<PAGE>
TAX-EXEMPT UNIT TRUST
PROSPECTUS
Part One
October 27, 1993
Note: This Prospectus may be used only when accompanied by Part
Two.
See Part Two for the "Schedules of Investments," essential
information based thereon, and financial statements, including the
report of independent public accountants, relating to the Series of
the Trust offered hereby.
THE NUVEEN TAX-EXEMPT UNIT TRUST consists of a number of underlying
separate unit investment trusts, each of which contains a
diversified portfolio of interest-bearing obligations issued by or
on behalf of states and territories of the United States and
authorities and political subdivisions thereof, the interest on
which is, in the opinion of bond counsel to each issuer, exempt
from all Federal income tax under existing law and, in the case of
a State Trust, from certain State income taxes in the State for
which such State Trust is named. All Bonds (as defined herein) in
each Traditional Trust (as defined herein) were rated in the
category A or better by either Standard & Poor's Corporation or
Moody's Investors Service, Inc., on the date each Series was
established (BBB or Baa, respectively, or better by such services
in the case of National Trust 76 and earlier National Trusts and
SP-1 or MIG 2 or better in the case of a Short Term Trust). All
Bonds in each Insured Trust (as defines herein) are covered by
policies of insurance obtained from the Municipal Bond Insurance
Association or the Municipal Bond Investor Assurance Corporation
guaranteeing payment of principal and interest when due. All such
policies of insurance remain effective so long as the obligations
are outstanding. As a result of such insurance, the Bonds in each
portfolio of the Insured Trusts have received a rating of Aaa by
Moody's Investors Service, Inc. and the Bonds in the Insured Trusts
and the Units of each such Trust have received a rating of AAA by
Standard & Poor's Corporation. Insurance relates only to the Bonds
in the Insured Trusts and not to the Units offered or to their
market value.
THE OBJECTIVES of the Trusts are tax-exempt income and conservation
of capital through a diversified investment in tax-exempt Bonds
(discount Bonds in the case of the Discount Trusts). (See "Tax
Status of Unitholders.") The payment of interest and the
preservation of capital are, of course, dependent upon the
continuing ability of the issuers or obligors, or both, of Bonds to
meet their obligations thereunder. There is no guarantee that the
Trusts' objectives will be achieved. The price received upon
redemption may be more or less than the amount paid by Unitholders,
depending upon the market value of the Bonds on the date of tender
for redemption.
INTEREST INCOME to each Trust in a Series of the Nuveen Tax-Exempt
Unit Trust and to the Unitholders thereof, in the opinion of
counsel, under existing law, is exempt from Federal income tax,
and, in the case of a State Trust, from State income taxes in the
State for which such State Trust is named. Capital gains, if any,
are subject to tax per Unit for a particular Trust.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit for a
particular Trust for "secondary market" sales is equal to a pro
rata share of the sum of bid prices per Unit of the Bonds in such
Trust plus the sales charges for the Bonds determined in accordance
with the table set forth herein under the caption "Public Offering
Price" based on the number of years remaining to the maturity of
each such Bond and adjusted for cash, if any, held or owed by the
Trust. See the table on page 6 regarding reduced sales charges on
large transactions. Units are offered at the Public Offering Price
plus interest accrued to, but not including, the date of
settlement. (See "Public Offering Price.") The minimum purchase
is either $5,000 or 50 Units, whichever is less. The bid prices of
the Bonds in a portfolio may represent a "market" discount from or
premium over the par value of the Bonds.
THE UNITS being offered by this Prospectus are issued and
outstanding Units that have been reacquired by John Nuveen & Co.
Incorporated either by purchase of Units tendered to the Trustee
for redemption or by purchase in the open market. The price paid in
each instance was not less than the Redemption Price determined as
provided herein under the caption "How Units May Be Redeemed
Without Charge." Any profit or loss resulting from the sale of the
Units will accrue to John Nuveen & Co. Incorporated and no proceeds
from the sale will be received by the Trusts.
MARKET. A Unitholder may redeem Units at the office of the Trustee,
United States Trust Company of New York, at prices based upon the
bid prices of the Bonds in such Trust. The Sponsor, although not
required to do so, intends to make a secondary market for the Units
at prices based upon the bid prices of the Bonds in each Trust.
Both parts of this Prospectus should be retained for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Page 1
<PAGE>
TABLE OF CONTENTS
Page No.
Accrued Interest
................................................... 7 Accrued
Interest Rate per Unit ..................................... 7
Accumulation Plan
.................................................. 69 Bonds, How
Selected ................................................ 8 Bonds,
Prohibition against Substitution ............................ 75
Bond Ratings
....................................................... * Bonds,
Removal from Trusts ......................................... 75
Call Provisions of Portfolio Bonds
................................. * Capital Gains Taxability
........................................... 53 Dealer Discount
.................................................... 72 Description
of Units of Trusts ..................................... 3
Distributions to Unitholders
....................................... 68 Distribution Payment
Dates ......................................... 68 Distribution of
Units to the Public ................................ 72 Estimated
Long-Term Return and Estimated Current Return ............ 7
Evaluation
......................................................... 72
Expenses to Trusts
................................................. 67 Financial
Statements ............................................... *
Insurance on Bonds in the Insured Trusts
........................... 4 Insurance on Certain Bonds in the
Traditional Trusts ............... 5 Interest Income to Trusts
.......................................... * Investments,
Schedules of .......................................... * Legality
of Units .................................................. 77
Limitations on Liabilities of Sponsor and Trustee
.................. 75 Market for Units
................................................... 73 Minimum
Transaction ................................................ *
Optional Distribution Plans
........................................ 69 Ownership and Transfer
of Units .................................... 73 Public Offering
Price of Units ..................................... 6 Quantity
Purchases ................................................. 6
Ratings, Description of
............................................ 77 Record Dates
....................................................... 68
Redemption of Units by Trustee
..................................... 74 Reports to Unitholders
............................................. 71 Repurchase of
Units by Sponsor ..................................... 75 Sales
Charge ....................................................... *
Selection of Bonds for Deposit in the Trusts
....................... 8 Sponsor, Information about
......................................... 76 State Tax Status
................................................... 55 Successor
Trustees and Sponsors .................................... 76 Tax
Status of Unitholders .......................................... 53
Trustee, Information about
......................................... 75 Trustee's Fees
..................................................... 67 Trust
Indenture, Amendment and Termination ......................... 77
Unit Issuance and Transfer
......................................... 73 Unit Value and
Evaluation .......................................... 72
______________
* Information on this item appears in Part Two.
Page 2
<PAGE>
THE NUVEEN TAX-EXEMPT UNIT TRUST
THE NUVEEN TAX-EXEMPT UNIT TRUST - DESCRIPTION
Each Series of the Nuveen Tax-Exempt Unit Trust (the "Trust") is
one of a series of separate but similar investment companies
created by the Sponsor, each of which is designated by a different
Series number. Each Series includes one or more underlying
separate unit investment trusts; the trusts in which few or none of
the Bonds are insured are sometimes referred to as the "Traditional
Trusts," the trusts in which all of the Bonds are insured as
described herein are sometimes referred to as the "Insured Trusts,"
and the state trusts (both Traditional and Insured) are sometimes
referred to as the "State Trusts." The general term "Trust(s)"
should be understood to refer collectively to both Traditional and
Insured Trusts. Each Trust includes only Bonds that are, in the
opinion of counsel, exempt from Federal income tax and, in the case
of a State Trust, from certain taxation in the State for which such
State Trust is named. Each Series was created under the laws of the
State of New York pursuant to a Trust Indenture and Agreement (the
"Indenture") between John Nuveen & Co. Incorporated (the "Sponsor")
and United States Trust Company of New York (the "Trustee").
The objectives of the Trusts are income exempt from Federal income
tax and, in the case of a State Trust, where applicable, from State
income and intangibles taxes, and conservation of capital through
an investment in obligations issued by or on behalf of states and
territories of the United States and authorities and political
subdivisions thereof, the interest on which is, in the opinion of
recognized bond counsel to the issuing governmental authorities,
exempt from Federal income tax under existing law. Bonds in any
State Trust have been issued primarily by or on behalf of the State
for which such Trust is named and counties, municipalities,
authorities and political subdivisions thereof, the interest on
which is, in the opinion of bond counsel, exempt from Federal and
(except for certain Bonds in the Connecticut Trusts, which were
issued prior to the taxation by Connecticut of interest income of
resident individuals) certain State income tax and intangibles
taxes, if any, for purchasers who qualify as residents of that
State. Insurance guaranteeing the timely payment, when due, of all
principal and interest on the Bonds in each Insured Trust has been
obtained by the Sponsor or by the issuers of such Bonds from the
Municipal Bond Insurance Association or Municipal Bond Investors
Assurance Corporation, and as a result of such insurance the
obligations in the Insured Trusts are rated Aaa by Moody's
Investors Service, Inc. ("Moody's") and AAA by Standard & Poor's
Corporation ("Standard & Poor's" or "S&P"). (See "Insurance on
Bonds in the Insured Trusts.") All obligations in each Traditional
Trust were rated at the date the Trust was established in the
category A or better (BBB or Baa or better by such services in the
case of National Trust 76 and earlier National Trusts and SP-1 or
MIG 2 or better in the case of short-term obligations included in
a Short Term Traditional Trust) by Standard & Poor's or Moody's
(including provisional or conditional ratings). (See "Description
of Bond Ratings.") In addition, certain Bonds in certain
Traditional Trusts may be covered by insurance guaranteeing the
timely payment, when due, of all principal and interest. The bid
prices of the Bonds in the portfolio of any Trust may represent a
deep "market" discount from the par value of the Bonds. At the time
each Discount Trust was established, the market value of the Bonds
in the portfolio was significantly below face value, and the
current bid prices of the Bonds in such Trusts may continue to
represent a deep "market" discount from the par value of the Bonds.
Gains realized on the sale, payment on maturity or redemption of
the Bonds by the Trustee or on the sale or redemption of Units by
a Unitholder are included in a Unitholder's gross income for
Federal income tax purposes as capital gains. (See "Tax Status of
Unitholders.") The Sponsor has deposited with the Trustee the
interest-bearing obligations listed in the Schedules of Investments
in Part Two (the "Bonds"), which constitute the Trusts' underlying
securities. There is, of course, no guarantee that the Trusts'
objectives will be achieved. The State of Florida imposes no income
tax on individuals, and exemption from that State's intangibles tax
provides only a slight tax advantage to purchasers of a Florida
Trust. The State of Texas currently imposes no income tax on
individuals; accordingly, there is no State tax advantage to
purchasers of a Texas Trust. (See "Tax Status of Unitholders" for
a discussion of these matters.)
Payment of interest on the Bonds in each Insured Trust, and of
principal at maturity, is guaranteed under policies of insurance
obtained by the Sponsor or by the issuers of the Bonds. (See
"Insurance on Bonds in Insured Trusts.")
At the Date of Deposit, each National Trust, State Trust and
Discount Trust consisted of long-term (approximately 15 to 40 year
maturities) obligations; each Long Intermediate Trust consisted of
intermediate to long-term (approximately 11 to 19 year maturities)
obligations; each intermediate Trust and State Intermediate Trust
consisted of intermediate-term (approximately 5 to 15 year
maturities) obligations; each Short Intermediate Trust and State
Short Intermediate Trust consisted of short to intermediate-term
(approximately 3 to 7 year maturities) obligations; and each Short
Term Trust consisted of short-term (approximately 1 to 5 year
maturities) obligations.
Each Trust consists of municipal debt obligations. Because of this
an investment in a Trust should be made with an understanding of
the risks which investment in debt obligations may entail,
including the risk that the value of the debt obligations, and
therefore of the Units, will decline with increases in market
interest rates. In general, the longer the period until the
maturity of a Bond, the more sensitive its value will be to
fluctuations in interest rates. During recent years there have
been substantial fluctuations in interest rates and, accordingly,
in the value of long-term debt obligations. The Sponsor cannot
predict whether such fluctuations will continue.
Each Unit of a Trust represents an undivided interest in such Trust
equal to every other Unit. To the extent that any Units are
redeemed by the Trustee, the aggregate value of the Trust's assets
will decrease by the amount paid to the redeeming Unitholder, but
the fractional undivided interest of each unredeemed Unit in such
Trust will increase proportionately. The Units offered hereby are
issued and outstanding Units which have been reacquired by the
Sponsor either by purchase of Units tendered to the Trustee for
redemption or by purchase in the open market. No offering is being
made on behalf of the Trusts and any profit or loss realized on the
sale of Units will accrue to the Sponsor.
Page 3
<PAGE>
INSURANCE ON BONDS IN INSURED TRUSTS
Insurance guaranteeing the timely payment, when due, of all
principal and interest on the Bonds in each Insured Trust has been
obtained by the Sponsor or by the issuers or underwriters of Bonds
from the Municipal Bond Insurance Association (the "Association")
(for Insured Series 1 through 107) or the Municipal Bond Investors
Assurance Corporation (the "Corporation") (for Insured Series 108
and all subsequent Series) (the Association and the Corporation are
referred to collectively as the "Insurers"). Each insurance policy
is an obligation only of the Insurer that issued it and not of the
other: policies issued by the Association are obligations of the
Association and not of the Corporation, and policies issued by the
Corporation are not obligations of the Association or its members.
The appropriate Insurer has issued a policy or policies of
insurance covering each of the Bonds in the Insured Trusts, each
policy to remain in force until the payment in full of such Bonds
and whether or not the Bonds continue to be held by an Insured
Trust. By the terms of each policy the appropriate Insurer will
unconditionally guarantee to the holders or owners of the Bonds the
payment, when due, required of the issuer of the Bonds of an amount
equal to the principal of and interest on the Bonds as such
payments shall become due but not be paid (except that in the event
of any acceleration of the due date of principal by reason of
mandatory or optional redemption, default or otherwise, the
payments guaranteed will be made in such amounts and at such times
as would have been due had there not been an acceleration). The
appropriate Insurer will be responsible for such payments, less any
amounts received by the holders or owners of the Bonds from any
trustee for the Bond issuers or from any other sources other than
the Insurer. The Insurers' policies relating to small industrial
development bonds and pollution control revenue bonds also
guarantee the full and complete payments required to be made by or
on behalf of an issuer of Bonds pursuant to the terms of the Bonds
if there occurs an event which results in the loss of the tax-
exempt status of the interest on such Bonds, including principal,
interest or premium payments, if any, as and when thereby required.
Each Insurer has indicated that the insurance policies do not
insure the payment of principal or interest on Bonds which are not
required to be paid by the issuer thereof because the Bonds were
not validly issued; as indicated under "Tax Status of Unitholders,"
the respective issuing authorities have received opinions of bond
counsel relating to the valid issuance of each of the Bonds in the
Insured Trusts. The Insurers' policies also do not insure against
nonpayment of principal of or interest on the Bonds resulting from
the insolvency, negligence or any other act or omission of the
trustee or other paying agent for the Bonds. The policies are not
covered by the Property/Casualty Insurance Security Fund specified
in Article 76 of the New York Insurance Law. The policies are non-
cancelable and the insurance premiums have been fully paid on or
prior to the Date of Deposit, either by the Sponsor or, if a policy
has been obtained by a Bond issuer, by such issuer.
Upon notification from the trustee for any Bond issuer or any
holder or owner of the Bonds or coupons that such trustee or paying
agent has insufficient funds to pay any principal or interest in
full when due, the appropriate Insurer will be obligated to deposit
funds promptly with Citibank, N.A., New York, New York, as fiscal
agent for the Insurers, sufficient to fully cover the deficit. If
notice of nonpayment is received on or after the due date, the
appropriate Insurer will provide for payment within one business
day following receipt of the notice. Upon payment by an Insurer of
any Bonds, coupons, or interest payments, such Insurer shall
succeed to the rights of the owner of such Bonds, coupons or
interest payments with respect thereto.
The Association. Each insurance company comprising the Association
is severally and not jointly obligated under each policy issued by
the Association in the following respective percentages: The AEtna
Casualty and Surety Company 33%;, Fireman's Fund Insurance Company,
30%; The Travelers Indemnity Company, 15%; CIGNA Property and
Casualty Company (formerly AEtna Insurance Company), 12%; and The
Continental Insurance Company, 10%. As a several obligor, each
such insurance company will be obligated only to the extent of its
percentage of any claim under the policy and will not be obligated
to pay any unpaid obligation of any other member of the
Association. Each insurance company's participation is backed by
all of its assets. However, each insurance company is a multiline
issuer involved in several lines of insurance other than municipal
bond insurance, and the assets of each insurance company also
secure all of its other insurance policy and surety bond
obligations.
The following table sets forth financial information with respect
to the five insurance companies comprising the Association. The
statistics have been furnished by the Association and are as
reported by the insurance companies to the New York State Insurance
Department and are determined in accordance with statutory
accounting principles. No representation is made herein as to the
accuracy or adequacy of such information or as to the absence of
material adverse changes in such information subsequent to the date
thereof. In addition, these numbers are subject to revision by the
New York State Insurance Department which, if revised, could either
increase or decrease the amounts.
Page 4
<PAGE>
<TABLE>
MUNICIPAL BOND INSURANCE ASSOCIATION
FIVE MEMBER COMPANIES, ASSETS AND POLICYHOLDERS' SURPLUS
AS OF MARCH 31, 1993
(Amounts in Thousands)
CIGNA
Property
AEtna Fireman's Travelers and
Continental Casualty Fund Indemnity
Casualty Insurance <S> <C>
<C> <C> <C> <C>
Assets $ 9,677,968 $ 6,525,501 $
10,035,535 $ 6,119,803 $ 2,552,384 Liabilities
8,372,450 4,858,297 8,149,483 5,568,613
2,196,125 Policyholder's
Surplus 1,305,518 1,667,204
1,886,052 551,190 356,259
</TABLE>
The Corporation. The Corporation is the principal operating
subsidiary of MBIA, Inc., a New York Stock Exchange listed company.
MBIA, Inc. is not obligated to pay the debts of or claims against
the Corporation. The Corporation is a limited liability
corporation rather than a several liability association. The
Corporation is domiciled in the State of New York and licensed to
do business in all 50 states, the District of Columbia and the
Commonwealth of Puerto Rico.
As of March 31, 1993, the Corporation had admitted assets of $2.7
billion (unaudited), total liabilities of $1.8 billion (unaudited),
and total capital and surplus of $918 million (unaudited)
determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities.
Copies of the Corporation's year-end financial statements prepared
in accordance with statutory accounting practices are available
from the Corporation. The address of the Corporation is 113 King
Street, Armonk, New York 10504.
Moody's rates all bond issues insured by the Insurers Aaa and
short-term loans MIG 1, both designated to be of the highest
quality.
Standard & Poor's rates all issues insured by the Insurers AAA
Prime Grade.
The Moody's rating of the Insurers should be evaluated
independently of the Standard & Poor's rating of the Insurers. No
application has been made to any other rating agency in order to
obtain additional ratings on the Bonds. The ratings reflect the
respective rating agency's current assessment of the
creditworthiness of the Insurers and their ability to pay claims on
their policies of insurance. (See "Description of Ratings.") Any
further explanation as to the significance of the above ratings may
be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Bonds, and such ratings may be subject to revision or withdrawal at
any time by the rating agencies. Any downward revision or
withdrawal of either or both ratings may have an adverse affect on
the market price of the Bonds.
Because the insurance on the Bonds will be effective so long as the
Bonds are outstanding, such insurance will be taken into account in
determining the market value of the Bonds and therefore some value
attributable to such insurance will be included in the value of the
Units of the Insured Trusts. The insurance does not, however,
guarantee the market value of the Bonds or of the Units.
INSURANCE ON CERTAIN BONDS IN TRADITIONAL TRUSTS
Insurance guaranteeing the timely payment, when due, of all
principal and interest on certain Bonds in a Traditional Trust may
have been obtained by the Sponsor, issuer, or underwriter of the
particular Bonds involved or by another party. Such insurance,
which provides coverage substantially the same as that obtained
with respect to Bonds in Insured Trusts as described above, is
effective so long as the insured Bond is outstanding and the
insurer remains in business. Insurance relates only to the
particular Bond and not to the Units offered hereby or to their
market value. Insured Bonds have received a rating of AAA by
Standard & Poor's and Aaa by Moody's, in recognition of such
insurance.
If a Bond in a Traditional Trust is insured, the Schedule of
Investments will identify the insurer. Such insurance will be
provided by Financial Guaranty Insurance Company, AMBAC Indemnity
Corporation, MBIA Corp. of Illinois, Capital Guaranty Insurance
Corporation ("CGIC"), Financial Security Assurance, Inc., the
Association, the Corporation or Connie Lee Insurance Company
("Connie Lee"). The Sponsor to date has purchased and presently
intends to purchase insurance for Bonds in Traditional Trusts
exclusively from the Corporation (see the preceding disclosure
regarding the Corporation). There can be no assurance that any
insurer listed herein will be able to satisfy its commitments in
the event claims are made in the future. However, at the date
hereof, Standard & Poor's has rated the claims-paying ability of
each insurer AAA, and Moody's has rated all bonds insured by each
such insurer, except CGIC and Connie Lee Aaa. Moody's gives no
ratings for bonds insured by CGIC or Connie Lee.
Page 5
<PAGE>
Because any such insurance will be effective so long as the insured
Bonds are outstanding, such insurance will be taken into account in
determining the market value of such Bonds and therefore some value
attributable to such insurance will be included in the value of the
Units of the Trust that includes such Bonds. The insurance does
not, however, guarantee the market value of the Bonds or of the
Units.
