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File No. 33-00069
CIK #775848
Securities and Exchange Commission
Washington, D. C. 20549
Post-Effective
Amendment No. 8
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
KEMPER TAX-EXEMPT INSURED INCOME TRUST, MULTI-STATE SERIES 8
NAME AND EXECUTIVE OFFICE ADDRESS OF DEPOSITOR:
KEMPER UNIT INVESTMENT TRUSTS
(a service of Kemper Securities, Inc.)
77 West Wacker - 5th Floor
Chicago, Illinois 60601
Name and complete address of agent for service:
C. PERRY MOORE
77 West Wacker - 5th Floor
Chicago, Illinois 60601
X(X) Check box if it is proposed that this filing will become effective
immediately upon pursuant to paragraph (b) of Rule 485.
<PAGE> 1
KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST SERIES 11-22
PART ONE
The date of this Part One is that date
which is set forth in Part Two of the Prospectus
Each State Trust of the Kemper Tax-Exempt Insured Income Trust,
Multi-State Series and Series 11-22 of the Ohio Tax-Exempt Bond Trust were
formed for the purpose of gaining interest income free from Federal, State and,
where applicable, local income taxes, while conserving capital and diversifying
risks by investing in an insured, fixed portfolio of Municipal Bonds consisting
of obligations issued primarily by or on behalf of the State for which such
Trust is named or counties, municipalities, authorities or political
subdivisions thereof.
Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio of each State Trust has
been obtained by the Trust from Financial Guaranty Insurance Company
("Financial Guaranty") or other insurers or directly by the issuer from
Financial Guaranty or other insurers. See "Insurance on the Portfolios" herein
and the "Schedule of Investments" in Part Two. Insurance obtained by the Trust
remains in effect only while the insured Municipal Bonds are retained in such
State Trust, while insurance obtained by a Municipal Bond issuer is effective
so long as such Bonds are outstanding. Pursuant to an irrevocable commitment
of Financial Guaranty or such other insurers, in the event of a sale of any
Bond covered under the Trust's insurance policy, the Trustee has the right to
obtain permanent insurance for such Bond upon the payment of a single
predetermined insurance premium from the proceeds of the sale of such Bond.
The insurance, in either case, does not relate to the Units offered hereby or
to their market value. As a result of such insurance, the Units of each State
Trust received on the original date of deposit a rating of "AAA" by Standard &
Poor's Corporation and, while held in a State Trust, the Municipal Bonds are
rated "Aaa" by Moody's Investors Service, Inc. See "Insurance on the
Portfolios" and "Description of Securities Ratings." No representation is made
as to Financial Guaranty's or any other insurer's ability to meet its
commitments.
This Prospectus is in two parts. Read and retain both parts for future
reference.
SPONSOR: KEMPER UNIT INVESTMENT TRUSTS
a service of Kemper Securities, Inc.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY . . . . . . . . . . . . . . . . 3
The Trust . . . . . . . . . . . . 3
Insurance . . . . . . . . . . . . 3
Public Offering Price . . . . . . . . . 4
Interest and Principal Distributions . 4
Reinvestment . . . . . . . . . . . . . 4
Estimated Current Return and
Estimated Long-Term Return . . . . 4
Market for Units . . . . . . . . . . . 4
THE TRUST . . . . . . . . . . . . . . . 5
PORTFOLIOS . . . . . . . . . . . . . . 6
Portfolio Risk Information . . . . . . 7
INSURANCE ON THE PORTFOLIOS . . . . . . 13
Financial Guaranty Insurance
Company . . . . . . . . . . . . . 15
AMBAC Indemnity Corporation . . . . . . 16
Municipal Bond Investors
Assurance Corporation . . . . . . 16
Financial Security Assurance . . . . . 17
Capital Guaranty Insurance
Company . . . . . . . . . . . . . 18
