<PAGE>
TAX-EXEMPT UNIT TRUST
PROSPECTUS
Part One
October 26, 1994
Note: This Prospectus may be used only when accompanied by Part Two.
See Part Two for the "Schedules of Investments," essential information based
thereon, and financial statements, including the report of independent public
accountants, relating to the Series of the Trust offered hereby.
THE NUVEEN TAX-EXEMPT UNIT TRUST consists of a number of underlying separate
unit investment trusts, each of which contains a diversified portfolio of
interest-bearing obligations issued by or on behalf of states and territories
of the United States and authorities and political subdivisions thereof, the
interest on which is, in the opinion of bond counsel to each issuer, exempt
from all Federal income tax under existing law and, in the case of a State
Trust, from certain State income taxes in the State for which such State Trust
is named. All Bonds (as defined herein) in each Traditional Trust (as defined
herein) were rated in the category A or better by either Standard & Poor's
Corporation or Moody's Investors Service, Inc., on the date each Series was
established (BBB or Baa, respectively, or better by such services in the case
of National Trust 76 and earlier National Trusts and SP-1 or MIG 2 or better in
the case of a Short Term Trust). All Bonds in each Insured Trust (as defined
herein) are covered by policies of insurance obtained from the Municipal Bond
Insurance Association or the Municipal Bond Investor Assurance Corporation
guaranteeing payment of principal and interest when due. All such policies of
insurance remain effective so long as the obligations are outstanding. As a
result of such insurance, the Bonds in each portfolio of the Insured Trusts
have received a rating of Aaa by Moody's Investors Service, Inc. and the Bonds
in the Insured Trusts and the Units of each such Trust have received a rating
of AAA by Standard & Poor's Corporation. Insurance relates only to the Bonds
in the Insured Trusts and not to the Units offered or to their market value.
THE OBJECTIVES of the Trusts are tax-exempt income and conservation of capital
through a diversified investment in tax-exempt Bonds (discount Bonds in the
case of the Discount Trusts). (See "Tax Status of Unitholders.") The payment
of interest and the preservation of capital are, of course, dependent upon the
continuing ability of the issuers or obligors, or both, of Bonds to meet their
obligations thereunder. There is no guarantee that the Trusts' objectives will
be achieved. The price received upon redemption may be more or less than the
amount paid by Unitholders, depending upon the market value of the Bonds on the
date of tender for redemption.
INTEREST INCOME to each Trust in a Series of the Nuveen Tax-Exempt Unit Trust
and to the Unitholders thereof, in the opinion of counsel, under existing law,
is exempt from Federal income tax, and, in the case of a State Trust, from
State income taxes in the State for which such State Trust is named. Capital
gains, if any, are subject to tax per Unit for a particular Trust.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit for a particular
Trust for "secondary market" sales is equal to a pro rata share of the sum of
bid prices per Unit of the Bonds in such Trust plus the sales charges for the
Bonds determined in accordance with the table set forth herein under the
caption "Public Offering Price" based on the number of years remaining to the
maturity of each such Bond and adjusted for cash, if any, held or owed by the
Trust. See the table on page 6 regarding reduced sales charges on large
transactions. Units are offered at the Public Offering Price plus interest
accrued to, but not including, the date of settlement. (See "Public Offering
Price.") The minimum purchase is either $5,000 or 50 Units, whichever is less.
The bid prices of the Bonds in a portfolio may represent a "market" discount
from or premium over the par value of the Bonds.
THE UNITS being offered by this Prospectus are issued and outstanding Units
that have been reacquired by John Nuveen & Co. Incorporated either by purchase
of Units tendered to the Trustee for redemption or by purchase in the open
market. The price paid in each instance was not less than the Redemption Price
determined as provided herein under the caption "How Units May Be Redeemed
Without Charge." Any profit or loss resulting from the sale of the Units will
accrue to John Nuveen & Co. Incorporated and no proceeds from the sale will be
received by the Trusts.
MARKET. A Unitholder may redeem Units at the office of the Trustee, United
States Trust Company of New York, at prices based upon the bid prices of the
Bonds in such Trust. The Sponsor, although not required to do so, intends to
make a secondary market for the Units at prices based upon the bid prices of
the Bonds in each Trust.
Both parts of this Prospectus should be retained for future reference.
Units of the Trust are not deposits or obligations of, or guaranteed or
endorsed by, any bank and are not federally insured or otherwise protected by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency and involve investment risk, including the possible loss of
principal.
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.
TABLE OF CONTENTS
Page
<PAGE>
Accrued Interest 7
Accrued Interest Rate per Unit 7
Accumulation Plan 67
Bonds, How Selected 8
Bonds, Prohibition against Substitution 72
Bond Ratings *
Bonds, Removal from Trusts 72
Call Provisions of Portfolio Bonds *
Capital Gains Taxability 50
Dealer Discount 70
Description of Units of Trusts 3
Distributions to Unitholders 66
Distribution Payment Dates 66
Distribution of Units to the Public 69
Estimated Long-Term Return and Estimated Current Return 7
Evaluation 69
Expenses to Trusts 65
Financial Statements *
Insurance on Bonds in the Insured Trusts 4
Insurance on Certain Bonds in the Traditional Trusts 5
Interest Income to Trusts *
Investments, Schedules of *
Legality of Units 75
Limitations on Liabilities of Sponsor and Trustee 73
Market for Units 71
Minimum Transaction *
Optional Distribution Plans 66
Ownership and Transfer of Units 70
Public Offering Price of Units 5
Quantity Purchases 6
Ratings, Description of 75
Record Dates 66
Redemption of Units by Trustee 71
Reports to Unitholders 69
Repurchase of Units by Sponsor 72
Sales Charge *
Selection of Bonds for Deposit in the Trusts 8
Sponsor, Information about 73
State Tax Status 50
Successor Trustees and Sponsors 73
Tax Status of Unitholders 50
Trustee, Information about 73
Trustee's Fees 65
Trust Indenture, Amendment and Termination 74
Unit Issuance and Transfer 70
Unit Value and Evaluation 69
* Information on this item appears in Part Two.
THE NUVEEN TAX-EXEMPT UNIT TRUST
THE NUVEEN TAX-EXEMPT UNIT TRUST - DESCRIPTION
Each Series of the Nuveen Tax Exempt Unit Trust (the "Trust") is one of a
series of separate but similar investment companies created by the Sponsor,
each of which is designated by a different Series number. Each Series includes
one or more underlying separate unit investment trusts; the trusts in which few
or none of the Bonds are insured are sometimes referred to as the "Traditional
Trusts," the trusts in which all of the Bonds are insured as described herein
are sometimes referred to as the "Insured Trusts," and the state trusts (both
Traditional and Insured) are sometimes referred to as the "State Trusts." The
general term "Trust(s)" should be understood to refer collectively to both
Traditional and Insured Trusts. Each Trust includes only Bonds that are, in
the opinion of counsel, exempt from Federal income tax and, in the case of a
State Trust, from certain taxation in the State for which such State Trust is
named. Each Series was created under the laws of the State of New York
pursuant to a Trust Indenture and Agreement (the "Indenture") between John
Nuveen & Co. Incorporated (the "Sponsor") and United States Trust Company of
New York (the "Trustee").
The objectives of the Trusts are income exempt from Federal income tax and, in
the case of a State Trust, where applicable, from State income and intangibles
taxes, and conservation of capital through an investment in obligations issued
by or on behalf of states and territories of the United States and authorities
and political subdivisions thereof, the interest on which is, in the opinion of
recognized bond counsel to the issuing governmental authorities, exempt from
Federal income tax under existing law. Bonds in any State Trust have been
issued primarily by or on behalf of the State for which such Trust is named and
counties, municipalities, authorities and political subdivisions thereof, the
interest on which is, in the opinion of bond counsel, exempt from Federal and
(except for certain Bonds in the Connecticut Trusts, which were issued prior to
the taxation by Connecticut of interest income of resident individuals) certain
State income tax and intangibles taxes, if any, for purchasers who qualify as
residents of that State. Insurance guaranteeing the timely payment, when due,
of all principal and interest on the Bonds in each Insured Trust has been
obtained by the Sponsor or by the issuers of such Bonds from the Municipal Bond
Insurance Association or Municipal Bond Investors Assurance Corporation, and as
a result of such insurance the obligations in the Insured Trusts are rated Aaa
by Moody's Investors Service, Inc. ("Moody's") and AAA by Standard & Poor's
Corporation ("Standard & Poor's" or "S&P"). (See "Insurance on Bonds in the
Insured Trusts.") All obligations in each Traditional Trust were rated at the
date the Trust was established in the category A or better (BBB or Baa or
better by such services in the case of National Trust 76 and earlier National
Trusts and SP-1 or MIG 2 or better in the case of short-term obligations
included in a Short Term Traditional Trust) by Standard & Poor's or Moody's
(including provisional or conditional ratings). (See "Description of Bond
Ratings.") In addition, certain Bonds in certain Traditional Trusts may be
covered by insurance guaranteeing the timely payment, when due, of all
principal and interest. The bid prices of the Bonds in the portfolio of any
Trust may represent a deep "market" discount from the par value of the Bonds.
At the time each Discount Trust was established, the market value of the Bonds
in the portfolio was significantly below face value, and the current bid prices
of the Bonds in such Trusts may continue to represent a deep "market" discount
from the par value of the Bonds.
Gains realized on the sale, payment on maturity or redemption of the Bonds by
the Trustee or on the sale or redemption of Units by a Unitholder are included
in a Unitholder's gross income for Federal income tax purposes as capital
gains. (See "Tax Status of Unitholders.") The Sponsor has deposited with the
Trustee the interest-bearing obligations listed in the Schedules of Investments
in Part Two (the "Bonds"), which constitute the Trusts' underlying securities.
There is, of course, no guarantee that the Trusts' objectives will be achieved.
The State of Florida imposes no income tax on individuals, and exemption from
that State's intangibles tax provides only a slight tax advantage to purchasers
of a Florida Trust. The State of Texas currently imposes no income tax on
individuals; accordingly, there is no State tax advantage to purchasers of a
Texas Trust. (See "Tax Status of Unitholders" for a discussion of these
matters.)
Payment of interest on the Bonds in each Insured Trust, and of principal at
maturity, is guaranteed under policies of insurance obtained by the Sponsor or
by the issuers of the Bonds. (See "Insurance on Bonds in Insured Trusts.")
At the Date of Deposit, each National Trust, State Trust and Discount Trust
consisted of long-term (approximately 15 to 40 year maturities) obligations;
each Long Intermediate Trust consisted of intermediate to long-term
(approximately 11 to 19 year maturities) obligations; each intermediate Trust
and State Intermediate Trust consisted of intermediate-term (approximately 5 to
15 year maturities) obligations; each Short Intermediate Trust and State Short
Intermediate Trust consisted of short to intermediate-term (approximately 3 to
7 year maturities) obligations; and each Short Term Trust consisted of
short-term (approximately 1 to 5 year maturities) obligations.
Each Trust consists of municipal debt obligations. Because of this an
investment in a Trust should be made with an understanding of the risks which
investment in debt obligations may entail, including the risk that the value of
the debt obligations, and therefore of the Units, will decline with increases
in market interest rates. In general, the longer the period until the maturity
of a Bond, the more sensitive its value will be to fluctuations in interest
rates. During the past decade there have been substantial fluctuations in
interest rates and, accordingly, in the value of long-term debt obligations.
The Sponsor cannot predict whether such fluctuations will recur. Other risks
include the ability of the issuer, or, if applicable, the insurer, to make
payments of interest and principal when due, early call provisions and the
potential for changes in the tax status of the debt obligations.
Each Unit of a Trust represents an undivided interest in such Trust equal to
every other Unit. To the extent that any Units are redeemed by the Trustee,
the aggregate value of the Trust's assets will decrease by the amount paid to
the redeeming Unitholder, but the fractional undivided interest of each
unredeemed Unit in such Trust will increase proportionately. The Units offered
hereby are issued and outstanding Units which have been reacquired by the
Sponsor either by purchase of Units tendered to the Trustee for redemption or
by purchase in the open market. No offering is being made on behalf of the
Trusts and any profit or loss realized on the sale of Units will accrue to the
Sponsor.
INSURANCE ON BONDS IN INSURED TRUSTS
Insurance guaranteeing the timely payment, when due, of all principal and
interest on the Bonds in each Insured Trust has been obtained by the Sponsor or
by the issuers or underwriters of Bonds from the Municipal Bond Insurance
Association (the "Association") (for Insured Series 1 through 107) or the
Municipal Bond Investors Assurance Corporation (the "Corporation") (for Insured
Series 108 and all subsequent Series) (the Association and the Corporation are
referred to collectively as the "Insurers"). Each insurance policy is an
obligation only of the Insurer that issued it and not of the other: policies
issued by the Association are obligations of the Association and not of the
Corporation, and policies issued by the Corporation are not obligations of the
Association or its members. The appropriate Insurer has issued a policy or
policies of insurance covering each of the Bonds in the Insured Trusts, each
policy to remain in force until the payment in full of such Bonds and whether
or not the Bonds continue to be held by an Insured Trust. By the terms of each
policy the appropriate Insurer will unconditionally guarantee to the holders or
owners of the Bonds the payment, when due, required of the issuer of the Bonds
of an amount equal to the principal of and interest on the Bonds as such
payments shall become due but not be paid (except that in the event of any
acceleration of the due date of principal by reason of mandatory or optional
redemption, default or otherwise, the payments guaranteed will be made in such
amounts and at such times as would have been due had there not been an
acceleration). The appropriate Insurer will be responsible for such payments,
less any amounts received by the holders or owners of the Bonds from any
trustee for the Bond issuers or from any other sources other than the Insurer.
The Insurers' policies relating to small industrial development bonds and
pollution control revenue bonds also guarantee the full and complete payments
required to be made by or on behalf of an issuer of Bonds pursuant to the terms
of the Bonds if there occurs an event which results in the loss of the
tax-exempt status of the interest on such Bonds, including principal, interest
or premium payments, if any, as and when thereby required. Each Insurer has
indicated that the insurance policies do not insure the payment of principal or
interest on Bonds which are not required to be paid by the issuer thereof
because the Bonds were not validly issued; as indicated under "Tax Status of
Unitholders," the respective issuing authorities have received opinions of bond
counsel relating to the valid issuance of each of the Bonds in the Insured
Trusts. The Insurers' policies also do not insure against nonpayment of
principal of or interest on the Bonds resulting from the insolvency, negligence
or any other act or omission of the trustee or other payment agent for the
Bonds. The policies are not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law. The
policies are non-cancelable and the insurance premiums have been fully paid on
or prior to the Date of Deposit, either by the Sponsor or, if a policy has been
obtained by a Bond issuer, by such issuer.
Upon notification from the trustee for any Bond issuer or any holder or owner
of the Bonds or coupons that such trustee or paying agent has insufficient
funds to pay any principal or interest in full when due, the appropriate
Insurer will be obligated to deposit funds promptly with State Street Bank and
Trust Company, N.A., New York, New York, as fiscal agent for the Insurers,
sufficient to fully cover the deficit. If notice of nonpayment is received on
or after the due date, the appropriate Insurer will provide for payment within
one business day following receipt of the notice. Upon payment by an Insurer
of any Bonds, coupons, or interest payments, such Insurer shall succeed to the
rights of the owner of such Bonds, coupons or interest payments with respect
thereto.
The Association. Each insurance company comprising the Association is
severally and not jointly obligated under each policy issued by the Association
in the following respective percentages: The Aetna Casualty and Surety
Company, 33%; Fireman's Fund Insurance Company, 30%; The Travelers Indemnity
Company, 15%; CIGNA Property and Casualty Company (formerly Aetna Insurance
Company), 12%; and The Continental Insurance Company, 10%. As a several
obligor, each such insurance company will be obligated only to the extent of
its percentage of any claim under the policy and will not be obligated to pay
any unpaid obligation of any other member of the Association. Each insurance
company's participation is backed by all of its assets. However, each
insurance company is a multiline insurer involved in several lines of insurance
other than municipal bond insurance, and the assets of each insurance company
also secure all of its other insurance policy and surety bond obligations.
The following table sets forth financial information with respect to the five
insurance companies comprising the Association. The statistics have been
furnished by the Association and are as reported by the insurance companies to
the New York State Insurance Department and are determined in accordance with
statutory accounting principles. No representation is made herein as to the
accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof. In
addition, these numbers are subject to revision by the New York State Insurance
Department which, if revised, could either increase or decrease the amounts.
MUNICIPAL BOND INSURANCE ASSOCIATION
FIVE MEMBER COMPANIES, ASSETS AND POLICYHOLDERS' SURPLUS
(UNAUDITED) AS OF JUNE 30, 1994
(Amounts in Thousands)
<TABLE>
<S> -<C>
AETNA
CASUALTY -<C>
FIREMAN'S FUND-<C>
TRAVELERS INDEMNITY-<C>
CIGNA PROPERTY
AND CASUALTY-<C>
CONTINENTAL
INSURANCE
Assets-$10,169,558-$6,751,350-$10,246,669-$4,992,242-$2,712,535
Liabilities-8,299,548-4,893,824-8,486,034-4,924,356-2,351,467
Policyholder's
Surplus-
1,870,010-
1,857,526-
1,760,635-
67,886-
361,068
</TABLE>.
The Corporation. The Corporation is the principal operating subsidiary of
MBIA, Inc., a New York Stock Exchange listed company. MBIA, Inc. is not
obligated to pay the debts of or claims against the Corporation. The
Corporation is a limited liability corporation rather than a several liability
association. The Corporation is domiciled in the State of New York and
licensed to do business in all 50 states, the District of Columbia and the
Commonwealth of Puerto Rico.
As of June 30, 1994, the Insurer had admitted assets of $3.3 billion
(unaudited), total liabilities of $2.2 billion (unaudited), and total capital
and surplus of $1.1 billion (unaudited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. Copies of the Corporation's year-end financial statements
prepared in accordance with statutory accounting practices are available from
the Corporation. The address of the Corporation is 113 King Street, Armonk,
New York 10504.
Moody's rates all bond issues insured by the Insurers Aaa and short-term loans
MIG 1, both designated to be of the highest quality. Standard & Poor's rates
all issues insured by the Insurers AAA Prime Grade.
The Moody's rating of the Insurers should be evaluated independently of the
Standard & Poor's rating of the Insurers. No application has been made to any
other rating agency in order to obtain additional ratings on the Bonds. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Insurers and their ability to pay claims on their
policies of insurance. (See "Description of Ratings.") Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Bonds, and
such ratings may be subject to revision or withdrawal at any time by the rating
agencies. Any downward revision or withdrawal of either or both ratings may
have an adverse effect on the market price of the Bonds. Because the insurance
on the Bonds will be effective so long as the Bonds are outstanding, such
insurance will be taken into account in determining the market value of the
Bonds and therefore some value attributable to such insurance will be included
in the value of the Units of the Insured Trusts. The insurance does not,
however, guarantee the market value of the Bonds or of the Units.
INSURANCE ON CERTAIN BONDS IN TRADITIONAL TRUSTS
Insurance guaranteeing the timely payment, when due, of all principal and
interest on certain Bonds in a Traditional Trust may have been obtained by the
Sponsor, issuer, or underwriter of the particular Bonds involved or by another
party. Such insurance, which provides coverage substantially the same as that
obtained with respect to Bonds in Insured Trusts as described above, is
effective so long as the insured Bond is outstanding and the insurer remains in
business. Insurance relates only to the particular Bond and not to the Units
offered hereby or to their market value. Insured Bonds have received a rating
of AAA by Standard & Poor's and Aaa by Moody's, in recognition of such
insurance.
If a Bond in a Traditional Trust is insured, the Schedule of Investments will
identify the insurer. Such insurance will be provided by Financial Guaranty
Insurance Company ("FGIC"), AMBAC Indemnity Corporation ("AMBAC"), MBIA Corp.
of Illinois, Capital Guaranty Insurance Corporation ("CGIC"), Financial
Security Assurance, Inc. ("FSA"), the Association, the Corporation or Connie
Lee Insurance Company ("Connie Lee"). The Sponsor to date has purchased and
presently intends to purchase insurance for Bonds in Traditional Trusts
exclusively from the Corporation (see the preceding disclosure regarding the
Corporation). There can be no assurance that any insurer listed herein will be
able to satisfy its commitments in the event claims are made in the future.
However, at the date hereof, Standard & Poor's has rated the claims-paying
ability of each insurer AAA, and Moody's has rated all bonds insured by each
such insurer, except CGIC and Connie Lee, Aaa. Moody's gives no ratings for
bonds insured by CGIC or Connie Lee.
Because any such insurance will be effective so long as the insured Bonds are
outstanding, such insurance will be taken into account in determining the
market value of such Bonds and therefore some value attributable to such
insurance will be included in the value of the Units of the Trust that includes
such Bonds. The insurance does not, however, guarantee the market value of the
Bonds or of the Units.
PUBLIC OFFERING PRICE
The Sponsor will appraise or cause to be appraised daily the value of the
underlying Bonds in each Trust as of 4:00 p.m. eastern time on each day on
which the New York Stock Exchange (the "Exchange") is normally open for
trading, and will adjust the Public Offering Price of the Units commensurate
with such appraisal. Such Public Offering Price will be effective for all
orders received by a dealer or the Sponsor at or prior to 4:00 p.m. eastern
time on each such day. Orders received after that time, or on a day when the
Exchange is closed for a scheduled holiday or weekend, will be held until the
next determination of price.
The Public Offering Price of the Units of each Trust for secondary market
purchases is determined by adding to the Trustee's determination of the bid
price of each Bond in the Trust the appropriate sales charge determined in
accordance with the table set forth below based upon the number of years
remaining to the maturity of each such Bond, adjusting the total to reflect the
amount of any cash held in or advanced to the principal account of the Trust,
and dividing the result by the number of Units of such Trust then outstanding.
For purposes of this calculation, Bonds will be deemed to mature on their
stated maturity dates unless: (a) the Bonds have been called for redemption or
funds or securities have been placed in escrow to redeem them on an earlier
call date, in which case such call date shall be deemed to be the date upon
which they mature; or (b) such Bonds are subject to a "mandatory put," in
which case such mandatory put date shall be deemed to be the date upon which
they mature. Any assumptions regarding maturity made for purposes of
determining the appropriate sales charge in no way predict or guarantee the
actual remaining life of a given Trust.
Pursuant to the terms of the Indenture, the Trustee may terminate a Trust if
the net asset value of such Trust, as shown by any evaluation, is less than
20% of the original principal amount of the Trust. In the course of regularly
appraising the value of Bonds in each Trust, the Sponsor will attempt to
estimate the date on which a Trust's value will fall below the 20% level based
on anticipated bond events over a five-year period, including maturities,
escrow calls and current calls or refundings, assuming certain market rates.
The Sponsor intends from time to time to recommend that certain Trusts whose
values have fallen or are anticipated to fall below the 20% level be terminated
based on certain criteria which could adversely affect the Trust's
diversification. Once the Sponsor has determined that a Trust's value has
fallen or may fall below the 20% level within a five-year period, for purposes
of computing the sales charge using the table set forth below, the maturity of
each bond in such Trust will be deemed to be the earlier of the estimated
termination date of the Trust or the actual date used when pricing the bond
under Municipal Securities Rulemaking Board rules and interpretations issued
thereunder.
The effect of this method of sales charge calculation will be that different
sales charge rates will be applied to each of the various Bonds in a Trust
portfolio based upon the maturities of such Bonds, in accordance with the
following schedule. As shown, the sales charge on Bonds in each maturity range
(and therefore the aggregate sales charge on the purchase) is reduced with
respect to purchases of at least $50,000 or 500 Units:
AMOUNT OF PURCHASE *
<TABLE>
<S>
Years to Maturity-<C>
Under
$50,000-<C>
$50,000
to
$99,999-<C>
$100,000
to
$249,999-<C>
$250,000
to
$499,999-<C>
$500,000
to
$999,999-<C>
$1,000,000
to
$2,499,999-<C>
$2,500,000
to
$4,999,999-<C>
$5,000,000
or more
Less than 1-0-0-0-0-0-0-0-0
1 but less than 2-1.523%-1.446%-1.369%-1.317%-1.215%-1.061%-.900%-.750%
2 but less than 3-2.041-1.937-1.833-1.729-1.626-1.420-1.225-1.030
3 but less than 4-2.564-2.433-2.302-2.175-2.041-1.781-1.546-1.310
4 but less than 5-3.093-2.961-2.828-2.617-2.459-2.175-1.883-1.590
5 but less than 7-3.627-3.433-3.239-3.093-2.881-2.460-2.165-1.870
7 but less than 10-4.167-3.951-3.734-3.520-3.239-2.828-2.489-2.150
10 but less than 13-4.712-4.467-4.221-4.004-3.788-3.253-2.842-2.430
13 but less than 16-5.263-4.988-4.712-4.439-4.167-3.627-3.169-2.710
16 or more-5.820-5.542-5.263-4.987-4.603-4.004-3.500-3.000
</TABLE>.
*Breakpoint sales charges are computed both on a dollar basis and on the basis
of the number of Units purchased, using the equivalent of 500 Units to $50,000,
2,500 Units to $250,000, etc., and will be applied on that basis which is more
favorable to the purchaser.
The secondary market sales charges above are expressed as a percent of the net
amount invested; expressed as a percent of the Public Offering Price, the
maximum sales charge on any Trust, including one consisting entirely of Bonds
with 16 years or more to maturity, would be 5.50% (5.820% of the net amount
invested). For purposes of illustration, the sales charge on a Trust
consisting entirely of Bonds maturing in 13 to 16 years would be 5% (5.263% of
the net amount invested); on a Trust consisting entirely of Bonds maturing in
10 to 13 years, 4.5% (4.712% of the net amount invested); on a Trust consisting
entirely of Bonds maturing in 5 to 7 years, 3.5% (3.627% of the net amount
invested); and on a Trust consisting entirely of Bonds maturing in 3 to 4
years, 2.5% (2.564% of the net amount invested). The actual sales charge
included in the Public Offering Price of any particular will depend on the
maturities of the Bonds in the portfolio of such Trust.
As more fully set forth under "Accrued Interest" below, accrued interest from
the preceding Record Date to, but not including, the settlement date of the
transaction (five business days after purchase) will be added to the Public
Offering Price to determine the purchase price of Units.
The above graduated sales charge will apply on all applicable purchases of
Nuveen investment company securities on any one day by the same purchaser in
the amounts stated, and for this purpose purchases of any Series will be
aggregated with concurrent purchases of Units of any other Series or of shares
of any open-end management investment company of which the Sponsor is principal
underwriter and with respect to the purchase of which a sales charge is
imposed.
Purchases by or for the account of an individual and his or her spouse and
children under 21 years of age will be aggregated to determine the applicable
sales charge. The graduated sales charges are also applicable to a trustee or
other fiduciary purchasing securities for a single trust estate or single
fiduciary account.
Units may be purchased at the Public Offering Price without a sales charge by
officers or directors and by bona fide, full-time employees of Nuveen, Nuveen
Advisory Corp., Nuveen Institutional Advisory Corp. and The John Nuveen
Company including in each case these individuals and their immediate family
members (as defined above).
Units may be purchased in the secondary market at the Public Offering Price for
non-breakpoint purchases minus the concession the Sponsor typically allows to
brokers and dealers for non-breakpoint purchases (see "Distribution of Units to
the Public") by investors who purchase Units through registered investment
advisors, certified financial planners and registered broker-dealers who in
each case either charge periodic fees for financial planning, investment
advisory or asset management services, or provide such services in connection
with the establishment of an investment account for which a comprehensive "wrap
fee" charge is imposed, and by bank trust departments investing funds over
which they exercise exclusive discretionary investment authority and that are
held in a fiduciary, agency, custodial or similar capacity. Notwithstanding
anything to the contrary, investors and bank trust departments purchasing Units
through this program will not receive sales charge reductions for quantity
purchases.
Cash, if any, made available to the Sponsor prior to the settlement date for a
purchase of Units may be available for use in the Sponsor's business, and may
be of benefit to the Sponsor.
Whether or not Units are being offered for sale, the Sponsor shall also
determine the aggregate value of each Trust as of 4:00 p.m. eastern time: (i)
on each June 30 or December 31 (or, if such date is not a business day, the
last business day prior thereto), (ii) on each day on which any Unit is
tendered for redemption (or the next succeeding business day if the date of
tender is a non-business day), and (iii) at such other times as may be
necessary. For this purpose, a "business day" shall be any day on which the
Exchange is normally open. (See "Unit Value and Evaluation.")
ACCRUED INTEREST
Accrued interest is the accumulation of unpaid interest on a Bond from the last
day on which interest thereon was paid. Interest on Bonds in each Trust is
accounted for daily on an accrual basis. For this reason, the purchase price
of Units of each Trust will include not only the Public Offering Price but also
the proportionate share of accrued interest to the date of settlement.
Interest accrues to the benefit of Unitholders commencing with the settlement
date of their purchase transaction.
Accrued interest does not include accrual of original issue discount on zero
coupon bonds, stripped obligations or other original issue discount bonds.
(See "Selection of Bonds for Deposit in the Trusts" and "Tax Status of
Unitholders.") The Trustee has no cash for distributions to Unitholders until
it receives interest payments on the Bonds in the Trust. Since municipal bond
interest is accrued daily but generally paid only semi-annually, during the
initial months of each Trust, the Interest Account, consisting of accrued but
uncollected interest and collected interest (cash), will be predominately the
uncollected accrued interest that is not available for distribution. However,
due to advances by the Trustee, the Trustee will provide a first distribution
between approximately 30 and 60 days after the Date of Deposit. The amount of
accrued interest at any point in time will be greater than the amount of
interest that the Trust will have actually received and distributed to
Unitholders. Assuming each Trust retains the size and composition shown in the
accompanying Part Two and expenses and fees remain the same, annual interest
collected and distributed in future periods will approximate the estimated Net
Annual Interest Income stated therein. There will, however, always remain an
item of accrued interest that is included in the purchase price and the
redemption price of Units.
As Bonds mature, or are redeemed or sold, the accrued interest applicable to
such Bonds is collected and subsequently distributed to Unitholders.
Unitholders who sell or redeem all or a portion of their Units will be paid
their proportionate share of the remaining accrued interest to, but not
including, the fifth business day following the date of sale or tender.
ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
The Estimated Long-Term Return for each Trust is a measure of the return to the
investor over the estimated life of the Trust. The Estimated Long-Term Return
represents an average of the yields to maturity (or call) of the Bonds in the
Trust's portfolio calculated in accordance with accepted bond practice and
adjusted to reflect expenses and sales charges. Under accepted bond practice,
tax-exempt bonds are customarily offered to investors on a "yield price" basis,
which involves computation of yield to maturity or to an earlier call date
(whichever produces the lower yield), and which takes into account not only the
interest payable on the bonds but also the amortization or accretion to a
specified date of any premium over or discount from the par (maturity) value in
the bond's purchase price. In calculating Estimated Long-Term Return, the
average yield for the Trust's portfolio is derived by weighing each Bond's
yield by the market value of the Bond and by the amount of time remaining to
the date to which the Bond is priced. Once the average portfolio yield is
computed, this figure is then reduced to reflect estimated expenses and the
effect of the maximum sales charge paid by investors. The Estimated Long-Term
Return calculation does not take into account the effect of the first
distribution which may be less than a regular distribution or may be paid at
some point after 30 days (or a second distribution which may be less than a
normal distribution for Unitholders who choose quarterly or semi-annual plans
of distribution), and it also does not take into account the difference in the
timing of payments to Unitholders who choose the quarterly or semi-annual plan
of distribution, each of which will reduce the return.
Estimated Current Return is computed by dividing the Net Annual Interest Income
per Unit by the Public Offering Price. In contrast to Estimated Long-Term
Return, Estimated Current Return does not reflect the amortization of premium
or accretion of discount, if any, on the Bonds in the Trust's portfolio. Net
Annual Interest Income per Unit is calculated by dividing the annual interest
income to the Trust, less estimated expenses, by the number of Units
outstanding.
Net Annual Interest Income per Unit, used to calculated Estimated Current
Return, will vary with changes in fees and expenses of the Trustee and the
Evaluator and with the redemption, maturity, exchange or sale of Bonds. A
Trust may experience expenses and portfolio changes different from those
assumed in the calculation of Estimated Long-Term Return. There thus can be no
assurance that the Estimated Current Returns or Estimated Long-Term Returns
quoted for a Trust will be realized in the future. A Unitholder's actual
return may significantly from the Estimated Long-Term Return based on their
holding period, market interest rate changes, other factors affecting the
prices of individual bonds in the portfolio, and differences between the
expected remaining life of portfolio bonds and the actual length of time that
they remain in the Trust; such actual holding periods may be reduced by
termination of the Trust, as described in "Amendment and Termination of
Indenture". Since both Estimated Current Return and Estimated Long-Term Return
quoted on a given business day are based on the market value of the underlying
Bonds on that day, subsequent calculations of these performance measures will
reflect the current market value of the underlying Bonds and may be higher or
lower.
DETERMINATION OF THE PRICE OF BONDS AT DATE OF DEPOSIT
Except as indicated below, for Series 590 and all prior Trusts, the prices at
which the Bonds deposited in each Trust would have been offered to the public
on the business day prior to the Date of Deposit were determined on the basis
of an evaluation of the Bonds by Standard & Poor's, a firm regularly engaged in
the business of evaluating, quoting and appraising comparable bonds. For
Series 591 and all subsequent Series, the prices at which the bonds deposited
in each Trust would have been offered to the public on the business day prior
to the Date of Deposit were determined on the basis of an evaluation of the
Bonds by Kenny S&P Evaluation Services ("Kenny S&P"), a firm regularly engaged
in the business of evaluating, quoting and appraising comparable bonds. With
respect to Bonds in Insured Trusts and insured Bonds in Traditional Trusts,
either Standard & Poor's or Kenny S&P, as applicable, evaluated the Bonds as so
insured. For National Trust 4 through 22, such prices were determined by the
Trustee on the basis of consultation with dealers in public bonds other than
the Sponsor, by reference to the Blue List of Current Municipal Offerings (a
daily publication containing the current public offering prices of public bonds
of all grades currently being offered by dealers and banks).
SELECTION OF BONDS FOR DEPOSIT IN THE TRUSTS
In selecting Bonds for the Trusts, the following factors, among others, were
considered: (i) the Standard & Poor's rating of the Bonds or the Moody's
rating of the Bonds (see page 1 for a description of minimum rating standards),
(ii) the prices of the Bonds relative to other bonds of comparable quality and
maturity (in addition, in the case of Discount Trusts, the prices relative to
newly issued bonds of comparable quality, coupon, and maturity, i.e., the
existence of "market" discount), (iii) the diversification of Bonds as to
purpose of issue and location of issuer, (iv) the maturity dates of the Bonds
and (v) in the case of Insured Trusts only, the availability of insurance on
such Bonds.
In order for Bonds to be eligible for insurance by the Association or the
Corporation, they must have credit characteristics which, in the opinion of the
applicable Insurer, would qualify them as "investment grade" obligations.
Insurance is not a substitute for the basic credit of an issuer, but rather
supplements the existing credit and provides additional security therefor. All
Bonds insured by either of the Insurers receive a rating of AAA by Standard &
Poor's or Aaa by Moody's, as the case may be. (See "Insurance on Bonds in the
Insured Trusts.")
Each Trust consists of such Bonds listed in the Schedules of Investments in
Part Two as may continue to be held from time to time (including certain
securities deposited in the Trust in exchange or substitution for any of such
Bonds or upon certain refundings) together with accrued and undistributed
interest thereon and undistributed cash realized from the disposition of Bonds.
Neither the Sponsor nor the Trustee shall be liable in any way for any default,
failure or defect in any Bond. Because certain of the Bonds may from time to
time under certain circumstances be sold or redeemed or will mature in
accordance with their terms and the proceeds from such events will be used to
pay for Units redeemed or distributed to Unitholders, and not reinvested, no
assurance can be given that a Trust will retain for any length of time its
present size and composition.
A Trust portfolio may consist of Bonds priced at a deep "market" discount from
par value at maturity. A primary reason for the market values of the Bonds
being less than their par values is that the coupon interest rates on the Bonds
are lower than the current market interest rates for newly issued bonds of
comparable rating and type. At the time of issuance the Bonds were for the
most part issued at then current coupon interest rates. The current yields
(coupon interest income as a percentage of market price) of discount bonds are
lower than the current yields of comparably rated bonds of similar type newly
issued at current interest rates because discount bonds tend to increase in
market value as they approach maturity and the full principal amount becomes
payable. A discount bond held to maturity will have a larger portion of its
total return in the form of capital gain and less in the form of tax-exempt
interest income than a comparable bond newly issued at current market rates.
(See "Tax Status of Unitholders".) Discount bonds with a longer term to
maturity tend to have a higher current yield and a lower current market value
than otherwise comparable bonds with a shorter term to maturity. If interest
rates rise, the market discount of discount bonds will increase and the value
of such bonds will decrease; and if interest rates decline, the market discount
of discount bonds will decrease and the value of the bonds will increase.
Market discount attributable to interest rate changes does not necessarily
indicate a lack of market confidence in the issuer. Investors should also be
aware that many of the Bonds in each Trust portfolio are subject to special or
extraordinary redemption at par (in the case of original issue discount bonds,
such redemption is generally to be made at the issue price plus the amount of
original issue discount accredit to redemption; such price is hereafter
referred to as "Accredit Value") under certain circumstances, including
economic and other defaults. Under such circumstances the redemption price for
such Bonds would not include any premium over par or Accredit Value which the
investor may have paid for such Bonds.
As a number of the Trusts contain Bonds issued by school districts, investors
should be aware that litigation challenging the validity, under state
constitutions, of present systems of financing public education has been
initiated in a number of states. Decisions have been reached in some states
holding such school financing in violation of state constitutions. In
addition, legislation to effect changes in public school financing has been
introduced in a number of states. The Sponsor, however, does not believe that
such efforts, even if successful, will have a material adverse effect on the
ability of any of the issuers of Bonds contained in the Trusts' portfolios to
make principal and interest payments when due.
The Sponsor participated as either the sole underwriter or manager or as a
member of the syndicates which were the original underwriters of a number of
the Bonds in certain Trusts. An underwriter or underwriting syndicate
purchases bonds from the issuer on a negotiated or competitive bid basis as
principal with the intention of marketing such bonds to investors at a profit.
All of the Bonds in each Trust are subject to being called or redeemed in whole
or in part prior to their stated maturities pursuant to the optional redemption
provisions described in the "Schedules of Investments" in Part Two and in most
cases pursuant to sinking fund, special or extraordinary redemption provisions.
A bond subject to optional call is one which is subject to redemption or
refunding prior to maturity at the option of the issuer. A refunding is a
method by which a bond issue is redeemed, at or before maturity, by the
proceeds of a new bond issue. A bond subject to sinking fund redemption is one
which is subject to partial call from time to time from a fund accumulated for
the scheduled retirement of a portion of an issue prior to maturity. Special
or extraordinary redemption provisions may provide for redemption of all or a
portion of an issue upon the occurrence of certain circumstances usually
related to defaults or unanticipated changes in circumstances. Events that may
permit or require the special or extraordinary redemption of bonds include,
among others: substantial damage to or destruction of the project for which
the proceeds of the bonds were used; exercise by a local, state or Federal
governmental unit of its power of eminent domain to take all or substantially
all of the project for which the proceeds of the bonds were used; a final
determination that the interest on the bonds is taxable; changes in the
economic availability of raw materials, operating supplies or facilities or
technological or other changes which render the operation of the project for
which the proceeds of the bonds were used uneconomical; changes in law or an
administrative or judicial decree which render the performance of the agreement
under which the proceeds of the bonds were made available to finance the
project impossible or which create unreasonable burdens or which impose
excessive liabilities, such as taxes, not imposed on the date the bonds were
issued, on the issuer of the bonds or the user of the proceeds of the bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the bonds;
an overestimate of the costs of the project to be financed with the proceeds of
the bonds resulting in excess proceeds which may be applied to redeem bonds; an
underestimate of a source of funds securing the bonds resulting in excess funds
which may be applied to redeem bonds; or a default in payment or failure to
comply with the restrictions created as part of the bond financing on the part
of the operator or principal user of a project financed by the bonds. The
Sponsor is unable to predict all of the circumstances which may result in such
redemption of an issue of Bonds. See the discussion of the various types of
bond issues, below, for certain information on the call provisions of such
bonds, particularly single family mortgage revenue bonds.
The exercise of redemption or call provisions will (except to the extent the
proceeds of the called Bonds are used to pay for Unit redemptions) result in
the distribution of principal and may result in a reduction in the amount of
subsequent interest distributions; it may also affect the current return on
Units of the Trust involved. Redemption pursuant to optional call provisions
is more likely to occur, and redemption pursuant to sinking fund or special or
extraordinary redemption provisions may occur, when the Bonds have an offering
side evaluation which represents a premium over par. Redemption pursuant to
optional call provisions may be, and redemption pursuant to sinking fund or
special or extraordinary redemption provisions is likely to be, at a price
equal to the par value of the bonds without any premium (in the case of
original issue discount bonds, such redemption is generally to be made at the
Accredit Value). Because Bonds may have been valued at prices above or below
par value or the then-current Accredit Value at the time Units were purchased,
Unitholders may realize gain or loss upon the redemption of portfolio Bonds.
(See "Estimated Long-Term Return and Estimated Current Return" and the
"Schedules of Investments" in Part Two.)
Certain of the Bonds in each Trust portfolio may be subject to continuing
requirements such as the actual use of Bond proceeds, manner of operation of
the project financed from Bond proceeds or rebate of excess earnings on Bond
proceeds that may affect the exemption of interest on such Bonds from Federal
income taxation. Although at the time of issuance of each of the Bonds in each
Trust an opinion of bond counsel was rendered as to the exemption of interest
on such obligations from Federal income taxation, and the issuers covenanted to
comply with all requirements necessary to retain the tax-exempt status of the
Bonds, there can be no assurance that the respective issuers or other obligors
on such obligations will fulfill the various continuing requirements
established upon issuance of the Bonds. A failure to comply with such
requirements may cause a determination that interest on such obligations is
subject to Federal income taxation, perhaps even retroactively from the date of
issuance of such Bonds, thereby reducing the value of the Bonds and subjecting
Unitholders to unanticipated tax liabilities.
Certain Bonds may carry a "mandatory put" (also referred to as a "mandatory
tender" or "mandatory repurchase") feature pursuant to which the holder of such
a Bond will receive payment of the full principal amount thereof on a stated
date prior to the maturity date unless such holder affirmatively acts to retain
the Bond. Under the Indenture, the Trustee does not have the authority to act
to retain any Bonds with such features; accordingly, it will receive payment of
the full principal amount of any such Bonds on the stated put date and such
date is therefore treated as the maturity date of such Bonds in selecting Bonds
for the respective Trust and for purposes of calculating the average maturity
of the Bonds in any Trust.
To the best knowledge of the Sponsor, there was no litigation pending as of the
date of this Prospectus in respect of any Bonds which might reasonably be
expected to have a material adverse effect on any of the Trusts. It is
possible that after the Date of Deposit, litigation may be initiated with
respect to Bonds in any Trust. Any such litigation may affect the validity of
such Bonds or the tax-exempt nature of the interest thereon, but while the
outcome of litigation of such nature can never be entirely predicted, the
opinions of bond counsel to the issuer of each Bond on the date of issuance
state that such Bonds were validly issued and that the interest thereon is, to
the extent indicated, exempt from Federal income tax.