PUBLIC OFFERING PRICE
The Sponsor will appraise or cause to be appraised daily the value
of the underlying Bonds in each Trust as of 4:00 p.m. eastern time
on each day on which the New York Stock Exchange (the "Exchange")
is normally open for trading, and will adjust the Public Offering
Price of the Units commensurate with such appraisal. Such Public
Offering Price will be effective for all orders received by a
dealer or the Sponsor at or prior to 4:00 p.m. eastern time on each
such day. Orders received after that time, or on a day when the
Exchange is closed for a scheduled holiday or weekend, will be held
until the next determination of price.
The Public Offering Price of the Units of each Trust for secondary
market purchases is determined by adding to the Trustee's
determination of the bid price of each Bond in the Trust the
appropriate sales charge determined in accordance with the table
set forth below based upon the number of years remaining to the
maturity of each such Bond, adjusting the total to reflect the
amount of any cash held in or advanced to the principal account of
the Trust, and dividing the result by the number of Units of such
Trust then outstanding. For purposes of this calculation, Bonds
will be deemed to mature on their stated 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 shall be deemed to be the
date upon which they mature; or (b) such Bonds are subject to a
"mandatory put," in which case such mandatory put date shall be
deemed to be the date upon which they mature.
Pursuant to the terms of the Indenture, the Trustee may terminate
a Trust if the net asset value of such Trust, as shown by any semi-
annual evaluation, is less than 20% of the original principal
amount of the Trust. In the course of regularly appraising the
value of Bonds in each Trust, the Sponsor will attempt to estimate
the date on which a Trust's value will fall below the 20% level
based on anticipated bond events over a five-year period, including
maturities, escrow calls and current calls or refundings, assuming
certain market rates. The Sponsor intends from time to time to
recommend that certain Trusts whose values have fallen or are
anticipated to fall below the 20% level be terminated based on
certain criteria which could adversely affect the Trust's
diversification. Once the Sponsor has determined that a Trust's
value has fallen or may fall below the 20% level within a five-year
period, for purposes of computing the sales charge using the table
set forth below, the maturity of each bond in such Trust will be
deemed to be the earlier of the estimated termination date of the
Trust or the actual date used when pricing the bond under Municipal
Securities Rulemaking Board rules and interpretations issued
thereunder.
The effect of this method of sales charge calculation will be that
different sales charge rates will be applied to each of the various
Bonds in a Trust portfolio based upon the maturities of such Bonds,
in accordance with the following schedule. As shown, the sales
charge on Bonds in each maturity range (and therefore the aggregate
sales charge on the purchase) is reduced with respect to purchases
of at least $100,000 or 1,000 Units:
<TABLE>
Amount of Purchase*
Years to Under $100,000 to $250,000 to
$500,000 to $1,000,000 Maturity $100,000
$249,999 $499,999 $999,999 or more
_________________________________________________________________
_________
<S> <C> <C> <C>
<C> <C> Less than 1 0
0 0 0 0 1 but less than
2 1.523% 1.369% 1.317% 1.215%
1.061% 2 but less than 3 2.041% 1.833% 1.729%
1.626% 1.420% 3 but less than 4 2.564%
2.302% 2.175% 2.041% 1.781% 4 but less
than 5 3.093% 2.828% 2.617% 2.459%
2.175% 5 but less than 7 3.627% 3.239%
3.093% 2.881% 2.460% 7 but less than 10
4.167% 3.734% 3.520% 3.239% 2.828% 10
but less than 13 4.712% 4.221% 4.004%
3.788% 3.253% 13 but less than 16 5.263%
4.712% 4.439% 4.167% 3.627% 16 or more
5.820% 5.263% 4.987% 4.603%
4.004% ----------------------------------
</TABLE>
*Breakdown sales charges are computed both on a dollar basis and on
the basis of the number of Units purchased, using
the equivalent of 1,000 Units to $100,000, 2,500 Units to
$250,000, etc., and will be applied on that basis which is
more favorable to the purchaser.
The secondary market sales charges above are expressed as a percent
of the net amount invested; expressed as a percent of the Public
Offering Price, the maximum sales charge on any Trust, including
one consisting entirely of Bonds with more than 16 years to
maturity, would be 5.50% (5.820% of the net amount invested). For
purposes of illustration, the sales charge on a Trust consisting
entirely of Bonds maturing in 13 to 16 years would be 5% (5.263% of
the net amount invested); on a Trust consisting entirely of Bonds
maturing in 10 to 13 years, 4.5% (4.712% of the net amount
invested); on a Trust consisting entirely of Bonds maturing in 5 to
7 years, 3.5% (3.627% of the net amount invested); and on a Trust
consisting entirely of Bonds maturing in 3 to 4 years, 2.5% (2.564%
of the net amount invested). The actual sales charge included in
the Public Offering Price of any particular Trust will depend on
the maturities of the Bonds in the portfolio of such Trust.
Page 6
<PAGE>
As more fully set forth under "Accrued Interest" below, accrued
interest from the preceding Record Date to, but not
including, the settlement date of the transaction (five business
days after purchase) will be added to the Public Offering Price to
determine the purchase price of Units.
The above graduated sales charge will apply on all purchases of
Nuveen unit trust and mutual fund securities on any one day by the
same purchaser in the amounts stated, and for this purpose
purchases of this Series will be aggregated with concurrent
purchases of Units of any other Series or of shares of any open-end
management investment company of which the Sponsor is principal
underwriter and with respect to the purchase of which a sales
charge is imposed.
Purchases by or for the account of an individual and his or her
spouse and children under 21 years of age will be aggregated to
determine the applicable sales charge. The graduated sales charges
are also applicable to a trustee or other fiduciary purchasing
securities for a single trust estate or single fiduciary account.
Employees of the Sponsor and any of its subsidiaries may purchase
Units of this or any other Nuveen unit trust at the current Public
Offering Price, plus accrued interest, less the sales charge.
Cash, if any, made available to the Sponsor prior to the settlement
date for a purchase of Units may be available for use in the
Sponsor's business, and may be of benefit to the Sponsor.
Whether or not Units are being offered for sale, the Sponsor shall
also determine the aggregate value of each Trust as of 4:00 p.m.
eastern time: (i) on each June 30 or December 31 (or, if such date
is not a business day, the last business day prior thereto), (ii)
on each day on which any Unit is tendered for redemption (or the
next succeeding business day if the date of tender is a non-
business day), and (iii) at such other times as may be necessary.
For this purpose, a "business day" shall be any day on which the
Exchange is normally open. (See "Unit Value and Evaluation.")
ACCRUED INTEREST
Accrued interest is the accumulation of unpaid interest on a bond
from the last day on which interest thereon was paid. Interest on
Bonds in each Trust is accounted for daily on an accrual basis.
For this reason, the purchase price of Units of each Trust will
include not only the Public Offering Price but also the
proportionate share of accrued interest to the date of settlement.
Interest accrues to the benefit of Unitholders commencing with the
settlement date of their purchase transaction.
Accrued Interest does not include accrual of original issue
discount on zero coupon bonds, stripped obligations or other
original issue discount bonds. (See "Selection of Bonds for Deposit
in the Trusts" and "Tax Status of Unitholders.") Since municipal
bond interest is accrued daily but generally paid only semi-
annually and because of the varying interest payment dates of the
Bonds comprising each Trust portfolio, the amount of accrued
interest at any point in time will be greater than the amount of
interest that the Trust will have actually received and distributed
to Unitholders. Assuming each Trust retains the size and
composition shown in the accompanying Part Two, annual interest
collected and distributed in future periods will approximate the
estimated Net Annual Interest Income stated therein. There will,
however, always remain an item of accrued interest that is included
in the purchase price and the redemption price of Units.
As Bonds mature, or are redeemed or sold, the accrued interest
applicable to such Bonds is collected and subsequently distributed
to Unitholders. Unitholders who sell or redeem all or a portion of
their Units will be paid their proportionate share of the remaining
accrued interest to, but not including, the fifth business day
following the date of sale or tender.
ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
The Estimated Long-Term Return for each Trust is a measure of the
return to the investor over the estimated life of the Trust. The
Estimated Long-Term Return represents an average of the yields to
maturity (or call) of the Bonds in the Trust's portfolio calculated
in accordance with accepted bond practice and adjusted to reflect
expenses and sales charges. Under accepted bond practice, tax-
exempt bonds are customarily offered to investors on a "yield
price" basis, which involves computation of yield to maturity or to
an earlier call date (whichever produces the lower yield), and
which takes into account not only the interest payable on the bonds
but also the amortization or accretion to a specified date of any
premium over or discount from the par (maturity) value in the
bond's purchase price. In calculating Estimated Long-Term Return,
the average yield for the Trust's portfolio is derived by weighing
each Bond's yield by the market value of the Bond and by the amount
of time remaining to the date to which the Bond is priced. Once
the average portfolio yield is computed, this figure is then
reduced to reflect estimated expenses and the effect of the maximum
sales charge paid by investors. The Estimated Long-Term Return
calculation does not take into account the difference in the timing
of payments to Unitholders who choose the quarterly or semi-annual
plan of distribution, which will reduce the economic return
compared to those who choose the monthly plan of distribution.
Estimated Current Return is computed by dividing the Net Annual
Interest Income per Unit by the Public Offering Price. In contrast
to Estimated Long-Term Return, Estimated Current Return does not
reflect the amortization of premium or accretion of discount, if
any, on the Bonds in the Trust's portfolio. Net Annual Interest
Income per Unit is calculated by dividing the annual interest
income to the Trust, less estimated expenses, by the number of
Units outstanding.
Net Annual Interest Income per Unit, used to calculate Estimated
Current Return, will vary with changes in fees and expenses of the
Trustee and the Evaluator and with the redemption, maturity,
exchange or sale of Bonds. A Trust may experience expenses and
portfolio changes different from those assumed in the calculation
of Estimated Long-Term Return. There thus can be no assurance that
the Estimated Current Returns or Estimated Long-Term Returns quoted
for a Trust will be realized in the future. Since both Estimated
Current Return and Estimated Long-Term Return quoted on a given
business day are based on the market value of the underlying Bonds
on that day, subsequent calculations of these performance measures
will reflect the current market value of the underlying Bonds and
may be higher or lower.
Page 7
<PAGE>
DETERMINATION OF THE PRICE OF BONDS AT DATE OF DEPOSIT
Except as indicated below, for Series 590 and all prior Trusts, the
prices at which the Bonds deposited in each Trust would have been
offered to the public on the business day prior to the Date of
Deposit were determined on the basis of an evaluation of the Bonds
by Standard & Poor's, a firm regularly engaged in the business of
evaluating, quoting and appraising comparable bonds. For Series
591 and all subsequent Series, the prices at which the bonds
deposited in each Trust would have been offered to the public on
the business day prior to the Date of Deposit was determined on the
basis of an evaluation of the Bonds by Kenny S & P Evaluation
Services ("Kenny S & P"), a firm regularly engaged in the business
of evaluating, quoting and appraising comparable bonds. With
respect to Bonds in Insured Trusts and insured Bonds in Traditional
Trusts, either Standard & Poor's or Kenny S&P, as applicable,
evaluated the Bonds as so insured. For National Trust 4 through 22,
such prices were determined by the Trustee on the basis of
consultation with dealers in public bonds other than the Sponsor,
by reference to the Blue List of Current Municipal Offerings (a
daily publication containing the current public offering prices of
public bonds of all grades currently being offered by dealers and
banks).
SELECTION OF BONDS FOR DEPOSIT IN THE TRUSTS
In selecting Bonds for the Trusts, the following factors, among
others, were considered: (i) the Standard & Poor's rating of the
Bonds or the Moody's rating of the Bonds (see page 1 for a
description of minimum rating standards), (ii) the prices of the
Bonds relative to other bonds of comparable quality and maturity
(in addition, in the case of Discount Trusts, the prices relative
to newly issued bonds of comparable quality, coupon, and maturity,
i.e., the existence of "market" discount), (iii) the
diversification of Bonds as to purpose of issue and location of
issuer, (iv) the maturity dates of the Bonds and (v) in the case of
Insured Trusts only, the availability of insurance on such Bonds.
In order for Bonds to be eligible for insurance by the Association
or the Corporation, they must have credit characteristics which, in
the opinion of the applicable Insurer, would qualify them as
"investment grade" obligations. Insurance is not a substitute for
the basic credit of an issuer, but rather supplements the existing
credit and provides additional security therefor. All Bonds insured
by either of the Insurers receive a rating of AAA by Standard &
Poor's or Aaa by Moody's, as the case may be. (See "Insurance on
Bonds in the Insured Trusts.")
Each Trust consists of such Bonds listed in the Schedules of
Investments in Part Two as may continue to be held from time to
time (including certain securities deposited in the Trust in
exchange or substitution for any of such Bonds or upon certain
refundings) together with accrued and undistributed interest
thereon and undistributed cash realized from the disposition of
Bonds. Neither the Sponsor nor the Trustee shall be liable in any
way for any default, failure or defect in any Bond. Because
certain of the Bonds may from time to time under certain
circumstances be sold or redeemed or will mature in accordance with
their terms and the proceeds from such events will be used to pay
for Units redeemed or distributed to Unitholders, and not
reinvested, no assurance can be given that a Trust will retain for
any length of time its present size and composition.
A Trust portfolio may consist of Bonds priced at a deep "market"
discount from par value at maturity. A primary reason for the
market values of the Bonds being less than their par values is that
the coupon interest rates on the Bonds are lower than the current
market interest rates for newly issued bonds of comparable rating
and type. At the time of issuance the Bonds were for the most part
issued at then current coupon interest rates. The current yields
(coupon interest income as a percentage of market price) of
discount bonds are lower than the current yields of comparably
rated bonds of similar type newly issued at current interest rates
because discount bonds tend to increase in market value as they
approach maturity and the full principal amount becomes payable.
A discount bond held to maturity will have a larger portion of its
total return in the form of capital gain and less in the form of
tax-exempt interest income than a comparable bond newly issued at
current market rates. (See "Tax Status of Unitholders.") Discount
bonds with a longer term to maturity tend to have a higher current
yield and a lower current market value than otherwise comparable
bonds with a shorter term to maturity. If interest rates rise, the
market discount of discount bonds will increase and the value of
such bonds will decrease; and if interest rates decline, the market
discount of discount bonds will decrease and the value of the bonds
will increase. Market discount attributable to interest rate
changes does not necessarily indicate a lack of market confidence
in the issuer. Investors should also be aware that many of the
Bonds in each Trust portfolio are subject to special or
extraordinary redemption at par (in the case of original issue
discount bonds, such redemption is generally to be made at the
issue price plus the amount of original issue discount accredit to
redemption; such price is hereafter referred to as "Accredit
Value") under certain circumstances, including economic and other
defaults. Under such circumstances the redemption price for such
Bonds would not include any premium over par or Accredit Value
which the investor may have paid for such Bonds.
As a number of the Trusts contain Bonds issued by school districts,
investors should be aware that litigation challenging the validity,
under state constitutions, of present systems of financing public
education has been initiated in a number of states. Decisions have
been reached in some states holding such school financing in
violation of state constitutions. In addition, legislation to
effect changes in public school financing has been introduced in a
number of states. The Sponsor, however, does not believe that such
efforts, even if successful, will have a material adverse affect on
the ability of any of the issuers of Bonds contained in the Trusts'
portfolios to make principal and interest payments when due.
The Sponsor participated as either the sole underwriter or manager
or as a member of the syndicates which were the original
underwriters of a number of the Bonds in certain Trusts. An
underwriter or underwriting syndicate purchases bonds from the
issuer on a negotiated or competitive bid basis as principal with
the intention of marketing such bonds to investors at a profit.
Page 8
<PAGE>
All of the Bonds in each Trust are subject to being called or
redeemed in whole or in part prior to their stated maturities
pursuant to the optional redemption provisions described in the
"Schedules of Investments" in Part Two and in most cases pursuant
to sinking fund, special or extraordinary redemption provisions.
A bond subject to optional call 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 bond issue is redeemed,
at or before maturity, by the proceeds of a new bond issue. A bond
subject to sinking fund redemption is one which is subject to
partial call from time to time without premium from a fund
accumulated for the scheduled retirement of a portion of an issue
prior to maturity. Special or extraordinary redemption provisions
may provide for redemption of all or a portion of an issue upon the
occurrence of certain circumstances usually related to defaults or
unanticipated changes in circumstances. Events that may permit or
require the special or extraordinary redemption of bonds include,
among others: substantial damage to or destruction of the project
for which the proceeds of the bonds were used; exercise by a local,
state or Federal governmental unit of its power of eminent domain
to take all or substantially all of the project for which the
proceeds of the bonds were used; a final determination that the
interest on the bonds is taxable; 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 uneconomical;
changes in law or an administrative or judicial decree which render
the performance of the agreement under which the proceeds of the
bonds were made available to finance the project impossible or
which create unreasonable burdens or which impose excessive
liabilities, such as taxes, not imposed on the date the bonds were
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 which may be applied to redeem bonds;
an underestimate of a source of funds securing the bonds resulting
in excess funds which may be applied to redeem bonds; or a default
in payment or failure to comply with the restrictions created as
part of the bond financing on the part of the operator or principal
user of a project financed by the bonds. The Sponsor is unable to
predict all of the circumstances which may result in such
redemption of an issue of Bonds. See the discussion of the various
types of bond issues, below, for certain information on the call
provisions of such bonds, particularly single family mortgage
revenue bonds.
The exercise of redemption or call provisions will (except to the
extent the proceeds of the called Bonds are used to pay for Unit
redemptions) result in the distribution of principal and may result
in a reduction in the amount of subsequent interest distributions;
it may also affect the current return on Units of the Trust
involved. Redemption pursuant to optional call provisions is more
likely to occur, and redemption pursuant to sinking fund or special
or extraordinary redemption provisions may occur, when the Bonds
have an offering side evaluation which represents a premium over
par. Redemption pursuant to optional call provisions may be, and
redemption pursuant to sinking fund or special or extraordinary
redemption provisions is likely to be, at a price equal to the par
value of the bonds without any premium (in the case of original
issue discount bonds, such redemption is generally to be made at
the Accredit Value). Because Bonds may have been valued at prices
above or below par value or the then- current Accredit Value at the
time Units were purchased, Unitholders may realize gain or loss
upon the redemption of portfolio Bonds. (See "Estimated Long-Term
Return and Estimated Current Return" and the "Schedules of
Investments" in Part Two.)
Certain of the Bonds in each Trust portfolio may be subject to
continuing requirements such as the actual use of Bond proceeds,
manner of operation of the project financed from Bond proceeds or
rebate of excess earnings on Bond proceeds that may affect the
exemption of interest on such Bonds from Federal income taxation.
Although at the time of issuance of each of the Bonds in each Trust
an opinion of bond counsel was rendered as to the exemption of
interest on such obligations from Federal income taxation, and the
issuers covenanted to comply with all requirements necessary to
retain the tax-exempt status of the Bonds, there can be no
assurance that the respective issuers or other obligors on such
obligations will fulfill the various continuing requirements
established upon issuance of the Bonds. A failure to comply with
such requirements may cause a determination that interest on such
obligations is subject to Federal income taxation, perhaps even
retroactively from the date of issuance of such Bonds, thereby
reducing the value of the Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Certain Bonds may carry a "mandatory put" (also referred to as a
"mandatory tender" or "mandatory repurchase") feature pursuant to
which the holder of such a Bond will receive payment of the full
principal amount thereof on a stated date prior to the maturity
date unless such holder affirmatively acts to retain the Bond.
Under the Indenture, the Trustee does not have the authority to act
to retain any Bonds with such features; accordingly, it will
receive payment of the full principal amount of any such Bonds on
the stated put date and such date is therefore treated as the
maturity date of such Bonds in selecting Bonds for the respective
Trust and for purposes of calculating the average maturity of the
Bonds in any Trust.
To the best knowledge of the Sponsor, there was no litigation
pending as of the Date of Deposit in respect of any Bonds which
might reasonably be expected to have a material adverse effect on
any of the Trusts. It is possible that after the Date of Deposit,
litigation may be initiated with respect to Bonds in any Trust.
Any such litigation may affect the validity of such Bonds or the
tax-exempt nature of the interest thereon, but while the outcome of
litigation of such nature can never be entirely predicted, the
opinions of bond counsel to the issuer of each Bond on the date of
issuance state that such Bonds were validly issued and that the
interest thereon is, to the extent indicated, exempt from Federal
income tax.
The following paragraphs discuss certain characteristics of the
Bonds in the Trusts and of certain types of issuers in whose
securities a Trust portfolio may be deemed to be "concentrated."
These paragraphs discuss, among other things, certain circumstances
which may adversely affect the ability of such issuers to make
payment of principal and interest on Bonds held in the portfolio of
a Trust or which may adversely affect the ratings of such Bonds;
with respect to the Insured Trusts, however, because of the
insurance obtained by the Sponsor or by the Bond issuers, such
changes should not adversely affect any Insured Trust's receipt of
principal and interest, the Standard & Poor's AAA or Moody's Aaa
ratings of the Bonds in the portfolio, or the Standard & Poor's AAA
rating of the Units of each Insured Trust. An investment in Units
of any Trust should be made with an understanding of the risks that
such an investment may entail, certain of which are described
below.
