<PAGE>
File No. 2-89294 CIK #740222
Securities and Exchange CommissionWashington, D. C. 20549
Post-Effective
Amendment No. 10
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
Ohio Tax-Exempt Bond Trust Series 4
Name and executive office address of Depositor:
Kemper Unit Investment Trusts
(a service of Kemper Securities, Inc.)
77 West Wacker - 29th Floor
Chicago, Illinois 60601
Name and complete address of agent for service:
Michael J. Thoms
77 West Wacker - 29th Floor
Chicago, Illinois 60601
( X ) Check box if it is proposed that this filing will
become effective at 2:00 p.m. on December 29, 1994
pursuant to paragraph (b) of Rule 485.
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KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
PART ONE
THE DATE OF THIS PART ONE IS THAT DATE
WHICH IS SET FORTH IN PART TWO
OF THE PROSPECTUS
Each State Trust of the Kemper Tax-Exempt Income Trust, Multi-State
Series, Series 1-10 of the Ohio Tax-Exempt Bond Trust and Kemper Defined Funds
(Tax-Exempt Portfolio) was formed for the purpose of gaining interest income
free from Federal, State and, where applicable, local income taxes and/or
property taxes while conserving capital and diversifying risks by investing in
fixed portfolios of Municipal Bonds consisting of obligations issued primarily
by or on behalf of the State for which such Trust is named or counties,
municipalities, authorities or political subdivisions thereof.
Units of the Trust are not deposits or obligations of, or guaranteed
by, any bank, and Units are not federally insured or otherwise protected by the
Federal Deposit Insurance Corporation and involve investment risk including
loss of principal.
This Prospectus is in two parts. Read and retain both parts for
future reference.
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,
A SERVICE OF KEMPER SECURITIES, INC.
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.
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TABLE OF CONTENTS
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<S> <C> <C> <C>
SUMMARY . . . . . . . . . . . . . . . . . 3 MARKET FOR UNITS . . . . . . . . . . . . 88
The Trust . . . . . . . . . . . . . . . 3
Public Offering Price . . . . . . . . . 4 REDEMPTION . . . . . . . . . . . . . . . 88
Interest and Principal Distributions . 4 Computation of Redemption Price . . . . 90
Reinvestment . . . . . . . . . . . . . 4
Estimated Current Return and UNITHOLDERS . . . . . . . . . . . . . . . 90
Estimated Long-Term Return . . . . . 4 Ownership of Units . . . . . . . . . . 90
Market for Units . . . . . . . . . . . 5 Distributions to Unitholders . . . . . 91
Statements to Unitholders . . . . . . . 93
THE TRUST . . . . . . . . . . . . . . . . 6 Rights of Unitholders . . . . . . . . . 94
PORTFOLIOS . . . . . . . . . . . . . . . 7 INVESTMENT SUPERVISION . . . . . . . . . 94
Portfolio Risk Information . . . . . . 8
ADMINISTRATION OF THE TRUST . . . . . . . 95
DISTRIBUTION REINVESTMENT . . . . . . . . 15 The Trustee . . . . . . . . . . . . . . 95
The Evaluator . . . . . . . . . . . . . 96
INTEREST, ESTIMATED LONG-TERM RETURN Amendment and Termination . . . . . . . 97
AND ESTIMATED CURRENT RETURN . . . . . . 15 Limitations on Liability . . . . . . . 97
FEDERAL TAX STATUS OF THE STATE EXPENSES OF THE TRUST . . . . . . . . . . 98
TRUSTS . . . . . . . . . . . . . . . . 16
THE SPONSOR . . . . . . . . . . . . . . 99
DESCRIPTION AND STATE TAX STATUS OF LEGAL OPINIONS . . . . . . . . . . . . . 100
THE STATE TRUSTS . . . . . . . . . . . 20
Arizona Trusts . . . . . . . . . . . 20 INDEPENDENT AUDITORS . . . . . . . . . . 100
Arkansas Trusts . . . . . . . . . . . 24
California Trusts . . . . . . . . . . 26 DESCRIPTION OF SECURITIES
Colorado Trusts . . . . . . . . . . . 35 RATINGS . . . . . . . . . . . . . . . . 100
Kansas Trusts . . . . . . . . . . . . 39
Kentucky Trusts . . . . . . . . . . . 41
Michigan Trusts . . . . . . . . . . . 42 ---------------------------------------------
Minnesota Trusts . . . . . . . . . . 46 Essential Information*
Missouri Trusts . . . . . . . . . . . 48 Report of Independent Auditors*
New Jersey Trusts . . . . . . . . . . 51 Statement of Assets and Liabilities*
New York Trusts . . . . . . . . . . . 55 Statement of Operations*
North Carolina Trusts . . . . . . . . 67 Statement of Changes in Net Assets*
Ohio Trusts . . . . . . . . . . . . . 71 Schedule of Investments*
South Carolina Trusts . . . . . . . . 76 Notes to Schedule of Investments*
Virginia Trusts . . . . . . . . . . . 80 Notes to Financial Statements*
PUBLIC OFFERING OF UNITS . . . . . . . . 83
Public Offering Price . . . . . . . . 83 * INFORMATION ON THESE ITEMS APPEARS IN PART TWO FOR
Accrued Interest . . . . . . . . . . 85 THE APPROPRIATE STATE TRUST
Purchased and Daily Accrued
Interest . . . . . . . . . . . . . 86
Public Distribution of Units . . . . 87
Profits of Sponsor . . . . . . . . . 88
</TABLE>
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KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
SUMMARY
THE TRUST. Kemper Tax-Exempt Income Trust, Multi-State Series, Ohio
Tax-Exempt Bond Trust, Series 1-10 and Kemper Defined Funds (Tax-Exempt
Portfolio) (collectively, the "Trust") are each a unit investment trust
consisting of a number of diversified portfolios designated as the State
Trusts. Each State Trust consists of obligations ("Municipal Bonds",
"Securities" or "Bonds") issued primarily by or on behalf of the State for
which such State Trust is named or counties, municipalities, authorities or
political subdivisions thereof.
Each State Trust's investment objective is interest income which is
exempt from Federal, State and, where applicable, local income taxes and/or
property taxes, while conserving capital and diversifying risks by investing
in fixed portfolios of Municipal Bonds consisting of obligations issued
primarily by or on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions thereof. There
is, of course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in
the category "BBB" or better by Standard & Poor's Corporation ("Standard &
Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's") on
the Date of Deposit or were unrated. However, if any Municipal Bonds were
unrated on the Date of Deposit, they must have had, in the opinion of the
Sponsor, credit characteristics equivalent to Bonds rated at least "BBB" or
"Baa." Municipal Bonds which are rated "BBB" or "Baa" are regarded as having
an adequate capacity to pay interest and repay principal but may lack
outstanding credit characteristics and, in fact, have speculative
characteristics as well. Ratings of the Municipal Bonds may have changed since
the Date of Deposit. See "Description of Securities Ratings" herein and the
"Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate Trust, 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 a State Trust and any profit or loss realized on the sale of Units
will accrue to the Sponsor and/or the firm reselling such Units. Offerees in
the States of Indiana, Virginia and Washington may only purchase Units of an
Indiana, Virginia or Washington Trust, respectively.
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PUBLIC OFFERING PRICE. The Public Offering Price per Unit of each
State Trust is equal to a pro rata share of the aggregate bid prices of the
Municipal Bonds in such State Trust plus or minus a pro rata share of cash, if
any, in the Principal Account, held or owned by the State Trust plus, in the
case of Kemper Defined Funds Purchased Interest, plus a sales charge shown
under "Public Offering of Units." In addition, there will be added to each
transaction in a State Trust an amount equal to the accrued interest ("Daily
Accrued Interest" in the case of Kemper Defined Funds) from the last Record
Date of such State Trust to the date of settlement (five business days after
order). The sales charge is reduced on a graduated scale as indicated under
"Public Offering of Units-Public Offering Price."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated
annual interest income to be received by each State Trust, after deduction of
estimated expenses, will be made monthly unless the Unitholder elects to
receive such distributions quarterly or semi-annually. In the case of Kemper
Defined Funds, distributions of the estimated annual interest income to be
received by each State Trust will be made monthly. Distributions will be paid
on the Distribution Dates to Unitholders of record of such State Trust on the
Record Dates set forth for the applicable option. See "Essential Information"
in Part Two. Only monthly distributions of estimated annual interest income
will be available of Kemper Defined Funds Unitholders.
The distribution of funds, if any, in the Principal Account of each
State Trust, will be made as provided in "Unitholders - Distribution to
Unitholders."
REINVESTMENT. Each Unitholder of a Trust Fund offered herein may
elect to have distributions of principal or interest or both automatically
invested without charge in shares of certain mutual funds sponsored by Kemper
Financial Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The
Estimated Current Return is calculated by dividing the estimated net annual
interest income per Unit by the Public Offering Price of such State Trust. The
estimated net annual interest income per Unit will vary with changes in fees
and expenses of such State Trust and with the principal prepayment, redemption,
maturity, exchange or sale of Securities while the Public Offering Price will
vary with changes in the bid price of the underlying Securities and with
changes in Purchased Interest for Kemper Defined Funds; therefore, there is no
assurance that the present Estimated Current Returns will be realized in the
future. Estimated Long-Term Return is calculated using a formula which (1)
takes into consideration, and determines and factors in the relative weightings
of, the market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirements of all of
the Securities in the State Trust and (2) takes into account the expenses and
sales charge associated with each State Trust Unit. Since the market values
and estimated retirements of the Securities and the expenses of the State Trust
will change, there is no assurance that the present Estimated Long-Term Return
will be realized in the future. Estimated Current Return and Estimated
Long-Term Return are expected to differ because the calculation of Estimated
Long-Term Return reflects the estimated date and amount of principal returned
while Estimated Current Return calculations include only net annual interest
income and Public Offering Price.
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MARKET FOR UNITS. While under no obligation to do so, the Sponsor
intends to and certain of the other Underwriters may, subject to change at any
time, maintain a market for the Units of each State Trust and to continuously
offer to repurchase such Units at prices which are based on the aggregate bid
side evaluation of the Municipal Bonds in each State Trust plus accrued
interest (which, in the case of Kemper Defined Funds, consists of Purchased
Interest and Daily Accrued Interest). If such a market is not maintained and
no other over-the-counter market is available, Unitholders will still be able
to dispose of their Units through redemption by the Trustee at prices based
upon the aggregate bid price of the Municipal Bonds in such State Trust. See
"Redemption."
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KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
THE TRUST
Each State Trust Fund is one of a series of unit investment trusts
created by the Sponsor under the name Ohio Tax-Exempt Bond Trust, or under the
name Kemper Tax-Exempt Income Trust, Multi-State Series or under the name
Kemper Defined Funds (Tax-Exempt Portfolio), all of which are similar, and each
of which was created under the laws of the State of Missouri pursuant to a
Trust Agreement*1 (the "Agreement") (such "State Trusts" being collectively
referred to herein as the "Trust"). Kemper Unit Investment Trusts, a service
of Kemper Securities, Inc., acts as Sponsor and Evaluator and Investors
Fiduciary Trust Company acts as Trustee. For information regarding the
relationship of Kemper Unit Investment Trusts and Investors Fiduciary Trust
Company, see "The Sponsor."
The State Trusts may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of tax-exempt, fixed income
securities with greater diversification than they might be able to acquire
individually. In addition, Municipal Bonds of the type deposited in the State
Trusts are often not available in small amounts.
Each State Trust's investment objective is interest income which is
exempt from Federal, State and, where applicable, local income and/or property
taxes, while conserving capital and diversifying risks by investing in fixed
portfolios of Municipal Bonds consisting of obligations issued primarily by or
on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof. There is, of
course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in
the category "BBB" or better by either Standard & Poor's Corporation ("Standard
& Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's")
on the Date of Deposit or were unrated. However, if any Municipal Bonds were
unrated on the Date of Deposit, they must have had, in the opinion of the
Sponsor, credit characteristics equivalent to Municipal Bonds rated at least
"BBB" or "Baa". Municipal Bonds which are rated "BBB" or
- ------------------
* Reference is hereby made to said Trust Agreement, and any
statements contained herein are qualified in their entirety by the
provisions of said Trust Agreement.
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"Baa" are regarded as having an adequate capacity to pay interest and
repay principal but may lack outstanding credit characteristics and, in fact,
have speculative characteristics as well. Ratings of the Municipal Bonds may
have changed since the Date of Deposit. See "Description of Securities
Ratings" herein and the "Schedule of Investments" in Part Two.
Proceeds of the maturity, redemption or sale of the Municipal Bonds in
a State Trust, unless used to pay for Units tendered for redemption, will be
distributed to Unitholders thereof and will not be utilized to purchase
additional Municipal Bonds.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate State Trust, 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 State Trusts and any profit or loss realized on the sale of Units
will accrue to the Sponsor and/or the firm reselling such Units. To the extent
that Units of any State Trust are redeemed, the principal amount of Municipal
Bonds in such State Trust will be reduced and the undivided fractional interest
represented by each outstanding Unit of such State Trust will increase. See
"Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based
largely upon the experience and judgment of the Sponsor. In making such
selections the Sponsor considered the following factors, among others, to be of
primary importance: (a) Standard & Poor's or Moody's ratings of the Municipal
Bonds; (b) the price of the Municipal Bonds relative to other issues of similar
quality and maturity; (c) the diversification of the Municipal Bonds as to
purpose of issue; (d) the income to the Unitholders of the State Trust; and (e)
the dates of maturity of the Bonds. Subsequent to the Date of Deposit, a
Municipal Bond may have ceased to be rated or its rating may have been reduced
below the minimum required as of the Date of Deposit. Neither event requires
the elimination of such investment from a State Trust, but may be considered in
the Sponsor's determination to direct the Trustee to dispose of such
investment. See "Investment Supervision" herein and the "Schedule of
Investments" in Part Two.
The Sponsor may not alter the portfolio of a State Trust except that
certain of the Municipal Bonds may be sold upon the happening of certain
extraordinary circumstances described under "Investment Supervision." Certain
of the Municipal Bonds in the State Trusts are subject to redemption prior to
their stated maturity date, call or redemption pursuant to sinking fund
provisions, call provisions or extraordinary optional or mandatory redemption
provisions or otherwise. A sinking fund is a reserve fund accumulated over a
period of time for retirement of debt. A callable debt obligation is one which
is subject to redemption or refunding prior to maturity at the option of the
issuer. A refunding is a method by which a debt obligation is redeemed, at or
before maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a
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discount from par. Accordingly, any such call, redemption, sale or maturity
will reduce the size and diversity of such Series, and the net annual interest
income of the Series and may reduce the Estimated Long-Term Return and/or
Estimated Current Return. See "Interest and Estimated Long-Term and Current
Returns." Each Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the project for
which the proceeds of the Municipal Bonds were used; an exercise by a local,
State or Federal governmental unit of its power of eminent domain to take all
or substantially all of the project for which the proceeds of the Municipal
Bonds were used; changes in the economic availability of raw materials,
operating supplies or facilities or technological or other changes which render
the operation of the project for which the proceeds of the Municipal Bonds were
used uneconomic; changes in law or an administrative or judicial decree which
renders the performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive liabilities, such as
taxes, not imposed on the date the Municipal Bonds are issued on the issuer of
the Municipal Bonds or the user of the proceeds of the Municipal 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
Municipal Bonds; an overestimate of the costs of the project to be financed
with the proceeds of the Municipal Bonds resulting in excess proceeds of the
Municipal Bonds which may be applied to redeem Municipal Bonds; or an
underestimate of a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any
default, failure or defect in any Municipal Bond.
PORTFOLIO RISK INFORMATION. An investment in Units of a Series of the
State Trusts should be made with an understanding of the risks which an
investment in fixed rate debt obligations may entail, including the risk that
the value of the portfolio and hence of the Units will decline with increases
in interest rates. The value of the underlying Municipal Bonds will fluctuate
inversely with changes in interest rates. The uncertain economic conditions of
recent years, together with the fiscal measures adopted to attempt to deal with
them, have resulted in wide fluctuations in interest rates and, thus, in the
value of fixed rate debt obligations generally and long-term obligations in
particular. The Sponsor cannot predict whether such fluctuations will continue
in the future.
Certain of the Municipal Bonds in the State Trusts may be general
obligations of a governmental entity that are backed by the taxing power of
such entity. All other Municipal Bonds in the State Trusts are revenue bonds
payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing
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power for the payment of principal and interest. Revenue bonds, on the other
hand, are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. There are, of course, variations in the
security of the different Municipal Bonds in the State Trusts, both within a
particular classification and between classifications, depending on numerous
factors.
Certain Series of the State Trusts contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services provided by
hospitals and other health care facilities, including nursing homes. In view
of this an investment in such Series should be made with an understanding of
the characteristics of such issuers and the risks that such an investment may
entail. Ratings of bonds issued for health care facilities are often based on
feasibility studies that contain projections of occupancy levels, revenues and
expenses. A facility's gross receipts and net income available for debt
service will be affected by future events and conditions including, among other
things, demand for services and the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, economic developments in the service area, competition, efforts
by insurers and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar
third party payor programs, and government regulation. Federal legislation has
been enacted which implemented a system of prospective Medicare reimbursement
which may restrict the flow of revenues to hospitals and other facilities which
are reimbursed for services provided under the Medicare program. Future
legislation or changes in the areas noted above, among other things, would
affect all hospitals to varying degrees and, accordingly, any adverse changes
in these areas may adversely affect the ability of such issuers to make payment
of principal and interest on Municipal Bonds held in such Series. Such adverse
changes also may adversely affect the ratings of the Municipal Bonds held in
such State Trusts. Hospitals and other health care facilities are subject to
claims and legal actions by patients and others in the ordinary course of
business. Although these claims are generally covered by insurance, there can
be no assurance that a claim will not exceed the insurance coverage of a health
care facility or that insurance coverage will be available to a facility. In
addition, a substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health care facility.
Certain hospital bonds may provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity or in
other circumstances. For example, certain hospitals may have the right to call
bonds at par if the hospital may legally be required because of the bonds to
perform procedures against specified religious principles. Certain FHA-insured
bonds may provide that all or a portion of those bonds, otherwise callable at a
premium, can be called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid receivables
may be uncertain and, if the bond obligation is secured by the hospital
facilities, legal restrictions on the ability to foreclose upon the facilities
and the limited alternative uses to which a hospital can be put may reduce
severely its collateral value.
Certain of the Municipal Bonds in the State Trusts 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
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of events such as sale of the mortgaged premises, default, condemnation or
casualty loss. Because these Municipal Bonds are subject to extraordinary
mandatory redemption in whole or in part from such prepayments of mortgage
loans, a substantial portion of such Municipal Bonds will probably be redeemed
prior to their scheduled maturities or even prior to their ordinary call dates.
The redemption price of such issues may be more or less than the offering price
of such Municipal Bonds. 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 or, in
some cases, from the sale by the Municipal Bond issuer of the mortgage loans.
Failure of the originating financial institutions to make mortgage loans would
be due principally to the interest rates on mortgage loans funded from other
sources becoming competitive with the interest rates on the mortgage loans
funded with the proceeds of the single family mortgage revenue 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,
which Section contains certain ongoing requirements relating to the use of the
proceeds of such Municipal Bonds in order for the interest on such Municipal
Bonds to retain its tax-exempt status. In each case, the issuer of the
Municipal Bonds has covenanted to comply with applicable ongoing requirements
and bond counsel to such issuer has issued an opinion that the interest on the
Municipal Bonds is exempt from Federal income tax under existing laws and
regulations. There can be no assurances that the ongoing requirements will be
met. The failure to meet these requirements could cause the interest on the
Municipal Bonds to become taxable, possibly retroactively from the date of
issuance.
Certain of the Municipal Bonds in the State Trusts may be obligations
of issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. 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,
increases in taxes, employment and income conditions prevailing in local labor
markets, utility costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations, the
appropriation of subsidies and social economic trends affecting the localities
in which the projects are located. The occupancy of housing projects may be
adversely affected by high rent levels and income limitations imposed under
Federal and state programs. Like single family mortgage revenue bonds,
multi-family mortgage revenue bonds are subject to redemption and call
features, including extraordinary mandatory redemption features, upon
prepayment, sale or non-origination of mortgage loans as well as upon the
occurrence of other events. Certain issuers of single or multi-family housing
bonds have considered various ways to redeem bonds they have issued prior to
the stated first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the State Trusts, the Sponsor has not had any
direct communications with any of the issuers thereof, but at the initial Date
of Deposit it was not aware that any of the respective issuers of such
Municipal Bonds were actively considering the redemption of such Municipal
Bonds prior to their respective stated initial call dates. However, there can
be no assurance that an issuer of a Municipal Bond in the State Trusts will not
attempt to so redeem a Municipal Bond in the State Trusts.
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Certain of the Municipal Bonds in the State Trusts may be obligations
of issuers whose revenues are derived from the sale of water and/or sewerage
services. Water and sewerage bonds are generally payable from user fees.
Problems faced by such issuers include the ability to obtain timely and
adequate rate increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs, the limitations
on operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees. Because of the relatively short history of solid waste
disposal bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing environmental
regulation on the Federal, State and local level has a significant impact on
waste disposal facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and changing equipment
standards and required methods of operation and the cost of disposing of the
waste residue that remains after the disposal process in an environmentally
safe manner. In addition, waste disposal facilities frequently face
substantial opposition by environmental groups and officials to their location
and operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the facilities'
services. Finally, waste disposal facilities are concerned with many of the
same issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be obligations
of issuers whose revenues are primarily derived from the sale of electric
energy or natural gas. Utilities are generally subject to extensive regulation
by state utility commissions which, among other things, establish the rates
which may be charged and the appropriate rate of return on an approved asset
base. The problems faced by such issuers include the difficulty in obtaining
approval for timely and adequate rate increases from the governing public
utility commission, the difficulty in financing large construction programs,
the limitations on operations and increased costs and delays attributable to
environmental considerations, increased competition, recent reductions in
estimates of future demand for electricity in certain areas of the country, the
difficulty of the capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy conservation.
Issuers may have experienced 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 such Municipal Bonds to make payments of
principal and/or interest on such Municipal Bonds. The ability of State and
local joint action power agencies to make payments on bonds they have issued is
dependent in large part on payments made to them pursuant to power supply or
similar agreements. Courts in Washington and Idaho have held that certain
agreements between the Washington Public Power Supply System ("WPPSS") and the
WPPSS participants are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions are not
specifically applicable to agreements entered into by public entities in other
states, they may cause a reexamination of
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the legal structure and economic viability of certain projects financed by
joint action power agencies, which might exacerbate some of the problems
referred to above and possibly lead to legal proceedings questioning the
enforceability of agreements upon which payment of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts 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 or corporate guarantor. Corporate operators
or guarantors may be affected by many factors which may have an adverse impact
on the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from
leveraged buy-outs or takeovers. The IRBs in the State Trusts may be subject
to special or extraordinary redemption provisions which may provide for
redemption at par or, with respect to original issue discount bonds, at issue
price plus the amount of original issue discount accreted to the redemption
date plus, if applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in the State
Trusts prior to the stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be obligations
which are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from signatory
airlines pursuant to use agreements which consist of annual payments for
leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry
is experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Municipal Bonds related to other facilities is
dependent on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
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Certain of the Municipal Bonds in the State Trusts may be obligations
of issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes, or
for higher education systems, from tuition, dormitory revenues, grants and
endowments. General problems relating to school bonds include litigation
contesting the state constitutionality of financing public education in part
from ad valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation or
legislation on this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating to college
and university obligations would include the prospect of a declining percentage
of the population consisting of "college" age individuals, possible inability
to raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding and new
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. In addition, the ability of universities
and colleges to meet their obligations is dependent upon various factors,
including the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and restrictions on the use
of endowments and other funds, the quality and maintenance costs of campus
facilities, and, in the case of public institutions, the financial condition of
the relevant state or other governmental entity and its policies with respect
to education. The institution's ability to maintain enrollment levels will
depend on such factors as tuition costs, geographic location, geographic
diversity and quality of student body, quality of the faculty and the diversity
of program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the URBs. Regardless of the structure,
payment of the URBs is solely dependent upon the creditworthiness of the
operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease
revenue bonds whose revenues are derived from lease payments made by a
municipality or other political subdivision which is leasing equipment or
property for use in its operation. The risks associated with owning Municipal
Bonds of this nature include the possibility that appropriation of funds for a
particular project or equipment may be discontinued. The Sponsor cannot
predict the likelihood of nonappropriation of funds for these types of lease
revenue Municipal Bonds. Lease revenue Municipal Bonds may also be subject to
the risk of abatement in many states -- rental obligations cease in the event
that damage, destruction or condemnation of the project prevents its use by the
lessee. (In these cases, insurance provisions designed to alleviate this risk
become important credit factors.) In the event of default by the lessee
government, there may be significant legal and/or practical difficulties
involved in the re-letting or sale of the project. Some of these issues,
particularly those for equipment purchase, contain the so-called "substitution
safeguard", which bars the lessee government, in the event its defaults on its
rental payments, from the purchase or use of similar equipment for a certain
period of time. This safeguard is designed to insure that the lessee
government will appropriate even though it is not legally obligated to do so,
but its legality remains untested in most, if not all, states.