An investment in Units of any Trust should be made with an understanding of the
risks that such an investment may entail. These include but are not limited to
the ability of the issuer, or, if applicable, the insurer, to make payments of
interest and principal when due, the effects of changes in interest rates
generally, early call provisions and the potential for changes in the tax
status of the Bonds. The following paragraphs discuss certain characteristics
of the Bonds in the Trusts and of certain types of issuers in whose securities
a Trust portfolio may be deemed to be "concentrated." These paragraphs
discuss, among other things, certain circumstances which may adversely affect
the ability of such issuers to make payment of principal and interest on Bonds
held in the portfolio of a Trust or which may adversely affect the ratings of
such Bonds; with respect to the Insured Trusts, however, because of the
insurance obtained by the Sponsor or by the Bond issuers, such changes should
not adversely affect any Insured Trust's receipt of principal and interest, the
Standard & Poor's AAA or Moody's Aaa ratings of the Bonds in the portfolio, or
the Standard & Poor's AAA rating of the Units of each Insured Trust.
Health Facility Obligations. Some of the Bonds in a Trust may be obligations of
issuers whose revenues are derived from services provided by hospitals or other
health care facilities, including nursing homes. Ratings of bonds issued for
health care facilities are sometimes based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A facility's gross
receipts and net income available for debt service may be affected by future
events and conditions including, among other things, demand for services, the
ability of the facility to provide the services required, an increasing
shortage of qualified nurses or a dramatic rise in nursing salaries,
physicians' confidence in the facility, management capabilities, economic
developments in the service area, competition from other similar providers,
efforts by insurers and governmental agencies to limit rates, legislation
establishing state rate-setting agencies, expenses, government regulation, the
cost and possible unavailability of malpractice insurance, and the termination
or restriction of governmental financial assistance, including that associated
with Medicare, Medicaid and other similar third party payor programs. Medicare
reimbursements are currently calculated on a prospective basis and are not
based on a provider's actual costs. Such method of reimbursement may adversely
affect reimbursements to hospitals and other facilities for services provided
under the Medicare program and thereby may have an adverse effect on the
ability of such institutions to satisfy debt service requirements. In the
event of a default upon a bond secured by hospital facilities, the limited
alternative uses for such facilities may result in the recovery upon such
collateral not providing sufficient funds to repay fully the bonds.
Certain hospital bonds provide for redemption at par at any time upon the
damage, destruction or condemnation of the hospital facilities or in other
special circumstances.
Housing Obligations. Some of the Bonds in a Trust may be obligations of
issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. Such issues are generally
characterized by mandatory redemption at par or, in the case of original issue
discount bonds, Accredit Value in the event of economic defaults and in the
event of a failure of the operator of a project to comply with certain
covenants as to the operation of the project. The failure of such operator to
comply with certain covenants related to the tax-exempt status of interest on
the Bonds, such as provisions requiring that a specified percentage of units be
rented or available for rental to low or moderate income families, potentially
could cause interest on such bonds to be subject to Federal income taxation
from the date of issuance of the Bonds. The ability of such issuers to make
debt service payments will be affected by events and conditions affecting
financed projects, including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income,
employment and income conditions prevailing in local labor markets, increases
in taxes, utility costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends affecting the
localities in which the projects are located. Occupancy of such housing
projects may be adversely affected by rent levels and income limitations
imposed under Federal and state programs.
Single Family Mortgage Revenue Bonds. Some of the Bonds in a Trust may be
single family mortgage revenue bonds, which are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences located within the issuer's boundaries and owned by persons of low
or moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgaged premises, default, condemnation or casualty loss. Because these
bonds are subject to extraordinary mandatory redemption in whole or in part
from such prepayments of mortgage loans, a substantial portion of such bonds
will probably be redeemed prior to their scheduled maturities or even prior to
their ordinary call dates. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial institutions to
make mortgage loans in sufficient amounts within a specified time period. The
redemption price of such issues may be more or less than the offering price of
such bonds. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of principal of or
interest on such mortgage revenue bonds. Single family mortgage revenue bonds
issued after December 31, 1980 were issued under Section 103A of the Internal
Revenue Code of 1954, as amended, or Section 143 of the Internal Revenue Code
of 1986, as amended (the "Code"), which Sections contain certain requirements
relating to the use of the proceeds of such bonds in order for the interest on
such bonds to retain its tax-exempt status. In each case, the issuer of the
bonds has covenanted to comply with applicable requirements and bond counsel to
such issuer has issued an opinion that the interest on the bonds is exempt from
Federal income tax under existing laws and regulations. There can be no
assurance that such continuing requirements will be satisfied; the failure to
meet such requirements could cause interest on the Bonds to be subject to
Federal income taxation, possibly from the date of issuance of the Bonds.
Federally Enhanced Obligations. Some of the mortgages which secure the various
health care or housing projects which underlie the previously discussed Health
Facility, Housing and Single Family Mortgage Revenue Obligations (the
"Obligations") in a Trust may be insured by the Federal Housing Administration
("FHA"). Under FHA regulations, the maximum insurable mortgage amount cannot
exceed 90% of the FHA's estimated value of the project. FHA mortgage insurance
does not constitute a guarantee of timely payment of the principal of and
interest on the Obligations. Payment of mortgage insurance benefits may be (1)
less than the principal amount of Obligations outstanding or (2) delayed if
disputes arise as to the amount of the payment or if certain notices are not
given to the FHA within prescribed time periods. In addition, some of the
previously discussed Obligations may be secured by mortgage-backed certificates
guaranteed by the Government National Mortgage Association ("GNMA"), a wholly
owned corporate instrumentality of the United States, or the Federal National
Mortgage Association ("Fannie Mae"), a federally chartered and
stockholder-owned corporation, or both. GNMA and Fannie Mae guarantee timely
payment of principal and interest on the mortgage-backed certificates, even
where the underlying mortgage payments are not made. While such
mortgage-backed certificates are often pledged to secure payment of principal
and interest on the Obligations, timely payment of interest and principal on
the Obligations is not insured or guaranteed by the United States, GNMA, Fannie
Mae or any other governmental agency or instrumentality. The GNMA
mortgage-backed certificates constitute a general obligation of the United
States backed by its full faith and credit. The obligations of Fannie Mae,
including its obligations under the Fannie Mae mortgage-backed securities, are
obligations solely of Fannie Mae and are not backed by, or entitled to, the
full faith and credit of the United States.
Industrial Revenue Obligations. Certain of the Bonds in a Trust may be
industrial revenue bonds ("IRBs"), including pollution control revenue bonds,
which are tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring, constructing
or improving various industrial projects. These projects are usually operated
by corporate entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended proceeds of the
IRBs or receipts or revenues of the issuer under an arrangement between the
issuer and the corporate operator of a project. The arrangement may be in the
form of a lease, installment sale agreement, conditional sale agreement or loan
agreement, but in each case the payments to the issuer are designed to be
sufficient to meet the payments of amounts due on the IRBs. Regardless of the
structure, payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project and, if applicable, corporate guarantor.
Corporate operators or guarantors may be affected by many factors which may
have an adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition and financial
deterioration resulting from a corporate restructuring pursuant to a leveraged
buy-out, takeover or otherwise. Such a restructuring may result in the
operator of a project becoming highly leveraged which may have an effect on
such operator's creditworthiness which in turn would have an adverse effect on
the rating or market value, or both, of such Bonds. Further, the possibility
of such a restructuring may have an adverse effect on the market for and
consequently the value of such Bonds, even though no actual takeover or other
action is ever contemplated or effected. The IRBs in a Trust may be subject to
special or extraordinary redemption provisions which may provide for redemption
at par or, in the case of original issue discount bonds, Accredit Value. The
Sponsor cannot predict the causes or likelihood of the redemption of IRBs in a
Trust prior to the stated maturity of such Bonds.
Electric Utility Obligations. Some of the Bonds in a Trust may be obligations
of issuers whose revenues are primarily derived from the sale of electric
energy. The problems faced by such issuers include the difficulty in obtaining
approval for timely and adequate rate increases from the applicable public
utility commissions, the difficulty of financing large construction programs,
increased competition, reduction in estimates of future demand for electricity
in certain areas of the country, the limitations on operations and increased
costs and delays attributable to environmental considerations, the difficulty
of the capital market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation. All of such
issuers have been experiencing certain of these problems in varying degrees.
In addition, Federal, state and municipal governmental authorities may from
time to time review existing, and impose additional, regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of certain of the Bonds in a Trust
to make payments of principal or interest, or both, on such Bonds.
Transportation Facility Revenue Bonds. Some of the Bonds in a Trust may be
obligations of issuers which are payable from and secured by revenues derived
from the ownership and operations of airports, public transit systems and
ports. The major portion of an airport's gross operating income is generally
derived from fees received from airlines pursuant to use agreements which
consist of annual payments for airport use, occupancy of certain terminal
space, service fees and leases. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under the use
agreements. The air transport industry is experiencing significant variations
in earnings and traffic, due to increased competition, excess capacity,
increased costs, deregulation, traffic constraints and other factors, and
several airlines are experiencing severe financial difficulties. In
particular, facilities with use agreements involving airlines experiencing
financial difficulty may experience a reduction in revenue due to the possible
inability of these airlines to meet their use agreement obligations because of
such financial difficulties and possible bankruptcy. The Sponsor cannot
predict what effect these industry conditions may have on airport revenues
which are dependent for payment on the financial condition of the airlines and
their usage of the particular airport facility. Bonds that are secured
primarily by the revenue collected by a public transit system typically are
additionally secured by a pledge of sales tax receipts collected at the state
or local level, or other governmental financial assistance. Transit system net
revenues will be affected by variations in utilization, which in turn may be
affected by the amount of local government subsidization, demographic and
population shifts, and competition from other forms of transportation, and by
increased costs, including costs resulting from previous deferrals of
maintenance. Port authorities derive their revenues primarily from fees
imposed on ships using the facilities. The rate of utilization may fluctuate
depending on the local economy and on competition from competing forms of
transportation such as air, rail and trucks.
Water and/or Sewerage Obligations. Some of the Bonds in a Trust may be
obligations of issuers whose revenues are derived from the sale of water and/or
sewerage services. Such Bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate rate
increases, population decline resulting in decreased user fees, the difficulty
of financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the effects of "no-growth" zoning
ordinances. All of such issuers have been experiencing certain of these
problems in varying degrees.
University and College Revenue Obligations. Some of the Bonds in a Trust may
be obligations of issuers which are, or which govern the operation of, colleges
and universities and whose revenues are derived mainly from tuition, dormitory
revenues, grants and endowments. General problems of such issuers include the
prospect of a declining percentage of the population consisting of "college
age" individuals, possible inability to raise tuitions and fees sufficiently to
cover increased operating costs, the uncertainty of continued receipt of
Federal grants and state funding, and government legislation or regulations
which may adversely affect the revenues or costs of such issuers. All of such
issuers have been experiencing certain of these problems in varying degrees.
Bridge Authority and Tollroad Obligations. Some of the Bonds in a Trust may be
obligations of issuers which derive their payments from bridge, road or tunnel
toll revenues. The revenues of such an issuer could be adversely affected by
competition from toll-free vehicular bridges and roads and alternative modes of
transportation. Such revenues could also be adversely affected by a reduction
in the availability of fuel to motorists or significant increases in the costs
thereof. Specifically, governmental regulations restricting the use of
vehicles in the New York City metropolitan area may adversely affect the
revenues of the Triborough Bridge and Tunnel Authority.
Dedicated-Tax Supported Bonds. Some of the Bonds in a Trust may be obligations
of issuers which are payable from and secured by tax revenues from a designated
source, which revenues are pledged to secure the bonds. The various types of
Bonds described herein differ in structure and with respect to the rights of
the bondholders to the underlying property. Each type of dedicated-tax
supported Bond has distinct risks, only some of which are set forth herein.
One type of dedicated-tax supported Bond is secured by the incremental tax
received on either real property or on sales within a specifically defined
geographical area; such tax generally will not provide bondholders with a lien
on the underlying property or revenues. Another type of dedicated-tax
supported Bond is secured by a special tax levied on real property within a
defined geographical area in such a manner that the tax is levied on those who
benefit from the project; such bonds typically provide for a statutory lien on
the underlying property for unpaid taxes. A third type of dedicated-tax
supported Bond may be secured by a tax levied upon the manufacture, sale or
consumption of commodities or upon the license to pursue certain occupations or
upon corporate privileges within a taxing jurisdiction. As to any of theses
types of Bonds, the ability of the designated revenues to satisfy the interest
and principal payments on such Bonds may be affected by changes in the local
economy, the financial success of the enterprise responsible for the payment of
the taxes, the value of any property on which taxes may be assessed and the
ability to collect such taxes in a timely fashion. Each of these factors will
have a different effect on each distinct type of dedicated-tax supported bonds.
Municipal Lease Bonds. Some of the Bonds in a Trust may be obligations that
are secured by lease payments of a governmental entity. Such payments are
normally subject to annual budget appropriations of the leasing governmental
entity. A governmental entity that enters into such a lease agreement cannot
obligate future governments to appropriate for and make lease payments but
covenants to take such action as is necessary to include any lease payments due
in its budgets and to make the appropriations therefor. A governmental
entity's failure to appropriate for and to make payments under its lease
obligation could result in insufficient funds available for payment of the
obligations secured thereby.
Original Issue Discount Bonds and Stripped Obligations. Certain of the Bonds
in a Trust may be original issue discount bonds. Theses Bonds were issued with
nominal interest rates less than the rates then offered by comparable
securities and as a consequence were originally sold at a discount from their
face, or par, values. This original issue discount, the difference between the
initial purchase price and face value, is deemed under current law to accrue on
a daily basis and the accrued portion is treated as tax-exempt interest income
for Federal income tax purposes. On sale or redemption, gain, if any, realized
in excess of the earned portion of original issue discount will be taxable as
capital gain. (See "Tax Status of Unitholders.") The current value of an
original issue discount bond reflects the present value of its face amount at
maturity. In a stable interest rate environment, the market value of an
original issue discount bond would tend to increase more slowly in early years
and in greater increments as the bond approached maturity.
Certain of the original issue discount bonds in a Trust may be zero coupon
bonds. Zero coupon bonds do not provide for the payment of any current
interest; the buyer receives only the right to receive a final payment of the
face amount of the bond at its maturity. The effect of owning a zero coupon
bond is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of the obligation.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest the income on such obligation at a rate as high as the
implicit yield, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are securities of comparable quality that pay
interest currently.
Original issue discount bonds, including zero coupon bonds, may be subject to
redemption at the Accreted Value plus, if applicable, some premium. Pursuant
to such call provisions an original issue discount bond may be called prior to
its maturity date at a price less than its face value. See the "Schedules of
Investments" in Part Two for call provisions of portfolio Bonds.
Certain of the Bonds in a Trust may be Stripped Obligations, which represent
evidences of ownership with respect to either the principal amount of or a
payment of interest on a tax-exempt obligation. An obligation is "stripped" by
depositing it with a custodian, which then effects a separation in ownership
between the bond principal and any interest payment which has not yet become
payable, and issues evidences of ownership with respect to such constituent
parts. A Stripped Obligation therefore has economic characteristics similar to
zero coupon bonds, as described above.
Each Stripped Obligation has been purchased at a discount from the amount
payable at maturity. With respect to each Unitholder, the Code treats as
"original issue discount" that portion of the discount which produces a yield
to maturity (as of the date of purchase of the Unitholder's Units) equal to the
lower of the coupon rate of interest on the underlying obligation or the yield
to maturity on the basis of the purchase price of the Unitholder's Units which
is allocable to each Stripped Obligation. Original issue discount which
accrues with respect to a Stripped Obligation will be exempt from Federal
income taxation to the same extent as interest on the underlying obligations.
(See "Tax Status of Unitholders.")
Unitholders should consult their own tax advisers with respect to the state and
local tax consequences of owning original issue discount bonds or Stripped
Obligations. Under applicable provisions governing determination of state and
local taxes, interest on original issue discount bonds or Stripped Obligations
may be deemed to be received in the year of accrual even though there is no
corresponding cash payment.
The Sponsor believes the information summarized below describes some of the
more significant events relating to the various State Trusts. The sources of
such information are official statements of issuers in each state and other
publicly available information, generally as of the date on or before September
1, 1994, unless otherwise indicated. The Sponsor has not independently
verified this information and makes no representation regarding the accuracy or
completeness of the sources of information which have been available to it, but
believes them to be complete and has itself relied upon them.
ALABAMA TRUSTS - ECONOMIC FACTORS
The portfolio of each Alabama Trust consists primarily of obligations issued by
entities located in Alabama.
General. Alabama's economy has experienced a major trend toward
industrialization over the last two decades. By 1990, manufacturing accounted
for 39.73% of Alabama's Real Gross State Product (the total value of goods and
services produced in Alabama). During the 1960s and 1970s the State's
industrial base became more diversified and balanced, moving away from primary
textiles (including apparel), chemicals, rubber and plastics. Since the early
1980s, modernization of existing facilities and an increase in direct foreign
investments in the State has made the manufacturing sector more competitive in
domestic and international markets.
Amount the leading manufacturing industries have been pulp and paper and
chemicals, the development and growth of which have been made possible by
abundant rainfall (the mean annual average of which varies between 52 and 68
inches) and a high pulpwood growth rate (averaging approximately one-half cord
per acre per year). In recent years Alabama has ranked as the fifth largest
producer of timber in the nation. Alabama has fresh water availability of
twenty times present usage. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper.
Mining, oil and gas production, textiles and apparel, rubber and plastics,
printing and publishing, steel, machinery and service industries are also
important to Alabama's economy. Coal mining is by far the most important
mining activity.
In recent years, the importance of service industries to the State's economy
has increased significantly. The major service industries in the State are the
general healthcare industries, most notably represented by the University of
Alabama medical complex in Birmingham, and the high technology research and
development industries concentrated in the Huntsville area. The financial,
insurance and real estate sectors have also shown strong growth over the last
several years.
The economy in the State of Alabama recovered quickly from the recession of the
early 1980s. The Alabama Development Office (ADO) reported as of December 31,
1992, that for the sixth consecutive year more than two billion dollars was
expended in Alabama for new and expanded industries. The State has new and
expanding capital investment of $2.2 billion in 1991 and $2.0 billion in 1992.
These expenditures included 17,693 announced jobs created by 845 separate
companies for 1991 and 19,582 announced jobs by 979 companies in 1992. In the
last five years, $13.2 billion has been invested in new or expanding industry
in the State. Some of the largest investments during the period 1987-1991
include Alabama Pine Pulp Company ($700 million); Mead Corporation ($500
million); EXXON Company, USA ($300 million); Gulf States Paper ($225 million);
and United States Steel Corp. ($200 million). During 1992, three significant
projects were announced by companies within the State. These projects are by
Scott Paper Company ($344 million); Russell Corporation ($147 million); and
Courtlaulde Fibers, Inc ($125 million).
During the recent recession, State revenues suffered along with the rest of the
Nation. Growth in overall tax revenues was only about 3.4 percent from fiscal
1991 to 1992. Corporate income tax receipts declined slightly from 1991 to
1992. However, State tax collections are up by about 8.9% for the nine month
period ending June 30, 1993, as compared to the same period for fiscal 1992,
indicating an economic recovery is in progress. Individual income tax receipts
and sales tax receipts for the same nine month period increased 8.0 percent and
7.8 percent, respectively.
Real Gross State Product. Real Gross State Product (RGSP) is a comprehensive
measure of economic performance for the State of Alabama. Alabama's RGSP is
defined as the total value of all final goods and services produced in the
State in constant dollar terms. Hence, changes in RGSP reflect changes in
final output. From 1986-1992, RGSP originating in manufacturing increased by
2.5% per year while RGSP originating in all the non-manufacturing sectors grew
by 2.1% per year.
Those non-manufacturing sectors exhibiting large percentage increases in RGSP
originating between 1986 to 1992 were Mining; Transportation, Communication,
and Public Utilities; and Services. From 1986 to 1992 RGSP originating in
Mining increased by 5.7% per year; Transportation, Communication, and Public
Utilities grew by 5.2% per year; and Services grew by 3.8% per year. The
present movement toward diversification of the State's manufacturing base and a
similar present trend toward enlargement and diversification of the
transportation, communication, and public utilities and service industries in
the State are expected to lead to increased economic stability.
Employment. The recent national economic recession was felt severely in the
State. The manufacturing growth described above reached a peak in 1979, and
was followed by a decrease in activity. The national economic recession was
principally responsible for this decline. The State's industrial structure is
particularly sensitive to high interest rates and monetary policy, and the
resulting unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited the
State. There was a significant decrease in unemployment in the period
1985-1989 due to the economic recovery from the recession of the early 1980s.
Since 1989 unemployment rates have come down more gradually due to the general
nationwide reduction in activity and employment in the industrial sector. The
unemployment rate for 1992, released by the Alabama Department of Industrial
Relations, was 7.3% with a national rate of 7.4%.
Certain Risk Factors. Among other risks, the State's economy depends upon
cyclical industries such as iron and steel, natural resources, and timber and
forest products. As a result, economic activity may be more cyclical than in
certain other Southeastern states. The national economic recession in the
early 1980s caused a decline in manufacturing activity and natural resource
consumption, and Alabama's unemployment rate was 14.4% in 1982, significantly
higher than the national average. Unemployment remains high in certain rural
areas of the State. A trend towards diversification of the State's economic
base and an expansion of service industries may lead to improved economic
stability in the future, although there is no assurance of this.
Political subdivisions of the State have limited taxing authority. In
addition, the Alabama Supreme Court has held that a governmental unit may first
use its taxes and other revenues to pay the expenses of providing necessary
governmental services before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions which result in
a proration procedure in the event estimated budget recourses in a fiscal year
are insufficient to pay in full appropriations for that year. Proration has a
materially adverse effect on public entities that are dependent upon State
funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and other
governmental revenues, as well as revenues to be used to service various
revenue obligations, such as industrial development obligations. Such
difficulties could adversely affect the market value of the bonds held by the
Alabama Trusts and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions to
which the issuers in an Alabama Trust are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State and various
agencies and political subdivisions located in the State. The Sponsor is
unable to predict whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of the Bonds or
the ability of the respective issuers of the Bonds acquired by an Alabama Trust
to pay interest on or principal of the Bonds.
ARIZONA TRUSTS - ECONOMIC FACTORS
The portfolio of each Arizona Trust consists primarily of obligations issued by
entities located in Arizona.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic/employment sectors include services, tourism and manufacturing.
Mining and agriculture are also significant, although they tend to be more
capital than labor intensive. Services is the single largest economic sector.
Many of these jobs are directly related to tourism.
According to the Arizona Department of Economic Security, 1992 unemployment
figures show 7.4% of Arizona's population was unemployed, compared to a
national level of 7.4% unemployment at the same time. Maricopa County reported
6.3% unemployment and Pima County reported 5.2% 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 many facets of real estate lending. In the near future, Arizona's
financial institutions are likely to continue to experience problems until the
excess inventories of commercial and residential properties are absorbed. The
problems of the financial institutions have adversely affected employment and
economic activity. Longer-term prospects are brighter, since population growth
is still strong by most standards, and Arizona's climate and tourist industry
still continue to stimulate the state's economy. However, the previously
robust pace of growth by financial institutions is not likely to be repeated
over an extended period.
Budgetary Process. Arizona operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 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 use 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%).
Most or all of the Bonds of the Arizona Insured Trust are not obligations of
the State of Arizona, and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Bonds is detailed in
the instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value or marketability
of any of the Bonds issued by an entity other than the State of Arizona will be
affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded indebtedness
and other matters. For example, the state legislature cannot appropriate
revenues in excess of 7% of the total personal income of the state in any
fiscal year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
Although most of the Bonds in the Arizona Insured Trust are revenue obligations
of local governments or authorities in the State, there can be no assurance
that the fiscal and economic conditions referred to above will not affect the
market value or marketability of the Bonds or the ability of the respective
obligors to pay principal of and interest on the Bonds when due.
The State of Arizona was recently sued by 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 equipments is
unconstitutional. The lawsuit does not seek damages, but requests that the
court order the State to create a new financing system that sets minimum
standards for buildings and furnishings that apply on a statewide basis. A
superior court ruling has upheld the constitutionality of the State's school
funding system. This decision has been appealed and is currently in the State
Court of Appeals. It is unclear, at this time, what affect any judgment would
have on the state finances or school district budgets. The U.S. Department of
Education recently determined that Arizona's educational funding system did not
meet federal requirements of equity. This determination could mean a loss in
federal funds of approximately $50 million.
Certain other circumstances are relevant to the market value, marketability and
payment of any hospital and health care revenue bonds in the Arizona Insured
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 regular 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 was
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 increase. Tucson
Electric serves approximately 270,000 customers, primarily in the Tucson area.
Inability of any regulated public utility to secure necessary rate increases
could adversely affect, to an indeterminable extent, its ability to pay debt
service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to refund
$197 million, including statutory interest, in State income taxes previously
collected from Federal retirees on their pensions. This payment will be made
over a four-year period beginning with approximately $14.6 million in tax
refunds in fiscal year 1993-94. A combination of tax refunds and tax credits
will be used to satisfy this liability.
CALIFORNIA TRUSTS - ECONOMIC FACTORS
The portfolio of each California Trust consists primarily of obligations issued
by entities located in California.
Economic Overview. California's economy is the largest among the 50 states and
one of the largest in the world. The State's population of almost 32 million
represents 12.3% of the total United States population and grew by 27% in the
1980s. Total personal income in the State, at an estimated $662 billion in
1992, accounts for 13% of all personal income in the nation. Total employment
is almost 14 million, the majority of which is in the service, trade and
manufacturing sectors. Reports issued by the State Department of Finance and
other sources indicate that the State's economy is suffering its worst
recession since the 1930s, with prospects for recovery slower than for the
nation as a whole. The State has experienced the worst job losses in any
postwar recession and employment levels are not expected to stabilize until
late 1994 or 1995. Pre-recession job levels may not be reached until near the
end of the decade. The largest job losses have been in Southern California,
led by declines in the aerospace and construction industries. Weakness
statewide occurred in manufacturing, construction, services and trade and will
be hurt in the next few years by continued cuts in federal defense spending and
base closures. Unemployment averaged over 9% in 1993 and is expected to remain
high in 1994. The State's economy is only expected to pull out of the
recession slowly, following the national recovery which has begun. Delay in
recovery will exacerbate shortfalls in State revenues.
Limitation on Taxes. Certain California municipal obligations may be
obligations of issuers which rely in whole or in part, directly or indirectly
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except upon new construction or change
of ownership (subject to a number of exemptions). Taxing entities may,
however, raise ad valorem taxes above the 1% limit to pay debt service on
voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13 and, on June 18, 1992, the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give 2/3 approval to levy any "special tax;" however,
Court decisions allowed non-voter approved levy of "general taxes" which were
not dedicated to a specific use. In response to these decisions, the voters of
the State in 1986 adopted an initiative statute which imposed significant new
limits on the ability of local entities to raise or levy general taxes, except
by receiving majority local voter approval. Significant elements of this
initiative, "Proposition 62," have been overturned in recent court cases. An
initiative proposed to re-enact the provisions of Proposition 62 as a
constitutional amendment was defeated by the voters in November 1990, but such
a proposal may be renewed in the future.
Appropriations Limits. California and its local governments are subject to an
annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consists of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January 1,
1979, or subsequently authorized by the voters, (2) appropriations arising from
certain emergencies declared by the Governor, (3) appropriations for certain
capital outlay projects, (4) appropriations by the State of post-1989 increases
in gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service responsibilities
between government units. The definitions for such adjustments were
liberalized in 1990 to more closely follow growth in California's economy.
"Excess" revenues are measured over a two-year cycle. Local governments must
return any excess to taxpayers by rate reduction. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues since
1990 because of the recession, few governments are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California municipal obligations or on the ability of
California or local governments to pay debt service on such California
municipal obligations. It is not presently possible to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service on their obligations. Future initiative or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
Obligations of the State of California. As of April 1, 1994, California had
approximately $18.1 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. Four general obligation bond propositions,
totaling $5.9 billion, will be on the June 1994 ballot. In fiscal year
1992-1993, 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.
Recent Financial Results. The principal sources of General Fund revenues in
1992-93 were the California personal income tax (44% of total revenues), the
sales tax (38%), bank and corporation taxes (12%), and the gross premium tax on
insurance (3%). California maintains a Special Fund for Economic Uncertainties
(the "Economic Uncertainties Fund"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund.
General
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many assistance
programs to local governments, which were constrained by Proposition 13 and
other laws. The largest State program is assistance to local public school
districts. In 1988, an initiative (Proposition 98) was enacted which (subject
to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 34%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal, and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. As a result, the State entered
a period of budget imbalance, with expenditures exceeding revenues for four of
the five fiscal years ending in 1991-92.
As the State fell into a deep recession in the summer of 1990, the State budget
fell sharply out of balance in the 1990-91 and 1991-92 fiscal years, despite
significant expenditure cuts and tax increases. The State had accumulated a
$2.8 billion budget deficit by June 30, 1992. This deficit also severely
reduced the State's cash resources, so that it had to rely on external
borrowing in the short-term markets to meet its cash needs.
1992-93 Fiscal Year. With the failure to enact a budget by July 1, 1992, the
State had no legal authority to pay many of its vendors until the budget was
passed; nevertheless, certain obligations (such as debt service, school
apportionments, welfare payments, and employee salaries) were payable because
of continuing or special appropriations, or court orders. However, the State
Controller did not have enough cash to pay as they came due all of these
ongoing obligations, as well as valid obligations incurred in the prior fiscal
year.
Because of the delay in enacting the budget, the State could not carry out its
normal cash flow borrowing and, starting on July 1, 1992, the Controller was
required to issue "registered warrants" in lieu of normal warrants backed by
cash to pay many State obligations. Available cash was used to pay
constitutionally mandated and priority obligations. Between July 1, and
September 3, 1992, the Controller issued an aggregate of approximately $3.8
billion of registered warrants, all of which were called for redemption by
September 4, 1992 following enactment of the 1992-93 Budget Act and issuance by
the State of $3.3 billion of Interim Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate the
State's accumulated deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of expenditures.
Thus, the State continued to carry its $2.8 billion budget deficit at June 30,
1993.
The 1993-94 Budget Act was similar to that of the prior year, in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a
two-year plan to eliminate the accumulated deficit by borrowing into the
1994-95 fiscal year. With the recession still continuing longer than expected,
the 1994-95 Governor's Budget now projects that in the 1993-94 Fiscal Year, the
General Fund will have $900 million less revenue and $800 million higher
expenditures than budgeted. As a result revenues will only exceed expenditures
by about $400 million. If this projection is met, it will be the first
operating surplus in four years; however, some budget analysts outside the
Department of Finance project revenues in the balance of 1993-94 will not even
meet the revised, lower projection. In addition, the General Fund may have
some unplanned costs for relief related to the January 17, 1994 Northridge
earthquake.
The State has implemented its short-term borrowing as a part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap of
around $5 billion by June 30, 1995. Over $3.1 billion of this amount is being
requested from the federal government as increased aid, particularly for costs
associated with incarcerating, educating and providing health and welfare
services to undocumented immigrants. However, President Clinton has not
included these costs in his proposed Fiscal 1995 Budget. The rest of the
budget gap is proposed to be closed with expenditure cuts and projects $600
million of new revenue assuming the State wins a tax case presently pending in
the U.S. Supreme Court. Thus the State will once again face significant
uncertainties and very difficult choices in the 1994-95 budget, as tax
increases are unlikely and many cuts and budget adjustments have been made in
the past three years.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon almost all local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental expenditures,
there can be no assurance that the State will not face budget gaps in the
future.
Bond Rating. State general obligation bonds are currently rated Aa by Moody's
and A+ by S&P. Both of these ratings were reduced from AAA levels which the
State held until late 1991. There can be no assurance that such ratings will
be maintained in the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Legal Proceedings. The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if decided against
the State, may require the State to make significant future expenditures or may
substantially impair revenues. The U.S. Supreme Court has granted review of
two cases challenging California's "unitary" method of taxing multinational
corporations. Although this taxing method has since been changed, if the State
loses these cases, it could be liable for tax refunds and lost receipts of
taxes assessed totaling $3.5 billion to $4 billion.
Obligations Of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of state
agencies, instrumentalities and political subdivisions of the State that issue
Municipal Obligations, some of which may be conduit revenue obligations payable
from payments from private borrowers. These entities are subject to various
economic risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of the obligations
backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments declined
more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance (including public schools) accounted for around 75% of General
Fund spending. To reduce State General Fund support for school districts, the
1992-93 and 1993-94 Budget Act caused local governments to transfer $3.9
billion of property tax revenues to school districts, representing loss of all
of the post-Proposition 13 "bailout" aid. The largest share of these transfers
came from counties, and the balance from cities, special districts and
redevelopment agencies. In order to make up this shortfall, the Legislature
proposed and voters approved dedicating 0.5% sales tax to local public safety
purposes. In addition, the Legislature has changed laws to relieve local
government of certain mandates, allowing them to reduce costs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be reduced. Any such reductions in State
aid could compound the serious fiscal constraints already experienced by many
local governments, particularly counties. The Richmond Unified School District
(Contra Costa County) entered bankruptcy proceedings in May 1991 but the
proceedings have been dismissed.
Assessment Bonds. California municipal obligations which are assessment bonds
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may 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.
California Long-Term Lease Obligations. Certain California long-term lease
obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common causes of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g., due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the "District") entered
into a lease transaction in which certain existing properties of the District
were sold and leased back in order to obtain funds to cover operating deficits.
Following a fiscal crisis in which the District's finances were taken over by a
State receiver (including a brief period under bankruptcy court protection),
the District failed to make rental payments on this lease resulting in a
lawsuit by the Trustee for the Certificate of Participation holders, in which
the State was named a defendant (on the grounds that it controlled the
District's finances). One of the defenses raised in answer to this lawsuit was
the invalidity of the District's lease. The trial court has upheld the
validity of the District's lease and the case has been settled. Any judgment
in a future case against the position asserted by Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
Other Considerations. The repayment of industrial development securities
secured by real property may be affected by California laws limiting
foreclosure rights of creditors. Securities backed by health care and hospital
revenues may be affected by changes in State regulations governing cost
reimbursements to health care providers under Medi-Cal (the State's Medicaid
program), including risks related to the policy of awarding exclusive contracts
to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of Tax
Allocation Securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which
any such legislation will be enacted. Nor is it presently possible to
determine the impact of any such legislation on California municipal
obligations in which the California Trusts may invest, future allocations of
State revenues to local governments or the abilities of State or local
governments to pay the interest on, or repay the principal of, such California
municipal obligations.
Substantially all of California is within a active geologic region subject to
major seismic activity. Any California municipal obligation in a California
Trust could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the Federal
or State government to appropriate sufficient funds within their respective
budget limitations.
On January 17, 1994, a major earthquake with an estimated magnitude of 6.8 on
the Richter scale struck the Los Angeles area, causing significant property
damage to public and private facilities, presently estimated at $15-20 billion.
While over $9.5 billion of federal aid, and a projected $1.9 billion of State
aid, plus insurance proceeds, will reimburse much of that loss, there will be
some ultimate loss of wealth and income in the region, in addition to costs of
the disruption caused by the event. Short-term economic projections are
generally neutral, as the infusion of aid will restore billions of dollars to
the local economy within a few months; already the local construction industry
has picked up. Although the earthquake will hinder recovery from the recession
in Southern California, already hard-hit, its long-term impact is not expected
to be material in the context of the overall wealth of the region. Almost five
years after the event, there are few remaining effects of the 1989 Loma Prieta
earthquake in northern California (which, however, caused less severe damage
than Northridge).
Colorado Trusts _ Economic Factors
The portfolio of each Colorado Trust consists primarily of obligations issued
by entities located in Colorado.
Restrictions on Appropriations and Revenues. The State Constitution requires
that expenditures for any fiscal year not exceed revenues for such fiscal year.
By statute, the amount of General Fund revenues available for appropriation is
based upon revenue estimates which, together with other available resources,
must exceed annual appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve requirement for
fiscal years 1991, 1992 and 1993 was set at 3%. For fiscal year 1992 and
thereafter, General Fund appropriations are also limited by statute to an
amount equal to the cost of performing certain required reappraisals of taxable
property plus an amount equal to the lesser of (i) five percent of Colorado
personal income or (ii) 106% of the total General Fund appropriations for the
previous fiscal year. This restriction does not apply to any General Fund
appropriations which are required as a result of a new federal law, a final
state or federal court order or moneys derived from the increase in the rate or
amount of any tax or fee approved by a majority of the registered electors of
the State voting at any general election. In addition, the statutory limit on
the level of General Fund appropriations may be exceeded for a given fiscal
year upon the declaration of a State fiscal emergency by the State General
Assembly.
The 1992 fiscal year end fund balance was $133.3 million, which was $49.1
million over the 3% Unappropriated Reserve requirement. The 1993 fiscal year
ending fund balance was $326.7 million, or $232.5 million over the 3% required
Unappropriated Reserve. Based on March 20, 1994, estimates, the 1994 fiscal
year ending fund balance is expected to be $283.6 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
could restrict the ability of the State and local governments to increase
revenues and impose taxes. The Amendment applies to the State and all local
governments, including home rule entities ("Districts"). Enterprises, defined
as government-owned businesses authorized to issue revenue bonds and receiving
under 10% of annual revenue in grants from all Colorado state and local
governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and will probably require judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to
the Amendment, local government spending is to be limited by the same formula
as the limitation for property tax revenues. The Amendment limits increases in
expenditures from the State general fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in State population in the
prior calendar year. The bases for initial spending and revenue limits are
fiscal year 1992 spending and 1991 property taxes collected in 1992. The bases
for spending and revenue limits for fiscal year 1994 and later years will be
the prior fiscal year's spending and property taxes collected in the prior
calendar year. Debt service changes, reductions and voter-approved revenue
changes are excluded from the calculation bases. The Amendment also prohibits
new or increased real property transfer tax rates, new State real property
taxes and local District income taxes.
Litigation was filed in 1993 against the Littleton Public School District on
issues relating to the power of Districts to increase mill levies for debt
service purposes. In this litigation, taxpayers challenged the school
district's ability to increase its mill levy to pay debt service on bonds
validly authorized pursuant to law existing prior to enactment of the
Amendment. In December of 1993, the district court ruled that the Amendment
did not prevent the District from raising its mill levy for debt service
purposes. The plaintiffs have appealed the district court's decision. The
outcome of the appeal cannot be predicted at this time. However, appellate
resolution of this case could determine whether Districts can increase the mill
levy to pay debt service on outstanding general obligation bonds.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1993-94,
March 20, 1994 (the "Economic Report"), inflation for 1992 was 3.8% and
population grew at the rate of 2.8% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will be
limited to 6.6% over expenditures during the 1993 fiscal year. The limitation
for the 1995 fiscal year is projected to be 7.1%, based on projected inflation
of 4.2% for 1993 and projected population growth of 2.9% during 1993. The 1993
fiscal year is the base year for calculating the limitation for the 1994 fiscal
year. For the 1993 fiscal year, general fund revenues totaled $3,450.1 million
and program revenues (cash funds) totaled $1,617.6 million, resulting in total
estimated base revenues of $5,067.7 million. Expenditures for the 1994 fiscal
year, therefore, cannot exceed $5,402.2 million. However, the 1994 fiscal year
general fund and program revenues (cash funds) are projected to be only
$5,233.6 million, or $168.6 million less than expenditures allowed under the
spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
State Finances. As the State experienced revenue shortfalls in the mid-1980s,
it adopted various measures, including impoundment of funds by the Governor,
reduction of appropriations by the General Assembly, a temporary increase in
the sales tax, deferral of certain tax reductions and inter-fund borrowings.
On a GAAP basis, the State had unrestricted General Fund balances at June 30 of
approximately $100.3 million in fiscal year 1988, $134.4 million in fiscal year
1989, $116.6 million in fiscal year 1990, $16.3 million in fiscal year 1991,
$133.3 million in fiscal year 1992 and $326.7 million in fiscal year 1993. The
fiscal year 1994 unrestricted general fund is currently estimated to be $283.6
million.
For fiscal year 1993, the following tax categories generated the following
respective revenue percentages of the State's $3,450.1 million total gross
receipts: individual income taxes represented 51.0% of gross fiscal year 1993
receipts; excise taxes represented 31.5% of gross fiscal year 1993 receipts;
and corporate income taxes represented 4.0% of gross fiscal year 1993 receipts.
The final budget for fiscal year 1994 projects general fund revenues of
approximately $3,546.6 million and appropriations of approximately $3,328.4
million. The percentages of general fund revenue generated by type of tax for
fiscal year 1994 are not expected to be significantly different from fiscal
year 1993 percentages.
State Debt. Under its Constitution, the State of Colorado is not permitted to
issue general obligation bonds secured by the full faith and credit of the
State. However, certain agencies and instrumentalities of the State are
authorized to issue bonds secured by revenues from specific projects and
activities. The State enters into certain lease transactions which are subject
to annual renewal at the option of the State. In addition, the State is
authorized to issue short-term revenue anticipation notes. Local governmental
units in the State are also authorized to incur indebtedness. The major source
of financing for such local government indebtedness is an ad valorem property
tax. In addition, in order to finance public projects, local governments in
the State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds payable
from special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the option
of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
State Economy. Based on data published by the State of Colorado, Office of
State Planning and Budgeting as presented in the Economic Report, over 50% of
non-agricultural employment in Colorado in 1992 was concentrated in the retail
and wholesale trade and service sectors, reflecting the importance of tourism
to the State's economy and of Denver as a regional economic and transportation
hub. The government and manufacturing sectors followed as the fourth and fifth
largest employment sectors in the State, representing approximately 18.3% and
11.6%, respectively, of non-agricultural employment in the State in 1992. The
Office of Planning and Budgeting estimates similar concentrations for 1993.
According to the Economic Report, during the first quarter of 1993, 68,700 net
new jobs were generated in the Colorado economy, an increase of 4.3% over 1992.
The unemployment rate improved slightly from an average of 5.8% during 1992 to
5.5% during 1993. Total retail sales increased by 10.0% during 1993.
Personal income rose 7.8% in Colorado during 1992 and 5.5% in 1991. During
1993 personal income rose 7.1% in Colorado as compared with 7.2% 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 Trusts), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
Connecticut Trusts _ Economic Factors
The portfolio of each Connecticut Trust primarily consists of obligations
issued by entities located in Connecticut .
Investors should be aware that manufacturing was historically the most
important economic activity within the State of Connecticut but, in terms of
number of persons employed, manufacturing has declined in the last ten years
while both trade and service-related industries have become more important, and
in 1992, manufacturing accounted for only 20.1% of the total non-agricultural
employment in Connecticut. Defense-related business represents a relatively
high proportion of the manufacturing sector; reductions in defense spending
have already had a substantial adverse effect on Connecticut's economy, and the
State's largest defense contractors have announced substantial planned labor
force reductions scheduled to occur over the next four years. Connecticut is
now in a recession, the depth and duration of which are uncertain. Moreover,
while unemployment in the State as a whole has generally remained below the
national level, as of May, 1993, the estimated rate of unemployment in the
State on a seasonally adjusted basis reached 7.4%, compared to 6.9% for the
United States as a whole and certain geographic areas in the State have been
affected by high unemployment and poverty. The State derives over 70% of its
revenues from taxes imposed by it, the most important of which are the sales
and use taxes and the corporation business tax, each of which is sensitive to
changes in the level of economic activity in the State, but the Connecticut
Income Tax, enacted in 1991, is expected to supersede each of them in
importance. There can be no assurance that general economic difficulties or
the financial circumstances of the State or its towns and cities will not
adversely affect the market value of the Bonds in the Connecticut Trusts or the
ability of the obligors to pay debt service on such Bonds.