Page 9
<PAGE>
Health Facility Obligations. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are derived from services
provided by hospitals or other health care facilities, including
nursing homes. Ratings of bonds issued for health care facilities
are sometimes 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 may be affected
by future events and conditions including, among other things,
demand for services, the ability of the facility to provide the
services required, an increasing shortage of qualified nurses or a
dramatic rise in nursing salaries, physicians' confidence in the
facility, management capabilities, economic developments in the
service area, competition from other similar providers, efforts by
insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, government
regulation, the cost and possible unavailability of malpractice
insurance, and the termination or restriction of governmental
financial assistance, including that associated with Medicare,
Medicaid and other similar third party payor programs. Medicare
reimbursements are currently calculated on a prospective basis and
are not based on a provider's actual costs. Such method of
reimbursement may adversely affect reimbursements to hospitals and
other facilities for services provided under the Medicare program
and thereby may have an adverse effect on the ability of such
institutions to satisfy debt service requirements. In the event of
a default upon a bond secured by hospital facilities, the limited
alternative uses for such facilities may result in the recovery
upon such collateral not providing sufficient funds to repay fully
the bonds.
Certain hospital bonds provide for redemption at par at any time
upon the damage, destruction or condemnation of the hospital
facilities or in other special circumstances.
Housing Obligations. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are primarily derived from
mortgage loans to housing projects for low to moderate income
families. Such issues are generally characterized by mandatory
redemption at par or, in the case of original issue discount bonds,
Accredit Value in the event of economic defaults and in the event
of a failure of the operator of a project to comply with certain
covenants as to the operation of the project. The failure of such
operator to comply with certain covenants related to the tax-exempt
status of interest on the Bonds, such as provisions requiring that
a specified percentage of units be rented or available for rental
to low or moderate income families, potentially could cause
interest on such bonds to be subject to Federal income taxation
from the date of issuance of the Bonds. The ability of such issuers
to make debt service payments will be affected by events and
conditions affecting financed projects, including, among other
things, the achievement and maintenance of sufficient occupancy
levels and adequate rental income, employment and income conditions
prevailing in local labor markets, increases in taxes, utility
costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends affecting
the localities in which the projects are located. Occupancy of such
housing projects may be adversely affected by rent levels and
income limitations imposed under Federal and state programs.
Single Family Mortgage Revenue Bonds. Some of the Bonds in a Trust
may be single family mortgage revenue bonds, which are 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.
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. The redemption price of such
issues may be more or less than the offering price of such bonds.
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. Single
family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code of 1954, as
amended, or Section 143 of the Internal Revenue Code of 1986, as
amended (the "Code"), which Sections contain 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. There can be no
assurance that such continuing requirements will be satisfied; the
failure to meet such requirements could cause interest on the Bonds
to be subject to Federal income taxation, possibly from the date of
issuance of the Bonds.
Federally Enhanced Obligations. Some of the mortgages which secure
the various health care or housing projects which underlie the
previously discussed Health Facility, Housing, and Single Family
Mortgage Revenue Obligations (the "Obligations") in a Trust may be
insured by the Federal Housing Administration ("FHA"). Under FHA
regulations, the maximum insurable mortgage amount cannot exceed
90% of the FHA's estimated value of the project. FHA mortgage
insurance does not constitute a guarantee of timely payment of the
principal of and interest on the Obligations. Payment of mortgage
insurance benefits may be (1) less than the principal amount of
Obligations outstanding or (2) delayed if disputes arise as to the
amount of the payment or if certain notices are not given to the
FHA within prescribed time periods. In addition, some of the
previously discussed Obligations may be secured by mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("GNMA"), a wholly owned corporate instrumentality of
the United States, or the Federal National Mortgage Association
("Fannie Mae"), a federally chartered and stockholder-owed
corporation, or both. GNMA and Fannie Mae guarantee timely payment
of principal and interest on the mortgage-backed certificates, even
where the underlying mortgage payments are not made. While such
mortgage-backed certificates are often pledged to secure payment of
principal and interest on the Obligations, timely payment of
interest and principal on the Obligations is not insured or
guaranteed by the United States, GNMA, Fannie Mae or any other
governmental agency or instrumentality. The GNMA mortgage-backed
certificates constitute a general obligation of the United States
backed by its full faith and credit. The obligations of Fannie
Mae, including its obligations under the Fannie Mae mortgage-backed
securities, are obligations solely of Fannie Mae and are not backed
by, or entitled to, the full faith and credit of the United States.
Page 10
<PAGE>
Industrial Revenue Obligations. Certain of the Bonds in a Trust may
be industrial revenue bonds ("IRBs"), including pollution control
revenue bonds, which are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance
the cost of acquiring, constructing or improving various industrial
projects. These projects are usually operated by corporate
entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended
proceeds of the IRBs or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a
project. The arrangement may be in the form of a lease,
installment sale agreement, conditional sale agreement or loan
agreement, but in each case the payments to the issuer are designed
to be sufficient to meet the payments of amounts due on the IRBs.
Regardless of the structure, payment of IRBs is solely dependent
upon the creditworthiness of the corporate operator of the project
and, if applicable, 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 have an effect on such
operator's creditworthiness which in turn would have an adverse
effect on the rating or market value, or both, of such Bonds.
Further, the possibility of such a restructuring may have an
adverse effect on the market for and consequently the value of such
Bonds, even though no actual takeover or other action is ever
contemplated or effected. The IRBs in a Trust may be subject to
special or extraordinary redemption provisions which may provide
for redemption at par or, in the case of original issue discount
bonds, Accredit Value. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs in a Trust prior to the stated
maturity of such Bonds.
Electric Utility Obligations. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are primarily derived from
the sale of electric energy. The problems faced by such issuers
include the difficulty in obtaining approval for timely and
adequate rate increases from the applicable public utility
commissions, the difficulty of financing large construction
programs, increased competition, reduction in estimates of future
demand for electricity in certain areas of the country, the
limitations on operations and increased costs and delays
attributable to environmental considerations, the difficulty of the
capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy
conservation. All of such issuers have been experiencing certain
of these problems in varying degrees. In addition, Federal, state
and municipal governmental authorities may from time to time review
existing, and impose additional, regulations governing the
licensing, construction and operation of nuclear power plants,
which may adversely affect the ability of the issuers of certain of
the Bonds in a Trust to make payments of principal or interest, or
both, on such Bonds.
Transportation Facility Revenue Bonds. Some of the Bonds in a Trust
may be obligations of issuers which are payable from and secured by
revenues derived from the ownership and operations of airports,
public transit systems and ports. The major portion of an airport's
gross operating income is generally derived from fees received from
airlines pursuant to use agreements which consist of annual
payments for airport use, occupancy of certain terminal space,
service fees and leases. 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. In
particular, facilities with use agreements involving airlines
experiencing financial difficulty may experience a reduction in
revenue due to the possible inability of these airlines to meet
their use agreement obligations because of such financial
difficulties and possible bankruptcy. The Sponsor cannot predict
what effect these industry conditions may have on airport revenues
which are dependent for payment on the financial condition of the
airlines and their usage of the particular airport facility. Bonds
that are secured primarily by the revenue collected by a public
transit system typically are additionally secured by a pledge of
sales tax receipts collected at the state or local level, or other
governmental financial assistance. Transit system net revenues
will be affected by variations in utilization, which in turn may be
affected by the amount of local government subsidies, and by
increased costs, including costs resulting from previous deferrals
of maintenance. Port authorities derive their revenues primarily
from fees imposed on ships using the facilities. The rate of
utilization may fluctuate depending on the local economy and on
competition from competing forms of transportation such as air,
rail and trucks.
Water and/or Sewerage Obligations. Some of the Bonds in a Trust may
be obligations of issuers whose revenues are derived from the sale
of water and/or sewerage services. 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 effects of "no-growth" zoning
ordinances. All of such issuers have been experiencing certain of
these problems in varying degrees.
University and College Revenue Obligations. Some of the Bonds in
a Trust may be obligations of issuers which are, or which govern
the operation of, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and
endowments. General problems of such issuers include the prospect
of a declining percentage of the population consisting of "college
age" individuals, possible inability to raise tuitions and fees
sufficiently to cover increased operating costs, the uncertainty of
continued receipt of Federal grants and state funding, and
government legislation or regulations which may adversely affect
the revenues or costs of such issuers. All of such issuers have
been experiencing certain of these problems in varying degrees.
Bridge Authority and Tollroad Obligations. Some of the Bonds in a
Trust may be obligations of issuers which derive their payments
from bridge, road or tunnel toll revenues. The revenues of such an
issuer could be adversely affected by competition from toll-free
vehicular bridges and roads and alternative modes of
transportation. Such revenues could also be adversely affected by
a reduction in the availability of fuel to motorists or significant
increases in the costs thereof. Specifically, governmental
regulations restricting the use of vehicles in the New York City
metropolitan area may adversely affect the revenues of the
Triborough Bridge and Tunnel Authority.
Page 11
<PAGE>
Dedicated-Tax Supported Bonds. Some of the Bonds in a Trust may be
obligations of issuers which are payable from and secured by tax
revenues from a designated source, which revenues are pledged to
secure the bonds. The various types of Bonds described herein
differ in structure and with respect to the rights of the
bondholders to the underlying property. Each type of dedicated-tax
supported Bond has distinct risks, only some of which are set forth
herein. One type of dedicated-tax supported Bond is secured by the
incremental tax received on either real property or on sales within
a specifically defined geographical area; such tax generally will
not provide bondholders with a lien on the underlying property or
revenues. Another type of dedicated-tax supported Bond is secured
by a special tax levied on real property within a defined
geographical area in such a manner that the tax is levied on those
who benefit from the project; such bonds typically provide for a
statutory lien on the underlying property for unpaid taxes. A
third type of dedicated-tax supported Bond may be secured by a tax
levied upon the manufacture, sale or consumption of commodities or
upon the license to pursue certain occupations or upon corporate
privileges within a taxing jurisdiction. As to any of these types
of Bonds, the ability of the designated revenues to satisfy the
interest and principal payments on such Bonds may be affected by
changes in the local economy, the financial success of the
enterprise responsible for the payment of the taxes, the value of
any property on which taxes may be assessed and the ability to
collect such taxes in a timely fashion. Each of these factors will
have a different affect on each distinct type of dedicated-tax
supported bonds.
Municipal Lease Bonds. Some of the Bonds in a Trust may be
obligations that are secured by lease payments of a governmental
entity. Such payments are normally subject to annual budget
appropriations of the leasing governmental entity. A governmental
entity that enters into such a lease agreement cannot obligate
future governments to appropriate for and make lease payments but
covenants to take such action as is necessary to include any lease
payments due in its budgets and to make the appropriations
therefor. A governmental entity's failure to appropriate for and
to make payments under its lease obligation could result in
insufficient funds available for payment of the obligations secured
thereby.
Original Issue Discount Bonds and Stripped Obligations. Certain of
the Bonds in a Trust may be original issue discount bonds. These
Bonds were issued with nominal interest rates less than the rates
then offered by comparable securities and as a consequence were
originally sold at a discount from their face, or par, values.
This original issue discount, the difference between the initial
purchase price and face value, is deemed under current law to
accrue on a daily basis and the accrued portion is treated as tax-
exempt interest income for Federal income tax purposes. On sale or
redemption, gain, if any, realized in excess of the earned portion
of original issue discount will be taxable as capital gain. (See
"Tax Status of Unitholders.") The current value of an original
issue discount bond reflects the present value of its face amount
at maturity. In a stable interest rate environment, the market
value of an original issue discount bond would tend to increase
more slowly in early years and in greater increments as the bond
approached maturity.
Certain of the original issue discount bonds in a Trust may be zero
coupon bonds. Zero coupon bonds do not provide for the payment of
any current interest; the buyer receives only the right to receive
a final payment of the face amount of the bond at its maturity.
The effect of owning a zero coupon bond 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 the 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, 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
that pay interest currently.
Original issue discount bonds, including zero coupon bonds, may be
subject to redemption at the Accreted Value plus, if applicable,
some premium. Pursuant to such call provisions an original issue
discount bond may be called prior to its maturity date at a price
less than its face value. See the "Schedules of Investments" in
Part Two for call provisions of portfolio Bonds.
Certain of the Bonds in a Trust may be Stripped Obligations, which
represent evidences of ownership with respect to either the
principal amount of or a payment of interest on a tax-exempt
obligation. An obligation is "stripped" by depositing it with a
custodian, which then effects a separation in ownership between the
bond principal and any interest payment which has not yet become
payable, and issues evidences of ownership with respect to such
constituent parts. A Stripped Obligation therefore has economic
characteristics similar to zero coupon bonds, as described above.
Each Stripped Obligation has been purchased at a discount from the
amount payable at maturity. With respect to each Unitholder, the
Code treats as "original issue discount" that portion of the
discount which produces a yield to maturity (as of the date of
purchase of the Unitholder's Units) equal to the lower of the
coupon rate of interest on the underlying obligation or the yield
to maturity on the basis of the purchase price of the Unitholder's
Units which is allocable to each Stripped Obligation. Original
issue discount which accrues with respect to a Stripped Obligation
will be exempt from Federal income taxation to the same extent as
interest on the underlying obligations. (See "Tax Status of
Unitholders.")
Unitholders should consult their own tax advisers with respect to
the state and local tax consequences of owning original issue
discount bonds or Stripped Obligations. Under applicable
provisions governing determination of state and local taxes,
interest on original issue discount bonds may be deemed to be
received in the year of accrual even though there is no
corresponding cash payment.
The Sponsor believes the information summarized below describes
some of the more significant events relating to the various State
Trusts. The sources of such information are official statements of
issuers in each state and other publicly available information,
generally as of a date on or before September 3, 1993, unless
otherwise indicated. The Sponsor has not independently verified
this information and makes no representation regarding the accuracy
or completeness of the sources of information which have been
available to it, but believes them to be complete and has itself
relied upon them.
Page 12
<PAGE>
Alabama Trusts - Economic Factors
The portfolio of each Alabama Trust consists primarily of
obligations issued by entities located in Alabama.
Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990,
manufacturing accounted for 39.7% of Alabama's Real Gross State
Product (the total value of goods and services 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 1980's, 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.
Pulp, paper and chemicals have been some of the leading
manufacturing industries. 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 its
production of wood pulp and paper. Mining, oil and gas production
and services industries are also important to Alabama's economy.
Coal mining is by far the most important mining activity.
In recent years, the importance of service industries to the
State's economy has increased significantly. 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. The
financial insurance and real estate sectors have also shown strong
growth over the last several years.
The economy in the State of Alabama recovered quickly from the
recession of the early 1980's. The State has recovered and moved
forward faster than the national average. The Alabama Development
Office (ADO) reported as of December 31, 1992, that for the sixth
consecutive year more than two billion dollars was expended in
Alabama for new and expanding industries. The State had new and
expanding capital investment of $2.2 billion in 1991 and $2.0
billion in 1992. These expenditures included 17,693 announced jobs
created by 845 separate companies for 1991 and 19,582 announced
jobs by 979 companies in 1992. In the last five years, $13.2
billion has been invested in new or expanding industry in the
State. Some of the largest investments during the period 1987-1991
include Alabama Pine Pulp Company ($700 million); Mead Corporation
($500 million); EXXON Company USA ($300 million); Gulf States Paper
($225 million) and United States Steel Corp. ($200 million).
During 1992, three significant were announced by companies within
the State. These projects are by the Scott Paper Company ($344
million); Russell Corporation ($147 million) and Courtaulds Fibers,
Inc. ($125 million).
During the recent recession, State revenues suffered along with the
rest of the Nation. Growth in overall tax revenues was only about
3.4 percent from fiscal 1991 to 1992. Corporate income tax
receipts declined slightly from 1991 to 1992. However, State tax
collections are up by about 8.9% for the nine-month period ending
June 30, 1993, as compared to the same period for fiscal 1992,
indicating an economic recovery is in progress. Individual income
tax receipts and sales tax receipts for the same nine-month period
increased 8.0 percent and 7.8 percent, respectively. (Source:
Department of Revenue Abstracts, unaudited)
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 1986
to 1992 RGSP originating in manufacturing increased by 2.5%, while
RGSP originating in all the non-manufacturing sectors grew by 2.1%.
Those non-manufacturing sectors exhibiting large percentage
increases in RGSP originating between 1986 and 1992 were Mining,
Transportation, Communication and Public Utilities, and Services.
From 1986 to 1992 RGSP originating in Mining increased by 5.7% per
year; Transportation, Communication and Public Utilities grew by
5.2% per year; and Services grew by 3.8% per year. The present
movement toward diversification of the State's manufacturing base
and a similar present trend toward enlargement and diversification
of the transportation, communication and public utilities and
service industries in the State are expected to lead to increased
economic stability.
Employment. The recent national economic recession was felt
severely in the State. 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 benefitted 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. The unemployment
rate for 1992, released by the Alabama Department of Industrial
Relations, was 7.3% with a national rate of 7.4%.
Certain Risk Factors. Among other risks, the State's economy
depends upon cyclical industries such as iron and steel, natural
resources, and timber and forest products. As a result, economic
activity may be more cyclical than in certain other Southeastern
states. The national economic recession in the early 1980s caused
a decline in manufacturing activity and natural resource
consumption, and Alabama's unemployment rate was 14.4% in 1982,
significantly higher than the national average. Unemployment
remains high in certain rural areas of the State. A trend towards
diversification of the State's economic base and an expansion of
service industries may lead to improved economic stability in the
future, although there is no assurance of this.
Page 13
<PAGE>
Political subdivisions of the State 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 necessary governmental services before paying debt
service on its bonds, warrants or other indebtedness. The State
has statutory budget provisions which result in a proration
procedure in the event estimated budget resources in a fiscal year
are insufficient to pay in full 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 adversely affect
the market value of the bonds held by the Alabama Trusts 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 an
Alabama Trust are subject. Additionally, many factors including
national economic, social and environmental policies and
conditions, which are not within the control of the issuers of
Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to
predict whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds
acquired by an Alabama Trust to pay interest on or principal of the
Bonds.
Arizona Trusts - Economic Factors
Arizona is the nation's sixth largest state in terms of area and
ranks among the leading states in three economic indices of growth.
The State's main economic/employment sectors include services,
tourism and manufacturing. Mining and agriculture are also
significant, although they tend to be more capital than labor
intensive. Services is the single largest economic sector. Many of
these jobs are directly related to tourism.
According to Arizona economic indicators released as of June 1992,
unemployment figures show 7.2% of Arizona's population is
unemployed, compared to a national level of 7.5% unemployment at
the same time. Maricopa County reported 6.1% unemployment and Pima
County reported 5.0% unemployment. Significant employers in the
State include the government, the service industry and the trade
industry. Building permits were down in all areas of the State
except for Pima County. In addition, home sales were down
approximately 28% from the previous year, and retail sales were
down approximately 7% from the previous year.
On June 27, 1991, America West Airlines filed a Chapter 11
reorganization petition in bankruptcy court. America West was at
one time the sixth largest employer in Maricopa County, employing
approximately 10,000 persons within the county, and 15,000
nationwide. The airline now employs approximately 7,000 employees
nationwide. The effect of the America West bankruptcy on the State
economy and, more particularly, the Phoenix economy, is uncertain.
Similarly, jobs will be lost by the anticipated closing of Williams
Air Force Base in Chandler 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 Closure and 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.
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous decade
with a resulting surplus of completed inventory. This decline
adversely affected both the construction industry and those Arizona
financial institutions which had aggressively pursued many facets
of real estate lending. In the near future, Arizona's financial
institutions are likely to continue to experience problems until
the excess inventories of commercial and residential properties are
absorbed. The problems of the financial institutions have
adversely affected employment and economic activity. Longer-term
prospects are brighter, 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 pace of growth by financial institutions is not likely to be
repeated over an extended period.
Budgetary Process. 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 $3.4 billion are expected during
fiscal year 1992. Approximately 45.8% of this budgeted revenue
comes from sales and use taxes, 38.9% from income taxes (both
individual and corporate) and 5.2% 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 called for expenditures of $2.7
billion. These expenditures fell into the following major
categories: education (51.3%), health and welfare (29.3%),
protection and safety (9.8%), general government (7.6%) and
inspection and regulation, natural resources and transportation
(2.0%). The State's general fund revenues for fiscal year 1993 are
budgeted at $3.6 billion and total general fund expenditures for
fiscal year 1993 are budgeted at $3.65 billion. Fiscal year 1993's
proposed expenditures fall into the following major categories:
education (55.4%), health and welfare (27.8%), protection and
safety (9.0%), general government (6.2%) and inspection and
regulation and natural resources (1.6%).
Page 14
<PAGE>
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 indebtness and other matters. For example, the state
legislature cannot appropriate revenues in excess of 7% of the
total personal income of the State in any fiscal year. These
limitations may affect the ability of the issuers to generate
revenues to satisfy their debt obligations.
Although most of the Bonds in the Arizona Trusts 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 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. A superior court
ruling has upheld the constitutionality of the State's school
funding system. This decision has been appealed and is currently in
the State Court of Appeals. It is unclear, at this time, what
affect any judgement would have on state finances or school
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 Trusts. 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 in the 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 managed care programs. In the 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 rate increases 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 Power") filed involuntary petitions under Chapter
11 of the U.S. Bankruptcy Code to force Tucson Power to reorganize
under the supervision of the bankruptcy court. On December 31,
1991, the Bankruptcy Court approved the utility's motion to dismiss
the July petition after five months of negotiations between Tucson
Power and its creditors to restructure the utility's debts and
other obligations. In December 1992, Tucson Electric announced
that it had completed its financial restructuring. In January
1993, Tucson Electric asked the Arizona Corporation Commission for
a 9.6% average rate increase. Tucson Power 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.