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Certain of the Municipal Bonds in the State Trusts may be "zero
coupon" bonds, i.e., an original issue discount bond that does not provide for
the payment of current interest. Zero coupon bonds are purchased at a deep
discount because the buyer receives only the right to receive a final payment
at the maturity of the bond and does not receive any periodic interest
payments. The effect of owning deep discount bonds which do not make current
interest payments (such as the zero coupon bonds) is that a fixed yield is
earned not only on the original investment but also, in effect, on all discount
earned during the life of such obligation. This implicit reinvestment of
earning at the same rate eliminates the risk of being unable to reinvest the
income on such obligation at a rate as high as the implicit yield on the
discount obligation, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are securities of comparable quality which pay
interest currently. For the Federal tax consequences of original issue
discount bonds such as the zero coupon bonds, see "Federal Tax Status of the
State Trusts."
Investors should be aware that many of the Municipal Bonds in the
State Trusts are subject to continuing requirements such as the actual use of
Municipal Bond proceeds or manner of operation of the project financed from
Municipal Bond proceeds that may affect the exemption of interest on such
Municipal Bonds from Federal income taxation. Although at the time of issuance
of each of the Municipal Bonds in the State Trusts an opinion of bond counsel
was rendered as to the exemption of interest on such obligations from Federal
income taxation, 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 Municipal 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 Municipal Bonds, thereby reducing the value of the
Municipal Bonds and subjecting Unitholders to unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivision or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent
"moral obligations" of a governmental entity. In the event that the issuer of
the Municipal Bond defaults in the repayment thereof, the governmental entity
lawfully may, but is not obligated to, discharge the obligation of the issuer
to repay such Municipal Bond. If an issuer of moral obligation bonds is unable
to meet its obligations, the repayment of such Municipal Bonds becomes a moral
commitment but not a legal obligation of the State or municipality in question.
Even though the State may be called on to restore any deficits in capital
reserve funds of the agencies or authorities which issued the bonds, any
restoration generally requires appropriation by the State legislature and
accordingly does not constitute a legally enforceable obligation or debt of the
State. The agencies or authorities generally have no taxing power.
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To the best of the Sponsor's knowledge, as of the date of this
Prospectus, there is no litigation pending with respect to any Municipal Bond
which might reasonably be expected to have a material adverse effect on the
Trust or any State Trust. Although the Sponsor is unable to predict whether
any other litigation may be instituted, or if instituted, whether such
litigation might have a material adverse effect on the Trust, the Trust
received copies of the opinions of bond counsel given to the issuing
authorities at the time of original delivery of each of the Municipal Bonds to
the effect that the Municipal Bonds had been validly issued and that the
interest thereon is exempt from Federal income taxes.
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have distributions of
principal (including capital gains, if any) or interest or both automatically
invested without charge in shares of any mutual fund underwritten or advised by
Kemper Financial Services, Inc., an affiliate of the Sponsor, (the "Kemper
Funds") which are registered in the Unitholder's state of residence, other than
those Kemper Funds sold with a contingent deferred sales charge. Since the
portfolio securities and investment objectives of such Kemper Funds may differ
significantly from that of the Trust, Unitholders should carefully consider the
consequences, including the fact that distributions from such Kemper Funds may
be taxable, before selecting such Kemper Funds for reinvestment. Detailed
information with respect to the investment objectives and the management of the
Kemper Funds is contained in their respective prospectuses, which can be
obtained from the Sponsor upon request. An investor should read the
appropriate prospectus prior to making the election to reinvest.
Unitholders who are receiving distributions in cash may elect to
participate in distribution reinvestment by filing with the Program Agent an
election to have such distributions reinvested without charge. Such election
must be received by the Program Agent at least ten days prior to the Record
Date applicable to any distribution in order to be in effect for such Record
Date. Any such election shall remain in effect until a subsequent notice is
received by the Program Agent. See "Unitholders - Distributions to
Unitholders."
The Program Agent is Investors Fiduciary Trust Company. All inquiries
concerning participation in distribution reinvestment should be directed to the
Kemper Service Company, a service agent for the Program Agent at P.O. Box
419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST, ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
As of the opening of business on the date indicated therein, the
Estimated Current Returns and the Estimated Long-Term Returns for each State
Trust were as set forth under "Essential Information" for the applicable State
Trust in Part Two of this Prospectus. Estimated Current Returns are calculated
by dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will vary
with changes in fees and expenses of the Trustee, the Sponsor and the Evaluator
and with the principal prepayment, redemption, maturity, exchange or sale of
Securities while the
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Public Offering Price will vary with changes in the offering price of the
underlying Securities and with the changes in Purchased Interest in the case of
Kemper Defined Funds; therefore, there is no assurance that the present
Estimated Current Returns will be realized in the future. Estimated Long-Term
Returns are calculated using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market values, yields
(which takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in the State
Trust and (2) takes into account the expenses and sales charge associated with
each State Trust Unit. Since the market values and estimated retirements of
the Securities and the expenses of the State Trust will change, there is no
assurance that the present Estimated Long-Term Returns will be realized in the
future. Estimated Current Returns and Estimated Long-Term Returns are expected
to differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current Returns
calculations include only net annual interest income and Public Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts were accompanied by
copies of opinions of bond counsel to the issuers thereof, given at the time of
original delivery of the Municipal Bonds, to the effect that the interest
thereon is excludable from gross income for Federal income tax purposes. In
addition, bond counsel to the issuing authorities rendered opinions as to the
exemption of interest on such Municipal Bonds, when held by residents of the
State in which the issuers of such Municipal Bonds are located, from State
income taxes and, where applicable, local income taxes. Gain realized on the
sale or redemption of the Municipal Bonds by the Trustee or of a Unit by a
Unitholder is, however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in respect of
accrued interest or earned original issue discount. It should be noted that
under legislation described below that subjects accretion of market discount on
tax-exempt bonds to taxation as ordinary income, gain realized on the sale or
redemption of Municipal Bonds by the Trustee or of Units by a Unitholder that
would have been treated as capital gain under prior law is treated as ordinary
income to the extent it is attributable to accretion of market discount.
Market discount can arise based on the price a Trust Fund pays for Municipal
Bonds or the price a Unitholder pays for his or her Units.
In connection with the offering of Units of the State Trusts, neither
the Sponsor, the Trustee, the Auditors nor their respective counsel have made
any review of the proceedings relating to the issuance of the Municipal Bonds
or the bases for such opinions.
At the time of the closing for each Trust, except with respect to the
various series of Ohio Tax-Exempt Bond Trust, Chapman and Cutler, counsel for
the Sponsor, rendered an opinion under then existing law substantially to the
effect that:
Each State Trust is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original issue discount on
Bonds which is excludable from gross income under the
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Internal Revenue Code of 1986 (the "Code") will retain its status when
distributed to Unitholders, except to the extent such interest is subject to
the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted below.
Each Unitholder is considered to be the owner of a pro rata portion of
each asset of the respective State Trust in the proportion that the number of
Units of such Trust held by him bears to the total number of Units outstanding
of such State Trust under subpart E, subchapter J of chapter 1 of the Code and
will have a taxable event when such State Trust disposes of a Bond, or when the
Unitholder redeems or sells his Units. Unitholders must reduce the tax basis
of their Units for their share of accrued interest received by a State Trust,
if any, on Bonds delivered after the Unitholders pay for their Units to the
extent that such interest accrued on such Bonds during the period from the
Unitholder's settlement date to the date such Bonds are delivered to a State
Trust and, consequently, such Unitholders may have an increase in taxable gain
or reduction in capital loss upon the disposition of such Units. Gain or loss
upon the sale or redemption of Units is measured by comparing the proceeds of
such sale or redemption with the adjusted basis of the Units. If the Trustee
disposes of Bonds (whether by sale, payment on maturity, redemption or
otherwise), gain or loss is recognized to the Unitholder. The amount of any
such gain or loss is measured by comparing the Unitholder's pro rata share of
the total proceeds from such disposition with the Unitholder's basis for his or
her fractional interest in the asset disposed of. In the case of a Unitholder
who purchases Units, such basis (before adjustment for earned original issue
discount and amortized bond premium, if any) is determined by apportioning the
cost of the Units among each of the State Trust's assets ratably according to
the value as of the date of acquisition of the Units. The tax cost reduction
requirements of the Code relating to amortization of bond premium may, under
some circumstances, result in the Unitholder realizing a taxable gain when his
Units are sold or redeemed for an amount equal to his original cost.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the
"Code") provide a complex set of rules governing the accrual of original issue
discount. These rules provide that original issue discount accrues either on
the basis of a constant compound interest rate or ratably over the term of the
Municipal Bond, depending on the date the Municipal Bond was issued. In
addition, special rules apply if the purchase price of a Municipal Bond exceeds
the original issue price plus the amount of original issue discount which would
have previously accrued based upon its issue price (its "adjusted issue
price"). The application of these rules will also vary depending on the value
of the Municipal Bond on the date a Unitholder acquires his Units, and the
price the Unitholder pays for his Units. Investors with questions regarding
these Code sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount (if
any) by which the stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued). Under the Tax Act,
accretion of market discount is taxable as ordinary income; under prior law the
accretion had been treated as capital gain. Market discount that accretes
while a Trust Fund holds a Municipal Bond would be recognized as ordinary
income by the Unitholders when principal payments are received on the
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Municipal Bond, upon sale or at redemption (including early redemption), or
upon the sale or redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The market discount
rules are complex and Unitholders should consult their tax advisers regarding
these rules and their application.
In the case of certain corporations, the alternative minimum tax and
the Superfund Tax depend upon the corporation's alternative minimum taxable
income, which is the corporation's taxable income with certain adjustments.
One of the adjustment items used in computing the alternative minimum taxable
income and the Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or REMIC) is an
amount equal to 75% of the excess of such corporation's "adjusted current
earnings" over an amount equal to its alternative minimum taxable income
(before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all the Municipal Bonds in a State Trust. Unitholders
are urged to consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or carry Units
of a State Trust is not deductible for Federal income tax purposes. The
Internal Revenue Service has taken the position that such indebtedness need not
be directly traceable to the purchase or carrying of Units (however, these
rules generally do not apply to interest paid on indebtedness incurred to
purchase or improve a personal residence). Also, under Section 265 of the
Code, certain financial institutions that acquire Units would generally not be
able to deduct any of the interest expense attributable to ownership of such
Units. Investors with questions regarding these issues should consult with
their tax advisers.
In the case of certain Municipal Bonds in the State Trusts, the
opinions of bond counsel indicate that interest on such securities received by
a "substantial user" of the facilities being financed with the proceeds of
these securities or persons related thereto, for periods while such securities
are held by such a user or related person, will not be excludable from Federal
gross income, although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes that he
or she may be a "substantial user" or a "related person" as so defined should
contact his or her tax adviser.
With respect to the various series of Ohio Tax-Exempt Bond Trust,
Squire, Sanders & Dempsey rendered an opinion at the time of each closing for
each Ohio Trust which was substantially similar to the foregoing.
Under existing law, the State Trusts are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income of
the Unitholders under the income tax laws of the State of Missouri.
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All statements of law in the Prospectus concerning exclusion from
gross income for Federal, State or other tax purposes are the opinions of
counsel and are to be so construed.
At the respective times of issuance of the Municipal Bonds, opinions
relating to the validity thereof and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective issuing
authorities. Neither the Sponsor nor Chapman and Cutler has made any special
review for the State Trusts of the proceedings relating to the issuance of the
Municipal Bonds or of the basis for such opinions.
For taxpayers other than corporations, net capital gains are presently
subject to a maximum marginal stated tax rate of 28 percent. However, it
should be noted that legislative proposals are introduced from time to time
that affect tax rates and could affect relative differences at which ordinary
income and capital gains are taxed.
Under the Code, taxpayers must disclose to the Internal Revenue
Service the amount of tax-exempt interest earned during the year.
Section 86 of the Code, in general, provides that fifty percent of
Social Security benefits are includable in gross income to the extent that the
sum of "modified adjusted gross income" plus fifty percent of the Social
Security benefits received exceeds a "base amount." The base amount is $25,000
for unmarried taxpayers, $32,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times during the
taxable year and who file separate returns. Modified adjusted gross income is
adjusted gross income determined without regard to certain otherwise allowable
deductions and exclusions from gross income and by including tax exempt
interest. To the extent that Social Security benefits are includable in gross
income, they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85 percent of Social Security benefits are includable
in gross income to the extent that the sum of "modified adjusted gross income"
plus fifty percent of Social Security benefits received exceeds an "adjusted
base amount." The adjusted base amount is $34,000 for married taxpayers,
$44,000 for married taxpayers filing a joint return and zero for married
taxpayers who do not live apart at all times during the taxable year and who
file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of Social
Security benefits will be included in gross income, no tax-exempt interest,
including that received from the Trust Fund, will be subject to tax. A
taxpayer whose adjusted gross income already exceeds the base amount or the
adjusted base amount must include fifty percent or eighty-five percent,
respectively of his Social Security benefits in gross income whether or not he
receives
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any tax-exempt interest. A taxpayer whose modified adjusted gross income
(after inclusion of tax-exempt interest) does not exceed the base amount need
not include any Social Security benefits in gross income.
For a discussion of the State tax status of income earned on Units of
a State Trust, see the discussion of tax status for the applicable trust.
Except as noted therein, the exemption of interest on State and local
obligations for Federal income tax purposes discussed above does not
necessarily result in exemption under the income or other tax laws of any state
or city. The laws of the several states vary with respect to the taxation of
such obligations.
All statements in the Prospectus concerning exemption from Federal,
state or other taxes are the opinions of counsel and are to be so construed.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ARIZONA TRUSTS. General Economic Conditions. The following brief
summary regarding the economy of Arizona is based upon information drawn from
publicly available sources and is included for the purpose of providing the
information about general economic conditions that may or may not affect
issuers of the Arizona Municipal Obligations. The Sponsor has not
independently verified any of the information contained in such publicly
available documents. Arizona is the nation's sixth largest state in terms of
area. Arizona's main economic sectors include services, tourism and
manufacturing. Mining and agriculture are also significant, although they tend
to be more capital than labor intensive. Services is the single largest
economic sector. Many of these jobs are directly related to tourism.
According to the Arizona Department of Economic Security, 1992
unemployment figures show 7.4 percent of Arizona's population was unemployed,
compared to a national level of 7.4 percent unemployment at the same time.
Maricopa County reported 6.3 percent unemployment and Pima County reported 5.2
percent unemployment. Significant employers in the state include the
government, the service industry and the trade industry. Building permits in
1992 were up in both Maricopa County and Pima County.
In June 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West is currently the fifth largest employer
in Maricopa County, employing approximately 7,100 persons within the county.
The effect of the America West bankruptcy on the state economy and, more
particularly, the Phoenix economy, is uncertain.
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
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many facets of real estate lending. In the neat 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 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.
The State operates on a fiscal year beginning July 1 and ending June
30. Fiscal year 1993 refers to the year ending June 30, 1993.
Total General Fund revenues increased 10.8% from fiscal year 1992 to
$3.77 billion during fiscal year 1993. Approximately 45% of this budgeted
revenue comes from sales and uses taxes, 40% from income taxes (both individual
and corporate) and 6% from property taxes and other taxes represented
approximately 9%.
For fiscal year 1993 total general fund expenditures were $3.4
billion. These expenditures fell into the following major categories:
education (54%), health and welfare (29%), protection and safety (9%), general
government (6%), and inspection and regulation, natural resources and
transportation (2.0%).
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 of marketability
of any of the Bonds issued by an entity other than the State of Arizona will be
affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded indebtedness
and other matters. For example, the legislature cannot appropriate revenues in
excess of 7% of the total personal income of the state in any fiscal year.
These limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
The State of Arizona was recently sued by four named school districts
with an additional fifty school districts within the state participating in the
suit, claiming that the State's funding system for school buildings and
equipment is unconstitutional. The lawsuit does not seek damages, but requests
that the court order the State to create a new financing system that sets
minimum standards for buildings and furnishings that apply on a statewide
basis. The complaint alleges that some school districts have sufficient funds
to build outdoor swimming pools, while others have classrooms that leak in the
rain. It is unclear, at this time, what effect any judgment would have on
state finances or school district budgets. The U.S. Department of Education
recently determined that Arizona's educational funding system did not meet
federal requirements of equity. This determination could mean a loss in
federal funds of approximately $50 million.
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Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue bonds in the
Arizona Trust. The Arizona Legislature attempted unsuccessfully in its 1984
regular and special sessions to enact legislation designed to control health
care costs, ultimately adopting three referenda measures placed on the November
1984 general election ballot which in various ways would have regulated
hospital and health care facility expansions, rates and revenues. At the same
time, a coalition of Arizona employers proposed two initiatives voted on 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 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 Electric") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Power to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations between Tucson
Electric and its creditors to restructure the utility's debts and other
obligations. In December 1992, Tucson Electric announced that it had completed
its financial restructuring. In January 1993, Tucson Electric asked the
Arizona Corporation Commission for a 9.6% average rate. Tucson Electric serves
approximately 270,000 customers, primarily in the Tucson area. Inability of
any regulated public utility to secure necessary rate increases could adversely
affect, to an indeterminable extent, its ability to pay debt service on its
pollution control revenue bonds.
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Based on a recent U.S. Supreme Court ruling, the State has determined
to refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6 million
in tax refunds in fiscal year 1993-94. A combination of tax refunds and tax
credits will be used to satisfy this liability.
The assets of the Trust will consist of interest-bearing obligations
issued: by or on behalf of the State of Arizona (the "State"), its political
subdivisions and authorities (the "Arizona Bonds"), and by or on behalf of the
government of Puerto Rico, the government of Guam, or the government of the
Virgin Islands (collectively the "Possession Bonds") (collectively the Arizona
Bonds and Possession Bonds shall be referred to herein as the "Bonds"),
provided the interest on such Bonds is exempt from State income taxes.
At the time of the closing for each Arizona Trust, Special Counsel to
the Fund for Arizona tax matters rendered an opinion under then existing
Arizona income tax law applicable to taxpayers whose income is subject to
Arizona income taxation substantially to the effect that:
(1) For Arizona income tax purposes, each Unitholder will be treated as
the owner of a pro rata portion of the Arizona Trust, and the income
of the Trust therefore will be treated as the income of the
Unitholder under State law;
(2) For Arizona income tax purposes, interest on the Bonds which is
excludable from Federal gross income and which is exempt from
Arizona income taxes when received by the Arizona Trust, and which
would be excludable from Federal gross income and exempt from
Arizona income taxes if received directly by a Unitholder, will
retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders;
(3) To the extent that interest derived from the Arizona Trust by a
Unitholder with respect to the Bonds is excludable from Federal
gross income, such interest will not be subject to Arizona income
taxes;
(4) Each Unitholder will receive taxable gain or loss for Arizona income
tax purposes when Bonds held in the Arizona Trust are sold,
exchanged, redeemed or paid at maturity, or when the Unitholder
redeems or sells Units, at a price that differs from original cost
as adjusted for amortization of Bond discount or premium and other
basis adjustments, including any basis reduction that may be
required to reflect a Unitholder's share of interest, if any,
accruing on Bonds during the interval between the Unitholder's
settlement date and the date such Bonds are delivered to the Arizona
Trust, if later;
(5) Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry
Units in the Arizona Trust, the interest on which is exempt from
Arizona income taxes;
(6) Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales tax or use tax; and
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<PAGE> 24
(7) In the case of Trusts for which an insurance policy of policies with
respect to the payment of principal and interest on the Arizona
Bonds has been obtained by the Depositor, any proceeds paid under
such policy or policies issued to the Trust, if any, with respect to
the Bonds in the Trust which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from State
income taxes if, and to the same extent as, such interest would have
been so exempt if paid by the issuer of the defaulted obligations.
ARKANSAS TRUSTS. The Constitution of Arkansas specifically prohibits the
creation of any State general obligation debt unless authorized in a Statewide
general election. Although the State of Arkansas defaulted on some of its
general obligation debt during the depression in the later 1930's, it has not
failed to pay the principal and interest on any of its general obligations when
due since that time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development
Act of 1981" ("Act 496"), authorized the issuance of State Water Resources
Development General Obligation Bonds by the State of Arkansas, acting by and
through the Arkansas Soil and Water Conservation Commission. The issuance of
bonds pursuant to Act 496 was approved by the electors of the State at the
general election on November 2, 1982. The total principal amount of bonds
issued during any fiscal biennium may not exceed $15,000,000, and the total
principal of all bonds issued under Act 496 may not exceed $100,000,000. All
Bonds to be issued under Act 496 shall be direct general obligations of the
State, the principal and interest of which are payable from the general
revenues of the State. Pursuant to Act 496, the State of Arkansas has issued
and outstanding two series of bonds in the aggregate principal amount of
$28,075,000 under Act 496.
Deficit spending has been prohibited by statute in Arkansas since 1945.
The Revenue Stabilization Law requires that before any State spending can take
place, there must be an appropriation by the General Assembly and there must be
funds available in the fund from which the appropriation has been made. The
State is prohibited from borrowing money to put into any State fund from which
appropriations can be paid.
Information regarding the financial condition of the State is included
for the purpose of providing information about general economic conditions that
may affect issuers of the Bonds in Arkansas. The Arkansas economy represents
approximately 2.0% of the total United States' economy. Its small size causes
the Arkansas economy to follow the national economy. Fluctuations in the
national economy are often mirrored by coinciding or delayed fluctuations in
the Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based. Only
five states generate a larger proportion of earnings from agriculture, and only
17 states generate a larger proportion of earnings from manufacturing.
Similarly, only 10 states have a larger proportion of employment in agriculture
and only 18 states have a larger proportion of employment in manufacturing.
Thus, the State of Arkansas feels the full force of the business cycle and also
sees the growth swing from positive to negative as conditions in agriculture
change.
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<PAGE> 25
Agriculture has had a depressant effect on the Arkansas economy
regardless of the phase the business cycle was in. In recent years,
agricultural employment in Arkansas has been on the decline. In both 1987 and
1988, agricultural employment declined by 1.6%. Agriculture employment also
declined in 1989 by 1.6% and should continue to decline according to State
forecasters as labor intensive production is shifted to less labor intensive
production.
Employment in Arkansas' construction industry decreased 2.3% in 1988.
This followed a 5.6% decline in 1987. In 1989, State forecasters anticipated a
decline in growth rate of 2.5%. A further decline of 0.7% is expected in 1990.
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. In 1986, Arkansas ranked fifth in the
United States with a 2.1% growth of new manufacturing jobs. The
diversification of economic interests has lessened Arkansas' cyclical
sensitivity to impact by any single sector. During 1988, total employment
increased by 3.4% and total nonagricultural wage and salary employment
increased by 2.8%. Total employment growth in Arkansas exceeded the growth
rate of total employment in the United States. The average unemployment rate
declined from 8.1% in 1987 to 7.7% in 1988. The increase in earnings along
with the rise in employment generated a 6.9% increase in total personal income
in 1988.
Counties and municipalities may issue general obligation bonds (pledging
an ad valorem tax), special obligation bonds (pledging other specific tax
revenues) and revenue bonds (pledging only specific revenues from sources other
than tax revenues). School districts may issue general obligation bonds
(pledging ad valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but as
in all cases of revenue bonds, neither the full faith and credit nor the taxing
power of the State of Arkansas or any municipality or county thereof is pledged
to the repayment of those bonds. Revenue bonds can be issued only for public
purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
At the time of the closing for each Arkansas Trust Special Counsel to
each Arkansas Trust for Arkansas tax matters rendered an opinion under then
existing Arkansas income tax law applicable to taxpayers whose income is
subject to Arkansas income taxation substantially to the effect that:
The opinion of Chapman and Cutler, counsel for the Sponsor, concludes
that each Trust, including the Arkansas Trust, will be governed for Federal tax
purposes by the provisions of Subchapter J of Chapter 1 of the Code. Although
there are no Arkansas income tax statutes similar to Subchapter J of Chapter 1
of the Code, Arkansas statutory provisions operate to reach the same result
that is reached under the Federal system. Arkansas law defines Arkansas gross
income for residents similarly to the definition of Federal gross income, and
that definition of Arkansas gross income specifically excludes interest on
obligations of the State of Arkansas or any political subdivision thereof.
25
<PAGE> 26
Based upon the foregoing and, in reliance upon the opinion of Chapman and
Cutler, counsel to the Sponsor, and upon an examination of such other documents
and an Investigation of such other matters of law as we have deemed necessary,
it is our opinion that the application of existing Arkansas income tax law to
Arkansas Unitholders would be as follows:
The Arkansas Trust is not taxable as a corporation or otherwise for
purposes of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata
portion of the Arkansas Trust for Arkansas income tax purposes, and the
income of the Arkansas Trust will therefore be treated as the income of
the Arkansas Unitholders under Arkansas law;
Interest on bonds, issued by the State of Arkansas, or by or on behalf
of political subdivisions, agencies or Instrumentalities thereof, that
would be exempt from Federal income taxation when paid directly to an
Arkansas Unitholder will be exempt from Arkansas income taxation when
received by the Arkansas Trust and attributed to such Arkansas Unitholder
and when distributed to such Arkansas Unitholder; and
Distribution of Income to Arkansas Unitholders consisting of gains
realized upon the sale or other disposition of obligations held by the
Arkansas Trust will be subject to Arkansas income taxation to the extent
that such income would be subject to Arkansas income taxation if the
obligations were held or sold or otherwise disposed of directly by the
Arkansas Unitholders.
CALIFORNIA TRUSTS. The Trust will invest substantially all of its assets
in California Municipal Obligations. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information provides
only a brief summary of the complex factors affecting the financial situation
in California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No Independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
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<PAGE> 27
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 30 million represents 12%
of the total United States population and grew by 27% in the 1980s. Total
personal income in the State, at an estimated $630 billion in 1991, accounts
for 13% of all personal income in the nation. Total employment is almost 14
million, the majority of which Is In the service, trade and manufacturing
sectors.