The General Fund budget adopted by Connecticut for the 1986-1987 fiscal year
contemplated both revenues and expenditures of $4.3 billion. The General Fund
ended the 1986-1987 fiscal year with a surplus of $365 million. The General
Fund budget for the 1987-1988 fiscal year contemplated General Fund revenues
and expenditures of $4.9 billion. However, the General Fund ended the
1987-1988 fiscal year with a deficit of $115.6 million. The General Fund
budget adopted for the 1988-1989 fiscal year anticipated that General Fund
expenditures of $5.5 billion and certain educational expenses of $206.7 million
not previously paid through the General Fund would be funded in part from
surpluses of prior years and in part from higher tax revenues, projected to
result from tax laws in effect for the 1987-1988 fiscal year and stricter
enforcement thereof; a substantial deficit was projected during the third
quarter of the 1988-1989 fiscal year, but largely because of tax law changes
that took effect before the end of the fiscal year, the deficit was kept to $28
million. The General Fund budget adopted for the 1989-1990 fiscal year
anticipated expenditures of approximately $6.2 billion and, by virtue of tax
increase legislation enacted to take effect generally at the beginning of the
fiscal year, revenues slightly exceeded such amount. However, largely because
of tax revenue shortfalls, the General Fund ended the 1989-90 fiscal year with
a deficit for the year of $259.5 million, wiping out reserves for such events
built up in prior years. The General Fund budget adopted for the 1990-1991
fiscal year anticipated expenditures of $6.4 billion but no significant new or
increased taxes were enacted. Primarily because of significant declines in tax
revenues and unanticipated expenditures reflective of economic adversity, the
General Fund ended the 1990-91 fiscal year alone with a further deficit of $809
million.
A General Fund budget for the 1991-92 fiscal year was not enacted until August
22, 1991. This budget anticipated General Fund expenditures of $7.0 billion
and revenues of $7.4 billion. Projected decreases in revenues resulting from a
25% reduction in the sales tax rate effective October 1, 1991, the repeal of
the taxes on the capital gains and interest and dividend income of resident
individuals for years starting after 1991, and the phase-out of the corporation
business tax surcharge over two years commencing with taxable years starting
after 1991 were expected to be more than offset by a new general income tax
imposed at effective rates not to exceed 4.5% on the Connecticut taxable income
of resident and non-resident individuals, trusts and estates. The General Fund
ended the 1991-92 fiscal year with an operating surplus of $110 million. The
General Fund budget for the 1992-93 fiscal year anticipated General Fund
expenditures of $7.3 billion and revenues of $7.3 billion, and the General Fund
ended the 1992-93 fiscal year with an operating surplus of $113.5 million.
Balanced General Fund budgets for the biennium ending June 30, 1995, have been
adopted appropriating expenditures of $7.8 billion for the 1993-94 fiscal year
and $8.2 billion for the 1994-95 fiscal year. In addition, expenditures of
federal, State and local funds in the twelve years started July 1, 1984 for the
repair of the State's roads and bridges now projected at $9.5 billion are
anticipated, a portion of the State's $4.1 billion share of which would be
financed by bonds expected to total $3.7 billion and by direct payments both of
which would be supported by a Special Transportation Fund first created by the
General Assembly for the 1984-85 fiscal year.
To fund operating cash requirements, prior to the 1991-92 fiscal year the State
borrowed up to $750 million pursuant to authorization to issue commercial paper
and on July 29, 1991, it issued $200 million of General Obligation Temporary
Notes, none of which temporary borrowings are currently outstanding. To fund
the cumulative General Fund deficit for the 1989-90 and 1990-91 fiscal years,
the legislation enacted August 22, 1991 authorized the State Treasurer to issue
Economic Recovery Notes up to the aggregate amount of such deficit, which must
be payable no later than June 30, 1996; at least $50 million of such Economic
Recovery Notes, but not more than a cap amount, is to be retired each fiscal
year commencing with the 1991-92 fiscal year, and any unappropriated surplus up
to $205 million in the General Fund at the end of each of the three fiscal
years commencing with the 1991-92 fiscal year must be applied to retire such
Economic Recovery Notes as may remain outstanding at those times. On September
25, 1991, and October 24, 1991, the State issued $640.7 million and $325
million, respectively, of such Economic Recovery Notes, of which $630.6 million
was outstanding as of March 1, 1994.
As a result of the State's budget problems, the ratings of its general
obligation bonds were reduced by Standard & Poor's from AA+ to AA on March 29,
1990, and by Moody's from Aa1 to Aa on April 9, 1990. Moreover, because of
these problems, on September 13, 1991, Standard & Poor's reduced its rating of
the State's general obligation bonds and certain other obligations that depend
in part on the creditworthiness of the State to AA-. On March 7, 1991, Moody's
downgraded its ratings of the revenue bonds of four Connecticut hospitals
because of the effects of the State's restrictive controlled reimbursement
environment under which they have been operating.
General obligation bonds issued by Connecticut municipalities are payable
primarily only from ad valorem taxes on property subject to taxation by the
municipality. Certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits in
recent years. The most notable of these is the City of Bridgeport, which filed
a bankruptcy petition on June 7, 1991. The State opposed the petition. The
United States Bankruptcy Court for the District of Connecticut has held that
Bridgeport has authority to file such a petition, but that its petition should
be dismissed on the grounds that Bridgeport was not insolvent when the petition
was filed. Regional economic difficulties, reductions in revenues, and
increased expenses could lead to further fiscal problems for the State and its
political subdivisions, authorities and agencies. Difficulty in payment of
debt service on borrowings could result in declines, possibly severe, in the
value of their outstanding obligations and increases in their future borrowing
costs.
Florida Trusts _ Economic Factors
The portfolio of each Florida Trust consists primarily of obligations issued by
entities located in Florida.
Population. In 1980, Florida was the seventh largest state in the U.S. by
population. The State has grown dramatically since then and as of April 1,
1992, ranks fourth with an estimated population of 13.4 million. Florida's
attraction, as both a growth and retirement state, has kept net migration
fairly steady with an average of 252,000 new residents a year from 1982 through
1991. The U.S. average population increase since 1980 is about 1% annually,
while Florida's average annual rate of increase is about 2.8%. Florida
continues to be the fastest growing of the eleven largest states. This strong
population growth is one reason the State's economy is performing better than
the nation as a whole. In addition to attracting senior citizens to Florida as
a place for retirement, the State is also recognized as attracting a
significant number of working age individuals. Since 1982, the prime working
age population (18-44) has grown at an average annual rate of 3.3%. The share
of Florida's total working age population (18-59) to total State population is
approximately 54%. This share is not expected to change appreciably into the
twenty-first century.
Income. The State's personal income has been growing strongly the last several
years and has generally outperformed both the U.S. as a whole and the southeast
in particular, according to the U.S. Department of Commerce and the Florida
Consensus Economic Estimating Conference. This is due to the fact that
Florida's population has been growing at a very strong pace and, since the
early 1970's the State's economy has diversified so as to provide greater
insulation from national economic downturns. As a result, Florida's real per
capita personal income has traced closely with the national average and has
tracked above the southeast. From 1983 through 1992, the State's real per
capital income rose at an average of 5.4% per year, while the national real per
capita income increased at an average of 5.5% per year.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest, and rent) and transfer payments (Social
Security and pension benefits, among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1992 was 61% of total personal income, while
a similar figure for the nation for 1990 was 72%. Transfer payments are
typically less sensitive to the business cycle than employment income and,
therefore, act as stabilizing forces in weak economic periods.
The State's per capita personal income in 1992 of $19,947 was slightly below
the national average of $19,841 and significantly ahead of that for the
southeast United States, which was $17,661. Real personal income in the State
is estimated to increase 5.5% in 1993-94 and to increase 4.7% in 1994-95. By
the end of 1994-95, real personal income per capita in the State is expected to
average 6.7% higher than its 1992-93 level.
Employment. Since 1980, the State's job creation rate is almost twice the rate
for the nation as a whole, and its growth rate in new non-agricultural jobs is
the fastest of the 11 most populous states, second only to California in the
absolute number of new jobs created. Contributing to the State's rapid rate of
growth in employment and income is international trade. Since 1980, the
State's unemployment rate has generally been below that of the U.S. In recent
years, however, as the State's economic growth has slowed from its previous
highs, the State's unemployment rate has tracked above the national average.
The average rate in Florida since 1980 has been 6.5% while the national average
is 7.1%. According to the U.S. Department of Commerce, the Florida Department
of Labor and Employment Security, and the Florida Consensus Economic Estimating
Conference (together, the "Organization"), the State's unemployment rate was
8.2% during 1992. As of January 1994, the Organization estimates that the
unemployment rate will be 6.7% for 1993-94 and 6.1% for 1993-94.
The rate of job creation in Florida's manufacturing sector has exceeded that of
the U.S. From the beginning of 1980 through 1993, the State added over 50,000
new manufacturing jobs, an 11.7% increase. During the same period, national
manufacturing employment declined ten out of the fourteen years, for a loss of
2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 2.7% in 1993-94
and rise 3.8% in 1994-95. Trade and services, the two largest sources of
employment in the State, account for more than half of the total non-farm
employment. Employment in the service sector should experience an increase of
3.9% in 1993-94. The service sector is now the State's largest employment
category.
Construction. The State's economy has in the past been highly dependent on the
construction industry and construction-related manufacturing. This dependency
has declined in recent years and continues to do so as a result of continued
diversification of the State's economy. For example, in 1980, total contract
construction employment as a share of total non-farm employment was just over
7% and in 1993, the share had edged downward to 5.0%. This trend is expected
to continue as the State's economy continues to diversity. The State
nevertheless has a dynamic construction industry with single and multi-family
housing starts accounting for 8.5% of the total U.S. housing starts in 1993
while the State's population is 5.3% of the U.S. total population. The State's
housing starts since 1980 have represented an average of 11.0% of the U.S.'s
total annual starts, and, since 1980, total housing starts have averaged 156.3
thousand a year.
A driving force behind the State's construction industry has been the State's
rapid growth in population. Although the State currently is the fourth most
populous state, its annual population growth is now projected to decline as the
number of people moving into the State is expected to hover near the mid
250,000 range annually throughout the 1990's. This population trend should
provide plenty of fuel for business and home builders to keep construction
activity lively in the State for some time to come. However, other factors do
influence the level of construction in the State. For example, Federal tax
reform in 1986 and other changes to the Code have eliminated tax deductions for
owners of more than two residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties. Economic
growth and existing supplies of commercial buildings and homes also contribute
to the level of construction activity in the State. Hurricane Andrew left some
parts of south Florida devastated. Post-Hurricane Andrew clean up and
rebuilding have changed the outlook for the State's economy. Single and
multi-family housing starts in 1993-94 are projected to reach a combined level
of 118,000 and to increase to 134,300 next year. Lingering recessionary
effects on consumers and tight credit are two of the reasons for relatively
slow core construction activity, as well as lingering effects from the 1986 tax
reform legislation discussed above. However, construction is one of the
sectors most severely affected by Hurricane Andrew. Low interest rates and
pent up demand combined with improved consumer confidence should lead to
improved housing starts. The construction figures above include additional
housing starts as a result of destruction by Hurricane Andrew. Total
construction expenditures are forecasted to increase 15.6% this year and
increase 13.3% next year.
Tourism. Tourism is one of Florida's most important industries. Approximately
40.9 million tourists visited the State in 1992, as reported by the Florida
Department of Commerce. In terms of business activities and state tax
revenues, tourists in Florida in 1992 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. The dollar's depreciation has enhanced the State's tourism
industry. Tourist arrivals are expected to decline by almost two percent this
year, but recover next year with 5.0% growth. Tourist arrivals to Florida by
air and car are expected to diverge from each other, air decreasing 5.6% and
auto increasing 1.6%. By the end of the State's current fiscal year, 41.0
million domestic and international tourists are expected to have visited the
State. In 1994-95 tourist arrivals should approximate 43.0 million.
Revenues and Expenses. Estimated fiscal year 1993-94 General Revenue plus
Working Capital funds available to the State total $13,582.7 million, an 8.4%
increase over 1992-93. This reflects a transfer of $190 million, out of an
estimated $220.0 million in non-recurring revenue due to Hurricane Andrew, to a
hurricane relief trust fund. Of the total General Revenue plus Working Capital
funds available to the State, $12,943.5 million of that is Estimated Revenues
(excluding the Hurricane Andrew Impact), which represents an increase of 7.3%
over the previous year's Estimated Revenues. With effective General Revenues
plus Working Capital Fund appropriations at $13,276.9 million, unencumbered
reserves at the end of 1993-94 are estimated at $305.8 million. Estimated
fiscal year 1994-95 General Revenue plus Working Capital Funds available total
$14,293.5 million, a 5.2% increase over 1993-94. This amount reflects a
transfer of $159.0 million in non-recurring revenue to a hurricane relief fund.
The $13,877.2 million in Estimated Revenues represent an increase of 7.2% over
the previous year's Estimated Revenues. The massive effort to rebuild and
replace destroyed or damaged property in the wake of Hurricane Andrew is
responsible for the substantial positive revenue impacts shown here. Most of
the impact is in the increase in the State's sales tax.
In fiscal year 1992-93, approximately 62% of the State's total direct revenue
to its three operating funds was derived from State taxes, with Federal grants
and other special revenue accounting for the balance. State sales and use tax,
corporate income tax, intangible personal property and beverage tax amounted to
68%, 7%, 4% and 4%, respectively, of total receipts by the General Revenue Fund
during fiscal year 199_-9_. In that same year, expenditures for education,
health and welfare, and public safety amounted to approximately 49%, 30% and
11%, respectively, of total expenditures from the General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the State's single
largest source of tax receipts. Slightly less than 10% of the State's sales
and use tax is designated for local governments and is distributed to the
respective counties in which collected for such use by counties and the
municipalities therein. In addition to this distribution, local governments
may assess (by referendum) a 0.5% or a 1.0% discretionary sales surtax within
their county. Proceeds from this local option sales tax are earmarked for
funding local infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided under State law.
Certain charter counties have other taxing powers in addition, and
non-consolidated counties with a population in excess of 800,000 may levy a
local option sales tax to fund indigent health care. It alone cannot exceed
0.5% and when combined with the infrastructure surtax cannot exceed 1.0%. For
the fiscal year ended June 30, 1993, sales and use tax receipts (exclusive of
the tax on gasoline and special fuels) totaled $9.4 billion, an increase of
12.5% over fiscal year 1991-92.
The second largest source of State tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage wholesale tax (excise tax) on beer,
wine, and liquor. This tax is one of the State's major tax sources, with
revenues totaling $442 million in fiscal year ending June 30, 1993. Alcoholic
beverage tax receipts increased 1.6% from the previous year's total. The
revenues collected from this tax are deposited into the State's General Revenue
Fund.
The State imposes a corporate income tax. All receipts of the corporate income
tax are credited to the General Revenue Fund. For the fiscal year ended June
30, 1993, receipts from this source were $846.6 million, an increase of 5.6%
from fiscal year 1991-92.
The State also imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totaled $639.0 million during fiscal year
1992-93, a 27.0% increase from the previous fiscal year. Beginning in fiscal
year 1992-93, 71.29% of these taxes are to be deposited to the General Revenue
Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipt utilities tax collections are
credited to the State's Public Education Capital Outlay and Debt Service Trust
Fund. In fiscal year 1992-93, this amounted to $447.9 million.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes, governmental
leaseholds, and certain other intangibles not secured by a lien on Florida real
property. The annual rate of tax is 2 mils. The State also imposes a
non-recurring 2 mil tax on mortgages and other obligations secured by liens on
Florida real property. In fiscal year 1992-93, total intangible personal
property tax collections were $783.4 million, a 33% increase over the prior
year. Of the tax proceeds, 66.5% is distributed to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50.0% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0% for costs of administering the
lottery. Fiscal year 1992-93 lottery ticket sales totaled $2.13 billion,
providing education with approximately $810.4 million.
The State's severance tax applies to oil, gas, and sulphur production, as well
as the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $64.5 million during fiscal year 1992-93, down 4.0%
from the previous year. Currently, 60.0% of this amount is transferred to the
General Revenue Fund.
Debt-Balanced Budget Requirement. At the end of fiscal 1993, approximately
$5.61 billion in principal amount of debt secured by the full faith and credit
of the State was outstanding. In addition, since July 1, 1993, the State
issued about $873 million in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget, as a whole,
and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believe a deficit will occur in any State fund, by statute, he must certify his
opinion to the Administrative Commission, which then is authorized to reduce
all State agency budgets and releases by a sufficient amount to prevent a
deficit in any fund. Additionally, the State Constitution prohibits issuance
of State obligations to fund State operations.
Litigation. Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General Revenue
Fund monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse effect on
the State's financial position.
State law provides preferential tax treatment to insurers who maintain a home
office in the State. Certain insurers challenged the constitutionality of this
tax preference and sought a refund of taxes paid. Recently, the State Supreme
Court ruled in favor of the State. This case and others, along with pending
refund claims, total about $200 million.
The State maintains a bond rating of Aa and AA from Moody's Investor Service
and S&P, respectively, on the majority of its general obligation bonds,
although the rating of a particular series of revenue bonds relates primarily
to the project, facility, or other revenue source from which such series
derives funds for repayment. While these ratings and some of the information
presented above indicate that the State is in satisfactory economic health,
there can be no assurance that there will not be a decline in economic
conditions or that particular Bonds purchased by the Florida Trusts will not be
adversely affected by any such changes.
Georgia Trusts _ Economic Factors
The portfolio of each Georgia Trust consists primarily of obligations issued by
entities located in Georgia.
Constitutional Considerations. The Georgia Constitution permits the issuance
by the State of general obligation debt and of certain guaranteed revenue debt.
The State may incur guaranteed revenue debt by guaranteeing the payment of
certain revenue obligations issued by an instrumentality of the State. The
Georgia Constitution prohibits the incurring of any general obligation debt or
guaranteed revenue debt if the highest aggregate annual debt service
requirement for the then current year or any subsequent fiscal year for
outstanding general obligation debt and guaranteed revenue debt, including the
proposed debt, exceed 10% of the total revenue receipts, less refunds, of the
State treasury in the fiscal year immediately preceding the year in which any
such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to supply
a temporary deficit in the State treasury in any fiscal year created by a delay
in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State
treasury in the fiscal year immediately preceding the year in which such debt
is incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred out of the taxes levied for that
fiscal year. No such debt may be incurred in any fiscal year if there is then
outstanding unpaid debt from any previous fiscal year which was incurred to
supply a temporary deficit in the State treasury. No such short-term debt has
been incurred under this provision since the inception of the constitutional
authority referred to in this paragraph.
Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other political
subdivisions and public authorities thereof are required by law to be validated
and confirmed in a judicial proceeding prior to issuance. The legal effect of
an approved validation in Georgia is to render incontestable the validity of
the pertinent bond issue and the security therefor.
The State and Its Economy. The State operates on a fiscal year beginning July
1 and ending June 30. Thus, the 1994 fiscal year ended June 30, 1994. Based
on data of the Georgia Department of Revenue, receipts of the State from income
tax and sales tax for the 1992 fiscal year comprised approximately 48.8% and
37.5%, respectively, of the total State tax revenues. Such data shows that
total State treasury receipts for the 1992 fiscal year increased by
approximately 2.16% over such collections in the 1991 fiscal year. The
estimated 1993 fiscal year figures indicate that receipts of the State from
income tax and sales tax for the 1993 fiscal year comprised approximately 48.1%
and 38%, respectively, of the total State tax revenues. Total estimated State
tax revenue collections for the 1993 fiscal year indicate an increase of
approximately 9.89% over such collections in the 1992 fiscal year. The
estimated 1994 fiscal year figures indicate that receipts of the State from
income tax and sales tax for the 1994 fiscal year will comprise approximately
48.8% and 37.9%, respectively, of the total State tax revenues. Total
estimated State tax revenue collections for the 1994 fiscal year indicate an
increase of approximately 9.56% over such collections in the 1993 fiscal year.
Georgia experienced an economic slowdown in the late 1980s that continued into
1992. The 1991 fiscal year ended with a balanced budget, but only because the
State had borrowed approximately $90 million from surpluses maintained for
special uses. In light of weaker than expected monthly revenue collections in
May and June of 1991, Georgia lawmakers, in a special legislative session, cut
budgeted expenditures for the 1992 fiscal year by $415 million. Georgia ended
its 1992 fiscal year, however, with strong monthly revenue collections. For
the last four months of fiscal year 1992, Georgia's revenues were more than 6%
higher than revenues reported one year earlier for the same period. By
year-end, revenue collections fell only 0.1% short of that expected to cover
1992 expenditures. This shortfall was made up from funds allocated to but not
used by state agencies. The authorized 1993 fiscal year budget consists of an
$8.3 billion spending plan and approximately $750 million in new general
obligation debt. On March 23, 1993, the Georgia General Assembly approved an
$8.9 billion budget for the 1994 fiscal year which includes authorization for
$792 million of general obligation borrowing.
The Georgia economy has performed relatively well during recent years and
generally has expanded at a rate greater than the national average during that
period. However, growth in 1988 through 1992 has slowed somewhat and was
modest compared to the robust pace of the early 1980's. Georgia's economy,
however, has made a recovery through the 1993 and 1994 fiscal years. The 1992
annual average unemployment rate for Georgia was 6.9% as compared for the 1992
national annual average unemployment rate of 7.4%. The 1993 annual average
unemployment rate for Georgia was 5.7% as compared to the 1993 national annual
average unemployment rate of 6.7%. Throughout 1994, the monthly unemployment
rate for Georgia (not seasonally adjusted) has remained below the national
average monthly unemployment rate (not seasonally adjusted). In June and July
1994, Georgia's unemployment rate was 5.8% and 5.9%, respectively, as compared
to the national average unemployment rate of 6.2% for both months.
In July 1994, widespread flooding in central and southern Georgia caused
extensive damage and destruction of farmland, private residences, businesses
and local and state government facilities. As of July 12, 1994, Governor Zell
Miller refused to estimate the dollar value of the damage but other sources
estimate that damage could exceed $300 million. Thirty-one counties have been
declared federal disaster areas. Moody's Investors Service, Inc. and Standard
and Poor's Corporation are observing the situation in Georgia, but neither
rating agency has expressed any immediate credit concerns.
Bond Ratings. Currently, Moody's Investors Service, Inc. rates Georgia general
obligation bonds Aaa and Standard and Poor's Corporation rates such bonds AA+.
Legal Proceedings. Georgia is involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. Several lawsuits have been
filed against Georgia asserting that the decision in Davis v. Michigan
Department of Treasury, 489 U.S. 803 (1989), invalidating Michigan's practice
of taxing retirement benefits paid by the federal government while exempting
state retirement benefits, also invalidates Georgia's tax treatment of Federal
Retirement Benefits for years prior to 1989. Under Georgia's applicable 3 year
statute of limitation the maximum potential liability under these suits
calculated to April 1, 1992 would appear to be no greater than $128 million.
The plaintiffs in these suits, however, have requested refunds for a period
from 1980 which could result in a maximum potential liability in the range of
$591 million. Any such liability would be predicted on a holding by a Georgia
court or the United States Supreme Court that the Davis decision is applicable
to Georgia's prior method of taxing Federal Retirement Benefits, that the Davis
decision is to be given a retroactive effect, i.e., that the decision affects
prior tax years and that a refund remedy is appropriate. In Georgia's "test
case", the Georgia Supreme Court held that no refunds are due. On June 28,
1993, however, the U.S. Supreme Court vacated that holding and remanded the
case for further consideration in light of the U.S. Supreme Court decision in
Harper v. Virginia Department of Taxation (Decided June 18, 1993). In Harper,
the Court held that its decision in Davis applied retroactively to federal
retirees who were denied Virginia personal income tax refunds.
Another suit filed against Georgia seeks a $31 million refund plus interest of
liquor taxes imposed under a Georgia Statute found retroactively invalid by the
U.S. Supreme Court. The trial court's decision that no refunds are due is
currently being reviewed by the Georgia Supreme Court.
Two additional suits have been filed with the State of Georgia by foreign
producers of alcoholic beverages seeking $96 million in refunds of alcohol
import taxes imposed under another statute. These claims constitute 99% of all
such taxes paid during the preceding three years.
In Board of Public Education for Savannah/Chatham County v. State of Georgia,
the local school board claimed that the State should finance the major portion
of the costs of its desegregation program. The Savannah Board originally
requested restitution in the amount of $30 million, but the Federal District
Court set forth a formula which would require a State payment in the amount of
approximately $6 million. Both sides have moved for reconsideration. In a
similar complaint, DeKalb County has requested restitution in the amount of $90
million, and there are approximately five other school districts which could
file similar claims. It is not possible to quantify such potential claims at
this time.
Maryland Trusts _ Economic Factors
The portfolio of each Maryland Trust consists primarily of obligations issued
by entities located in Maryland.
Some of the significant financial considerations relating to the investments of
the Maryland Trusts are summarized below. This information is derived
principally from official statements and preliminary official statements
relating to issues of Maryland obligations and does not purport to be a
complete description.
The State's total expenditures for the fiscal years ending June 30, 1990, June
30, 1991 and June 30, 1992 were $11.0, $11.3 and $11.6 billion, respectively.
As of January 13, 1993, it was estimated that total expenditures for fiscal
1993 would be $11.8 billion. The State's General Fund, representing
approximately 55%-60% of each year's total budget, had a surplus on a budgetary
basis of $57 million in fiscal year 1990, $55 thousand in fiscal 1991, and a
deficit of $56 million in fiscal 1992. The Governor of Maryland reduced fiscal
1993 appropriations by $56 million to offset the fiscal 1992 deficit. The
State Constitution mandates a balanced budget.
The 1993 fiscal year budget was enacted in April 1992 which, together with
legislation enacted 1992, involved the transfer of certain funds, new fees and
taxes, and alteration of certain statutory State expenditure programs. When
the 1993 budget was enacted, it was estimated that the General Fund surplus at
June 30, 1993 would be approximately $10 million on a budgetary basis. During
the final months of fiscal year 1992 and the initial months of fiscal year
1993, collections of State revenues were below the levels estimated at the time
of the adoption of the 1993 budget. The Governor proposed a cost containment
plan to address this revenue shortfall and to provide reserves to finance
potential deficiency appropriations. On September 30, 1992, the Board of
Public Works approved the Governor's proposal to reduce General Fund
appropriations by $168 million. The Board of Public Works also approved the
Governor's proposal to reduce the special fund appropriations for the
Department of Transportation by $30 million. Legislation was introduced at the
1993 session of the General Assembly to transfer this $30 million to the
General Fund, as well as $10 million from various other special funds. In a
special session held in November 1992, the General Assembly enacted legislation
reducing State aid to local governments by $147 million. In addition, other
elements of the Governor's original cost containment plan are in the process of
being implemented or revised.
The public indebtedness of Maryland and its instrumentalities is divided into
three basic types. The State issues general obligation bonds, to the payment
of which the State ad valorem property tax is exclusively pledged, for capital
improvements and for various State-sponsored projects. The Department of
Transportation of Maryland issues limited, special obligation bonds for
transportation purposes payable primarily from specific, fixed-rate excise
taxes and other revenues related mainly to highway use. Certain authorities
issue obligations payable solely from specific non-tax enterprise fund revenues
and for which the State has no liability and has given no moral obligation
assurance.
General. According to the most recent available ratings, general obligation
bonds of the State are rated Aaa by Moody's and AAA by Standard & Poor's, as
are those of Baltimore County, a separate political entity surrounding
Baltimore City, and Montgomery County in the suburbs of Washington, D General
obligation bonds of Prince George's County, the second largest metropolitan
county, which is also in the suburbs of Washington, D, are rated A1 by Moody's
and AA- by Standard & Poor's. The general obligation bonds of those other
counties of the State, which are rated by Moody's, carry an A rating or better,
except for those of Allegheny County, which are rated Baa. The most populous
municipality in the State is Baltimore City, the general obligation bonds of
which are rated A1 by Moody's and A by Standard & Poor's. The majority of
Maryland Health and Higher Education Authority and State Department of
Transportation revenue bond issues have received an A rating or better from
Moody's.
While these ratings and the other factors mentioned above indicate that
Maryland and its principal subdivisions and agencies are addressing the effects
of the economic recession and, overall, are in satisfactory economic health,
there can, of course, be no assurance that this will continue or that
particular bond issues may not be adversely affected by changes in State or
local economic or political conditions.
Massachusetts Trusts - Economic Factors
The portfolio of each Massachusetts Trust consists primarily of obligations
issued by entities located in Massachusetts.
Since 1988, there has been a significant slowdown in the Commonwealth's
economy, as indicated by a rise in unemployment, a slowing of its per capita
income growth and declining state revenues. In fiscal 1991, the Commonwealth's
expenditures for state government programs exceed current revenues and although
fiscal 1992 revenues exceeded expenditures, no assurance can be given that
lower than expected tax revenues will not resume and continue.
1993 Fiscal Year Budget. On July 20, 1992 the Governor signed the
Commonwealth's budget for fiscal 1993. This budget is based on estimated
budgeted revenue and other sources of $14.641 billion, including current tax
revenue estimates of $9.940 billion. Based on December 31, 1992 tax
collections, tax revenues for the fiscal 1993 budget were revised upwards on
January 27, 1993 from the original consensus tax estimate of $9.685 billion.
Estimated tax revenues for fiscal 1993 are approximately $456.4 million greater
than tax revenues for fiscal 1992. As modified by legislation enacted since
July 20, 1992, the fiscal 1993 budget provides for estimated budgeted
expenditures and other uses of $14.976 billion, which equals the sum of
projected revenues and other sources plus approximately $319.4 million of the
estimated $549.4 million positive budgetary fund balances existing as of the
close of fiscal 1992. The projected fiscal 1993 budgeted expenditures and
other uses represents an increase of 11.6% from fiscal 1992. The fiscal 1993
budget remains subject to certain of the Governor's line-item vetoes, which may
be overridden by the legislature.
With regard to revenues, the fiscal 1993 budget depends on certain non-tax
revenue sources, the availability of which is subject to certain contingencies.
The fiscal 1993 budget assumes contained federal reimbursements related to
uncompensated care payments, which is expected to be approximately $212.7
million in fiscal 1993.
The fiscal 1993 budget also assumes that the sale of certain assets will
generate approximately $45.0 million in non-tax revenues; however, there are
currently no agreements to sell such assets and the market for some or all of
such assets is unfavorable. The fiscal 1993 budget also assumes receipt of
approximately $80.0 million from the Massachusetts Water Resource Authority
("MWRA") under an agreement which would, among other things, relieve the MWRA
of certain comparable future financial commitments to the Commonwealth.
1992 Fiscal Year. The Commonwealth's budgeted expenditures and other uses were
approximately $13.420 billion in fiscal 1992, which is $238.7 million or 1.7%
lower than fiscal 1991 budgeted expenditures. Final fiscal 1992 budgeted
expenditures were $300 million more than the initial July 1991 estimates of
budgetary expenditures, due in part to increases in certain human services
programs, including an increase of $268.7 million for the Medicaid program and
$50.0 million for mental retardation consent decree requirements. Budgeted
revenues and other sources for fiscal 1992 totaled approximately $13.728
billion (including tax revenues of $9.484 billion), reflecting an increase of
approximately 0.7% from fiscal 1991 to 1992 and an increase of 5.4% in tax
revenues for the same period. Overall, fiscal 1992 is estimated to have ended
with an excess of revenues and other sources over expenditures and other uses
of $312.3 million. After payment in full of the quarterly distribution of
local aid to the Commonwealth's cities and towns ("Local Aid") in the amount of
$514.0 million due on June 30, 1992, retirement of the Commonwealth's
outstanding commercial paper (except for approximately $50 million of bond
anticipation notes) and certain other short term borrowings, as of June 30,
1992, the end of fiscal 1992, the Commonwealth showed a year-end position of
approximately $731 million, as compared with the Commonwealth's cash balance of
$182.3 million at the end of fiscal 1991.
1991 Fiscal Year. Budgeted expenditures for fiscal 1991 totalled approximately
$13.6 billion, as against budgeted revenues and other sources of approximately
$13.6 billion. The Commonwealth suffered an operating loss of approximately
$21.2 million. Application of the adjusted fiscal 1990 fund balances of $258.3
resulted in a fiscal 1991 budgetary surplus of $237.1 million. State law
requires that approximately $59.2 million of the fiscal year ending balances of
$237.1 million be placed in the Stabilization Fund, a reserve from which funds
can be appropriated (i) to make up any difference between actual state revenues
in any fiscal in which actual revenues fall below the allowable amount, (ii) to
replace state and local losses by federal funds or (iii) for any event, as
determined by the legislature, which threatens the health, safety or welfare of
the people or the fiscal stability of the Commonwealth or any of its political
subdivisions.
Upon taking office in January 1991, the new Governor proposed a series of
legislative and administrative actions, including withholding of allotments
under Section 9C of Chapter 29 of the General Laws, intended to eliminate the
projected deficits. The new Governor's review of the Commonwealth's budget
indicated projected spending of $14.1 billion with an estimated $850 million in
budget balancing measures that would be needed prior to the close of fiscal
1991. At that time, estimated tax revenues were revised to $8.8 billion, $903
million less than was estimated at the time the fiscal 1991 budget was adopted.
The Legislature adopted a number of the Governor's recommendations and the
Governor took certain administrative actions not requiring legislative
approval, including the adoption of a state employee furlough program. It is
estimated by the Commonwealth that spending reductions achieved through savings
initiatives and withholding of allotments total approximately $484.3 million in
aggregate for fiscal 1991. However, these savings and reductions may be
impacted negatively by litigation pursued by third parties concerning the
Governor's actions under Section 9C of Chapter 29 of the General Laws and with
regard to the state employee furlough program.
In addition, the new administration in May 1991 filed an amendment to its
Medicaid state plan that enables it to claim 50% federal reimbursement on
uncompensated care payments for certain hospitals in the Commonwealth. As a
result, in fiscal 1991, the Commonwealth obtained additional non-tax revenues
in the form of federal reimbursements equal to approximately $513 million on
account of uncompensated care payments. This reimbursement claim was based
upon recent amendments of federal law contained in the Omnibus Budget
Reconciliation Act of 1990 and, consequently, on relatively undeveloped federal
laws, regulations and guidelines. At the request of the federal Health Care
Financing Administration, the Office of Inspector General of the United States
Department of Health and Human Services has commenced an audit of the
reimbursement. The administration, which had reviewed the matter with the
Health Care Financing Administration prior to claiming the reimbursement
believes that the Commonwealth will prevail in the audit. If the Commonwealth
does not prevail, the Commonwealth would have the right to contest an appeal,
but could be required to repay all or part of Medicaid reimbursements with
interest and to have such amount deducted from future reimbursement payments.
1990, 1989 and 1988 Fiscal Years. In July 1989, the former Governor vetoed
certain provisions included in the budget legislation for fiscal 1990,
including approximately $273 million of the fiscal 1990 appropriations,
including $100 million for local aid to the Commonwealth's cities and towns
("Local Aid"). One of the Governor's vetoes occasioned a default by the
Commonwealth on a September 1, 1989 payment of $2.5 million on a general
obligation contract with the Massachusetts Community Development Finance
Corporation to which its full faith and credit had been pledged, which payment
was made on September 17, 1990 after a supplemental appropriation was proposed
by the Governor and passed by the legislature. The legislature overrode the
Governor's veto of $100 million of Local Aid and the Governor then indicated
that he was withholding the allotment for such expenditure. The Supreme
Judicial Court invalidated the Governor's withholding of $210 million of
appropriated funds for certain Local Aid purposes in May 1990.
Budgeted expenditures for fiscal 1988, 1989 and 1990 totalled approximately
$11.6 billion, $12.6 billion and $13.3 billion respectively. Budgeted revenues
for fiscal 1988, 1989 and 1990 totalled approximately $11.3 billion, $12.0
billion and $12.0 billion, respectively.
Employment. Reversing a trend of relatively low unemployment during the early
and mid 1980s, the Massachusetts unemployment rate has increased significantly
during the last three years to where the Commonwealth's unemployment rate
exceeds the national unemployment rate. In 1989, the average Massachusetts
unemployment rate was 4.0%, representing a 0.8% increase over the average 1987
unemployment rate, while the average United States unemployment rate was 5.3%,
representing a 0.9% decrease over the average 1987 United States unemployment
rate. During 1990, the Massachusetts unemployment rate increased from 4.5% in
January to 6.1% in July to 6.7% in August. During 1991, the Massachusetts
unemployment rate averaged 9.0% while the average United States unemployment
rate was 6.7%. The Massachusetts unemployment rate in October 1992 was 8.4%,
down from 8.6% for September 1992. Other factors which may significantly and
adversely affect the employment rate in the Commonwealth include the recently
announced proposal by the Clinton Administration to close United States
military bases and reduce federal government spending on defense-related
industries. Due to this and other considerations, there can be no assurances
that unemployment in the Commonwealth will not increase in the future.
Debt Ratings. S&P currently rates the Commonwealth's uninsured general
obligation bonds at A, having upgraded the rating from BBB on September 9,
1992. At the same time, S&P upgraded the rating of state and agency notes from
SP2 to SP1. In raising the rating, S&P cited the Commonwealth's improved
financial status as key to the upgrade. Prior to these actions by S&P, the
Commonwealth had experienced a steady decline in its S&P rating, with its most
recent decline beginning in May 1989, when S&P lowered its rating on the
Commonwealth's general obligation bonds and other Commonwealth obligations from
AA+ to AA and continuing a series of further reductions until March 1992, when
the rating was affirmed at BBB.
Moody's currently rates the Commonwealth's uninsured general obligation bonds
at A, having upgraded the rating from Baa on September 9, 1992. Moody's in
raising the rating on the bonds, pointed to the Commonwealth's application of
conservative revenue assumptions and efforts to impose spending discipline as
having reduced the Commonwealth's financial vulnerability and restored fiscal
control. Prior to this increase, the Commonwealth had experienced a steady
decline in its rating by Moody's since May 1989. In May 1989, Moody's lowered
its rating on the Commonwealth's notes from MIG-1 to MIG-2, and its rating on
the Commonwealth's commercial paper from P-1 to P-2. On June 21, 1989, Moody's
reduced the Commonwealth's general obligation rating from Aa to A. On November
15, 1989, Moody's reduced the rating on the Commonwealth's general obligations
from A to Baa1, citing the Commonwealth's lowering of revenue estimates, its
fiscal year 1990 deficit and to the legislature's apparent lack of consensus on
how to deal with it. On March 9, 1990, Moody's reduced the rating of the
Commonwealth's general obligation bonds from Baa1 to Baa, citing "extended
inaction" in resolving the Commonwealth's growing budget deficit. There can be
no assurance that these ratings will continue.
In recent years, the Commonwealth and certain of its public bodies and
municipalities have faced serious financial difficulties which have affected
the credit standing and borrowing abilities of Massachusetts and the respective
entities and may have contributed to higher interest rates on debt obligations.
The continuation of, or an increase in, such financial difficulties could
result in declines in the market values of, or default on, existing obligations
including Bonds deposited in any Massachusetts Trust. Should there be during
the term of a Massachusetts Trust a financial crisis relating to Massachusetts,
its public bodies or municipalities, the market value and marketability of all
outstanding bonds issued by the Commonwealth and its public authorities or
municipalities, including the Bonds in such Trust, and interest income to the
Trust could be adversely affected.
Total Bonds and Note Liabilities. The total general obligation bonded
indebtedness of the Commonwealth as of January 1, 1993, was approximately $7.9
billion. There were also outstanding approximately $339 million in general
obligation notes and other short-term general obligation debt. The total bond
and note liabilities of the Commonwealth as of January 1, 1993, including
guaranteed debt and contingent liabilities, was approximately $12.4 billion.
Debt Service. During the 1980's, capital expenditures were increased
substantially, which has had a short term impact on the cash needs of the
Commonwealth and also accounts for a significant rise in debt service during
that period. Payments for debt service on Commonwealth general obligation
bonds and notes have risen at an average annual rate of 18.7% from $563.7
million in fiscal 1988 to an estimated $942.3 million in fiscal 1991. Debt
service payments in fiscal 1992 were $898.3 million. Debt service payments for
fiscal 1992 reflect a $261 million one-time reduction achieved as a result of
the issuance of the refunding bonds in September and October 1991. Debt
Service expenditures are projected to be $1.195 billion for fiscal 1993 and
$1.311 billion for fiscal 1994. The amounts represented do not include debt
service on notes issued to finance the fiscal 1989 deficit and certain Medicaid
related liabilities, certain debt service contract assistance to the
Massachusetts Bay Transportation Authority, the Massachusetts Convention Center
Authority and the Massachusetts Government Land Bank, as well as grants to
municipalities under the school building assistance program to defray a portion
of the debt service costs on local school bonds.
In January 1990, legislation was passed to impose a limit on debt service
beginning in fiscal 1991, providing that no more than 10% of the total
appropriations in any fiscal year may be expended for payment of interest and
principal on general obligation debt (excluding the Fiscal Recovery Bonds).
The percentage of total appropriations expended from the budgeted operating
funds for debt service (excluding debt service on Fiscal Recovery Bonds) for
fiscal 1992 is 4.9% which is projected to increase to 6.1% in fiscal 1993.
Certain Liabilities. Among the material future liabilities of the Commonwealth
are significant unfunded general liabilities of its retirement systems and a
program to fund such liabilities; a program whereby, starting in 1978, the
Commonwealth began assuming full financial responsibility for all costs of the
administration of justice within the Commonwealth; continuing demands to raise
aggregate aid to cities, towns, schools and other districts and transit
authorities above current levels; and Medicaid expenditures which have
increased each year since the program was initiated. The Commonwealth has
signed consent decrees to continue improving mental health care and programs
for the mentally retarded in order to meet Federal standards, including those
governing receipt of Federal reimbursements under various programs, and the
parties in those cases have worked cooperatively to resolve the disputed
issues.
As a result of comprehensive legislation approved in January 1988, the
Commonwealth is required, beginning in fiscal 1989, to fund future pension
liabilities currently and to amortize the Commonwealth's unfunded liabilities
over 40 years. Total pension costs increased at an average annual rate of 5.8%
from $600.2 million in fiscal 1988 to $751.5 million in fiscal 1992. The
projected pension costs (inclusive of current benefits and reserves) for fiscal
1993 are $873.8 million, representing an increase of 16.2% over the fiscal 1992
expenditures.
Litigation. The Commonwealth is engaged in various lawsuits involving
environmental and related laws, including an action brought on behalf of the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean up of Boston Harbor. The Massachusetts Water
Resource Authority ("MWRA"), successor in liability to the Metropolitan
District Commission, has assumed primary responsibility for developing and
implementing a court-approved plan for the construction of the treatment
facilities necessary to achieve compliance with Federal requirements. Under
the Clean Water Act, the Commonwealth may be liable for costs of compliance in
these or any other Clean Water cases if the MWRA or a municipality is prevented
from raising revenues necessary to comply with a judgment. The MWRA currently
projects that the total cost of construction of the treatment facilities
required under the court's order is approximately $3.5 billion in current
dollars.
The Massachusetts Hospital Association has brought an action challenging an
element of the Medicaid rate-setting methodologies for hospitals. If the
plaintiff hospitals are successful, the Commonwealth may face additional
liabilities on the order of $70 million to $100 million. The parties have
recently agreed to a process of settlement and payment of fiscal 1988 through
1991 claims, with payment to be made in fiscal 1993.
There are also actions pending in which recipients of human services benefits,
such as welfare recipients, the mentally retarded, the elderly, the
handicapped, children, residents of state hospitals and inmates of corrections
institutions, seek expanded levels of services and benefits and in which
providers of services to such recipients challenge the rates at which they are
reimbursed by the Commonwealth. To the extent that such actions result in
judgments requiring the Commonwealth to provide expanded services or benefits
or pay increased rates, additional operating and capital expenditures might be
needed to implement such judgments.