DISTRIBUTION REINVESTMENT . . . . . . . 19
INTEREST AND ESTIMATED CURRENT AND
LONG-TERM RETURNS . . . . . . . . 20
FEDERAL TAX STATUS OF THE STATE
TRUSTS . . . . . . . . . . . . . . 20
DESCRIPTION AND STATE TAX STATUS
OF THE STATE TRUSTS . . . . . . . 24
Alabama Trusts . . . . . . . . . . 24
Arizona Trusts . . . . . . . . . . 26
California Trusts . . . . . . . . 31
Colorado Trusts . . . . . . . . . 39
Florida Trusts . . . . . . . . . . 42
Louisiana Trusts . . . . . . . . . 47
Massachusetts Trusts . . . . . . . 50
Michigan Trusts . . . . . . . . . 52
Minnesota Trusts . . . . . . . . . 55
Missouri Trusts . . . . . . . . . 57
New Jersey . . . . . . . . . . . . 59
New York Trusts . . . . . . . . . 64
North Carolina Trusts . . . . . . 73
Ohio Trusts . . . . . . . . . . . 75
Pennsylvania Trusts . . . . . . . 79
Texas Trusts . . . . . . . . . . . 84
PUBLIC OFFERING OF UNITS . . . . . . . 88
Public Offering Price . . . . . . 88
Public Distribution of Units . . . 90
Profits of Sponsor . . . . . . . . 90
MARKET FOR UNITS . . . . . . . . . . . 91
REDEMPTION . . . . . . . . . . . . . . 91
Computation of Redemption Price . 92
UNITHOLDERS . . . . . . . . . . . . . . 93
Ownership of Units . . . . . . . . 93
Distributions to Unitholders . . . 93
Statements to Unitholders . . . . . 94
Rights of Unitholders . . . . . . . 96
INVESTMENT SUPERVISION . . . . . . . . 96
ADMINISTRATION OF THE TRUST . . . . . . 97
The Trustee . . . . . . . . . . . . 97
The Evaluator . . . . . . . . . . . 98
Amendment and Termination . . . . . 98
Limitations on Liability . . . . . 98
EXPENSES OF THE TRUST . . . . . . . . . 99
THE SPONSOR . . . . . . . . . . . . . . 100
LEGAL OPINIONS . . . . . . . . . . . . 101
AUDITORS . . . . . . . . . . . . . . . 101
DESCRIPTION OF SECURITIES RATINGS . . . 101
Standard & Poor's Corporation . . . 101
Moody's Investors
Service, Inc. . . . . . . . . . . 102
</TABLE>
Essential Information*
Report of Certified Public Accountants*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
*INFORMATION ON THESE ITEMS APPEARS
IN PART TWO FOR THE APPROPRIATE
STATE TRUST
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 11-22
SUMMARY
THE TRUST. Kemper Tax-Exempt Insured Income Trust,
Multi-State Series and Ohio Tax-Exempt Bond Trust, Series 11-22 (collectively,
the "Trust") is a unit investment trust consisting of a number of diversified
portfolios designated as the State Trusts. Each State Trust consists of
obligations ("Municipal Bonds", "Bonds" or "Securities") issued primarily by or
on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof.
Each State Trust's investment objective is interest income
which is exempt from Federal, State and, where applicable, local income taxes,
while conserving capital and diversifying risks by investing in an insured,
fixed portfolio of Municipal Bonds consisting of obligations issued primarily
by or on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof. There is, of
course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios
were rated in the category "BBB" or better by either Standard & Poor's
Corporation ("Standard & Poor's") or "Baa" by Moody's Investors Service, Inc.
("Moody's") on the date such State Trust was established (the "Date of
Deposit"). Ratings of the Municipal Bonds may have changed since the Date of
Deposit. See "Description of Securities Ratings" herein and the "Schedule of
Investments" in Part Two.
The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds deposited in the
appropriate Trust, are issued and outstanding Units which have been reacquired
by the Sponsor either by purchase of Units tendered to the Trustee for
redemption or by purchase in the open market. No offering is being made on
behalf of the State Trust and any profit or loss realized on the sale of Units
will accrue to the Sponsor and/or the firm reselling such Units.