Reports issued by the State Department of Finance and the Commission on
State Finance (the "COSF") indicate that the State's economy is suffering its
worst recession since the 1930s, with prospects for recovery slower than for
the nation as a whole. The State has lost over 800,000 jobs since the start of
the recession and additional significant job losses are expected before an
upturn begins. The largest job losses have been in Southern California, led by
declines in the aerospace and construction industries. Weaknesses statewide
occurred in manufacturing, construction, services and trade. Unemployment was
7.5% for 1991 (compared to 6.7% nationally), and is expected to be higher than
the national average in the near future. The State's economy is only expected
to pull out of the recession slowly once the national recovery has begun.
Delay In recovery will exacerbate shortfalls in State revenues.
Certain California municipal obligations may be obligations of issuers
which rely in whole or in part, directly or indirectly, on ad valorem property
taxes as a source of revenue. The taxing powers of California local
governments and districts are limited by Article XIIIA of the California
Constitution, enacted by the voters in 1978 and commonly known as "Proposition
13." Briefly, Article XIIIA limits to 1% of full cash value the rate of ad
valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except upon new construction or change
of ownership (subject to a number of exemptions). Taxing entities may,
however, raise ad valorem taxes above the 1% limit to pay debt service on
voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been flied challenging the acquisition-based
assessment system of Proposition 13 and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through
ad valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give 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 reenact 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.
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<PAGE> 28
The State and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California Constitution,
enacted by the voters in 1979 and significantly amended by Propositions 98 and
111 in 1988 and 1990, respectively. Article XIIIB prohibits the State or any
covered local government from spending "appropriations subject to limitation"
in excess of the appropriations limit imposed. "Appropriations subject to
limitation" are authorizations to spend.proceeds of taxes," which consists of
tax revenues and certain other funds, including proceeds from regulatory
licenses, user charges or other fees to the extent that such proceeds exceed
the cost of providing the product or service, but "proceeds of taxes" excludes
most State subventions to local governments. No limit is imposed on
appropriations or funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to more closely follow
growth in California's economy.
"Excess" revenues are measured over a two-year cycle. Local governments
must return any excess to taxpayers by rate reduction. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up 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 million, $7.5 billion and $5.2 billion for the
five most recent fiscal years ending with 1991-92. State appropriations are
expected to be $4.2 billion under the limit for Fiscal Year 1992-93.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution (described briefly above), the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of Article XIIIA or Article XIIIB on
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<PAGE> 29
California Municipal Obligations or on the ability of the State or local
governments to pay debt service on such California Municipal Obligations. It
is not presently possible to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality of either
Article XIIIA or Article XIIIB, or the impact of any such determinations upon
State agencies or local governments, or upon their ability to pay debt service
on their obligations. Future initiative or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
As of July 1, 1993, California had approximately $17.6 billion of general
obligation bonds outstanding, and $7.2 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. In fiscal year 1992-93, debt service on general obligation bonds and
lease-purchase debt was approximately 4.1% of General Fund revenues. The State
has paid the principal of and interest on its general obligation bonds,
lease-purchase debt and short-term obligations when due.
The principal sources of General Fund revenues are the California
personal income tax (45% of total revenues), the sales tax (35%), bank and
corporation taxes (12%), and the gross premium tax on insurance (3%). The
State maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished as soon
as sufficient revenues are available. Year-end balances in the Economic
Uncertainties Fund are included for financial reporting purposes in the General
Fund balance. In recent years, the State has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but essentially no
reserve is budgeted in 1992-93.
Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 33%).
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 (K-14 education,
health, welfare and corrections) growing at rates significantly higher than the
growth rates for the principal revenue sources of the General Fund. As a
result, the State entered a period of budget imbalance, with expenditures
exceeding revenues for four of the last five fiscal years. Revenues declined
in 1990-91 over 1989-90, the first time since the 1930s. By June 30, 1992,
the State's General Fund had an accumulated deficit, on a budget basis, of
approximately $2.2 billion.
29
<PAGE> 30
As a consequence of the large budget imbalances built up over two
consecutive years, the State used up all of its available cash resources. The
State has to rely increasingly on a series of external borrowings to meet its
cash flow requirements.
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 all of these ongoing obligations as
they came due, 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 1992-93 Budget Bill 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 revenue again lagged behind 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.
30
<PAGE> 31
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 wealth
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 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 and upcoming
budget years will result in continued pressure upon various local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental expenditures,
there can be no assurance that the State will not face budget gaps in the
future.
State general obligation bonds are currently rated "Aa" by Moody's and
"A+" by S&F. Both of these ratings were recently reduced from "AAA" levels
which the State held until late 1991. There can be no assurance that such
ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues.
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.
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<PAGE> 32
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 1990-1991,
local assistance (including public schools) accounted for around 75% of General
Fund spending. To reduce State General Fund support 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 "bail-out" 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 governments 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 apparently put off after the Governor approved
legislation to provide additional funds for the county. Other counties have
also indicated that their budgetary condition is extremely grave. The Richmond
United School District (Contra Costa County) entered bankruptcy proceedings in
May 1991, but the proceedings have been dismissed.
Municipal Obligations which are assessment bonds may be adversely
affected by a general decline in real estate values or a slowdown in real
estate sales activity. In many cases, such bonds are secured by land which is
undeveloped at the time of issuance but anticipated to be developed within a
few years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed,
the lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds
in the event of delinquency in the payment of assessments or taxes, except from
amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically payable
from the general fund of the municipality, are subject to "abatement" in the
event the facility being leased is unavailable for beneficial use and occupancy
by the municipality during the term of the lease. Abatement is not a default,
and there may be no remedies available to the holders of the certificates
evidencing the lease obligation in the event abatement occurs. The most common
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
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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 United School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were
taken over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The case is
still in very preliminary stages, and it is not known how it will be resolved.
If the case goes to trial, a judgment against the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
The repayment of Industrial Development Securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. 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 (for example, because of a major
natural disaster such as an earthquake), the tax increment revenue may be
insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after the
enactment of Article XIIIA and Article XIIIB, and only resumed such ratings on
a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the Issuers of Tax
Allocation Securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or
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other revenue-raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local governments to
impose new taxes or increase existing taxes. It is not presently possible to
determine the impact of any such legislation on California Municipal
Obligations in which the Fund may invest future allocations of state revenues
to local governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California Municipal Obligation in the
Portfolio could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the Federal
or State government to appropriate sufficient funds within their respective
budget limitations.
At the time of the closing for each California Trust, Special Counsel to
each California Trust for California tax matters, rendered an opinion under
then existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
(1) The California Trust is not an association taxable as a corporation
and the income of the California Trust will be treated as the income
of the Unitholders under the Income tax laws of California;
(2) amounts treated as interest on the underlying Securities in the
California Trust which are exempt from tax under California personal
income tax and property tax laws when received by the California
Trust will, under such laws, retain their status as tax-exempt
interest when distributed to Unitholders. However, interest on the
underlying Securities attributed to a Unitholder which is a
corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal
income tax and which is treated as an item of tax preference for
purposes of the federal alternative minimum tax pursuant to Section
57(a)(5) of the Internal Revenue Code of 1986 may also be treated as
an Item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the
provisions of the California Constitution exempting the interest on
bonds issued by the State of California, or by local governments
within the state, from taxes levied on income, the application of
the new California alternative minimum tax to Interest otherwise
exempt from the California personal income tax in some cases may be
unclear;
(3) under California income tax law, each Unitholder in the California
Trust will have a taxable event when the California Trust disposes
of a Security (whether by sale, exchange, redemption, or payment at
maturity) or when the Unitholder redeems or sells Units. Because of
the requirement that tax cost basis be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder
may realize taxable gains when Units are sold or redeemed for an
amount equal to,
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or less than, their original cost. The total cost of each Unit in
the California Trust to a Unitholder is allocated among each of the
Bond issues held in the California Trust (in accordance with the
proportion of the California Trust comprised by each Bond issue) in
order to determine his per Unit tax cost for each Bond issue; and
the tax cost reduction requirements relating to amortization of bond
premium will apply separately to the per Unit tax cost of each Bond
issue. Unitholders' bases in their Units, and the bases for their
fractional interest in each Trust asset, may have to be adjusted for
their pro rata share of accrued interest received, if any, on
Securities delivered after the Unitholders' respective settlement
dates;
(4) under the California personal property tax laws, bonds (including
the Securities in the California Trust) or any interest therein is
exempt from such tax;
(5) any proceeds paid under the insurance policy issued to the
California Trust with respect to the Securities which represent
maturing interest on defaulted obligations held by the Trustee will
be exempt from California personal income tax if, and to the same
extent as, such interest would have been so exempt if paid by the
issuer of the defaulted obligations; and
(6) under Section 17280(b)(2) of the California Revenue and Taxation
Code, interest on indebtedness incurred or continued to purchase or
carry Units of the California Trust is not deductible for the
purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of Interest costs for this purpose. The Franchise Tax
Board has not yet proposed or prescribed such regulations. In
interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need
not be directly traceable to the purchase or carrying of Units
(although the Service has not contended that a deduction for
interest on indebtedness incurred to purchase or improve a personal
residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or
other California authority, the California Franchise Tax Board
generally has interpreted California statutory tax provisions in
accord with Internal Revenue Service interpretations of similar
Federal provisions.
At the respective times of issuance of the Securities, opinions relating
to the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such
made a review of proceedings relating to the issuance of certain Securities at
the time of their issuance, Special Counsel has not made any special review for
the California Trusts of the proceedings relating to the issuance of the
Securities or of the basis for such opinions.
COLORADO TRUSTS. The State Constitution requires that expenditures for
any fiscal year not exceed revenues for such fiscal year. By statute, the
amount of General Fund revenues available for appropriation is based upon
revenue estimates which, together with other available resources, must exceed
annual appropriations by the amount of the unappropriated reserve (the
"Unappropriated Reserve"). The
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Unappropriated Reserve requirement for fiscal years 1991, 1992 and 1993 was set
at 3% to enable it to respond to prison overcrowding. For fiscal year 1992 and
thereafter, General Fund appropriations are also limited to an amount equal to
the cost of performing certain required reappraisals of taxable property plus
an amount equal to the lesser of (i) five percent of Colorado personal income
or (ii) 106% of the total General Fund appropriations for the previous fiscal
year. This restriction does not apply to 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 limit on the level of General Fund
appropriations may be exceeded for a given fiscal year upon the declaration of
a State fiscal emergency by the State General Assembly.
The 1991 fiscal year end fund balance was $16.3 million, which was $62.8
million below the 3% Unappropriated Reserve requirement. As of the end of the
1992 fiscal year, the fund balance was $133.3 million, which was $49.1 million
over the 3% Unappropriated Reserve requirement. Based on June 20, 1993
estimates, the 1993 fiscal year ending fund balance is expected to be $218.8
million, or $189.7 million over the 3% required Unappropriated Reserve
On November 3, 1992 voters in Colorado approved a constitutional
amendment (the "Amendment") which, in general, became effective December 31,
1992, and which could severely restrict the ability of the State and local
governments to increase revenues and impose taxes. The Amendment applies to
the State and all local governments, including home rule entities
("Districts"). Enterprises, defend as government-owned businesses authorized
to issue revenue bonds and receiving under 10% of annual revenue in grants from
all Colorado state and local governments combined, are excluded from the
provisions of the Amendment.
The provisions of the Amendment are unclear and would 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
1992 fiscal year 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.
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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 the 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.
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, $134.8 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 States's $2,995.8 million total
gross receipts: individual 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.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of financing
for such local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or enterprise or
from the proceeds of an excise tax, or assessment bonds payable from special
assessments. Colorado local governments can also finance
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public projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State
Planning and Budgeting as presented in the Economic Report, over 50% of
non-agricultural employment in Colorado in 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.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to
the Fund for Colorado tax matters rendered an opinion under then existing
Colorado income tax law applicable to taxpayers whose income is subject to
Colorado income taxation substantially to the effect that:
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1) each Colorado Unitholder will be treated as owning a pro rata share
of each asset of the Colorado Trust for Colorado income tax purposes
in the proportion that the number of Units of such Trust held by the
Unitholder bears to the total number of outstanding Units of the
Colorado Trust, and the income of the Colorado Trust will therefore
be treated as the income of each Colorado Unitholder under Colorado
law in the proportion described;
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(2) interest on Bonds that would not be includable in income for income
tax purposes when paid directly to a Colorado Unitholder will be
exempt from Colorado income taxation when received by the Colorado
Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder;
(3) to the extent that interest paid and original issue discount, if
any, derived from the Colorado Trust by a Unitholder with respect to
Possession Bonds is excludable from gross income for Federal income
tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section
1423a, and 48 U.S.C. Section 1403, such interest paid and original
issue discount, if any, will not be subject to the Colorado State
Income Tax; however, no opinion is expressed herein regarding
taxation of interest paid and original issue discount, if any, on
the Possession Bonds received by the Colorado Trust and distributed
to Unitholders under any other tax imposed pursuant to Colorado law;
(4) any proceeds paid under individual policies obtained by issuers of
Bonds in the Colorado Trust which represent maturing interest on
defaulted obligations held by the Trustee will not be includable in
income for Colorado income tax purposes if, and to the same extent
as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations;
(5) each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Colorado Unitholder
redeems or sells Units at a price that differs from original cost as
adjusted for amortization of bond discount or premium and other
basis adjustments (including any basis reduction that may be
required to reflect a Colorado Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Colorado
Unitholder's settlement date and the date such Bonds are delivered
to the Colorado Trust, if later);
(6) tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost;
and
(7) if interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not deductible
for Federal income tax purposes, it also will be nondeductible for
Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
KANSAS TRUSTS. Since the Kansas Trust will invest substantially all of
its assets in Kansas municipal securities, the Kansas Trust is susceptible to
political and economic factors affecting issuers of Kansas municipal
securities. As of 1991, 2,494,366 people lived in Kansas, representing a .69%
increase in
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population since the 1990 census. Based on these numbers, Kansas ranked
twenty-first in the nation in terms of per capita income. Historically,
agriculture and mining constituted the principal industries in Kansas. Since
the 1950s, however, manufacturing, governmental services and the services
industry have steadily grown, and as of 1993 approximately 15.7% of Kansas
workers were in the manufacturing sector, 20.8% in the government sector and
23.3% in the services sector (not including transportation, public utilities,
trade, finance, insurance and real estate), while the farming and mining
sectors combined for approximately 5.0% of the work force. The 1991
unemployment rate was 4.4%, and the seasonally adjusted rate for December 1992
was 4.2%. By constitutional mandate, Kansas must operate within a balanced
budget and public debt may only be incurred for extraordinary purposes and then
only to a maximum of $1 million. As of November 12, 1992, Kansas had no
general obligation bonds outstanding.
At the time of the closing for each Kansas Trust, Special Counsel to
each Kansas Trust for Kansas tax matters, rendered an opinion under then
existing Kansas income tax law applicable to taxpayers whose income is subject
to Kansas income taxation substantially to the effect that:
The Trust is not an association taxable as a corporation for Kansas
income tax purposes;
Each Unitholder of the Trust will be treated as the owner of a pro rata
portion of the Trust, and the income and deductions of the Trust will therefore
be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas
or any of its political subdivisions will be exempt from income taxation
imposed on individuals, corporations and fiduciaries (other than insurance
companies, banks, trust companies or savings and loan associations) however,
interest on Bonds issued prior to January 1, 1988 by the State of Kansas or any
of its political subdivisions will not be exempt from income taxation imposed
on individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) unless the laws of the
State of Kansas authorizing the issuance of such Bonds specifically exempt the
interest on the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on insurance companies under
Article 40, Chapter 28 of the Kansas statutes unless the laws of the State of
Kansas authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas; interest on the Bonds
which is exempt from Kansas income taxation when received by the Trust will
continue to be exempt when distributed to a Unitholder (other than a bank,
trust company or savings and loan association);
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Each Unitholder of the Trust will recognize gain or loss for Kansas
income tax purposes if the Trustee disposes of a Bond (whether by sale,
exchange, payment on maturity, retirement or otherwise) or if the Unitholder
redeems or sells Units of the Trust to the extent that such transaction results
in a recognized gain or loss for federal income tax purposes;
Interest received by the Trust on the Bonds is exempt from intangibles
taxation imposed by any counties, cities and townships pursuant to present
Kansas law; and
No opinion is expressed regarding whether the gross earnings derived from
the Units is subject to intangibles taxation imposed by any counties, cities
and townships pursuant to present Kansas law.
KENTUCKY TRUSTS. The Commonwealth of Kentucky leads the nation in total
tonnage of coal produced and ranks among the top 10 states in the value of all
minerals produced. Tobacco is the dominant agricultural crop and Kentucky
ranks second among the states in the total cash value of tobacco raised. The
manufacturing mix in the state reflects a significant diversification. In
addition to the traditional concentration of tobacco processing plants and
bourbon distilleries, there is considerable durable goods production, such as
automobiles, heavy machinery, consumer appliances and office equipment. The
State's parks system and the horse breeding and racing industry, symbolized by
the Kentucky Derby, play an important role in an expanding tourist business in
the state.
Current economic problems, including particularly the continuing high
unemployment rate, have had varying effects on the differing geographic areas
of the State and the political subdivisions located within such geographic
areas. Although revenue obligations of the State or its political subdivisions
may be payable from a specific source or project, there can be no assurance
that further economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value of the Bonds
in a Kentucky Trust or the ability of the respective obligors to pay debt
service of such Bonds.
At the time of the closing for each Kentucky Trust, Special Counsel to
each Kentucky Trust for Kentucky tax matters rendered an opinion under then
existing Kentucky income tax law applicable to taxpayers whose income is
subject to Kentucky income taxation substantially to the effect that:
Because Kentucky income tax law is based upon the Federal law and in
explicit reliance upon the opinion of Chapman and Cutler referred to above, and
in further reliance on the determination letter to us of the Revenue Cabinet of
Kentucky dated May 10, 1984, it is our opinion that the application of existing
Kentucky income tax law would be as follows:
Each Kentucky Unitholder will be treated as the owner of a pro rata
portion of the Kentucky Trust for Kentucky income tax purposes, and the income
of the Kentucky Trust will therefore be treated as the income of the Kentucky
Unitholders under Kentucky law;
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Interest on Bonds that would be exempt from Federal income taxation when
paid directly to a Kentucky Unitholder will be exempt from Kentucky income
taxation when: (i) received by the Kentucky Trust and attributed to such
Kentucky Unitholder; and (ii) when distributed to such Kentucky Unitholder;
Each Kentucky Unitholder will realize taxable gain or loss when the
Kentucky Trust disposes of a Bond (whether by sale, exchange, redemption or
payment of maturity) or when the Kentucky Unitholder redeems or sells Units at
a price that differs from original cost as adjusted for amortization or
accrual, as appropriate, of bond discount or premium and other basis
adjustments (including any basis reduction that may be required to reflect a
Kentucky Unitholder's share of interest, if any, accruing on Bonds during the
interval between the Kentucky Unitholder's settlement date and the date such
Bonds are delivered to the Kentucky Trust, if later);
Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Kentucky Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost;
Units of the Kentucky Trust, to the extent the same represent an
ownership in obligations issued by or on behalf of the Commonwealth of Kentucky
or governmental units of the Commonwealth of Kentucky, the interest on which
is exempt from Federal and Kentucky income taxation will not be subject to ad
valorem taxation by the Commonwealth of Kentucky or any political subdivision
thereof, and
If interest on indebtedness incurred or continued by a Kentucky
Unitholder to purchase Units in the Kentucky Trust is not deductible for
Federal income tax purposes, it also will be nondeductible for Kentucky income
tax purposes.
MICHIGAN TRUSTS. Investors should be aware that the economy of the State
of Michigan has, in the past, proven to be cyclical, due primarily to the fact
that the leading sector of the State's economy is the manufacturing of durable
goods. While the State's efforts to diversify its economy have proven
successful, as reflected by the fact that the share of employment in the State
in the durable goods sector has fallen from 33.1 percent in 1960 to 17.9
percent in 1990, durable goods manufacturing still represents a sizable portion
of the State's economy. As a result, any substantial national economic
downturn is likely to have an adverse effect on the economy of the State and on
the revenues of the State and some of its local governmental units.
In May 1986, Moody's Investors Service raised the State's general
obligation bond rating to "A1." In October 1989, Standard & Poor's Corporation
raised its rating on the State's general obligation bonds to "AA".
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The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the areas
in which plants are closed could be more severe.
General Motors Corporation has announced the scheduled closing of several
of its plants in Michigan in 1993 and 1994. The impact these closures will
have on the State's revenues and expenditures is not currently known. The
impact on the financial condition of the municipalities in which the plants are
located may be more severe than the impact on the State itself.
In recent years, the State has reported its financial results in
accordance with generally accepted accounting principles. For each of the five
fiscal years ending with the fiscal year ended September 30, 1989, the State
reported positive year-end General Fund balances and positive cash balances in
the combined General Fund/School Aid Fund. For the fiscal years ending
September 30 1990 and 1991, the State reported negative year-end General Fund
Balances of $310.4 million and $169.4 million, respectively, negative year-end
General Fund Balances of $310.4 million and $169.4 million, respectively, but
ended the 1992 fiscal year with its general fund in balance. In the 1993
fiscal year, the State took actions to eliminate a projected year-end general
fund deficit of $370 million, but the final financial reports for the 1993
fiscal year have not yet been released. A positive cash balance in the
combined General Fund/School Aid Fund was recorded at September 30, 1990.
Since 1991 the State has experienced deteriorating cash balances which have
necessitated short term borrowing and the deferral of certain scheduled cash
payments. The State borrowed $900 million for cash flow purposes in the 1992
fiscal year. The State's Budget Stabilization Fund was nearly depleted with a
$168 million transfer to the General Fund for the 1992 State fiscal year.
The Michigan Constitution of 1963 limits the amount of total revenues of
the State raised from taxes and certain other sources to a level for each
fiscal year equal to a percentage of the State's personal income for the prior
calendar year. In the event that the State's total revenues exceeds the limit
by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
In the summer of 1993, the State adopted legislation which modifies the
local ad valorem property tax system by exempting all property from school
operating millage beginning December 31, 1993, changing the date on which
property valuation is determined (which will have the effect of freezing
assessed values on property for one year, with a one-year lag in assessment
changes thereafter). The legislation contains no provisions replacing school
operating revenues or tax increment revenues lost as a result of the
elimination of school operating taxes, or to assure payment of bonds pledging
those revenues. The ability of taxing units to levy millage to pay voted
unlimited tax general obligation debt is not impaired by the legislation.
While the impact of the legislation and the ultimate nature, extent and impact
of any additional property tax reform measures cannot currently be predicted,
investors should be alert to the potential effect of the movement for property
tax and school finance reform in Michigan upon bonds issued by the State and
local units for government in Michigan, and the security therefor.
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Although all or most of the Bonds in each Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of bonds
issued by the State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to meet debt service
requirements upon such bonds. In the 1991 fiscal year, the State deferred
certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year and $34.4 million in
the 1992 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the
local unit, are payable from property taxes levied without limitation as to
rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of the
local unit for debt service purposes is subject to constitutional, statutory
and charter tax rate limitations. In addition, several major industrial
corporations have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State. If successful,
such challenges could have an adverse impact on the ad valorem tax bases of
such units which could adversely affect their ability to raise funds for
operating and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to
each Michigan Trust for Michigan tax matters rendered an opinion under then
existing Michigan income tax law applicable to taxpayers whose income is
subject to Michigan income taxation substantially to the effect that:
(1) A Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business Tax
in substantially the same manner as they are for purposes of the
Federal income tax laws, as currently enacted. Accordingly, we have
relied upon the opinion of Chapman and Cutler as to the
applicability of Federal income tax under the Internal Revenue Code
of 1986 to a Michigan Trust and the Holders of Units;
(2) Under the income tax laws of the State of Michigan, a Michigan Trust
is not an association taxable as a corporation; the income of a
Michigan Trust will be treated as the income of the Unitholders and
be deemed to have been received by them when received by a Michigan
Trust. Interest on the underlying Bonds which is exempt from tax
under these laws when received by a Michigan Trust will retain its
status as tax exempt interest to the Unitholders;
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(3) For purposes of the foregoing Michigan tax laws, each Unitholder
will be considered to have received his pro rata share of Bond
interest when it is received by a Michigan Trust and each Unitholder
will have a taxable event when a Michigan Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity) or
when the Unitholder redeems or sells his Certificate to the extent
the transaction constitutes a taxable event for Federal income tax
purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in
the same manner as such cost is established and allocated for
Federal income tax purposes;
(4) Under the Michigan Intangibles Tax, a Michigan Trust is not taxable
and the pro rata ownership of the underlying Bonds, as well as the
interest thereon, will be exempt to the Unitholders to the extent
the Michigan Trust consists of obligations of the State of Michigan
or its political subdivisions or municipalities, or of obligations
of possessions of the United States;
(5) The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject
to the Single Business Tax the income from which would be considered
in computing the Single Business Tax. Persons are subject to the
Single Business Tax only if they are engaged in "business activity",
as defined in the Act. Under the Single Business Tax, both interest
received by a Michigan Trust on the underlying Bonds and any amount
distributed from a Michigan Trust to a Unitholder, if not included
in determining taxable income for Federal income tax purposes, is
also not included in the adjusted tax base upon which the Single
Business Tax is computed, of either a Michigan Trust or the
Unitholders. If a Michigan Trust or the Unitholders have a taxable
event for Federal income tax purposes when a Michigan Trust disposes
of a Bond (whether by sale, exchange, redemption or payment at
maturity) or the Unitholder redeems or sells his Certificate, an
amount equal to any gain realized from such taxable event which was
included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual
realized in connection with such event but excluded in computing
that individual's Federal taxable income) will be included in the
tax base against which, after allocation, apportionment and other
adjustments, the Single Business Tax is computed. The tax base will
be reduced by an amount equal to any capital loss realized from such
a taxable event, whether or not the capital loss was deducted in
computing Federal taxable income in the year the loss occurred.