In December 1988, nine municipalities of the Commonwealth which claim to own
substantial interests in a nuclear power plant in Seabrook, New Hampshire,
filed suit against the Commonwealth, the Governor, the Attorney General and
other State officials claiming damages arising from their opposition to
licensure of the plant. The municipalities allege damages in the amount of $1
billion. The Commonwealth's motion to dismiss was allowed, but the plaintiffs
in that case have appealed and the case is under advisement in the Appeals
Court.
In addition there are several tax matters in litigation which could result in
significant refunds to taxpayers if decisions unfavorable to the Commonwealth
are rendered. The amount of taxes and interest at issue in those cases is
approximately $195 million.
A variety of other civil suits pending against the Commonwealth may also affect
its future liabilities. These include challenges to the Commonwealth's
allocation of school aid and to the Governor's authority to withhold or reduce
allotments of appropriated funds under section 9C of Chapter 29 of the General
Laws and to adopt a state employee furlough program. No prediction is possible
as to the ultimate outcomes of these proceedings.
Many factors, in addition to those cited above, do or may have a bearing upon
the financial condition of the Commonwealth, including social and economic
conditions, many of which are not within the control of the Commonwealth.
Expenditure and Tax Limitation Measures. Limits have been established on State
tax revenues by legislation approved by the Governor on October 25, 1986 and by
an initiative petition approved by the voters on November 4, 1986. The
Executive Office for Administration and Finance currently estimates that State
tax revenues will not reach the limit imposed by either the initiative petition
or the legislative enactment in fiscal 1992.
Proposition 2-1/2, passed by the voters in 1980, led to large reductions in
property taxes, the major source of income for cities and towns, and large
increases in state aid to offset such revenue losses. According to Executive
Office for Administration and Finance, all of the 351 cities and towns have not
achieved a property tax level of no more than 2.5% of full property values.
Under the terms of Proposition 2-1/2, the property tax levy can now be
increased annually for all cities and towns, almost all by 2.5% of the prior
fiscal year's tax levy plus 2.5% of the value of new properties and of
significant improvements to property. Legislation has also been enacted
providing for certain local option taxes. A voter initiative petition approved
at the statewide general election in November 1990 further regulates the
distribution of Local Aid and, among other matters, requires, subject to
appropriation, the distribution as Local Aid of no less than 40% of collections
from individual income taxes, sales and use taxes, corporate excise taxes, and
the balance of the state lottery fund. If implemented in accordance with its
terms (including appropriation of the necessary funds), the petition as
approved would shift several hundred million dollars to direct Local Aid.
Other Tax Matters. To provide revenue to pay debt service on both the deficit
and Medicaid-related borrowings and to fund certain direct Medicaid
expenditures, legislation was enacted imposing an additional tax on certain
types of personal income for 1989 and 1990 taxable years at rates of 0.375% and
0.75% respectively, effectively raising the tax rate of 1989 from 5% to 5.375%
and for 1990 to 5.75%. Recent legislation has effectively further increased
tax rates to 5.95% for tax year 1990 to 6.25% for tax year 1991 and returning
to 5.95% for tax year 1992 and subsequent tax years. The tax is applicable to
all personal income except income derived from interest, dividends, capital
gains, unemployment compensation, alimony, rent, pensions, annuities and
IRA/Keogh distributions. The income tax rate on other interest (excluding
interest on obligations of the United States and of the Commonwealth and its
subdivisions), dividends and net capital gains (after a 50% reduction) was
increased from 10% to 12% for the tax year 1990 and subsequent years, by
recently enacted legislation.
Other Issuers of Massachusetts Obligations. There are a number of state
agencies, instrumentalities and political subdivisions of the Commonwealth that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the Commonwealth. The brief
summary above does not address, nor does it attempt to address, any
difficulties and the financial situations of those other issuers of
Massachusetts Obligations.
Michigan Trusts _ Economic Factors
The portfolio of each Michigan Trust primarily consists of obligations issued
by entities located in Michigan.
Economy. The principal sectors of the State's economy are manufacturing of
durable goods (including automobile and office equipment manufacturing),
tourism and agriculture. As reflected in historical employment figures, the
State's economy has lessened its dependence upon durable goods manufacturing.
In 1960, employment in such industry accounted for 33% of the State's
workforce. This figure fell to 17% by 1992. However, manufacturing (including
auto-related manufacturing) continues to be an important part of the State's
economy. These industries are highly cyclical. This factor could adversely
affect the revenue streams of the State and its political subdivisions because
of its impact on tax sources, particularly sales taxes and single business
taxes.
Recently, as well as historically, the average monthly unemployment rate in the
State has been higher than the average figures for the United States. For
example, for 1992 the average monthly unemployment rate in the State was 8.8%
as compared to a national average of 7.4%. For 1993, the average monthly
unemployment rate in the State was 8.7% as compared to a national average of
6.8%.
Budget. The budget of the State is a complete financial plan and encompasses
the revenues and expenditures, both operating and capital outlay, of the
General Fund and special revenue funds. The budget is prepared on a basis
consistent with GAAP. The State's Fiscal Year begins on October 1 and ends
September 30 of the following year. Under State law, the executive budget
recommendations for any fund may not exceed the estimated revenue thereof, and
an itemized statement of estimated revenues in each operating fund must be
contained in an appropriation bill as passed by the Legislature, the total of
which may not be less than the total of all appropriations made from the fund
for that fiscal year. The State Constitution provides that proposed
expenditures from and revenues of any fund must be in balance and that any
prior year's surplus or deficit in any fund must be included in the succeeding
year's budget for that fund.
The State's Constitution limits the amount of total State revenues that may be
raised from taxes and other sources. State revenues (excluding federal aid and
revenues used for payment of principal and interest on general obligation
bonds) in any fiscal year are limited to a specified percentage of State
personal income in the prior calendar year or average of the prior three
calendar years, whichever is greater. The State may raise taxes in excess of
the limit in emergency situations.
The State finances its operations through the State's General Fund and special
revenue funds. The General Fund receives revenues of the State that are not
specifically required to be included in the special revenue funds. General
Fund revenues are obtained approximately 59 percent from the payment of State
taxes and 46 percent from federal and non-tax revenue sources. Tax revenues
credited to the General Fund include the State's personal income tax, single
business tax, use tax and approximately 38% of sales tax. In addition, the
State levies various other taxes. Approximately one-half of total General Fund
expenditures are made by the State's Department of Education and Department of
Social Services. Other significant expenditures from the General Fund provide
funds for law enforcement, general State government, debt service and capital
outlays.
Despite modest surpluses in the three preceding fiscal years, the State ended
fiscal years 1989-90 and 1990-91 with negative balances of $310.3 million and
$169.4 million, respectively. This negative balance had been eliminated as of
the end of fiscal year 1991-92, which ended September 30, 1992. The State
ended fiscal year 1992-93 with a projected balance of $26 million after the
transfer of $286.2 million to the BSF described below.
The State budget for the 1993-94 fiscal year, which began on October 1, 1993,
was passed by the Legislature in September 1993. This budget passed by the
Legislature totaled $7,955.5 million from General Fund/general purpose
revenues. The Governor vetoed $2.3 million of these appropriations. In
December 1993, supplemental appropriations of $45 million were adopted and
signed by the Governor.
The State also maintains the Counter-Cyclical Budget and Economic Stabilization
Fund ("BSF") which accumulates balances during the years of significant
economic growth and which may be utilized during periods of budgetary
shortfalls. The unreserved balance for the BSF for the 1990-91 fiscal year end
was $182.2 million and for the 1991-92 fiscal year end was $20.1 million.
Approximately $286.2 million is expected to be transferred to the BSF bringing
the preliminary accrued balance of the BSF as of September 30, 1993 to $307.1
million.
Debt. The State Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes which must be repaid in the same
fiscal year in which it is issued and which cannot exceed 15% of the
undedicated revenues received by the State during the preceding fiscal year,
(ii) short and long term debt unlimited in amount for the purpose of making
loans to school districts and (iii) long term debt for voter-approved purposes.
The State has issued and has outstanding general obligation full faith and
credit bonds for water resources, environmental protection program and
recreation program purposes totalling as of September 30, 1993, approximately
$386 million. In November 1988 the State's voters approved the issuance of
$800 million of general obligation bonds for environmental protection and
recreational purposes; of this amount approximately $440 million remains to be
issued. The State issued $900 million in general obligation notes in February
1993 which matured on September 30, 1993. The State issued $40.9 million in
general obligation school loan notes in October 1993 which will mature on April
29, 1994.
Other Issuers of Michigan Municipal Obligations. There are a number of state
agencies, instrumentalities and political subdivisions of the State that issue
bonds, some of which may be conduit revenue obligations payable 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 obligations backed by the full faith and credit of the State.
Ratings. Currently the State's general obligation bonds are rated A1 by
Moody's, AA by S&P and AA by Fitch Investors Service, Inc.
Litigation. The State is a party to various legal proceedings seeking damages
or injunctive or other relief. In addition to routine litigation, certain of
these proceedings could, if unfavorably resolved from the point of view of the
State, substantially affect State programs or finances. These lawsuits involve
programs generally in the areas of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and governmental units and court funding. The ultimate disposition of these
proceedings is not determinable.
Property Tax. At the present time, the State does not levy any ad valorem
taxes on real or tangible personal property. In addition, the State
Constitution limits the extent to which municipalities or political
subdivisions may levy taxes upon real and personal property through a process
that regulates assessments.
On August 19, 1993, the Governor signed into law Act 145, Public Acts of
Michigan, 1993 ("Act 145"), a measure which would have significantly impacted
financing of primary and secondary school operations and which has resulted in
additional property tax and school finance reform legislation. Act 145 would
have exempted all property in the State of Michigan from millage levied for
local and intermediate school districts operating purposes, other than millage
levied for community colleges, effective July 1, 1994. In order to replace
local property tax revenues lost as a result of Act 145, the Michigan
Legislature, in December 1993, enacted several statutes which address property
tax and school finance reform.
The property tax and school finance reform measures included a ballot proposal
which was approved by the voters on March 15, 1994. Effective May 1, 1994, the
State sales and use tax will be increased from 4% to 6%, the State income tax
will be decreased from 4.6% to 4.4%, the cigarette tax will be increased from
$.25 to $.75 per pack and an additional tax of 16% of the wholesale price will
be imposed on certain other tobacco products. A 2% real estate transfer tax
will be effective January 1, 1995, which will decrease to 0.75% in April 1995.
Beginning in 1994, a state-wide property tax of 6 mills will be imposed on all
real and personal property currently subject to the general property tax. The
ability of school districts to levy property taxes for school operating
purposes will be partially restored. A school board will, with voter approval,
be able to levy up to the lesser of 18 mills or the number of mills levied in
1993 for school operating purposes, on non-homestead property. The adopted
ballot proposal contained additional provisions regarding the ability of local
school districts to levy taxes as well as a limit on assessment increases for
each parcel of property, beginning in 1995 to the lesser of 5% or the rate of
inflation. When property is subsequently sold, its assessed value will revert
to the current assessment level of 50% of true cash value. Under the adopted
ballot proposal, much of the additional revenue generated by the new taxes will
be dedicated to the State School Aid Fund.
The adopted ballot proposal contained a system of financing local school
operating costs relying upon a foundation allowance amount which may vary by
district based upon historical spending levels. State funding would provide
each school district an amount equal to the difference their foundation
allowance and the revenues generated by their local property tax levy. Local
school districts would also be entitled to levy supplemental property taxes to
generate additional revenue if their foundation allowance is less than their
historical per pupil expenditures. The proposal also contained provisions
which allow for the levy of a limited number of enhancement mills on regional
and local school district bases.
The adopted ballot proposal will shift significant portions of the cost of
local school operations from local school districts to the State and raise
additional State revenues to fund theses additional State expenses. These
additional revenues will be included within the State's constitutional revenue
limitations and may impact the State's ability to raise additional revenues in
the future.
Minnesota Trusts _ Economic Factors
The portfolio of each Minnesota Trust consists primarily of obligations issued
by entities located in Minnesota.
In the early 1980s, the State of Minnesota experienced financial difficulties
due to a downturn in the State's economy resulting from the national recession.
As a consequence, the State's revenues were significantly lower than
anticipated in the July 1, 1979 to June 30, 1981 biennium and the July 1, 1981
to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and increased the
State sales tax, increased income taxes (by increasing rates and eliminating
deductions), reduced appropriations and deferred payments of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local governments, school districts and State agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases, revenues of
local governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's reduced its rating on
the State's outstanding general obligation bonds from AAA to AA+ in August 1981
and to AA in March 1982. Moody's lowered its rating on the State's outstanding
general obligation bonds from Aaa to Aa in April 1982.
The State's economy recovered in the July 1, 1983 to June 30, 1985 biennium,
and substantial reductions in the individual income tax were enacted in 1984
and 1985. Standard & Poor's raised its rating on the State's outstanding
general obligation bonds to AA+ in January 1985. Legislation has been 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 analysis released by the
Minnesota Department of Finance on May 27, 1994 projects a General Fund balance
of $130 million at the end of the current biennium, June 30, 1995, plus a
budget reserve of $500 million. Total projected expenditures and transfers for
the biennium are $16.9 billion. Recently, the Minnesota Supreme Court has
determined that numerous banks are entitled to refunds of Minnesota bank excise
taxes paid for tax years 1979 through 1983. The taxes and interest to be
refunded are estimated to be in excess of $188 million. The State will be
permitted to pay the refunds over a four-year period. The State also is party
to a variety of other civil actions that could adversely affect the State's
General Fund.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in the State. Even with respect
to Bonds that are revenue obligations of the issuer and not general obligations
of the State, there can be no assurance that fiscal problems of the State will
not adversely affect the market value or marketability of the Bonds or the
ability of the respective obligors to pay interest on and principal of the
Bonds.
Missouri Trusts _ Economic Factors
The portfolio of each Missouri Trust consists primarily of obligations issued
by entities located in Missouri (the "State"). Bonds in a Missouri Trust may
include obligations issued by or obligations not issued by the State of
Missouri.
Each Missouri Trust is therefore susceptible to political, economic or
regulatory factors affecting issuers of Bonds. The following information
provides only a brief summary of some of the complex factors affecting the
financial situation in the State and is derived from sources that are generally
available to investors and is believed to be accurate, including information
obtained from various State agencies in Missouri. No independent verification
has been made of the accuracy or completeness of any of that information.
There can be no assurance that current or future statewide or regional economic
difficulties, and the resulting impact on issuers of Bonds and the obligors
thereon, will not adversely affect the market value of Missouri Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations. Because all or most of the Bonds in the Trust are revenue or
general obligations of local governments, rather than general obligations of
the State itself, ratings on the Bonds may be different from those given to
general obligations of the State. Prospective investors should study with care
the portfolios of Bonds in the Trust and should consult with their own
investment advisors as to the merits of particular issues in the portfolio.
Economic Condition and Outlook for the State of Missouri. As noted in the
Comprehensive Annual Financial Report for the fiscal year ended June 30, 1993
which was prepared and issued by the State Office of Administration, Division
of Accounting and audited by the State Auditor's Office, the State improved its
financial condition in fiscal year 1993. Withholdings and spending controls
limited expenditures to a small increase and revenue collections were on target
with projections. As a result, revenues exceeded expenditures for the General
Revenue Fund and all funds in total. Balancing Missouri's budget in fiscal
year 1993 was achieved through spending controls.
As a major manufacturing, financial, and agricultural state, Missouri's
economic health is tied closely to that of the nation. The economic outlook is
for modest improvement in fiscal year 1994. Missouri's per capita personal
income, which directly impacts individual income tax and sales tax, rose at a
4.6% rate during calendar year 1992. General revenue collections in fiscal
year 1993 were $4,350.4 million, 3.3% above fiscal year 1992 collections. The
Office of Administration projects fiscal year 1994 general revenue collections
at $4.556.2 million, an increase of 4.7%. The fiscal year 1994 budget is based
upon an extensive examination of current economic trends and long-term
forecasts of the National and State economy and their impact on State revenues.
Federal court-ordered payments for the St. Louis and Kansas City desegregation
plans were $275.8 million in fiscal year 1993 which is about 6% of the State's
general revenue budget.
A large portion of the State has experienced severe flood conditions during
1993. The flood conditions have receded, and the evaluation of the extent of
damage to the State and municipal infrastructure, including bridges, roads,
railways, water treatment plans, sewage treatment plants, drainage systems,
levees, as well as damage to private property and commerce, including homes,
farms, commercial buildings, business operations was begun in 1993; the full
extent of damage is not yet determinable but is expected to be extensive. The
cost of flood damage has been partially offset by federal disaster aid, and
initial federal aid payments have begun, but the full nature and extent of
further federal disaster aid is not yet known. It is not yet possible to
predict whether such flood conditions will have a materially adverse effect on
the Bonds held in the Trust, or the obligors thereon.
Economic statistics included in the Comprehensive Annual Fiscal Report for the
State of Missouri for fiscal year 1993, as published by the Missouri Department
of Economic Development, indicate a slowing in certain key economic growth
indicators, such as new investment, new jobs, and new manufacturers, from
levels attained in the mid and late 1980s. The State's unemployment rates have
followed a course similar to the unemployment rate for the nation, except in
1992 when the State's unemployment rate decreased when compared to 1991 while
the national unemployment rate increased for the same period. However, over
the last ten years there have been at least four years during which the State's
unemployment rate exceeded that of the national average.
Since 1989 industrial growth in the State has taken a downturn. From 1987 to
1989, the number of new manufacturers in the State grew from 93 to 118 and the
number of expansions in existing manufacturers also grew from 130 in 1987 to
223 in 1989. The number of new manufacturers and the number of expansions in
existing manufacturers peaked in 1989, reaching the highest it had been since
at least 1983, as reported in the 1993 Missouri Comprehensive Annual Financial
Report. However, from 1989 to 1992, the number of new manufacturers in the
State declined from 118 in 1989 to 73 in 1992, and the number of expansions in
existing manufacturers also decreased, from 223 in 1989 to 110 in 1992.
Correspondingly, investment in industrial growth in the State has declined in
the past few years from $966.02 million in 1988 to $293.62 million in 1991,
which figure represents the lowest investment totals for the State in the prior
nine years. However, industrial investment increased $1,085.68 million in
1992.
The State's largest private employers represent a wide spectrum of industries.
These industries engage in manufacturing, defense-related contracts, retail and
wholesale, health-related services, education and communications, among others.
Based on data from the Missouri Department of Economic Development for 1993,
the fifteen largest private employers in the State in descending number of
employees are: McDonnell Douglas Corporation, Wal-Mart Stores, Inc., Trans
World Airlines, Inc., Southwestern Bell Telephone Company, Washington
University, American Telephone & Telegraph Company, Schnuck Markets, Inc., SSM
Health Care, Hallmark Cards, Incorporated, the Ford Motor Company, Sears
Roebuck, Inc., Barnes Hospital, St. Louis University, Union Electric Company
and May Department Stores. At the end of fiscal year 1992, these employers'
labor forces ranged in size from 20,000 to 30,000 employees for McDonnell
Douglas Corporation to 5,000 to 6,000 employees for the May Department Stores.
Since the compilation of the foregoing data on these private employers, some of
the foregoing listed employers have announced and are implementing reductions
in their labor forces.
Defense-related business plays an important role in Missouri's economy.
Historically a large number of civilians have been employed at various military
installations and training bases in the State. Aircraft and other related
defense contractors in the State of Missouri have historically been the
recipients of sizable defense contract awards. Both defense-related businesses
and the airline industry, both as manufacturers and as providers of
transportation services, are under pressure in the State of Missouri, as
Congress makes significant reductions in defense spending, and the airline
industry continues to feel the impact of deregulation. Further reductions in
the labor force in these industries may have a materially adverse effect on the
economy of the State.
Based on data obtained from the U.S. Department of Commerce-Bureau of the
Census and the Bureau of Economic Analysis for the past 30 years, the State has
faced declining increases in population. Percentage increase in population has
systematically declined since 1970 measured at 10-year intervals. For the last
30 years, the percentage of population living in urban and rural areas has
stabilized at approximately 70 percent of the population living in urban areas,
stemming the prior growth in urban populations.
Major Initiatives. The "Outstanding Schools Act" legislation was passed in
fiscal year 1993, which will provide significant changes in the State's
education system in future years. The Act revised the public school foundation
formula, established a school reform program and provided numerous enhancements
to existing programs.
The Act also provides new procedures for funding of public education. The
revenue sources for the plan include a cap of the State deduction for federal
taxes paid by individuals at $5,000 on single returns and $10,000 on joint
returns. Previously, there was no limit on the amount of federal taxes that
could be deducted. A further revenue source for the new plan is limiting the
State deduction for federal taxes paid by corporations at 50% and an increase
in the corporate income tax from 5% to 6.25%. According to projections
developed by the State Office of Administration, Division of Budget and
Planning, the amount and sources of funding for fiscal year 1994 are $76.4
million from the limitation of the federal income tax deductions for
individuals, and $29.3 million from the combined effect of increased State
corporate income tax rate and the 50% cap of the State deduction for federal
corporate income taxes. The projections are based upon assumptions of a growth
factor of 6% in 1994. The State has used growth factors of 5% in fiscal years
1995 and thereafter to project the impact of the plan through fiscal year 1997
at $215.2 million from individuals and $95.2 million from corporations.
Finally, as a minimum, each school district must have a property tax levy at
$2.75, up from the $2.00 property tax levy in use before the effective date of
the plan. The maximum State equalized tax levy was set at $4.60. The
additional taxes imposed by the Outstanding Schools Act will be subject to a
Statewide referendum if the State supreme court rules that the State has not
violated the State Constitution in the manner and amounts of funding for public
education.
Capital Expenditures. In fiscal year 1993, Missouri invested a total of $99.8
million in its capital assets with appropriations for maintenance and
construction projects throughout the State. Included in this total were
capital appropriations of: $8.8 million for projects at colleges and
universities; $25.0 million for projects at natural wildlife areas, State
forests and stream access areas; $20.7 million for projects at mental health
facilities, including a new acute care facility; $12.1 million for projects at
State parks; $6.1 million for projects at public safety facilities, including
armories and veterans' homes; and $6.9 million for projects at job service
offices, including new office buildings in St. Louis County and City.
Budgetary Control. The State maintains budgetary controls to ensure compliance
with legal provisions embodied in the annual appropriated budget passed by the
State legislature and approved by the Governor prior to the beginning of the
fiscal year. If appropriations are not sufficient for a fiscal year,
supplemental amounts are requested during the next legislative session by the
same process that original appropriations are requested. Budgetary control is
maintained by the individual departments. Expenditures cannot exceed the
appropriation amounts at the department appropriation level. Also, the
Governor has the authority to reduce the allotments or appropriations in any
fund if it appears that revenues for the fiscal year will fall below the
estimated revenues. Encumbrance accounting under which purchase orders,
contracts and other commitments for the expenditure of moneys are recorded in
order to reserve part of the appropriation, is employed for purposes of
budgetary control and contract compliance. Unexpended appropriations lapse at
the end of each appropriation year.
General Government Functions. Revenues for general government functions
(General, Special Revenue, Debt Service and Capital Projects funds) totaled
$8.9 billion in fiscal year 1993, an increase of 4.4% from fiscal year 1992.
Taxes produced 58.8% of general revenues, an increase of 10.3% from fiscal year
1992. Contributions and Intergovernmental charges produced 33.9% of general
revenues, a decrease of 4.6% from fiscal year 1992. Expenditures for general
government functions (General, Special Revenue, Debt Service and Capital
Projects Funds) totaled $8.3 billion in fiscal year 1993, an increase of 4.2%
from fiscal year 1992. The majority of the expenditure increase is attributed
to increases in Education and Human Services. Education received $2.6 million,
an increase of 5.3% from fiscal year 1992. Human Services received $3.6
million, an increase of 4.9% from fiscal year 1992. Transportation and Law
Enforcement received $971,234, an increase of 1.4% from fiscal year 1992.
Fund Balance. The State ended fiscal year 1993 with an unreserved fund balance
(surplus) of $643 million for the governmental funds. The unreserved fund
balance of the General Fund improved due to increases in revenues and
withholdings of appropriations to control expenditures. Following is a table
representing a comparison of the 1993 and 1992 fiscal year unreserved fund
balances (in thousands of dollars) for the funds comprising these figures.
<TABLE>
<S> FUND-<C>
1993-<C>
1992-<C>
INCREASE
(DECREASE)
---
General-$98,830-$ 81,139-$ 17,691
Special Revenue-450,230- 323,488- 126,742
Capital Projects-94,646- 72,911- 21,735
---
Total Fund Balance-$643,706-$477,538-$166,168
</TABLE>.
Pension Funds. The State has two retirement systems, the Missouri State
Employees' Retirement System (MOSERS) and the Highway Employees' and Highway
Patrol Retirement System (HEHPRS). Retirement benefits for members of the
judiciary are included below within MOSERS. Some key actuarial amounts for the
systems (in thousands of dollars) at June 30, 1993 were:
<TABLE>
<S>-<C>
MOSERS -<C>
HEHPRS
Pension benefit obligation-$2,216,569 -$930,093
Net assets available, at cost-2,238,801 - 659,662
--
Unfunded (assets in excess of)
pension benefit obligation-$ (22,232) -$270,431
</TABLE>.
The unfunded pension benefit obligation of MOSERS decreased during fiscal year
1993.
Tax Limitation. Article X of Missouri's Constitution imposes various
restrictions on taxation and spending by the State and by local governments.
Section 16 of Article X generally requires that property and other local taxes
and state taxation and spending may not be increased above the limitations set
forth in Missouri's Constitution without direct voter approval. Section 22 of
Article X limits the amount of taxes, licenses or other fees that may be levied
absent approval of a majority of the qualified voters. Section 18 of Article X
imposes a limit (the "Limit") on the amount of taxes which may be imposed by
the State in any fiscal year. The Limit is tied to total State revenues for
the fiscal year 1980-81, as defined, adjusted annually in accordance with a
formula which is tied to increases in the average personal income of Missouri
for certain designated periods. If the Limit is exceeded in any fiscal year, a
refund of the excess revenues (through a pro rata credit on the state income
tax return) may be required. The Limit can be exceeded by a constitutional
amendment, duly adopted by the people, or if the State's General Assembly
approves by a two-thirds vote of each house an emergency declaration by the
Governor. The Office of Administration has determined that the revenue limit
was not exceeded in fiscal year 1993.
In November of 1994, the Missouri voters are to vote on a constitutional
amendment that would redefine the definition of State revenues for purposes of
computing the Limit to include certain revenues that are currently not included
in the valvulation. If this amendment is approved, projections for fiscal
years 1995 and 1996 prepared by James R. Moody of James R. Moody and
Associates, Jefferson City, Missouri, who was the Missouri State budget
director from 1987 to 1989, indicate that refunds will have to be made in such
fiscal years of $516.7 million and $507.2 million, respectively, and State
revenues available to fund programs will correspondingly be reduced. (Mr.
Moody has characterized such estimates as conservative. No assurance can be
given, however, that these estimates accurately predict the impact of this
amendment on the State's revenues in fiscal years 1995 and 1996. Mr. Moody did
not make any projections for the years follow 1996.) In addition to the
reduction in State revenues, the amendment could generate litigation to which
the State may be a party.
No prediction can be made as to whether or not this amendment will be approved
or, if approved, will be enforceable. However, if approved, the amendment
could have a material adverse affect on the State's revenues in the future.
Debt Administration. Article III, Section 37 of the Constitution of the State
of Missouri restricts the power of the State to create debt without voter
approval except to refund outstanding bonds and to incur limited temporary
liabilities and by reason of unforeseen emergencies or deficiencies in revenue.
Article VI, Section 26(a) - 26(g) of Missouri's Constitution imposes
limitations on the ability of local governments to incur certain indebtedness
without voter approval.
The amount of general obligation debt that can be issued by the State is
limited to the amount approved by citizen vote plus the amount of $1 million.
The State's debt limit at June 30, 1993 was $1.226 billion of which $281.5
million was unissued. During fiscal year 1993, $25.9 million of the bonds were
retired, $297.8 million of the bonds were refunded and $358.6 million of new
bonds were issued. At year end, the total general obligation debt outstanding
was $839.2 million and the interest rate range was from .05 to 9.25 percent.
The State's general obligation bond issues received triple "A" ratings from
Moody's Investors Services, Inc., Standard & Poor's Ratings Group and Fitch
Investors Services, Inc.
The State's revenue bond coverage (i.e., the ratio of net revenue available for
debt service to the debt service requirements, has increased from .5 in 1987
(the low in the last ten years) to 1.33 in 1993. No assurance can be given,
however, that the economic and other factors on which these ratings are based
will continue or that particular bond issues may not be adversely affected by
changes in economic, political or other conditions. Because some or all of the
bonds that may be included in the Trust are revenue or general obligations of
local governments or authorities, rather than general obligations of the State
itself, ratings on such bonds may be different from those given to general
obligations of the State.
Cash Management. During the year, cash from the various State funds are
invested by the State Treasurer. Most of these funds' cash balances are pooled
for investment purposes. The State also invests its "float" which increases
the earning power. Cash was invested in time deposits with maturities ranging
from 30 to 365 days, in U.S. Treasury and federal agency securities with
maturities ranging from 1 to 1,096 days and in repurchase agreements with
maturities ranging from 1 to 90 days. At June 30, 1993, these investments
consisted of Time Deposits ($453.6 million), Treasurer and Agency Securities
($234.3 million), and Repurchase Agreements ($832.4 million). The average
yield on maturing investments during the year was 3.19% and the amount of
interest received was $40.9 million.
The State attempts to minimize credit and market risks while maintaining a
competitive yield on its investments. Approximately 90% of investments held by
the State at June 30, 1993 are classified in the lowest risk category as
defined by the Governmental Accounting Standards Board. All deposits invested
by the State Treasurer are either insured by federal depository insurance of
collateralized. A portion of deposits of the Economic Development, Export and
Infrastructure Board are uninsured and uncollateralized. However, this
represents less than 1% of the State's total deposits.
Public School Desegregation Plans. Litigation has been pending in Missouri
federal courts since the 1970s alleging that St. Louis and Kansas City,
Missouri, schools are racially segregated in violation of the United States
Constitution. A desegregation plan for St. Louis was approved in 1980 and
remained in effect. With regard to Kansas City, a desegregation plan was
implemented in 1985, and in April 1993, the United States District Court for
the Western District of Missouri ordered a two-year extension of the
desegregation plan. Under the plans, the State of Missouri has incurred and
continues to incur substantial costs.
The Kansas City, Missouri School District ("KCMSD") has already budgeted $517
million for capital improvements to effect the desegregation plan; however,
these costs are expected to escalate, and the scope of the total capital
improvements program is unknown. The State of Missouri is jointly and
severally liable for the KCMSD's share of the desegregation costs. The KCMSD
has accumulated debt of $87 million, and an additional approximately $130
million is expected to be incurred in fiscal years 1993 and 1994. KCMSD
operates at a substantial deficit, which is projected to accumulate to as much
as $300 million by the end of the decade. Accordingly, no predictions can be
made about the future financial viability of the KCMSD or the effect of the
possible insolvency of KCMSD on the State of Missouri.
No assurance can be given that the ultimate costs of the current plans, new
legislation or additional measures that are expected to be implemented or
ordered, which cannot currently be quantified, will not adversely affect the
finances of the State of Missouri, the State's ability to pay the debt service
on any of its Obligations that may be held in the portfolio of the Trust, or
the market for Bonds held in the portfolio of the Trust or the Units of the
Trust.
Risk Management, Litigation and Other Contingent Liabilities. The State
assumes substantially all risks associated with claims of State employees for
unemployment compensation benefits; claims of covered employees for workers'
compensation and Second Injury Fund benefits; claims of covered employees for
medical insurance; liability claims against the State or its agencies for the
dangerous conditions of property and operation of motor vehicle and watercraft;
and liability claims actionable under the law that parties may file against the
State, its officials, employees, or appointees.
The State maintains the Legal Expense Fund which purchases insurance coverage
for aircraft liability and hull; and faithful Performance Employee Bond.
The State is a party to numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of state and federal laws. Adverse
judgments in these or other matters could have the potential for either a
significant loss of revenue or a significant unanticipated expenditure by the
State. In addition to the school desegregation cases discussed above, the
State is also subject to pending litigation naming the State as a defendant on
child welfare payments. The plaintiffs in the welfare case allege that the
State did not follow federal regulations in assessing non-custodial parents for
child welfare payments. A United States District Court Judge ruled that the
State was liable for assessment in excess of the amounts allowed by federal
regulations. The judgment was appealed to the 8th United States Circuit Court
which upheld the lower court's decision. The case has been remanded by the 8th
United States Circuit Court for further proceedings in the District Court. The
Office of Administration made a note specifically for this case in the State's
June 30, 1993 Financial Statement, and declined to determine the potential
impact on such financial statement. In addition to the State's risk management
program, the State has indicated certain other contingent liabilities in the
notes to its June 30, 1993 Financial Statement. The State has concluded that a
portion of those liabilities, if they become due, would be immaterial. The
other contingent liabilities noted total approximately $10 million.
Other Issuers of Bonds. There are a number of state agencies,
instrumentalities and political subdivisions of the State that issue Municipal
Obligations, some of which may be conduit revenue obligations payable from
payments from private borrowers. These entities are subject to various
economic risk and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.
New Jersey Trusts - Economic Factors
The portfolio of each New Jersey Trust consists primarily of obligations issued
by entities located in New Jersey.
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,050 people per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
Historically, New Jersey's average per capita income has been well above the
national average, and in 1992 the State ranked second among the 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 7.1%
in June 1994, which is higher than the national average of 6.0% in June 1994.
Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact that some
sectors may lag due to continued excess capacity. In addition, employers even
in rebounding sectors can be expected to remain cautious about hiring until
they become convinced that improved business will be sustained. Also, certain
firms will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain other
fees are pledged to meet the principal and interest payments and if provided,
redemption premium payments, if any, required to repay the bonds. As of June
30, 1993, there was a total authorized bond indebtedness of approximately $8.98
billion, of which $3.6 billion was issued and outstanding, $4.0 billion was
retired (including bonds for which provision for payment has been made through
the sale and issuance of refunding bonds) and $1.38 billion was unissued. The
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 $11.4 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 2%
to 7%, with the higher rates applying to married couples with incomes exceeding
$70,000 who file joint returns, and to individuals filing single returns with
incomes of more than $35,000.
The Florio administration has contended that the income tax package will help
reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation, the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion is proposed
to be sent by the State to school districts beginning in 1991, thus reducing
the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from 7% to
6%. Effective January 1, 1994, an across-the-board 5% reduction in the income
tax rates was enacted and effective January 1, 1995, further reductions range
from 1% up to 10% in income tax rates will take effect.
On June 30, 1994 Governor Whitman signed the New Jersey Legislature's $15.7
billion budget for Fiscal Year 1995. The balanced budget, which includes $455
million in surplus, is $141 million less than the 1994 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect 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 case 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 each 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.
Debt Ratings. For many years prior to 1991, both Moody's and Standard and
Poor's had rated New Jersey general obligation bonds Aaa and AAA, respectively.
On July 3, 1991, however, Standard and Poor's downgraded New Jersey general
obligation bonds to AA+. On June 4, 1992, Standard and Poor's placed New
Jersey general obligation bonds on Credit Watch with negative implications,
citing as its principal reason for its caution the unexpected denial by the
Federal Government of New Jersey's request for $450 million in retroactive
Medicaid payments for psychiatric hospitals. These funds were critical to
closing a $1 billion gap in the State's $15 billion budget for fiscal year 1992
which ended on June 30 1992. Under New Jersey state law, the gap in the
current budget must be closed before the new budget year begins on July 1,
1992. Standard and Poor's suggested the State could close fiscal 1992's budget
gap and help fill fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability. On July 6, 1992, Standard and Poor's
reaffirmed its AA+ rating for New Jersey general obligation bonds and removed
the debt from its Credit Watch list, although it stated that New Jersey's
long-term financial outlook is negative. Standard and Poor's was concerned
that the State was entering the 1993 fiscal year that began July 1, 1992, with
a slim $26 million surplus and remained concerned about whether the sagging
State economy would recover quickly enough to meet lawmakers' revenue
projections. It also remained concerned about the recent federal ruling
leaving in doubt how much the State was due in retroactive Medicaid
reimbursements and a ruling by a federal judge, now on appeal, of the State's
method for paying for uninsured hospital patients. However, on July 27, 1994,
Standard and Poor's announced that it was changing the State's outlook from
negative to stable due to a brightening of the State's prospects as a result of
Governor Whitman's effort to trim spending and cut taxes, coupled with an
improving economy. Standard and Poor's reaffirmed its AA+ rating at the same
time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to Aa1, stating that the reduction reflected a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures would
persist.
Although New Jersey recently received $412 million in settlement of its $450
million dispute with the federal government for retroactive Medicaid
reimbursements, neither Moody's Investors Service, Inc. nor Standard and Poor's
Corporation has revised its rating for New Jersey general obligation bonds.
New York Trusts - Economic Factors
The portfolio of each New York Trust includes primarily obligations issued by
New York State (the "State"), by it various public bodies (the "Agencies"),
and/or by other entities located within the State, including the City of New
York (the "City").
(1) The State: The State has historically been one of the wealthiest states in
the nation. For decades, however, the State economy has grown more slowly than
that of the nation as a whole, gradually eroding the State's relative economic
affluence. Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older northeast cities have
suffered because of the relative success that the South and the West have had
in attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
Slowdown of Regional Economy. A national recession commenced in mid-1990. The
downturn continued throughout the State's 1990-91 fiscal year and was followed
by a period of weak economic growth during the 1991 calendar year. For
calendar year 1992, the national economy continued to recover, although at a
rate below all post-war recoveries. For calendar year 1993, the economy grew
faster than in 1992, but still at a very moderate rate, as compared to other
recoveries. Moderate economic growth is expected to continue in calendar year
1994 at a slightly faster rate than in 1993. Economic recovery started
considerably later in the State than in the nation as a whole due in part to
the significant retrenchment in the banking and financial services industries,
downsizing by several major corporations, cutbacks in defense spending, and an
oversupply of office buildings. Many uncertainties exist in forecasts of both
the national and State economies and there can be no assurance that the State
economy will perform at a level sufficient to meet the State's projections of
receipts and disbursements.
1994-95 Fiscal Year. The Governor presented the recommended Executive Budget
for the 1994-95 fiscal year on January 18, 1994 and amended it on February 17,
1994. The Recommended 1994-95 State Financial Plan projects a balanced General
Fund, receipts and transfers from other funds at $33.422 billion (including a
projected $339 million surplus anticipated for the State's 1993-94 fiscal year)
and disbursements and transfers to other funds at $33.399 billion.
The recommended 1994-95 Executive Budget includes tax and fee reductions ($210
million), retention of revenues currently received, primarily by deferral of a
scheduled personal income tax rate reduction ($1.244 billion), and additional
increases to miscellaneous revenue sources ($237 million). No major additional
programs are recommended other than a $198 million increase in school aid, $185
million in Medicaid cost-containment initiatives and $110 million in local
government Medicaid costs to be assumed by the State.
There can be no assurance that the State Legislature will enact the Executive
Budget as proposed, nor can there be any assurance that the Legislature will
enact a budget for the State's 1994-95 fiscal year prior to its commencement.
A delay in its enactment may negatively affect certain proposed actions and
reduce projected savings.
1993-94 Fiscal Year. The 1993-94 State Financial Plan issued on April 16, 1993
projected 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
reflected increases in both receipts and disbursements in the General Fund of
$811 million.
The 1993-94 State Financial Plan was last revised on January 18, 1994. The
State projects a surplus of $299 million, as the result of developments which
positively impacted upon receipts and disbursements. In the revised Plan, the
State announced its intention to pay a 53rd weekly Medicaid payment, estimated
at $120 million, and to add $82 million to a reserve fund for contingencies.
On January 21, 1994, the State entered into a settlement with Delaware with
respect to State of Delaware v. State of New York, which is discussed below at
State Litigation. The State made an immediate $35 million payment and agreed
to make a $33 million annual payment in each of the next five fiscal years.
The State has not settled with other parties to the litigation and will
continue to incur litigation expenses as to those claims.
On November 16, 1993, the Court of Appeals, the State's highest court, affirmed
the decision of a lower court in three actions, which declared unconstitutional
State actuarial funding methods for determining State and local contributions
to the State employee retirement system. Following the decision, the State
Comptroller developed a plan to phase in a constitutional funding method and to
restore prior funding levels of the retirement systems over a four year period.
The plan is not expected to require the State to make additional contributions
with respect to the 1993-94 fiscal year nor to materially and adversely affect
the State's financial condition thereafter. Through fiscal year 1998-99, the
State expects to contribute $643 million more to the retirement plans than
would have been required under the prior funding method.
Future Fiscal Years. 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.
Indebtedness. As of December 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.3 billion. As of
the same date, the State had approximately $5.0 billion in general obligation
bonds and $2.9 million of Bond Anticipation Notes ("BANS"). The State issued
$850 million in tax and revenue anticipation notes ("TRANS") on May 4, 1993,
all of which matured on December 31, 1993. The State does not project the need
to issue TRANS during the State's 1994 fiscal year.
The State projects that its borrowing for capital purposes during the State's
1994-95 fiscal year will consist of $413 million in general obligation bonds
and BANS. The projection of the State regarding its borrowings for the 1994-95
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. As of
February 28, 1994, LGAC has issued bonds to provide net proceeds of $3.7
billion. The Governor has recommended the issuance of additional bonds to
provide net proceeds of $315 million during the State's 1994-95 fiscal year.
The Legislature passed a proposed constitutional amendment which would permit
the State, subject to certain restrictions, to issue revenue bonds without
voter referendum. Among the restrictions proposed is that such bonds would not
be backed by the full faith and credit of the State. The Governor intends to
submit changes to the proposed amendment, which before becoming effective must
be passed again by the next separately-elected Legislature and approved by
voter referendum at a general election. The earliest such an amendment could
take effect would be in November 1995.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1 Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the first
time the State's TRANS have received these ratings since its May 1989 TRANS
issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April 23,
1993, and S&P's rating stood at A- with a stable outlook on April 23, 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- 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 maintained its A rating and S&P continued its A- rating in connection
with the State's issuance of $224.1 million of its general obligation bonds in
March 1994.
(2) The City and the Municipal Assistance Corporation ("MAC"): The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board") to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related 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 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 1994-97 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.
On August 10, 1993, the City adopted and submitted to the Control Board its
Financial Plan for fiscal years 1994-1997, which was subsequently modified on
November 23, 1993. As modified in November 1993, the Plan projects a balanced
budget for fiscal year 1994 based upon revenues of $31.585 billion, and
projects budget gaps of $1.7 billion, $2.5 billion and $2.7 billion in fiscal
years 1995 through 1997, respectively.
During December 1993, a three-member panel appointed by the Mayor, the Office
of the State Deputy Comptroller and the Control Board issued reports that were
critical of the City's 1994-96 Financial Plan. While each report noted
improvement in the outlook for fiscal year 1994, the reports indicated that the
budget gap for fiscal year 1995 could be as much as $450 million higher than
projected and that the budget gap might continue to increase in later years to
as much as $1.5 billion above current projections by fiscal year 1997.
Recommendations included addressing the City's tax and cost structure to
maximize revenues on a recurring basis and minimize expenditures, a review of
capital spending plans, service cuts, productivity gains and economic
development measures.
On February 2, 1994, the Mayor proposed further modifications to the 1994-1997
Financial Plan. The Mayor's proposed Plan projects a balanced budget for
fiscal year 1994, assuming revenues of $31.735 billion, and includes a reserve
of $198 million. The proposed modification projects budget gaps for fiscal
years 1995, 1996 and 1997 of $2.3 billion, $3.2 billion and $3.3 billion,
respectively. The Mayor identified $2.2 billion in gap closing measures for
fiscal year 1995. Implementation of these measures will require the
cooperation of municipal labor unions, the City Council and the State and
Federal governments. The Mayor's proposal includes a tax reduction program
which will have a financial impact on later years.
