Although all or most 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 orprincipal 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.
Personal income in the State increased by 4.2% in the fiscal year ended
June 30, 1992, while that of the U.S. increased by 4.0%. For this same fiscal
year, unemployment in South Carolina was 6.1%, compared with the national rate
of 7.1%.
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 aconstitutional
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 June30, 1985 the balance in
the General Fund reserve was $89,100,000.
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 endedJune 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 Reserve Fund to the
General Fund, bringing the balance in the 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 by $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 fundsupplemental
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 $80.8million.
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 GeneralAssembly 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 ControlBoard, 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.
Subsequently, the Budget and Control Board announced that the State had
incurred a $54 million deficit for fiscal year 1991-92. This deficit will be
offset by theGeneral Reserve Fund and a small amount saved by state agencies
and local government, leaving the State with an estimated $7.5 million balance
for the 1991-92 fiscal year.
Responding to these recurrent operating deficits, Standard & Poor's Corp.
has placed the State's AAA-rated general debt on its CreditWatch, indicating
that it expects to review this action during the first quarter of 1993.
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 which,
together with funds from the Capital Reserve Fund, was sufficient to balance
the budget for the current fiscal year.
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 ofArticle 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 areexempt 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 forSouth 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; and
(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
Special Counsel 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 amajor 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 ofthe end of the Cold War remains a cloud on the economic horizon.
In 1989, Virginia's per capita personal income of $18,927 was the highest
of the southeastern states and exceeded the national average of $17,596. In
1989, Virginia ranked 11th in per capita income, with an average approximately
7% greater than the national average. Virginia unemployment rates have
generally followed a pattern similar to
the national rate but have consistently
been at least 15% lower than the national rate over the past five-year period.
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
percentsince 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, althoughit 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 en
ded June 30, 1991, of $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.
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 personsother than full time residents of Virginia.
(1) 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;
(2) 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;
(3) 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; and
(4)
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 rataportion of the Bonds held
by the Virginia Trust may affect the determination of such Unitholders' Bank
Franchise Tax. Prospective investors
subject to the Virginia Bank Franchise Tax
should consult their tax advisors.
THE SPONSOR
Van Kampen Merritt Inc., a Delaware corporation, is the Sponsor of the
Fund. Van Kampen Merritt Inc. is primarily owned by Clayton, Dubilier & Rice,
Inc., a New York-based private investment firm. Van Kampen Merritt, Inc.
management owns a significant minority
equity position. Van Kampen Merritt 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 its principal office at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 (708-684-6000). 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, 1992, the total
stockholders' equity of Van Kampen Merritt Inc. was $299,865,984 (audited).
(This paragraph relates only to the Sponsor and not to the Trusts or to any
other person. 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 December 31, 1992, the Sponsor managed, or conducted surveillance
and evaluation services with respect to, approximately $34 billion of
investment products. The Sponsor managed$18.5 billion of assets, consisting of
$6.9 billion for 12 mutual funds, $6.1
billion for 22 closed-end funds and $5.5
billion for 38 institutional accounts. The Sponsor has also deposited over $22
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 Municipal
Income Trust
or the IM-IT
trust. The Sponsor also provides surveillance and evaluation services at cost
for approximately $15 billion of unit investment trust assets outstanding.
Since 1976, the Sponsor has opened over one million retail investor accounts
through retail distribution firms. Van Kampen Merritt 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.
Van Kampen Merritt Inc. is the sponsor of the various series of the
following unit investment trusts: Investors' Quality Tax-Exempt Trust;
Investors' Quality Tax-Exempt Trust, Multi-Series; Investors' Quality
Municipals Trust, AMT Series; Insured Municipals Income Trust; Insured
Municipals Income Trust, lnsured Multi-Series; California Insured Municipals
Income Trust; New York Insured Municipals Income Trust; Pennsylvania Insured
Municipals Income Trust; Insured Tax Free Bond Trust; Insured Tax Free Bond
Trust, Insured Multi-Series; Investors' Corporate Income Trust; Investors'
Governmental Securities-Income Trust; Van Kampen Merritt International Bond
Income Trust; Van Kampen Merritt Utility Income Trust; Van Kampen Merritt
Insured Income Trust; Van Kampen Merritt Blue Chip Opportunity Trust; and Van
Kampen Merritt Blue Chip Opportunity and Treasury Trust.
Van Kampen Merritt Inc. is the distributor of the following mutual funds:
Van Kampen Merritt U.S. Government Fund; Van Kampen Merritt California Insured
Tax Free Fund; Van Kampen Merritt
Tax-Free High Income Fund; Van Kampen Merritt
Insured Tax-Free Income Fund; Van Kampen Merritt High Yield Fund; Van Kampen
Merritt Growth and Income Fund; VanKampen Merritt Pennsylvania Tax-Free Income
Fund; Van Kampen Merritt Money Market Fund; Van Kampen Merritt Tax Free Money
Fund; Van Kampen Merritt Municipal Income Fund; Van Kampen Merritt Short-Term
Global Income Fund; and Van Kampen Merritt Adjustable Rate U.S. Government
Fund.