Unitholders should consult their tax advisor as to their status
under Michigan law;
(6) Any proceeds paid under an insurance policy issued to the Trustee of
a Trust, or paid under individual policies obtained by issuers of
Bonds, which, when received by the Unitholders, represent maturing
interest on defaulted obligations held by the Trustee, will be
excludable from the Michigan income tax laws and the Single Business
Tax if, and to the same extent as, such interest would have been so
excludable if paid by the issuer of the defaulted obligations.
While treatment under the Michigan Intangibles Tax is not premised
upon the characterization of such proceeds under the Internal
Revenue Code, the Michigan Department of Treasury should adopt the
same approach as under the Michigan income tax laws and the Single
Business tax; and
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(7) As the Tax Reform Act of 1986 eliminates the capital gain deduction
for tax years beginning after December 31, 1986, the federal
adjusted gross income, the computation base for the Michigan Income
Tax, of a Unitholder will be increased accordingly to the extent
such capital gains are realized when the Michigan Trust disposes of
a Bond or when the Unitholder redeems or sells a Unit, to the extent
such transaction constitutes a taxable event for Federal income tax
purposes.
MINNESOTA TRUSTS. In the early 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 government, school districts and state agencies, which, in
varying degrees, also faced cash flow difficulties. In certain cases, revenues
of local governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation
reduced its rating on the State's outstanding general obligation bonds from AAA
to AA+ in August 1981 and to AA in March 1982. Moody's Investors Service, Inc.
lowered its rating on 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 budget shortfall, primarily attributable to
reduced income tax receipts, for the biennium ending June 30, 1993. Planning
estimates for the 1994-95 biennium projected a budget shortfall of $1.75
billion (less a $400 million reserve). The State responded by enacting
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 and spending
changes. The 1993 legislature enacted further tax and spending changes. An
end-of-legislative-session budget forecast released by the Department of
Finance on June 15, 1993 projects a $297 million General Fund surplus as the
end of the biennium ended on June 30, 1993, plus a $360 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 surplus of $16 million at the end of the biennium, after applying the
surplus from June 30, 1993 and after reserving $360 million for the cash flow
account.
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State grants and aids represent a large percentage of the total revenues
of cities, towns, counties and school districts in Minnesota. Even with
respect to bonds that are revenue obligations and not general obligations of
the State, there can be no assurance that the fiscal problems referred to above
will not adversely affect the market value or marketability of the bonds or the
ability of the respective obligors to pay interest on and principal of the
bonds.
At the time of the closing for each Minnesota Trust, Special Counsel to
each Minnesota Trust for Minnesota tax matters rendered an opinion under then
existing Minnesota income tax law applicable to taxpayers whose income is
subject to Minnesota income taxation substantially to the effect that:
We understand that a Minnesota Trust will have no income other than (i)
interest income on bonds issued by the State of Minnesota and its
political and governmental subdivisions, municipalities and governmental
agencies and instrumentalities and on bonds issued by possessions of the
United States which would be exempt from Federal and Minnesota income
taxation when paid directly to an individual, trust or estate (and the
term "Bonds" as used herein refers only to such Bonds), (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain
insurance policies issued to the Trustee or to the issuers of the Bonds
which represent maturing interest or principal payments on defaulted
Bonds held by the Trustee.
"Taxable income" for Minnesota income tax purposes is the same as
"taxable Income" for Federal income tax purposes with certain modifications
that (with one exception) do not apply to the present circumstances. The
exception is that corporations must add to Federal taxable income the amount of
any interest received on the obligations of states and their agencies and
instrumentalities, political and governmental subdivisions, and municipalities.
The terms "trust" and "corporation" have the same meanings for Minnesota income
tax purposes, as relevant to the Minnesota tax status of a Minnesota Trust, as
for Federal income tax purposes.
In view of the relationship between Federal and Minnesota law described
in the preceding paragraph and the opinion of Chapman and Cutler with respect
to Federal tax treatment of a Minnesota Trust and its Unitholders: (1) a
Minnesota Trust will be treated as a trust rather than a corporation for
Minnesota income tax purposes and will not be deemed the recipient of any
Minnesota taxable income; (2) each Unitholder of a Minnesota Trust will be
treated as the owner of a pro rata portion of a Minnesota Trust for Minnesota
income tax purposes and the income of a Minnesota Trust will therefore be
treated as the income of the Unitholders under Minnesota law; (3) interest on
the Bonds will be exempt from Minnesota income taxation of Unitholders who are
individuals, trusts and estates when received by a Minnesota Trust and
attributed to such Unitholders and when distributed to such Unitholders (except
as hereinafter provided with respect to "industrial development bonds" and
"private activity bonds" held by "substantial users"); (4) interest on the
Bonds will be includible in the Minnesota taxable income (subject to allocation
and apportionment) of Unitholders that are corporations; (5) each Unitholder
will realize taxable gain or loss when a Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells Units at a price which differs from original cost
as adjusted for amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be required to reflect a
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Unitholder's share of interest, if any, accruing on Bonds during the interval
between the Unitholder's settlement date and the date such Bonds are delivered
to a Minnesota Trust, if later); (6) tax cost reduction requirements relating
to amortization of bond premium may, under some circumstances, result in
Unitholders realizing taxable gain when their Units are sold or redeemed for an
amount equal to or less than their original cost; (7) any proceeds paid under
the insurance policy issued to the Trustee with respect to the Bonds which
represent maturing interest on defaulted obligations held by the Trustee will
be excludible from Minnesota gross income if, and to the same extent as, such
interest would have been so excludible if paid by the issuer of the defaulted
obligations; (8) any proceeds paid under individual insurance policies obtained
by issuers of Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be excludible from Minnesota gross income if, and to
the same extent as, such interest would have been so excludible if paid in the
normal course by the issuer of the defaulted obligations; (9) net capital gains
of Unitholders attributable to the Bonds will be fully includible in the
Minnesota taxable income of Unitholders (subject to allocation and
apportionment In the case of corporate Unitholders); and (10) interest on Bonds
includible in the computation of "alternative minimum taxable income" for
Federal income tax purposes will also be includible in the computation of
"alternative minimum taxable income" for Minnesota income tax purposes.
Interest income attributable to Bonds that are "industrial development
bonds" or "private activity bonds," as those terms are defined in the Internal
Revenue Code, will be taxable under Minnesota law to a Unitholder who is a
"substantial user" of the facilities financed by the proceeds of such Bonds (or
a "related person" to such a "substantial user") to the same extent as if such
Bonds were held by such Unitholder.
MISSOURI TRUSTS. The following discussion regarding constitutional
limitations and the economy of the State of Missouri is Included for the
purpose of providing general information that may or may not affect Issuers of
the Bonds In Missouri.
In November 1981, the voters of Missouri adopted a tax limitation
amendment to the constitution of the State of Missouri (the "Amendment"). The
Amendment prohibits increases in local taxes, licenses or fees by political
subdivisions without approval of the voters of such political subdivision. The
Amendment also limits the growth in revenues and expenditures of the State to
the rate of growth in the total personal income of the citizens of Missouri.
The limitation may be exceeded if the General Assembly declares an emergency by
a two-thirds vote.
Although the June 1993 revenue estimate has been revised downward by
$27.5 million, the State budget remains balanced due primarily to delayed
spending for desegregation capital projects. The downward revision in revenues
was considered necessary because of weak economic performances to date, and
more importantly an economic outlook for the second half of the fiscal year
which projects slower growth than was anticipated in June 1992.
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The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade has offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the United
States Bureau of Labor Statistics, the 1991 unemployment rate in Missouri was
6.6%, the 1992 rate was 5.7% and the seasonally adjusted rate for March of
1993 was 6.7%. There can be no assurance that general economic conditions or
the financial circumstances of Missouri or its political subdivisions will not
adversely affect the market value of the Bonds or the ability of the obligor to
pay debt service on such Bonds.
Currently, Moody's Investors Service rates Missouri general obligation
bonds "Aaa" and Standard & Poor's Corporation rates Missouri general obligation
bonds "AAA". Although these ratings indicate that the State of Missouri is in
relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely affected
by changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay interest
on or principal of the Bonds.
The assets of the Missouri Trust will consist of debt obligations issued
by or on behalf of the State of Missouri (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Missouri
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds
to be deposited in and held in the Missouri Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for Federal income tax purposes and (iii) interest on the Missouri
Bonds, if received directly by a Unitholder, would be exempt from the Missouri
income tax applicable to individuals and corporations ("Missouri state income
tax"). The opinion set forth below does not address the taxation of persons
other than full time residents of Missouri. No opinion is expressed regarding
whether the gross earnings derived from the Units is subject to intangible
taxation imposed by counties, cities and townships pursuant to present Kansas
law.
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In the opinion of Chapman and Cutler, counsel to the Sponsor under
existing law:
(1) The Missouri Trust is not an association taxable as a corporation
for Missouri income tax purposes, and each Unitholder of the
Missouri Trust will be treated as the owner of a pro rata portion of
the Missouri Trust and the income of such portion of the Missouri
Trust will be treated as the income of the Unitholder for Missouri
state income tax purposes;
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri state income tax if received
directly by a Unitholder will be exempt from the Missouri state
income tax when received by the Missouri Trust and distributed to
such Unitholder; however, no opinion is expressed herein regarding
taxation of interest paid and original issue discount, if any, on
the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes;
(3) To the extent that interest paid and original issue discount, if
any, derived from the Missouri Trust by a Unitholder with respect to
Possession Bonds is excludable from gross income for Federal income
tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section
142 3a, and 48 U.S.C. Section 1403, such interest paid and original
issue discount, if any, will not be subject to the Missouri state
income tax; however, no opinion is expressed herein regarding
taxation of interest paid and original issue discount, if any, on
the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes;
(4) Each Unitholder of the Missouri Trust will recognize gain or loss
for Missouri state income tax purposes if the Trustee disposes of a
bond (whether by redemption, sale, or otherwise) or if the
Unitholder redeems or sells Units of the Missouri Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for Federal income tax purposes. Due to the
amortization of bond premium and other basis adjustments required by
the Internal Revenue Code, a Unitholder under some circumstances,
may realize taxable gain when his or her Units are sold or redeemed
for an amount equal to their original cost;
(5) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross
income for Federal income tax purposes will be excludable from
Missouri state income tax to the same extent as such interest would
have been paid by the issuer of such Bonds held by the Missouri
Trust; however, no opinion is expressed herein regarding taxation of
interest paid and original issue discount, if any, on the Bonds
received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not
limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes;
(6) The Missouri state income tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Trust, the interest on which is
exempt from such Tax; and
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(7) The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of
the Bonds held by the Missouri Trust will not generally be subject
to the Kansas City, Missouri Earnings and Profits Tax or the City of
St Louis Earnings Tax (except in the case of certain Unitholders,
including corporations, otherwise subject to the St. Louis City
Earnings Tax).
NEW JERSEY TRUSTS. Each New Jersey Trust consists of a portfolio of
Bonds. The Trust is therefore susceptible to political, economic or regulatory
factors affecting issuers of the Bonds. The following information provides
only a brief summary of some of the complex factors affecting the financial
situation in New Jersey (the "State") and is derived from sources that are
generally available to investors and is believed to be accurate. It is based
in part on information obtained from various State and local agencies in New
Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,050 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 States in per
capita personal income ($26,457).
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 6.2%
in November 1993, which is below the national average of 6.4% in November
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.
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Debt Service. The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These bonds
are backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1993, there was a total authorized bond indebtedness of
approximately $8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.38 billion
was unissued. The debt service obligation for such outstanding indebtedness is
$119.9 million for fiscal year 1994.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of fiscal year
1989, there was a surplus in the State's general fund (the fund into which all
State revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal year 1990,
there was a surplus in the general fund of $1 million. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus of $760.8 million. It is estimated
that New Jersey closed its fiscal year 1993 with a surplus of $361.3 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional revenue.
Projections and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the
form of an increased state income tax on individuals. At the time of
enactment, it was projected that this increase would raise approximately $1.3
billion in additional income taxes to fund a new school aid formula, a new
homestead rebate program and state assumption of welfare and social services
costs. Projections and estimates of receipts from income taxes, however, have
also been subject to variance in recent fiscal years. Under the legislation,
income tax rates increased from their previous range of 2% to 3.5% to a new
range of 2% to 7%, with the higher rates applying to married couples with
incomes exceeding $70,000 who file joint returns, and to individuals filing
single returns with incomes of more than $35,000.
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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 State 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 the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings
pertaining to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are cases challenging the
following: the formula relating to State aid to public schools, the method by
which the State shares with its counties maintenance recoveries and costs for
residents in State institutions, unreasonably low Medicaid payment rates for
long-term facilities in New Jersey, the obligation of counties to maintain
Medicaid or Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, various provisions, and
the constitutionality of the Fair Automobile Insurance Reform Act of 1990, the
State's method of funding the judicial system, certain provisions of New
Jersey's hospital rate-setting system, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required by
the Health Care Cost Reduction Act of 1991, refusal of the State to share with
Camden County federal funding the State recently received for disproportionate
share hospital payments made to county psychiatric facilities, and 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 judgments in these and other matters could have the
potential for either a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure for
these claims.
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Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds Aaa
and "AAA", respectively. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to "AA+." On June 4,
1992, Standard and Poor's Corporation placed New Jersey general obligation
bonds on CreditWatch with negative implications, citing as its principal reason
for its caution the unexpected denial by the federal government of New Jersey's
request for $450 million in retroactive Medicaid payments for psychiatric
hospitals. These funds were critical to closing a $1 billion gap in the
State's $15 billion budget for fiscal year 1992 which ended on June 30, 1992.
Under New Jersey state law, the gap in the budget must be closed before the new
budget year begins on July 1, 1992. Standard and Poor's suggested the State
could close fiscal 1992's budget gap and help fill fiscal 1993's hole by a
reversion of $700 million of pension contributions to its general fund under a
proposal to change the way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the sagging State economy would recover quickly enough
to meet lawmakers' revenue projections. It also remained concerned about the
recent federal ruling leaving in doubt how much the State was due in
retroactive Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital patients.
There can be no assurance that these ratings will continue or that particular
bond issues may not be adversely affected by changes in the State or local
economic or political conditions.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aal," stating that the reduction reflects a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures will
persist.
Although New Jersey received $412 million in settlement of its $450
million dispute with the federal government for retroactive Medicaid
reimbursements, neither Moody's nor Standard and Poor's has revised its rating
for New Jersey general obligation bonds.
At the time of the closing for each New Jersey Trust Special Counsel to
each New Jersey Trust for New Jersey tax matters rendered an opinion under then
existing New Jersey income tax law applicable to taxpayers whose income is
subject to New Jersey income taxation substantially to the effect that:
(1) Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. Each New Jersey Trust will
not be subject to the New Jersey Corporation Business Tax or the New
Jersey Corporation Income Tax;
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(2) With respect to the non-corporate Unitholders who are
residents of New Jersey, the income of a New Jersey Trust will
be treated as the income of such Unitholder under the New
Jersey Gross Income Tax. Interest on the underlying Bonds
which is exempt from tax under the New Jersey Gross Income Tax
when directly received by the New Jersey Trust will retain its
status as tax-exempt interest when distributed to the
Unitholders. Any proceeds paid under the insurance policy
issued to the Trustee of a New Jersey Trust with respect to
the Bonds or under individual policies obtained by issuers of
Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be exempt from New Jersey
Gross Income Tax if, and to the same extent as, such interest
would have been so exempt if paid by the issuer of the
defaulted obligations;
(3) A non-corporate Unitholder will not be subject to the New
Jersey Gross Income Tax on any gain realized either when a New
Jersey Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity), when the Unitholder
redeems or sells his Units or upon payment of any proceeds
under an insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual
policies obtained by issuers of Bonds which represent maturing
principal on defaulted obligations held by the Trustee. Any
loss realized on such disposition may not be utilized to
offset gains realized by such Unitholder on the disposition of
assets the gain on which is subject to the New Jersey Gross
Income Tax;
(4) Units of a New Jersey Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law
or the New Jersey Estate Tax Law; and
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in a New Jersey Trust which is
allocable to such corporation will be includable in its entire
net income for purposes of the New Jersey Corporation Business
Tax or New Jersey Corporation Income Tax, less any interest
expense incurred to carry such investment to the extent such
interest expense has not been deducted in computing Federal
taxable income. Net gains derived by such corporation on the
disposition of the Bonds by a New Jersey Trust or on the
disposition of its Units will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax
or New Jersey Corporation Income Tax. Any proceeds paid under
an insurance policy issued to the Trustee of a New Jersey
Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest
or maturing principal on defaulted obligations held by the
Trustee will be included in its entire net income for purposes
of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax if, and to the same extent as, such
interest or proceeds would have been so included if paid by
the issuer of the defaulted obligations.
NEW YORK TRUSTS. The portfolio of the New York Trust includes
certain Bonds issued by New York State (the "State"), by its various public
bodies (the "Agencies"), and/or by other entities located within the State,
including the City of New York (the "City").
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Some of the more significant events relating to the financial
situation in New York are summarized below. This section provides only a brief
summary of the complex factors affecting the financial situation in New York
and is based in part on official statements issued by, and on other information
reported by, the State, the City and the Agencies in connection with the
issuance of their respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the New York Trust or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than
that of the nation as a whole, gradually eroding the State's relative economic
affluence. Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had
in attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued
throughout the State's 1990-91 fiscal year and was followed by a period of weak
economic growth during the 1991 calendar year. For calendar year 1992, the
national economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow faster
than 1992, but still at a very moderate rate as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry, cutbacks
in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approval
a $32.08 billion budget. Following enactment of the budget the 1993-94 State
Financial Plan was formulated on April 16, 1993. This Plan projects General
Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. In comparison
to the Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
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While a portion of the increased receipts was the result of a $487
million increase in the States's 1992-93 positive year-end margin at March 31,
1993 to $671 million, the balance of such increased receipts is based upon (i)
a projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the
1993-94 State Financial Plan, a reduction in aid to some local government units
can be expected. To offset a portion of such reductions, the 1993-94 State
Financial Plan contains a package of mandate relief, cost containment and other
proposals to reduce the costs of many programs for which local governments
provide funding. There can be no assurance, however, that localities that
suffer cuts will not be adversely affected, leading to further requests for
State financial assistance.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions
to align recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end
deposit to the refund reserve account of $671 million, General Fund receipts in
1992-93 would have been $716 million higher than originally projected. This
year-end deposits 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.
Fiscal year 1992-93 was the first time in four years that the State
did not incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term
State general obligation debt authorized but unissued stood at $2.4 billion.
As of the same date, the State had approximately $5.4 billion
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in general obligation bonds. The State issued $850 million in tax and revenue
anticipation notes ("TRANS") on April 28, 1993. The State does not project the
need to issue additional TRANS during the States's 1993-94 fiscal year.
The State anticipates that its borrowings for capital purposes during
the State's 1993-94 fiscal year will consist of $460 million in general
obligation bonds and $140 million in new commercial paper issuances. In
addition, the State expects to issue $140 million in bonds for the purpose of
redeeming outstanding bond anticipation notes. The Legislature has authorized
the issuance of up to $85 million in certificates of participation during the
State's 1993-94 fiscal year for personal and real property acquisitions. The
projection of the State regarding its borrowing for the 1993-94 fiscal year may
change if actual receipts fall short of State projections or if other
circumstances require.
In June, 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
To date, LGAC has issued its bonds to provide net proceeds of $3.28 billion.
LGAC has been authorized to issue additional bonds to provide net proceeds of
$703 million during the State's 1993-94 fiscal year.
The $850 million in TRANS issued by the State in April 1993 were rated
SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23, 1993,
which represents the highest ratings given by such agencies and the first time
the State's TRANS have received these ratings since its May 1989 TRANS
issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at a A
on April 23, 1993, and S&P's rating stood at A- with a stable outlook on
April 26, 1993, an improvement from S&P's negative outlook prior to April 1993.
Previously, Moody's lowered its rating to A on June 6, 1990, its rating having
been A1 since May 27, 1986. S&P lowered its rating from A to A- on January
13, 1992. S&P's previous ratings were A from March 1990 to January 1992, AA-
from August 1987 to March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation
bonds, and S&P, in improving its outlook on such bonds from negative to stable,
noted the State's improved fiscal condition and reasonable revenue assumptions
contained in the 1993-94 State budget.
New York 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.
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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 enacted legislation in response to this crisis. During 1975, the
State Legislature (i) created the Municipal Assistance Corporation ("MAC") to
assist with long-term financing for the City's short-term debt and other cash
requirements and (ii) created the State Financial Control Board (the "Control
Board") to review and approve the City's budgets and City four-year financial
plans (the financial plans also apply to certain City-related public agencies
(the "Covered Organizations")).
Over the past three years, the rate of economic growth in the City has
slowed substantially, and the City's economy is currently in recession. The
City projects and its current four-year financial plan assumes a recovery early
in the 1993 calendar year. The Mayor is responsible for preparing the City's
four-year financial plan, including the City's current financial plan. The
City Comptroller has issued reports concluding that the recession of the City's
economy will be more severe and last longer than is assumed in the Financial
Plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal
year results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results.
The City's modified 1993-1996 Financial Plan dated February 9, 1993
covering fiscal years 1993-1996 projects budget gaps for 1994 through 1996.
The Office of the State Deputy Controller for the City of New York has
estimated that under the modified Financial Plan budget gaps will be $102
million for fiscal year 1994, $196 million for fiscal year 1995 and $354
million for fiscal year 1996, primarily due to anticipated higher spending on
labor costs.
However, the City's modified Plan is dependent upon a gap-closing
program, certain elements of which the staff of Control Board identified on
March 25, 1993 to be at risk due to projected levels of State and Federal aid
and revenue and expenditures estimates which may not be achievable. The
Control Board indicated that the City's modified Financial Plan does not make
progress towards establishing a balanced budget process. The Control Board's
report identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion
and $2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for
Fiscal Year 1993-94 would be $280 million less than projected and that in order
to balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot-revenues. The State Comptroller added that
the City's budget should be based on "recurring revenues that fund recurring
expenditures."
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Given the foregoing factors, there can be no assurance that City will
continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base.
Pursuant to State law, the City prepares a four-year annual financial
plan which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the occurrence of
an annual operating deficit of more than $100 million or the loss of access to
the public credit markets to satisfy the City's capital and seasonal financing
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. As a result of the
national and regional economic recession, the State's projections of tax
revenues for its 1991 and 1992 fiscal years were substantially reduced. For
its 1993 fiscal year, the State, before taking any remedial action reflected in
the State budget enacted by the State Legislature on April 2, 1992 reported a
potential budget deficit of $4.8 billion. If the State experiences revenue
shortfalls or spending increases beyond its projections during its 1993 fiscal
year or subsequent years, such developments could also result in reductions in
projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow and
additional City expenditures as a result of such delays.
The City's projections set forth in the Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future City
budgets by the New York City Council, and approval by the Governor or the State
Legislature and the cooperation of MAC, with respect to various other actions
proposed in such financial plan.
The City's ability to maintain a balanced operating budget is
dependent on whether it can implement necessary service and personnel reduction
programs successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
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Attaining a balanced budget is also dependent upon the City's ability
to market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to reimburse
the City's general fund for capital expenditures already incurred. In
addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public bond
and note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs and
other issues may affect the market for outstanding City general obligation
bonds and notes. If the City were unable to sell its general obligation bonds
and notes, it would be prevented from meeting its planned operating and capital
expenditures.
The City Comptroller, the staff of the Control Board, the Office of
the State Deputy Comptroller for the City of New York (the "OSDC") and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and future
expenditures may be greater than those forecast in the financial plan. In
addition, the Control Board and other agencies have questioned whether the City
has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services. It is
reasonable to expect that such reports and statements will continue to be
issued and to engender public comment.
The City achieved balanced operating results as reported in accordance
with GAAP for the 1992 fiscal year. During the 1990 and 1991 fiscal years, the
City implemented various actions to offset a projected budget deficit of $3.2
billion for the 1991 fiscal year, which resulted from declines in City revenue
sources and increased public assistance needs due to the recession. Such
actions included $822 million of tax increases and substantial expenditure
reductions.
The quarterly modification to the City's financial plan submitted to
the Control Board on May 7, 1992 (the "1992 Modification") projected a balanced
budget in accordance with GAAP for the 1992 fiscal year after taking into
account a discretionary transfer of $455 million to the 1993 fiscal year as the
result of a 1992 fiscal year surplus. In order to achieve a balanced budget
for the 1992 fiscal year, during the 1991 fiscal year, the City proposed
various actions for the 1992 fiscal year to close a projected gap of $3.3
billion in the 1992 fiscal year.