California Trusts - Economic Factors
The portfolio of each California Trust consists primarily of
obligations issued by entities located in California.
Economic Overview. 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 12.3% of the total United
States population and grew by 27% in the 1980s. Total personal
income in the State, at an estimated $640 billion in 1992, 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.
Page 15
<PAGE>
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 for the nation as a whole. After the
worst job losses in any postwar recession, employment is expected
to stabilize by late 1993 before net employment starts to increase
slowly. The largest job losses have been in Southern California,
led by declines in the aerospace and construction industries.
Weakness statewide occurred in manufacturing, construction,
services and trade. Additional military base closures will have
further adverse effects on the State's economy later in the decade.
Unemployment is expected to average over 9% through 1993 and 1994.
The State's economy is only expected to pull out of the recession
slowly, once the national recovery has begun. The Department and
the COSF project a stagnant economy in California until 1994.
Delay in recovery will exacerbate shortfalls in State revenues.
Limitation on Taxes. Certain of the Bonds in the California Trusts
may be obligations of issuers which rely in whole or in part,
directly or indirectly on ad valorem property taxes as a source of
revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California
Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year,
except upon new construction or change of ownership (subject to a
number of exemptions). Taxing entities may, however, raise ad
valorem taxes above the 1% limit to pay debt service on voter-
approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier), subject
to certain adjustments. This system has resulted in widely varying
amounts of tax on similarly situated properties. Several lawsuits
have been filed challenging the acquisition-based assessment system
of Proposition 13 and, on June 13, 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 2/3
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 the voters in November
1990, but such a proposal may be renewed in the future.
Appropriations Limits. California and its local governments are
subject to an annual "appropriations limit" imposed by Article
XIIIB of the California Constitution, enacted by the voters in 1979
and significantly amended by Propositions 98 and 111 in 1988 and
1990, respectively. Article XIIIB prohibits the State or any
covered local government from spending "appropriations subject to
limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consists of tax revenues and certain
other funds, including proceeds from regulatory licenses, user
charges or other fees to the extent that such proceeds exceed the
cost of providing the product or service, but "proceeds of taxes"
excludes most State subventions to local governments. No limit is
imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other
non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued
or authorized prior to January 1, 1979, or subsequently authorized
by the voters, (2) appropriations arising from certain emergencies
declared by the Governor, (3) appropriations for certain capital
outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any transfers
of service responsibilities between government units. The
definitions for such adjustments were liberalized in 1990 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 to four years. During fiscal year 1986-87, State receipts from
proceeds of taxes exceeded its appropriations limit by $1.1
billion, which was returned to taxpayers. Appropriations subject to
limitation were under the State limit by $1.2 billion, $259
million, $1.6 billion, $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 and XIIIB of the
California Constitution, the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting
future appropriations or changes in population and cost of living,
and the probability of continuing legal challenges, it is not
currently possible to determine fully the impact of Article XIIIA
or Article XIIIB on California municipal obligations or on the
ability of California or local governments to pay debt service on
such California municipal obligations. It is not presently
possible to predict the outcome of any pending litigation with
respect to the ultimate scope, impact or constitutionality of
either Article XIIIA or Article XIIIB, or the impact of any such
determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Future
initiative or legislative changes in laws or the California
Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Page 16
<PAGE>
Obligations of the State of California. As of June 1, 1993,
California had approximately $17.7 billion of general obligation
bonds outstanding, and $7.2 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, 24% is presently self-liquidating (for which
program revenues are anticipated to be sufficient to reimburse the
General Fund for debt service payments). 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.
Recent Financial Results. The principal sources of General Fund
revenues in 1991-92 were the California personal income tax (42% of
total revenues), the sales tax (39%), bank and corporation taxes
(11%), and the gross premium tax on insurance (3%). California
maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is
required to be replenished as soon as sufficient revenues are
available. Year-end balances in the Economic Uncertainties Fund
are included for financial reporting purposes in the General Fund
balance. In most recent years, California has budgeted to maintain
the Economic Uncertainties Fund at around 3% of General Fund
expenditures, but essentially no reserve is budgeted in 1992-93.
General
Throughout the 1980's, 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 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 five fiscal years ending in
1991-92; revenues and expenditures were about equal in 1992-93.
Revenues declined in 1990-91 over 1989-90, the first time since the
1930s, and will decline in 1992-93 compared to 1991-92. By June
30, 1993, the State's General Fund had an accumulated deficit, on
a budget basis, of approximately $2.2 billion.
As a consequence of the large budget imbalances built up over the
past three years, the State depleted its available cash resources.
The State has had to rely increasingly on a series of external
borrowings to meet its cash flow requirements.
1992-93 Fiscal Year. 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 fiscal year without a budget deficit.
The difficulty of taking these actions delayed enactment of a
budget for more than two months past the start of 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 as they came due all of these ongoing
obligations, as well as valid obligations incurred in the prior
fiscal year.
Because of the delay in enacting the budget, the State could not
carry out its normal cash flow borrowing and, 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 gap was 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.
As in the prior year, the economic and fiscal assumptions on which
the 1992-93 Budget Act was based proved to be too optimistic. As
the recession in the State entered its third year, with no real
upturn predicted until 1994, State revenues again lagged
projections. The Department of Finance projects current-year
revenues will be about $2.4 billion below projections and
expenditures $300 million higher. As a result, the Department
predicts the General Fund will end at June 30, 1993 with a fund
balance deficit of about $2.2 billion, almost unchanged from June
30, 1992. The projected negative balance of the Special Fund for
Economic Uncertainties is $2.75 billion.
Page 17
<PAGE>
1993-94 Budget. The 1993-94 Budget represents the third
consecutive year of extremely difficult budget choices for the
State, in view of the continuing recession. The Budget Act, signed
on June 30, 1993, provides for General Fund expenditures of $38.5
billion, a 6.3% decline from the prior year. Revenues are
projected at $40.6 billion, about $400 million below the prior
year. To bring the budget into balance, the Budget Act and related
legislation provided for transfer of $2.6 billion of local property
taxes to school districts, thus relieving State support
obligations; reductions in health and welfare expenditures;
reductions in support for higher education institutions; a two-year
suspension of the renters' tax credit; and miscellaneous cuts in
general government spending and certain one-time and accounting
adjustments. There were no general state tax increases, but a 0.5%
temporary state sales tax scheduled to expire on June 30 was
extended for six months, and dedicated to support local government
public safety costs.
As part of the 1993-94 Budget, the Governor implemented a plan to
repay the accumulated $2.75 billion deficit in the Special Fund for
Economic Uncertainties over 18 months, funding the deficit with
external borrowing maturing not later than December 31, 1994.
About $1.6 billion of the deficit is scheduled to be repaid by June
30, 1994, with the balance paid by December 31, 1994. Taking this
borrowing into account, the Department of Finance projects the
Special Fund for Economic Uncertainties would have a balance of
about $600 million at June 30, 1994, and about $100 million at June
30, 1995.
The State's severe financial difficulties for the current budget
year will result in continued pressure upon almost all local
governments, particularly school districts and counties which
depend on State aid. Despite efforts in recent years to increase
taxes and reduce governmental expenditures, there can be no
assurance that the State will not face budget gaps in the future.
Bond Rating. State general obligation bonds are currently rated Aa
by Moody's and A+ by S&P. Both of these ratings were 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 issuers may be unrelated to the creditworthiness
of obligations issued by the State of California, and that there is
no obligation on the part of the State to make payment on such
local obligations in the event of default.
Legal Proceedings. 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.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a
number of state agencies, instrumentalities and political
subdivisions of the State that issue Municipal Obligations, some of
which may be conduit revenue obligations payable from payments from
private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of the
obligations backed by the full faith and credit of the State.
State Assistance. 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.
Through 1990- 91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce State
General Fund support for school districts, the 1992-93 Budget Act
caused local governments to transfer $1.3 billion of property tax
revenues to school districts, representing loss of almost half the
post-Proposition 13 "bailout" aid. The 1993-94 Budget Act
transfers about $2.6 billion of local property taxes to school
districts, the largest share ($2 billion) coming from counties, and
the balance from cities ($288 million), special districts ($244
million) and redevelopment agencies ($65 million). In order to
make up this shortfall to cities and counties, the Legislature has
dedicated 0.5% sales tax to local public safety purposes through
December 31, 1993. Voters at a statewide election in November,
1993 will vote on a permanent extension of this sales tax for local
public safety. In addition, the Legislature has changed laws to
relieve local government of certain mandates, allowing them to
reduce costs.
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 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.
Assessment Bonds. California municipal obligations which are
assessment bonds may be adversely affected by a general decline in
real estate values or a slowdown in real estate sales activity. In
many cases, such bonds are secured by land which is undeveloped at
the time of issuance but anticipated to be developed within a few
years after issuance. In the event of such reduction or slowdown,
such development may nor occur or may be delayed, thereby
increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal
liability of the owners of the property assessed, the lien on the
property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on
the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund
established for the bonds.
Page 18
<PAGE>
California Long-Term Lease Obligations. 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 named a defendant (on
the grounds that it controlled the District's finances). One of
the defenses raised in answer to this lawsuit was the invalidity of
the original lease transaction. The trial court has upheld the
validity of the District's lease, but further appeals may occur.
Any ultimate judgment against the Trustee may have adverse
implications for lease transactions of a similar nature by other
California entities.
Other Considerations. The repayment of industrial development
securities secured by real property may be affected by California
laws limiting foreclosure rights of creditors. Securities backed
by health care and hospital revenues may be affected by changes in
State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including
risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment agencies.
Such bonds are secured solely by the increase in assessed valuation
of a redevelopment project area after the start of redevelopment
activity. In the event that assessed values in the redevelopment
project decline (e.g., because of a major natural disaster such as
an earthquake), the tax increment revenue may be insufficient to
make principal and interest payments on these bonds. Both Moody's
and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such
ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires
that all revenues produced by a tax rate increase go directly to
the taxing entity which increased such tax rate to repay that
entity's general obligation indebtedness. As a result,
redevelopment agencies (which, typically, are the issuers of Tax
Allocation Securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased
to repay voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to pay
interest and principal on their obligations remain unclear.
Furthermore, other measures affecting the taxing or spending
authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be
introduced which would modify existing taxes or other revenue-
raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local
governments to impose new taxes or increase existing taxes. It is
not presently possible to predict the extent to which any such
legislation will be enacted. Nor is it presently possible to
determine the impact of any such legislation on California
municipal obligations in which the California Trusts may invest,
future allocations of State revenues to local governments or the
abilities of State or local governments to pay the interest on, or
repay the principal of, such California municipal obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California municipal
obligation in a California Trust 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.
Colorado Trusts - Economic Factors
The portfolio of each Colorado Trust consists primarily of
obligations issued by entities located in Colorado.
Restrictions on Appropriations and Revenues. The State
Constitution requires that expenditures for any fiscal year not
exceed revenues for such fiscal year. By statute, the amount of
General Fund revenues available for appropriation is based upon
revenue estimates which, together with other available resources,
must exceed annual appropriations by the amount of the
unappropriated reserve (the "Unappropriated Reserve"). The
Unappropriated Reserve requirement for fiscal years 1991, 1992 and
1993 was set at 3%. For fiscal year 1992 and thereafter, General
Fund appropriations are also limited by statute to an amount equal
to the cost of performing certain required reappraisals of taxable
property plus an amount equal to the lesser of (i) five percent of
Colorado personal income or (ii) 106% of the total General Fund
appropriations for the previous fiscal year. This restriction does
not apply to any General Fund appropriations which are required as
a result of a new federal law, a final state or federal court order
or moneys derived from the increase in the rate or amount of any
tax or fee approved by a majority of the registered electors of the
State voting at any general election. In addition, the statutory
limit on the level of General Fund appropriations may be exceeded
for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
Page 19
<PAGE>
The provisions of the Amendment are unclear and will probably
require judicial interpretation. Among other provisions, beginning
November 4, 1992, the Amendment requires voter approval prior to
tax increases, creation of debt, or mill levy or valuation for
assessment ratio increases. The Amendment also limits increases in
government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax
revenues yield no more than the prior year's revenues adjusted for
inflation, voter approved changes and (except with regard to school
districts) local growth in property values according to a formula
set forth in the Amendment. School districts are allowed to adjust
tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same
formula as the limitation for property tax revenues. The Amendment
limits increases in expenditures from the State general fund and
program revenues (cash funds) to the growth in inflation plus the
percentage change in State population in the prior calendar year.
The bases for initial spending and revenue limits are fiscal year
1992 spending and 1991 property taxes collected in 1992. The bases
for spending and revenue limits for fiscal year 1994 and later
years will be the prior fiscal year's spending and property taxes
collected in the prior calendar year. Debt service changes,
reductions and voter-approved revenue changes are excluded from the
calculation bases. The Amendment also prohibits new or increased
real property transfer tax rates, new State real property taxes and
local District income taxes.
According to the Colorado Economic Perspective, Fourth Quarter, FY
1992-93, June 20, 1993 (the "Economic Report"), inflation for 1992
was 3.7% and population grew at the rate of 2.7% in Colorado.
Accordingly, under the Amendment, increases in State expenditures
during the 1994 fiscal year will be limited to 6.4% over
expenditures during the 1993 fiscal year. The 1993 fiscal year is
the base year for calculating the limitation for the 1994 fiscal
year. For the 1993 fiscal year, the Office of State Planning and
Budgeting estimates that general fund revenues will total $3,341.7
million and that program revenues (cash funds) will total $1,753.4
million, or total estimated base revenues of $5,095.1 million.
Expenditures for the 1994 fiscal year, therefore, cannot exceed
$5,421.2 million. However, the 1994 fiscal year general fund and
program revenues (cash funds) are projected to be only $5,220.4
million, or $200.8 million less than expenditures allowed under the
spending limitation.
There is also a statutory restriction on the amount of annual
increases in taxes that the various taxing jurisdictions in
Colorado can levy without electoral approval. This restriction
does not apply to taxes levied to pay general obligation debt.
State Finances. As the State experienced revenue shortfalls in the
mid-1980s, it adopted various measures, including impoundment of
funds by the Governor, reduction of appropriations by the General
Assembly, a temporary increase in the sales tax, deferral of
certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of
approximately $100.3 million in fiscal year 1988, $134.4 million in
fiscal year 1989, $116.6 million in fiscal year 1990, $16.3 million
in fiscal year 1991 and $133.3 million in fiscal year 1992. The
fiscal year 1993 unrestricted general fund is currently estimated
to be $281.8 million.
For fiscal year 1992, the following tax categories generated the
following respective revenue percentages of the State's $2,995.8
million total gross receipts: individual income taxes represented
53.7% of gross fiscal year 1992 receipts; excise taxes represented
33.4% of gross fiscal year 1992 receipts; and corporate income
taxes represented 3.7% of gross fiscal year 1992 receipts. The
final budget for fiscal year 1993 projects general fund revenues of
approximately $3,341.7 million and appropriations of approximately
$3,046.7 million. The percentages of general fund revenue
generated by type of tax for fiscal year 1993 are not expected to
be significantly different from fiscal year 1992 percentages.
State Debt. Under its Constitution, the State of Colorado is not
permitted to issue general obligation bonds secured by the full
faith and credit of the State. However, certain agencies and
instrumentalities of the State are authorized to issue bonds
secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to
annual renewal at the option of the State. In addition, the State
is authorized to issue short-term revenue anticipation notes.
Local governmental units in the State are also authorized to incur
indebtness. The major source of financing for such local
government indebtness is an ad valorem property tax. In addition,
in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment
bonds payable from special assessments. Colorado local governments
can also finance public projects through leases which are subject
to annual appropriation at the option of the local government.
Local governments in Colorado also issue tax anticipation notes.
The Amendment requires prior voter approval for the creation of any
multiple fiscal year debt or other financial obligation whatsoever,
except for refundings at a lower rate or obligations of an
enterprise.
State Economy. Based on data published by the State of Colorado,
Office of State Planning and Budgeting as presented in the Economic
Report, over 50% of non-agricultural employment in Colorado in 1992
was concentrated in the retail and wholesale trade and service
sectors, reflecting the importance of tourism to the State's
economy and of Denver as a regional economic and transportation
hub. The government and manufacturing sectors followed as the
fourth and fifth largest employment sectors in the State,
representing approximately 18.3% and 11.5%, respectively, of non-
agricultural employment in the State in 1992.
According to the Economic Report, during the first quarter of 1993,
45,900 net new jobs were generated in the Colorado economy, an
increase of 24.4% over the first quarter of 1992. However, the
unemployment rate rose from an average of 5.5% during the first
quarter of 1992 to 5.8% during the first quarter of 1993. Total
retail sales increased by 9.8% during the first quarter of 1993 as
compared to the same period in 1992.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991.
In 1992, Colorado was the twelfth fastest growing state in terms of
personal income growth. However, because of heavy migration into
the state and a large increase in low-paying retail sector jobs,
per capita personal income in Colorado increased by only 3.8% in
1992, 0.1% below the increase in per capita personal income for the
nation as a whole.
Page 20
<PAGE>
Economic conditions in the State may have continuing effects on
other governmental units within the State (including issuers of the
Bonds in the Colorado Trusts), which, to varying degrees, have also
experienced reduced revenues as a result of recessionary conditions
and other factors.
Connecticut Trusts - Economic Factors
The portfolio of each Connecticut Trust primarily consists of
obligations issued by entities located in Connecticut.
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 1992, manufacturing
accounted for only 20.1% of the total non-agricultural employment
in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing sector; reductions in defense
spending have already had a substantial adverse effect on
Connecticut's economy, and the State's largest defence contractors
have announced substantial planned labor force reductions scheduled
to occur over the next four years. Connecticut is now in a
recession, the depth and duration of which are uncertain.
Moreover, while unemployment in the State as a whole has generally
remained below the national level, as of May, 1993, the estimated
rate of unemployment in the State on a seasonally adjusted basis
reached 7.4%, compared to 6.9% for the United States as a whole and
certain geographic areas in the State have been affected by high
unemployment and poverty. The State derives over 70% of its
revenues from taxes imposed by it, the most important of which are
the sales and use taxes and the corporation business tax, each of
which is sensitive to changes in the level of economic activity in
the State, but the Connecticut Income Tax, enacted in 1991, is
expected to supercede each of them in importance. There can be no
assurance that general economic difficulties or the financial
circumstances of the State or its towns and cities will not
adversely affect the market value of the Bonds in the Connecticut
Trusts or the ability of the obligors to pay debt service on such
Bonds.
The General Fund budget adopted by Connecticut for the 1986-1987
fiscal year contemplated both revenues and expenditures of $4.3
billion. The General Fund ended the 1986-1987 fiscal year with a
surplus of $365 million. The General Fund budget for the 1987-1988
fiscal year contemplated General Fund revenues and expenditures of
$4.9 billion. However, the General Fund ended the 1987-1988 fiscal
year with a deficit of $115 million. The General Fund budget
adopted for the 1988-1989 fiscal year anticipated that General Fund
expenditures of $5.5 billion and certain educational expenses of
$206 million 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 1987-1988 fiscal year and stricter enforcement thereof; a
substantial deficit was projected during the third quarter of the
1988-1989 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 million. The General Fund budget adopted for the 1989-1990
fiscal year anticipated expenditures of approximately $6.2 billion
and, by virtue of tax increase legislation enacted to take effect
generally at the beginning of the fiscal year, revenues slightly
exceeded 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 million, wiping out reserves for such
events built up in prior years. The General Fund budget adopted
for the 1990-1991 fiscal year anticipated expenditures of $6.4
billion 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 million.
A General Fund budget for the 1991-92 fiscal year was not enacted
until August 22, 1991. This budget anticipated General Fund
expenditures of $7.0 billion and revenues of $7.4 billion.
Projected decreases in revenues resulting from a 25% reduction in
the sales tax rate effective October 1, 1991, the repeal of the
taxes on the capital gains and interest and dividend income of
resident individuals for years starting after 1991, and the phase-
out of the corporation business tax surcharge over two years
commencing with taxable years starting after 1991 were expected to
be more than offset by a new general income tax imposed at
effective rates not to exceed 4.5% on the Connecticut taxable
income of resident and non-resident individuals, trusts and
estates. The General Fund ended the 1991-92 fiscal year with an
operating surplus of $110 million. The General Fund budget for the
1992-93 fiscal year anticipated General Fund expenditures of $7.3
billion and revenues of $7.3 billion, and the State's Comptroller
has projected a surplus of $10 million for the 1992-93 fiscal year.
Balanced General Fund budgets for the biennium ending June 30,
1995, have been adopted appropriating expenditures of $7.8 billion
for the 1993-94 fiscal year and $8.2 billion for the 1994-95 fiscal
year. In addition, expenditures of federal, State, and local funds
in the ten years started July 1, 1984 for the repair of the State's
roads and bridges now projected at $8.6 billion are anticipated,
the State's share of which would be financed by bonds expected to
total $3.2 billion 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 million pursuant to
authorization to issue commercial paper and on July 29, 1991, it
issued $200 million of General Obligation Temporary Notes, none of
which temporary borrowings are currently outstanding. To fund the
cumulative General Fund deficit for the 1989-90 and 1990-91 fiscal
years, the legislation enacted August 22, 1991 authorized the State
Treasurer to issue Economic Recovery Notes up to the aggregate
amount of such deficit, which must be payable no later than June
30, 1996; at least $50 million of such Economic Recovery Notes, but
not more than a cap amount, is to be retired each fiscal year
commencing with the 1991-92 fiscal year, and any unappropriated
surplus up to $205 million in the General Fund at the end of each
of the three fiscal years commencing with the 1991-92 fiscal year
must be applied to retire such Economic Recovery Notes as may
remain outstanding at those times. On September 25, 1991, and
October 24, 1991, the State issued $640 million and $325 million,
respectively, of such Economic Recovery Notes, of which $705
million was outstanding on July 1, 1993.