Van Kampen Merritt Inc. is the distributor of the following closed-end
funds: Van Kampen Merritt Municipal
Income Trust; Van Kampen Merritt California
Municipal Trust; Van Kampen Merritt Intermediate Term High Income Trust; Van
Kampen Merritt Limited Term High Income Trust; Van Kampen Merritt Prime Rate
Income Trust; Van Kampen Merritt Investment Grade Municipal Trust; Van Kampen
Merritt Municipal Trust; Van Kampen
Merritt California Quality Municipal Trust;
Van Kampen Merritt Florida Quality
Municipal Trust; Van Kampen Merritt New York
Quality Municipal Trust; Van Kampen Merritt Ohio Quality Municipal Trust; Van
Kampen Merritt Pennsylvania Quality Municipal Trust; Van Kampen Merritt Trust
for Investment Grade Municipals; Van Kampen Merritt Trust for Insured
Municipals; Van Kampen Merritt Trust for Investment Grade CA Municipals; Van
Kampen Merritt Trust for Investment Grade FL Municipals; Van Kampen Merritt
Trust for Investment Grade NJ Municipals; Van Kampen Merritt Trust forI
nvestment Grade NY Municipals; Van
Kampen Merritt Trust for Investment Grade PA
Municipals; Van Kampen Merritt Municipal Opportunity Trust; Van Kampen Merritt
Advantage Municipal Income Trust; Van Kampen Merritt Advantage Pennsylvania
Municipal Income Trust; and Van Kampen Merritt Strategic Sector Municipal
Trust.
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 C
orporation 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
Associationand 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 isto 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 vestin 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 Merritt
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 exc
eed 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 an annual fee based on the largest aggregate amount of Securities in
each Trust at any time during such annual period. The fees will be computed as
set forth in Part I to this Prospectus. The Trustee's fees are payable monthly
on orbefore 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. Since the Trusteehas 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 othermarket 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 Securityin 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 ofbusiness 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 noticethereof 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
suchTrust 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, theamount 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 g
ood 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 TrustAgreement 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 DISTRIBUTlON
Units repurchased in the secondary market, if any, may be offered by this
Prospectus at the secondary Public Offering Price 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 ind
icated 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 toregister 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 ofany 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.
AUDITORS
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, independent certified public accountants,
as set forth in their report in Part One of this Prospectus, and are included
herein in reliance upon the authorityof said firm as experts in accounting and
auditing.
DESCRIPTION OF SECURITIES RATINGS*
*As published by the rating companies.
Standard & Poor's Corporation. A Standard & Poor's Corporation ("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, suspendedor 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.
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 issecure. 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.
<PAGE>
INTENTIONALLY LEFT BLANK
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
<S> <C>
Title
Introduction..................................... 1
Descripton of The Funds.......................... 2
Securities Selection.......................... 2
Portfolio Cencentrations...................... 3
Replacement Bonds............................. 6
Bond Redemptions ............................. 6
Distributions ................................ 7
Certificates ................................. 8
Estimated Current Returns and
Estimated Long-Term Returns ..................... 8
Accrued Interest (Accrued Interest To Carry) . 9
Public Offering Price ........................ 9
Market for Units ............................. 10
Reinvestment Option .......................... 11
Redemption of Units .......................... 11
Reports Provided ............................. 13
Federal Tax Status of Each Trust ............. 13
Description and State Tax Status of State Trust . 16
Alabama Trusts ............................... 16
Arizona Trusts ............................... 18
Arkansas Trusts .............................. 22
California Trusts ............................ 23
Colorado Trusts .............................. 30
Connecticut Trusts .......................... 33
Delaware Trusts .............................. 36
Florida Trusts ............................... 38
Georgia Trusts .............................. 42
Kansas Trusts ................................ 44
Kentucky Trusts .............................. 45
Maine Trusts ................................. 46
Maryland Trusts .............................. 49
Massachusetts Trusts ......................... 50
Michigan Trusts .............................. 52
Minnesota Trusts ............................. 55
Missouri Trusts .............................. 57
Nebraska Trusts .............................. 59
New Jersey Trusts ............................ 60
New York Trusts .............................. 64
North Carolina Trusts ........................ 72
Ohio Trusts .................................. 76
Oregon Trusts ................................ 79
Pennsylvania Trusts .......................... 83
South Carolina Trusts ........................ 88
Virginia Trusts .............................. 91
The Sponsor ..................................... 94
The Trustee ..................................... 95
Expenses of the Trust ........................ 96
Portfolio Administration ..................... 97
Purchase of Units by The Sponsor ............. 97
Amendment or Termination ..................... 98
Limitation on Liabilities .................... 98
Unit Distribution ............................ 99
Sponsor and Dealer Compensation .............. 99
Legal Opinions ...............................101
Auditors .....................................101
Description of Securities Ratings ...............101
</TABLE>
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of the information set forth in the registration stat
ements 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 Merritt
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Mellon Bank Center
1735 Market Street
Suite 1300
Philadelphia, Pennsylvania 19103
Please retain this Prospectus
for future reference.
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, Investors' Quality Tax-Exempt Trust, Series 23, 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 21st
day of February, 1994.
Investors' Quality Tax-Exempt Trust,
Series 23
(Registrant)
By Van Kampen Merritt 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 February 21, 1994:
Signature Title
John C. Merritt Chairman, Chief Executive )
Officer and Director )
)
William R. Rybak Senior Vice President and )
Chief Financial Officer )
)
Ronald A. Nyberg Director )
)
William R. Molinari Director )
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 December 17, 1993 accompanying the
financial statements of Investors' Quality Tax-Exempt Trust, Series 23 as
of September 30, 1993, and for the period then ended, contained in this
Post-Effective Amendment No. 10 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
Chicago, Illinois
February 21, 1994