On November 19, 1992 the City submitted to the Control Board the
Financial Plan for the 1993 through 1996 fiscal years, which is a modification
to a financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education ("BOE")
and the City University of New York ("CUNY"). The 1993-1996 Financial Plan
projects revenues and expenditures of $29.9 billion each for the 1993 fiscal
year balanced in accordance with GAAP.
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During the 1992 fiscal year, the City proposed various actions to
close a previously projected gap of approximately $1.2 billion for the 1993
fiscal year. The gap-closing actions for the 1993 fiscal year proposed during
the 1992 fiscal year and outlined in the City's June Financial Plan included
$489 million of discretionary transfers from the 1992 fiscal year. The 1993-
1996 City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines
a proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for the fiscal
years 1994, 1995, and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject
to approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other actions
to decrease expenditures or increase revenues to maintain a balanced financial
plan.
On March 9, 1993, OSDC issued a report on the February Modification.
The report expressed concern that the budget gaps projected for fiscal years
1994 through 1996 are the largest the City has faced at this point in the
financial planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
torts, breaches of contracts and other violations of law and condemnation
proceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the City's ability to
carry out its financial plan. As of June 30, 1992, legal claims in excess of
$341 billion were outstanding against the City for which the City estimated its
potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's
general obligation bonds stood at Baa1 and S&P's rating stood at A-. On
February 11, 1991, Moody's lowered its rating from A.
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On June 30, 1993 in confirming the Baa1 rating, Moody's noted that:
The recent trend of declining reliance on [one-shot revenues]
is notable, and it is too early to predict the increased
reliance on one-shots in the fiscal 1994 budget represents the
beginning of a continuing upward movement in the use of
one-shots. . . . Moody's recognized in February of 1991, when
the [C]ity's rating was lowered from A to Baa1, that the
[C]ity faced structural budgetary imbalances which were
unlikely to be cured in the near term. Moody's continues to
expect the [C]ity's progress toward achieving structural
balance to be slow and uneven, but that the [C]ity will be
diligent and prudent in closing each year's gap, factors which
are consistent with the Baa1 rating level.
On March 30, 1993, S&P affirmed its rating with a negative outlook,
stating that:
The City's key credit factors are marked by a high and growing
debt burden, and taxation levels that are relatively high, but
stable. The City's economy is broad-based and diverse, but
currently is in prolonged recession, with slow growth
prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued
fiscal pressure facing the City, driven by continued weakness
in the local economy, rising spending pressures for education
and labor costs of city employees, and increasing costs
associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial
increases in aid from national and state governments.
Maintenance of the current rating, and stabilization of the
rating outlook, will depend on the City's success in realizing
budgetary aid from these governments, or replacing those
revenues with ongoing revenue-raising measures or spending
reductions under the City's control. However, increased
reliance on non-recurring budget balancing measures that would
support current spending, but defer budgetary gaps to future
years, would be viewed by S&P as detrimental to New York
City's single-'A-' rating.
Previously, Moody's had raised its rating to A in May 1988, to Baa1 in
December 1985, to Baa in November 1983 and to Bal in November,1981. S&P had
raised its rating to A- in November 1987, to BBB+ in July 1985 and to BBB in
March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding
City revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25 billion
in notes then being sold. On April 29, 1991, S&P revised downward its rating
on City revenue anticipation notes from SP-1 to SP-2.
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As of December 31, 1992, the City and MAC had, respectively, $20.3
billion and $4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial
difficulties which could adversely affect the ability of such Agencies to make
payments of interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under so-called "moral
obligation" provisions which are non-binding statutory provisions for State
appropriations to maintain various debt service reserve funds) to appropriate
funds on behalf of the Agencies. Moreover, it is expected that the problems
faced by these Agencies will continue and will require increasing amounts of
State assistance in future years. Failure of the State to appropriate
necessary amounts or to take other action to permit those Agencies having
financial difficulties to meet their obligations could result in a default by
one or more of the Agencies. Such default, if it were to occur, would be
likely to have a significant adverse effect on investor confidence in, and
therefore the market price of, obligations of the defaulting Agencies. In
addition, any default in payment on any general obligation of any Agency whose
bonds contain a moral obligation provision could constitute a failure of
certain conditions that must be satisfied in connection with Federal guarantees
of City and MAC obligations and could thus jeopardize the City's long-term
financing plans.
As of September 30, 1992, the State reported that there were eighteen
Agencies that each had outstanding debt of $100 million or more. These
eighteen Agencies had an aggregate of $62.2 billion of outstanding debt,
including refunding bonds, of which the State was obligated under
lease-purchase, contractual obligation or moral obligation provisions on $25.3
billion.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of significant
social welfare programs primarily involving the State's mental hygiene
programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the
future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations claim
that significant amounts of land were unconstitutionally taken from the Indians
in violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
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The U.S. Supreme Court on March 30, 1993, referred to a Special Master
for determination of damages on an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York-based brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz
1993"), petitioners have challenged the constitutionality of mass
transportation bonding programs of the New York State Thruway Authority and the
Metropolitan Transportation Authority. On May 24, 1993, the Supreme Court,
Albany County, temporarily enjoined the State from implementing those bonding
programs. In previous actions Mr. Schulz and others have challenged on similar
grounds bonding programs for the New York State Urban Development Corporation
and the New York Local Government Assistance Corporation. While there have
been no decisions on the merits in such previous actions, by an opinion dated
May 11, 1993, the New York Court of Appeals held in a proceeding commenced on
April 29, 1991 in the Supreme Court, Albany County (Schulz v. State of New
York), that petitioners had standing as voters under the State Constitution to
bring such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the
two Authorities is subject to approval by statewide referendum. At this time
there can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to borrow
funds in the future. The State has not indicated that the temporary injunction
issued by the Supreme Court in this action will have any immediate impact on
its financial condition or interfere with projects requiring immediate action.
Adverse developments in the foregoing proceedings or new proceedings
could adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance. Both the Revised
1992-93 State Financial Plan and the recommended 1993-94 State Financial Plan
include a significant reduction in State aid to localities in such programs as
revenue sharing and aid to education from projected base-line growth in such
programs. It is expected that such reductions will result in the need for
localities to reduce their spending or increase their revenues. The potential
impact on the State of such actions by localities is not included in
projections of State revenues and expenditures in the State's 1993-94 fiscal
year.
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Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1991, the total indebtedness of all
localities in the State was approximately $31.6 billion, of which $16.8 billion
was debt of New York City (excluding $6.7 billion in MAC debt). State law
requires the Comptroller to review and make recommendations concerning the
budgets of those local government units other than New York City authorized by
State law to issue debt to finance deficits during the period that such deficit
financing is outstanding. Fifteen localities had outstanding indebtedness for
State financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, New York City or any of the Agencies were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by
localities within the State, including notes or bonds in the New York Trust,
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions, and
long-range economic trends. The longer-range potential problems of declining
urban population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
At the time of the closing for each New York Trust, Special Counsel to
each New York Trust for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect that:
Each New York Trust is not an association taxable as a
corporation and the income of a New York Trust will be treated as the
income of the Unitholders under the income tax laws of the State and
the City of New York. Individuals who reside in New York State or
City will not be subject to State and City tax on interest income
which is exempt from Federal income tax under section 103 of the
Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be
subject to New York State and City tax with respect to any gains
realized when such obligations are sold, redeemed or paid at maturity
or when any such Units are sold or redeemed.
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NORTH CAROLINA TRUSTS. General obligations of a city, town or county
in North Carolina are payable from the general revenues of the entity,
including ad valorem tax revenues on property within the jurisdiction. Revenue
bonds issued by North Carolina political subdivisions include (1) revenue bonds
payable exclusively from revenue-producing governmental enterprises and (2)
industrial revenue bonds, college and hospital revenue bonds and other "private
activity bonds" which are essentially non-governmental debt issues and which
are payable exclusively by private entities such as non-profit organizations
and business concerns of all sizes. State and local governments have no
obligation to provide for payment of such private activity bonds and in many
cases would be legally prohibited from doing so. The value of such private
activity bonds may be affected by a wide variety of factors relevant to
particular localities or industries, including economic developments outside of
North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit
any city, town, school district, county or other taxing district to avail
itself of the provisions of Chapter 9 of the United States Bankruptcy Code, but
only with the consent of the Local Government Commission of the State and of
the holders of such percentage or percentages of the indebtedness of the issuer
as may be required by the Bankruptcy Code (if any such consent is required).
Thus, although limitations apply, in certain circumstances political
subdivisions might be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution
requires that the total expenditures of the State for the fiscal period covered
by each budget not exceed the total of receipts during the fiscal period and
the surplus remaining in the State Treasury at the beginning of the period.
The State's fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget
projections. Lower than anticipated revenues coupled with increases in State
spending requirements imposed by the federal government led to projected budget
deficits for fiscal 1989-1990 and fiscal 1990-91. Consequently, the Governor
ordered cuts in budgeted State expenditures for both fiscal years.
When similar budget deficits were projected for the next two fiscal
years, the General Assembly addressed the problem through a broad array of
State spending reductions in existing programs or previously budgeted increases
and tax increases. The taxes include a one-cent increase in the sales tax, a
three-cent increase in the excise tax on cigarettes, an increase in the
corporate tax rate (from 7 to 7.75 percent, as well as a four-year surtax,
starting at 4% of the regular income tax for tax year 1991 and reducing by 1%
for each of the following three years), an increase in the individual income
tax rate for married couples with income of more than $100,000 and individuals
with income over $60,000, and other taxes.
The effect of the budget reductions and tax increases resulted in a
small budget surplus (approximately $160 million) for the 1991-1992 fiscal year
(ended June 30, 1992). The State netted a larger budget surplus (approximately
$342 million) for the 1992-1993 fiscal year (ended June 30, 1993). The $9
billion for 1993-1994 adopted by the General Assembly did not include any new
tax measures. The 1993-1994 budget does include new spending cuts and
estimated increased revenues totalling $30.6 million.
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Both the nation and the State have experienced a modest economic
recovery in recent months. However, it is unclear what effect these
developments, as well as the reduction in government spending or increase in
taxes may have on the value of the Debt Obligation in the North Carolina Trust.
No clear upward trend has developed, and both the State and the national
economies must be watched carefully.
The fiscal condition of the State might be affected adversely by
litigation concerning the legality of certain State tax provisions following
the decision of the United States Court in Davis v. Michigan Dept. of Treasury
(decided March 28, 1989). In Davis, the United States Supreme Court held
unconstitutional a Michigan statute exempting from state income taxation
retirement benefits paid by the state of Michigan or its local governments, but
not exempting retirement benefits paid by the federal government.
Subsequent to Davis, certain federal retirees and federal military
personnel plaintiffs brought an action in North Carolina state court seeking
refund of the illegal taxes. Swanson, et al. v. State of North Carolina, et
al. (Wake County, North Carolina Superior Court, No. 90 CVS 3127) ("Swanson
State").
The amount of refunds claimed by the federal retirees in the Swanson
action has not been calculated. Plaintiffs have asserted that the plaintiff
class contains about 100,000 taxpayers; the State has asserted that the claims
would aggregate at least $140 million (which might not include interest).
In a 4-3 decision, the North Carolina Supreme Court found for the
defendants, declaring the State would not be required to refund taxes illegally
collected prior to the decision in Davis. Because of this determination, the
Court did not need to decide what remedies would be available if Davis were
held to apply retroactively. The Court reaffirmed its decision following
reconsideration.
Plaintiffs in Swanson State applied for review by the U.S. Supreme
Court. The U.S. Supreme Court vacated the judgement and remanded the case to
the North Carolina Supreme Court for reconsideration in the light of the U.S.
Supreme Court's holding in Harper v. Virginia Dept. of Taxation (No. 91-794)
("Harper"). In Harper, which also involved the disparate income tax treatment
of retired state and federal employees and the question of retroactive
application of the decision in Davis, the Supreme Court held that the
Commonwealth of Virginia must provide "meaningful backward-looking relief" to
the plaintiffs, if the Commonwealth did not have a predeprivation process
adequate to satisfy due process requirements. The case was remanded to the
Supreme Court of Virginia to determine whether a remedy was required and, if
so, what form it would take.
The impact of Harper on the estimated $140 million of refund claims in
Swanson State has yet to be determined. The North Carolina Supreme Court must
determine whether North Carolina law provides an adequate predeprivation
process, and, if not, what remedy should be fashioned to satisfy due process
requirements.
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General. The population of the State has increased 13% from 1980,
from 5,880,095 to 6,647,351 as reported by the 1990 federal census. Although
North Carolina is the tenth largest state in population, it is primarily a
rural state, having only five municipalities with populations in excess of
100,000.
The labor force has undergone significant change during recent years.
The State has moved from an agricultural to a service and goods producing
economy. Those persons displaced by farm mechanization and farm consolidations
have, in large measure, sought and found employment in other pursuits. Due to
wide dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1990, the State labor force grew about 19% (from 2,855,200 to
3,401.000), and per capita income grew from $7,999 to $16,203, an increase of
102.6%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of May 1991, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment, Employment indicators have fluctuated somewhat in the
annual periods since June of 1989.
The unemployment rate in June 1993 was 5.4% of the labor force, as
compared with an unemployment rate of 7.0% nationwide.
The diversity of agriculture in North Carolina and a continuing push
in marketing efforts have protected farm income from some of the wide
variations that have been experienced in other states where most of the
agricultural economy is dependent on a small number of agricultural
commodities.
Gross agricultural income in 1991 was $4.98 billion, including
approximately $4,924,071,000 income from commodities. As of 1991, the State
was tenth in the nation in gross agricultural income. Tobacco production is a
leading source of agricultural income in the State, accounting for 21.4% of
gross agricultural income. Tobacco farming in North Carolina has been and is
expected to continue to be affected by major Federal legislation and regulatory
measures regarding tobacco production and marketing and by international
competition. Measures adverse to tobacco farming could have negative effects
on farm income and the North Carolina economy generally. Eggs and poultry
products accounted for revenues of approximately $1.5 billion in 1991.
According to the State Commissioner of Agriculture, based on 1991
figures, the State ranked first in the nation in the production of flue-cured
tobacco, total tobacco, turkeys and sweet potatoes; second in the production of
cucumbers for pickles; third in the value of poultry products and trout; fourth
in commercial broilers and peanuts; sixth in burley tobacco, greenhouse and
nursery receipts, hogs and strawberries; and seventh in the number of chickens
(excluding broilers), peaches and apples. The number of farms has been
decreasing; in 1992 there were approximately 60,000 farms in the State (down
from approximately 72,000
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in 1987, a decrease of about 17% in five years). However, a strong
agribusiness sector also supports farmers with farm inputs
(fertilizer,insecticide, pesticide and farm machinery) and processing of
commodities produced by farmers (vegetable canning and cigarette
manufacturing).
The State Department of Commerce, Travel and Tourism Division, has
reported that in 1991 approximately $7 billion was spent on tourism in the
State with 1992 revenues from tourism expected to exceed $7.3 billion. In
1990, traveler expenditures directly generated more than 141,000 jobs within
the State, 4.5 percent to total nonagricultural employment in that year.
Bond Ratings. Currently, Moody's rates North Carolina general
obligation bonds as Aaa and Standard & Poor's rates such bonds as AAA.
Standard & Poor's placed North Carolina general obligation bonds on "credit
watch" in June of 1990 and continued to monitor the State's economy closely
through 1990 and 1991.
In June of 1992 Standard & Poor's revised its outlook on the State's
AAA-rated general obligation bonds to stable from negative. Among the reasons
for the revision were the revenue spending measures adopted since 1991.
The rating agencies presumably will monitor the results of the
legislative approach to the fiscal difficulties.
Thus, although both ratings agencies have reaffirmed the AAA rating of
North Carolina's outstanding general obligation bonds for the present time,
there can be no assurance that these ratings will continue, that local
government bond ratings will not decline or that particular bond issues may not
be adversely affected by changes in the economic, political or other conditions
that do not affect the ratings.
The Sponsor believes the information summarized above describes some
of the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers located in
North Carolina, State agencies, publicly available documents, publications of
ratings agencies and news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any contained in this Prospectus
other than the tax opinions set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special
Counsel to the fund for North Carolina tax matters rendered an opinion under
then existing North Carolina income tax law applicable to taxpayers whose
income is subject to North Carolina income taxation substantially to the effect
that:
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Upon the establishing of the North Carolina Trust and the Units
thereunder:
(1) The North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law with the result that
income of the North Carolina Trust will be deemed to be income
of the Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina
income tax when received by the North Carolina Trust will
retain its tax-exempt status when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North
Carolina Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when a Unitholder
redeems or sells his Units (or any of them), and taxable gains
for Federal income tax purposes. However, when a Bond had
been issued under an act of the North Carolina General
Assembly that provides that all income from such Bond,
including any profit made from the sale thereof, shall be free
from all taxation by the State of North Carolina, any such
profit received by the North Carolina Trust will retain its
tax-exempt status in the hands of the Unitholders.
(4) Unitholders must authorize their proportionate share of any
premium on a Bond. Amortization for each taxable year is
accomplished by lowering the Unitholder's basis (as adjusted)
in his Units with no deduction against gross income for the
year.
(5) The Units are exempt from the North Carolina tax on intangible
personal property so long as the corpus of the North Carolina
Trust remains composed entirely of Bonds or, pending
distribution, amounts received on the sale, redemption or
maturity of the Bonds and the Trustee periodically supplies to
the North Carolina Department of Revenue at such times
required by the Department of Revenue a complete description
of the North Carolina Trust and also the name, description and
value of the obligations held in the corpus of the North
Carolina Trust.
OHIO TRUSTS. The Ohio Trust will invest substantially all of its net
assets in obligations issued by or on behalf of (or in certificates of
participation in lease purchase obligations of) the State of Ohio, political
subdivisions thereof, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Trust is therefore
susceptible to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the complex factors that may have
an effect. This information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in
connection with their issuance of securities of certain Ohio issuers and from
other publicly available documents, and is believed to be accurate. No
independent verification has been made of any of the following information.
The creditworthiness of Ohio Obligations of local issuers is generally
unrelated to that of obligations issued by the State itself, and the State has
no responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio
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Obligations or in those obligations of particular Ohio issuers. It is possible
the investment will be in particular Ohio Obligations or in those Obligations
of particular issuers as to which those factors apply. However, the
information below is intended only as a general summary and is not intended as
a discussion of any specific factors that may affect any particular issue or
issuer.
Ohio is the seventh most populous state. Its 1990 Census count of
10,847,000 indicates a 0.5% population increase from 1980.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture
also is an important segment of the economy, with over half the State's area
devoted to farming and approximately 15% of total employment is in
agribusiness.
The State's overall unemployment rate was commonly somewhat higher
than the national figure. For example, the reported 1990 average monthly State
rate was 5.7%, compared to the 5.5% national figure. However, for both 1991
and 1992 the State rates (6.4% and 7.4%) were below the national rates (6.7%
and 7.4%). The unemployment rate, and its effects, vary among particular
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Trust portfolio or the ability of particular
obligors to make timely payments of debt service on (or lease payments relating
to) those obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund (GRF), for which
personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the FY-ending balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure a resource/expenditure balances during less favorable economic periods.
These include general and selected reductions in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million
in the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). In FYs 1990-91, necessary corrective steps were
taken to respond to lower receipts and higher expenditures in certain
categories than earlier estimated. Those steps included selected reductions
in appropriations spending and
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the transfer of $64 million from the BSF to the GRF. The State reported June
30, 1991 ending fund balances of $135.3 million (GRF) and $300 million (BSF).
To allow time to resolve certain Senate and House budget differences
for the latest complete biennium that began July 1, 1991, an interim
appropriations act was enacted, effective July 1, 1991; it included State debt
service and lease rental GRF appropriations for the entire 1992-93 biennium,
while continuing most other appropriations for a month. The general
appropriations act for the entire biennium was passed on July 11, 1991 and
signed by the Governor. Pursuant to it, $200 million was transferred from the
BSF to the GRF in FY 1992.
Based on updated FY financial results and the economic forecast in the
course of FY 1992, both in light of the continuing uncertain nationwide
economic situation, there was projected and timely addressed, an FY 1992
imbalance in GRF resources and expenditures. GRF receipts significantly below
original forecasts resulted primarily from lower collections of certain taxes,
particularly sales and use taxes and personal income taxes. Higher expenditure
levels resulted from higher spending in certain areas, particularly human
services including Medicaid. As an initial action, the Governor ordered most
State agencies to reduce GRF appropriations spending in the final six months of
the FY 1992 by a total of approximately $184 million. As authorized by the
General Assembly, the $100.4 million BSF balance and additional amounts from
certain other funds were transferred late in the FY to the GRF, and adjustments
in the timing of certain tax payments made. Other administrative revenue and
spending actions resolved the remaining GRF imbalance.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addresses by appropriate legislative and
administrative actions. As a first step the Governor ordered, effective July
1, 1992, $300 million in selected GRF spending reductions. Executive and
legislative action in December 1992 (a combination of tax revisions and
additional appropriations spending reductions) resulted in a balance of GRF
resources and expenditures in the 1992-93 biennium. The State reported an
ending GRF fund balance at June 30, 1993 of approximately $111 million, and, as
a first step to BSF replenishment. OBM has deposited $21 million in the BSF.
No spending reductions were applied to appropriations needed for debt
services or lease rentals on any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed
and signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for biennial State debt services and lease rental payments.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State Constitution
provisions. The State may incur debt limited in amount to $750,000 to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The
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Constitution expressly precludes the State from assuming the debts of any local
government or corporation. (An exception in both cases is for any debt incurred
to repel invasion, suppress insurrection or defend the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt to which taxes or excises were
pledged. At January 31, 1994, $712.6 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
awaiting delivery. With the only such State debt then still authorized to be
incurred are portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($43.1 million outstanding); (b) $1.2 billion of obligations
authorized for local infrastructure improvements, no more than $120 million may
be issued in any calendar year ($645.2 million outstanding or awaiting
delivery, $480 million remaining to be issued); and (c) up to $200 million in
general obligation bonds for parks and recreation purposes may be outstanding
at any one time (no more than $50 million to be issued in any one year, and
none have yet been issued).
The Constitution also authorizes the issuance of State obligations for
certain purposes the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include
obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, $4.28 billion of which were outstanding or awaiting
delivery at January 31, 1994.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
State and local agencies issue revenue obligations that are payable
from revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitution
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the issuer's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (on a
state-wide basis, recently approximately 46%) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 98 districts
from voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school district
cash need borrowing directly from commercial lenders, with diversion of State
subsidy distributions to repayment if needed; in FY 1991 under this program 26
districts borrowed a total of $41.8 million (including over $27 million by one
district), and in FY 1992
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borrowings totaled $61.9 million (including $46.6 million for one district).
FY 1993 loans totaled $94.5 million for 43 districts (including $75 million for
one district). FY 1994 loans totaled at January 31, 1994, $9.90 million for 16
districts.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations, and, with other local
governments, receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs, and
for development of a financial plan developed to eliminate deficits and cure
any defaults. Since inception in 1979, these procedures have been applied to
23 cities and villages; in 16 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy any ad valorem taxes on real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since 1934
limited the amount of the aggregate levy (including a levy for unvoted general
obligations) of property taxes by all overlapping subdivisions, without a vote
of the electors or a municipal charter provision, to 1% of true value in money,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes unlimited
as to amount or rate.
Commencing in 1985 Ohio municipalities may be permitted under Ohio law
to subject interest on certain of the obligations held by Insured Ohio Series 5
to income taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Counsel to
each Ohio Trust for Ohio tax matters rendered an opinion under then existing
Ohio income tax law applicable to taxpayers whose income is subject to Ohio
income taxation substantially to the effect that:
(1) An Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax or the Ohio
dealers in intangibles tax;
(2) Income of an Ohio Trust will be treated as the income of the
Unitholders for purposes of the Ohio personal income tax, Ohio
school district income taxes, Ohio municipal income taxes and
the Ohio corporation franchise tax in proportion to the
respective interest therein of each Unitholder;
(3) Interest on obligations issued by or on behalf of the State of
Ohio, political subdivisions thereof, or agencies or
instrumentalities thereof ("Ohio Obligations"), or by the
governments of Puerto Rico, the Virgin Islands or Guam
("Territorial Obligations") held by the Trust is exempt from
the Ohio personal income tax, Ohio municipal income tax and
Ohio school district income taxes,
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<PAGE> 76
and is excluded from the net income base of the Ohio
corporation franchise tax when distributed or deemed
distributed to Unitholders;
(4) Proceeds paid to an Ohio Trust under insurance policies
representing maturing interest on defaulted obligations held
by the Ohio Trust will be exempt from Ohio income tax, Ohio
school district income taxes, Ohio municipal income taxes and
the net income base of the Ohio corporation franchise tax if,
and to the same extent as, such interest would be exempt from
such taxes if paid directly by the issuer of such obligations;
and
(5) Gains and losses realized on the sale, exchange or other
disposition by an Ohio Trust of Ohio Obligations are excluded
in determining adjusted gross and taxable income for purposes
of the Ohio personal income tax, Ohio municipal income taxes
and Ohio school district income taxes, and are excluded from
the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
SOUTH CAROLINA TRUSTS. Although all or most of the Bonds in the South
Carolina Quality Trust are revenue obligations of local governments or
authorities rather than general obligations of the State of South Carolina
itself, there can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of the
Bonds or the ability of the respective obligors to pay interest on or principal
of the Bonds. The information regarding the financial condition of the State
is included for the purpose of providing information about general economic
conditions that may affect issuers of the Bonds in South Carolina.