Given the foregoing factors, there can be no assurance that the City will
continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base.
Pursuant to State Law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the occurrence of
an annual operating deficit of more than $100 million or the loss of access to
the public credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. If the State experiences revenue
shortfalls or spending increases beyond its projections during its 1993 fiscal
year or subsequent years, such developments could result in reductions in
projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow and
additional City expenditures as a result of such delays.
The City's projections set forth in its financial plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
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 personal reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
Attaining a balanced budget is also dependent upon the City's ability to market
its securities successfully in the public credit markets. The City's financing
program for fiscal years 1994 through 1997 contemplates capital spending of
$16.2 billion which will be financed through issuance of $10.5 billion of
general obligation bonds, $4.3 billion of Water Authority Revenue Bonds and the
balance by Covered Organization obligations, and will be utilized 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.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating results
as reported in accordance with GAAP for the 1992 fiscal year. During the 1990
and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines in City revenue sources and increased public assistance
needs due to the recession. Such actions included $822 million of tax
increases and substantial expenditure reductions.
The 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, of 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 the 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.
Ratings. As of the date hereof, Moody's rating of the City's general
obligation bonds stood at Baa1 and S&P's rating stood at A-. On February 11,
1991, Moody's lowered its rating from A.
On December 6, 1993, in confirming the Baa1 rating, Moody's noted that:
The fiscal 1994 budget is nominally balanced, in part through reliance on
one-shot revenues, but contains a number of risks... . [T]he financial
plan...shows increased gaps in succeeding years.
The financial plan for fiscal 1995 and beyond shows an ongoing imbalance
between the City's expenditures and revenues... . A key risk is that the
replacement of one-shot revenues is likely to become increasingly difficult
over time. Moody's continues to expect that the City's progress toward
achieving long-term balance will be slow and uneven, but that the City will be
diligent and prudent in closing gaps as they arise.
As discussed above under Fiscal Year 1993 and 1994-1997 Financial Plan, on July
2, 1993 after a review of the City's budget for fiscal year 1994, its proposed
budget for fiscal year 1995 and certain additional cuts in both proposed by the
Mayor and the City Comptroller, S&P confirmed its A- rating with a negative
outlook of the City's general obligation bonds but indicated a continuing
concern about budgets for fiscal year 1995 and thereafter. S&P's rating of the
City's general obligation bonds remains unchanged.
On October 12, 1993, Moody's increased its rating of the City's issuance of
$650 million of Tax Anticipation Notes ("TANs") to MIG-1 from MIG-2. Prior to
that date, 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. S&P's rating of the October 1993 TANS issue
increased to SP-1 from SP-2. Prior to that date, on April 29, 1991, S&P
revised downward its rating on City revenue anticipation notes from SP-1 to
SP-2.
As of June 30, 1993, the City and MAC had, respectively, $19.6 billion and $4.5
billion of outstanding net long-term indebtedness.
(3) The State Agencies: 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, 1993, 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 $63.5 billion of outstanding debt, including
refunding bonds, of which $7.7 billion was moral obligation debt of the State
and $19.3 billion was financed under lease-purchase or contractual obligation
financing arrangements.
(4) State Litigation: 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 judgment in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs
in the future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993, referred to a Special Master for
determination of damages in an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. New York and Delaware have entered into a
settlement agreement which provides for a payment of $35 million in fiscal year
1993-94 and thereafter five $33 million annual payments. Claims of other
states and the District of Columbia have not been settled and the State expects
that additional payments, which may be significant, may be required with
respect thereto during fiscal year 1994 and thereafter.
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. By decision dated
October 21, 1993, the Appellate Division, Third Department, affirmed the order
of the Supreme Court, Albany County, granting the State's motion for summary
judgment, dismissing the complaint and vacating the temporary restraining
order. In December 1993, the New York Court of Appeals indicated that it would
hear the plaintiff's appeal of the Appellate Division's decision in Schulz
1993. 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.
Adverse development in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
(5) Other Municipalities: Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance. The potential impact in the State of such actions by localities is
not included in projections of State revenues and expenditures in the State's
1993-94 and 1994-95 fiscal years.
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 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 Trusts, 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.
(6) Other Issuers of New York Municipal Obligations. There are a number of
other agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
North Carolina Trusts - Economic Factors
The economic profile of North Carolina consists primarily of manufacturing,
agriculture, tourism and mining. The North Carolina Employment Security
Commission's preliminary figures indicate that non-agriculture payroll
employment accounted for approximately 3,250,500 jobs in September 1993, the
largest segment of which was the approximately 852,600 in manufacturing.
During the period 1985 to 1990, per capita income in North Carolina grew from
$11,669 to approximately $16,266, an increase of 39.4%.
Agriculture is a basic element in the economy of North Carolina. Gross
agricultural income in 1992 was $5.2 billion, which placed North Carolina tenth
in cash receipts in commodities. 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 North Carolina Department of Commerce, Division of Travel and Tourism has
reported that in 1992 approximately $7.6 billion was spent on tourism in the
State (up 12.3% from 1989), and that approximately $8.0 billion will have been
spent by the end of fiscal year 1993. The Department also estimated that as of
the third quarter of 1993 approximately 255,000 people were employed in tourism
related jobs.
The North Carolina Employment Security Commission estimated the North Carolina
unemployment rate in September 1993 to be 3.7% of the labor force (not
seasonally adjusted) and 4.2% (seasonally adjusted), as compared with an
unemployment rate nationwide of 6.4% (not seasonally adjusted) and 6.7%
(seasonally adjusted).
General obligations of the State are currently rated AAA and Aaa by Standard &
Poor's and Moody's, respectively. There can be no assurance that the economic
condition on which these ratings, or the ratings of the Bonds in a North
Carolina Trust, are based will continue or that particular bond issues may not
be adversely affected by changes in economic or political conditions, by
uncertainties peculiar to the issuers thereof or the revenue sources from which
they are to be paid. The factual information provided above was derived from
publications of various State departments or agencies and has not been
independently verified. Investors are encouraged to consult the Schedule of
Investments in Part Two for the appropriate North Carolina Trust and their own
investment advisors regarding the merits of particular Bonds in the portfolio
of such Trust.
Ohio Trust _ Economic Factors
Each Ohio Trust is susceptible to general or particular political, economic or
regulatory factors that may affect issuers of Ohio Obligations. The following
information constitutes only a brief summary of some of the many complex
factors that may affect the financial situation of issuers in Ohio, and is not
applicable to "conduit" obligations for which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available 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 Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations or in those of particular issuers as to which those factors apply.
However, the information below is intended only as a general summary, and is
not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
When the timely payment of principal of and interest on Ohio obligations has
been guaranteed by bond insurance purchased by the issuers, the Trust or other
parties, the timely payment of debt service on Ohio Obligations so insured may
not be subject to the factors referred to in this section of the Prospectus.
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 is an important segment of
the economy, with over half the State's area devoted to farming and
approximately 15% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher that the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the national figure of 5.5%. However,
for both 1991 and 1992 the State rates (6.4% and 7.2%) 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 portfolio of the Trusts or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
obligations.
The State operates on the basis of a fiscal biennium for its appropriations and
expenditures, and is precluded by law from ending its July 1 to June 30 fiscal
year ("FY") or fiscal biennium in a deficit position. Most State operations
are financed through the General Revenue Fund ("GRF"), for which personal
income and sales-use taxes are the major sources. Growth and depletion of GRF
ending fund balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
These procedures 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 FY's 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 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
1992.
Based on the updated FY financial results and economic forecast in the course
of FY 1992, both in light of the continuing uncertain nationwide economic
situation, there was projected, and timely addressed, a 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 spending in the last six months of FY 1992 by a
total of approximately $184 million. As authorized by the General Assembly,
the $100.4 million BSF balance, and additional amounts from certain other
funds, were transferred late in the FY to the GRF, and adjustments 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 addressed 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, representing a combination of tax revisions and additional
appropriations spending reductions, resulted in a balance of GRF resources and
expenditures in the 1992-93 biennium. OBM has reported an ending GRF cash
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. Based on June 30,
1994 balances, an additional $260 million has been deposited in the BSF.
No spending reductions were applied to appropriations needed for debt service
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 service 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 Constitutional provisions.
The State may incur debt limited in amount to $750,000 to cover casual deficits
or failures in revenues or to meet expenses not otherwise provided for. The
Constitution expressly precludes the State from assuming the debts of any local
government or corporation. An exception is made in both cases for any debt
incurred to repel invasion, suppress insurrection, or defend the State in war.
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt to the payment of which taxes or
excises were pledged. At June 20, 1994, $710.2 million (excluding certain
highway bonds payable primarily from highway use charges) of this debt was
outstanding or awaiting delivery. The only such State debt then still
authorized to be incurred were 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 time ($43.1 million outstanding); (b) of
$1.2 billion of obligations for local infrastructure improvements, no more than
$120 million may be issued in any calendar year ($645.2 million outstanding,
$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, $4.25 billion of which were outstanding at June 20, 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 constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (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 on voter authorized
income taxes, for significant portions of their budgets. Litigation, similar
to that in other states, is pending questioning the constitutionality of Ohio's
system of school funding. The trial court recently concluded that aspects of
the system (including basic operating assistance) are unconstitutional, and
ordered the State to provide for and fund a system complying with the Ohio
Constitution. The State has announced its intention to appeal. A small number
of the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion
of State subsidy distributions to repayment if needed; in FY 1991 under this
program, 26 districts borrowed a total of $41.8 million (including over $27
million by one district), and in FY 1992 borrowings totaled $68.6 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
loan approval totaled at June 20, 1994, $18.9 million for 25 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 to eliminate deficits and cure any defaults.
Since inception in 1979, these procedures have been applied to 23 cities and
villages; for 18 of them the fiscal situation was resolved and the procedures
terminated.
At present the State itself does not levy 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 the aggregate levy to 10 mills per $1 of assessed
valuation (commonly referred to as the "ten-mill limitation"). Voted general
obligations of subdivisions are payable from property taxes that are unlimited
as to amount or rate.
Oregon Trusts _ Economic Factors
The portfolio of each Oregon Trust consists primarily of obligations issued by
entities located in Oregon.
Article IX, Section 2 of the Constitution of Oregon provides that "The
Legislative Assembly shall provide for raising revenue sufficiently to defray
the expenses of the State for each fiscal year, and also a sufficient sum to
pay the interest on the State debt, if there by any." Article IX, Section 6 of
the Constitution of Oregon further provides that "[W]henever the expenses, of
any fiscal year, shall exceed the income, the Legislative Assembly shall
provide for levying a tax, for the ensuing fiscal year, sufficient, with other
sources of income, to pay the deficiency, as well as the estimated expense of
the ensuing fiscal year." These balanced budget constraints limit the State
from operating with a deficiency. Despite the passage of a property tax
limitation measure and the State's continuing transition from dependence on the
declining forest products industry, currently the State of Oregon does not have
a deficit. The State's budgetary revenue estimates are updated quarterly by
the Executive Department. In the event the forecasting process predicts a
shortfall of revenue, there are a number of legislative and executive
mechanisms for preventing an overall deficit from occurring or continuing.
Pennsylvania Trusts _ Economic Factors
Risk Factors. Prospective investors should consider the financial difficulties
and pressures which the Commonwealth of Pennsylvania and certain of its
municipal subdivisions have undergone. Both the Commonwealth and the City of
Philadelphia have historically experienced significant revenue shortfalls.
There can be no assurance that the Commonwealth will not experience further
declines in economic conditions or that portions of the Pennsylvania
Obligations purchased by the Pennsylvania Trusts will not be affected by such
declines. Without intending to be complete, the following briefly summarizes
some of these difficulties and the current financial situation, as well as some
of the complex factors affecting the financial situation in the Commonwealth.
It is derived from sources that are generally available to investors and is
based in part on information obtained from various agencies in Pennsylvania.
No independent verification has been made of the following information.
State Economy. Pennsylvania has been historically identified as a heavy
industry state although that reputation has changed recently as the industrial
composition of the Commonwealth diversified when the coal, steel and railroad
industries began to decline. The major new sources of growth in Pennsylvania
are in the service sector, including trade, medical and health services,
education and financial institutions. Pennsylvania's agricultural industries
are also an important component of the Commonwealth's economic structure,
accounting for more than $3.6 billion in crop and livestock products annually
while agribusiness and food related industries support $38 billion in economic
activity annually.
Non-agricultural employment within the Commonwealth has increased steadily from
1984 to its 1992 level of 81.3 percent of total employment. The growth in
employment experienced in Pennsylvania is comparable to the nationwide growth
in employment which has occurred during this period. In 1993, manufacturing
employment represented 18.4 percent of all non-agricultural employment in
Pennsylvania while the services sector accounted for 29.9 percent and the trade
sector accounted for 22.4 percent.
The Commonwealth is currently facing a slowdown in its economy. Moreover,
economic strengths and weaknesses vary in different parts of the Commonwealth.
In general, heavy industry and manufacturing have been facing increasing
competition from foreign producers. During 1993, the annual average
unemployment rate in Pennsylvania was 7.0% compared to 6.8% for the United
States. For May 1994 the unadjusted unemployment rate was 6.4% in Pennsylvania
and 5.9% in the United States, while the seasonally adjusted unemployment rate
for the Commonwealth was 6.2% compared to 6.0% for the United States.
State Budget. The Commonwealth operates under an annual budget which is
formulated and submitted for legislative approval by the Governor each
February. The Pennsylvania Constitution requires that the Governor's budget
proposal consist of three parts: (i) a balanced operating budget setting forth
proposed expenditures and estimated revenues from all sources and, if estimated
revenues and available surplus are less than proposed expenditures,
recommending specific additional sources of revenue sufficient to pay the
deficiency; (ii) a capital budget setting forth proposed expenditures to be
financed from the proceeds of obligations of the Commonwealth or its agencies
or from operating funds; and (iii) a financial plan for not less than the
succeeding five fiscal years, which includes for each year projected operating
expenditures and estimated revenues and projected expenditures for capital
projects. The General Assembly may add, change or delete any items in the
budget prepared by the Governor, but the Governor retains veto power over the
individual appropriations passed by the legislature. The Commonwealth's fiscal
year begins on July 1 and ends on June 30.
All funds received by the Commonwealth are subject to appropriation in specific
amounts by the General Assembly or by executive authorization by the Governor.
Total appropriations enacted by the General Assembly may not exceed the ensuing
year's estimated revenues, plus (less) the unappropriated fund balance
(deficit) of the preceding year, except for constitutionally authorized debt
service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at
the end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an
independent fiscal and accounting entity with a self-balancing set of accounts,
recording cash and/or other resources together with all related liabilities and
equities. In the Commonwealth, over 120 funds have been established by
legislative enactment or in certain cases by administrative action for the
purpose of recording the receipts and disbursement of moneys received by the
Commonwealth. Annual budgets are adopted each fiscal year for the principal
operating funds of the Commonwealth and several other special revenue funds.
Expenditures and encumbrances against these funds may only be made pursuant to
appropriation measures enacted by the General Assembly and approved by the
Governor. The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bond indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
Financial information for the principal operating funds of the Commonwealth are
maintained on a budgetary basis of accounting, which is used for the purpose of
insuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on
a modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
Recent Financial Results. From fiscal 1984, when the Commonwealth first
prepared its financial statements on a GAAP basis, through fiscal 1989, the
Commonwealth reported a positive unreserved-undesignated fund balance for its
governmental fund types at each fiscal year end. Slowing economic growth
during 1990, leading to a national economic recession beginning in fiscal 1991,
reduced revenue growth and increased expenditures and contributed to negative
unreserved-undesignated fund balances at the end of the 1990 and 1991 fiscal
years. At the end of fiscal 1990 and fiscal 1991, the unreserved-undesignated
fund balance was a negative $205.8 million and a negative $1.2 billion,
respectively, a drop of $579.6 million and $983.4 million, respectively, from
the year-earlier amounts. The decline in the fiscal 1990
unreserved-undesignated fund balance for government fund types was largely the
result of a $718.2 million operating deficit in the General Fund, which caused
the total fund balance of the General Fund to fall to a negative $119.8 million
at June 30, 1990. The decline in the fiscal 1991 unreserved-undesignated fund
balance was principally the result of operating deficits of $1.1 billion and
$66.2 million, respectively, in the General Fund and the State Lottery Fund.
Rising demands on state programs caused by the economic recession, particularly
for medical assistance and cash assistance programs, and the increased costs of
special education programs and correction facilities and programs, contributed
to increased expenditures in fiscal 1991, while tax revenues for the 1991
fiscal year were severely affected by the economic recession. Total
corporation tax receipts and sales and use tax receipts during fiscal 1991
were, respectively, 7.3 percent and 0.9 percent below amounts collected during
fiscal 1990. Personal income tax receipts also were affected by the recession,
but not to the extent of the other major General Fund taxes, increasing only
2.0 percent over fiscal 1990 collections.
The Commonwealth experienced a $454 million general fund deficit as of the end
of its 1991 fiscal year. The deficit reflected below-estimate economic
activity and growth rates of economic indicators and total tax revenue
shortfalls of $817 million (4.1 percent) below those assumed in the enacted
budget. Economic conditions also affected expenditure trends during the 1991
fiscal year, with expenditures for medical assistance costs and other human
service programs running $512 million above estimates assumed in the 1991
budget. In January 1991, the Commonwealth initiated a number of cost-saving
measures, including the firing of 2,000 state employees, deferral of paychecks
and reduction of funds to state universities, which resulted in approximately
$871 million cost savings.
Actions taken during fiscal 1992 to bring the General Fund budget back into
balance, including tax increases and expenditure restraints, resulted in a $1.1
billion reduction of the unreserved-undesignated fund deficit for combined
governmental fund types and a return to a positive fund balance. Total general
fund revenues for fiscal 1992 were $14.5 billion, which is approximately 22
percent higher than fiscal 1991 revenues of $11.9 billion due in large part to
tax increases. The increased revenues funded substantial increases in
education, social services and corrections programs. As a result of the tax
increases and certain appropriation lapses, fiscal 1992 ended with an $8.8
million surplus after having started the year with an unappropriated balance
deficit of $453.6 million.
Financial performance continued to improve during fiscal 1993, resulting in a
positive unreserved-undesignated balance for combined governmental fund types
at June 30, 1993, as a result of a $420.4 million increase in the balance.
These gains were produced by continued efforts to control expenditures growth.
Fiscal 1993 Budget. On June 30, 1992, the Pennsylvania legislature presented
the Governor with a $14.1 billion general fund budget for the 1993 fiscal year,
which began on July 1, 1992. Before signing the budget, the Governor deleted
approximately $73 million in certain state expenditures such as aid to county
courts and district justices. As a result, the budget for the 1993 fiscal year
was approximately $14.1 billion, which is approximately $105 million more than
the fiscal 1992 budget. On February 9, 1993, the Governor announced that he
anticipated that the 1993 budget would be in balance at the end of the fiscal
year.
Fiscal 1994 Budget. On May 28, 1993, the Governor signed a $14.9 billion
general fund budget, an increase of approximately five percent from the fiscal
1993 budget. A substantial amount of the increase is targeted for medical
assistance programs and prisons.
Fiscal 1995 Budget. On June 26, 1994, the Governor signed a $15.7 billion
general fund budget, an increase of over 5% from the Fiscal 1994 budget. A
substantial amount of the increase is targeted for human services and prisons.
Debt Limits and Outstanding Debt. The Constitution of Pennsylvania permits the
issuance of the following types of debt: (i) debt to suppress insurrection or
rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii)
debt for capital projects subject to an aggregate debt limit of 1.75 times the
annual average tax revenues of the preceding five fiscal years; and (iv) tax
anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required annually to
certify to the Governor and the General Assembly certain information regarding
the Commonwealth's indebtedness. According to the most recent Auditor General
certificate, the average annual tax revenues deposited in all funds in the five
fiscal years ended June 30, 1993 was $14.5 billion, and therefore, the net debt
limitation for the 1994 fiscal year was $27.1 billion. Outstanding net debt
totaled $4.0 billion at June 30, 1993, a decrease of $42.2 million from June
30, 1992. At February 28, 1994, the amount of debt authorized by law to be
issued, but not yet incurred, was $15.0 billion.
Debt Ratings. All outstanding general obligation bonds of the Commonwealth are
rated AA- by S&P and A1 by Moody's.
City of Philadelphia. The City of Philadelphia experienced a series of general
fund deficits for fiscal years 1988 through 1992 which have culminated in the
City's present serious financial difficulties. In its 1992 Comprehensive
Annual Financial Report, Philadelphia reported a cumulative general fund
deficit of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board which
will oversee the fiscal affairs of the City of Philadelphia. The legislation
empowers PICA to issue notes and bonds on behalf of Philadelphia, and also
authorizes Philadelphia to levy a one-percent sales tax, the proceeds of which
would be used to pay off the bonds. In return for PICA's fiscal assistance,
Philadelphia was required, among other things, to establish a five-year
financial plan that includes balanced annual budgets. Under the legislation,
if Philadelphia does not comply, PICA may withhold bond revenues and certain
state funding.
In May 1992, the city counsel of Philadelphia approved the Mayor's five-year
plan and adopted a fiscal 1993 budget. On June 5, 1992, PICA sold
approximately $480 million in bonds at yields ranging from 5.25 percent to 6.88
percent.
The proceeds of the bonds were used to cover shortfalls accumulated over fiscal
years 1988 through 1991, projected deficits for fiscal year 1992 and fiscal
year 1993, construction projects and other capital expenditures. In accordance
with the enabling legislation, PICA was guaranteed a percentage of the wage tax
revenue expected to be collected from Philadelphia residents to permit
repayment of the bonds.
In January 1993, Philadelphia anticipated a cumulative general fund budget
deficit of $57 million for the 1993 fiscal year. In response to the
anticipated deficit, the Mayor unveiled a financial plan eliminating the budget
deficit for the 1993 budget year through significant service cuts that included
a plan to privatize certain city provided services. Philadelphia currently
anticipates a balanced general fund budget for the 1993 budget year. Due to an
upsurge in tax receipts, cost-cutting and additional PICA borrowings,
Philadelphia completed the 1993 fiscal year with a balanced general fund
balance.
In January 1994, the Mayor proposed a $2.3 billion city general fund budget
that included no tax increases, no significant service cuts and a series of
modest health and welfare program increases. At that time, the Mayor also
unveiled a $2.2 billion program (the "Philadelphia Economic Stimulus Program")
designed to stimulate Philadelphia's economy and stop the loss of 1,000 jobs a
month. However, the success of the Philadelphia Economic Stimulus Program has
been predicated upon several contingencies including, among others, $250
million in revenues from riverboat gambling over the next three years, which
first must be approved by the state legislature, and $100 million in federal
"empowerment zone" subsidies, which Philadelphia may or may not receive. As of
January 1994, the 1994 general fund budget was running at a deficit of
approximately $10 million. The Mayor has predicted that the general fund will
be balanced by the end of the 1994 fiscal year.
Litigation. The Commonwealth is a party to numerous lawsuits in which an
adverse final decision could materially affect the Commonwealth's governmental
operations and consequently its ability to pay debt service on its obligations.
The Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity affected by Act 152, approved September 28, 1978.
Tennessee Trusts _ Economic Factors
The following brief summary regarding the economy of Tennessee 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 Tennessee obligations. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
The State Constitution of Tennessee requires a balanced budget. No legal
authority exists for deficit spending for operating purposes beyond the end of
a fiscal year. Tennessee law permits tax anticipation borrowing but any amount
borrowed must be repaid during the fiscal year for which the borrowing was
done. Tennessee has not issued any debt for operating purposes during recent
years with the exception of some advances which were made from the Federal
Unemployment Trust Fund in 1984. No such advances are now outstanding nor is
borrowing of any type for operating purposes contemplated.
The State Constitution of Tennessee forbids the expenditure of the proceeds of
any debt obligation for a purpose other than the purpose for which it was
authorized by statute. Under State law, the term of bonds authorized and
issued cannot exceed the expected life of the projects being financed.
Furthermore, the amount of a debt obligation cannot exceed the amount
authorized by the General Assembly.
The State and Its Economy. As required by law, the legislature enacted a
balanced budget for fiscal year 1991-92. Through December 1991, general fund
tax revenues were undercollected by $19.9 million. The revenue estimates on
which the budget as adopted was based were revised to reflect actual
collections. Subsequently, revenue collections improved and the original
budget estimates for the year were achieved.
In a special session in January of fiscal year 1992-93, the General Assembly
failed to enact the Governor's proposals for tax reform and education reform.
In the regular session the legislature enacted education reform, adopted a
one-half percent sales tax increase (effective April 1, 1992 through June 30,
1993) and raised other taxes and fees effective beginning fiscal year ending
June 30, 1992 for a total revenue increase of $275 million. A new 6.75% tax on
services was enacted which enables the State to continue funding the Medicaid
program and avoid major reductions in provider payments.
The revised estimate of general sales tax collections for the fiscal year
ending June 30, 1992 assumes 3% growth over the previous fiscal year; a 3%
growth has been estimated for fiscal year 1992-93. Collections grew 5.49%
through April 1992. The revised estimates for franchise and excise tax
collections assume a 2.06% decline for the fiscal year ending June 30, 1992,
without certain one-time revenue collections; the assumption for the fiscal
year 1992-93 is 4.3% growth. Excluding one-time collections of nearly $40
million, franchise and excise tax collections increased by 0.6% through April
1992.
The Tennessee economy generally tends to rise and fall in a roughly parallel
manner with the U.S. economy, although in recent years Tennessee has
experienced less economic growth than the U.S. average. The Tennessee economy
entered a recession in the last half of 1990 as the Tennessee index of leading
economic indicators fell throughout the period. Tennessee nominal gross State
product rose at a lower rate for 1990 and 1991 than the average annual rates
for the five-year period 1985-89.
Tennessee's population increased 6.2% from 1980 to 1990, less than the national
increase of 10.2% for the same period. Throughout 1990, seasonally adjusted
unemployment rates were at or slightly below the national average. Beginning
in the fourth quarter of that year, however, initial unemployment claims showed
substantial monthly increases. In December, unemployment stood at 6.3%,
slightly above the national rate of 6.1%. In February 1991, the unemployment
rate rose to 6.8%. By 1992, Tennessee unemployment had decreased to 6.1%, as
compared to the national rate of 7.3% and has remained below the national rate
throughout 1993. The October 1993 rate stood at 5.2%, as compared to the
national rate of 6.8%. A decline in manufacturing employment has been partly
offset by moderate growth in service sector employment.
Historically, the Tennessee economy has been characterized by a greater
concentration in manufacturing employment than the U.S. as a whole. While in
recent years Tennessee has followed the national shift away from manufacturing
toward service sector employment, manufacturing continues to be the largest
source of non-agricultural employment in the state, and the state continues to
attract new manufacturing facilities. In addition to the General Motors Saturn
project and a major Nissan facility built in Tennessee in the 1980s, in January
1991, Nissan announced plans to develop a $600 million engine and component
parts manufacturing facility in Decherd, Tennessee. However, total planned
investment in Tennessee's manufacturing and service sectors has declined in
recent years.
Non-agricultural employment in Tennessee is relatively uniformly diversified,
with approximately 22% in the manufacturing sector, approximately 23% in the
wholesale and retail trade sector, approximately 23% in the service sector and
approximately 16% in government.
Bond Ratings. Tennessee's general obligation bonds are rated Aaa by Moody's
and AA+ by Standard & Poor's. There can be no assurance that the economic
conditions on which these ratings are based will continue or that particular
obligations contained in the Portfolio of a Tennessee Trust may not be
adversely affected by changes in economic or political conditions.
Legal Proceedings. Tennessee is involved in certain legal proceedings, which,
if decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. The Tennessee Supreme Court
currently is reviewing a case in which the lower court found the Tennessee
Department of Revenue improperly defined non-business earnings for tax
purposes. Although this case involves only $925,000, its outcome could affect
at least five other cases and could have a detrimental impact on Tennessee's
revenue base. If the case is affirmed, Tennessee could lose an estimated $80
million to $100 million a year in corporate income taxes. The Tennessee
Supreme Court also may hear a similar case in which the lower court found the
taxpayer's partial sale of business holdings resulted in taxable business
income. A ruling in favor of the taxpayer could result in a $10 million tax
refund.
Two other tax related cases could also affect the State's financial condition.
A recently filed class-action suit seeks damages in excess of $25 million for
the allegedly illegal collection of sales taxes paid on extended warranty
contracts on motor vehicles. In addition, a coalition of more than a dozen
hospitals is considering a class-action suit to challenge the legality of
Tennessee's Medicaid service tax. Tennessee's hospitals currently pay
approximately $504 million dollars in special taxes.
The foregoing information does not purport to be a complete or exhaustive
description of all conditions to which the issuers of Bonds in a Tennessee
Trust are subject. Many factors, including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could affect or could have an adverse impact on the financial
condition of the State and various agencies and political subdivisions located
in the State. Since certain Bonds in the Tennessee Trusts (other than general
obligation bonds issued by the State) are payable from revenue derived from a
specific source or authority, the impact of a pronounced decline in the
national economy or difficulties in significant industries within the State
could result in a decrease in the amount of revenues realized from such source
or by such authority and thus adversely affect the ability of the respective
issuers of the Bonds in the Tennessee Trusts to pay the debt service
requirements on the Bonds. Similarly, such adverse economic developments could
result in a decrease in tax revenues realized by the State and thus could
adversely affect the ability of the State to pay the debt service requirements
of any Tennessee general obligation bonds in the Tennessee Trusts. The Sponsor
is unable to predict whether or to what extent such factors or other factors
may affect the issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired by the Tennessee
Trusts to pay interest on or principal of the Bonds.
Texas Trusts _ Economic Factors
Economic and Demographic Information. The State is the second largest in the
nation by size (approximately 266,807 square miles) and has the third largest
population (approximately 16,986,510 according to the 1990 Census). Over
one-half of the State's population resides in the metropolitan areas of
Dallas/Fort Worth, Houston and San Antonio. The average annual population
growth rate for the State between 1980 and 1990 was approximately 1.8%.
State output accounts for more than 7% of the total output of the United
States. Long identified with the oil and gas industry, these businesses today
account for only approximately 12% of the State's economy. The
service-producing sectors (e.g., transportation, public utilities, finance,
insurance, real estate, trade and services) and government are the major
sources of job growth in Texas. Further, manufacturing job growth is
anticipated by the Comptroller to be significant to the State's future growth.
In 1986, the decline in oil prices and changes in the Federal income tax laws
affecting real estate induced a recession in the Texas economy in general.
However, by early 1987 the Texas economy had moved into a period of recovery
and economic expansion has continued since 1988. Based upon information
gathered by the Texas Employment Commission, Texas nonfarm employment has
reached an all-time high of 7.46 million jobs in 1993. At the same time, the
jobless rate had fallen from a peak of approximately 10 percent in the summer
of 1986 to about 6.0% in the middle of 1990 before rising to a rate of
approximately 7.4% in August 1992; the rate subsequently has fallen to
approximately 7% as of October 1993.
The total value of taxable property in the State amounted to approximately
$623.1 billion in 1992 according to records maintained by the State Property
Tax Board derived from school district data in the State. Property tax values
rose 0.1% in 1990 from the levels posted for 1989, but 1991 property tax values
fell 0.5% from the 1990 levels and 1992 property tax values fell an additional
0.9%. The State does not levy any property tax for general revenue purposes;
however, such taxes are an important source of revenue for local political
subdivisions in the State. The total property tax levied by all taxing
jurisdictions (counties, cities, school districts and special districts)
reached approximately $14.0 billion in 1992, including approximately $2.3
billion levied by cities, $2.0 billion levied by counties, approximately $8.2
billion levied by school districts and approximately $1.5 billion levied by
special districts.
Budgetary Process and Budget. The State operates on a fiscal year basis which
begins on September 1 of each year; however, the State's accounting and
budgetary period is a biennium which begins on September 1 of each odd-numbered
year. The State Constitution (the "Constitution") requires an appropriation
for any funds to be drawn out of the State treasury (the "Treasury"). Such
appropriations are in some instances made by the Constitution, but more
generally are made by the Legislature. Legislative appropriations are limited
by the Constitution to a two-year period, and generally are made by the
Legislature separately for each fiscal year of the biennium. The Constitution
also prohibits the Legislature from sending any appropriations bill to the
Governor for consideration until the Comptroller has certified that the amounts
appropriated are within the amounts estimated to be available in the affected
funds.
Payments for state expenditures from the Treasury are made only after the
Comptroller and State treasurer (the "Treasurer") have determined that there
are adequate funds in the account from which such payment is to be made.
In the event of temporary cash deficiencies in the General Revenue Fund caused
by timing differences between cash receipts and cash expenditures, interim
interfund transfers of surplus cash from other funds in the Treasury to the
General Revenue Fund can be made and tax and revenue anticipation notes on
behalf of the State are issuable solely to coordinate the State's cash flow
within a fiscal year and must mature and be paid in full during the biennium in
which they were issued. Under no circumstances may the amount of notes
outstanding exceed 25% of the forcasted taxes and revenues to be credited to
the General Revenue Fund (reduced by the total outstanding liability of such
fund for interfund borrowings described above). Since the statute authorizing
the issuance of tax and revenue anticipation notes was first enacted in 1986,
the State annually has issued and retired such notes in varying amounts. On
October 1, 1993, the Treasurer (on behalf of the State) issued $1.4 billion of
such notes, which mature on August 31, 1994.
State Revenues and Expenditures. The Treasury comprises several hundred
different funds. Approximately 63% of the state revenue receipts in fiscal
year 1993 were deposited into the General Revenue Fund, from which financing
for a large number of the programs of the State is drawn. In addition,
approximately 27% of the state revenue receipts were deposited into various
special revenue funds out of which identified programs (chiefly dealing with
human services, transportation or education) are funded. Finally, the
remaining approximately 10% of the state revenues receipts, such as state sales
tax receipts required to be paid over to municipalities, were deposited into
various suspense or trust funds within the Treasury.
Historically, the primary sources of the State's revenues have been sales
taxes, mineral severance taxes and federal grants. Due to the collapse of oil
and gas prices and the resulting enactment by recent Legislatures of new tax
measures, including those increasing the rates of existing taxes and expanding
the tax base for certain taxes, there has been a reordering of the relative
importance of the State's taxes in terms of their contribution to the State's
revenue in any year. In 1993, federal receipts became the State's largest
revenue source, accounting for approximately 29.2% of the total revenue during
the fiscal year. Sales taxes, which had been the State's main revenue source,
fell to second place, accounting for 27% of the State revenues during fiscal
year 1993. Interest and investment income became the third largest revenue
source, accounting for 6.4% of the total state revenue during fiscal year 1993.
The motor fuel tax became the State's fourth largest revenue source, accounting
for approximately 6.2% of the total revenue during fiscal year 1992, while
licenses, fees and permits fell to being the State's fifth largest revenue
source, accounting for approximately 6.1% of the total revenue. The State also
imposes motor vehicle, corporate franchise, oil and gas severance and other
taxes.
The State is constitutionally barred from levying ad valorem taxes on property
for general state revenue purposes, and may not impose a rate of such taxes for
other purposes which is in excess of $0.35/$100 of valuation. The State
further is constitutionally limited from increasing appropriations from tax
revenues (other than those appropriated under the Constitution, and other than
in the event of a legislatively determined emergency) at a rate of growth in
excess of that estimated for the State's economy. Finally, the State does not
currently impose any personal or corporate income tax (although, as noted
below, it does impose a corporate franchise tax measured, in part, by the net
earned surplus of the corporation).
In each of the past five fiscal years the State has ended the year with a cash
surplus in the General Revenue Fund: at the end of fiscal year 1989, that
surplus was $297 million; at the end of fiscal year 1990, that surplus was $767
million; at the end of fiscal year 1991, that surplus was $1.005 billion; at
the end of fiscal year 1992, that surplus was $609 million; and at the end of
the most recent fiscal year, 1993, that surplus was $1.623 billion.
In connection with the appropriations process, as directed by the Constitution,
the Comptroller has prepared his estimates of revenues for fiscal years 1994
through 1995. Those estimates are based upon an econometric model of the Texas
economy created by the Comptroller utilizing extensive data bases relating to
state and local economic conditions and demographic statistics. For fiscal
year 1992, the Texas economy was in an expansion. Sales taxes (both general
and motor vehicle), which have become the workhorse of the State's tax system,
in 1993 continued to grow with the economy, and are expected to continue such
growth in 1994. The Comptroller's revenue estimates for 1994 and 1995 are
based on an assumption that the Texas economy will show a steady growth.
State Indebtedness. Except as specifically authorized, the Constitution
generally prohibits the creation of debt by or on behalf of the State; further,
the Constitution prohibits the lending or pledging of the credit of the State
in any manner to or in support of the payment of liabilities of any person
(including municipalities). For purposes of this limitation, "debt" generally
comprises obligations which are payable over a period extending beyond the end
of the current budget period and out of monies other than funds available or
expected to become available during that budget period. However, "debt" does
not include revenue bonds, since the Texas courts (like the courts of many
states) have held that certain obligations issued by or on behalf of the State
which are not payable from tax sources (or the payment of debt service on which
is subject to appropriation) do not create a "debt" within the meaning of the
Constitution.
At various times, the voters of the State, by the adoption of constitutional
amendments, have authorized the issuance of debt of the State, including
general obligation indebtedness for which the full faith and credit and the
taxing power of the State may be pledged. The total amount of such debt which
has been authorized is in excess of $10.03 billion.
As of May 31, 1994, there was outstanding (or committed to issuance) general
obligation indebtedness of the State aggregating approximately $4.175 billion.
Of this amount, approximately $1.20 billion had been issued by the Veterans'
Land Board, all of which was issued to fund programs which are expected to
produce revenues sufficient to pay all debt service on such bonds,
approximately $450 million had been issued by the Texas Higher Education
Coordinating Board to finance student loans, and approximately $231 million had
been issued by the Water Development Board, all of which was issued to fund
loans to political subdivisions, the repayment of which is expected to produce
revenues sufficient to pay all debt service on those bonds. As of May 31,
1994, additional authorized but unissued general obligation debt included:
$890 million authorized to be issued by the Veterans' Land Board; $1.61 billion
authorized to be issued by the Water Development Board; $936 million authorized
to be issued by the Public Finance Authority; $250 million authorized to be
issued by the National Research Laboratory Commission; and $50 million
authorized to be issued by the Higher Education Coordinating Board.
In addition to the issuance of general obligation indebtedness, certain state
agencies have the authority to issue revenue bonds indirectly payable from
funds appropriated from the General Revenue Fund.
Further, additional state programs may be financed with revenue bonds or
similar obligations payable from revenues generated by the specific programs
authorized, and not from the general revenues of the State or its taxing power.
Among the state agencies authorized to issue such revenue bonds are the
Veterans' Land Board, the Texas Water Development Board, the Texas Water
Resources Finance Authority, the Texas Agricultural Finance Authority, the
Texas Housing Agency, the Texas Department of Commerce, the Texas Turnpike
Authority, and Texas colleges and universities.
Litigation. On December 6, 1987, a class action suit was filed on behalf of
the League of United Latin American Citizens, and other persons, mostly
students, alleging that the State discriminated against Mexican-American
students by denying them equal access to first class universities. On January
21, 1992, after a jury trial, the Court ruled that the State's higher education
system violated the state constitution and enjoined the defendants from
applying sections of the Texas Education Code and present and future
appropriations of the Legislature relating to the financing of public
universities, or distributing monies from the General Revenue Fund, the
Permanent University Fund, or the Texas Higher Education Assistance Fund, and
from financing any permanent improvements at the schools. On October 6, 1993,
the State Supreme Court reversed the lower court's decision and held that the
method of financing higher education was not in violation of the Constitution.
The State is a party to various legal proceedings relating to its operations
and governmental functions; the Texas Attorney General has rendered opinions
with respect to recent state bond issues that none of such proceedings, if
decided adversely to the State, would have a material adverse effect on the
long-term financial condition of the State.
Over the past several years, the state Legislature has passed several public
education financing systems which have ultimately been declared
unconstitutional. In 1991, the Legislature approved an appropriations bill
funding public education at a level of $16.038 billion for the 1992-93 biennium
under a school finance bill that was passed in 1990. On January 30, 1992, the
Texas Supreme Court held that the public school finance system enacted in 1990
levies an unconstitutional ad valorem tax; however, the Texas Supreme Court
also held that its decision will not adversely affect the validity,
incontestability, obligation of payment or source of payment of any bonds
issued by Texas school districts for authorized purposes prior to June 1, 1993,
the distribution to school districts of state and federal funds before June 1,
1993, in accordance with present procedures and laws, or the assessment and
collection after June 1, 1993, of any taxes or other revenues levied or imposed
for or pledged to the payment of any bonds issued or debt incurred prior to
June 1, 1993. On July 7, 1992, a trial judge denied a request to appoint a
court master to develop an alternative school finance plan in the event the
Texas Legislature failed to develop a plan by June 1, 1993. In its 1993
regular session, the Legislature had adopted legislation, including a call for
an electoral referendum to approve the amendment of the Constitution; that
referendum was held on May 1, 1993, at which time the constitutional amendment
was defeated. Subsequently, the Legislature adopted SB 7, which directed that
the State's wealthiest school districts choose from among various alternatives
for sharing their wealth with poorer districts. Upon review, the trial court
upheld the constitutionality of SB 7 but required that the Legislature provide
for the equitable and efficient funding of school facilities. It preserved the
right of the plaintiffs to seek further relief under certain circumstances. An
appeal of the decision is likely.
Local Municipalities and Political Subdivisions. The same factors affecting
the State and its agencies also have affected cities, counties, school
districts and other issuers of bonds located throughout the State. Declining
revenues caused by the downturn in the Texas economy have forced these various
other issuers to raise taxes and cut services to achieve the balanced budget
mandated by their respective charters or applicable state law requirements.
S&P and Moody's assign separate ratings to each issue of bonds sold by these
other issuers. Such ratings may be significantly lower than the ratings
assigned by such rating agencies to Texas general obligation bonds.
A wide variety of Texas laws, rules and regulations affect, directly or
indirectly, the payment of interest on, or the repayment of the principal of,
Texas Municipal Obligations. The impact of such laws and regulations on
particular Texas Municipal Obligations may vary depending upon numerous factors
including, among others, the particular type of Texas Municipal Obligations
involved, the public purpose funded by the Texas Municipal Obligations and the
nature and extent of insurance or other security for payment of principal and
interest on the Texas Municipal Obligations. For example, Texas Municipal
Obligations which are payable only from the revenues derived from a particular
facility may be adversely affected by Texas laws or regulations which make it
more difficult for the particular facility to generate revenues sufficient to
pay such interest and principal, including, among others, laws and regulations
which limit the amount of fees, rates or other charges which may be imposed for
use of the facility or which increase competition among facilities of that type
or which limit or otherwise have the effect of reducing the use of such
facilities generally, thereby reducing the revenues generated by the particular
facility. Texas Municipal Obligations, the payment of interest and principal
on which is payable from annual appropriations, may be adversely affected by
local laws or regulations that restrict the availability of monies with which
to make such appropriations. Similarly, Texas Municipal Obligations, the
payment of interest and principal on which is secured, in whole or in part, by
an interest in real property may be adversely affected by declines in real
estate values and by Texas laws that limit the availability of remedies or the
scope of remedies available in the event of a default on such Texas Municipal
Obligations. Because of the diverse nature of such laws and regulations and
the impossibility of predicting the nature or extent of future changes in
existing laws or regulations or the future enactment or adoption of additional
laws or regulations, it is not presently possible to determine the impact of
such laws and regulations on the Texas Municipal Obligations in which a Fund
invests.
Debt Ratings. General obligation bonds issued by the State have been rated by
Moody's continuously since July 1987 at Aa and by S&P at AA.