Page 21
<PAGE>
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 rating of the
State's general obligation bonds and certain other obligations that
depend in part on the creditworthiness of the State to AA-. On
March 7, 1991, Moody's downgraded its ratings of the revenue bonds
of four Connecticut hospitals because of the effects of the State's
restrictive controlled reimbursement environment under which they
have been operating.
General obligation bonds issued by Connecticut municipalities are
payable primarily only from ad valorem taxes on property subject to
taxation by the municipality. Certain Connecticut municipalities
have experienced severe fiscal difficulties and have reported
operating and accumulated deficits in recent years. The most
notable of these is the City of Bridgeport, which filed a
bankruptcy petition on June 7, 1991. The State opposed the
petition. The United States Bankruptcy Court for the District of
Connecticut has held that Bridgeport has authority to file such a
petition, but that its petition should be dismissed on the grounds
that Bridgeport was not insolvent when the petition was filed.
Regional economic difficulties, reductions in revenues, and
increased expenses could lead to further fiscal problems for the
State and its political subdivisions, authorities and agencies.
Difficulty in payment of debt service on borrowings could result in
declines, possibly severe, in the value of their outstanding
obligations and increases in their future borrowing costs.
Florida Trusts - Economic Factors
The portfolio of each Florida Trust consists primarily of
obligations issued by entities located in Florida.
Population. In 1980, Florida was the seventh largest state in the
U.S. by population. The State has grown dramatically since then
and as of April 1, 1992, ranks fourth with an estimated population
of 13.2 million. Florida's attraction, as both a growth and
retirement state, has kept net migration fairly steady with an
average of 277,000 new residents a year from 1980 through 1990.
The U.S. average population increase since 1980 is about 1%
annually, while Florida's average annual rate of increase is about
3%. Florida continues to be the fastest growing of the eleven
largest states. This strong population growth is one reason the
State's economy is performing better than the nation as a whole.
In addition to attracting senior citizens to Florida as a place for
retirement, the State is also recognized as attracting a
significant number of working age individuals. Since 1980, the
prime working age population (18-44) has grown at an average annual
rate of 3.6%. The share of Florida's total working age population
(18-59) to total State population is approximately 53%. This share
is not expected to change appreciably into the twenty-first
century.
Income. The State's personal income has been growing strongly the
last several years and has generally outperformed both the U.S. as
a whole and the southeast in particular, according to the U.S.
Department of Commerce and the Florida Consensus Economic
Estimating Conference. This is due to the fact that Florida's
population has been growing at a very strong pace and, since the
early 1970's the State's economy has diversified so as to provide
greater insulation from national economic downturns. As a result,
Florida's real per capita personal income overtook the national
average in 1985 and has tracked above the southeast as a whole for
most of the 1980's. From 1980 through 1990, the State's real per
capita personal income rose at an average of 7% per year, while the
national real per capita personal income increased at an average of
6.8% per year.
Because Florida has a proportionately greater retirement age
population, 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 1989 was 55.3% of total personal income, while a
similar figure for the nation for 1990 was 65.0%. Transfer
payments are typically less sensitive to the business cycle than
employment income and, therefore, act as stabilizing forces in weak
economic periods.
The State's per capita personal income in 1991 of $18,880 was
slightly below the national average of $19,082 and significantly
ahead of that for the southeast United States, which was $16,927.
Real personal income in the State is estimated to have increased
0.7% in 1991-92 and to increase 5.1% in 1993-94. By the end of
1993-94, real personal income per capita in the State is expected
to average 3.6% higher than its 1991-92 level.
Employment. 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, second only to California in the absolute number of new
jobs created. Contributing to the State's rapid rate of growth in
employment and income is international trade. Since 1980, the
State's unemployment rate has generally been below that of the U.S.
Only in the last two years has the State's unemployment rate moved
ahead of the national average. The average rate in Florida since
1980 has been 7.0% while the national average is 7.2%. According
to the U.S. Department of Commerce, the Florida Department of Labor
and Employment Security, and the Florida Consensus Economic
Estimating Conference (together, the "Organization"), the State's
unemployment rate was 7.3% during 1991. As of January 1993, the
Organization estimates that the unemployment rate will be 7.4% for
1992-93 when final numbers are in, and drop to 6.4% for 1993-94.
The rate of job creation in Florida's manufacturing sector has
exceeded that of the U.S. From the beginning of 1980 through 1990,
the State added over 78,700 new manufacturing jobs, a 17.7%
increase. During the same period, national manufacturing
employment declined seven out of the eleven years, for a loss of
1,979,000 jobs.
Total non-farm employment in Florida is expected to increase 1.3%
in 1992-93 and rise 4.3% in 1993-94. These figures, as well as the
figures for income above, include the post-Hurricane Andrew impact.
Trade and services, the two largest sources of employment in the
State, account for more than half of the total non-farm employment.
Employment in the service sector should experience an increase of
3.6% in 1992-93, and 5.6% in 1993-94. The service sector is now
the State's largest employment category comprising 30.7% of total
non-farm employment.
Page 22
<PAGE>
Construction. The State'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 7%
and in 1990, the share had edged downward to 6%. This trend is
expected to continue as the State's economy continues to diversify.
The State nevertheless has a dynamic construction industry with
single and multi-family housing starts accounting for 9.5% of the
total U.S. housing starts in 1991 while the State's population is
5.3% of the U.S. total population. The State's housing starts since
1980 have represented an average of 11.5% of the U.S.'s total
annual starts, and except for the recession years 1980-82, and the
recession beginning in 1990, Florida housing starts have exceeded
160 thousand a year.
A driving force behind the State's construction industry has been
the State's rapid growth in population. Although the State
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 1990's. This population trend should provide
plenty of fuel for business and home builders to keep construction
activity lively in the State 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 Code
have eliminated tax deductions for owners of more than two
residential real estate properties and 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.
Hurricane Andrew left some parts of south Florida devastated.
Post-Hurricane Andrew clean up and rebuilding have changed the
outlook for the State's economy. Single and multi-family housing
starts in 1992-93 are projected to reach a combined level of
116,800, and to increase to 148,100 in 1993-94. Lingering
recessionary effects on consumers and tight credit are two of the
reasons for relatively slow core construction activity, as well as
lingering effects from the 1986 tax reform legislation discussed
above. However, construction is one of the sectors most severely
affected by Hurricane Andrew. The construction figures above
include, over the two year period, more than 20,000 additional
housing starts as a result of destruction by Hurricane Andrew.
Total construction expenditures are forecasted to increase 11.1%
this year and increase 23.7% next year.
Tourism. Tourism if one of Florida's most important industries.
Approximately 39.3 million tourists visited the State in 1991, as
reported by the Florida Department of Commerce. In terms of
business activities and state tax revenues, tourists in Florida in
1991 represented an estimated 4.4 million additional residents.
Visitors to the State tend to arrive equally by air and car. The
State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree,
reducing its seasonality. Tourist arrivals should be slightly
negatively impacted as a result of Hurricane Andrew, but should
recover and approximate in 1993-94 the number expected prior to the
storm. When the final numbers are in, it is expected that by the
end of the State's current fiscal year, 41.9 million domestic and
international tourists will have visited the State, up 7.8% from
the 39 million tourists that visited Florida in 1991-92. In
1993-94, tourist arrivals should approximate 43.2 million.
Revenues and Expenses. Estimated fiscal year 1992-93 General
Revenue plus Working Capital funds available to the State total
$12,285.9 million, a 9.2% increase over 1991-92. This reflects a
transfer of $228.8 million, out of an estimated $233.5 million in
non-recurring revenue due to Hurricane Andrew, to a hurricane
relief trust fund. Of the total General Revenue plus Working
Capital funds available to the State, $12,004.1 million of that is
Estimated Revenues (excluding the Hurricane Andrew Impact), which
represents an increase of 10.1% over the previous year's Estimated
Revenues. With effective General Revenues plus Working Capital
Fund appropriations at $11,914.0 million, unencumbered reserves at
the end of the current fiscal year are estimated at $371.9 million.
Estimated fiscal year 1993-94 General Revenue plus Working Capital
Funds available total $13,490.1 million, a 9.8% increase over
1992-93. The $13,016.1 million in Estimated Revenues represent an
increase of 8.4% over the previous year's Estimated Revenues. The
massive effort to rebuild and replace destroyed or damaged property
in the wake of Hurricane Andrew is responsible for the substantial
positive revenue impacts shown here. Most of the impact is in the
increase in the State's sales tax.
In fiscal year 1991-92, approximately 64.0% of the State's total
direct revenue to its three operating funds was derived from State
taxes, with Federal grants and other special revenue accounting for
the balance. State sales and use tax, corporate income tax, and
beverage tax amounted to 68%, 7%, and 5%, respectively, of total
receipts by the General Revenue Fund during fiscal year 1991-92.
In that same year, expenditures for education, health and welfare,
and public safety amounted to 53%, 30%, and 13.3%, respectively, of
total expenditures from the General Revenue Fund.
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 counties and the municipalities therein.
In addition to this distribution, local governments may assess (by
referendum) a 0.5% or a 1.0% discretionary sales surtax 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 State law. Certain charter counties
have other taxing powers in addition, and non-consolidated counties
with a population in excess of 800,000 may levy a local option
sales tax to fund indigent health care. It alone cannot exceed
0.5% and when combined with the infrastructure surtax cannot exceed
1.0%. For the fiscal year ended June 30, 1992, sales and use tax
receipts (exclusive of the tax on gasoline and special fuels)
totalled $8.3 billion, an increase of 2.7% over fiscal year 1990-
1991.
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.
Page 23
<PAGE>
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 $435.2 million in fiscal year
ending June 30, 1992. Alcoholic beverage tax receipts declines from
the previous year's total. The revenues collected from this tax
are deposited into the State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For
the fiscal year ended June 30, 1992, receipts from this source were
$801.3 million, an increase of 14.2% from fiscal year 1990-91.
The State also imposes a documentary stamp tax on deeds and other
documents relating to realty, corporate shares, bonds, certificates
of indebtness, promissory notes, wage assignments, and retail
charge accounts. The documentary stamp tax collections totalled
$472.4 million during fiscal year 1991-92, a .05% increase from the
previous fiscal year. For the fiscal year 1991-92, 76.2% of the
documentary stamp tax revenues were deposited to the General
Revenue Fund. Beginning in fiscal year 1992-93, 71.29% of these
taxes are to be deposited to the General Revenue Fund.
The State imposes an intangible personal property tax on stocks,
bonds, including bonds secured by liens in Florida real property,
notes, governmental leaseholds, and certain other intangibles not
secured by a lien on Florida real property. The annual rate of tax
is 2 mils. The State also imposes a non-recurring 2 mil tax on
mortgages and other obligations secured by liens on Florida real
property. In fiscal year 1991-92, total intangible personal
property tax collections were $586.2 million, a 13.0% increase over
the prior year. Of the tax proceeds, 66.5% is distributed to the
General Revenue Fund.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50.0% to the public in prizes,
38.0% for use in enhancing education, and the balance, 12.0% for
costs of administering the lottery. Fiscal year 1991-92 lottery
ticket sales totalled $2.19 billion, providing education with
approximately $835.4 million.
The State's severance tax applies to oil, gas, and sulphur
production, as well as the severance of phosphate rock and other
solid minerals. Total collections from severance taxes total $67.2
million during fiscal year 1991-92, down 6.9% from the previous
year. Beginning in fiscal year 1989-90, 60.0% of this amount was
transferred to the General Revenue Fund. The 60.0% allocation is
expected to continue.
Debt-Balanced Budget Requirement. At the end of fiscal 1992,
approximately $4.52 billion in principal amount of debt secured by
the full faith and credit of the State was outstanding. In
addition, since July 1, 1992, the State issued about $274 million
in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be kept
in balance from currently available revenues each fiscal year. If
the Governor or Comptroller believe a deficit will occur in any
State fund, by statute, he must certify his opinion to the
Administrative Commission, which then is authorized to reduce all
State agency budgets and releases by a sufficient amount to prevent
a deficit in any fund. Additionally, the State Constitution
prohibits issuance of State obligations to fund State operations.
Litigation. 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 the State'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, suits have 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 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 decided in favor of the taxpayers by the U.S.
Supreme Court on June 4, 1990. 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 of the
U.S. Supreme Court. The Florida Department of Revenue ("the
Department") 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. The Florida Supreme Court
remanded the matter to the Circuit Court for the 2nd Judicial
Circuit to hear arguments on the method chosen by the State to
provide a clear and certain remedy. On October 15, 1992, the
Circuit Court trial judge orally stated that the method chosen by
the State is unconstitutional. The Circuit Court has not issued a
written, final order, which the State is likely to appeal. Any
unfavorable outcome could result in the State having to refund over
$340 million.
State law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged
the constitutionality of this tax preference and sought a refund of
taxes paid. Recently, the State Supreme Court ruled in favor of
the State. This case and others, along with pending refund claims,
total about $200 million.
The State maintains a bond rating of Aa and AA from Moody's
Investor Service and S&P, respectively, on its general obligation
bonds, although the rating of a particular series of revenue bonds
relates primarily to the project, facility, or other revenue source
from which series derives funds for repayment. While these ratings
and some of the information presented above indicate that the State
is in satisfactory economic health, there can be no assurance that
there will not be a decline in economic conditions or that
particular Bonds purchased by the Florida Trusts will not be
adversely affected by any such changes.
Page 24
<PAGE>
Georgia Trusts - Economic Factors
The portfolio of each Georgia Trust consists primarily of
obligations issued by entities located in Georgia.
Constitutions Considerations. The Georgia Constitution permits the
issuance by the State of general obligation debt and of certain
guaranteed revenue debt. The State may incur guaranteed revenue
debt by guaranteeing the payment of certain revenue obligations
issued by an instrumentality of the State. The Georgia
Constitution prohibits the incurring of any general obligation debt
or guaranteed revenue debt if the highest aggregate annual debt
service requirement for the then current year or any subsequent
fiscal year for outstanding general obligation debt and guaranteed
revenue debt, including the proposed debt, exceed 10% of the total
revenue receipts, less refunds, of the State treasury in the fiscal
year immediately preceding the year in which any such debt is to be
incurred.
The Georgia Constitution also permits the State to incur public
debt to supply a temporary deficit in the State treasury in any
fiscal year created by a delay in collecting the taxes of that
year. Such debt must not exceed, in the aggregate, 5% of the total
revenue receipts, less refunds, of the State treasury in the fiscal
year immediately preceding the year in which such debt is incurred.
The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred out of the taxes levied
for that fiscal year. No such debt may be incurred in any fiscal
year if there is then outstanding unpaid debt from any previous
fiscal year which was incurred under this provision since the
inception of the constitutional authority referred to in this
paragraph.
Virtually all of the issues of long-term debt obligations issued by
or on behalf of the State of Georgia and counties, municipalities
and other political subdivisions and public authorities thereof are
required by law to be validated and confirmed in a judicial
proceeding prior to issuance. The legal effect of an approved
validation in Georgia is to render incontestable the validity of
the pertinent bond issue and the security therefor.
The State and Its Economy. The State operates on a fiscal year
beginning July 1 and ending June 30. Thus, the 1993 fiscal year
ended June 30, 1993. Based on data of the Georgia Department of
Revenue, estimated receipts of the State from income tax and sales
tax for the 1992 fiscal year comprised approximately 48.8% and
37.9%, respectively, of the total State tax revenues. Such data
shows that total estimated State treasury receipts for the 1992
fiscal year increased by approximately 2.8% over such collections
in the 1991 fiscal year. The estimated 1993 fiscal year figures
indicate that receipts of the State from income tax and sales tax
for the 1993 fiscal year will comprise approximately 49.4% and
37.9%, respectively, of the total State tax revenues. Total
estimated State tax revenue collections for the 1993 fiscal year
indicate an increase of approximately 8.4% over such collections in
the 1992 fiscal year.
Georgia experienced an economic slowdown in the late 1980s that
continued into 1992. The 1991 fiscal year ended with a balanced
budget, but only because the State had borrowed approximately $90
million from surpluses maintained for special uses. In light of
weaker than expected monthly revenue collections in May and June of
1991, Georgia lawmakers, in a special legislative session, cut
budgeted expenditures for the 1992 fiscal year by $415 million.
Georgia ended its 1992 fiscal year, however, with strong monthly
revenue collections. For the last four months of fiscal year 1992,
Georgia's revenues were more than 6% over year-earlier levels. By
year-end, revenue collections fell only 0.1% short of that expected
to cover 1992 expenditures. This shortfall was made up from funds
allocated to but not used by state agencies. The authorized 1993
fiscal year budget consists of an $8.3 billion spending plan and
approximately $750 million in new general obligation debt. On
March 23, 1993, the Georgia General Assembly approved an $8.9
billion budget for the 1994 fiscal year which includes
authorization for $792 million of general obligation borrowing.
The Georgia economy has performed relatively well during recent
years and generally has expanded at a rate greater than the
national average during that period. However, growth in 1988
through 1992 has slowed somewhat and was modest compared to the
robust pace of the early 1980's. Georgia's leading economic
indicators currently suggest that the rate of growth of the Georgia
economy will continue at the pace of 1988 and 1989 and more closely
match the national economy. The 1992 annual average unemployment
rate for Georgia was 6.9% as compared to the 1992 national annual
average unemployment rate of 7.4%. Georgia's unemployment rates
(not seasonally adjusted) have consistently fallen throughout the
first five months of 1993. The January unemployment rate stood at
6.8%, while the May rate stood at 5.2%. These 1993 rates are, with
one exception, lower than both the corresponding 1993 national
employment rates, 7.9% and 6.7% for January and May, and the 1992
Georgia unemployment rates, 6.0% and 6.6% for January and May.
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-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. Presently, Georgia continues to lead the
nation in the production of pulp, 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.
Bond Ratings. Currently, Moody's Investors Service, Inc. rates
Georgia general obligation bonds Aaa and Standard and Poor's
Corporation rates such bonds AA+.
Legal Proceedings. Georgia is involved in certain legal
proceedings that, if decided against the State, may require the
State to make significant future expenditures or may substantially
impair revenues. Several lawsuits have been filed against Georgia
asserting that the decision in Davis v. Michigan Department of
Treasury, 489 U.S. 803 (1989), invalidating Michigan's practice of
taxing retirement benefits paid by the federal government while
exempting state retirement benefits, also invalidates Georgia's tax
treatment of Federal Retirement Benefits for years prior to 1989.
Under Georgia's applicable 3 year statute of limitation the maximum
potential liability under these suits calculated to April 1, 1992
would appear to be no greater than $128 million.
Page 25
<PAGE>
The plaintiffs in these suits, however, have requested refunds for
a period from 1980 which could result in a maximum potential
liability in the range of $591 million. Any such liability would
be predicated on a holding by a Georgia court or the United States
Supreme Court that the Davis decision is applicable to Georgia's
prior method of taxing Federal Retirement Benefits, that the Davis
decision is to be given a retroactive effect, i.e., that the
decision affects prior tax years and that a refund remedy is
appropriate. In Georgia's "test case", the Georgia Supreme Court
held that no refunds are due. On June 28, 1993, however, the U.S.
Supreme Court vacated that holding and remanded the case for
further consideration in light of the U.S. Supreme Court decision
in Harper v. Virginia Department of Taxation (Decided June 18,
1993). In Harper, the Court held that its decision in Davis
applied retroactively to federal retirees who were denied Virginia
personal income tax refunds.
Another suit filed against Georgia seeks a $31 million refund plus
interest of liquor taxes imposed under a Georgia Statute found
retroactively invalid by the U.S. Supreme Court. The trial court's
decision that no refunds are due is currently being reviewed by the
Georgia Supreme Court.
Two additional suits have been filed with the State of Georgia by
foreign producers of alcoholic beverages seeking $96 million in
refunds of alcohol import taxes imposed under another statute.
These claims constitute 99% of all such taxes paid during the
preceding three years.
In Board of Public Education for Savannah/Chatham County v. State
of Georgia, the local school board claimed that the State should
finance the major portion of the costs of its desegregation
program. The Savannah Board originally requested restitution in
the amount of $30 million, but the Federal District Court set forth
a formula which would require a State payment in the amount of
approximately $6 million. Both sides have moved for
reconsideration. In a similar complaint, DeKalb County has
requested restitution in the amount of $90 million, and there are
approximately five other school districts which could file similar
claims. It is not possible to quantify such potential claims at
this time.
Maryland Trusts - Economic Factors
The portfolio of each Maryland Trust consists primarily of
obligations issued by entities located in Maryland.
Some of the significant financial considerations relating to the
investments of the Maryland Trusts are summarized below. This
information is derived principally from official statements and
preliminary official statements released on or before May 13, 1992,
relating to issues of Maryland obligations and does not purport to
be a complete description.