From the early 1920s to the present nine, the State's economy has been
dominated by the textile industry with over one out of every three
manufacturing workers directly or indirectly related to the textile industry.
While the textile industry is still the major industrial employer in the State,
since 1950 the State's economy has undergone a gradual transition. The
economic base of the State has diversified as the trade and service sectors
developed and with the added development of the durable goods manufacturing
industries, South Carolina's economy now resembles more closely that of the
United States.
Personal income in the State increased by 4.2% in the fiscal year
ended June 30, 1992, while that of the U.S. increased by 4.0%. For this same
fiscal year, unemployment in South Carolina was 6.1%, compared with the
national rate of 7.1%.
The State Constitution requires the General Assembly to provide a
balanced budget and requires that if there be a deficit, such deficit shall be
provided for in the succeeding fiscal year. The State Constitution also
provides that the State Budget and Control Board may, if a deficit appears
likely, effect such reductions in appropriations as may be necessary to prevent
a deficit. At the November 6, 1984 general election there was approved a
constitutional amendment providing that annual increases in State
appropriations may not exceed the average growth rate of the economy of the
State and that the annual increase in the number of
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<PAGE> 77
State employees may not exceed the average growth of population of the State.
The State Constitution also establishes a Reserve Fund to be maintained in an
amount equal to 4% of General Fund revenue for the latest fiscal year. Despite
the efforts of the State Budget and Control Board, deficits were experienced in
each of the fiscal years ended June 30, 1981, June 30, 1982, June 30, 1985 and
June 30, 1986. All deficits have been funded out of the Reserve Fund. For the
fiscal years ending June 30, 1983 and 1984, the State had cash surpluses. As
of June 30, 1985 the General Fund reserve was $89,100,000.
At its July 1985 meeting the State Budget and Control Board, acting
upon advice that a shortfall in General Fund revenues for the fiscal year
ending June 30, 1985 might develop, froze all supplemental appropriations
pending the final accounting of the General Fund for fiscal year 1985. On
August 8, 1985, the Office of the Comptroller General advised the State Budget
and Control Board that General Fund expenditures for the fiscal year ended June
30, 1985 did exceed General Fund revenues by $11,936,636. Obedient to the
constitutional mandate that a casual deficit shall be provided for in the
succeeding fiscal year, the State Budget and Control Board delayed certain
hiring and capital improvements scheduled to be made in fiscal year 1986 in an
amount sufficient to meet the fiscal year 1985 budget shortfall. In January of
the fiscal year ended June 30, 1986 the State Budget and Control Board was
advised of a possible shortfall of $46,346,968. The Board immediately reduced
State agency appropriations by the amount of the anticipated shortfall.
Notwithstanding this action, at the end of fiscal year 1986, it became apparent
that a shortfall would result. In August of 1986, the State Budget and Control
Board voted to fund the deficit by transferring $37,353,272 from the Reserve
Fund to the General Fund, bringing the balance in the Reserve Fund to $51.8
million.
At the November 5, 1986 meeting of the Budget and Control Board, the
Board of Economic Advisors advised that it had reduced its revenue estimate for
the current fiscal year by $87,434,452. As required by the provisions of the
Capital Expenditure Fund, the Board applied $27,714,661 budgeted for this fund
to the anticipated shortfall. This action left a remaining shortfall of
$59,719,791 which the Budget and Control Board funded by imposing a 2.6% cut in
expenditures. In a February 1987 meeting of the Board, a further cut in
expenditures of 0.8% was ordered.
After net downward revisions of $122 million in estimated revenues
during the year, the actual revenue collections exceeded the final estimate by
$37 million, resulting in a surplus for the fiscal year ending June 30, 1987,
of $20.5 million. The General Reserve Fund received $6.6 million during the
year in accordance with the Appropriation Act, and $17 million of the year-end
surplus was transferred to the General Reserve Fund, bringing the balance in
the General Reserve Fund to $75.4 million at June 30, 1987.
On August 5, 1988, it was announced that for the fiscal year ending
June 30, 1988, the Budgetary General Fund had a surplus of $107.5 million. The
surplus resulted from a $117.3 million excess of revenues over expenditures.
The State will use $52.6 million of the surplus to fund supplemental
appropriations, $28.3 million to fund the Capital Reserve, and $20.5 million
for an early buy-out of a school bus lease agreement The General Assembly will
decide how the State will spend the remaining $6.1 million.
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<PAGE> 78
The General Reserve Fund received $25.1 million during the 1987-88
fiscal year in accordance with the Appropriation Act During the year, the
General Assembly reduced the required funding of the General Reserve Fund from
4% to 3% of the latest completed fiscal year's actual revenue. The General
Assembly used $14.4 million of the resulting excess to fund the 1987-1988
Supplemental Appropriation Act, leaving $86.1 million in the General Reserve
Fund at June 30, 1988. The full-funding amount at that date, however, was only
$80.8 million. In accordance with the 1988-1989 Appropriation Act, the excess
of $5.3 million will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was approved a
constitutional amendment reducing from 4% to 3% the amount of General Fund
revenue which must be kept in the General Reserve Fund, and removing the
provisions requiring a special vote to adjust this percentage. The amendment
also created a Capital Reserve Fund equal to 2% of General Fund revenue.
Before March 1 of each year, the Capital Reserve Fund must be used to offset
mid-year budget reductions before mandating cuts in operating appropriations,
and after March 1, the Capital Reserve Fund may be appropriated by a special
vote in separate legislation by the General Assembly to finance in cash
previously authorized capital improvement bond projects, retire bond principal
or interest on bonds previously issued, and for capital improvements or other
nonrecurring purposes which must be ranked in order of priority of expenditure.
Monies in the Capital Reserve Fund not appropriated or any appropriation for a
particular project or item which has been reduced due to application of the
monies to year-end deficit must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Reserve Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year
1989-1990, the State Budget and Control Board committed $42.4 million of the
$58.7 million Capital Reserve Fund in April, 1990. Lack of sufficient funding
at year end resulted in an additional use of $4.5 million from the Capital
Reserve Fund. After the above reductions, the State had a fiscal year
1989-1990 surplus of $13,159,892 which was used to fund supplemental
appropriations of $1,325,000 and the Capital Reserve Fund at $11,834,892. At
June 30, 1990, the balance in the General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control Board has
approved mid-year budget changes in November of 1990 and again in February of
1991, to offset lower revenue estimates. Those changes included committing the
Capital Reserve Fund appropriation ($62,742,901) and reducing agency
appropriations in an additional amount necessary to offset (together with
automatic expenditure reductions that are tied to revenue levels) what would
otherwise be a projected deficit of approximately $132.6 million. On May 14
and May 21, 1991, the Budget and Control Board, responding to April revenue
figures and unofficial estimates indicating an additional shortfall of $30 to
$50 million, ordered an immediate freeze on all personnel activities, from
hiring to promotions; a freeze on purchasing, with limited exceptions; and an
indefinite halt to new contracts and contract renewals. The Board also asked
the General Assembly for the power to furlough government workers periodically
during the next fiscal year.
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<PAGE> 79
In the past the State's budgetary accounting principles allowed
revenue to be recorded only when the State received the related cash. On July
30, 1991, the Budget and Control Board approved a change in this principle for
sales tax revenue beginning with the fiscal year ended June 30, 1991. The
Board's resolution requires that sales taxes collected by merchants in June and
received by the State in July be reported as revenue in June rather than in
July. This change resulted in a $5.2 million decrease in reported 1990-91
sales tax revenue and a one-time $83.1 million addition to fund balance. The
one-time adjustment increases the fund balance to the level it would be if the
new principle had been in effect in years before 1990-91. Following such
action, the year-end balance in the General Reserve Fund was $33.4 million.
At its July 30, 1991, meeting the Budget and Control Board also took
action with respect to the current fiscal year. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected a
revenue shortfall of $148 million for the fiscal year 1991-92 budget of $3.581
billion. In response, the Budget and Control Board eliminated the two percent
(2%) Capital Reserve Fund appropriation of $65.9 million and reduced other
expenditures across the board by three percent (3%). On February 10, 1992, the
Board of Economic Advisers advised the Budget and Control Board that it had
revised its estimate of revenues for the current fiscal year downward by an
additional $55 million. At its February 11, 1992 meeting, the Budget and
Control Board responded by imposing an addition one percent (1%) across-the-
board reduction of expenditures (except with respect to approximately $10
million for certain agencies). At its February 13, 1992 meeting, the Budget
and Control Board restored a portion of the one percent (1%) reduction to four
(4) education-related agencies totalling approximately $5.7 million. These
expenditure reduction measures, when coupled with revenue increases projected
by the Budget and Control Board, resulted in an estimated balance of
approximately $1.4 million in the General Fund for the fiscal year 1991-92.
Subsequently, the Budget and Control Board announced that the State had
incurred a $54 million deficit for fiscal year 1991-92. This deficit will be
offset by the General Reserve Fund and a small amount saved by state agencies
and local government, leaving the State with an estimated $7.5 million balance
for the 1991-92 fiscal year.
Responding to these recurrent operating deficits, Standard & Poor's
Corp. has placed the State's AAA-rated general obligation debt on its
CreditWatch, and on January 29, 1993, this rating was reduced to AA+.
On August 22, 1992, the Budget and Control Board adopted a plan to
reduce appropriations under the 1992 Appropriations Act because of revenue
shortfall projections of approximately $200 million for the 1992-93 fiscal
year. These reductions were based on the rate of growth in each agency's
budget over the past year. On September 15, 1992, the Supreme Court of South
Carolina enjoined the Budget and Control Board from implementing its proposed
plan for budget reductions on the grounds that the Board had authority to make
budget reductions only across-the-board based on total appropriations. In
response to this decision, the Board instituted a 4% across the board
reduction which, together with funds from the Capital Reserve Fund, was
sufficient to balance the budget for the current fiscal year.
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<PAGE> 80
Prospective investors should study with care the portfolio of Bonds in
the South Carolina Trust and should consult with their investment advisers as
to the merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special
Counsel for each South Carolina Trust for South Carolina tax matters rendered
an opinion under then existing South Carolina income tax law applicable to
taxpayers whose income is subject to South Carolina income taxation
substantially to the effect that:
By the provision of paragraph (j) of Section 3 of Article 10 of the
South Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation.
Pursuant to the provisions of Section 12-1-60 the interest of all
bonds, notes or certificates of indebtedness issued by or on behalf of the
State of South Carolina and any authority, agency, department or institution of
the State and all counties, school districts, municipalities, divisions and
subdivisions of the State and all agencies thereof are exempt from income taxes
and that the exemption so granted extends to all recipients of interest paid
thereon through the Trust. (This opinion does not extend to so-called 63-20
obligations.) The income of the Trust would be treated as income to each
Unitholder of the Trust in the proportion that the number of Units of the Trust
held by the Unitholder bears to the total number of Units of the Trust
outstanding. For this reason, interest derived by the Trust that would not be
includable in income for South Carolina income tax purposes when paid directly
to a South Carolina Unitholder will be exempt from South Carolina income
taxation when received by the Trust and attributed to such South Carolina
Unitholder.
Each Unitholder will recognize gain or loss for South Carolina state
income tax purposes if the Trustee disposes of a Bond (whether by sale, payment
on maturity, retirement or otherwise) or if the Unitholder redeems or sells his
Unit. The Trust would be regarded, under South Carolina law, as a common trust
fund and therefore not subject to taxation under any income tax law of South
Carolina.
The above described opinion of Special Counsel has been concurred in
by an informal ruling of the South Carolina Tax Commission pursuant to Section
12-3-170 of the South Carolina Code.
VIRGINIA TRUSTS. The Commonwealth's financial condition is supported
by a broad-based economy, including manufacturing, tourism, agriculture, ports,
mining and fisheries. Manufacturing continues to be a major source of
employment, ranking behind only services, wholesale and retail trade, and
government (Federal, state and local). The federal government is a major
employer in Virginia, due to the heavy concentration of federal employees in
the metropolitan Washington, D.C. segment of Northern Virginia and the military
employment in the Hampton Roads area, which houses the nation's largest
concentration of military installations. However, the expected retrenchment of
the military sector as a consequence of the end of the Cold War remains a cloud
on the economic horizon.
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In recent years per capita personal income in Virginia has
consistently been above the national average. However, while total personal
income has continued to rise during the current recession, it has not always
kept pace with both inflation and the population, either nationally or in
Virginia. Real personal income in Virginia fell for seven consecutive
quarters, ending with the last quarter of 1991, with a slow recovery being
evidenced in 1992. The annualized rate of growth in real personal income in
Virginia for the second quarter of 1992 was 0.5 percent compared to a national
rate of 0.3 percent. Virginia's real per capita income has exceeded that for
both the nation and the southeast region since the early 1980s, although the
differentials have decreased since 1989. Virginia's nonagricultural employment
figures mirror the national economy although the recent recession has hit
Virginia harder than the nation as a whole with employment declining at an
average annual rate of 1.6 percent since 1990 in Virginia, compared to 0.7
percent nationally. With respect of unemployment, Virginia's unemployment rate
has consistently been below that of the nation. For the decade of 1980 to
1990, the differential has been two percentage points, although it decreased to
below one percentage point in 1991 and the first six months of 1992.
Employment trends in Virginia have varied from sector to sector and
from region to region. For example, manufacturing and trade sectors in 1980
each employed more workers than the service sector. Now the service sector is
the largest employer in Virginia and mining and manufacturing are now at lower
levels than in 1980. Highest rates of employment are concentrated in southwest
Virginia where mining jobs have been lost and the lowest unemployment rates are
seen in Northern Virginia where much federally related employment is
concentrated. Not surprisingly, there is great overlap between areas of lowest
unemployment and those highest per capita income. Economic recovery from the
recent recession is expected to be long and slow in Virginia, although in the
long term, a growing and more diversified export sector holds promise that
should mitigate current concerns.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1992, fiscal year, the General
Fund had an ending fund balance computed on a budgetary cash basis of $195.2
million, of which $15 million was in required reserve; $142.3 million thereof
was designated for expenditure during the next fiscal year, leaving an
undesignated, unreserved fund balance of $52.8 million, the first such
undesignated fund balance since 1988. Computed on a modified accrual basis in
accordance with generally accepted accounting principles, the General Fund
balance at the end of the fiscal year ended June 30, 1992, was minus $121.8
million, compared with a General Fund balance at the end of the fiscal year
ended June 30, 1991, of minus $265.1 million. Contributing to the reduction
were $256.4 million in deferred credits, representing estimated tax refunds
associated with income taxes withheld for the period January through June,
1992, and an accrual for estimated Medicaid claims of $155.8 million.
As of June 30, 1992, Outstanding general obligation debt backed by the
full faith and credit of the Commonwealth was $582.7 million at June 30, 1992.
Of that amount, $544.4 million was also secured by revenue producing capital
projects. Debt service on the balance equaled 0.2% of total General Fund
expenditures in fiscal year 1992.
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The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth can issue. These limits are
substantially in excess of current levels of outstanding bonds, and at June 30,
1992 would permit an additional total of approximately $5.00 billion of bonds
secured by revenue-producing projects and approximately $5.50 billion of
unsecured general obligation bonds, with not more than approximately $1.39
billion of the latter to be issued in any four-year period. Bonds which are
not secured by revenue-producing projects must be approved in a state-wide
election.
In November of 1992 the Constitution of Virginia was amended to
establish a permanent Revenue Stabilization Fund. This Fund will go into
effect in the 1994-96 biennium. In anticipation of the first required deposit
($40.5 million) to the fund, the Governor included, and the General Assembly
approved, a $30.0 million down payment.
The current biennium started on July 1, 1992 and will end on June 30,
1994. The amended biennial budget appropriated a total of $29,090.6 million:
$6,416.0 million in general funds and $7,907.1 million in nongeneral funds in
fiscal 1993, and $6,852.1 million in general funds and $7,915.3 million in
nongeneral funds in fiscal 1994.
The amended Appropriations Act assumed that general fund revenues
would increase by 7.1 percent in fiscal 1993 and 6.0 percent in fiscal 1994.
Currently, year-to-date general fund growth for the 11 months of fiscal 1993 is
9.7 percent. When general fund revenues are adjusted for one-time corporate
payments, the year-to-date growth declined to 7.9 percent.
The Commonwealth of Virginia has consistently maintained ratings of
AAA by Standard & Poor's and Aaa by Moody's on its general obligation
indebtedness, reflecting in part its sound fiscal management, diversified
economic base and low debt ratios. There can be no assurance that these
conditions will continue. Nor are these same conditions necessarily applicable
to securities which are not general obligations of the Commonwealth.
Securities issued by specific municipalities, governmental authorities or
similar issuers may be subject to economic risks or uncertainties peculiar to
the issuers of such securities or the sources from which they are to be paid.
At the time of the closing for each Virginia Trust, Special Counsel to
each Virginia Trust for Virginia tax matters rendered an opinion under then
existing Virginia income tax law applicable to taxpayers whose income is
subject to Virginia income taxation substantially to the effect that:
(1) The Virginia Trust is not an association taxable as a
corporation for purposes of the Virginia Income Tax and each
Unitholder of the Trust will be treated as the owner of a pro
rata portion of the assets held by the Trust and the income of
such portion of the Virginia Trust will be treated as income
of the Unitholder for purposes of the Virginia Income Tax.
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(2) Income on the Bonds which is exempt from Virginia Income Tax
when received by the Virginia Trust and which would be exempt
from Virginia Income Tax if received directly by a Unitholder,
will retain its status as exempt from such tax when received
by the Trust and distributed to such Unitholder.
(3) Each Unitholder will recognize gain or loss for purposes of
the Virginia Income Tax if the Trustee disposes of a bond
(whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Trust to the extent
that such a transaction results in a recognized gain or loss
to such Unitholder for federal income tax purposes, except as
described in this paragraph. Virginia has by law provided
that all income from certain tax-exempt obligations issued
under the laws of Virginia, including any profits made from
the sale of such Bonds, shall be exempt from all taxation by
Virginia. Although we express no opinion, the Virginia
Department of Taxation has indicated that the gain on the sale
of such tax-exempt obligations, recognized for federal income
tax purposes, would not be subject to Virginia income
taxation. Accordingly, any such gain relating to the
disposition of any Bond that would not be subject to Virginia
Income Tax if the Bond was held directly by a Unitholder will
retain its tax-exempt status for purposes of the Virginia
Income Tax when the Bond is disposed of by the Virginia Trust
or when the Unitholder is deemed to have disposed of his pro
rata portion of such Bond upon the disposition of his Unit
provided that such gain can be determined with reasonable
certainty and substantiated.
(4) The Virginia Income Tax does not permit a deduction of
interest paid on indebtedness incurred or continued to
purchase or carry Units in the Virginia Trust to the extent
that interest income related to the ownership of Units is
exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax,
the income derived by such a Unitholder from his pro rata portion of the Bonds
held by the Virginia Trust may affect the determination of such Unitholders'
Bank Franchise Tax. Prospective investors subject to the Virginia Bank
Franchise Tax should consult their tax advisors.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are offered at the
Public Offering Price thereof. The Public Offering Price per Unit is equal to
the aggregate bid side evaluation of the Municipal Bonds in the State Trust's
portfolio (as determined pursuant to the terms of a contract with the
Evaluator, by Muller Data Corporation, a non-affiliated firm regularly engaged
in the business of evaluating, quoting or appraising comparable securities),
plus or minus cash, if any, in the Principal Account, held or owned by the
State Trust, divided by the number of outstanding Units of the State Trust plus
accrued interest to the date of settlement (which in the case of Kemper Defined
Funds, consists of Purchased Interest and Daily Accrued Interest), plus the
sales charge applicable to a Unit of such State Trust.
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The sales charge is based upon the dollar weighted average maturity of
the State Trust and is determined in accordance with the table set forth below.
For purposes of this computation, Municipal Bonds will be deemed to mature on
their expressed maturity dates unless: (a) the Municipal Bonds have been
called for redemption or funds or securities have been placed in escrow to
redeem them on an earlier call date, in which case such call date will be
deemed to be the date upon which they mature; or (b) such Municipal Bonds are
subject to a "mandatory tender", in which case such mandatory tender will be
deemed to be the date upon which they mature. The effect of this method of
sales charge computation will be that different sales charge rates will be
applied to the State Trust based upon the dollar weighted average maturity of
such State Trust's portfolio, in accordance with the following schedule:
<TABLE>
<CAPTION>
DOLLAR PERCENT OF PERCENT OF NET
WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- -------------- --------------
<S> <C> <C>
0 to .99 years. . . . . . . . . . . . . . . . . . . . . . . 0.00% 0.000%
1 to 3.99 years . . . . . . . . . . . . . . . . . . . . . . 2.00 2.041
4 to 7.99 years . . . . . . . . . . . . . . . . . . . . . . 3.50 3.627
8 to 14.99 years . . . . . . . . . . . . . . . . . . . . . 4.50 4.712
15 or more years . . . . . . . . . . . . . . . . . . . . . 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*2
4 TO 7.99 8 TO 14.99 15 OR MORE
--------------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% 4.50% 5.50%
$100,000 to $499,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.25 4.25 5.00
$500,000 to $999,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00 4.00 4.50
$1,000,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.75 3.75 4.00
</TABLE>
The reduced sales charges as shown on the preceding charts will apply
to all purchases of Units on any one day by the same purchaser from the same
firm and for this purpose, purchases of Units of a Series of the Trust will be
aggregated with concurrent purchases of Units of any other unit investment
trust that may be offered by the Sponsor. Additionally, Units purchased in
the name of a spouse or child (under 21) of such purchaser will be deemed to
be additional purchases by such purchaser. The reduced sales charges will also
be applicable to a trust or other fiduciary purchasing for a single trust
estate or single fiduciary account.
- -----------
* If the dollar weighted average maturity of a State Trust is from 1 to 3.99
years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1 to $249,999 and $250,000 or more, respectively.
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The Sponsor intends to permit officers, directors and
employees of the Sponsor and Evaluator and in the sole direction of the
Sponsor, registered representatives of selling firms to purchase Units of the
Trust without a sales charge, although a transaction processing fee may be
imposed on such trades.
The Public Offering Price per Unit of a State Trust on
the date shown on the cover page of Part Two of the Prospectus or on any
subsequent date will vary from the amounts stated under "Essential Information"
in Part Two in accordance with fluctuations in the prices of the underlying
Municipal Bonds and the amount of accrued interest on the Units. The aggregate
bid side evaluation of the Municipal Bonds shall be determined (a) on the basis
of current bid prices of the Municipal Bonds, (b) if bid prices are not
available for any particular Municipal Bond, on the basis of current bid prices
for comparable bonds, (c) by determining the value of the Municipal Bonds on
the bid side of the market by appraisal, or (d) by any combination of the
above.
The foregoing evaluations and computations shall be made
as of the Evaluation Time stated under "Essential Information" in Part Two, on
each business day effective for all sales made during the preceding 24-hour
period, and for purposes of resales and repurchases of Units.
The interest on the Municipal Bonds in each State Trust,
less the related estimated fees and expenses, is estimated to accrue in the
annual amounts per Unit set forth under "Essential Information" in Part Two.
The amount of net interest income which accrues per Unit may change as
Municipal Bonds mature or are redeemed, exchanged or sold, or as the expenses
of a State Trust change or as the number of outstanding Units of such State
Trust changes.
Payment for Units must be made on or before the fifth
business day following the order for purchase (the "settlement date"). A
purchaser becomes the owner of Units on the settlement date. Cash, if any,
made available to the Sponsor prior to the date of settlement for the purchase
of Units may be used in the Sponsor's business and may be deemed to be a
benefit to the Sponsor, subject to the limitations of the Securities Exchange
Act of 1934. If a Unitholder desires to have certificates representing Units
purchased, such certificates will be delivered as soon as possible following a
written request therefor, or shortly thereafter. For information with respect
to redemption of Units purchased, but as to which certificates requested have
not been received, see "Redemption" below.
The following section entitled "Accrued Interest"
applies only to series of Kemper Tax-Exempt Income Trust, Multi-State Series
and Ohio Tax-Exempt Bond Trust, Series 1-10.
ACCRUED INTEREST. Accrued interest consists of two
elements. The first element arises as a result of accrued interest which is
the accumulation of unpaid interest on a bond from the last day on which
interest thereon was paid. Interest on Bonds in the State Trusts is actually
paid either monthly or semi-annually to
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the State Trust. However, interest on the Bonds in the State Trusts is
accounted for daily on an accrual basis. Because of this, a State Trust always
has an amount of interest earned but not yet collected by the Trustee because
of coupons that are not yet due. For this reason, the Public Offering Price of
Units will have added to it the proportionate share of accrued and
undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as
of the First Settlement Date (which is five business days following the Date of
Deposit) and the same was distributed to the Sponsor. Such advance was repaid
to the Trustee through the first receipts of interest received on the Municipal
Bonds. Consequently, the amount of accrued interest added to the Public
Offering Price of Units included only accrued interest arising after the First
Settlement Date of a State Trust, less any distributions from the Interest
Account subsequent to this First Settlement Date. Since the First Settlement
Date was the date of settlement for anyone who ordered Units on the Date of
Deposit, no accrued interest was added to the Public Offering Price of Units
ordered on the Date of Deposit.
The second element of accrued interest arises because of
the structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments on the Bonds in
a State Trust. The Trustee is obligated to provide its own funds, at times, in
order to advanced interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the Trustee
to advance its own funds in connection with such interest distributions. The
Interest Account balances are also structured so that there will generally be
positive cash balances and since the funds held by the Trustee will be used by
it to earn interest thereon, it benefits thereby (see "Expenses of the Trust").