Virginia Trusts _ Economic Factors
Virginia'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
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
and cutbacks can be expected to occur.
Although the Commonwealth enjoyed an economic boom in the mid-1980s, the
Commonwealth's economy began to slow toward the end of the decade, and went
into a recession with the rest of the nation after July 1990. Growth since the
end of the recession in March 1991, has been weak.
The impact of national trends on the Commonwealth is clearly seen in personal
income figures. While year-to-year percentage changes in the Commonwealth
personal income parallel those at the national level, the Commonwealth figures
were higher during the first half of the 1980s. The differential has narrowed
since 1988 and testifies to the lethargy of the Commonwealth's economy. From a
peak of 107 percent of national per capita income, the Commonwealth has
experienced a relative decline to 104 percent in 1992. Compared to the South
Atlantic region, the Commonwealth's real per capita income has declined
slightly from a peak of 109 percent in 1987 to 108 percent in 1992.
After real personal income in the Commonwealth had fallen for seven consecutive
quarters ending with the last quarter of 1991, it rose throughout 1992.
Personal income declined in the first quarter of 1993, although forthcoming
data revisions are likely to show much milder decreases. Overall, the data
suggest a fitful recovery continues.
Virginia's nonagricultural employment figures also mirror the national economy.
During the period 1983-1990, the Commonwealth substantially outpaced the nation
in growth of nonagricultural employment, with 4.1 percent average annual growth
compared to 2.8 percent nationally; however, the trend line for both has been
flat since 1990. For the period 1985-1990, the Commonwealth went ahead of the
South Atlantic region, but was hit harder during the recession in 1990. Since
then, the region has outperformed the Commonwealth.
With respect to unemployment, Virginia's unemployment rate has consistently
been below that of the nation. For the decade of 1980 to 1990, the
differential has been two percentage points, although it decreased to below one
percentage point in 1991 and 1992. For the last month of FY 1993, the
Commonwealth's unemployment rate was 5.3 percent, compared to the national rate
of 7.1 percent.
Employment trends in Virginia are varied from sector to sector and from region
to region. For example, an overall increase of 0.8 percent in FY 1993 was
driven by modest increases in government and service sectors, whereas wholesale
and retail trade employment was flat. Employment dropped in six of ten
categories, with mining experiencing the greatest percent loss at 3.6 percent.
The service sector is now the largest employer in Virginia and mining and
manufacturing are now at lower levels than in 1980. All of the Commonwealth's
MSAs showed increased employment from FY 1992 to FY 1993, ranging from 0.5
percent to 1.8 percent, with most employment increases being experienced in
metropolitan areas.
Highest rates of unemployment are concentrated in southwest Virginia where
mining jobs have been lost and the lowest unemployment rates are seen in
Northern Virginia where much federally-related employment is concentrated. Not
surprisingly, there is great overlap between areas of lowest unemployment and
those of highest per capita income.
The Commonwealth's recovery has been hurt by the defense cutbacks, but so far
the employment and output reductions in the Commonwealth have not been severe.
Further cuts are anticipated in 1995. Base closing actions in 1993 will result
in a statewide net loss of 7,800 defense related jobs, with the largest impact
being experienced in Northern Virginia. The national recession, the overheated
construction market in Northern Virginia and the restructuring of the banking
industry have also contributed to the Commonwealth's problems. Even the
Commonwealth's export sector, whose conspicuous growth had been promising,
reflected disappointing results in 1992, with a loss of 2.6 percent in current
dollars, although the Commonwealth's exports have expanded rapidly to most
areas of the world over the past five years, averaging 11.3 percent annually.
The evidence of a slow economic recovery, coupled with major plant downsizings
as well as military base closures, with more likely in 1995, portends slow
growth in the near term. Additional defense cutbacks in the next three years
may be very difficult if the recovery has not gained momentum by then.
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, 1993, fiscal year, the General
Fund had an ending fund balance computed on budgetary cash basis of $331.8
million, of which $942,000 was in required reserve; $271.2 million thereof was
designated for expenditure during the next fiscal year, leaving an
undesignated, unreserved fund balance of $59.7 million, the second consecutive
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, 1993, was $78.8
million, compared with a General Fund balance of minus $121.8 million at the
end of the fiscal year ended June 30, 1992. This is the first year since 1989
that the General Fund, measured on a modified accrual basis, has shown a
positive fund balance.
As of June 30, 1993, total debt for the Commonwealth aggregated $7.5 billion.
Of that amount, $2 billion was tax-supported. Outstanding general obligation
debt backed by the full faith and credit of the Commonwealth was $817 million
at June 30, 1993. Of that amount, $511 million was also secured by revenue
producing capital projects.
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, 1993 would
permit an additional total of approximately $5.3 billion of bonds secured by
revenue-producing projects and approximately $5.5 billion of unsecured general
obligation bonds, with not more than approximately $1.46 billion of the latter
to be issued in any four-year period. Bonds which are not secured by
revenue-producing projects must be approved in a State-wide election.
The Commonwealth maintains ratings of AAA by Standard & Poor's Corporation 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 assurances 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.
TAX STATUS OF UNITHOLDERS
At the respective times of issuance of Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities. In addition,
with respect to State Trusts, where applicable, bond counsel to issuing
authorities rendered opinions as to the exemption of interest on such Bonds,
when held by residents of the state in which issuers of such Bonds are located,
from state income taxes and certain state or local intangibles and local income
taxes. For a discussion of the tax status of State Trusts see "Summary of
Portfolios_Tax Status" for the respective State Trust. (See Sections 2 and 3.)
Neither the Sponsor nor its counsel have made any special review for the Trusts
of the proceedings relating to the issuance of the Bonds or of the bases for
the opinions rendered in connection therewith.
Taxpayers must disclose on their Federal tax returns the amount of tax-exempt
interest earned during the year. Federally tax-exempt income, including income
on Units of the Trusts, will be taken into consideration in computing the
portion, if any, of social security benefits received that will be included in
a taxpayer's gross income subject to the Federal income tax.
Gain realized on the sale or redemption of the Bonds by the Trustee or of a
Unit by a Unitholder is includable in gross income for Federal income tax
purposes, and may be includable in gross income for state tax purposes. (Such
gain does not include any amounts received in respect of accrued interest or
accrued original issue discount, if any.) It should be noted that under
provisions of the Revenue Reconciliation Act of 1993 (the "Tax Act") described
below that subject accretion of market discount on tax-exempt bonds to taxation
as ordinary income, gain realized on the sale or redemption of 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 the Trust pays for the Bonds or the price a Unitholder pays for
his or her Units.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under existing
law:
(1) the Trusts are not associations taxable as corporations for Federal income
tax purposes. Tax-exempt interest received by each of the Trusts on Bonds
deposited therein will retain its status as tax-exempt interest, for Federal
income tax purposes, when received by the Trusts and when distributed to the
Unitholders, except that the alternative minimum tax and the environmental tax
(the "Superfund Tax") applicable to corporate Unitholders may, in certain
circumstances, include in the amount on which such taxes are calculated a
portion of the interest income received by the Trust. See "Certain Tax Matters
Applicable to Corporate Unitholders," below;
(2) each Unitholder of a Trust is considered to be the owner of a pro rata
portion of such Trust under Subpart E, subchapter J of Chapter 1 of the
Internal Revenue Code of 1986 (the "Code") and will have a taxable event when
the Trust disposes of a Bond or when the Unitholder redeems or sells Units.
Unitholders must reduce the tax basis of their Units for their share of accrued
interest received by the Trust, if any, on Bonds delivered after the date the
Unitholders pay for their Units 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 at
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder. The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition with
the Unitholder's basis for his or her fractional interest in the asset disposed
of. In the case of a Unitholder who purchases Units, such basis (before
adjustment for earned original issue discount and amortized bond premium, if
any) is determined by apportioning the cost of the Units among each of the
Trust assets ratably according to value as of the date of acquisition of the
Units. The tax cost reduction requirements of said Code relating to
amortization of bond premium may, under some circumstances, result in the
Unitholder realizing a taxable gain when his or her Units are sold or redeemed
for an amount equal to their original cost; and
(3) any amounts paid on defaulted Bonds held by the Trustee under policies of
insurance issued with respect to such Bonds will be excludable from Federal
gross income if, and to the same extent as, such interest would have been so
excludable if paid by the respective issuer; provided that, at the time such
policies are purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the issuer of the
bonds, rather than the insurer, will pay debt service on the bonds. Paragraph
(2) of this opinion is accordingly applicable to policy proceeds representing
maturing interest.
In the opinion of Carter, Ledyard & Milburn, counsel to the Trustee, and, in
the absence of a New York Trust from the Series, special counsel for the Series
for New York tax matters, under existing law:
Under the income tax laws of the State and City of New York, each Trust is not
an association taxable as a corporation and the income of each Trust will be
treated as the income of the Unitholders.
For a summary of each opinion of special counsel to the respective State Trusts
for state tax matters, see Section 3.
All statements in the prospectus concerning exemption from Federal, state or
other taxes are the opinion of Counsel and are to be so construed.
The redemption of Units in a Trust by a Unitholder would result in each of the
remaining Unitholders of said Trust owning a greater proportionate interest in
the remaining assets of said Trust. Although present law does not directly
address this matter, it would appear reasonable that a remaining Unitholder's
tax basis in his Units would include his proportionate share of any proceeds
received by the Trust on the sale of bonds which were not distributed to him
but were instead used by the Trust to redeem Units and that his tax basis in
the remaining assets of the Trust would accordingly be increased by such share
of proceeds, based on the relative fair market value of the remaining assets of
the Trust as of the date of such redemption.
Sections 1288 and 1272 of the Code provide a complex set of rules governing the
accrual of original issue discount. These rules provide that original issue
discount accrues either on the basis of a constant compound interest rate or
ratably over the term of the Bond, depending on the date the Bond was issued.
In addition, special rules apply if the purchase price of a Bond exceeds the
original issue price plus the amount of original issue discount which would
have previously accrued based upon its issue price (its "adjusted issue
price"). The application of these rules will also vary depending on the value
of the Bond on the date a Unitholder acquires his Units, and the price the
Unitholder pays for his Units. The accrual of tax-exempt original issue
discount on zero coupon bonds and other original issue discount bonds will
result in an increase in the Unitholder's basis in such obligations and,
accordingly, in his basis in his Units.
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 the Trust holds a Bond would be
recognized as ordinary income by the Unitholders when principal payments are
received on the Bond, upon sale or at redemption (including early redemption),
or upon the sale or redemption of his or her Units, unless a Unitholder elects
to include market discount in taxable income as it accrues. The market
discount rules are complex and Unitholders should consult their tax advisors
regarding these rules and their application.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry obligations, the interest on which is wholly exempt from
Federal income taxes, is not deductible. Because each Unitholder is treated
for Federal income tax purposes as the owner of a pro rata share of the Bonds
owned by the applicable Trust, interest on borrowed funds used to purchase or
carry Units of such Trust will not be deductible for Federal income tax
purposes. Under rules used by the Internal Revenue Service for determining
when borrowed funds are considered used for the purpose of purchasing or
carrying particular assets, the purchase of Units may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of Units (however, these rules generally do not apply
to interest paid on indebtedness incurred to purchase or improve a personal
residence). Similar rules are generally applicable for state tax purposes.
Special rules apply in the case of certain financial institutions that acquire
Units. Investors with questions regarding these issues should consult with
their tax advisers.
In general, each issue of Bonds in the Trusts is subject to certain
post-issuance requirements which must be met in order for the interest on the
Bonds to be and remain exempt from Federal income taxation. Bond counsel to
each issuer generally has opined that, assuming continuing compliance by such
issuers with certain covenants, interest on such Bonds will continue to be
exempt from Federal income taxation (other than with respect to the application
to corporate Unitholders of the alternative minimum tax or the Superfund Tax,
as discussed below).
For purposes of computing the alternative minimum tax for individuals and
corporations, interest on certain specified tax-exempt private activity bonds
is included as a preference item. The Trusts do not include any such bonds.
For taxpayers other than corporations, net capital gains are presently subject
to a maximum 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.
Taxable Equivalent Yields
The following tables show the approximate taxable estimated current returns for
individuals that are equivalent to tax-exempt estimated current returns under
published 1994 marginal Federal tax rates. The tables illustrate what you
would have to earn on taxable investments to equal the tax-exempt estimated
current return for your income tax bracket. A taxpayer's marginal tax rate is
affected by both his taxable income and his adjusted gross income. Locate your
adjusted gross income and your taxable income (which is your adjusted gross
income reduced by any deductions and exemptions), then locate your tax bracket
based on joint or single tax filing. Read across to the equivalent taxable
estimated current return you would need to match the tax-free income. 1994 TAX
YEAR MARGINAL FEDERAL TAX RATES FOR JOINT TAXPAYERS WITH FOUR PERSONAL
EXEMPTIONS [S] [C] [C] [C] [C] [C] [C] [C] [C] c<>
Federal
Federal Adusted
Taxable Gross Federal
Income Income Tax Tax-Exempt Estimated Current Return
(1,000's) (1,000's) Rate* 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25%
$0-38.0 $0-111.8 15.00% 5.59% 5.88% 6.18% 6.47% 6.76% 7.06% 7.35%
38.0-91.9 0-111.8 28.00% 6.60% 6.94% 7.29% 7.64% 7.99% 8.33% 8.68%
111.8-167.7 29.00% 6.69% 7.04% 7.39% 7.75% 8.10% 8.45% 8.80%
91.9-140.0 0-111.8 31.00% 6.88% 7.25% 7.61% 7.97% 8.33% 8.70% 9.06%
111.8-167.7 32.00% 6.99% 7.35% 7.72% 8.09% 8.46% 8.82% 9.19%
167.7-290.2 34.50% 7.25% 7.63% 8.02% 8.40% 8.78% 9.16% 9.54%
140.0-250.0 111.8-167.7 37.00% 7.54% 7.94% 8.33% 8.73% 9.13% 9.52% 9.92%
167.7-290.2 40.00% 7.92% 8.33% 8.75% 9.17% 9.58% 10.00% 10.42%
Over 290.2 37.00%** 7.54% 7.94% 8.33% 8.73% 9.13% 9.52% 9.92%
Over 250.0 167.7-290.2 44.00%
8.48% 8.93% 9.38% 9.82% 10.27% 10.71% 11.16% Over
290.2 41.00%*** 8.05% 8.47% 8.90% 9.32% 9.75% 10.17% 10.59%
COMBINED MARGINAL FEDERAL TAX RATES FOR SINGLE TAXPAYERS WITH ONE PERSONAL
EXEMPTION [S] [C] [C] [C] [C] [C] [C] [C] [C] [C]
Federal
Federal Adusted
Taxable Gross Federal
Income Income Tax Tax-Exempt Estimated Current Return
(1,000's) (1,000's) Rate* 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25%
$0-22.8 $0-111.8 15.00% 5.59% 5.88% 6.18% 6.47% 6.76% 7.06% 7.35%
22.8-55.1 0-111.8 28.00% 6.60% 6.94% 7.29% 7.64% 7.99% 8.33% 8.68%
55.1-115.0 0-111.8 31.00% 6.88% 7.25% 7.61% 7.97% 8.33% 8.70% 9.06%
111.8-234.3 32.50% 7.04% 7.41% 7.78% 8.15% 8.52% 8.89% 9.26%
115.0-250.0 111.8-234.3 38.00%
7.66% 8.06% 8.47% 8.87% 9.27% 9.68% 10.08% Over 234.3 37.00% **
7.54% 7.94% 8.33% 8.73% 9.13% 9.52% 9.92% Over 250.0 Over
234.3 41.00%*** 8.05% 8.47% 8.90% 9.32% 9.75% 10.17% 10.59%
* The table reflects the effect of the limitations on itemized deductions and
the deduction for personal exemptions. They were designed to phase out certain
benefits of these deductions for higher income taxpayers. These limitations,
in effect, raise the marginal Federal tax rate to approximately 44% for
taxpayers filing a joint return and entitled to four personal exemptions and to
approximately 41% for taxpayers filing a single return entitled to only one
personal exemption. These limitations are subject to certain maximums, which
depend on the number of exemptions claimed and the total amount of the
taxpayer's itemized deductions. For example, the limitation on itemized
deductions will not cause a taxpayer to lose more than 80% of his allowable
itemized deductions, with certain exceptions.
** Federal tax rate reverts to 36% after the 80% cap on the limitation on
itemized deductions has been met. The above table reflects only the effect of
exemption from Federal income taxes. Unitholders of State Trusts, which are
exempt from both Federal and state taxes, would need a somewhat higher taxable
yield than shown in the table to equal the tax-exempt yield of such Trusts.
There can be no assurance that state tax rates will remain unchanged.
*** Federal tax rate reverts to 39.6% after the 80% cap on the limitation on
itemized deductions has been made.
A comparison of tax-free and equivalent taxable estimated current returns with
the returns on various taxable investments is one element to consider in making
an investment decision. The Sponsor may from time to time in its advertising
and sales materials compare the then current estimated returns on a Trust and
returns over specified periods on other similar Nuveen Trusts with returns on
taxable investments such as corporate or U.S. Government bonds, bank CDs and
money market accounts or money market funds, each of which has investment
characteristics that may differ from those of the Trust. U.S. Government
bonds, for example, are backed by the full faith and credit of the U.S.
Government and bank CDs and money market accounts are insured by an agency of
the Federal government. Money market accounts and money market funds provide
stability of principal, but pay interest at rates that vary with the condition
of the short-term debt market. The investment characteristics of the Trusts
are described more fully elsewhere in this Prospectus.
Certain Tax Matters Applicable to Corporate Unitholders. In the case of
certain corporations, the alternative minimum tax and the Superfund Tax depend
upon the corporation's alternative minimum taxable income ("AMTI"), which is
the corporation's taxable income with certain adjustments. One of the
adjustment items used in computing AMTI 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 AMTI
(before such adjustment item and the alternative tax net operation loss
deduction). Although tax-exempt interest received by each of the Trusts on
Bonds deposited therein will not be included in the gross income of
corporations for Federal income tax purposes, "adjusted current earnings"
includes all tax-exempt interest, including interest on all Bonds in the Trust
and tax-exempt original issue discount.
Corporate Unitholders are urged to consult their own tax advisers with respect
to the particular tax consequences to them resulting under Federal tax law,
including the corporate alternative minimum tax, the Superfund Tax, and the
branch profits tax imposed by Section 884 of the Code.
Except as noted above, the exemption of interest on state and local obligations
for Federal income tax purposes 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.
Alabama Trusts _ Tax Matters
At the time of closing for each Alabama Trust, Balch & Bingham, special counsel
for the Trusts for Alabama tax matters, rendered an opinion under then existing
law substantially to the effect that:
Under the income tax laws of Alabama, the Alabama Trust is not taxable as a
corporation or otherwise.
Income of the Alabama Trust, to the extent it is taxable, will be taxable to
the Unitholders, not to the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trusts' net income will be
treated as the income of the Unitholder for Alabama income tax purposes.
Interest on obligations of the State and subdivisions thereof and the
Possessions of the United States held by the Alabama Trust which is exempt from
the Alabama income tax will retain its tax-exempt character when the
distributive share thereof is distributed or deemed distributed to each
Unitholder.
Each Unitholder will, for the purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders.
Gains realized on the sale or redemption of Units by Unitholders who are
subject to the Alabama income tax will be includable in the Alabama income of
such Unitholders.
Arizona Trusts _ Tax Matters
Snell & Wilmer acted as special Arizona counsel to Arizona Traditional Trust
192 and all prior Arizona Traditional Trusts. Chapman and Cutler, Counsel for
the Sponsor, acted as special Arizona counsel to Arizona Traditional Trust 193
and all subsequent Arizona Trusts, including all Arizona Insured Trusts. At
the time of the closing for each Arizona Trust, the respective counsel to the
Trusts rendered an opinion under then existing law substantially to the effect
that:
For Arizona income tax purposes, each Unitholder will be treated as the owner
of a pro rata portion of the related Arizona Trust, and the income of the
Arizona Trust therefore will be treated as the income of the Unitholder under
State law.
For Arizona income tax purposes, interest on the Bonds which is excludable from
Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal gross
income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from an Arizona Trust by a Unitholder with
respect to the Bonds is excludable from Federal gross income, such interest
will not be subject to Arizona income taxes.
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for amortization of Bond discount
or premium and other basis adjustments, including any basis reduction that may
be required to reflect a Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the date
such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by an insurer under an insurance policy or policies issued to the
Trust, if any, with respect to the Bonds in the Trust which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from State
income taxes if, and to the same extent as, such interest would have been so
exempt if paid by the issuer of the defaulted obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
California Trusts _ Tax Matters
Jones, Day, Reavis & Pogue acted as special California counsel to California
Traditional Trust 206 and all prior California Traditional Trusts and to
California Insured Trust 77 and all prior California Insured Trusts. Wyman,
Bautzer, Kuchel & Silbert acted as special California counsel to California
Traditional Trust 207 through California Traditional Trust 239 and California
Insured Trust 78 through California Insured Trust 107. Orrick, Herrington &
Sutcliffe acted as special California counsel to California Traditional Trust
240 and all subsequent California Traditional Trusts and to California Insured
Trust 108 and to all subsequent California Insured Trusts and to California
Intermediate Insured Trust 1 and all subsequent California Intermediate Insured
Trusts. At the time of the closing for each California Trust, the respective
counsel to the Trusts rendered an opinion under then existing California income
and property tax law applicable to individuals who are California residents
substantially to the effect that:
The California Trust is not an association taxable as a corporation and the
income for the California Trust will be treated as the income of the
Unitholders thereof under the income tax laws of California.
Interest on the underlying securities (which may include bonds or other
obligations issued by the governments of Puerto Rico, the Virgin Islands, Guam
or the Northern Mariana Islands) which is exempt from tax under California
personal income tax and property tax laws when received by the California Trust
will, under such laws, retain its 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.
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 gain when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total tax cost of each
Unit 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 cost of each
bond issue. Unitholders' bases in their Units, and the bases for their
fractional interest in each California Trust asset, may have to be adjusted for
the their pro rata share of accrued interest received, if any, on securities
delivered after the Unitholders' respective settlement dates.
Under the California personal property tax laws, bonds (including the bonds in
the California Trust as well as "regular-way" and "when-issued" contracts for
the purpose of bonds) or any interest therein are exempt from such tax.
Any proceeds paid under an insurance policy, if any, issued to the Trustee with
respect to the bonds in a California Trust as well as "regular-way" and
"when-issued" contracts for the purchase of bonds 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.
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 Trust
is not deductible for the purposes of the California personal income tax.
While there currently 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.
Colorado Trusts _ Tax Matters
At the time of the closing for each Colorado Trust, Sherman & Howard L.L.C,
special Colorado counsel to the Trusts, rendered an opinion under then existing
law substantially to the effect that:
Each Colorado Trust consists of obligations which were issued by the State of
Colorado or its political subdivisions or by the United States or possessions
of the United States, including Puerto Rico, the Virgin Islands and Guam
("Bonds").
Because Colorado income tax law is based upon the Federal law and in light of
the opinion of Chapman and Cutler, the Colorado Trust is not an association
taxable as a corporation for purposes of Colorado income taxation.
With respect to Colorado Trust Unitholders, in view of the relationship between
Federal and Colorado tax computations described above and the opinion of
Chapman and Cutler referred to above:
Each Colorado Trust Unitholder will be treated as owning a share of each asset
of the Colorado Trust for Colorado income tax purposes, in the proportion that
the number of Units of such Colorado Trust held by him bears to the total
number of outstanding Units of such Colorado Trust, and the income of such
Colorado Trust will therefore be treated as the income of the Colorado
Unitholders under Colorado law in the proportion described.
Interest on Bonds that would not be subject to Colorado income tax or Colorado
alternative minimum tax when paid directly to a Colorado Unitholder will not be
subject to Colorado income tax or Colorado alternative minimum tax when
received by the related Colorado Trust and attributed to such Colorado
Unitholder and when distributed to such Colorado Unitholder.
Any proceeds paid under an insurance policy issued to the issuer of the Bonds
involved, to the Depositor prior to deposit of the Bonds in the Colorado Trust,
or to the Colorado Trust, which proceeds represent maturing interest on
defaulted Bonds and which proceeds would not be subject to Colorado income tax
or alternative minimum tax when paid directly to a Colorado Unitholder will not
be subject to Colorado income and alternative minimum tax when received by the
Colorado Trust and attributed to such Colorado Unitholder and when distributed
to such Colorado Unitholder.
Each Colorado Unitholder will realize gain or loss taxable in Colorado when the
related Colorado Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Colorado Unitholder redeems or
sells Units at a price that differs from original cost as adjusted for
amortization of bond discount or premium and other basis adjustments (including
any basis reduction that may be required to reflect a Colorado Unitholder's
share of interest, if any, accruing on Bonds during the interval between the
Colorado Unitholder's settlement date and the date such Bonds are delivered to
the Colorado Trust, if later).
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Colorado Unitholders realizing gain taxable
in Colorado when their Units are sold or redeemed for an amount equal to or
less than their original cost.
If interest on indebtedness incurred or continued by a Colorado Unitholder to
purchase Units in a Colorado Trust is not deductible for Federal income tax
purposes, it will not be deductible for Colorado income tax purposes.
Connecticut Trusts _ Tax Matters
The assets of each Connecticut Trust consist of obligations issued by or on
behalf of the State of Connecticut or its political subdivisions or public
instrumentalities, State or local authorities, districts, or similar public
entities created under the laws of the State of Connecticut or on behalf of a
United States territory or possession the interest on the obligations of which
Federal law would prohibit Connecticut from taxing if received directly by a
Unitholder (the "Bonds"). Certain Bonds in the Connecticut Trust that were
issued by the State of Connecticut or governmental authorities located in
Connecticut were issued prior to the enactment of a Connecticut tax on the
interest income of individuals; therefore, bond counsel to the issuers of such
Bonds did not opine as to the exemption of the interest on such Bonds from such
tax. However, the Sponsor and special counsel to the Trusts for Connecticut
tax matters believe that such interest will be so exempt. Interest on Bonds in
the Connecticut Trusts issued by other issuers, if any, is, in the opinion of
bond counsel to such issuers, exempt from state taxation.
At the time of the closing for each Connecticut Trust, Day, Berry & Howard,
special counsel to the Trusts for Connecticut tax matters, rendered an opinion
which relied explicitly on the opinion of Chapman and Cutler, rendered at such
time, regarding Federal income tax matters under then existing Connecticut law,
substantially to the effect that:
The Connecticut Trust is not subject to the Connecticut corporation business
tax or any other tax on or measured by net income imposed by the State of
Connecticut.
Interest income from Bonds held by the Connecticut Trust that would not be
taxable under the Connecticut tax on the interest and dividend income of
resident individuals, trusts and estates if received directly by the Unitholder
from the issuer of the Bond is not taxable under such tax when such interest is
received by the Connecticut Trust or distributed by it to such a Unitholder.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption or other disposition by the Connecticut
Traditional Trust of a Bond held by the Connecticut Trust or upon the
redemption, sale or disposition of a Unit of a Connecticut Trust held by a
Unitholder are taken into account as gains or losses, respectively, for
purposes of the Connecticut Income Tax, except that, in the case of a
Unitholder holding a Unit of the Connecticut Trust as a capital asset, such
gains and losses recognized upon the sale or exchange of a Bond issued by or on
behalf of the State of Connecticut, any political subdivision thereof, or
public instrumentality, state or local authority, district, or similar public
entity created under the laws of the State of Connecticut (a "Connecticut
Bond") held by the Connecticut Trust are excluded from gains and losses taken
into account for purposes of such tax, and no opinion is expressed as to the
treatment for purposes of such tax of gains and losses taken into account for
purposes of such tax, and no opinion is expressed as to the treatment for
purposes of such tax of gains and losses recognized upon the maturity or
redemption of a Connecticut Bond held by the Connecticut Trust or, to the
extent attributable to Connecticut Bonds, of gains and losses recognized upon
the redemption, sale, or other disposition by a Unitholder of a Unit of the
Connecticut Trust held by him.
The portion of any interest income or capital gain of the Connecticut Trust
that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax.
An interest in a Unit of the Connecticut Trust that is owned by or attributable
to a Connecticut resident at the time of his death is includable in his gross
estate for purposes of the Connecticut succession tax and the Connecticut
estate tax.
Florida Trusts _ Tax Matters
The assets of each Florida Trust will consist solely of interest-bearing
obligations issued by or on behalf of the State of Florida, its political
subdivisions and authorities or by the Commonwealth of Puerto Rico, Guam, the
Virgin Islands, American Samoa, or the Northern Mariana Islands (the "Bonds").
At the time of the closing for each Florida Trust, Carlton, Fields, Ward,
Emmanuel, Smith & Cutler, P.A., special counsel to the Trusts for Florida tax
matters, rendered an opinion under then existing law substantially to the
effect that:
For Florida State income tax purposes, the Florida Trust will not be subject to
the Florida income tax imposed by the Florida Code so long as the Trust has no
income subject to Federal taxation. In addition, political subdivisions of
Florida do not impose any income taxes.
Because Florida does not impose an income tax on individuals, noncorporate
Unitholders will not be subject to any Florida income tax on income realized by
the Trust. Each corporate Unitholder will be subject to Florida income
taxation on its share of the income realized by the Trust notwithstanding the
tax-exempt status of the interest received from any bonds under Section 103(a)
of the Internal Revenue Code of 1986 or any other Federal law, unless the
interest income constitutes Nonbusiness Income. Nevertheless, any corporate
Unitholder that has its commercial domicile in Florida will be taxable under
the Florida Code on its share of the Florida Trust income which constitutes
Nonbusiness Income.
Florida Trust Units will be subject to Florida estate tax only if owned by
Florida residents, certain natural persons not domiciled in Florida, or certain
natural persons not residents of the United States. However, the Florida
estate tax is limited to the amount of the credit allowable under the
applicable Federal Revenue Act (currently Section 2011 (and in some cases 2102)
of the Internal Revenue Code of 1986, as amended) for death taxes actually paid
to the several states.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax or Florida sales or use tax.
Because Bonds issued by the State of Florida or its political subdivisions or
by the Commonwealth of Puerto Rico, Guam, the Virgin Islands, American Samoa
and the Northern Mariana Islands are exempt from Florida intangible personal
property taxation under Chapter 199, Florida Statutes, as amended, the Florida
Trust will not be subject to Florida intangible personal property tax. In
addition, the Unitholders will not be subject to Florida intangible personal
property tax on the Units.
Georgia Trusts _ Tax Matters
Smith, Gambrell & Russell acted as special Georgia counsel to Georgia Trust 188
and all prior Georgia Trusts. Chapman and Cutler, Counsel for the Sponsor,
acted as special Georgia Counsel to Georgia Trust 189 and all subsequent
Georgia Trusts, including all Georgia Insured Trusts. At the time of the
closing for each Georgia Trust, the respective counsel to the Trusts rendered
an opinion under then existing law substantially to the effect that:
For Georgia income tax purposes, the Georgia Trust is not an association
taxable as a corporation, and the income of the Georgia Trust will be treated
as the income of the Unitholders. Interest on the Bonds, which is exempt from
Georgia income tax when received by the Georgia Trust, and which would be
exempt from Georgia income tax if received directly by a Unitholder, will
retain its status as tax-exempt interest when distributed by the Georgia Trust
and received by the Unitholders.
If the Trustee disposes of a Bond (whether by sale, exchange, payment on
maturity, retirement or otherwise) or if a Unitholder redeems or sells his
Units, the Unitholder will recognize gain or loss for Georgia income tax
purposes to the same extent that gain or loss would be recognized for Federal
income tax purposes (except in the case of Georgia Bonds issued before March
11, 1987 issued with original issue discount owned by the Georgia Trust, in
which case gain or loss for Georgia income tax purposes would be determined by
accruing said original issue discount on a ratable basis). Due to the
amortization of bond premium and other basis adjustments required by the 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.
Because obligations or evidences of debt of Georgia, its political subdivisions
and public institutions and bonds issued by the Government of Puerto Rico are
exempt from the Georgia intangible personal property tax, the Trust will not be
subject to such tax as the result of holding such obligations, evidences of
debt or bonds. Although there currently is no published administrative
interpretation or opinion of the Attorney General of Georgia dealing with the
status of bonds issued by a political subdivision of Puerto Rico, counsel has
been advised orally by representatives of the Georgia Department of Revenue
that such bonds would also be considered exempt from such tax. Based on that
advice, and in the absence of a published administrative interpretation to the
contrary, counsel is of the opinion that the Trust would not be subject to such
tax as the result of holding bonds issued by a political subdivision of Puerto
Rico.
Amounts paid by an insurer under an insurance policy or policies issued to the
Georgia 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 Georgia income taxes if, and to the extent that, such interest would have
been so exempt if paid by the issuer of the defaulted obligations; provided
that, at the time such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the reasonable
expectations that the issuer of the bonds, rather than the insurer, will pay
debt service on the bonds.
Counsel have expressed no opinion regarding whether a Unitholder's ownership of
an interest in the Trust is subject to the Georgia intangible personal property
tax. Although the application of the Georgia intangible personal property tax
to the ownership of the Units by the Unitholders is not clear, representatives
of the Georgia Department of Revenue have in the past advised counsel orally
that, for purposes of the intangible property tax, the Department considers a
Unitholder's ownership of an interest in the Trust as a whole to be taxable
intangible property separate from any ownership interest in the underlying
tax-exempt Bonds.
Neither the Bonds nor the Units will be subject to Georgia sales or use tax.
Maryland Trusts _ Tax Matters
The assets of each Maryland Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Maryland, its political subdivisions and
authorities and, provided the interest thereon is exempt from State income
taxes by the laws or treaties of the United States, obligations issued by or on
behalf of the United States' territories or possessions, including Puerto Rico,
Guam and the Virgin Islands, their political subdivisions and authorities (the
"Bonds").
At the time of the closing for each Maryland Trust, Venable, Baetjer and
Howard, special counsel for the Trusts for Maryland tax matters, rendered an
opinion under then existing law substantially to the effect that:
For Maryland State and local income tax purposes, the Maryland Trust will not
be recognized as an association, and the income of the Maryland Trust will be
treated as the income of the Unitholders.
For Maryland State and local tax purposes, interest on the Bonds which is
exempt from Maryland State and local income tax when received by the Maryland
Trust, and which would be exempt from Maryland State and local income tax if
received directly by a Unitholder, will retain its status as tax-exempt
interest when received by the Maryland Trust and distributed to the
Unitholders.
Interest derived from the Maryland Trust by a Unitholder with respect to the
Bonds will not be subject to Maryland State or local income taxes; provided
that interest derived from the Maryland Trust by a financial institution, as
defined in Section 8-101(c) of the Tax-General Article of the Annotated Code of
Maryland, will be subject to the Maryland state franchise tax on financial
institutions, except to the extent such interest is expressly exempt from the
Maryland state franchise tax by the statutes which authorize the issuance of
such Bonds (see Section 8-204 of the Tax-General Article of the Annotated Code
of Maryland).
A Unitholder will not be subject to Maryland state or local income tax with
respect to gain realized when Bonds held in the Maryland Trust are sold,
redeemed or paid at maturity, except with respect to gain realized upon a sale,
redemption or payment at maturity of such bonds as are issued by or on behalf
of United States territories or possessions, their political subdivisions and
authorities; such gain will equal the proceeds of sale, redemption or payment,
less the tax bases of the Bonds (adjusted to reflect (a) the amortization of
Bond premium or discount, and (b) the deposit in the Maryland Trust after the
Unitholder's settlement date of Bonds with accrued interest).
Although the matter is not free from doubt, gain realized by a Unitholder from
the redemption, sale or other disposition of a Maryland Trust Unit (i) will be
subject to Maryland state income tax except in the case of individual
Unitholders who are not Maryland residents, and (ii) will be subject to
Maryland local income tax in the case of individual Unitholders who are
Maryland residents.
If interest on indebtedness incurred or continued by a Unitholder to purchase
Units in the Maryland Trust is not deductible for Federal income tax purposes,
it will also be nondeductible for Maryland state income tax purposes and, if
applicable, local income tax purposes.
Maryland Trust Units will be subject to Maryland inheritance and estate tax
only if held by Maryland residents. Neither the Bonds nor the Maryland Trust
Units will be subject to Maryland personal property tax, sales tax or use tax.
Massachusetts Trusts _ Tax Matters
Peabody & Arnold acted as special Massachusetts counsel to Massachusetts
Traditional Trust 182 and all prior Massachusetts Traditional Trusts and to
Massachusetts Insured Trust 44 and all prior Massachusetts Insured Trusts.
Edwards & Angell acted as special Massachusetts counsel to Massachusetts
Traditional Trust 183 and all subsequent Massachusetts Traditional Trusts and
to Massachusetts Insured Trust 45 and all subsequent Massachusetts Insured
Trusts. At the time of the closing for each Massachusetts Trust, the
respective counsel to the Trusts rendered an opinion, based on rulings by the
Commissioner of Revenue and under then existing law, substantially to the
effect that:
For Massachusetts income tax purposes, the Massachusetts Trust will be treated
as a corporate trust under Section 8 of Chapter 62 of the Massachusetts General
Laws ("M.G.L.") and not as a grantor trust under Section 10(e) of M.G.L.
Chapter 62.
The Massachusetts Trust will not be held to be engaging in business in
Massachusetts within the meaning of said Section 8 and will, therefore, not be
subject to Massachusetts income tax.
Unitholders who are subject to Massachusetts income taxation under M.G.L.
Chapter 62 will not be required to include their respective shares of the
earnings of or distributions from the Massachusetts Trust in their
Massachusetts gross income to the extent that such earnings or distributions
represent tax-exempt interest excludable from gross income for Federal income
tax purposes received by the Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or by Puerto Rico, the Virgin Islands, Guam,
the Northern Mariana Islands or other possessions of the United States within
the meaning of Section 103(c) of the Code ("Obligations").
In the case of a Massachusetts Insured Trust, Unitholders who are subject to
Massachusetts income taxation under M.G.L. Chapter 62 will not be required to
include their respective shares of the earnings of or distributions from such
Trust in their Massachusetts gross income to the extent that such earnings of
or distributions are derived from the proceeds of insurance obtained by the
Sponsor of such Trust or by the issuer or underwriter of an obligation held by
such Trust that represent maturing interest on defaulted obligations held by
the Trustee, if and to the same extent that such earnings or distributions
would have been excludable from the gross income of such Unitholders if derived
from interest paid by the issuer of the defaulted obligation.
Unitholders which are corporations subject to taxation under M.G.L. Chapter 63
will be required to include their respective shares of the earnings of or
distributions from the Trust in their Massachusetts gross income to the extent
that such earnings or distributions represent interest from bonds, notes or
indebtedness of any state, including Massachusetts, except for interest which
is specifically exempted from such tax by the acts authorizing issuance of said
Obligations.
The Massachusetts Trust's capital gains or capital losses, or both, which are
includable in the Federal gross income of Unitholders who are subject to
Massachusetts income taxation under M.G.L. Chapter 62, or Unitholders which are
corporations subject to Massachusetts income taxation under M.G.L. Chapter 63
will be included as capital gains or losses, or both, in the Unitholders'
Massachusetts gross income, except for capital gain, which is specifically
exempted from income taxation under such Chapters by the acts authorizing
issuance of said Obligations.
Unitholders which are corporations subject to tax under M.G.L. Chapter 63 and
which are tangible property corporations will not be required to include the
Units when determining the value of their tangible property. Unitholders which
are intangible property corporations will be required to include the Units when
determining their net worth.
Gains or losses realized on sale or redemption of Units by Unitholders who are
subject to Massachusetts income taxation under M.G.L. Chapter 62, or
Unitholders which are corporations subject to Massachusetts income taxation
under M.G.L. Chapter 63, will be includable in their Massachusetts gross
incomes. In determining such gain or loss Unitholders will, to the same extent
required as for Federal tax purposes, have to adjust their tax bases for their
Units for accrued interest received, if any, on Obligations delivered to the
Trustee after the Unitholders pay for their Units, for amortization of
premiums, if any, on Obligations held by the Massachusetts Trust, and for
accrued original issue discount with respect to each Obligation which, at the
time the Obligation was issued, had original issue discount.
The Units of the Trust are not subject to any property tax levied by
Massachusetts or any political subdivision thereof, nor to any income tax
levied by any such political subdivision. They are includable in the gross
estate of a deceased holder who is a resident of Massachusetts for purposes of
the Massachusetts Estate Tax.
Michigan Trusts _ Tax Matters
At the time of the closing for each Michigan Trust, Dickinson, Wright, Moon,
Van Dusen & Freeman, special Michigan counsel to the Trusts, rendered an
opinion under then-existing law substantially to the effect that:
The assets of a Michigan Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Michigan, and counties, municipalities,
authorities and political subdivisions thereof, and, in limited instances,
bonds issued by Puerto Rico, the Virgin Islands, Guam, the Northern Mariana
Islands or possessions of the United States (the "Bonds").
Under the Michigan income tax act, the Michigan single business tax act, the
Michigan intangibles tax act, the Michigan city income tax act (which
authorizes the only income tax ordinance that may be adopted by cities in
Michigan), and under the law which authorizes a "first class" school district
to levy an excise tax upon income, the Michigan Trust is not subject to tax.
The income of the Michigan Trust will be treated as the income of the
Unitholders thereof and be deemed to have been received by them when received
by the Michigan Trust.
Interest on the Bonds in the Michigan Trust which is exempt from Federal income
tax is exempt from Michigan state and local income taxes and from the Michigan
single business tax. Further, any amounts paid under an insurance policy
representing maturing interest on defaulted obligations held by the Trustee
will be excludable from Michigan state and local income taxes and from the
Michigan single business tax if, and to the same extent as, such interest would
have been excludable if paid by the respective issuer.
For purposes of the foregoing Michigan tax laws (corporations and financial
institutions are not subject to the Michigan income tax), each Unitholder will
be considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable event
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells
Units. Due to the requirement that tax cost be reduced to reflect amortization
of bond premium, under some circumstances a Unitholder may realize taxable gain
when Units are sold or redeemed for an amount equal to, or less than, their
original cost. The tax cost of each Unit to a Unitholder will be allocated for
purposes of these Michigan tax laws in the same manner as the cost is allocated
for Federal income tax purposes.
Pursuant to the position of the Michigan Department of Treasury in a bulletin
dated December 19, 1986, reaffirmed in a bulletin dated March 31, 1989, the
portion of a Michigan Trust represented by the Bonds will be exempt from the
Michigan Intangibles Tax. The Department of Treasury has not indicated a
position with respect to treatment of amounts paid under a policy of insurance
with respect to maturing interest on defaulted obligations (which amounts would
have been excludable if paid by the respective issuer) for purposes of
determining the income base for the Michigan Intangibles Tax.
If a Unitholder is subject to the Michigan single business tax (i.e., is
engaged in a "business activity" as defined in the Michigan single business tax
act), and has a taxable event for Federal income tax purposes when the Michigan
Trust sells or exchanges Bonds or the Unitholder sells or exchanges units, such
event may affect the adjusted tax base upon which the single business tax is
computed. Any capital gain or loss realized from such taxable event which was
included in the computation of the Unitholder's Federal taxable income, plus
the portion, if any, of such capital gain excluded in such computation and
minus the portion, if any, of such capital loss not deducted in such
computation for the year the loss occurred, will be included in the adjusted
tax base. The adjusted tax base of any person other than a corporation is
affected by any gain or loss realized from the taxable event only to the extent
that the resulting Federal taxable income is derived from "business activity."