The State's total expenditures for the fiscal years ending June 30,
1990, June 30, 1991 and June 30, 1992 were $11.0, $11.3 and $11.6
billion, respectively. As of January 13, 1993, it was estimated
that total expenditures for fiscal 1993 would be $11.8 billion.
The State's General Fund, representing approximately 55% of each
year's total budget, had a surplus on a budgetary basis of $57
million in fiscal year 1990, $55 thousand in fiscal 1991, and a
deficit of $56 million in fiscal 1992. The Governor of Maryland
reduced fiscal 1993 appropriations by $56 million to offset the
fiscal 1992 deficit. The State Constitution mandates a balanced
budget.
The 1993 fiscal year budget was enacted in April 1992 which,
together with legislation enacted in 1992, involved the transfer of
certain funds, new fees and taxes, and alteration of certain
statutory State expenditure programs. When the 1993 budget was
enacted, it was estimated that the General Fund surplus at June 30,
1993 would be approximately $10 million on a budgetary basis.
During the final months of fiscal year 1992 and the initial months
of fiscal year 1993, collections of State revenues were below the
levels estimated at the time of the adoption of the 1993 budget.
The Governor proposed a cost containment plan to address this
revenue shortfall and to provide reserves to finance potential
deficiency appropriations. On September 30, 1992, the Board of
Public Works approved the Governor's proposal to reduce General
Fund appropriations by $168 million. The Board of Public Works
also approved the Governor's proposal to reduce the special fund
appropriations for the Department of Transportation by $30 million.
Legislation was introduced at the 1993 session of the General
Assembly to transfer this $30 million to the General Fund, as well
as $10 million from various other special funds. In a special
session held in November 1992, the General Assembly enacted
legislation reducing State aid to local governments by $147
million. In addition, other elements of the Governor's original
cost containment plan are in the process of being implemented or
revised.
The public indebtedness of Maryland and its instrumentalities is
divided into three basic types. The State issues general
obligation bonds, to the payment of which the State ad valorem
property tax is exclusively pledged, for capital improvements and
for various State-sponsored projects. The Department of
Transportation of Maryland issues limited, special obligation bonds
for transportation purposes payable primarily from specific, fixed-
rate excise taxes and other revenues related mainly to highway use.
Certain authorities issue obligations payable solely from specific
non-tax, enterprise fund revenues and for which the State has no
liability and has given no moral obligation assurance.
General. According to the most recent available ratings, general
obligation bonds of the State are rated Aaa by Moody's and AAA by
Standard & Poor's, as are those of Baltimore County, a separate
political entity surrounding Baltimore City, and Montgomery County
in the suburbs of Washington, D.C. General obligation bonds of
Prince George's County, the second largest metropolitan county,
which is also in the suburbs of Washington, D.C., are rated A1 by
Moody's and AA- by Standard & Poor's. The general obligation bonds
of those other counties of the State, which are rated by Moody's,
carry an A rating or better, except for those of Allegheny County,
which are rated Baa. The most populous municipality in the State is
Baltimore City, the general obligation bonds of which are rated A1
by Moody's and A by Standard & Poor's. The majority of Maryland
Health and Higher Education Authority and State Department of
Transportation revenue bond issues have received an A rating or
better from Moody's.
Page 26
<PAGE>
While these ratings and the other factors mentioned above indicate
that Maryland and its principal subdivisions and agencies are
addressing the effects of the economic recession and, overall, are
in satisfactory economic health, there can, of course, be no
assurance that this will continue or that particular bond issues
may not be adversely affected by changes in State or local economic
or political conditions.
Massachusetts Trusts - Economic Factors
The portfolio of each Massachusetts Trust consists primarily of
obligations issued by entities located in Massachusetts.
Since 1988, there has been a significant slowdown in the
Commonwealth's economy, as indicated by a rise in unemployment, a
slowing of its per capita income growth and declining state
revenues, and although fiscal 1992 revenues exceeded expenditures,
no assurance can be given that lower than expected tax revenues
will not resume and continue. In fiscal 1991, the Commonwealth's
expenditures for state government programs exceeded current
revenues. Continuing a five-year trend of lower than expected tax
revenues in the face of growing state expenditures, actual fiscal
1991 revenues were less than estimated revenues.
1993 Fiscal Year Budget. On July 20, 1992 the Governor signed the
Commonwealth's budget for fiscal 1993. This budget is based on
estimated budgeted revenue and other sources of $14.641 billion,
including current tax revenue estimates of $9.940 billion. Based
on December 31, 1992 tax collections, tax revenues for the fiscal
1993 budget were revised upwards on January 27, 1993 from the
original consensus tax estimate of $9.685 billion. Estimated tax
revenues for fiscal 1993 are approximately $456.4 million greater
than tax revenues for fiscal 1992. As modified by legislation
enacted since July 20, 1992, the fiscal 1993 budget provides for
estimated budgeted expenditures and other uses of $14.976 billion,
which equals the sum of projected revenues and other sources plus
approximately $319.4 million of the estimated $549.4 million
positive budgetary fund balances existing as of the close of fiscal
1992. The projected fiscal 1993 budgeted expenditures and other
uses represents an increase of 11.6% from fiscal 1992. The fiscal
1993 budget remains subject to certain of the Governor's line-item
vetoes, which may be overridden by the legislature.
With regard to revenues, the fiscal 1993 budget depends on certain
non-tax revenue sources, the availability of which is subject to
certain contingencies. The fiscal 1993 budget assumes continued
federal reimbursements related to uncompensated care payments,
which is expected to be approximately $212.7 million in fiscal
1993.
The fiscal 1993 budget also assumes that the sale of certain assets
will generate approximately $45.0 million in non-tax revenues;
however, there are currently no agreements to sell such assets and
the market for some or all of such assets is unfavorable. The
fiscal 1993 budget also assumes receipt of approximately $80.0
million from the Massachusetts Water Resource Authority ("MWRA")
under an agreement which would, among other things, relieve the
MWRA of certain comparable future financial commitments to the
Commonwealth.
1992 Fiscal Year. The Commonwealth's budgeted expenditures and
other uses were approximately $13.420 billion in fiscal 1992, which
is $238.7 million or 1.7% lower than fiscal 1991 budgeted
expenditures. Final fiscal 1992 budgeted expenditures were $300
million more than the initial July 1991 estimates of budgetary
expenditures, due in part to increases in certain human services
programs, including an increase of $268.7 million for the Medicaid
program and $50.0 million for mental retardation consent decree
requirements. Budgeted revenues and other sources for fiscal 1992
totaled approximately $13.728 billion (including tax revenues of
$9.484 billion), reflecting an increase of approximately .70% from
fiscal 1991 to 1992 and an increase of 5.4% in tax revenues for the
same period. Overall, fiscal 1992 is estimated to have ended with
an excess of revenues and other sources over expenditures and other
uses of $312.3 million. After payment in full of the quarterly
distribution of local aid to the Commonwealth's cities and towns
("Local Aid") in the amount of $514.0 million due on June 30, 1992,
retirement of the Commonwealth's outstanding commercial paper
(except for approximately $50 million of bond anticipation notes)
and certain other short term borrowings, as of June 30, 1992, the
end of fiscal 1992, the Commonwealth showed a year-end position of
approximately $731 million, as compared with the Commonwealth's
cash balance of $182.3 million at the end of fiscal 1991.
1991 Fiscal Year. Budgeted expenditures for fiscal 1991 totalled
approximately $13.6 billion, as against revenues and other sources
of approximately $13.6 billion. The Commonwealth suffered an
operating loss of approximately $21.2 million. Application of the
adjusted fiscal 1990 fund balances of $258.3 resulted in a fiscal
1991 budgetary surplus of $237.1 million. State law requires that
approximately $59.1 million of the fiscal year ending balances of
$237.1 million be placed in the Stabilization Fund, a reserve from
which funds can be appropriated (i) to make up any difference
between actual state revenues in any fiscal in which actual
revenues fall below the allowable amount, (ii) to replace state and
local losses by federal funds or (iii) for any event, as determined
by the legislature, which threatens the health, safety or welfare
of the people or the fiscal stability of the Commonwealth or any of
its political subdivisions.
Upon taking office in January 1991, the new Governor proposed a
series of legislative and administrative actions, including
withholding of allotments under Section 9C of Chapter 29 of the
General Laws, intended to eliminate the projected deficits. The
new Governor's review of the Commonwealth's budget indicated
projected spending of $14.1 billion with an estimated $850 million
in budget balancing measures that would be needed prior to the
close of fiscal 1991. At that time, estimated tax revenues were
revised to $8.8 billion, $903 million less than was estimated at
the time the fiscal 1991 budget was adopted. The Legislature
adopted a number of the Governor's recommendations and the Governor
took certain administrative actions not requiring legislative
approval, including $65 million in savings from the adoption of a
state employee furlough program. It is estimated by the
Commonwealth that spending reductions achieved through savings
initiatives and withholding of allotments total approximately
$484.3 million in aggregate for fiscal 1991. However, these
savings and reductions may be affected by litigation pursued by
third parties concerning the Governor's actions under Section 9C of
Chapter 29 of the General Laws and with regard to the state
employee furlough program.
Page 27
<PAGE>
In addition, the new administration in May 1991 filed an amendment
to its Medicaid state plan that enables it to claim 50% federal
reimbursement on uncompensated care payments for certain hospitals
in the Commonwealth. As a result, in fiscal 1991, the Commonwealth
obtained additional non-tax revenues in the form of federal
reimbursements equal to approximately $513 million on account of
uncompensated care payments. This reimbursement claim was based
upon recent amendments of federal law contained in the Omnibus
Budget Reconciliation Act of 1990 and, consequently, on relatively
undeveloped federal laws, regulations and guidelines. At the
request of the federal Health Care Financing Administration, the
Office of Inspector General of the United States Department of
Health and Human Services has commenced an audit of the
reimbursement. The administration, which had reviewed the matter
with the Health Care Financing Administration prior to claiming the
reimbursement, believes that the Commonwealth will prevail in the
audit. If the Commonwealth does not prevail, the Commonwealth
would have the right to contest an appeal, but could be required to
repay all or part of Medicaid reimbursements with interest and to
have such amount deducted from future reimbursement payments.
1990, 1989 and 1988 Fiscal Years. In July 1989, the former
Governor vetoed certain provisions included in the budget
legislation for fiscal 1990, including approximately $273 million
of the fiscal 1990 appropriations, including $100 million for local
aid to the Commonwealth's cities and towns ("Local Aid"). One of
the Governor's vetoes occasioned a default by the Commonwealth on
a September 1, 1989 payment of $2.5 million on a general obligation
contract with the Massachusetts Community Development Finance
Corporation to which its full faith and credit had been pledged,
which payment was made on September 17, 1990 after a supplemental
appropriation was proposed by the Governor and passed by the
legislature. The legislature overrode the Governor's veto of $100
million of Local Aid and the Governor then indicated that he was
withholding the allotment for such expenditure. The Supreme
Judicial Court invalidated the Governor's withholding of $210
million of appropriated funds for certain Local Aid purposes in May
1990.
The budget for fiscal 1991 was signed into law by the Governor on
August 1, 1990 and included estimated spending of $13.9 billion,
representing an increase of 3.3% or $448.3 million above fiscal
1990 spending. Estimated tax revenues at the time of the budget's
enactment were $9.7 billion including $1.2 billion expected to
result from recently enacted tax legislation. Actual revenues,
however, for the first two months of the fiscal 1991 were lower
than anticipated and revenue estimates for the remainder of the
fiscal year were subsequently revised downward twice during
September 1990.
Budgeted expenditures for fiscal 1988, 1989 and 1990 totalled
approximately $11.6 billion, $12.6 billion and $13.3 billion
respectively. Budgeted revenues for fiscal 1988, 1989 and 1990
totalled approximately $11.3 billion, $12.0 billion and $12.0
billion, respectively.
Employment. Reversing a trend of relatively low unemployment
during the early and mid 1980s, the Massachusetts unemployment rate
has increased significantly during the last three years to where
the Commonwealth's unemployment rate exceeds the national
unemployment rate. In 1989, the average Massachusetts unemployment
rate was 4.0%, representing a 0.8% increase over the average 1987
unemployment rate, while the average United States unemployment
rate was 5.3%, representing a 0.9% decrease over the average 1987
United States unemployment rate. During 1990, the Massachusetts
unemployment rate increased from 4.5% in January to 6.1% in July to
6.7% in August. During 1991, the Massachusetts unemployment rate
averaged 9.0% while the average United States unemployment rate was
6.7%. The Massachusetts unemployment rate in October 1992 was
8.4%, down from 8.6% for September 1992. Other factors which may
significantly and adversely affect the employment rate in the
Commonwealth include the recently announced proposal by the Clinton
Administration to close United States military bases and reduce
federal government spending on defense-related industries. Due to
this and other considerations, there can be no assurances that
unemployment in the Commonwealth will not increase in the future.
Debt Ratings. S&P currently rates the Commonwealth's uninsured
general obligation bonds at A, having upgraded the rating from BBB
on September 9, 1992. At the same time, S&P upgraded the rating of
state and agency notes from SP2 to SP1. In raising the ratings,
S&P cited the Commonwealth's improved financial status as key to
the upgrade. Prior to these actions by S&P, the Commonwealth had
experienced a steady decline in its S&P rating, with its most
recent decline beginning in May 1989, when S&P lowered its rating
on the Commonwealth's general obligation bonds and other
Commonwealth obligations from AA+ to AA and continuing a series of
further reductions until March 1992, when the rating was affirmed
at BBB.
Moody's currently rates the Commonwealth's uninsured general
obligation bonds at A, having upgraded the rating from Baa on
September 9, 1992. Moody's in raising the rating on the bonds,
pointed to the Commonwealth's application of conservative revenue
assumptions and efforts to impose spending discipline as having
reduced the Commonwealth's financial vulnerability and restored
fiscal control. Prior to this increase, the Commonwealth had
experienced a steady decline in its rating by Moody's since May
1989. In May 1989, Moody's lowered its rating on the
Commonwealth's notes from MIG-1 to MIG-2, and its rating on the
Commonwealth's commercial paper from P-1 to P-2. On June 21, 1989,
Moody's reduced the Commonwealth's general obligation rating from
Aa to A. On November 15, 1989, Moody's reduced the rating on the
Commonwealth's general obligations from A to Baa1, citing the
Commonwealth's lowering of revenue estimates, its fiscal year 1990
deficit and to the legislature's apparent lack of consensus on how
to deal with it. In March 9, 1990, Moody's reduced the rating of
the Commonwealth's general obligation bonds form Baa1 to Baa,
citing "extended inaction" in resolving the Commonwealth's growing
budget deficit. There can be no assurance that these ratings will
continue.
In recent years, the Commonwealth and certain of its public bodies
and municipalities have faced serious financial difficulties which
have affected the credit standing and borrowing abilities of
Massachusetts and the respective entities and may have contributed
to higher interest rates on debt obligations. The continuation of,
or an increase in such financial difficulties, could result in
declines in the market values of, or default on, existing
obligations including Bonds deposited in any Massachusetts Trust.
Should there be during the term of a Massachusetts Trust a
financial crisis relating to Massachusetts, its public bodies or
municipalities, the market value and marketability of all
outstanding bonds issued by the Commonwealth and its public
authorities or municipalities, including the Bonds in such Trust,
and interest income to the Trust could be adversely affected.
Page 28
<PAGE>
Total Bonds and Note Liabilities. The total general obligation
bonded indebtedness of the Commonwealth as of
January 1, 1993, was approximately $7.9 billion. There were also
outstanding approximately $339 million in general obligation notes
and other short-term general obligation debt. The total bond and
note liabilities of the Commonwealth as of January 1, 1993,
including guaranteed debt and contingent liabilities, was
approximately $12.4 billion.
Debt Service. During the 1980's, capital expenditures were
increased substantially, which has had a short term impact on the
cash needs of the Commonwealth and also accounts for a significant
rise in debt service during that period. Payments for debt service
on Commonwealth general obligation bonds and notes have risen at an
average annual rate of 18.7% from $563.7 million in fiscal 1988 to
an estimated $942.3 million in fiscal 1991. Debt service payments
in fiscal 1992 were $898.3 million. Debt service payments for
fiscal 1992 reflect a $261 million one-time reduction achieved as
a result of the issuance of the refunding bonds in September and
October 1991. Debt Service expenditures are projected to be $1.195
billion for fiscal 1993 and $1.311 billion for fiscal 1994. The
amounts represented do not include debt service on notes issued to
finance the fiscal 1989 deficit and certain Medicaid related
liabilities, certain debt service contract assistance to the
Massachusetts Bay Transportation Authority, the Massachusetts
Convention Center Authority and the Massachusetts Government Land
Bank, as well as grants to municipalities under the school building
assistance program to defray a portion of the debt service costs on
local school bonds.
In January 1990, legislation was passed to impose a limit on debt
service beginning in fiscal 1991, providing that no more than 10%
of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt
(excluding the Fiscal Recovery Bonds). The percentage of total
appropriations estimated to be expended from the budgeted operating
funds for debt service (excluding debt service on Fiscal Recovery
Bonds) for fiscal 1992 is 4.9% which is projected to increase to
6.1% in fiscal 1993.
Certain Liabilities. Among the material future liabilities of the
Commonwealth are significant unfunded general liabilities of its
retirement systems and a program to fund such liabilities; a
program whereby, starting in 1978, the Commonwealth began assuming
full financial responsibility for all costs of the administration
of justice within the Commonwealth; continuing demands to raise
aggregate aid to cities, towns, schools and other districts and
transit authorities above current levels; and Medicaid expenditures
which have increased each year since the program was initiated.
The Commonwealth has signed consent decrees to continue improving
mental health care and programs for the mentally retarded in order
to meet Federal standards, including those governing receipt of
Federal reimbursements under various programs, and the parties in
those cases have worked cooperatively to resolve the disputed
issues.
As a result of comprehensive legislation approved in January 1988,
the Commonwealth is required, beginning in fiscal 1989, to fund
future pension liabilities currently and to amortize the
Commonwealth's unfunded liabilities over 40 years. Total pension
costs increased at an average annual rate of 5.8% from $600.2
million in fiscal 1988 to $751.5 million in fiscal 1992. The
projected pension costs (inclusive of current benefits and
reserves) for fiscal 1993 are $873.8 million, representing an
increase of 16.2% over the fiscal 1992 expenditures.
Litigation. The Commonwealth is engaged in various lawsuits
involving environmental and related laws, including an action
brought on behalf of the U.S. Environmental Protection Agency
alleging violations of the Clean Water Act and seeking to enforce
the clean up of Boston Harbor. The Massachusetts Water Resource
Authority ("MWRA"), successor in liability to the Metropolitan
District Commission, has assumed primary responsibility for
developing and implementing a court-approved plan for the
construction of the treatment facilities necessary to achieve
compliance with Federal requirements. Under the Clean Water Act,
the Commonwealth may be liable for costs of compliance in these or
any other Clean Water cases if the MWRA or a municipality is
prevented from raising revenues necessary to comply with a
judgment. The MWRA currently projects that the total cost of
construction of the treatment facilities required under the court's
order is approximately $3.5 billion in current dollars.
The Massachusetts Hospital Association has brought an action
challenging an element of the Medicaid rate-setting methodologies
for hospitals. If the plaintiff hospitals are successful, the
Commonwealth may face additional liabilities on the order of $70
million to $100 million. The parties have recently agreed to a
process of settlement and payment of fiscal 1988 through 1991
claims, with payment to be made in fiscal 1993.
There are also actions pending in which recipients of human
services benefits, such as welfare recipients, the mentally
retarded, the elderly, the handicapped, children, residents of
state hospitals and inmates of corrections institutions, seek
expanded levels of services and benefits and in which providers of
services to such recipients challenge the rates at which they are
reimbursed by the Commonwealth. To the extent that such actions
result in judgments requiring the Commonwealth to provide expanded
services or benefits or pay increased rates, additional operating
and capital expenditures might be needed to implement such
judgments.
In December 1988, nine municipalities of the Commonwealth which
claim to own substantial interests in a nuclear power plant in
Seabrook, New Hampshire, filed suit against the Commonwealth, the
Governor, the Attorney General and other State officials claiming
damages arising from their opposition to licensure of the plant.
The municipalities allege damages in the amount of $1 billion. The
Commonwealth's motion to dismiss was allowed, but the plaintiffs in
that case have appealed and the case is under advisement in the
Appeals Court.
In addition there are several tax matters in litigation which could
result in significant refunds to taxpayers if decisions unfavorable
to the Commonwealth are rendered. The amount of taxes and interest
at issue in those cases is approximately $195 million.
Page 29
<PAGE>
A variety of other civil suits pending against the Commonwealth may
also affect its future liabilities. These include challenges to
the Commonwealth's allocation of school aid and to the Governor's
authority to withhold or reduce allotments of appropriated funds
under section 9C of Chapter 29 of the General Laws and to adopt a
state employee furlough program. No prediction is possible as to
the ultimate outcomes of these proceedings.
Many factors, in addition to those cited above, do or may have a
bearing upon the financial condition of the Commonwealth, including
social and economic conditions, many of which are not within the
control of the Commonwealth.
Expenditure and Tax Limitation Measures. Limits have been
established on State tax revenues by legislation approved by the
Governor on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The Executive Office for
Administration and Finance currently estimates that State tax
revenues will not reach the limit imposed by either the initiative
petition or the legislative enactment in fiscal 1991.