INSURANCE. Insurance guaranteeing the scheduled payment of
principal and interest on all of the Municipal Bonds in the portfolio of each
State Trust has been obtained by the Trust from Financial Guaranty Insurance
Company ("Financial Guaranty" or other insurers), or directly by the issuer
from Financial Guaranty or other insurers. See "Insurance on the Portfolios"
herein and the "Schedule of Investments" in Part Two. Insurance obtained by
the Trust remains in effect only while the insured Municipal Bonds are retained
in such State Trust, while insurance obtained by a Municipal Bond issuer is
effective so long as such Bonds are outstanding. Pursuant to an irrevocable
commitment of Financial Guaranty or such other insurers, in the event of a sale
of any bond covered under the Trust's insurance policy, the Trustee has the
right to obtain permanent insurance for such Municipal Bonds upon the payment
of a single predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. The insurance, in either case, does not relate to the
Units offered hereby or to their market value. As a result of such insurance,
the Units of each State Trust received on the original Date of Deposit a rating
of "AAA" from Standard & Poor's and, while held in a State Trust, the
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Municipal Bonds are rated "Aaa" by Moody's. See "Insurance on the Portfolios."
No representation is made as to Financial Guaranty's or any other insurer's
ability to meet its commitments.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit
of each State Trust is equal to a pro rata share of the aggregate bid prices of
the Municipal Bonds in such State Trust (plus or minus a pro rata share of
cash, if any, in the Principal Amount, held or owed by the State Trust) plus a
sales charge shown under "Public Offering of Units." In addition, there will
be added to each transaction in a State Trust an amount equal to the accrued
interest from the last Record Date of such State Trust to the date of
settlement (five business days after order). The sales charge is reduced on a
graduated scale for sales as indicated under "Public Offering of Units."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the
estimated annual interest income to be received by each State Trust, after
deduction of estimated expenses, will be made monthly unless the Unitholder
elects to receive such distributions quarterly or semi-annually. Distributions
will be paid on the Distribution Dates to holders of record of such State Trust
on the Record Dates set forth for the applicable option. See "Essential
Information" in Part Two.
The distribution of funds, if any, in the Principal Account
of each State Trust, will be made semi-annually to Unitholders of Record of
such State Trust on the appropriate dates. See "Essential Information" in Part
Two.
REINVESTMENT. Each Unit Holder of a Trust Fund offered
hearin may elect to have distributions of principal or interest or both
automatically invested without charge in shares of certain mutual funds
sponsored by Kemper Financial Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN.
The Estimated Current Return is calculated by dividing the estimated net annual
interest income per Unit by the Public Offering Price of such State Trust. The
estimated net annual interest income per Unit will vary with changes in fees
and expenses of the Trusts and with the principal prepayment, redemption,
maturity, exchange or sale of Bonds while the Public Offering Price will vary
with changes in the bid price of the underlying Bonds; therefore, there is no
assurance that the present Estimated Current Returns will be realized in the
future. Estimated Long-Term Return is calculated using a formula which (1)
takes into consideration, and determines and factors in the relative weightings
of, the market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirement of all of the
Bonds in the State Trust and (2) takes into account the expenses and sales
charge associated with each State Trust Unit. Since the market values and
estimated retirement of the Bonds and the expenses of the State Trust will
change, there is no assurance that the present Estimated Long-Term Return will
be realized in the future. Estimated Current Return and Estimated Long-Term
Return are expected to differ because the calculation of Estimated Long-Term
Return reflects the estimated date and amount of principal returned while
Estimated Current Return calculations include only net annual interest income
and Public Offering Price.
MARKET FOR UNITS. While under no obligation to do so, the
Sponsor intends, subject to change at any time, to maintain a market for the
Units of each State Trust and to continuously offer to repurchase such Units
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at prices which are based on the aggregate bid side evaluation of the Municipal
Bonds in each State Trust. If such a market is not maintained and no other
over-the-counter market is available, Unitholders will still be able to dispose
of their Units through redemption by the Trustee at prices based upon the
aggregate bid price of the Municipal Bonds in such State Trust. See
"Redemption."
THE TRUST
Each State Trust Fund is one of a series of unit investment
trusts created by the Sponsor under the name Kemper Tax-Exempt Insured Income
Trust, Multi-State Series or Series 11-22 of Ohio Tax-Exempt Bond Trust, all of
which are similar, and each of which was created under the laws of the State of
Missouri pursuant to a Trust Agreement*1 (the "Agreement") (such "State Trusts"
being collectively referred to herein as the "Trust"). Kemper Unit Investment
Trusts, a service of Kemper Securities, Inc., acts as Sponsor and Evaluator and
Investors Fiduciary Trust Company acts as Trustee. For information regarding
the relationship of Kemper Unit Investment Trusts and Investors Fiduciary Trust
Company, see "The Sponsor."