Minnesota Trusts _ Tax Matters
At the time of the closing for each Minnesota Trust, Dorsey & Whitney, special
Minnesota counsel for the Trusts, rendered an opinion under then-existing law
substantially to the effect that:
Counsel understands that the 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 Puerto Rico, the Virgin Islands, the
Northern Mariana Islands or Guam 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 the 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 the
Federal tax treatment of the Minnesota Trust and its Unitholders, (1) the
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 the Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota Trust for Minnesota
income tax purposes and the income of the 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 the 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 includable 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 the Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells Units at a price which differs from original cost
as adjusted for amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be required to reflect a
Unitholder'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 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 an insurance policy issued to the Trustee with respect to the Bonds which
represent maturing interest on defaulted obligations held by the Trustee will
be excludable from Minnesota gross income if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligation; (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 excludable from Minnesota gross income if, and to
the same extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations; (9) net capital gains
of Unitholder attributable to the Bonds will be fully includable in the
Minnesota taxable income of Unitholders (subject to allocation and
apportionment in the case of corporate Unitholders); and (10) interest on bonds
includable in the computation of "alternative minimum taxable income" for
Federal income tax purposes will also be includable 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 directly by such Unitholder.
Missouri Trusts _ Tax Matters
At the time of the closing for each Missouri Trust, Watson & Marshall special
counsel to the Trusts for Missouri tax matters, rendered an opinion under then
existing Missouri income tax law (not including any Missouri law imposing a
franchise tax) applicable to corporations with Missouri taxable income and to
individuals who are Missouri residents for Missouri income tax purposes
substantially to the effect that:
The Missouri Trust will not be an association taxable as a corporation for
purposes of Missouri income taxation.
Each Missouri Unitholder will be treated as owning a pro rata share of each
asset of the Missouri Trust for Missouri 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 Missouri Trust, and the income of the
Missouri Trust will therefore be treated as the income of each Missouri
Unitholder under Missouri law in the proportion described.
Interest on Bonds that would not be includable in Missouri adjusted gross
income when paid directly to a Missouri Unitholder will not be includable in
Missouri adjusted gross income when received by the Missouri Trust and
attributed to such Missouri Unitholder or when distributed to such Missouri
Unitholder.
Each Missouri Unitholder will realize taxable gain or loss when the Missouri
Trust disposes of a Bond (whether by sale, exchange, redemption, or payment at
maturity) at a gain or loss or when the Missouri Unitholder redeems or sells
Units at a price that differs from the adjusted basis. Gain or loss and the
adjusted basis will be computed in the same manner as for Federal income tax
treatment. Due to the amortization of bond premium and other basis adjustments
required by the Internal Revenue Code, a Missouri Unitholder, under some
circumstances, may realize taxable gain when his or her Units are sold or
redeemed for an amount equal to or less than their original cost.
If interest on indebtedness incurred or continued by a Missouri Unitholder to
purchase Units in the Missouri Trust is not deductible for Federal income tax
purposes, it also will be nondeductible for Missouri income tax purposes.
Obligations issued by U.S. Possessions will not be subject to a Missouri
intangibles tax or a personal property tax.
New Jersey _ Tax Matters
The assets for each New Jersey Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Jersey and counties,
municipalities, authorities and other political subdivisions thereof, and
certain territories of the United States, including Puerto Rico, Guam, the
Virgin Islands and the Northern Mariana Islands (the "Bonds").
At the time of the closing for each New Jersey Trust, Pitney, Hardin, Kipp &
Szuch, special counsel to the Trusts for New Jersey tax matters, rendered an
opinion under then-existing law substantially to the effect that:
The New Jersey Trust will be recognized as a trust and not an association
taxable as a corporation. The New Jersey Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation Income Tax.
With respect to the non-corporate Unitholders who are residents of New Jersey,
the income of the New Jersey Trust will be treated as the income of such
Unitholders under the New Jersey Gross Income Tax. Interest on the underlying
Bonds which is exempt from tax under the New Jersey Gross Income Tax Law when
received by the New Jersey Trust will retain its status as tax-exempt interest
when distributed to Unitholders.
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) or when the
Unitholder redeems or sells his Units. 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.
Units of the New Jersey Trust may be taxable on the death of a Unitholder under
the New Jersey Transfer Inheritance Tax Law or the New Jersey Estate Tax Law.
If a Unitholder is a corporation subject to the New Jersey Corporation Business
Tax or New Jersey Corporation Income Tax, interest from the Bonds in the New
Jersey Trust which is allocable to such corporation will be includable in its
entire net income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax, less any interest expense incurred to carry
such investment to the extent such interest expense has not been deducted in
computing Federal taxable income. Net gains derived by such corporation on the
disposition of the Bonds by the New Jersey Trust or on the disposition of its
Units will be included in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax.
New York Trusts _ Tax Matters
In the opinion of Edwards & Angell, special counsel to the Trusts for New York
tax matters, under existing law:
Interest on obligations issued by New York State, a political subdivision
thereof, Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands,
or other possessions of the United States within the meaning of Section 103(c)
of the Internal Revenue Code of 1986, as amended ("New York Obligations"),
which would be exempt from New York State or New York City personal income tax
if directly received by a Unitholder, will retain its status as tax-exempt
interest when received by the New York Insured Trust (the "Trust") and
distributed to such Unitholder.
Interest (less amortizable premium, if any) derived from the Trust by a
resident of New York State (or New York City) in respect of obligations issued
by states other than New York (or their political subdivisions) will be subject
to New York State (or New York City) personal income tax.
A Unitholder who is a resident of New York State (or New York City) will be
subject to New York State (or New York City) personal income tax with respect
to gains realized when New York Obligations held in the New York Insured Trust
are sold, redeemed or paid at maturity or when the Unitholder's Units are sold
or redeemed; such gain will equal the proceeds of sale, redemption or payment
less the tax basis of the New York Obligation or Unit (adjusted to reflect (a)
the amortization of premium or discount, if any, on New York Obligations held
by the Trust, (b) accrued original issue discount, with respect to each New
York Obligation which, at the time the New York Obligation was issued, had
original issue discount, and (c) the deposit of New York Obligations with
accrued interest in the Trust after the Unitholder's settlement date).
Interest or gain from the Trust derived by a Unitholder who is not a resident
of New York State (or New York City) will not be subject to New York State (or
New York City) personal income tax, unless the Units are property employed in a
business, trade, profession or occupation carried on in New York State (or New
York City).
In the case of the Trust, amounts paid under the insurance policies
representing maturing interest on defaulted New York Obligations held by the
Trustee in the Trust will be excludable from New York State and New York City
income if, and to the same extent as, such interest would have been excludable
if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of obligations of any state or subdivision
thereof including New York.
If borrowed funds are used to purchase Units in the Trust, all (or part) of the
interest on such indebtedness will not be deductible for New York State and New
York City tax purposes. The purchase of Units may be considered to have been
made with borrowed funds even though such funds are not directly traceable to
the purchase of Units in any New York Trust.
North Carolina _ Tax Matters
The assets of the Trust will consist of interest-bearing obligations issued by
or on behalf of the State of North Carolina, its political subdivisions and
authorities and, provided the interest thereon is exempt from North Carolina
income taxes by the laws or treaties of the United States, by or on behalf of
the United States territories or possessions (including Puerto Rico, the Virgin
Islands, Guam and the Northern Mariana Islands), their political subdivisions
and authorities (the "North Carolina Bonds").
The North Carolina Trust is not an association taxable as a corporation for
North Carolina income tax purposes. Interest on the North Carolina Bonds which
is exempt from North Carolina income tax when received by the North Carolina
Trust will retain its status as tax-exempt interest when distributed to
Unitholders.
For North Carolina income tax purposes, each Unitholder will have a taxable
event when, upon redemption or sale of his Units, he receives cash or other
property. Gain or loss will be determined by computing the difference between
the proceeds of such a redemption or sale and the Unitholder's adjusted basis
for the Units.
For North Carolina income tax purposes, each Unitholder will have a taxable
event when the North Carolina Trust disposes of one of the North Carolina Bonds
(whether by sale, payment at maturity, retirement or otherwise); provided that
when any of the North Carolina Bonds held by the North Carolina Trust have been
issued under an act of the General Assembly of North Carolina that provides
that all income from such Bond, including a 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 each Unitholder.
Ownership of the Units representing a pro rata ownership of the North Carolina
Bonds is exempt from the North Carolina tax on intangible personal property so
long as the corpus of the Trust is composed entirely of North Carolina
obligations or is composed entirely of obligations of the United States and its
possessions and North Carolina and at least eighty percent (80%) of the fair
market value of such obligations represents North Carolina obligations;
provided that for this exemption to apply, the Trustee must periodically
provide to the North Carolina Department of Revenue such information about the
North Carolina Trust as required by applicable law.
Interest on indebtedness paid or incurred by a Unitholder in connection with
ownership of Units in the North Carolina Trust will not be deductible by the
Unitholder for North Carolina state income tax purposes.
Amortization of North Carolina Bond premiums is mandatory for North Carolina
state income tax purposes for all North Carolina resident Unitholders.
Amortization for the taxable year is accomplished by lowering the basis or
adjusted basis of the Units, with no deduction against gross income for the
year.
Trust Units will be subject to North Carolina inheritance and estate tax if
owned by a North Carolina resident on the date of his death. Neither the North
Carolina bonds nor the Units will be subject to the North Carolina sales tax or
use tax.
Ohio Trusts _ Tax Matters
Each Ohio Trust is comprised primarily of interest-bearing obligations issued
by or on behalf of the State of Ohio, political subdivisions thereof, or
agencies or instrumentalities thereof (the "Ohio Obligations"), or by the
governments of Puerto Rico, the Virgin Islands, the Northern Mariana Islands or
Guam ("Territorial Obligations") (collectively, "Obligations").
At the time of the closing for each Ohio Trust, Squire, Sanders & Dempsey,
special Ohio counsel to the Trusts, rendered an opinion under then existing law
substantially to the effect that, provided that at all times at least fifty
percent of the value of the total assets of the Ohio Trust consist of Ohio
Obligations or similar obligations of other states or their subdivisions:
The 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.
Income of the 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.
Interest on Obligations held by the Ohio Trust is exempt from the Ohio personal
income tax, Ohio municipal income taxes and Ohio school district income taxes
and is excluded from the net income base of the Ohio corporation franchise tax
when distributed or deemed distributed to Unitholders.
Proceeds paid under insurance policies, if any, to the Trustee of the Ohio
trust, representing maturing interest on defaulted obligations held by the Ohio
Trust will be exempt from the Ohio personal 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.
Gains and losses realized on the sale, exchange or other disposition by the
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.
Oregon Trusts _ Tax Matters
At the time of the closing for each Oregon Trust, Schwabe, Williamson, Wyatt,
Moore & Roberts, special counsel to the Trusts for Oregon tax matters, who
relied on the opinion of Chapman and Cutler, rendered at such time, rendered an
opinion under then existing Oregon law applicable to individuals who are Oregon
residents for Oregon tax purposes substantially to the effect that:
The Oregon Trust is not an association taxable as a corporation for Oregon
income tax or corporate excise tax purposes.
Each Unitholder of the Oregon Trust will be considered the owner of an aliquot
portion of the Oregon Trust for purposes of Oregon personal income taxes.
An item of Oregon Trust income which would be exempt from income tax under
Oregon law if directly received by a Unitholder and which is exempt from income
tax under Oregon law when received by the Oregon Trust will retain its status
as tax-exempt when distributed by such Oregon Trust and received by the
Unitholders.
A Unitholder of the Oregon Trust will have a taxable event when the Oregon
Trust disposes of a trust asset (whether by sale, payment on maturity,
retirement or otherwise) or when the Unitholder redeems or sells his Units.
Because of the requirement that tax cost basis be reduced to reflect
amortization of bond premiums, if any, on obligations held by the Oregon Trust,
a Unitholder may realize taxable gains when his Units are sold or redeemed for
an amount equal to or less than his original cost.
To the extent that the assets of the Oregon Trust consist of intangible
personal property, such assets and any interest thereon are exempt from
property tax under Oregon law.
Pennsylvania Trusts _ Tax Matters
At the time of the closing for each Pennsylvania Trust, Dechert Price & Rhoads,
special Pennsylvania counsel to the Trusts, rendered an opinion under then
existing law substantially to the effect that:
Units evidencing fractional undivided interests in the Pennsylvania Trusts are
not subject to any of the personal property taxes presently in effect in
Pennsylvania to the extent of that proportion of the Trusts represented by
Bonds issued by the Commonwealth of Pennsylvania, its agencies and
instrumentalities, or by any county, city, borough, town, township, school
district, municipality and local housing or parking authority in the
Commonwealth of Pennsylvania or issued by Puerto Rico, the Virgin Islands,
Guam, or the Northern Mariana Islands ("Pennsylvania Bonds"). The taxes
referred to above include the County Personal Property Tax, the additional
personal property taxes imposed on Pittsburgh residents by the School District
of Pittsburgh and by the City of Pittsburgh. The City of Pittsburgh, the
School District of Pittsburgh and Allegheny County cannot impose personal
property taxes as of January 1, 1995. Pennsylvania Trust Units may be taxable
under the Pennsylvania inheritance and estate taxes.
The proportion of interest income representing interest income from
Pennsylvania Bonds distributed to Unitholders of a Pennsylvania Trust is not
taxable under the Pennsylvania Personal Income Tax or under the Corporate Net
Income Tax imposed on corporations by Article IV of the Tax Reform Code. Nor
will such interest be taxable under the Philadelphia School District Investment
Income Tax imposed on Philadelphia resident individuals.
The disposition by a Pennsylvania Trust of a Pennsylvania Bond (whether by
sale, exchange, redemption or payment at maturity) will not constitute a
taxable event to a Unitholder under the Pennsylvania Personal Income Tax.
Further, although there is no published authority on the subject, counsel is of
the opinion that (i) a Unitholder of a Pennsylvania Trust will not have a
taxable event under the Pennsylvania State and local income taxes referred to
in the preceding paragraph (other than the Corporate Net Income Tax) upon the
redemption or sale of his Unit to the extent that the Pennsylvania Trust is
then comprised of Pennsylvania Bonds issued prior to February 1, 1994 and (ii)
the disposition by a Pennsylvania Trust of a Pennsylvania Bond (whether by
sale, exchange, redemption or payment at maturity) will not constitute a
taxable event to a Unitholder under the Corporation Net Income Tax or the
Philadelphia School District Investment Income Tax if the Pennsylvania Bond was
issued prior to February 1, 1994. (The School District tax has no application
to gain on the disposition of property held by the taxpayer for more than six
months.)
Gains on the sale, exchange, redemption, or payment at maturity of a
Pennsylvania Bond issued on or after February 1, 1994 will be taxable under all
of these taxes, as will gains on the redemption or sale of a unit to the extent
that the Trust is comprised of Pennsylvania Bonds issued on or after February
1, 1994.
Tennessee Trusts _ Tax Matters
At the time of the closing for each Tennessee Trust, Chapman and Cutler,
special counsel for the Trusts for Tennessee tax matters, rendered an opinion
under then existing law substantially to the effect that:
The assets of the Trust will consist of bonds issued by the State of Tennessee
(the "State"), or any county or any municipality or political subdivision
thereof, including any agency, board, authority or commission, the interest on
which is exempt from the Hall Income Tax imposed by the State of Tennessee
("Tennessee Bonds"), or by the Commonwealth of Puerto Rico or its political
subdivisions (the "Puerto Rico Bonds") (collectively, the "Bonds").
Under Tennessee law, a unit investment trust taxable as a grantor trust for
Federal income tax purposes is entitled to special Tennessee State tax
treatment (as more fully described below) with respect to its proportionate
share of interest income received or accrued with respect to Tennessee Bonds.
The law also provides an exemption for distributions made by a unit investment
trust or mutual fund that are attributable to "bonds or securities of the
United States government or any agency or instrumentality thereof" ("U.S.
Government, Agency or Instrumentality Bonds"). If it were determined that the
Trust held assets other than Tennessee Bonds or U.S. Government, Agency, or
Instrumentality Bonds, a proportionate share of distributions from the Trust
would be taxable to Unitholders for Tennessee Income Tax purposes. Further,
because Tennessee law only provides an exemption for distributions that relate
to interest income, distributions by the Trust that relate to capital gains
realized from the sale or redemptions of Tennessee Bonds or U.S. Government,
Agency, or Instrumentality Bonds are likely to be treated as taxable dividends
for purposes of the Hall Income Tax. However, capital gains realized directly
by a Unitholder when the Unitholder sells or redeems his Unit will not be
subject to the Hall Income Tax. The opinion set forth below assumes that the
interest on the Tennessee Bonds, if received directly by a Unitholder, would be
exempt from the Hall Income Tax under State law. This opinion does not address
the taxation of persons other than full-time residents of the State of
Tennessee.
Because the recent amendments only provide an exemption for distributions
attributable to interest on Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds, it must be determined whether bonds issued by the
Government of Puerto Rico qualify as U.S. Government, Agency or Instrumentality
Bonds. For Hall Income Tax purposes, there is currently no published
administrative interpretation or opinion of the Attorney General of Tennessee
dealing with the status of distributions made by unit investment trusts such as
the Tennessee Trust that are attributable to interest paid on bonds issued by
the Government of Puerto Rico. However, in a letter dated August 14, 1992 (the
"Commissioner's Letter"), the Commissioner of the State of Tennessee Department
of Revenue advised that Puerto Rico would be an "Instrumentality" of the U.S.
Government and treated bonds issued by the Government of Puerto Rico as U.S.
Government, Agency or Instrumentality Bonds.
Based on this conclusion, the Commissioner advised that distributions from a
mutual fund attributable to investments in Puerto Rico Bonds are exempt from
the Hall Income Tax. Both the Sponsor and Chapman and Cutler, for purposes of
its opinion (as set forth below), have assumed, based on the Commissioner's
Letter, that bonds issued by the Government of Puerto Rico are U.S. Government,
Agency or Instrumentality Bonds. However, it should be noted that the position
of the Commissioner is not binding, and is subject to change, even on a
retroactive basis.
The Sponsor cannot predict whether new legislation will be enacted into law
affecting the tax status of Tennessee Trusts. The occurrence of such an event
could cause distributions of interest income from the Trust to be subject to
the Hall Income Tax. Additional information regarding such proposals is
currently unavailable. Investors should consult their own tax advisors in this
regard.
In the opinion of Chapman and Cutler, Special Counsel to the Trust for
Tennessee tax matters; under existing law as of the date hereof:
For purposes of the Hall Income Tax, the Tennessee Excise Tax imposed by
Section 67-4-806 (the "State Corporate Income Tax"), and the Tennessee
Franchise Tax imposed by Section 67-4-903, the Trust will not be subject to
such taxes.
For Hall Income Tax purposes, a proportionate share of such distributions from
the Trust to Unitholders, to the extent attributable to interest on the
Tennessee Bonds (based on the relative proportion of interest received or
accrued attributable to Tennessee Bonds), will be exempt from the Hall Income
Tax when distributed to such Unitholders. Based on the Commissioner's Letter,
distributions from the Trust to Unitholders, to the extent attributable to
interest on the Puerto Rico Bonds (based on the relative proportion of interest
received or accrued attributable to the Puerto Rico Bonds), will be exempt from
the Hall Income Tax when distributed to such Unitholders. A proportionate
share of distributions from the Tennessee Trust attributable to assets other
than the Bonds, would not, under current law, be exempt from the Hall Income
Tax when distributed to Unitholders.
For State Corporate Income Tax purposes, Tennessee law does not provide an
exemption for interest on Tennessee Bonds and requires that all interest
excludible from Federal gross income must be included in calculating "net
earnings" subject to the State Corporate Income Tax. No opinion is expressed
regarding whether such tax would be imposed on the earnings or distributions of
the Trust (including interest on the Bonds or gain realized upon the
disposition of the Bonds by the Trust) attributable to Unitholders subject to
the State Corporate Income Tax. However, based upon prior written advice from
the Tennessee Department of Revenue, earnings and distributions from the Trust
(including interest on the Bonds or gain realized upon the disposition of the
Bonds by the Trust) attributable to the Unitholders should be exempt from the
State Corporate Income Tax. The position of the Tennessee Department of
Revenue is not binding, and is subject to change, even on a retroactive basis.
Each Unitholder will realize taxable gain or loss for State Corporate Income
Tax purposes when the Unitholder redeems or sells his Units at a price that
differs from original cost as adjusted for accretion or any discount or
amortization of any 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 Trust, if later. Tax basis
reduction requirements relating to amortization of bond premium may, under some
circumstances, result in Unitholders realizing taxable gain when the Units are
sold or redeemed for an amount equal to less than their original cost.
For purposes of the Tennessee Property Tax, the Trust will be exempt from
taxation with respect to the Bonds it holds. As for the taxation of the Units
held by the Unitholders, although intangible personal property is not presently
subject to Tennessee taxation, no opinion is expressed with regard to potential
property taxation of the Unitholders with respect to the Units because the
determination of whether property is exempt from such tax is made on a county
by county basis.
The Bonds and the Units held by the Unitholder will not be subject to Tennessee
sales and use taxes.
No opinion is expressed as to the exemption from State income taxes of the
interest on the Bonds if received directly by a Unitholder.
Texas Trusts _ Tax Matters
The State of Texas currently imposes no income tax. However, several proposals
have been introduced in the Texas Legislature that would, among other things,
impose a Texas income tax on individuals, trusts and businesses. It is
impossible to predict whether any such proposals will be enacted, and whether,
if enacted, any such law would exempt interest on Texas Bonds (or out of state
Bonds) from the Texas income tax, or if so whether income distributed by a
Texas Trust would retain its tax-exempt status when received by unitholders.
While no opinion is rendered as to whether income distributions from any Texas
Trust will be exempt from any income tax that may be imposed on residents of
Texas in the future, at the time of the closing for each Texas Trust, Johnson &
Gibbs, P.C., special Texas counsel to the Texas Trusts, rendered an opinion
pursuant to then existing Texas law applicable to individuals who are residents
of Texas for Texas tax purposes substantially to the effect that:
Neither the State nor any political subdivision of the State currently imposes
an income tax. Therefore, no portion of any distribution received by a
Unitholder of a Texas Trust in respect of his Units is subject to income
taxation by the State or any political subdivision of the State.
Except in the case of certain transportation businesses, savings and loan
associations and insurance companies, no Unit of the Fund is taxable under any
property tax levied in the State;
The "inheritance tax" of the State, imposed upon certain transfers of property
of a deceased resident individual Unitholder, may be measured in part upon the
value of Units of a Texas Trust included in the estate of such Unitholder; and
With respect to any Unitholder which is subject to the State corporate
franchise tax, Units in a Texas Trust held by such Unitholder, and
distributions received thereon, will be taken into account in computing the
taxable capital of the Unitholder allocated to the State, upon which such
franchise tax is measured.
Virginia Trusts _ Tax Matters
At the time of the closing for each Virginia Trust Christian, Barton, Epps,
Brent & Chappell, special counsel for the Trusts for Virginia tax matters,
rendered an opinion under then existing law substantially to the effect that:
The assets of each Virginia Trust will consist of interest-bearing obligations
issued by or on behalf of the Commonwealth of Virginia, its counties,
municipalities, authorities or political subdivisions and, provided the
interest thereon is exempt from Virginia income taxes by the laws or treaties
of the United States, by or on behalf of the United States' territories or
possessions, including Puerto Rico, Guam, the Virgin Islands and the Northern
Mariana Islands, and their political subdivisions and authorities (the
"Virginia Bonds").
The Virginia Trust will be treated as a trust for Virginia income tax purposes
and not as an association taxable as a corporation. As a result, income of the
Virginia Trust will be treated as the income of the Unitholders.
The calculation of Virginia taxable income begins with Federal adjusted gross
income in the case of an individual or Federal taxable income in the case of a
corporation, estate or trust. Certain modifications are specified, but no such
modification requires the addition of interest on obligations such as the
Virginia Bonds in the Virginia Trusts. Accordingly, amounts representing
tax-exempt interest for Federal income tax purposes received or accrued by the
Virginia Trusts with respect to the Virginia Bonds, will not be taxed to the
Virginia Trusts or to the Unitholders for Virginia income tax purposes.
In this respect, to the extent that interest on obligations of the Commonwealth
or any political subdivision or instrumentality thereof is included in Federal
adjusted gross income, Virginia law provides that the income should be
subtracted in arriving at Virginia taxable income. In addition, Virginia
income tax exemption is independently provided for interest on certain
obligations, including those issued by industrial development authorities
created pursuant to the Virginia Industrial Development and Revenue Bond Act,
by the Virginia Housing Development Authority, by the Virginia Resources
Authority and by the Virginia Education Loan Authority. Where such an
independent exemption is provided, interest on such obligations is exempt from
Virginia income taxation without regard to any exemption from Federal income
taxes, including interest which may be subject to Federal income tax in the
hands of a recipient who is, or is related person to, a substantial user of
facilities financed with the proceeds of obligations upon which such interest
is paid.
As a general rule, to the extent that gain (whether as a result of the sale of
Bonds by the Virginia Trust or a result of the sale of a Unit by the
Unitholder) is subject to Federal income taxation, such gain will be included
in the Unitholder's Virginia taxable income. Under the language of certain
enabling legislation, however, such as the Virginia Industrial Development and
Revenue Bond Act and the Virginia Housing Development Authority Act, profit
made on the sale of obligations issued by authorities created thereunder is
expressly exempt from Virginia income taxation. Such enabling legislation does
not appear to require a disallowance in the calculation of Virginia taxes of
any loss that may be deductible for Federal income tax purposes with respect to
such obligations, although the Virginia Department of Taxation has taken a
contrary view.
No income tax is imposed by any political subdivision of the Commonwealth of
Virginia. The Commonwealth of Virginia does not impose a gift tax. The
Virginia estate tax is equal to the maximum state death tax credit allowable
against the Federal estate tax payable by the estate.
COUNSEL FOR TRUSTEE
At the time of the closing for each Trust, Carter, Ledyard & Milburn, counsel
for the Trustee and, in the absence of a New York Trust from a Series, special
counsel for such Series for New York tax matters, rendered an opinion under the
existing law substantially to the effect that:
Under the income tax laws of the State and City of New York, each Trust is not
an association taxable as a corporation and the income of each Trust will be
treated as the income of the Unitholders.
OPERATING EXPENSES
No annual advisory fee is charged the Trusts by the Sponsor. The Sponsor does,
however, receive a fee of $0.17 per annum per $1,000 principal amount of the
underlying Bonds in each Trust for regularly evaluating the Bonds and for
maintaining surveillance over the portfolio. (See "Unit Value and
Evaluation.") Except as provided below, for Traditional Trusts, the Trustee
receives for ordinary recurring services an annual fee computed at $1.08 per
$1,000 principal amount of underlying Bonds in the Trusts for those portions of
each Trust under the monthly plan of distribution and $0.76 and $0.57 per
$1,000 principal amount of underlying Bonds, respectively, for those portions
of each Trust representing quarterly and semi-annual distribution plans; for
Insured Trusts, the Trustee receives for ordinary recurring services, except as
stated below, an annual fee computed at $1.12 per $1,000 principal amount of
underlying Bonds in the Trusts for that portion of each Trust under the monthly
distribution plan and $0.80 and $0.61 per $1,000 principal amount of underlying
Bonds, respectively, for those portions of each trust representing quarterly
and semi-annual distribution plans.
For the following Traditional Trusts, the Trustee receives for ordinary
recurring services an annual fee computed at $1.02 per $1,000 principal amount
of underlying Bonds for those portions of each such Trust under the monthly
plan of distribution and $0.72 and $0.54 per $1,000 principal amount of
underlying Bonds, respectively, for those portions of each such Trust
representing quarterly and semi-annual distribution plans: National Trusts
347-380, Short Intermediate Trusts 8-17, Intermediate Trusts 47-60, Long
Intermediate Trusts 2-7, Intermediate California Trusts 1-3, Intermediate New
York Trusts 1 & 2, Arizona Trust 182-191, California Trusts 189-203, Colorado
Trusts 180-186, Connecticut Trusts 184-198, Georgia Trusts 180-187,
Massachusetts Trusts 186-198, Maryland Trusts 187-199, Michigan Trusts 184-196,
Minnesota Trusts 181-185, Missouri Trusts 3-8, North Carolina Trusts 182-194,
New Jersey Trusts 185-195, New York Trusts 189-203, Ohio Trusts 181-186,
Pennsylvania Trusts 183-193, Virginia Trusts 186-197, Short Term Trusts 4-11.
For the following Insured Trusts, the Trustee receives for ordinary recurring
services an annual fee computed at $1.06 per $1,000 principal amount of
underlying Bonds for those portions of each such Trust under the monthly plan
of distribution and $0.76 and $0.58 per $1,000 principal amount of underlying
Bonds, respectively, for those portions of each Trust representing quarterly
and semi-annual distribution plan: National Trusts 61-84, Short Intermediate
Trusts 3-9, Intermediate Trusts 22-32, Long Intermediate Trusts 6-11,
California Trusts 59-74, Colorado Trusts 1-3, Florida Trusts 51-67, New Jersey
Trusts 47-61, New York Trusts 50-62, Ohio Trusts 6-14, Pennsylvania Trusts
48-62. The Trustee's fee may be adjusted provided that all adjustments upward
will not exceed the cumulative percentage increases of the Untied States
Department of Labor's Consumer Price Index entitled "All Services Less Rent"
since the establishment of the Trusts. The Trustee has the use of funds, if
any, being held in the Interest and Principal Accounts of each Trust for future
distributions, payment of expenses and redemptions. These Accounts are
non-interest bearing to Unitholders. Pursuant to normal banking procedures,
the Trustee benefits from the use of funds held therein. Part of the Trustee's
compensation of its services to the Trusts is expected to result from such use
of these funds.
For all Trusts beginning with those in Nuveen Tax-Exempt Unit Trust, Series 723
and all subsequent Trusts, the Trustee receives for ordinary recurring services
an annual fee for each plan of distribution for each Trust as set forth in
"Essential Information Regarding the Trusts." Each annual fee is per $1,000
principal amount of the underlying Bonds in a Trust for that portion of the
Trust that represents a particular plan of distribution. The Trustee's fee may
be periodically adjusted in response to fluctuations in short-term interest
rates (reflecting the cost to the Trustee of advancing funds to a Trust to meet
scheduled distributions) and may be further adjusted in accordance with the
cumulative percentage increase of the United States Department of Labor's
consumer Price Index entitled "All Services Less Rent" since the establishment
of the Trusts. The Trustee has the use of funds, if any, being held in the
Interest and Principal Accounts of each Trust for future distributions, payment
of expenses and redemptions. These Accounts are non-interest bearing to
Unitholders. Pursuant to normal banking procedures, the Trustee benefits from
the use of funds held therein. Part of the Trustee's compensation for its
services to the Fund is expected to result from such use of these funds.
Premiums for the policies of insurance obtained by the Sponsor or by the Bond
issuers with respect to Bonds in Insured Trusts have been paid in full prior to
the deposit of the Bonds in the Trusts, and the value of such insurance has
been included in the evaluation of the Bonds in each Trust and accordingly in
the Public Offering Price of Units of each Trust. There are no annual or
continuing premiums for such insurance.
The Sponsor has borne all costs of creating and establishing the Trusts. The
following are expenses of the Trusts and, when paid by or owed to the Trustee,
are secured by a lien on the assets of the Trust or Trusts to which such
expenses are allocable: (1) the expenses and costs of any action undertaken by
the Trustee to protect the Trusts and the rights and interests of the
Unitholders; (2) all taxes and other governmental charges upon the Bonds or any
part of the Trust (no such taxes or charges are being levied or made or, to the
knowledge of the Sponsor, contemplated); (3) amounts payable to the Trustee as
fees for ordinary recurring services and for extraordinary non-recurring
services rendered pursuant to the Indenture, all disbursements and expenses
including counsel fees (including fees of bond counsel which the Trustee may
retain) sustained or incurred by the Trustee in connection therewith; and (4)
any losses or liabilities accruing to the Trustee without negligence, bad faith
or willful misconduct on its part. The Trustee is empowered to sell Bonds in
order to pay these amounts if funds are not otherwise available in the Interest
and Principal Accounts of the appropriate Trust.
The Indenture for certain Series requires each Trust to be audited on an annual
basis at the expense of the Trust by independent public accountants selected by
the Sponsor. The Trustee shall not be required, however, to cause such an
audit to be performed if its cost to a Trust shall exceed $0.5 per Unit on an
annual basis. Unitholders of a Trust covered by an audit may obtain a copy of
the audited financial statements upon request.
DISTRIBUTIONS TO UNITHOLDERS
Interest received by the Trustee on the Bonds in each Trust, including that
part of the proceeds of any disposition of Bonds which represents accrued
interest and including any insurance proceeds representing interest due on
defaulted Bonds, shall be credited to the "Interest Account" of the appropriate
Trust and all other moneys received by the Trustee shall be credited to the
"Principal Account" of the appropriate Trust.
National Traditional Trusts 4 Through 39 _ Semi-Annual Distributions
The pro rata share of the Interest Account and the pro rata share of the cash
in the Principal Account for each Unit will be computed by the Trustee
semi-annually each year on the Record Dates (stated in Part Two). Shortly
after such computations, distributions will be made to the Unitholders as of
the Record Date. Proceeds received from the disposition of any of the Bonds
after a Record Date and prior to the following Distribution Date will be held
in the Principal Account and either used to pay for Units redeemed or
distributed on the Distribution Date following the next Record Date. The
Trustee is not required to make a distribution from the Principal Account
unless the amount available for distribution shall equal at least ten cents per
Unit. Persons who purchase Units after a Record Date and prior to the
following Distribution Date will receive their first distribution on the second
Distribution Date after their purchase of Units.
As of each Record Date the Trustee will deduct from the Interest Account or, to
the extent funds are not sufficient therein, from the Principal Account,
amounts needed for payment of expenses of the Trust. The Trustee also may
withdraw from said accounts such amount, if any, as it deems necessary to
establish a reserve for any governmental charges payable out of the Trust.
Amounts so withdrawn shall not be considered a part of the Trust's assets until
such time as the Trustee shall return all or part of such amount to the
appropriate account.
National Traditional Trust 40 And Subsequent National Traditional Trusts; All
Other Trusts _ Optional Distributions
The pro rata share of cash in the Principal Account in each Trust will be
computed as of each semi-annual Record Date and distributions to the
Unitholders as of such Record Date will be made on or shortly after the
fifteenth day of the month. Proceeds received from the disposition, including
sale, call or maturity, of any of the Bonds and all amounts paid with respect
to zero coupon bonds and Stripped Obligations will be held in the Principal
Account and either used to pay for Units redeemed or distributed on the
Distribution Date following the next semi-annual Record Date. The Trustee is
not required to make a distribution from the Principal Account of any Trust
unless the amount available for distribution in such account equals at least
ten cents per Unit.
The pro rata share of the Interest Account in each Trust will be computed by
the Trustee each month as of the Record Date. For National Traditional Trusts
40 through 51, distributions will be made on or shortly after the fifteenth day
of each month to Unitholders as of the Record Date. For National Traditional
Trust 52 and subsequent National Traditional Trusts, State Traditional Trust
and subsequent State Traditional Trusts and all other Trusts, Unitholders have
the option of receiving distributions monthly, quarterly or semi-annually.
Record Dates are the first day of each month for Unitholders under the monthly
plan of distribution, the first day of March, June, September and December for
quarterly distributions, and the first day of June and December for semi-annual
distributions (for National Traditional Trust 140 and subsequent National
Traditional Trusts and all other Trusts, quarterly Record Dates are the first
day of February, May, August and November and for semi-annual distributions the
Record Dates are the first day of May and November). Distributions will be
made on or shortly after the fifteenth day of the month to Unitholders of such
Trust as of the Record Date who are entitled to distributions at that time
under the plan of distribution in effect. Persons who purchase Units between a
Record Date and a Distribution Date will receive their first distribution on
the Distribution Date following the next Record Date under the applicable plan
of distribution.
Unitholders purchasing Units of a Trust in the secondary market will initially
receive distributions in accordance with the election of the prior owner.
Unitholders of Trusts having more than one available plan of distribution who
desire to change their plan of distribution may do so by sending a written
notice requesting the change, together with any Certificate(s), to the Trustee.
The notice and any Certificate(s) must be received by the Trustee not later
than the semi-annual Record Date to be effective as of the semi-annual
distribution following the subsequent semi-annual Record Date. Unitholders are
requested to make any such changes within 45 days prior to the applicable
Record Date. Certificates should only be sent by registered or certified mail,
return receipt requested, to minimize the possibility of their being lost or
stolen. If no notice is received by the Trustee in proper form the Unitholder
will be deemed to have elected to continue the same plan.
As of the first day of each month the Trustee will deduct from the Interest
Account of a Trust or, to the extent funds are not sufficient therein, from the
Principal Account of a Trust, amounts needed for payment of expenses of such
Trust. The Trustee also may withdraw from said accounts such amount, if any,
as it deems necessary to establish a reserve for any governmental charges
payable out of such Trust. Amounts so withdrawn shall not be considered a part
of the Trust's assets until such time as the Trustee shall return all or any
part of such amounts to the appropriate account.
For the purpose of minimizing fluctuations in the distributions from the
Interest Account of a Trust, the Trustee is authorized to advance such amounts
as may be necessary to provide for interest distributions of approximately
equal amounts. The Trustee shall be reimbursed, without interest, for any such
advances from funds in the Interest Account of such Trust. The Trustee's fee
takes into account the costs attributable to the outlay of capital needed to
make such advances.
The Trustee shall withdraw from the Interest Account and the Principal Account
of a Trust such amounts as may be necessary to cover redemptions of Units of
such Trust by the Trustee. (See "How Units May Be Redeemed Without Charge.")
Funds which are available for future distributions, redemptions and payments of
expenses are held in accounts which are non-interest bearing to Unitholder and
are available for use by the Trustee pursuant to normal banking procedures.
ACCUMULATION PLAN
The Sponsor is also the principal underwriter of the Nuveen Municipal Bond
Fund, Inc. (the "Bond Fund"), Nuveen Tax-Free Reserves, Inc. ("Tax-Free
Reserves"), Nuveen California Tax-Free Fund, Inc. (the "California Fund"),
Nuveen Tax-Free Bond Fund, Inc. ("Tax-Free Bond Fund"), Nuveen Insured Tax-Free
Bond Fund, Inc. (the "Insured Bond Fund"), Nuveen Tax-Free Money Market Fund,
Inc. (the "Money Market Fund") and Nuveen Multistate Tax-Free Trust (the
"Multistate Trust"). Each of these funds (together, the "Accumulation Funds")
is an open-end, diversified management investment company into which
Unitholders may choose to reinvest their distributions automatically, without
any sales charge. (Reinvestment in the California Fund is available only to
Unitholders who are California residents. Reinvestment in the state portfolios
of the Tax-Free Bond Fund, the Insured Bond Fund, the Money Market Fund and the
Multistate Trust is available only to Unitholders who are residents of the
states for which such portfolios are named.) Unitholders may reinvest both
interest an principal distributions or principal distributions only. Each
Accumulation Fund has investment objectives which differ in certain respects
from those of the Trusts and may invest in securities which would not be
eligible for deposit in the Trusts. The investment adviser to each
Accumulation Fund is Nuveen Advisory Corp., a wholly owned subsidiary of the
Sponsor. The following is a general description of the investment objectives
and policies of each Accumulation Fund. For a more detailed description,
Unitholders should read the Prospectus of the Accumulation Fund in which they
are interested.
The Bond Fund
The Bond Fund has the objective of providing, through investment in a
professionally managed portfolio of long-term municipal bonds, as high a level
of current interest income exempt from Federal income tax as is consistent with
preservation of capital. The Bond Fund may include in its portfolio tax-exempt
bonds rated Baa or BBB or better by Moody's or Standard & Poor's, unrated bonds
which, in the opinion of the investment adviser, have credit characteristics
equivalent to bonds rated Baa or BBB or better, and certain temporary
investments, including securities the interest income from which may be subject
to Federal income tax.
Tax-Free Reserves
Tax-Free Reserves is a "money market" fund that includes in its portfolio only
obligations maturing within one year from the date of acquisition, maintains an
average maturity of all investments of 120 days or less, and values its
portfolio at amortized cost and seeks to maintain a net asset value of $1.00
per share. Tax-Free Reserves provides for check writing and expedited wire
redemption privileges. Tax-Free Reserves has the objective of providing,
through investment in a professionally managed portfolio of high quality
short-term municipal obligations, as high a level of current interest income
exempt from Federal income tax as is consistent with preservation of capital
and the maintenance of liquidity. Tax-Free Reserves may include in its
portfolio municipal obligations rated Aaa, Aa, MIG 1, VMIG 1 or Prime-1 by
Moody's, or AAA, AA, SP-1 or A-1 by Standard & Poor's, unrated municipal
obligations that, in the opinion of the investment adviser, have credit
characteristics equivalent to obligations rated as above, tax-exempt
obligations backed by the U.S. Government, and temporary investments that may
be subject to Federal income tax.
The California Fund
The California Fund has the objective of providing, through investment in
professionally managed portfolios of California municipal obligations, as high
a level of current interest income exempt from both Federal and California
income taxes as is consistent with the investment policies of each of the
portfolios of the California Fund and with preservation of capital. Each
portfolio of the California Fund may include temporary investments that may be
subject to tax. California Unitholders may reinvest in one of three portfolios
of the California Fund: the Nuveen California Tax-Free Value Fund, the Nuveen
California Insured Tax-Free Value Fund and the Nuveen California Tax-Free Money
Market Fund.
The Nuveen California Tax-Free Value Fund invests primarily in long-term
investment grade California tax-exempt bonds (i.e., bonds rated in the fourth
highest categories by Moody's or Standard & Poor's or, if unrated, that have
equivalent credit characteristics). The Nuveen California Insured Tax-Free
Value Fund invests primarily in the same type of investments as the Nuveen
California Tax-Free Value Fund, each of which is covered by insurance
guaranteeing the timely payment of principal and interest or is backed by a
deposit of U.S. Government securities.
The Nuveen California Tax-Free Money Market Fund invests primarily in
high-quality short-term California tax-exempt money market instruments (i.e.,
obligations rated in the two highest categories by Moody's or Standard & Poor's
or, if unrated, that have equivalent credit characteristics). This portfolio
will include only obligations maturing within one year from the date of
acquisition, will maintain an average maturity of all investments of 120 days
or less, will value its portfolio at amortized cost and will seek to maintain a
net asset value of $1.00 per share. The Nuveen California Tax-Free Money
Market Fund provides for an expedited wire redemption privilege.
The Tax-Free Bond Fund
The Tax-Free Bond Fund consists of the Massachusetts Tax-Free Value Fund, the
New York Tax-Free Value Fund, the Ohio Tax-Free Value Fund, and the Nuveen New
Jersey Tax-Free Value Fund, which are each available for reinvestment to
Unitholders who are residents of the state for which such portfolio is named.
The Tax-Free Bond Fund has the objective of providing, through investment in a
professionally managed portfolio of municipal bonds, as high a level of current
interest income exempt both from Federal income tax and from the income tax
imposed by each portfolio's designated state as is consistent with preservation
of capital. The Tax-Free Bond Fund may include in each of its portfolios
tax-exempt bonds rated Baa or BBB or better, unrated bonds which, in the
opinion of the investment adviser, have credit characteristics equivalent to
bonds rated Baa or BBB or better, and certain temporary investments, including
securities the interest income from which may be subject to Federal and state
income tax.
The Insured Bond Fund
The Insured Bond Fund consists of the Nuveen Insured Municipal Bond Fund, the
Nuveen Massachusetts Insured Tax-Free Value Fund and the Nuveen New York
Insured Tax-Free Value Fund, which are each available for reinvestment to
Unitholders. (The Massachusetts and New York portfolios are available only to
those Unitholders who are residents of the state for which the portfolio is
named.) The Insured Bond Fund has the objective of providing, through
investment in professionally managed portfolios of municipal bonds, as high a
level of current interest income exempt from both Federal income tax and, in
the case of designated state portfolios, from the income tax imposed by each
portfolio's designated state, as is consistent with preservation of capital.