Proposition 2-1/2, passed by the voters in 1980, led to large
reductions in property taxes, the major source of income for cities
and towns, and large increases in state aid to offset such revenue
losses. According to Executive Office for Administration and
Finance, all of the 351 cities and towns have now achieved a
property tax level of no more than 2.5% of full property values.
Under the terms of Proposition 2-1/2, the property tax levy can now
be increased annually for all cities and towns, almost all by 2.5%
of the prior fiscal year's tax levy plus 2.5% of the value of new
properties and of significant improvements to property.
Legislation has also been enacted providing for certain local
option taxes. A voter initiative petition approved at the
statewide general election in November 1990 further regulates the
distribution of Local Aid and, among other matters, requires,
subject to appropriation, the distribution as Local Aid of no less
than 40% of collections from individual income taxes, sales and use
taxes, corporate excise taxes, and the balance of the state lottery
fund. If implemented in accordance with its terms (including
appropriation of the necessary funds), the petition as approved
would shift several hundred million dollars to direct Local Aid.
Other Tax Matters. To provide revenue to pay debt service on both
the deficit and Medicaid related borrowings and to fund certain
direct Medicaid expenditures, legislation was enacted imposing an
additional tax on certain types of personal income for 1989 and
1990 taxable years at rates of 0.375% and 0.75% respectively,
effectively raising the tax rate of 1989 from 5% to 5.375% and for
1990 from 5% to 5.75%. Recent legislation has effectively further
increased tax rates to 5.95% for tax year 1990 to 6.25% for tax
year 1991 and returning to 5.95% for tax year 1992 and subsequent
tax years. The tax is applicable to all personal income except
income derived from interest, dividends, capital gains,
unemployment compensation, alimony, rent, pensions, annuities and
IRA/Keogh distributions. The income tax rate on other interest
(excluding interest on obligations of the United States and of the
Commonwealth and its subdivisions), dividends and net capital gains
(after a 50% reduction) was increased from 10% to 12% for the tax
year 1990 and subsequent years, by recently enacted legislation.
Other Issuers of Massachusetts Obligations. There are a number of
state agencies, instrumentalities and political subdivisions of the
Commonwealth that issue Municipal Obligations, some of which may be
conduit revenue obligations payable from payments from private
borrowers. These entities are subject to various economic risks
and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the
Commonwealth. The brief summary above does not address, nor does
it attempt to address, any difficulties and the financial
situations of those other issuers of Massachusetts Obligations.
Michigan Trusts - Economic Factors
The portfolio of each Michigan Trust primarily consists of
obligations issued by entities located in Michigan.
Economy. The principal sectors of the State's economy are
manufacturing of durable goods (including automobile and office
equipment manufacturing), tourism and agriculture. As reflected in
historical employment figures, the State's economy has lessened its
dependence upon durable goods manufacturing. In 1960, employment in
such industry accounted for 33% of the State's workforce. This
figure fell to 17.3% by 1991. However, manufacturing (including
auto-related manufacturing) continues to be an important part of
the State's economy. These industries are highly cyclical and in
the 1992-1993 period are expected to operate at substantially less
than full capacity. This factor adversely affects the revenue
streams of the State and its political subdivisions because it
adversely affects tax sources, particularly sales taxes and single
business taxes.
Recently, as well as historically, the average monthly unemployment
rate in the State has been higher than the average figures for the
United States. For example, for 1991 the average monthly
unemployment rate in the State was 9.2% as compared to a national
average of 6.7% in the United States. For 1992, the average
monthly unemployment rate in the State was 8.8% as compared to a
national average of 7.4%.
Budget. The budget of the State is a complete financial plan and
encompasses the revenues and expenditures, both operating and
capital outlay, of the General Fund and special revenue funds. The
budget is prepared on a basis consistent with GAAP. The State's
Fiscal Year begins on October 1 and ends September 30 of the
following year. Under State law, the executive budget
recommendations for any fund may not exceed the estimated revenue
thereof, and an itemized statement of estimated revenues in each
operating fund must be contained in an appropriation bill as passed
in the Legislature, the total of which may not be less than the
total of all appropriations made from the fund for that fiscal
year. The State Constitution provides that proposed expenditures
from and revenues of any fund must be in balance and that any prior
year's surplus or deficit in any fund must be included in the
succeeding year's budget for that fund.
The State's Constitution limits the amount of total State revenues
that may be raised from taxes and other sources. State revenues
(excluding federal aid and revenues used for payment of principal
and interest on general obligation bonds) in any fiscal year are
limited to a specified percentage of State personal income in the
prior calendar year or average of the prior three calendar years,
whichever is greater. The State may raise taxes in excess of the
limit in emergency situations.
Page 30
<PAGE>
The State finances its operations through the State's General Fund
and special revenue funds. The General Fund
receives revenues of the State that are not specifically required
to be included in the special revenue funds. General Fund revenues
are obtained approximately 63 percent from the payment of State
taxes and 37 percent from federal and non-tax revenue sources. The
majority of the revenues from the State taxes are from the State's
personal income tax, single business tax, use tax and sales tax.
In addition the State levies various other taxes. Approximately
one-half of total General Fund expenditures are made by the State's
Department of Education and Department of Social Services. The
Department of Education provides general supervision over all
public education in the State, including general, adult and special
education. The Department of Social Services administers economic,
social and medical programs in the State, including Medicare,
Medicaid and Aid to Families with Dependent Children. Other
significant expenditures from the General Fund provide funds for
law enforcement, general State government, debt service and capital
outlays.
Despite modest surpluses in the three preceding fiscal years, the
State ended fiscal years 1989-90 and 1990-91 with negative balances
of $310.3 million and $169.4 million, respectively. In February
1993 the State estimated that this negative balance had been
eliminated as of the end of fiscal year 1991-92 which ended
September 30, 1992.
The State budget for the 1992-93 fiscal year, which began on
October 1, 1992, was passed by the Legislature on July 28, 1992.
This budget appropriated $8,017.7 million General Fund-General
Purpose monies (including $4.5 million in supplemental
appropriations passed by the Legislature in the fall of 1992). In
July 1992, the Governor, using line item veto authority in the
State Constitution, vetoed $34.2 million of appropriations that
lapse to the General Fund. Including supplemental appropriations
passed by the Legislature in the fall of 1992, other anticipated
supplemental needs and lower revenue projections, in late January
1993 the State projected a cumulative deficit of approximately $373
million for the 1992-93 fiscal year; however the administration
reached agreement with the Legislature on a deficit reduction
package which the administration expects to be adopted and which
will eliminate the 1992-93 fiscal year deficit. As noted above,
the State Constitution requires that any prior year's surplus or
deficit in any fund must be included in the succeeding year's
budget for that fund. In February 1993 the State also projected
that fiscal year 1992-93 would end with a $242.4 million negative
cash balance for the combined General Fund and School Aid Fund
because certain accounting adjustment accruals will not occur on a
cash basis until the following fiscal year.
The State also maintains the Counter-Cyclical Budget and Economic
Stabilization Fund ("BSF") which accumulates balances during the
years of significant economic growth and which may be utilized
during periods of budgetary shortfalls. The unreserved balance for
the BSF for the 1989-90 fiscal year end was $385.1 million, for the
1990-91 fiscal year end was $182.2 million and for the 1991-92
fiscal year end was $23.1 million.
Debt. The State Constitution limits State general obligation debt
to (i) short-term debt for State operating purposes which must be
repaid in the same fiscal year in which it is issued amd which
cannot exceed 15% of the undedicated revenues received by the State
during the preceeding fiscal year, (ii) short and long term debt
unlimited in amount for the purpose of making loans to school
districts and (iii) long term debt for voter-approved purposes.
The State has issued and has outstanding general obligation full
faith and credit bonds for water resources, environmental
protection program and recreation program purposes totalling, as of
September 30, 1992, approximately $390 million. In November 1988
the State's voters approved the issuance of $800 million of general
obligation bonds for environmental protection and recreational
purposes; of this amount approximately $453 million remains to be
issued. On December 12, 1991 the State issued $700 million in
general obligation notes which matured on September 30, 1992. The
State issued $900 million in general obligation notes in February
1993 which will mature on September 30, 1993. The State issued
$34.6 million in general obligation school loan notes in April 1993
which will mature on October 29, 1993.
Other Issuers of Michigan Municipal Obligations. There are a
number of state agencies, instrumentalities and political
subdivisions of the State that issue bonds, some of which may be
conduit revenue obligations payable from private borrowers. These
entities are subject to various economic risks and uncertainties,
and the credit quality of the securities issued by them may vary
considerably from obligations backed by the full faith and credit
of the State.
Ratings. Currently the State's general obligation bonds are rated
A1 by Moody's, AA by S&P and AA by Fitch Investors Service, Inc.
On January 23, 1991, S&P placed the State's general obligation debt
on Credit Watch with negative implications for S&P's AA rating on
such debt. On July 29, 1991 S&P removed the State's general
obligation bonds from Credit Watch and confirmed its AA rating on
such debt.
Litigation. The State is a party to various legal proceedings
seeking damages or injunctive or other relief. In addition to
routine litigation, certain of these proceedings could, if
unfavorably resolved from the point of view of the State,
substantially affect State programs or finances. These lawsuits
involve programs generally in the areas of corrections, highway
maintenance, social services, tax collection, commerce and
budgetary reductions to school districts and governmental units and
court funding. The ultimate disposition of these proceedings is
not determinable.
In 1991, the Michigan Court of Appeals in Caterpillar, Inc. v.
Michigan Department of Treasury upheld a lower court decision
finding the capital acquisition deduction ("CAD") provisions of the
Michigan Single Business Tax Act ("SBTA") unconstitutional. On
July 31, 1992, the Michigan Supreme Court reversed the Court of
Appeals and upheld the constitutionality of the CAD as originally
enacted. The Caterpillar plaintiffs then sought a writ of
certiorari from the United States Supreme Court, which was denied
by the Supreme Court on November 30, 1992. However, in response to
the Court of Appeals' Caterpillar decision, the SBTA was amended by
1991 PA 77 ("Act 77") to (i) replace the previous CAD with an
apportioned CAD applicable to real and personal property purchases,
regardless of location; (ii) modify the SBTA apportionment formula
used to determine the applicable SBTA tax base from a three factor
(one-third property, one-third payroll and one-third sales) formula
to a double-weighted sales (one-quarter property, one-quarter
payroll and one-half sales) formula by 1993; and (iii) increase the
filing threshold to $60,000 in 1991 and $100,000 in 1992 and
beyond. Act 77 made the new CAD formula retroactive to tax years
beginning after September 30, 1989.
Page 31
<PAGE>
Because of this retroactivity, it contained a fallback provision
stating that if a court allowed an unapportioned CAD for 1990,
there would be no 1991 CAD. 1991 PA 128, effective October 25,
1991, modified the provisions of Act 77 to eliminate the reference
to a fallback provision and established a specific method for
calculating the CAD for 1991 regardless of the retroactivity
provisions of Act 77. Lawsuits challenging the constitutionality
of Act 77 have been filed.
Property Tax. At the present time the State does not levy any ad
valorem taxes on real or tangible personal property. In addition,
the State Constitution limits the extent to which municipalities or
political subdivisions may levy taxes upon real and personal
property through a process that regulates assessments. On July 21,
1993, the Legislature passed Senate Bill 1, a measure that
significantly impacts financing of K-12 school operations beginning
with July 1, 1994 tax levies. Senate Bill 1 was signed into law by
the Governor on August 19, 1993.
Senate Bill 1 also exempts all property in Michigan from millage
levied for local school and intermediate school district operating
purposes, other than millage levied for community colleges. It
does not affect millage levied for voter-approved general
obligation debt. It also changes the date for determining property
valuations, basically resulting in a one year freeze in current
assessments. The bill does not contain a method for replacing
revenues lost by these exemptions or provide for other means of
financing public education. However, the State has indicated an
intention to address these issues prior to January 1, 1994.
Senate Bill 1 is the latest development in a long-term effort by
the State to modify the local ad valorem property tax system. Two
previous proposed constitutional amendments that would have reduced
rates or capped assessment increases were rejected by the voters at
the November 1992 general election, and a third proposal was
rejected at a special election held June 2, 1993. Current law bases
1993 ad valorem property tax levies upon equalized assessments as
of December 31, 1992, representing an increase for the first time
since December 31, 1990.
The ultimate nature, extent and impact of any property tax or
public education finance reform measure cannot currently be
predicted. Both Senate Bill 1 and the continuing consideration by
the State of proposals that will impact taxation in the State may
substantially change the State's method of conducting and financing
K-12 public education.
Minnesota Trusts - Economic Factors
The portfolio of each Minnesota Trust consists primarily of
obligations issued by entities located in Minnesota.
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
appropriations for and aids to local governmental units. The
State's fiscal problems affected other governmental units within
the State, such as local governments, school districts and State
agencies, which, in varying degrees, also faced cash flow
difficulties. In certain cases, revenues of local governmental
units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's reduced
its rating on the State's outstanding general obligation bonds from
AAA to AA+ in August 1981 and to AA in March 1982. Moody's lowered
its rating on the State's outstanding general obligation bonds from
Aaa to Aa in April 1982.
The State's economy recovered in the July 1, 1983 to June 30, 1985
biennium, and substantial reductions in the individual income tax
were enacted in 1984 and 1985. Standard & Poor's raised its rating
on the State's outstanding general obligation bonds to AA+ in
January 1985. In 1986, 1987 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 Finance on
February 27, 1992 projected a $569 million 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 billion (less a $400 million
reserve). The State responded by enacted legislation that made
substantial accounting changes, reduced the budget reserve (cash
flow account) by $160 million to $240 million, reduced
appropriations for state agencies and higher education, imposed a
sales tax on purchases by local governmental units, and adopted
other tax spending changes.
A budget forecast released by the Department of Finance on March 3,
1993 projects a $434 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. The forecast for the biennium ending June 30, 1995
projects a General Fund deficit of $163 million at the end of the
biennium, after applying the surplus from June 30, 1993 and after
reserving $240 million for the cash flow account.
State grants and aids represent a large percentage of the total
revenue of cities, towns, counties and school districts in the
State. Even with respect to Bonds that are revenue obligations of
this issuer and not general obligations of the state, there can be
no assurance that the fiscal problems referred to above will not
adversely affect the market value or marketability of the Bonds or
the ability of the respective obligors to pay interest on and
principal of the Bonds.
Missouri Trusts - Economic Factors
The portfolio of each Missouri Trust consists primarily of
obligations issued by entities located in Missouri (the "State").
Bonds in a Missouri Trust may include obligations issued by or
obligations not issued by the State of Missouri.
Page 32
<PAGE>
Each Missouri Trust, therefore, is susceptible to political,
economic or regulatory factors affecting issuers of Bonds. The
following information provides only a brief summary of some of the
complex factors affecting the financial situation in 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 Missouri. No
independent verification has been made of the accuracy or
completeness of any of the following information.
There can be no assurance that current or future statewide or
regional economic difficulties, and the resulting impact on issuers
of Bonds and the obligors thereon, will not adversely affect the
market value of Missouri Municipal Obligations held in the
portfolio of the Trust or the ability of particular obligors to
make timely payments of debt service on (or relating to) those
obligations. Because all or most of the Bonds in the Trust are
revenue or general obligations of local governments, rather than
general obligations of the State itself, ratings on the Bonds may
be different from those given to general obligations of the State.
Prospective investors should study with care the portfolios of
Bonds in the Trust and should consult with their own investment
advisors as to the merits of particular issues in the portfolio.
Economic Condition and Outlook for the State of Missouri. As noted
in the Comprehensive Annual Financial Report for the fiscal year
ended June 30, 1992 which was prepared and issued by the State
Office of Administration and audited by the State Auditor's Office,
significant reductions were made in the State's 1992 budget due to
the national recession. Over $290 million was withheld from
appropriated or planned spending to balance the budget. Further,
courts mandated allocation of expenditures in specific areas, which
had the effect of limiting resources for other portions of the
budget. Federal court-ordered payments for the St. Louis and
Kansas City school desegregation plans were $296.5 million in
fiscal year 1992, which is about 7% of the State's general revenue
budget.
A large portion of the State has experienced severe flood
conditions in the past several weeks. The flood conditions have
begun to recede, and the evaluation of the extent of damage to the
State and municipal infrastructure, including bridges, roads,
railways, water treatment plans, sewage treatment plants, drainage
systems, levees, as well as damage to private property and
commerce, including homes, farms, particularly ruined crops,
commercial buildings, business operations has begun; the full
extent of damage is not yet determinable but is expected to be
extensive. The cost of flood damage may be partially offset by
federal disaster aid, and initial federal aid payments have begun,
but the full nature and extent of further federal disaster aid is
not yet known. It is not yet possible to predict whether such
flood conditions will have a materially adverse effect on the Bonds
held in the Trust, or the obligors thereon.
Missouri's manufacturing, financial and agricultural base, and in
turn its economic health, is tied closely to that of the nation.
Missouri's personal income, which directly impacts the individual
income tax and sales tax, rose at a 2.7% rate during calendar year
1991. General revenue collections in fiscal year 1992 were $4.26
million, 2.6% above fiscal year 1991 collections. However, economic
statistics included in the Comprehensive Annual Fiscal Report for
the State of Missouri for fiscal year 1992, as published by the
Missouri Department of Economic Development, indicate a slowing in
certain key economic growth indicators, such as new investment, new
jobs, and new manufacturers, from levels attained in the mid and
late 1980's. State unemployment rates have followed a similar
course as the unemployment rate for the nation. However, over the
last ten years there have been at least four years during which the
State of Missouri's unemployment rate exceeded that of the national
average.
Since 1989 industrial growth in the State has taken a downturn.
From 1987 to 1989, the number of new manufacturers in the State
grew from 93 to 118 and the number of expansions in existing
manufacturers also grew from 130 in 1987 to 223 in 1989. The
number of new manufacturers and the number of expansions in
existing manufacturers peaked in 1989, reaching a nine-year high,
as reported in the 1992 Missouri Comprehensive Annual Financial
Report. However, from 1989 to 1991, the number of new
manufacturers in the State declined from 118 in 1989 to 79 in 1991,
and the number of expansions in existing manufacturers also
decreased, from 223 in 1989 to 149 in 1991. Correspondingly,
investment in industrial growth in the State has declined in the
past few years from $966.02 million in 1988 to $293.62 million in
1991, which figure represents the lowest investment totals for the
State in nine years.
The State's largest private employers represent a wide spectrum of
industries. These industries engage in manufacturing, defense-
related contracts, retail and wholesale, health-related services,
education and communications, among others. Based on data from the
Missouri Department of Economic Development for 1992, the ten
largest private employers in the State in descending number of
employees are: McDonnell Douglas Corporation, Wal-Mart Stores,
Inc., Southwestern Bell Telephone Company, Trans World Airlines,
Inc., Washington University, Schnuck Markets, Inc., SSM Health
Care, Brown Group, Inc., Hallmark Cards, Incorporated, and the Ford
Motor Company. At the end of fiscal year 1992, these employers'
labor forces ranged in size from 30,000 to 40,000 employees for
McDonnell Douglas Corporation to 6,000 to 7,000 employees for Ford
Motor Company. Since the compilation of the foregoing data on
these private employers, some of the foregoing listed employers
have announced and are implementing reductions in their labor
forces. Flooding in certain areas of the State has caused
businesses, including manufacturers and distributors, to cease
operations, at least temporarily, and some business, with
significant concentrations of employees for particular
municipalities or regions within the State, have announced that
they will not re-open their operations due to the extensive nature
of the flood damage.
Defense-related business plays an important role in Missouri's
economy. Historically a large number of civilians have been
employed at various military installations and training bases in
the State. Aircraft and other related defense contractors in the
State of Missouri have historically been the recipients of sizable
defense contract awards. Both defense-related businesses and the
airline industry, both as manufacturers and as providers of
transportation services, are under pressure in the State of
Missouri, as Congress makes significant reductions in defense
spending, and the airline industry continues to feel the impact of
deregulation and the economic slow-down. Further reductions in the
labor force in these industries have a materially adverse effect on
the economy of the State.
Page 33
<PAGE>
Based upon data obtained from the U.S. Department of Commerce-
Bureau of the Census, the State has for the last 20 years faced
declining increases in population. Percentage increase in
population has systematically declined since 1970 measured at 10-
year intervals. For the last 20 years, the percentage of
population living in urban and rural areas has stabilized, stemming
the prior growth in urban populations.
Major Initiatives. Balancing Missouri's budget in fiscal year 1992
required extensive withholdings and downsizing. Despite budget
limitations, State agencies were able to implement Congressionally
approved Medicaid programs that expanded access to health care.
Federal reimbursements were used to help offset the rising cost of
medical care for individuals, hospitals and nursing homes, and
scarce State resources were channelled to vital public services.
In addition, in fiscal year 1992, Missouri invested a total of $80
million in its capital assets with appropriations for maintenance
and construction projects throughout the State.
Budgetary Control. The State maintains budgetary controls to
ensure compliance with legal provisions embodied in the annual
appropriated budget passed by the State legislature and approved by
the Governor prior to the beginning of the fiscal year. If
appropriations are not sufficient for a fiscal year, supplemental
amounts are requested during the next legislative session by the
same process that original appropriations are requested. Budgetary
control is maintained by the individual departments. Expenditures
cannot exceed the appropriation amounts at the departmental
appropriation level. Also, the Governor has the authority to
reduce the allotments or appropriations in any fund if it appears
that revenues for the fiscal year will fall below the estimated
revenues. Encumbrance accounting under which purchase orders,
contracts and other commitments for the expenditure of moneys are
recorded in order to reserve part of the appropriation, is employed
for purposes of budgetary control and contract compliance.