Accrued interest is computed as of the initial Record
Date of the State Trusts. On the date of the first distribution of interest to
Unitholders after the First Settlement Date the interest collected by the
Trustee will be sufficient to repay its advances, to allow for accrued interest
under the monthly, quarterly and semi-annual plans of distribution and to
generate enough cash to commerce distributions to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units or if the Bonds in a State Trust
are sold or otherwise removed or if a State Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest computed
to the settlement date in the case of sale or liquidation and to the date of
tender in the case of redemption in such State Trust.
The following section entitled "Purchased and Daily
Accrued Interest" applies only to series of Kemper Defined Funds (Tax-Exempt
Portfolio).
PURCHASED AND DAILY ACCRUED INTEREST. Accrued interest
consists of two elements. The first element arises as a result of accrued
interest which is the accumulation of unpaid interest on a bond from the later
of the last day on which interest thereon was paid or the date of original
issuance of the bond. Interest on the coupon Bonds in the State Trust is paid
semi-annually to the Trust. In the case of series of Kemper Defined Funds, a
portion of the aggregate amount of such accrued interest on the Bonds in the
Trust to the
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First Settlement Date of the Trust is referred to herein as "Purchased
Interest." Included in the Public Offering Price of the Trust Units in any
series of Kemper Defined Funds is the Purchased Interest. In an effort to
reduce the amount of Purchased Interest which would otherwise have to be paid
by Unitholders, the Trustee may advance a portion of the accrued interest to
the Sponsor as the Unitholder of record as the First Settlement Date. The
second element of accrued interest arises because the estimated net interest on
the Units in the State Trust is accounted for daily on an accrual basis (herein
referred to as "Daily Accrued Interest in connection with Kemper Defined
Funds"). Because of this, the Units always have an amount of interest earned
but not yet paid or reserved for payment. For this reason, the Public Offering
Price of Units in any series of Kemper Defined Funds will include the
proportionate share of Daily Accrued Interest to the date of settlement.
If a Unitholder in any series of Kemper Defined Funds
sells or redeems all or a portion of his Units or if the Bonds are sold or
otherwise removed or if the State Trust is liquidated, he will receive at that
time his proportionate share of the Purchased Interest and Daily Accrued
Interest computed to the settlement date in the case of sale or liquidation and
to the date of tender in the case of redemption in the State Trust.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified
Units of each State Trust for ale in the State for which such State Trust is
named. Units will be sold through dealers who are members of the National
Association of Securities Dealers, Inc. and through others. Sales may be made
to or through dealers at prices which represent discounts from the Public
Offering Price as set forth in the table below. Certain commercial banks are
making Units of the Trust available to their customers on an agency basis. A
portion of the sales charge paid by their customers is retained by or remitted
to the banks, in the amounts in the table below. Under the Glass-Steagall Act,
banks are prohibited from underwriting Trust Units; however, the Glass-Steagall
Act does permit certain agency transactions and the banking regulators have
indicated that these particular agency transactions are permitted under such
Act. In addition, state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*3
4 TO 7.99 8 TO 14.99 15 OR MORE
-------------------------------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
- -------------------- --------------------------------------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . 2.00% 3.00% 4.00%
$100,000 to $499,999 . . . . . . . . . . . . 1.75 2.75 3.50
$500,000 to $999,999 . . . . . . . . . . . . 1.50 2.50 3.00
$1,000,000 or more . . . . . . . . . . . . . 1.25 2.25 2.50
</TABLE>
- ----------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99 years,
the concession or agency commission is 1.00% of the Public Offering Price.
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In addition to such discounts, the Sponsor may, from
time to time, pay or allow an additional discount, in the form of cash or other
compensation, to dealers employing registered representatives who sell, during
a specified time period, a minimum dollar amount of Units of the Trust and
other unit investment trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of
discounts at any time. The difference between the discount allowed to firms
and the sales charge will be retained by the Sponsor and the Underwriters.
The Sponsor reserves the right to reject, in whole or in
part, any order for the purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion
of the sales charge on each Unit sold from its inventory, representing the
difference between the Public Offering Price of the Units, calculated as stated
under "Public Offering Price," and the discounts allowed to firms selling such
Units. The Sponsor may realize additional profit or loss as a result of the
possible change in the daily evaluation of the Municipal Bonds in the State
Trusts from its inventory.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to,
and certain of the Underwriters may, subject to change at any time, maintain a
market for Units of the State Trust offered hereby and to offer to purchase
said Units at prices, as determined by the Evaluator, based on the aggregate
bid prices of the underlying Municipal Bonds in such State Trusts, together
with accrued interest to the expected date of settlement (which, in the case of
Kemper Defined Funds, consists of Purchased Interest and Daily Accrued
Interest). Accordingly, Unitholders who wish to dispose of their Units should
inquire of their broker or bank as to the current market prices in order to
determine whether there is in existence any price in excess of the Redemption
Price and, if so, the amount thereof.
The offering price of any Units resold by the Sponsor or
Underwriters will be in accord with that described in the currently effective
Prospectus describing such Units. Any profits or loss resulting from the
resale of such Units will belong to the Sponsor and/or the Underwriters. The
Sponsor and/or the Underwriters may suspend of discontinue purchases of Units
of any Trust Fund if the supply of Units exceeds demand, or for other business
reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the
secondary market described above may cause their Units to be redeemed by the
Trustee by making a written request to the Trustee, Investors Fiduciary Trust
Company, P.O. Box 419430, Kansas City, Missouri 64173-0216 and, in the case of
Units evidenced by a
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<PAGE> 89
certificate, by tendering such certificate to the Trustee, properly endorsed or
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Trustee. Unitholders must sign such written request, and
such certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to be
redeemed. If the amount of the redemption is $25,000 or less and the proceeds
are payable to the Unitholder of record at the address of record, no signature
guarantee is necessary for redemptions by individual account owners (including
joint owners). Additional documentation may be requested, and a signature
guarantee is always required, from corporations, executors, administrators,
trustees, guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guarantee program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee . A certificate should only be sent
by registered or certified mail for the protection of the Unitholder. Since
tender of the certificate is required for redemption when one has been issued,
Units represented by a certificate cannot be redeemed until the certificate
representing such Units has been received by the purchasers.
Redemption shall be made by the Trustee on the seventh
calendar day following the day on which a tender for redemption is received, or
if the seventh calendar day is not a business day, on the first business day
prior thereto (the "Redemption Date"), by payment of cash equivalent to the
Redemption Price for such State Trust, determined as set forth below under
"Computation of Redemption Price," as of the Evaluation Time stated under
"Essential Information" in Part Two, next following such tender, multiplied by
the number of Units being redeemed. The price received upon redemption might
be more or less than the amount paid by the Unitholder depending on the value
of the Municipal Bonds in the State Trust's portfolio at the time of
redemption. Any Units redeemed shall be cancelled and any undivided fractional
interest in the State Trust will be extinguished.
Under regulations issued by the Internal Revenue
Service, the Trustee is required to withhold a specified percentage of the
principal amount of a Unit redemption if the Trustee has not been furnished the
redeeming Unitholder's tax identification number in the manner required by such
regulations. Any amount so withheld is transmitted to the Internal Revenue
Service and may be recovered by the Unitholder only when filing a tax return.
Under normal circumstances the Trustee obtains the Unitholder's tax
identification number from the selling broker. However, any time a Unitholder
elects to tender Units for redemption, such Unitholder should make sure that
the Trustee has been provided a certified tax identification number in order to
avoid this possible "back-up withholding." In the event the Trustee has not
been previously provided such number, one must be provided at the time
redemption is requested.
Any amounts paid on redemption representing interest
shall be withdrawn from the Interest Account for such State Trust to the extent
that funds are available for such purpose. All other amounts paid on
redemption shall be withdrawn from the Principal Account for such State Trust.
The Trustee is empowered to sell Municipal Bonds for such State Trust in order
to make funds available for the redemption of Units of such State Trust. Such
sale may be required when Municipal Bonds would not otherwise be sold and might
result in lower prices then might otherwise be realized. To the extent
Municipal Bonds are sold, the size and diversity of such State Trust will be
reduced.
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The Trustee is irrevocably authorized in its discretion,
if the Sponsor does not elect to purchase any Units tendered for redemption, in
lieu of redeeming such Units, to sell such Units in over-the-counter market for
the account of tendering Unitholders at prices which will return to such
Unitholders amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price for such
Units. In the event of any such sale, the Trustee shall pay the net proceeds
thereof to the Unitholders on the day they would otherwise be entitled to
receive payment of the Redemption Price.
The right of redemption may be suspended and payment
postponed (1) for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or during which (as
determined by the Securities and Exchange Commission) trading on the New York
Stock Exchange is restricted; (2) for any period during which an emergency
exists as a result of which disposal by the Trustee of Municipal Bonds is not
reasonably practicable or it is not reasonably practicable fairly to determine
the value of the underlying Municipal Bonds in accordance with the Agreement;
or (3) for such other period as the Securities and Exchange Commission may by
order permit. The Trustee is not liable to any person or in any way for any
loss or damage which may result from any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The Redemption Price
for Units of each State Trust is computed by the Evaluator as of the Evaluation
Time stated under "Essential Information" in Part Two next occurring after the
tendering of a Unit for redemption and on any other business day desired by it,
by
A. adding (1) the principal cash on hand held or owed
by the State Trust other than cash deposited in the Trust Fund to purchase
Municipal Bonds not applied to the purchase of such Bonds; (2) the aggregate
value of the Municipal Bonds held in the State Trust, as determined by the
Evaluator on the basis of bid prices therefor; and (3) interest accrued and
unpaid on the Municipal Bonds in the State Trust as of the date of computation;
and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of the State Trust and for
which no deductions have been previously made for the purpose of additions to
the Reserve Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of the State Trust including, but not
limited to, unpaid fees and expenses of the Trustee (including legal and
auditing fees and any insurance costs), the Evaluator, the Sponsor and bond
counsel, if any; (3) cash held for distribution to Unitholders of record as of
the business day prior to the evaluation being made; and (4) other liabilities
incurred by the State Trust; and
C. finally, dividing the results of such computation
by the number of Units of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State
Trust will not be evidenced by a certificate unless a Unitholder or the
Unitholder's registered broker/dealer or the clearing agent for such
broker/dealer
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makes a written request to the Trustee. Certificates, if issued, will be so
noted on the confirmation statement sent to the Underwriter and broker.
Non-receipt of such certificate(s) must be reported to the Trustee within one
year; otherwise, a 2% surety bond fee will be required for replacement.
Units are transferable by making a written request to
the Trustee and, in the case of Units evidenced by a certificate, by presenting
and surrendering such certificate to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer which should be
sent registered or certified mail for the protection of Unitholders.
Unitholders must sign such written request, and such certificate or transfer
instrument, exactly as their names appear on the records of the Trustee and on
any certificate representing the Units to be transferred. Such signatures must
be guaranteed by a participant in the Securities Transfer Agents Medallion
Program ("STAMP") or such other signature guaranty program in addition to, or
in substitution for, STAMP, as may be accepted by the Trustee.
Units may be purchased and certificates, if requested,
will be issued in denominations of one Unit or any multiple thereof subject to
any minimum investment requirement established by the Sponsor from time to
time. Any certificate issued will be numbered serially for identification,
issued in fully registered form and will be transferable only on the books of
the trustee. The Trustee may require a Unitholder to pay a fee for each
certificate re-issued or transferred, and to pay any governmental charge that
may be imposed in connection with each such transfer or interchange. The
Trustee at the present time does not intend to charge for the normal transfer
or interchange of certificates. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity (generally amounting to 3% of the market value of the Units),
affidavit of loss, evidence of ownership and payment of expenses incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest Distributions:
Interest received by each State Trust, including any portion of the proceeds
from a disposition of Municipal Bonds which represents accrued interest, is
credited by the Trustee to the Interest Account for such State Trust. All
other receipts are credited by the Trustee to a separate Principal Account for
the State Trust. The Trustee normally has no cash for distribution to
Unitholders until it received interest payments on the Bonds in the State
Trust. Since municipal interest usually is paid semi-annually, during the
initial months of the Trust, the Interest Account of each State Trust,
consisting of accrued but uncollected interest and collected interest (cash),
will be predominantly the uncollected accrued interest that is not available
for distribution.
Thereafter, assuming the State Trust retains its
original size and composition, after deduction of the fees and expenses of the
Trustee, the Sponsor and Evaluator and reimbursements (without interest) to the
Trustee for any amount advanced to a State Trust, the Trustee will normally
distribute on each Interest Distribution Date (the fifteenth of the month) of
shortly thereafter to Unitholders of record of such State Trust on the
preceding Record Date. Unitholders of the State Trusts will receive an amount
substantially equal to one-twelfth, one-fourth or one-half (depending on the
distribution option selected) of such holders' pro rata share of the estimated
net annual interest income to the Interest Account of such State Trust.
However, interest earned at any point in time will be greater than the amount
actually received by the Trustee and distributed to the Unitholders.
Therefore, there will always remain an item of accrued interest that is added
to the daily
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<PAGE> 92
value of the Units. If Unitholders of a State Trust sell or redeem all or a
portion of their Units, they will be paid their proportionate share of the
accrued interest of such State Trust to, but not including, the fifth business
day after the date of a sale or to the date of tender in the case of a
redemption.
In order to equalize distributions and keep the
undistributed interest income of the Trusts at a low level, all Unitholders of
record in such State Trust on the first Record Date received and interest
distribution on the first Interest Distribution Date. Because the period of
time between the first Interest Distribution Date and the regular distribution
dates may not have been a full period, the first regular distributions amy have
been partial distributions.
Persons who purchase Units between a Record Date and a
Distribution Date will receive their first distribution on the second
Distribution Date following their purchase of Units. Since interest on
Municipal Bonds in the State Trusts is payable at varying intervals, usually in
semi-annual installments, and distributions of income are made to Unitholders
at different intervals from receipt of interest, the interest accruing to a
State Trust may not be equal to the amount of money received and available for
distribution from the Interest Account. Therefore, on each Distribution Date
the amount of interest actually deposited in the Interest Account of a State
Trust and available for distribution may be slightly more or less than the
interest distribution made. In order to eliminate fluctuations in interest
distributions resulting from variances, the Trustee is authorized by the Trust
Agreements to advance such amounts as may be necessary to provide interest
distributions of approximately equal amounts. The Trustee will be reimbursed,
without interest, for any such advances from funds available in the Interest
Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income
Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 who desire
to receive distributions on a quarterly or semi-annual basis may elect to do
so, however, only monthly distributions are available for series of Kemper
Defined Funds. Record Dates for monthly distributions will be the first day of
each month; Record Dates for quarterly distributions will be the first day of
January, April, July and October; and Record Dates for semi-annual
distributions will be the first day of January and July. The distribution
option selected by a Unitholder of any series of Kemper Tax-Exempt Income
Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 will
remain in effect until changed by written notice to the Trustee.
Unitholders of any series of Kemper Tax-Exempt Income
Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 purchasing
Units of the State Trusts in the secondary market will initially receive
distributions in accordance with the election of the prior owner. Unitholders
of such Trusts desiring to change their distribution option may do so by
sending written notice to the Trustee, together with their certificate (if one
was issued). Certificates should only be sent by registered or certified mail
to minimize the possibility of loss. If written notice and any certificate are
received by the Trustee not later than January 1 or July 1 of a year, the
change will become effective for distributions commencing with February 15 or
August 15, respectively, of that year. If notice is not received by the
Trustee, the Unitholder will be deemed to have elected to continue with the
same option.
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Principal Distributions. The Trustee will distribute on
each semi-annual Distribution Date (or, in the case of Kemper Defined Funds, on
each Distribution Date) or shortly thereafter, to each Unitholder of record of
the State Trust of the preceding Record Date, an amount substantially equal to
such holder's pro rata share of the cash balance, if any, in the Principal
Account of such State Trust computed as of the close of business on the
preceding Record Date. However, no distribution will be required if the
balance in the Principal Account is less than $1.00 per Unit (or $.001 per Unit
for certain Series). Additionally, in the case of any series of Kemper
Tax-Exempt Income Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust,
Series 1-10, if such balance is between $5.00 and $10.00 per Unit,
distributions will be made on each quarterly Distribution Date; and if such
balance exceeds $10.00 per Unit, such amounts will be distributed on the next
monthly Distribution Date.
STATEMENTS TO UNITHOLDERS. With each distribution, the
Trustee will furnish each Unitholder a statement of the amount of interest and
the amount of other receipts, if any, which are being distributed, expressed in
each case as a dollar amount per Unit.
The accounts of each State Trust are required to be
audited annually, at the State Trust's expense, by independent auditors
designated by the Sponsor, unless the Trustee determines that such an audit
would not be in the best interest of the Unitholders of such State Trust. The
accountants' report will be furnished by the Trustee to any Unitholder of such
State Trust upon written request.
Within a reasonable period of time after the end of each
calendar year, the Trustee shall furnish to each person who at any time during
the calendar year was a Unitholder of a State Trust a statement covering the
calendar year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal
Bonds and the percentage of such amount by states and territories in which the
issuers of such Bonds are located;
2. The amount paid from the Interest Account of such
State Trust representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such
State Trust for applicable taxes, if any, fees and expenses (including auditing
fees) of the Trustee, the Evaluator, the Sponsor and bond counsel, if any;
4 Any amounts credited by the Trustee to a Reserve
Account for such State Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and
deductions, expressed both as a total dollar amount and a dollar amount per
Unit outstanding on the last business day of such calendar year.
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B. As to the Principal Account:
1. The dates of the maturity, liquidation or
redemption of any of the Municipal Bonds in such State Trust and the net
proceeds received therefrom excluding any portion credited to the Interest
Account;
2. The amount paid from the Principal Account of such
Series representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such
Series for payment of applicable taxes, if any, fees and expenses (including
auditing expenses) of the Trustee, the Evaluator, the Sponsor and bond counsel,
if any;
4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of
principal and deductions, expressed both as a dollar amount and as a dollar
amount per Unit outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust
as of the last business day of such calendar year;
2. The number of Units of such State Trust outstanding
on the last business day of such calendar year;
3. The Redemption Price of such State Trust based on
the last Trust Fund Evaluation made during such calendar year; and
4. The amount actually distributed during such
calendar year from the Interest and Principal Accounts of such State Trust
separately stated, expressed both as total dollar amounts and as dollar amounts
per Unit of such State Trust outstanding on the Record Date for each such
distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time
tender Units to the Trustee for redemption. No Unitholder of a State Trust
shall have the right to control the operation and management of the Trust or
such State Trust in any manner, except to vote with respect to amendment of the
Agreement or termination of the Trust or such State Trust. The death or
incapacity of any Unitholder will not operate to terminate the Trust or any
State Trust nor entitle legal representatives or heirs to claim an accounting
or to bring any action or proceeding in any court for partition or winding up
of the Trust or any State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State
Trusts by the purchase, sale or substitution of Municipal Bonds, except in the
special circumstances noted below. Thus, with the exception of the
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<PAGE> 95
redemption or maturity of Municipal Bonds in accordance with their terms,
and/or the sale of Municipal Bonds to meet redemption requests, the assets of
the State Trusts will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of
Municipal Bonds the value of which has been affected by certain adverse events
including default in the payment of principal or interest, institution of
certain legal proceedings, default under other documents which may adversely
affect debt service, default in the payment of interest on other obligations of
the same issuer, decline in projected income pledged for debt service on
revenue bonds, or decline in their price or the occurrence of other market
factors, including advance refunding, so that in the opinion of the Sponsor the
retention of such Municipal Bonds in a State Trust would be detrimental to the
interest of its Unitholders. The proceeds from any such sales, exclusive of
any portion which represents accrued interest, will be credited to the
Principal Account of such Trust Fund for distribution to its Unitholders.
The Sponsor is required to instruct the Trustee to
reject any offer made by an issuer of the Municipal Bonds to issue new
obligations in exchange or substitution for any of such Municipal Bonds
pursuant to a refunding financing plan, except that the Sponsor may instruct
the Trustee to accept or reject such an offer or to take any other action with
respect thereto as the Sponsor may deem proper if (a) the issuer is in default
with respect to such Municipal Bonds; or (b) in the written opinion of the
Sponsor, there is a reasonable basis to believe that the issuer will default
with respect to such Municipal Bonds in the foreseeable future. Any
obligations received in exchange or substitution will be held by the Trustee
subject to the terms and conditions of the Agreement to the same extent as the
Municipal Bonds originally deposited thereunder. Within five days after such
deposit, notice of such exchange and deposit shall be given by the Trustee to
each unitholder of such State Trust registered on the books of the Trustee,
including an identification of the Municipal Bonds eliminated and the Municipal
Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the
Sponsor, from a State Trust for the purpose of redeeming Units of such State
Trust tendered for redemption and the payment of expenses.
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust
Company, is a trust company specializing in investment related services,
organized and existing under the laws of Missouri, having its trust office at
127 West 10th Street, Kansas City, Missouri 64105. The Trustee is subject to
supervision and examination by the Division of Finance of the State of Missouri
and the Federal Deposit Insurance Corporation. Investors Fiduciary Trust
Company is jointly owned by DST Systems, Inc. and Kemper Financial Services,
Inc., an affiliate of the Sponsor.
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The Trustee, whose duties are ministerial in nature, has
not participated in selecting the portfolio of any Trust Fund. For information
relating to the responsibilities of the Trustee under the Agreement, reference
is made to the material set forth under "Unitholders."
In accordance with the Agreements, the Trustee shall
keep proper books of record and account of all transactions at its office.
Such records shall include the name and address of, and the number of Units
held by, every Unitholder of each State Trust. Such books and records shall be
open to inspection by any Unitholder of such State Trust at all reasonable
times during the usual business hours. The Trustee shall make such annual or
other reports as may from time to time be required under any applicable state
or Federal statute, rule or regulation. The Trustee shall keep a certified
copy or duplicate original of the Agreements on file in its office available
for inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in each
State Trust. Pursuant to the Agreements, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds
comprising the portfolios.
Under the Agreement, the Trustee or any successor
trustee may resign and be discharged of the trust created by the Agreement by
executing an instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the
notice of resignation to all Unitholders then of record, not less than sixty
days before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is obligated to
appoint a successor trustee promptly. If, upon such resignation, no successor
trustee has been appointed and has accepted the appointment within thirty days
after notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. In case the Trustee becomes
incapable of acting or is adjudged a bankrupt or is taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor trustee
as provided in the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by a successor trustee, all the rights, powers,
duties and obligations of the original Trustee shall vest in the successor.
The Trustee shall be a corporation organized under the
laws of the United States or any state thereof, which is authorized under such
laws to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than $5,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service
of Kemper Securities, Inc., the Sponsor, also serves as Evaluator. The
Evaluator may resign or be removed by the Trustee, which is to use its best
efforts to appoint a satisfactory successor. Such resignation or removal shall
become effective upon acceptance of appointment by the successor evaluator.
If, upon resignation of the Evaluator no successor has accepted appointment
within thirty days after notice of resignation, the Evaluator may apply to a
court of
96
<PAGE> 97
competent jurisdiction for the appointment of a successor. Notice of such
resignation or removal and appointment shall be mailed by the Trustee to each
Unitholder. At the present time, pursuant to a contract with the Evaluator,
Muller Data Corporation a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable securities, provides
portfolio evaluations of the Municipal Bonds in the State Trusts which are then
reviewed by the Evaluator. In the event the Sponsor is unable to obtain
current evaluations from Muller Data Corporation, it may make its own
evaluations or it may utilize the services of any other non-affiliated
evaluator or evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended
by the Trustee and the Sponsor without the consent of any of the Unitholders:
(1) to cure any ambiguity or to correct or supplement any provision which may
be defective or inconsistent; (2) to change any provision thereof as may be
required by the Securities and Exchange Commission or any successor
governmental agency; or (3) to make such provisions as shall not adversely
affect the interest of the Unitholders. The Agreement with respect to any
State Trust may also be amended in any respect by the Sponsor and the Trustee,
or any of the provisions thereof may be waived, with the written consent of the
holders of Units representing 66-2/3% of the Units then outstanding of such
State Trust, provided that no such amendment or waiver will reduce the interest
in the State Trust of any Unitholder thereof without the consent of such
Unitholder or reduce the percentage of Units required to consent to any such
amendment or waiver without the consent of all Unitholders of such State Trust.
In no event shall the Agreement be amended to increase the number of Units of a
State Trust issuable thereunder or to permit, except in accordance with the
provisions of the Agreement, the acquisition of any Municipal Bonds in addition
to or in substitution for those in a State Trust. The Trustee shall promptly
notify Unitholders of the substance of any such amendment.
The Agreement provides that each State Trust shall
terminate upon the maturity, redemption or other disposition, as the case may
be, of the last of the Municipal Bonds held in such State Trust. If the value
of a State Trust shall be less than the applicable minimum value stated under
"Essential Information" in Part Two the Trustee may, in its discretion, and
shall, when so directed by the Sponsor, terminate the State Trust. A State
Trust may be terminated at any time by the holders of Units representing
66-2/3% of the Units thereof then outstanding. Notwithstanding the foregoing,
in no event shall any State Trust continue beyond the mandatory termination
date shown in Part Two under "Essential Information." In the event of
termination of a State Trust, written notice thereof will be sent by the
Trustee to all Unitholders of such State Trust. Within a reasonable period
after termination, the Trustee will sell any Municipal Bonds remaining in the
State Trust and, after paying all expenses and charges incurred by the State
Trust, will distribute to Unitholders thereof (upon surrender for cancellation
of certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is
liable for the performance of its obligations arising from its responsibilities
under the Agreement, but will be under no liability to the Unitholders for
taking any action or refraining from any action in good faith pursuant to the
Agreement or for errors in judgment, except in cases of its own gross
negligence, bad faith or willful misconduct. The Sponsor shall not be liable
or responsible in any way for depreciation or loss incurred by reason of the
sale of any Municipal Bonds.