The Insured Bond Fund may include in each of its portfolios the same type of
investments as the Tax-Free Bond Fund, each of which is covered by insurance
guaranteeing the timely payment of principal and interest or is backed by a
deposit of U.S. Government securities.
The Money Market Fund
The Money Market Fund consists of the Nuveen Massachusetts Tax-Free Money
Market Fund and the Nuveen New York Tax-Free Money Market Fund, which are each
available for reinvestment to Unitholders who are residents of the state for
which such portfolio is named.
The Money Market Fund includes in its portfolios only obligations maturing
within one year from the date of acquisition, maintains an average maturity of
120 days or less, values its portfolios at amortized cost and seeks to maintain
a net asset value of $1.00 per share. The Money Market Fund has the objective
of providing, through investment in professionally managed portfolios of high
quality short-term municipal obligations, as high a level of current interest
income exempt both from Federal income tax and from the income tax imposed by
each portfolio's designated state as is consistent with stability of principal
and the maintenance of liquidity. The Money Market Fund may include in each of
its portfolios municipal obligations rated Aaa, Aa, MIG-1, MIG-2, VMIG-1,
VMIG-2, Prime 1 or Prime 2 by Moody's or AAA, AA, SP-1, SP-2, A-1 or A-2 by
Standard & Poor's, unrated municipal obligations which, in the opinion of the
investment adviser, have credit characteristics equivalent to obligations rated
as above, and temporary investments that may be subject to Federal and state
income tax.
The Multistate Trust
The Multistate Trust consists of the Nuveen Arizona Tax-Free Value Fund, the
Nuveen Florida Tax-Free Value Fund, the Nuveen Maryland Tax-Free Value Fund,
the Nuveen Michigan Tax-Free Value Fund,, the Nuveen New Jersey Tax-Free Value
Fund, the Nuveen Pennsylvania Tax-Free Value Fund and the Nuveen Virginia
Tax-Free Value Fund, which are each available for reinvestment to Unitholders
who are residents of the state for which such portfolio is named. The
Multistate Trust has the objective of providing, through investment in a
professionally managed portfolio of municipal bonds, as high a level of current
interest income exempt from both regular Federal income tax and the applicable
state personal income tax as is consistent with preservation of capital. The
Multistate Trust may include in each of its portfolios tax-exempt bonds rated
Baa or BBB or better, unrated bonds which, in the opinion of the investment
advisor, have credit characteristics equivalent to bonds rated Baa or BBB or
better, limited to no more than 20% of the Multistate Trust's assets, and
certain temporary investments that may be subject to Federal and state income
tax.
Each person who purchases Units of a Trust may become a participant in the
Accumulation Plan and elect to have his or her distributions on Units of the
Trust invested directly in shares of one of the Accumulation Funds.
Reinvesting Unitholders may select any interest distribution plan. Thereafter,
each distribution of interest income or principal on the participant's Units
(principal only in the case of a Unitholder who has chosen to reinvest only
principal distributions) will, on the applicable distribution date or the next
day on which the Exchange is normally open ("business day") if the distribution
date is not a business day, automatically be received by Shareholder Services
Inc., transfer agent for each of the Accumulation Funds, on behalf of such
participant and applied on that date to purchase shares (or fractions thereof)
of the Accumulation Fund chosen at the net asset value computed as of 4:00 p.m.
eastern time on each such date. All distributions will be reinvested in the
Accumulation Fund chosen and no part thereof will be retained in a separate
account. These purchases will be made without a sales charge.
Shareholder Services Inc. will mail to each participant in the Accumulation
Plan a quarterly statement containing a record of all transactions involving
purchases of Accumulation Fund shares (or fractions thereof) with Trust
interest distributions or as a result of reinvestment of Accumulation Fund
dividends. Any distribution of principal used to purchase shares of an
Accumulation Fund will be separately confirmed by Shareholder Services Inc.
Unitholders will also receive distribution statements fro the Trustee detailing
the amounts transferred to their Accumulation Fund accounts.
Participants may at any item, by so notifying the Trustee in writing, elect to
change the Accumulation Fund into which their distributions are being
reinvested to change from principal-only reinvestment to reinvestment of both
principal and interest or vice versa, or to terminate their participation in
the Accumulation Plan altogether and receive future distributions on their
Units in cash. There will be no charge or other penalty for such change of
election or termination.
The character of Trust distributions for income tax purposes will remain
unchanged even if they are reinvested in an Accumulation Fund.
DETAILED REPORTS TO UNITHOLDERS
The Trustee shall furnish Unitholders of a Trust, in connection with each
distribution, a statement of the amount of interest and, if any, the amount of
other receipts (received since the preceding distribution) being distributed,
expressed in each case as a dollar amount representing the pro rata share of
each Unit of a Trust outstanding and a year-to-date summary of all
distributions paid on said Units. Within a reasonable period of time after the
end of each calendar year, the Trustee will furnish to each person who at any
time during the calendar year was a registered Unitholder of a Trust a
statement with respect to such Trust (i) as to the Interest Account: interest
received (including amounts representing interest received upon any disposition
of Bonds), and the percentage of such interest with respect to Trusts other
than State Trusts by states in which the issuers of the Bonds are located,
deductions for fees and expenses of such Trust, redemption of Units and the
balance remaining after such distributions and deductions, expressed in each
case both as a total dollar amount and as a dollar amount representing the pro
rata share of each Unit outstanding on the last business day of such calendar
year; (ii) as to the Principal Account: the dates of disposition of any Bonds
and the net proceeds received therefrom (excluding any portion representing
accrued interest), the amount paid for purchase of Replacement Bonds, the
amount paid upon redemption of Units, deductions for payment of applicable
taxes and fees and expenses of the Trustee, and the balance remaining after
such distributions and deductions expressed both as a total dollar amount and
as a dollar amount representing the pro rata share of each Unit outstanding on
the last business day of such calendar year; (iii) a list of the Bonds held and
the number of Units outstanding on the last business day of such calendar year;
(iv) the Unit Value based upon the last computation thereof made during such
calendar year; and (v) amounts actually distributed during such calendar year
from the Interest Account and from the Principal Account, separately stated,
expressed both as total dollar amounts and as dollar amounts representing the
pro rata share of each Unit outstanding.
Each annual statement will reflect pertinent information with respect to all
plans of distribution so that Unitholders may be informed regarding the results
of other plans of distribution.
UNIT VALUE AND EVALUATION
The value of each Trust is determined by the Sponsor on the basis of (1) the
cash on hand in the Trust or moneys in the process of being collected, (2) the
value of the Bonds in the Trust based on the bid prices of the Bonds and (3)
interest accrued thereon not subject to collection, less (1) amounts
representing taxes or governmental charges payable out of the Trust and (2) the
accrued expenses of the Trust. The result of such computation is divided by
the number of Units of such Trust outstanding as of the date hereof to
determined the per Unit value ("Unit Value") of such Trust. The Sponsor may
determine the value of the Bonds in each Trust (1) on the basis of current bid
prices of the Bonds obtained from dealers or brokers who customarily deal in
bonds comparable to those held by the Trust, (2) if bid prices are not
available for any of the Bonds, on the basis of bid prices for comparable
bonds, (3) by causing the value of the Bonds to be determined by others engaged
in the practice of evaluating, quoting or appraising comparable bonds or (4) by
any combination of the above.
Because the insurance obtained by the Sponsor or by the issuers of Bonds with
respect to the Bonds in the Insured Trusts and with respect to insured Bonds in
Traditional Trusts is effective so long as such Bonds are outstanding, such
insurance will be taken into account in determining the bid and offering prices
of such Bonds and therefore some value attributable to such insurance will be
included in the value of Units of Trusts that include such Bonds.
DISTRIBUTION OF UNITS TO THE PUBLIC
The Sponsor currently intends to maintain a secondary market for Units of each
Trust. (See "Market for Units" below.) The amount of the dealer concession on
secondary market purchases of Trust Units through the Sponsor will be computed
based upon the value of the Bonds in the Trust portfolio, including the sales
charge computed as described in "Public Offering Price," and adjusted to
reflect the cash position of the Trust principal account, and will vary with
the size of the purchase as shown in the following table:
AMOUNT OF PURCHASE*
<TABLE>.
<S>
Years to Maturity-<C>
Under
$50,000-<C>
$50,000
to
$99,999-<C>
$100,000
to
$249,999-<C>
$250,000
to
$499,999-<C>
$500,000
to
$999,999-<C>
$1,000,000
to
$2,499,999-<C>
$2,500,000
to
$4,999,999-<C>
$5,000,000
or more
Less than 1-0-0-0-0-0-0-0-0
1 but less than 2-1.00%- .90%- .85%- .80%- .70%- .55%- .467%- .389%
2 but less than 3-1.30%-1.20%-1.10%-1.00%- .90%- .73%- .634%- .538%
3 but less than 4-1.60%-1.45%-1.35%-1.25%-1.10%- .90%- .781%- .662%
4 but less than 5-2.00%-1.85%-1.75%-1.55%-1.40%-1.25%-1.082%- .914%
5 but less than 7-2.30%-2.15%-1.95%-1.80%-1.65%-1.50%-1.320%-1.140%
7 but less than 10-2.60%-2.45%-2.25%-2.10%-1.95%-1.70%-1.496%-1.292%
10 but less than 13-3.00%-2.80%-2.60%-2.45%-2.30%-2.00%-1.747%-1.494%
13 but less than 16-3.25%-3.15%-3.00%-2.75%-2.50%-2.15%-1.878%-1.606%
16 or more-3.50%-3.50%-3.40%-3.35%-3.00%-2.50%-2.185%-1.873%
</TABLE>.
*Breakpoint sales charges and related dealer concessions are computed both on a
dollar basis and on the basis of the number of Units purchased, using the
equivalent of 500 Units to $50,000, 2,500 Units to $250,000, etc., and will be
applied on that basis which is more favorable to the purchaser.
The Sponsor reserves the right to change the foregoing dealer concessions from
time to time.
Registered investment advisers, certified financial planners and registered
broker-dealers who in each case either charge periodic fees for financial
planning, investment advisory or asset management services, or provide such
services in connection with the establishment of an investment account for
which a comprehensive "wrap fee" charge is imposed, and bank trust departments
investing funds over which they exercise exclusive discretionary investment
authority and that are held in a fiduciary, agency, custodial or similar
capacity, and are not entitled to receive any dealer concession for secondary
market purchases in which an investor purchases any number of Units at the
Public Offering Price for non-breakpoint purchases minus the conession the
Sponsor typically allows to brokers and dealers for non-breakpoint purchases
(see "Public Offering Price" ).
Certain commercial banks are making Units of the Trusts available to their
customers on an agency basis. A portion of the sales charge paid by these
customers is retained by or remitted to the banks in the amount shown in the
above table. The Glass-Steagall Act prohibits banks from underwriting Trust
Units; the Act does, however, permit certain agency transactions and banking
regulators have not indicated that these particular agency transactions are not
permitted under the Act. In Texas and in certain other states, any bank making
Units available must be registered as broker-dealer under state law.
To facilitate the handling of transactions, sales of Units shall be limited to
transactions involving a minimum of either of $5,000 or 50 Units, whichever is
less. The Sponsor reserves the right to reject, in whole or in part, any order
for the purchase of Units.
OWNERSHIP AND TRANSFER OF UNITS
Ownership of Units is evidenced either by Certificates executed by the Trustee
or by book-entry positions recorded on the books and records of the Trustee in
accordance with whichever option is available to the dealer through whom the
purchase was made. For Trusts included in Nuveen Tax-Exempt Unit Trust, Series
723 and all subsequent Trusts, the ownership of Units is evidenced by book
entry positions recorded on the books and records of the Trustee unless the
Unitholder expressly requests that the purchased Units be evidenced in
Certificate form. The Trustee is authorized to treat as the owner of Units
that person who at the time is registered as such on the books of the Trustee.
Any Unitholder who holds a Certificate may change to book-entry ownership by
submitting to the Trustee the Certificate along with a written request that the
Units represented by such Certificate be held in book-entry form. Likewise, a
Unitholder who holds Units in book-entry form may obtain a Certificate for such
Units by written request to the Trustee. Units may be held in denominations of
one Unit or any multiple or fraction thereof. Fractions of Units are computed
to three decimal places. Any Certificates issued will be numbered serially for
identification, and are issued in fully registered form, transferable only on
the books of the Trustee. Book-Entry Unitholders will receive a Book-Entry
Position Confirmation reflecting their ownership.
For series allowing optional plans of distribution, Certificates for Units bear
an appropriate notation on their face indicating which plan of distribution has
been selected. When a holder of certificated Units changes his plan of
distribution, the existing Certificate must be surrendered to the Trustee and a
new Certificate issued to reflect the currently effective plan of distribution.
There will be no charge for this service. Holders of book-entry Units can
change their plan of distribution by making a written request to the Trustee,
which will issue a new Book-Entry Position Confirmation to reflect the change.
Units are transferable by making a written request to the Trustee and, in the
case of Units evidenced by Certificate(s), by presenting and surrendering such
Certificate(s) to the Trustee, at its corporate trust office in New York City,
properly endorsed or accompanied by a written instrument or instruments of
transfer. The Certificate(s) should be sent registered or certified mail for
the protection of the Unitholders. Each Unitholder must sign such written
request, and such Certificate(s) or transfer instrument, exactly as his name
appears on (a) the face of the Certificate(s) representing the Units to be
transferred, or (b) the Book-Entry Position Confirmation(s) relating to the
Units to be transferred. Such signature(s) must be guaranteed by a member of
an approved Medallion Guarantee Program or in such other manner as may be
acceptable to the Trustee. In certain instances the Trustee may require
additional documents such as, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or
certificates of corporate authority. Mutilated Certificates must be
surrendered to the Trustee in order for a replacement Certificate to be issued.
Although at the date hereof no charge is made and none is contemplated, a
Unitholder may be required to pay $2.00 to the Trustee for each Certificate
reissued or transfer of Units requested and to pay any governmental charge
which may be imposed in connection therewith.
The process of registration and delivery the Unitholder of Certificates or
Book-Entry Position Confirmations may take up to 30 days. Purchasers of Units
will be unable to exercise any right to transfer or redemption until they have
received their Certificate(s) or Book-Entry Position Confirmation(s). (See
"How Units May Be Redeemed Without Charge.")
Replacement Of Lost, Stolen Or Destroyed Certificates
To obtain a new Certificate replacing one that has been lost, stolen, or
destroyed, the Unitholder must furnish the Trustee with sufficient
indemnification and pay such expenses as the Trustee may incur.
The indemnification protects the Trustee, Sponsor, and Trust from risk if the
original Certificate is presented for transfer or redemption by a person who
purchased it in good faith, for value, and without notice of any fraud or
irregularity.
This indemnification must be in the form of an Open Penalty Bond of
Indemnification. The premium for such an indemnity bond may vary from time to
time, but currently amounts to 1.0% of the market value of the Units
represented by the Certificate. In the case, however, of a Trust as to which
notice of termination has been given, the premium currently amounts to 0.5% of
the market value of the Units represented by such Certificate.
MARKET FOR UNITS
Although it is not obligated to do so, the Sponsor intends to maintain a
secondary market for outstanding Units of each Trust at its own expense and
continuously to offer to purchase Units of each Trust at prices, subject to
change at any time, which are based upon the bid prices of Bonds in the
respective portfolios of the Trusts. If the supply of Units of any of the
Trusts exceeds the demand, or for some other business reason, the Sponsor may
discontinue purchases of Units of such Trust at such prices. Unitholders who
wish to dispose of Units should inquire of the Trustee or their brokers as to
current market prices.
In connection with its secondary market-making activities, the Sponsor may from
time to time enter into secondary market joint account agreements with other
brokers and dealers. Pursuant to such an agreement the Sponsor will purchase
Units from the broker or dealer at the bid price into a joint account managed
by the Sponsor; sales from the account will be made in accordance with the then
current prospectus and the Sponsor and the broker or dealer will share profits
and losses in the joint account in accordance with the terms of their joint
account agreement.
HOW UNITS MAY BE REDEEMED WITHOUT CHARGE
Unitholders may redeem all or a portion of their Units by (1) making a written
request for such redemption (book-entry Unitholders may use the redemption form
on the reverse side of their Book-Entry Position Confirmation) to the Trustee
at its corporate trust office in New York City (redemptions of 1,000 Units or
more will require a signature guarantee), (2) in the case of Units evidenced by
a Certificate, by also tendering such Certificate to the Trustee, duly endorsed
or accompanied by proper instruments of transfer with signatures guaranteed as
explained under "Ownership and Transfer of Units" above, and (3) payment of
applicable governmental charges, if any. Certificates should be sent only by
registered or certified mail to minimize the possibility of their being lost or
stolen. In order to effect a redemption of Units evidenced by a Certificate,
Unitholders must tender their Certificate to the Trustee or provide
satisfactory indemnity required in connection with lost, stolen or destroyed
Certificates. (See "Ownership and Transfer of Units.") No redemption fee will
be charged.
A Unitholder may authorize the Trustee to honor telephone instructions for the
redemption of Units held in book-entry form. Units represented by Certificates
may not be redeemed by telephone. The proceeds of Units redeemed by telephone
will be sent by check either to the Unitholder at the address specified on his
account or to a financial institution specified by the Unitholder for credit to
the account of the Unitholder. A Unitholder wishing to use this method of
redemption must complete a Telephone Redemption Authorization Form and furnish
the Form to the Trustee. Telephone Redemption Authorization Forms can be
obtained from a Unitholder's registered representative or by calling the
Trustee. Once the completed Form is on file, the Trustee will honor telephone
redemption requests by any person. If the telephone redemption request is
received prior to 4:00 p.m. Eastern time, the Unitholder will be entitled to
receive for each unit tendered the Redemption Price as determined above. A
telephone redemption request received after 4:00 p.m. eastern time will be
treated as having been received the following business day. The redemption
proceeds will be mailed within seven calendar days following the telephone
redemption request. Telephone redemptions are limited to 1,000 Units or less.
Only Units held in the name of individuals may be redeemed by telephone;
accounts registered in broker name, or accounts of corporations or fiduciaries
(including, among others, trustees, guardians, executors and administrators)
may not use the telephone redemption privilege.
On the seventh calendar day following the date of tender, or if the seventh
calendar day is not a business day, on the first business day prior thereto,
the Unitholder will be entitled to receive in cash for each Unit tendered an
amount equal to the Unit Value of such Trust determined by the Trustee (see
"Unit Value and Evaluation"), as of 4:00 p.m. eastern time on the date of
tender as defined hereafter, plus accrued interest to, but not including, the
fifth business day after the date of tender ("Redemption Price"). The
Redemption Price may be more or less than the amount paid by the Unitholder
depending on the value of the Bonds in the Trust on the date of tender. Such
value will vary with market and credit conditions, including changes in
interest rate levels. Unitholders should check with the Trustee or their
broker to determine the Redemption Price before tendering Units.
While the Trustee has the power to determine the Redemption Price when Units
are tendered for redemption, the authority has by practice been delegated by
the Trustee to The Sponsor, which determines the Redemption Price on a daily
basis.
The "date of tender" is deemed to be the date on which the request for
redemption of Units is received in proper form by the Trustee, except that as
regards redemption requests received after 4:00 p.m. eastern time or on any day
on which the Exchange is normally closed, the date of tender is the next day on
which the Exchange is normally open for trading and such request will be deemed
to have been made on such day and the redemption will be effected at the
Redemption Price computed on that day.
Accrued interest paid on redemption will be withdrawn from the Interest Account
of a Trust or, if the balance therein is insufficient, from the Principal
Account of such Trust. All other amounts paid on redemption will be withdrawn
from the Principal Account of the Trust. The Trustee is empowered to sell
underlying Bonds of a Trust in order to make funds available for redemption.
(See "How Bonds May Be Removed from a Trust.") Units so redeemed will be
cancelled.
To the extent that Bonds are sold, the size and diversity of a Trust will be
reduced. Such sales may be required at a time when Bonds would not otherwise
be sold and could result in lower prices than might otherwise be realized.
The Redemption Price will be determined on the basis of the current bid prices
of the Bonds in each Trust.
The right of redemption may be suspended and payment postponed for any period
during which the Securities and Exchange Commission determines that trading in
the municipal bond market is restricted or an emergency exists, as a result of
which disposal or evaluation of the Bonds is not reasonably practicable, or for
such other periods as the Securities and Exchange Commission may by order
permit.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold 31% 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 his or her tax return. Under normal circumstances
the Trustee obtains the Unitholder's tax identification number from the selling
broker at the time Certificates or Book-Entry Position Confirmation is issued,
and this number is printed on the Certificate or Book-Entry Position
Confirmation and on distribution statements. If a Unitholder's tax
identification number does not appear as noted above, or if it is incorrect,
the Unitholder should contact the Trustee before redeeming Units to determine
what action, if any, is required to avoid this "backup withholding."
HOW UNITS MAY BE PURCHASED BY THE SPONSOR
The Trustee will notify the Sponsor of any tender of Units for redemption. If
the Sponsor's bid in the secondary market at that time equals or exceeds the
Redemption Price it may purchase such Units by notifying the Trustee before the
close of business on the second succeeding business day and by making payment
therefor to the Unitholder not later than the day on which payment would
otherwise have been made by the Trustee. (See "How Units May Be Redeemed
Without Charge.") The Sponsor's current practice is to bid at the Redemption
Price in the secondary market. Units held by the Sponsor may be tendered to
the Trustee for redemption as any other Units.
The Public Offering Price upon resale of any Units thus acquired by the Sponsor
will be calculated in accordance with the procedure described in the then
currently effective prospectus relating to such Units. (See "Public Offering
Price.") Any profit resulting from the resale of such Units will belong to the
Sponsor, which likewise will bear any loss resulting from a lower Public
Offering Price or Redemption Price subsequent to its acquisition of such Units.
HOW BONDS MAY BE REMOVED FROM THE TRUSTS
Bonds will be removed from a Trust as they mature or are redeemed by the
issuers thereof. See the "Schedule of Investments" in Part Two and "Selection
of Bonds for Deposit in the Trusts" herein for a discussion of call provisions
of Bonds in the Trusts.
The Indenture also empowers the Trustee to sell Bonds for the purpose of
redeeming Units tendered by any Unitholders, and for the payment of expenses
for which income may not be available. Under the Indenture the Sponsor is
obligated to provide the Trustee with a current list of Bonds to be sold in
such circumstances. In deciding which Bonds should be sold, the Sponsor
intends to consider, among other things, such factors as: (1) market
conditions; (2) market prices of the Bonds; (3) the effect on income
distributions to Unitholders of the sale of various Bonds; (4) the effect on
principal amount of underlying Bonds per Unit on the sale of various Bonds; (5)
the financial condition of the issuers; and (6) the effect of the sale of
various Bonds on the investment character of the Trust. Such sales, if
required, could result in the sale of Bonds by the Trustee at prices less than
original cost to the Trust. To the extent Bonds are sold, the size and
diversity of the Trust will be reduced.
In addition, the Sponsor is empowered to direct the Trustee to liquidate Bonds
upon the happening of certain other events, such as default in the payment of
principal and/or interest, an action of the issuer that will adversely affect
its ability to continue payment of the principal of and interest on its Bonds,
or an adverse change in market, revenue or credit factors affecting the
investment character of the Bonds. If a default in the payment of the
principal of and/or interest on any of the Bonds occurs, and if the Sponsor
fails to instruct the Trustee whether to sell or continue to hold such Bonds
within 30 days after notification by the Trustee to the Sponsor of such
default, the Indenture provides that the Trustee shall liquidate said Bonds
forthwith and shall not be liable for any loss so incurred.
In connection with its determination as to the sale or liquidation of any
Bonds, the Sponsor will consider the Bonds' then current rating, but because
such ratings are opinions of the rating agencies as to the quality of Bonds
they undertake to rate and not absolute standards of quality, the Sponsor will
exercise its independent judgment as to Bond creditworthiness.
The Sponsor may also direct the Trustee to liquidate Bonds in a Trust if the
Bonds in the Trust are the subject of an advanced refunding, generally
considered to be when refunding bonds are issued and the proceeds thereof are
deposited in irrevocable trust to retire the refunded bonds on their redemption
date.
Except for refunding securities that may be exchanged for Bonds under certain
conditions specified in the Indenture, the Indenture does not permit either the
Sponsor or the Trustee to acquire or deposit bonds either in addition to, or in
substitution for, any of the Bonds initially deposited in the Trust.
INFORMATION ABOUT THE TRUSTEE
The Trustee is United States Trust Company of New York, with its principal
place of business at 114 West 47th Street, New York, New York 10036 and its
corporate trust office at 770 Broadway, New York, New York 10003. United
States Trust Company of New York, established in 1853, has, since its
organization, engaged primarily in the management of trust and agency accounts
for individuals and corporations. The Trustee is a member of the New York
Clearing House Association and is subject to supervision and examination by the
Superintendent of Banks of the State of New York, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System. In
connection with the storage and handling of certain Bonds deposited in the
Trusts, the Trustee may use the services of The Depository Trust Company.
These services would include safekeeping of the Bonds and coupon-clipping,
computer book-entry transfer and institutional delivery services. The
Depository Trust Company is a limited purpose trust company organized under the
Banking Law of the State of New York, a member of the Federal Reserve System
and a clearing agency registered under the Securities Exchange Act of 1934, as
amended.
LIMITATIONS ON LIABILITIES OF SPONSOR AND TRUSTEE
The Sponsor and the Trustee shall be under no liability to Unitholders for
taking any action or for refraining from any action in good faith pursuant to
the Indenture, or for errors in judgment, but shall be liable only for their
own negligence, lack of good faith or willful misconduct. The Trustee shall
not be liable for depreciation or loss incurred by reason of the sale by the
Trustee of any of the Bonds. In the event of the failure of the Sponsor to act
under the Indenture, the Trustee may act thereunder and shall not be liable for
any action taken by it in good faith under the Indenture.
The Trustee shall not be liable for any taxes or other governmental charges
imposed upon or in respect of the Bonds or upon the interest thereon or upon it
as Trustee under the Indenture or upon or in respect of any Trust which the
Trustee may be required to pay under any present or future law of the United
States of America or of any other taxing authority having jurisdiction. In
addition, the Indenture contains other customary provisions limiting the
liability of the Trustee.
SUCCESSOR TRUSTEES AND SPONSORS
The Trustee or any successor trustee may resign by executing an instrument of
resignation in writing and filing same with the Sponsor and mailing a copy of a
notice or resignation to all Unitholders then of record. Upon receiving such
notice, the Sponsor is required promptly to appoint a successor trustee. If
the Trustee becomes incapable of acting or is adjudged a bankrupt or insolvent,
or a receiver or other public officer shall take charge of its property or
affairs, the Sponsor may remove the Trustee and appoint a successor by written
instrument. The resignation or removal of a trustee and the appointment of a
successor trustee shall become effective only when the successor trustee
accepts its appointment as such. Any successor trustee shall be a corporation
authorized to exercise corporate trust powers, having capital, surplus and
undivided profits of not less than $5,000,000. Any corporation into which a
trustee may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which a trustee shall be a party,
shall be the successor trustee.
If upon resignation of a trustee no successor has been appointed and has
accepted the appointment within 30 days after notification, the retiring
trustee may apply to a court of competent jurisdiction for the appointment of a
successor.
If the Sponsor fails to undertake any of its duties under the Indenture, and no
express provision is made for action by the Trustee in such event, the Trustee
may, in addition to its other powers under the Indenture, (1) appoint a
successor sponsor, or (2) terminate the Indenture and liquidate the Trusts.
INFORMATION ABOUT THE SPONSOR
John Nuveen & Co. Incorporated, the Sponsor and Underwriter, was founded in
1898 and is the oldest and largest investment banking firm specializing in the
underwriting and distribution of tax-exempt securities and maintains the
largest research department in the investment banking community devoted
exclusively to the analysis of municipal securities. In 1961, the Sponsor
began sponsoring the Nuveen Tax-Exempt Unit Trust, and since that time, it has
issued more than $30 billion in tax-exempt unit trusts, including over $8
billion in insured trusts. The Sponsor is also principal underwriter of the
Nuveen Municipal Bond Fund, Inc., the Nuveen Tax-Exempt Money Market Fund,
Inc., Nuveen Tax-Free Reserves, Inc., Nuveen California Tax-Free Fund, Inc.,
Nuveen Tax-Free Bond Fund, Inc., Nuveen Insured Tax-Free Bond Fund, Inc. and
Nuveen Tax-Free Money Market Fund, Inc., all registered open-end management
investment companies, and acted as co-managing underwriter of Nuveen Municipal
Value Fund, Inc., Nuveen California Municipal Value Fund, Inc., Nuveen New York
Municipal Value Fund, Inc., Nuveen Municipal Income Fund, Inc., Nuveen
California Municipal Income Fund, Inc., Nuveen New York Municipal Income Fund,
Inc., Nuveen Premium Income Municipal Fund, Inc., Nuveen Performance Plus
Municipal Fund, Inc., Nuveen California Performance Plus Municipal Fund, Inc.,
Nuveen New York Performance Plus Municipal Fund, Inc., Nuveen Municipal
Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen
California Municipal Market Opportunity Fund, Inc., Nuveen New York Municipal
Market Opportunity Fund, Inc., Nuveen Investment Quality Municipal Fund, Inc.,
Nuveen California Investment Quality Municipal Fund, Inc., Nuveen New York
Investment Quality Municipal Fund, Inc., Nuveen Insured Quality Municipal Fund,
Inc., Nuveen Florida Investment Quality Municipal Fund, Nuveen Pennsylvania
Investment Quality Municipal Fund, Nuveen New Jersey Investment Quality
Municipal Fund, Inc., Nuveen Select Quality Municipal Fund, Inc., Nuveen
California Select Quality Fund, Inc., Nuveen New York Select Quality Municipal
Fund, Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen Insured
Municipal Opportunity Fund, Inc., Nuveen Florida Quality Income Municipal Fund,
Nuveen Michigan Quality Income Municipal Fund, Inc., Nuveen New Jersey Quality
Income Municipal Fund, Inc., Nuveen Ohio Quality Income Municipal Fund, Inc.,
Nuveen Pennsylvania Quality Income Municipal Fund, Nuveen Texas Quality Income
Municipal Fund, Nuveen California Income Fund, Inc., Nuveen New York Quality
Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen
Premier Insured Municipal Income Fund, Inc., Nuveen Select Tax Free Income
Portfolio, Nuveen Select Tax-Free Income Portfolio 2, Nuveen Insured California
Select Tax-Free Income Portfolio, Nuveen Insured New York Select Tax-Free
Income Portfolio, Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select
Tax Free Income Portfolio 3, Nuveen Select Maturities Municipal Fund, Inc.,
Nuveen Insured California Premium Income Municipal Fund, Inc., Nuveen Arizona
Premium Income Municipal Fund, Inc., Nuveen Insured Premium Income Municipal
Fund, Inc., Nuveen Insured Florida Premium Income Municipal Fund, Nuveen
Michigan Premium Income Municipal Fund, Inc., Nuveen New Jersey Premium Income
Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal Fund,
Inc., Nuveen Ohio Premium Income Municipal Fund, Inc., Nuveen Pennsylvania
Premium Income Municipal Fund, Nuveen Texas Premium Income Municipal Fund,
Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Pennsylvania Premium
Income Municipal Fund 2, Nuveen Insured Florida Premium Income Municipal Fund
2, Nuveen Maryland Premium Income Municipal Fund, Nuveen Virginia Premium
Income Municipal Fund, Nuveen Massachusetts Premium Income Municipal Fund,
Nuveen Insured California Premium Income Municipal Fund 2, Inc., Nuveen Insured
New York Premium Income Municipal Fund 2, Nuveen New Jersey Premium Income
Municipal Fund 2, Nuveen Washington Premium Income Municipal Fund, Nuveen
Michigan Premium Income Municipal Fund 2, Nuveen Georgia Premium Income
Municipal Fund, Nuveen Missouri Premium Income Municipal Fund, Nuveen
Connecticut Premium Income Municipal Fund, Nuveen North Carolina Premium Income
Municipal Fund, Nuveen New Jersey Premium Income Municipal Fund 3, Nuveen
Florida Premium Income Municipal Fund, Nuveen New York Premium Income Municipal
Fund, Nuveen California Premium Income Municipal Fund, Nuveen Pennsylvania
Premium Income Municipal Fund 3, Nuveen Maryland Income Municipal Fund 2,
Nuveen Virginia Premium Income Municipal Fund 2, Nuveen Ohio Premium Income
Municipal Fund 2, Nuveen Insured Premium Income Municipal Fund 2, Nuveen
California Premium Income Municipal Fund 2, all registered closed-end
management investment companies. These registered open-end and closed-end
investment companies currently have approximately $32.8 billion in tax-exempt
securities under management. Nationwide, more than 1,000,000 individual
investors have purchased Nuveen's tax-exempt trusts and funds. The present
corporation was organized in 1967 as a wholly owned subsidiary of Nuveen
Corporation, successor to the original John Nuveen & Co. founded in 1898 as a
sole proprietorship and incorporated in 1953. In 1974, the Sponsor became a
wholly-owned subsidiary of The St. Paul Companies, Inc. ("St. Paul"), a
financial services management company located in St. Paul, Minnesota. On May
19, 1992, common shares comprising a minority interest in The John Nuveen
Company ("JNC"), a newly organized corporation which holds all of the shares of
the Sponsor, were sold to the public in an initial public offering. St. Paul
retains a controlling interest in JNC with over 70% of JNC's shares. The
Sponsor is a member of the National Association of Securities Dealers, Inc.,
and the Securities Industry Association and has its principal offices located
in Chicago (333 W. Wacker Drive) and New York (Swiss Bank Tower, 10 East 50th
Street). It maintains 14 regional offices.
AMENDMENT AND TERMINATION OF INDENTURE
The Indenture 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 thereof which may be defective or inconsistent, or (2) to make
such other provisions as shall not adversely affect the Unitholders, provided,
however, that the Indenture may not be amended to increase the number of Units
in a Trust or to permit the deposit or acquisition of bonds either in addition
to, or in substitution for, any of the Bonds initially deposited in a Trust
except the substitution of refunding bonds under certain circumstances. The
Trustee shall advise the Unitholders of any amendment promptly after execution
thereof.
A Trust may be liquidated at any time by the written consent of 100% of the
Unitholders of such Trust or by the Trustee when the value of such Trust, as
shown by any evaluation, is less than 20% of the original principal amount of
the Trust and will be liquidated by the Trustee in the event that Units not yet
sold aggregating more than 60% of the Units originally created are tendered for
redemption by the Sponsor thereby reducing the net worth of the Trust to less
than 40% of the principal amount of the Bonds originally deposited in the
portfolio. The sale of Bonds from the Trusts upon termination may result in
realization of a lesser amount than might otherwise be realized if such sale
were not required at such time. For this reason, among others, the amount
realized by a Unitholder upon termination may be less than the principal amount
of Bonds originally represented by the Units held by such Unitholder. The
Indenture with respect to any Trust will terminate upon the redemption, sale or
other disposition of the last Bond held thereunder, but in no event shall it
continue beyond the end of the calendar year preceding the fiftieth anniversary
of its execution for National, State and Discount Trusts, beyond the end of the
calendar year preceding the twentieth anniversary of its execution for Long
Intermediate, State Intermediate, Intermediate and Compound Interest Trusts or
beyond the end of the calendar year preceding the tenth anniversary of its
execution for Short Intermediate and Short Term Trusts.
Written notice of any termination specifying the time or times at which
Unitholders may surrender their Certificates, if any, for cancellation shall be
given by the Trustee to each Unitholder at the address appearing on the
registration books of the Trust maintained by the Trustee. Within a reasonable
time thereafter the Trustee will liquidate any Bonds in the Trust then held and
shall deduct from the assets of the Trust any accrued costs, expenses or
indemnities provided by the Indenture which are allocable to such Trust,
including estimated compensation of the Trustee and costs of liquidation and
any amounts required as a reserve to provide for payment of any applicable
taxes or other governmental charges. The Trustee shall then distribute to
Unitholders of such Trust their pro rata share of the balance of the Interest
and Principal Accounts. With such distribution the Unitholders shall be
furnished a final distribution statement, in substantially the same form as the
annual distribution statement, of the amount distributable. At such time as
the Trustee in its sole discretion shall determine that any amounts held in
reserve are no longer necessary, it shall make distribution thereof to
Unitholders in the same manner.
LEGAL OPINION
The legality of the Units offered hereby has been passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603. Special counsel for
the Trusts for respective state matters are named in "Tax Status of
Unitholders" herein. Carter, Ledyard & Milburn, 2 Wall Street, New York, New
York 10005, act as counsel for the Trustee with respect to the Trusts and as
special New York tax counsel for the Trusts.
AUDITORS
The Statement of Condition and the Schedule of Investments for each Trust in a
Series and the related Statement of Operations and Statement of Changes in
Condition and changes in the Trust Units have been audited by Arthur Andersen &
Co., independent public accountants, as indicated in their report in Part Two
of this Prospectus with information pertaining to the specific Trusts in the
Series to which such report relates, and are set forth in reliance upon the
authority of said firm as experts in giving said report.
DESCRIPTION OF RATINGS (as published by the rating companies)
Standard & Poor's Corporation. A description of the applicable Standard &
Poor's Corporation rating symbols and their meanings follows:
A Standard & Poor's rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers or lessees.
The 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 or
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. Liklihood of default - capacity and willlingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation. 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 effect 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 the higher rated
categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
CC the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from AA to CCC 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 that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the issuance of bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise judgment with respect to such
likelihood and risk.
Note Ratings: A Standard & Poor's note rating reflects the liquidity concerns
and market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating.
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
CreditWatch. CreditWatch highlights potential changes in ratings of bonds and
other fixed income securities. It focuses on events and trends which place
companies and government units under special surveillance by Standard & Poor's
analytical staff. These may include mergers, voter referendums, actions by
regulatory authorities, or developments gleaned from analytical review. Unless
otherwise noted, a rating decision will be made within 90 days. Issues appear
on CreditWatch where an event, situation, or deviation from trends occurred and
needs to be evaluated. A listing, however, does not mean a rating change is
inevitable. Since Standard & Poor continuously monitors all of its ratings,
CreditWatch is not intended to include all issues under review. Thus, rating
changes will occur without issues appearing on CreditWatch.
Ratings of Insured Trust Units. A Standard & Poor's Corporation rating on the
units of an insured investment trust (hereinafter referred to collectively as
"units" and "trusts") is a current assessment of creditworthiness with respect
to the investments held by such trust. This assessment takes into
consideration the financial capacity of the issuers and of any guarantors,
insurers, lessees or mortgagors with respect to such investments. The
assessment, however, does not take into account the extent to which trust
expenses or portfolio asset sales for less than the trust purchase price will
reduce payment to the unitholder of the interest and principal required to be
paid on the portfolio assets. In addition, the rating is not a recommendation
to purchase, sell or hold units, inasmuch as the rating does not comment as to
market price of the units or suitability for a particular investor.
Units rated AAA are composed exclusively of assets that are rated AAA by
Standard & Poor's or certain short-term investments, or both. Standard &
Poor's defines its AAA rating for such assets as the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest and repay
principal is very strong. However, unit ratings may be subject to revision or
withdrawal at any time by Standard & Poor's and each rating should be evaluated
independently of any other rating.
Moody's Investors Service, Inc. A brief description of the applicable Moody's
Investors Service, Inc. rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. 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.
Moody's bond rating symbols may contain numerical modifiers of a generic rating
classification. The modifier 1 indicates that the bond ranks at the high end
of its category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. 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 period of
economic normalcy, except in instances of oversupply.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
the contract over any long period of time may be small.
Con.(-) - Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operated 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 Ratings:
MIG 1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2 - This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
Prospectus Part One must be accompanied by Part Two
Sponsor John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Illinois 60606-1286
312/917-7700
Swiss Bank Tower
10 East 50th Street
New York, New York 10022
212/207-2000
Trustee United States Trust Company of New York
770 Broadway
New York, New York 10003
800/257-8787
Legal Counsel to Sponsor Chapman and Cutler
111 West Monroe Street
Chicago, Illinois 60603
Legal Counsel to Trustee Carter, Ledyard & Milburn
2 Wall Street
New York, New York 10005
Independent Public
Accountants for the Trust Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
_______________________
Except as to statements made herein furnished by the Trustee, the Trustee has
assumed no responsibility for the accuracy, adequacy and completeness of the
information contained in this Prospectus.
This Prospectus does not contain all of the information set forth in the
registration statement and exhibits relating thereto, filed with the Securities
and Exchange Commission, Washington, D. C., under the Securities Act of 1933,
as amended, and to which reference is made.
No person is authorized to give any information or to make any representations
not contained in this Prospectus or in supplementary sales literature prepared
by the Sponsor; and any information or representation not contained herein must
not be relied upon as having been authorized by either the Trusts, the Trustee
or the Sponsor. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any State to any person to whom
it is not lawful to make such offer in such state. The Trusts are registered
as a Unit Investment Trust under the Investment Company Act of 1940, as
amended. Such registration does not imply that the Trusts or any of their
Units has been guaranteed, sponsored, recommended or approved by the United
States or any State or agency or officer thereof.
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NUVEEN TAX-EXEMPT UNIT TRUSTS
Supplement to the Prospectus
The Prospectus currently provides that Units may be purchased in the
primary or secondary market at the Public Offering Price for non-breakpoint
purchases minus the concession the Sponsor typically allows to brokers and
dealers for non-breakpoint purchases by (1) investors who purchase Units
through registered investment advisors, certified financial planners and
registered broker-dealers who in each case either charge periodic fees for
financial planning, investment advisory or asset management services, or
provide such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" charge is imposed and (2) bank
trust departments investing funds over which they exercise exclusive
discretionary investment authority and that are held in a fiduciary agency,
custodial or similar capacity. Effective as of the date of this Supplement,
the Sponsor has extended this attractive purchase offer to: (1) any person and
his or her immediate family (which includes his or her spouse and children
under 21 years of age) who for at least 90 days, has been an officer, director
or bona fide employee of any firm offering Units for sale to investors; and
(2) officers and directors of bank holding companies that make Units available
directly or through subsidiaries or bank affiliates. Notwithstanding anything
to the contrary in this Prospectus, such investors, bank trust departments,
firm employees and bank holding company officers and directors who purchase
Units through this program will not receive sales charge reductions for
quantity purchases.
February 14, 1995
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NUVEEN TAX-EXEMPT UNIT TRUSTS
SUPPLEMENT TO THE PROSPECTUS
Commencing September 1, 1995, The Chase Manhattan Bank (National Association)
will become successor to United States Trust Company of New York as Trustee of
the Nuveen Tax-Exempt Unit Trusts. This change will have no material effect
upon Unitholders of the Nuveen Tax-Exempt Unit Trusts. In addition, the
address and phone number for the Trustee listed in the Prospectus will remain
the same.
Also commencing September 1, 1995, the calculation of Estimated Long Term
Return as set forth in the Prospectus for each Nuveen Tax-Exempt Unit Trust
will be modified in accordance with accepted unit investment trust industry
practice as follows:
"In the calculation of Estimated Long Term Return, the average yield for the
Trust's portfolio is derived by weighting each Bond's yield by the market value
of the Bond and by the amount of time remaining to the date to which the Bond
is priced. The weighted average yield is then adjusted to reflect estimated
expenses, is compounded, and is reduced by a factor which represents the
amortization of the sales charge over the expected average life of the Trust.
August 31, 1995
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Nuveen Tax-Exempt Unit Trust, Series 328
RULE 497(d)
SEC FILE NO. 2-97530
September 5, 1995
This is the first page of the Prospectus Supplement dated August 31, 1995 of
the Prospectus for the above named series.