Appropriation hearings are expected on issues of flood disaster
relief. The preliminary estimates orally provided by the State
Emergency Management Agency indicate that as of August 26, 1993,
damage to agricultural lands approximates $1.79 billion dollars,
while damage to private homes, businesses and public infrastructure
approximates $1.25 billion dollars. The Agency further indicated
that 28,500 Missouri residents have requested disaster relief aid
which consists of federal and state aid. The foregoing figures
concerning the number of disaster aid applications are preliminary
and do not address applications which may be rejected or the extent
of offset by homeowner's, flood, or other private insurance. There
are no definite estimates on the total aid that will be sought, or
paid, and the underlying damages sustained, related to flood
conditions; these conditions continue to be evaluated, and, to an
extent, estimates of damages sustained may worsen, as waters in
flooded areas begin to recede, allowing for more complete
projections and evaluations.
General Government Functions. Revenues for general government
functions (General, Special Revenue, Debt Service and Capital
Projects funds) totaled $8.5 billion in fiscal year 1992, an
increase of 15.4% over fiscal year 1991. Taxes produced 55.6% of
general revenues compared to 62.1% for the prior year. Increases in
contributions and intergovernmental revenues were the primary
factor in the increase of general government revenues. Because of
additional federal mandates for Medicaid programs, State
expenditures increased and matching revenues from the federal
government also increased.
Expenditures for general government functions (General, Special
Revenue, Debt Service and Capital Projects Funds) totaled $8.0
billion in fiscal year 1992, an increase of 12.0% over fiscal year
1991. The majority of the expenditure increase is attributed to
increases in human services due to additional federal mandates for
Medicaid programs.
Fund Balance. The State ended fiscal year 1992 with an unreserved
fund balance (surplus) of $475.1 million for the governmental
funds. The unreserved fund balance of the General Fund improved
due to increases in revenues and withholdings of appropriations to
control expenditures. Following is a table representing a
comparison of the 1992 and 1991 fiscal year unreserved fund
balances (in thousands of dollars) for the funds comprising these
figures.
INCREASE
FUND 1992 1991
(DECREASE) General . . . . . . . . . . . . $76,786
$(93,030) $169,816 Special Revenue . . . . . . . . . . . .
325,361 303,943 21,418 Capital Projects. . . . . . . .
. . . . .72,911 127,361 (54,450)
Total Fund Balance. . . . . . . . . . .$475,058 $338,274
$136,784
Pension Funds. The State has two retirement systems, the Missouri
State Employees' Retirement Systems (MOSERS) and the Highway
Employees' and Highway Patrol Retirement System (HEHPRS).
Retirement benefits for members of the judiciary are included below
within MOSERS.
MOSERS HEHPRS
Pension benefit obligation $2,059,595
$835,865 Net Assets, available at cost
1,946,133 575,957 Unfunded pension benefit obligations
$ 113,462 $259,908
The unfunded pension benefit obligations of MOSERS increased during
the fiscal years 1991 and 1992, by .43% and 1.08%, respectively.
(This figure represents the unfunded pension benefit obligation as
a percentage of the State's annual covered payroll.) The increases
were due to funding less than the actuarially determined rate,
changes in actuarial assumptions, and plan amendments. On the
other hand, the unfunded pension benefit obligations of HEHPRS
decreased during both the fiscal year 1991 and the fiscal year
1992, by 12.5% and .3%, respectively.
Page 34
<PAGE>
Tax Limitation. Article X of Missouri's Constitution imposes
various restrictions on taxation and spending by the State and by
local governments. Section 16 of Article X generally requires that
property and other local taxes and state taxation and spending may
not be increased above the limitations set forth in Missouri's
Constitution without direct voter approval. Section 22 of Article
X limits the amount of taxes, licenses or other fees that may be
levied absent approval of a majority of the qualified voters.
Section 18 of Article X imposes a limit (the "Limit") on the amount
of taxes which may be imposed by the State in any fiscal year. The
Limit is tied to total State revenues for fiscal year 1980-81, as
defined, adjusted annually in accordance with a formula which is
tied to increases in the average personal income of Missouri for
certain designated periods. If the Limit is exceeded in any fiscal
year, a refund of the excess revenues (through a pro rata credit on
the state income tax return) may be required. The Limit can be
exceeded by a constitutional amendment, duly adopted by the people,
or if the State's General Assembly approves by a two-thirds vote of
each house an emergency declaration by the Governor.
Debt Administration. Article III, Section 37 of the Constitution
of the State of Missouri restricts the power of the State to create
debt without voter approval except to refund outstanding bonds and
to incur limited temporary liabilities and by reason of unforeseen
emergencies or deficiencies in revenue. Article VI, Section
26(a)-26(g) of Missouri's Constitution imposes limitations on the
ability of local governments to incur certain indebtness without
voter approval.
The amount of general obligation debt that can be issued by the
State is limited to the amount approved by citizen vote plus the
amount of $1 million. According to the Director of Division of
Accounting for the State of Missouri, in his letter dated December
11, 1992 directed to the then Governor of the State, the State's
debt limit at June 30, 1992 was $1,226,000,000, of which
$316,505,760 was unissued.
During fiscal year 1992, $23,000,000 of bonds were retired,
$145,725,000 of the bonds were refunded and $192,835,000 of new
bonds were issued. At year end, the total general obligation debt
outstanding was $804,225,000 and the interest rate range was
.05-9.7%, provided, however, no assurance can be given that the
bonds or other ultimate obligations which may be a part of this
Trust will bear rates of interest in the foregoing range.
General obligations of the State are currently rated AAA and Aaa by
Standard & Poor's Corporation and Moody's Investors Service, Inc.,
respectively. No assurance can be given, however, that the
economic and other factors on which these ratings are based will
continue or that particular bond issues may not be adversely
affected by changes in economic, political or other conditions.
Because some or all of the bonds that may be included in the Trust
are revenue or general obligations of local governments or
authorities, rather than general obligations of the State itself,
ratings on such bonds may be different from those given to general
obligations of the State.
Public School Desegregation Plans. Litigation has been pending in
Missouri federal courts since the 1970's alleging that St. Louis
and Kansas City, Missouri, schools are racially segregated in
violation of the United States Constitution. A desegregation plan
for St. Louis was approved in 1980 and remains in effect. With
regard to Kansas City, a desegregation plan was implemented in
1985, and on April 16, 1993, the United States District Court for
the Western District of Missouri ordered a two-year extension of
the desegregation plan. Under the plans, the State of Missouri has
incurred and continues to incur substantial costs.
The Kansas City, Missouri School District ("KCMSD") has already
budgeted $517 million for capital improvements to effect the
desegregation plan; however, these costs are expected to escalate,
and the scope of the total capital improvements program is unknown.
The State of Missouri is jointly and severally liable for the
KCMSD's share of the desegregation costs. The KCMSD has
accumulated debt of $87 million, and an additional approximately
$130 million is expected to be incurred in fiscal years 1993 and
1994. KCMSD operates at a substantial deficit, which is projected
to accumulate to as much as $300 million by the end of the decade.
Accordingly, no predictions can be made about the future financial
viability of the KCMSD or the effect of the possible insolvency of
KCMSD on the State of Missouri.
On May 14, 1993, the Missouri General Assembly approved a package
(the "Outstanding Schools Act") providing new procedures for
funding of public education. The Outstanding Schools Act was
signed into law on May 27, 1993, by Governor Mel Carnahan. The
revenue sources for the plan include a cap of the State deduction
for federal taxes paid by individuals at $5,000 on single returns
and $10,000 on joint returns. Previously, there was no limit on
the amount of federal taxes that could be deducted. A further
revenue source for the new plan is limiting the State deduction for
federal taxes paid by corporations at 50% and an increase in the
corporate income tax from 5% to 6.25%. According to projections
developed by the State Office of Administration, Division of Budget
and Planning, the amount and sources of funding for fiscal year
1994 are $76.4 million from the limitation of the federal income
tax deductions for individuals, and $29.3 million from the combined
effect of increased State corporate income tax rate and the 50% cap
of the State deduction for federal corporate income taxes. The
projections are based upon assumptions of a growth factor of 6% in
1994. The State has used growth factors of 5% in fiscal years 1995
and thereafter to project the impact of the plan through fiscal
year 1997 at $215.2 million from individuals and $95.2 million from
corporations. Finally, as a minimum, each school district must have
a property tax levy at $2.75, up from the $2.00 property tax levy
in use before the effective date of the plan. The maximum State
equalized tax levy was set at $4.60. The additional taxes imposed
by the Outstanding Schools Act will be subject to a Statewide
referendum if the State supreme court rules that the State has not
violated the State Constitution in the manner and amounts of
funding for public education.
No assurance can be given that the ultimate costs of the current
plans, new legislation or additional measures that are expected to
be implemented or ordered, which cannot currently be quantified,
will not adversely affect the finances of the State of Missouri,
the State's ability to pay the debt service on any of its
Obligations that may be held in the portfolio of the Trust, or the
market for Bonds held in the portfolio of the Trust or the Common
Shares of the Trust.
Page 35
<PAGE>
Litigation. The State is a party to 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. Adverse
judgements in these or other matters could have the potential for
either a significant loss of revenue or a significant unanticipated
expenditure by the State. In addition to the school desegregation
cases discussed above, the State is also subject to pending
litigation naming the State as a defendant on child welfare
payments. The plaintiffs in the welfare case allege that the State
did not follow federal regulations in assessing non-custodial
parents for child welfare payments. A United States District Court
Judge ruled that the State was liable for assessments in excess of
the amounts allowed by federal regulations. The judgement was
appealed to the 8th United States Circuit Court which upheld the
lower court's decision. The case has been remanded by the 8th
United States Circuit Court for further proceedings in the District
Court. The Office of Administration made a note specifically for
this case in the State's June 30, 1992 Financial Statement, and
declined to determine the potential impact on such financial
statement.
Other Issuers of Bonds. There are a number of state agencies,
instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties,
and the credit quality of the securities issued by them may vary
considerably from the credit quality of obligations backed by the
full faith and credit of the State.
New Jersey Trusts - Economic Factors
The portfolio of each New Jersey Trust consists primarily of
obligations issued by entities located in New Jersey.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,050 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 the
states in per capita personal income ($25,666).
The New Jersey Economic Policy Council, a statutory arm of the New
Jersey Department of Commerce and Economic Development, has
reported in New Jersey Economic Indicators, a monthly publication
of the New Jersey Department of Labor, Division of Labor Market and
Demographic Research, that in 1988 and 1989 employment in New
Jersey's manufacturing sector failed to benefit from the export
boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost
momentum. In the meantime, the prolonged fast growth in the State
in the mid-1980s resulted in a tight labor market situation, which
has led to relatively high wages and housing prices. This means
that, while the incomes of New Jersey residents are relatively
high, the State's business sector has become more vulnerable to
competitive pressures.
The onset of the national recession (which officially began in July
1990 according to the National Bureau of Economic Research) caused
an acceleration of New Jersey's job losses in construction and
manufacturing. In addition, the national recession caused an
employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in
the State rose from a low of 3.6% during the first quarter of 1989
to an estimated 6.9% in July 1992, which is slightly higher than
the national average of 6.8% in July 1993. 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 December 31,
1992, there was a total authorized bond indebtness of approximately
$8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds from which provision for
payment has been made through the sale and issuance of refunding
bonds) and $1.38 billion was unissued. The debt service obligation
for such outstanding indebtness 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, there
was a surplus in the general fund of $1 million. At the end of
Fiscal Year 1991, there was a surplus in the general fund of $1.4
million. New Jersey closed its Fiscal Year 1992 with a surplus of
$760.8 million. It is estimated that New Jersey closed its Fiscal
Year 1993 with a surplus of $385.8 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.
Page 36
<PAGE>
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 more that
$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 29, 1993 Governor Florio signed the New Jersey
Legislature's $15.9 billion budget for Fiscal Year 1994. The
balanced budget does not rely on any new taxes, college tuition
increases or any commuter fare increases, while providing a surplus
of more than $400 million. Whether the State can achieve a
balanced budget depends on its ability to enact and implement
expenditure reductions and to collect estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings
pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not
limited to, claims asserted against the State arising from alleged
torts, alleged breaches of contracts, condemnation proceedings and
other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are cases challenging the
following: the formula relating to State aid to public schools, the
method by which the State shares with its counties maintenance
recoveries and costs for residents in State institutions,
unreasonably low Medicaid payment rates for long-term facilities in
New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation
Fund (a fund established to provide money for use by the State to
remediate hazardous waste sites and to compensate other persons for
damages incurred as a result of hazardous waste discharge) based on
Federal preemption, various provisions, and the constitutionality,
of the Fair Automobile Insurance Reform Act of 1990, the State's
method of funding the judicial system, certain provisions of New
Jersey's hospital rate-setting system and recently enacted
legislation calling for a revaluation of several New Jersey public
employee pension funds in order to provide additional revenues for
the State's general fund. Adverse judgements in these and other
matters could have the potential for either a significant loss of
revenue or a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees seeking
recovery of monetary damages that are primarily paid out of the
fund created pursuant to the New Jersey Tort Claims Act. In
addition, at any given time, there are various numbers of contract
claims against the State and State agencies seeking recovery of
monetary damages. The State is unable to estimate its exposure for
these claims.
Debt Ratings. For many years prior to 1991, both Moody's and
Standard and Poor's have rated New Jersey general obligation bonds
Aaa and AAA, respectively. On July 3, 1991, however, Standard and
Poor's downgraded New Jersey general obligation bonds to AA+. On
June 4, 1992, Standard and Poor's placed New Jersey general
obligation bonds on Credit Watch with negative implications, citing
as its principal reason for its caution the unexpected denial by
the Federal Government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These
funds were critical to closing a $1 billion gap in the State's $15
billion budget for fiscal year 1992 which ended on June 30, 1992.
Under New Jersey state law, the gap in the current 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 reaffirmed its AA+ rating for New
Jersey general obligation bonds and removed the debt from its
Credit Watch list, although it stated that New Jersey's long-term
financial outlook is negative. Standard and Poor's was concerned
that the State was entering the 1993 fiscal year that began July 1,
1992, with a slim $26 million surplus and remained concerned about
whether the sagging State economy will recover quickly enough to
meet lawmakers' revenue projections. It also remained 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.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New
Jersey general obligation bonds to Aa1, stating that the reduction
reflected a developing pattern of reliance on nonrecurring measures
to achieve budgetary balance, four years of financial operations
marked by revenue shortfalls and operating deficits, and the
likelihood that serious financial pressures would persist.
Although New Jersey recently received $412 million in settlement of
its $450 million dispute with the federal government for
retroactive Medicaid reimbursements, neither Moody's Investors
Service, Inc. nor Standard and Poor's Corporation has revised its
rating for New Jersey general obligation bonds.
Page 37
<PAGE>
New York Trusts - Economic Factors
The portfolio of each New York Trust includes primarily obligations
issued by New York State (the "State"), by its various public
bodies (the "Agencies"), and/or by other entities located within
the State, including the City of New York (the "City").
Some of the more significant events relating to the financial
situation in New York are summarized below. This section provides
only a brief summary of the complex factors affecting the financial
situation in New York and is based in part on official statements
issued by, and on other information reported by, the State, the
City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional
economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market
value of New York Municipal Obligations held in the portfolio of
the Trusts or the ability of particular obligors to make timely
payments of debt service on (or relating to) those obligations.
(1) The State: The State has historically been one of the
wealthiest states in the nation. For decades, however, the State
economy has grown more slowly than that of the nation as a whole,
gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an
influx of generally less affluent residents. Regionally, the older
northeast cities have suffered because of the relative success that
the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major
cities have developed financial and business capabilities which
make them less dependent on the specialized services traditionally
available almost exclusively in the City.
The State has for many years had a very high state and local tax
burden relative to other states. The burden of State and local
taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate
within, the State.
Slowdown of Regional Economy. A national recession commenced in
mid-1990. The downturn continued throughout the State's 1990-91
fiscal year and was followed by a period of weak economic growth
during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow
faster than in 1992, but still at a very moderate rate, as compared
to other recoveries. The national recession has been more severe
in the State because of factors such as a significant retrenchment
in the financial services industry, cutbacks in defense spending,
and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1998, the State Legislature
approved a $32.08 billion budget. Following enactment of the
budget the 1993-94 State Financial Plan was formulated on April 16,
1993. This Plan projects General Fund receipts and transfers from
other funds at $32.4 billion and disbursements and transfers to
other funds at $32.3 billion. In comparison to the Governor's
recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan
reflects increases in both receipts and disbursements in the
General Fund of $811 million.
While a portion of the increased receipts was the result of a $487
million increase in the State's 1992-93 positive year- end margin
at March 31, 1993 to $671 million, the balance of such increased
receipts is based upon (i) a projected $269 million increase in
receipts resulting from improved 1992-93 results and the
expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as
reimbursements for indigent medical care, (iii) the early payment
of $50 million of personal tax returns in 1992-93 which otherwise
would have been paid in 1993-94; offset by (iv) the State's
Legislature's failure to enact $195 million of additional revenue-
raising recommendations proposed by the Governor. There can be no
assurance that all of the projected receipts referred to above will
be received.
Despite the $811 million increase in disbursements included in the
1993-94 State Financial Plan, a reduction in aid to some local
government units can be expected. To offset a portion of such
reductions, the 1993-94 State Financial Plan contains a package of
mandate relief, cost containment and other proposals to reduce the
costs of many programs for which local governments provide funding.
There can be no assurance, however, that localities that suffer
cuts will not be adversely affected, leading to further requests
for State financial assistance.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs
at current levels. To address any potential budgetary imbalance,
the State may need to take significant actions to align recurring
receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end
deposit to the refund reserve account of $671 million, General Fund
receipts in 1992-93 would have been $716 million higher than
originally projected. This year-end deposit effectively reduced
1992-93 receipts by $671 million and made those receipts available
for 1993-94.
The State's favorable performance primarily resulted from income
tax collections that were $700 million higher than projected which
reflected both stronger economic activity and tax-induced one-time
acceleration of income into 1992. In other areas larger than
projected business tax collections and unbudgeted receipts offset
the loss of $200 million of anticipated Federal reimbursement and
losses of, or shortfalls in, other projected revenue sources.
For 1992-93 disbursements and transfers to other funds (including
the deposit to the refund reserve account discussed above) totalled
$30.8 billion, an increase of $45 million above projections in
April 1992.
Page 38
<PAGE>
Fiscal year 1992-93 was the first time in four years that the State
did not incur a cash-basis operating deficit in the
General Fund requiring the issuance of deficit notes or other
bonds, spending cuts or other revenue raising measures.
Indebtness. As of March 31, 1993, the total amount of long-term
State general obligation debt authorized but unissued stood at $2.4
billion. As of the same date, the State had approximately $5.4
billion in general obligation bonds. The State issued $850 million
in tax and revenue anticipation notes ("TRANS") on 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 projects that its borrowings for capital purposes during
the State's 1993-94 fiscal year will consist of $460 million in
general obligation bonds and $140 million in new commercial paper
issuances. In addition, the State expects to issue $140 million in
bonds for the purpose of redeeming outstanding bond anticipation
notes. The Legislature has authorized the issuance of up to $65
million in certificates of participation during the State's 1993-94
fiscal year for personal and real property acquisitions. The
projection of the State regarding its borrowings for the 1993-94
fiscal year may change if actual receipts fall short of State
projections or if other circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit
corporation empowered to issue long-term obligations to fund
certain payments to local governments traditionally funded through
the State's annual seasonal borrowing. To date, LGAC has issued
bonds to provide net proceeds of $3.28 billion. LGAC has been
authorized to issue additional bonds to provide net proceeds of
$703 million during the State's 1993-94 fiscal years.
Ratings. The $850 million in TRANS issued by the State in April
1993 were rated SP-1 Plus by S&P on April 26, 1993, and MIG-1 by
Moody's on April 26, 1993 which represents the highest ratings
given by such agencies and the first time the State's TRANS have
received these ratings since its May 1989 TRANS issuance. Both
agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A
on April 26, 1993, and S&P's rating stood at A- with a stable
outlook, an improvement from S&P's negative outlook prior to April
1993. Previously, Moody's lowered its rating to A on June 6, 1990,
its rating having been A1 since May 27, 1986. S&P lowered its
rating from A to A- on January 13, 1992. S&P's previous ratings
were A from March 1990 to January 1992, AA- from August 1987 to
March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation
bonds, and S&P, in improving its outlook on such bonds from
negative to stable, noted the State's improved fiscal condition and
reasonable revenue assumptions contained in the 1993-94 State
budget.
(2) The City and the Municipal Assistance Corporation ("MAC"): The
City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State
in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a
number of steps to assist the City in returning to fiscal
stability. Among other actions, the State Legislature (i) created
MAC to assist with long-term financing for the City's short-term
debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve
the City's budgets and City four-year financial plans (the
financial plans also apply to certain City- related pubic agencies
(the "Covered Organizations")).
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt,
defaulted on certain of its short-term notes. Shortly after the
UDC default, the City entered a period of financial crisis. Both
the State Legislature and the United States Congress enacted
legislation in response to this crisis. During 1975, the State
Legislature (i) created MAC to assist with long-term financing for
the City's short- term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board") to
review and approve the City's budgets and City four-year financial
plans (the financial plan also applies 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'