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<PAGE> 98
The Trustee: The Agreement provides that the Trustee
shall be under no liability for any action taken in good faith in reliance upon
prima facie properly executed documents or for the disposition of monies,
Municipal Bonds, or certificates except by reason of its own gross negligence,
bad faith or willful misconduct, nor shall the Trustee be liable or responsible
in any way for depreciation or loss incurred by reason of the sale by the
Trustee of any Municipal Bonds. In the event that the Sponsor shall fail to
act, the Trustee may act and shall not be liable for any such action taken by
it in good faith. The Trustee shall not be personally liable for any taxes or
other governmental charges imposed upon or in respect of the Municipal Bonds or
upon the interest thereon. In addition, the Agreement contains other customary
provisions limiting the liability of the Trustee. The Trustee, whose duties
are ministerial, did not participate in the selection of Municipal Bonds for
the State Trusts.
The Evaluator: The Trustee and Unitholders may rely on
any evaluation furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. The Agreement provides that the determinations made by
the Evaluator shall be made in good faith upon the basis of the best
information available to it; provided, however, that the Evaluator shall be
under no liability to the Trustee or Unitholders for errors in judgment, but
shall be liable only for its gross negligence, lack of good faith or willful
misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the
next sentence and except as otherwise stated under "Essential Information" in
Part Two of the Prospectus, the Sponsor will not charge any State Trust an
advisory fee and will receive no fee from the Trust for services performed as
Sponsor. The Sponsor will charge Kemper Tax-Exempt Income Trust, Multi-State
Series 45 and subsequent series and all series of Kemper Defined Funds an
annual surveillance fee for services performed for such Trust Funds in an
amount not to exceed the amount shown under "Essential Information" in Part
Two, but in no event will such compensation when combined with all compensation
received from other unit investment trusts for which the Sponsor acts as
Sponsor and provides portfolio surveillance, exceed the aggregate cost to the
Sponsor for providing such services. Such fee shall be based on the total
number of Units of such State Trust outstanding as of the January Record Date
for any annual period. The Sponsor and other Underwriters paid all the
expenses of creating and establishing the Trust, including the cost of the
initial preparation, printing and execution of the Prospectus, Agreements and
the certificates, legal and accounting expenses, advertising and selling
expenses, payment of closing fees, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated
on the basis of the annual rate set forth under "Essential Information" in Part
Two per $1,000 principal amount of Municipal Bonds in each State Trust, based
on the largest aggregate principal amount of Municipal Bonds in the State Trust
at any time during the monthly, quarterly or semi-annual period, as
appropriate. The Trustee also receives indirect benefits to the extent that it
holds funds on deposit in the various non-interest bearing accounts created
pursuant to the Agreement; however, the Trustee is also authorized by the
Agreement to make from time to time certain non-interest bearing advances to
the State Trusts. See "Unitholders - Distributions to Unitholders."
98
<PAGE> 99
For evaluation of Municipal Bonds in the State Trusts,
the Evaluator receives a fee, payable monthly calculated on an annual rate as
set forth under "Essential Information" in Part Two, based upon the largest
aggregate principal amount of Municipal Bonds in such State Trust at any time
during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees
for the State Trusts are payable monthly on or before each Distribution Date by
deductions from the Interest Accounts thereof to the extent funds are available
and then from the Principal Accounts. Such fees may be increased without
approval of the Unitholders by amounts not exceeding a proportionate increase
in the Consumer Price Index entitled "All Services Less Rent of Shelter,"
published by the United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred
by a State Trust: (a) fees for the Trustee's extraordinary services; (b)
expenses of the Trustee (including legal and auditing expenses, but not
including any fees and expenses charged by any agent for custody and
safeguarding of Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by the Trustee
to protect the Trust or such State Trust, or the rights and interests of the
Unitholders; (e) indemnification of the Trustee for any loss, liability or
expense incurred by it in the administration of the Trust or such State Trust
without gross negligence, bad faith or willful misconduct on its part; (f)
indemnification of the Sponsor for any loss, liability or expense incurred in
acting as Sponsor of the State Trust without gross negligence, bad faith or
willful misconduct; and (g) expenditures incurred in contacting Unitholders
upon termination of the State Trust. The fees and expenses set forth herein
are payable out of the appropriate State Trust and, when owed to the Trustee,
are secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted
from the Interest Account thereof, or, to the extent funds are not available in
such Account, from the Principal Account. The Trustee may withdraw from the
Principal Account or the Interest Account of any State Trust such amounts, if
any, as it deems necessary to establish a reserve for any taxes or other
governmental charges or other extraordinary expenses payable out of the State
Trust. Amounts so withdrawn shall be credited to a separate account maintained
for the State Trust known as the Reserve Account and shall not be considered a
part of the State Trust when determining the value of the Units until such time
as the Trustee shall return all or any part of such amounts to the appropriate
account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an
office at 77 W. Wacker Drive, 29th Floor, Chicago, Illinois 60601, (800)
621-5024, is a service of Kemper Securities, Inc., which is a wholly-owned
subsidiary of Kemper Financial Companies, Inc., a financial services holding
company which, in turn, is a wholly-owned subsidiary of Kemper Corporation.
The Sponsor acts as principal underwriter of a number of other Kemper unit
investment trusts and will act as underwriter of any other unit investment
trust products developed by the Sponsor in the future. As of January 31, 1994,
the total stockholder's equity of Kemper Securities, Inc. was approximately
$261,673,436 (unaudited).
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<PAGE> 100
If at any time the Sponsor shall fail to perform any of
its duties under the Agreement or shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or its affairs are taken over by public
authorities, then the Trustee may (a) appoint a successor sponsor at rates of
compensation deemed by the Trustee to be reasonable and not exceeding such
reasonable amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the Trust or any State
Trust as provided therein or (c) continue to act as Trustee without terminating
the Agreement.
The foregoing financial information with regard to the
Sponsor relates to the Sponsor only and not to this Trust or any State Trust.
Such information is included in this Prospectus only for the purpose of
informing investors as to the financial responsibility of the Sponsor and its
ability to carry out its contractual obligations with respect to the State
Trusts. More comprehensive financial information can be obtained upon request
from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain
matters relating to federal tax law were originally passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of
investments, appearing in Part Two of this Prospectus and Registration
Statement, with information pertaining to the specific State Trust to which
such statement relates, has been audited by Ernst & Young, independent
auditors, as set forth in their report appearing in Part Two and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS*4
Standard & Poor's Corporation. - A brief description of
the applicable Standard & Poor's Corporation rating symbols and their meanings
follows:
A Standard & Poor's corporate or municipal bond rating
is a current assessment of the creditworthiness of an obligor with respect to a
specific debt obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees.
- -------------
* As published by the rating companies.
100
<PAGE> 101
The bond rating is not a recommendation to purchase,
sell or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the
following considerations:
I. Likelihood of default - capacity and willingness of
the obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of,
the obligation in the event of bankruptcy, reorganization or other arrangement,
under the laws of bankruptcy and other laws affecting creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned
by Standard & Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest rated issues only in
small degree.
A - Bonds rated A have a strong capacity to pay
interest and repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB - Bonds rated BBB are regarded as having an
adequate capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for bonds in this category than for bonds in higher rated
categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Provisional Ratings: The letter "p" indicates the
rating is provisional. A provisional rating assumes the successful completion
of the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the
successful and timely completion of
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<PAGE> 102
the project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood of, or the
risk of default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
Moody's Investors Service, Inc. - A brief description of
the applicable Moody's Investors Service, Inc. rating symbols and their
meanings follow:
Aaa - Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues. Their safety is so absolute that with the occasional exception of
oversupply in a few specific instances, characteristically, their market value
is affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat larger
than in Aaa securities. Their market value is virtually immune to all but
money market influences, with the occasional exception of oversupply in a few
specific instances.
A -Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future. The market value of A-rated bonds may be
influenced to some degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy, A-rated bonds
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
A1 - Bonds which are rated A1 offer the maximum in
security within their quality group, can be bought for possible upgrading in
quality, and additionally, afford the investor an opportunity to gauge more
precisely the relative attractiveness of offerings in the market place.
Baa - Bonds which are rated Baa are considered as lower
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. The market value of Baa-rated bonds is more sensitive
to changes in economic circumstances and, aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa and A obligations during periods of economic normalcy,
except in instances of oversupply.
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<PAGE> 103
Conditional Ratings: Bonds rated "Con(-)" are ones for
which the security depends upon the completion of some act or the fulfillment
of some condition. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3
in each generic rating classification from Aa through B in certain areas of its
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
103
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Part Two
Dated December 29, 1994
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.
NOTE: Part Two of this Prospectus May Not Be Distributed unless Accompanied by
Part One.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Essential Information
As of November 15, 1994
Sponsor and Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
Managing Underwriters: McDonald & Company
Securities, Inc., Seasongood & Mayer
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $3,430,000
Number of Units 9,458
Fractional Undivided Interest in the Trust per Unit 1/9,458
Principal Amount of Municipal Bonds per Unit $362.66
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $3,656,717
Aggregate Bid Price of Municipal Bonds per Unit $386.63
Cash per Unit (1) $(.31)
Sales Charge 4.712% (4.5% of Public Offering Price) $18.20
Public Offering Price per Unit (exclusive of accrued
interest) (2) $404.52
Redemption Price per Unit (exclusive of accrued interest) $386.32
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $18.20
Minimum Value of the Trust under which Trust Agreement
may be terminated $2,000,000
</TABLE>
Date of Trust February 24, 1984
Mandatory Termination Date January 1, 2034
Annual Evaluation Fee: $.40 per $1,000 principal amount of Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units are made as
of the close of business of the Sponsor next following receipt of an order for
a sale or purchase of Units or receipt by Investors Fiduciary Trust Company of
Units tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (five business days after purchase). On November 15, 1994,
there was added to the Public Offering Price of $404.52, accrued interest to
the settlement date of November 22, 1994 of $9.58, $12.12 and $19.62 for a
total price of $414.10, $416.64 and $424.14 for the monthly, quarterly and
semiannual distribution options, respectively.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Essential Information (continued)
As of November 15, 1994
Sponsor and Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
Managing Underwriters: McDonald & Company
Securities, Inc., Seasongood & Mayer
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
-------- -------- --------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $30.5753 $30.5753 $30.5753
Less: Estimated Annual Expense 1.1646 .8504 .6971
-------- -------- --------
Estimated Net Annual Interest Income $29.4107 $29.7249 $29.8782
======== ======== ========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $29.4107 $29.7249 $29.8782
Divided by 12, 4 and 2, respectively $2.4509 $7.4312 $14.9391
Estimated Daily Rate of Net Interest
Accrual per Unit $.0817 $.0826 $.0830
Estimated Current Return Based on Public
Offering Price (3) 7.27% 7.35% 7.39%
Estimated Long-Term Return (3) 7.01% 7.09% 7.12%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee): $1.1646,
$.8504 and $.6971 ($.6750, $.4587 and $.4183 of which represent expenses) per
Unit under the monthly, quarterly and semiannual distribution options,
respectively.
Record and Computation Dates: First day of the month, as follows: monthly -
each month; quarterly - January, April, July and October; semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Ohio Tax-Exempt Bond Trust
Fourth Series
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Ohio Tax-Exempt Bond Trust Fourth
Series as of August 31, 1994, and the related statements of operations and
changes in net assets for each of the three years in the period then ended.
These financial statements are the responsibility of the Trust's sponsor. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of August 31, 1994,
by correspondence with the custodial bank. An audit also includes assessing
the accounting principles used and significant estimates made by the sponsor,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ohio Tax-Exempt Bond Trust
Fourth Series at August 31, 1994, and the results of its operations and the
changes in its net assets for each of the three years in the period then ended
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
December 14, 1994
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Statement of Assets and Liabilities
August 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $3,092,125) (Note 1) $3,857,738
Accrued interest 100,518
Cash 10,882
----------
3,969,138
Liabilities and net assets
Accrued liabilities 1,451
Net assets, applicable to 9,621 Units outstanding
(Note 5):
Cost of Trust assets, exclusive of interest
(Note 1) $3,092,125
Unrealized appreciation (Note 2) 765,613
Distributable funds 109,949
---------- ----------
Net assets $3,967,687
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Statement of Operations
<TABLE>
<CAPTION>
Year ended August 31
1994 1993 1992
<S> <C> <C> <C>
--------- --------- --------
Investment income - interest $424,282 $796,640 $871,155
Expenses:
Trustee's fees and related expenses 9,745 13,241 12,402
Evaluator's fees 2,036 3,442 3,710
--------- --------- --------
Total expenses 11,781 16,683 16,112
--------- --------- --------
Net investment income 412,501 779,957 855,043
Realized and unrealized gain (loss)
on investments:
Realized gain 69,036 7,449 32,151
Unrealized depreciation during
the year (360,026) (289,166) (37,253)
--------- --------- --------
Net loss on investments (290,990) (281,717) (5,102)
--------- --------- --------
Net increase in net assets resulting
from operations $121,511 $498,240 $849,941
========= ========= ========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended August 31
1994 1993 1992
<S> <C> <C> <C>
----------- ----------- -----------
Operations:
Net investment income $412,501 $779,957 $855,043
Realized gain on investments 69,036 7,449 32,151
Unrealized depreciation
on investments during the year (360,026) (289,166) (37,253)
----------- ----------- -----------
Net increase in net assets resulting
from operations 121,511 498,240 849,941
Distributions to Unitholders:
Net investment income (486,438) (804,492) (862,158)
Principal from investment
transactions (4,200,464) (1,344,669) (252,134)
Capital transactions:
Redemption of Units (37,128) (112,379) (199,311)
----------- ----------- -----------
Total decrease in net assets (4,602,519) (1,763,300) (463,662)
Net assets:
At the beginning of the year 8,570,206 10,333,506 10,797,168
----------- ----------- -----------
At the end of the year (including
distributable funds applicable to
Trust Units of $109,949, $241,431
and $242,743 at August 31, 1994,
1993 and 1992, respectively) $3,967,687 $8,570,206 $10,333,506
=========== =========== ===========
Trust Units outstanding at the
end of the year 9,621 9,700 9,810
=========== =========== ===========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Schedule of Investments
August 31, 1994
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond(5) Rate Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C> <C> <C> <C> <C>
------- ---------- -------------- -------- ---------- ----------
County of Cuyahoga, Ohio, Hospital Improvement 6.50% 1/01/2016 2015 @ 100 S.F. AA $200,000 $192,119
Revenue Bonds, Series 1983 (University 1995 @ 100
Hospital of Cleveland Project).
Ohio Air Quality Development Authority 7.00 9/01/2009 1995 @ 100 S.F. Baa3* 250,000 242,067
Collateralized Air Quality Revenue Bonds, 1995 @ 100.5
1979 Series A (The Cleveland Electric
Illuminating Company Project).
+Ohio Building Authority State Facilities 10.125 10/01/2006 2003 @ 100 AAA 1,410,000 1,686,106
Bonds, 1982 Series A.
Ohio Public Facilities Commission, Ohio Higher 5.00 6/01/2001 1994 @ 101 A+ 750,000 700,695
Education Facilities Bonds, Series 1977-A.
+Ohio Water Development Authority, Water 9.375 12/01/2010 1994 @ 100 S.F. AAA 885,000 1,036,751
Development Revenue Bonds, Safe Water
Series II. ---------- ----------
$3,495,000 $3,857,738
========== ==========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices
thereafter, but not below par value. In addition, certain Bonds in the
Portfolio may be redeemed in whole or in part other than by operation of the
stated redemption or sinking fund provisions under certain unusual or
extraordinary circumstances specified in the instruments setting forth the
terms and provisions of such Bonds. "S.F." indicates a sinking fund is
established with respect to an issue of Bonds. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund provisions
may, occur at times when the redeemed Bonds have a valuation which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of
capital when compared with the original Public Offering Price of the Units.
To the extent that the Bonds were acquired at a price lower than the
redemption price, this may represent an increase in capital when compared with
the original Public Offering Price of the Units. Distributions of net income
will generally be reduced by the amount of the income which would otherwise
have been paid with respect to redeemed Bonds and, unless utilized to pay for
Units tendered for redemption, there will be distributed to Unitholders the
principal amount and any premium received on such redemption. In this event
the estimated current return and estimated long-term return may be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a description of
the method of determining cost and value.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Notes to Schedule of Investments (continued)
4. At August 31, 1994, the Portfolio of the Trust consists of 5 obligations
issued by entities located in Ohio. All of the issues are payable from the
income of a specific project or authority and are not supported by an issuer's
power to levy taxes. The sources of payment for the revenue bonds are divided
as follows: Air Quality, 1; Building Authority, 1; Education, 1; Hospitals
and Health Care, 1; Water and Sewer, 1. Approximately 25% of the aggregate
principal amount of Bonds in the Trust are water and sewer bonds.
Approximately 40% of the aggregate principal amount of Bonds in the Trust are
building authority bonds. Approximately 60% of the aggregate principal amount
of Bonds in the Trust are subject to call by the issuers within five years
after August 31, 1994.
5. Those securities preceded by (+) are secured by, and payable from, escrowed
U.S. Government securities.
[FN]
See accompanying notes to financial statements.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Notes to Financial Statements
1. Significant Accounting Policies
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the "Evaluator" and
sponsor of the Trust. The aggregate bid prices of the Bonds are determined by
the Evaluator based on (a) current bid prices of the Bonds, (b) current bid
prices for comparable bonds, (c) appraisal, or (d) any combination of the
above.
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
February 24, 1984 (Date of Deposit). The premium or discount (including any
original issue discount) existing at February 24, 1984, is not being
amortized. Realized gain (loss) from Bond transactions is reported on an
identified cost basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at August 31, 1994:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized depreciation $-
Gross unrealized appreciation 765,613
--------
Net unrealized appreciation $765,613
========
</TABLE>
3. Transactions with Affiliates
The Trustee, Investors Fiduciary Trust Company, is 50% owned by Kemper
Financial Services, Inc., an affiliate of Kemper Unit Investment Trusts. On
September 27, 1994, State Street Boston Corporation entered into an agreement
to acquire Investors Fiduciary Trust Company. The acquisition is not expected
to have an effect on the operation of the Trust. The Trustee's annual fee
(not including the reimbursement of out-of-pocket expenses), calculated
monthly, is at the annual rate of $1.35, $1.08 and $.75 under the monthly,
quarterly and semiannual distribution options, respectively, per $1,000
principal amount of Bonds in the Trust, based on the largest aggregate
principal amount of Bonds in the Trust at any time during such monthly period.
The Evaluator received a fee, payable monthly, at an annual rate of $.40 per
$1,000 principal amount of Bonds, based on the largest aggregate principal
amount of Bonds in the Trust at any time during such monthly period.
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Notes to Financial Statements (continued)
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income
tax purposes. Each Unitholder is considered to be the owner of a pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1 of the
Internal Revenue Code of 1986, as amended. Accordingly, no provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a
sales charge of 4.5% of the Public Offering Price (equivalent to 4.712% of the
net amount invested). The Public Offering Price for secondary market
transactions is based on the aggregate bid price of the Bonds plus or minus a
pro rata share of cash or overdraft in the Principal Account, if any, on the
date of an investor's purchase, plus a sales charge of 4.5% of the Public
Offering Price (equivalent to 4.712% of the net amount invested).
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution August 31, 1994 August 31, 1993 August 31, 1992
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- --------
Monthly $48.01 $217,093 $81.45 $365,151 $85.96 $383,227
Quarterly 51.80 97,958 82.98 160,348 86.56 172,558
Semiannual 52.01 170,678 83.32 275,557 86.91 301,622
-------- -------- --------
$485,729 $801,056 $857,407
======== ======== ========
</TABLE>
<PAGE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Notes to Financial Statements (continued)
5. Other Information (continued)
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended August 31
1994 1993 1992
<S> <C> <C> <C>
------- -------- --------
Principal portion $37,128 $112,379 $199,311
Net interest accrued 709 3,436 4,751
------- -------- --------
$37,837 $115,815 $204,062
======= ======== ========
Units 79 110 190
======= ======== ========
</TABLE>
<PAGE>
<TABLE>
Ohio Tax-Exempt Bond Trust
Fourth Series
Notes to Financial Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each year -
<CAPTION>
Monthly Quarterly Semiannual
Year ended August 31 Year ended August 31 Year ended August 31
1994 1993 1992 1994 1993 1992 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Investment income - interest $43.83 $81.84 $87.81 $43.83 $81.84 $87.81 $43.83 $81.84 $87.81
Expenses 1.45 2.07 1.98 1.10 1.61 1.55 .88 1.27 1.20
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Net investment income 42.38 79.77 85.83 42.73 80.23 86.26 42.95 80.57 86.61
Distributions to Unitholders:
Net investment income (48.01) (81.45) (85.96) (51.80) (82.98) (86.56) (52.01) (83.32) (86.91)
Principal from investment
transactions (433.55) (138.56) (25.46) (433.55) (138.56) (25.46) (433.55) (138.56) (25.46)
Net loss on investments (30.10) (28.96) (.59) (30.10) (28.96) (.59) (30.10) (28.96) (.59)
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Change in net asset value (469.28) (169.20) (26.18) (472.72) (170.27) (26.35) (472.71) (170.27) (26.35)
Net asset value:
Beginning of the year 880.14 1,049.34 1,075.52 886.39 1,056.66 1,083.01 886.51 1,056.78 1,083.13
-------- -------- --------- -------- -------- --------- -------- -------- ---------
End of the year, including
distributable funds $410.86 $880.14 $1,049.34 $413.67 $886.39 $1,056.66 $413.80 $886.51 $1,056.78
======== ======== ========= ======== ======== ========= ======== ======== =========
</TABLE>
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated December 14, 1994, in this Post-
Effective Amendment to the Registration Statement (Form S-6) and related
Prospectus of Ohio Tax-Exempt Bond Trust Fourth Series dated December 29,
1994.
Ernst & Young LLP
Kansas City, Missouri
December 29, 1994
<PAGE>
Contents of Post-Effective AmendmentTo Registration Statement
This Post-Effective amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933,
The Registrant, Ohio Tax-Exempt Bond Trust Series 4, certifies
that it meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago,
and State of Illinois, on the 28th day of December, 1994.
Ohio Tax-Exempt Bond Trust Series
4
Registrant
By: Kemper Unit Investment Trusts
(a service of Kemper
Securities, Inc.)
Depositor
By: Michael J. Thoms
Vice President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement has been signed
below on December 28, 1994 by the following persons, who
constitute a majority of the Board of Directors of Kemper
Securities, Inc.
Signature Title
James R. Boris Chairman and Chief Executive Officer
James R. Boris
Donald F. Eller Senior Executive Vice President and Director
Donald F. Eller
Stanley R. Fallis Senior Executive Vice President, Chief Financial
Stanley R. Fallis Officer and Director
Frank V. Geremia Senior Executive Vice President and Director
Frank V. Geremia
David B. Mathis Director
David B. Mathis
Robert T. Jackson Director
Robert T. Jackson
Jay B. Walters Senior Executive Vice President and Director
Jay B. Walters
Frederick C. Hosken Senior Executive Vice President and Director
Frederick C. Hosken
Charles M. Kierscht Director
Charles M. Kierscht
Arthur J. McGivern Director
Arthur J. McGivern
Michael J. Thoms
Michael J. Thoms signs this document pursuant to power of
attorney filed with the Securities and Exchange Commission with
(a) Amendment No. 1 to the Registration Statement on Form S-6 for
Kemper Tax-Exempt Insured Income Trust, Series A-70 and
Multi-State Series 28 and Kemper Tax-Exempt Income Trust,
Multi-State Series 42 (Registration No. 33-35425, (b) Amendment
No. 1 to the Registration Statement of Form S-6 for Kemper
Tax-Exempt Insured Income Trust, Series A-72 and Multi-State
Series 30 (Registration No. 33-37178) and (c) Amendment No. 1 to
the Registration Statement of Form S-6 for Kemper Tax-Exempt
Insured Income Trust, Multi-State Series 51 (Registration No.
33-48398).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
Post-effective Amendment Number 10 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amendment to Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> OHIO TAX EXEMPT BOND TRUST SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> SEP-01-1993
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 3,092,125
<INVESTMENTS-AT-VALUE> 3,857,738
<RECEIVABLES> 100,518
<ASSETS-OTHER> 10,882
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,969,138
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,451
<TOTAL-LIABILITIES> 1,451
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,092,125
<SHARES-COMMON-STOCK> 9,621
<SHARES-COMMON-PRIOR> 9,700
<ACCUMULATED-NII-CURRENT> 109,949
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 765,613
<NET-ASSETS> 3,967,687
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 424,282
<OTHER-INCOME> 0
<EXPENSES-NET> 11,781
<NET-INVESTMENT-INCOME> 412,501
<REALIZED-GAINS-CURRENT> 69,036
<APPREC-INCREASE-CURRENT> (360,026)
<NET-CHANGE-FROM-OPS> 121,511
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (486,438)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (4,200,464)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 79
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,602,519)
<ACCUMULATED-NII-PRIOR> 241,431
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