A State Trust may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of insured, tax-exempt,
fixed income securities with greater diversification than they might be able to
acquire individually. In addition, Municipal Bonds of the type deposited in
the State Trusts are often not available in small amounts.
Each State Trust's investment objective is interest income
which is exempt from Federal, State and, where applicable, local income taxes,
while conserving capital and diversifying risks by investing in an insured,
fixed portfolio of Municipal Bonds consisting of obligations issued primarily
by or on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof. There is, of
course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trusts' portfolios
are rated "BBB" or better by Standard & Poor's Corporation ("Standard &
Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's").
See "Description of Securities Ratings" herein and the "Schedule of
Investments" in Part Two.
Each State Trust consists of an insured portfolio of
interest bearing obligations issued by or on behalf of states of the United
States or counties, municipalities, authorities or political subdivisions
thereof the interest on which is, in the opinion of bond counsel to the issuing
authorities, exempt from all Federal income taxes under existing law, but may
not be subject to State and local taxes. Proceeds of the maturity, redemption
or sale of the Municipal Bonds in a State Trust, unless used to pay for Units
tendered for redemption, will be distributed to Unitholders thereof and will
not be utilized to purchase replacement or additional Municipal Bonds for the
State Trust.
_________________________________
*Reference is hereby made to said Trust Agreement, and any
statements contained herein are qualified in their entirety by
the provisions of said Trust Agreement.
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The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds deposited in
the appropriate State Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the Trustee
for redemption or by purchase in the open market. No offering is being made on
behalf of the State Trusts and any profit or loss realized on the sale of Units
will accrue to the Sponsor and/or the firm reselling such Units. To the extent
that Units of any State Trust are redeemed, the principal amount of Municipal
Bonds in such State Trust will be reduced and the undivided fractional interest
represented by each outstanding Unit of such State Trust will increase. See
"Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was
based largely upon the experience and judgment of the Sponsor. In making such
selections the Sponsor considered the following factors: (a) a minimum rating
in the category "BBB" by Standard & Poor's Corporation or "Baa" by Moody's
Investors Service, Inc. (see "Description of Securities Ratings") except that
the Sponsor may, from time to time, in specifically designated State Trusts,
have deemed it to be acceptable to acquire unrated municipal bonds which had,
in the opinion of the Sponsor, credit characteristics at least equal to
municipal bonds so rated; (b) the price of the Municipal Bonds relative to
other issues of similar quality and maturity; (c) the diversification of the
Municipal Bonds as to purpose of issue; (d) the income to the Unitholders of
the State Trust; and (e) whether such Municipal Bonds were insured, or the cost
and availability of insurance for the scheduled payment of principal and
interest, when due, on the Municipal Bonds; and (f) the dates of maturity of
the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may
cease to be rated or its rating may be reduced below the minimum required as of
the Date of Deposit. Neither event requires the elimination of such investment
from a State Trust, but may be considered in the Sponsor's determination to
direct the Trustee to dispose of the investment. See "Investment Supervision"
herein and the "Schedule of Investments" in Part Two.
The Sponsor may not alter the portfolio of a State Trust
except that certain of the Municipal Bonds may be sold upon the happening of
certain extraordinary circumstances. See "Investment Supervision."
Certain of the Municipal Bonds in the State Trusts may be
subject to redemption prior to their stated maturity date pursuant to sinking
fund provisions, call provisions or extraordinary optional or mandatory
redemption provisions or otherwise. A sinking fund is a reserve fund
accumulated over a period of time for retirement of debt. A callable debt
obligation is one which is subject to redemption or refunding prior to maturity
at the option of the issuer. A refunding is a method by which a debt
obligation is redeemed, at or before maturity, by the proceeds of a new debt
obligation. In general, call provisions are more likely to be exercised when
the offering side valuation is at a premium over par than when it is at a
discount from par. Accordingly, any such call, redemption, sale or maturity
will reduce the size and diversity of such State Trust, and the net annual
interest income of the State Trust and may reduce the Estimated Current and
Long-Term Returns. See "Interest and Estimated Current and Long-Term Returns."
Each State Trust portfolio contains a listing of the sinking fund and call,
provisions if any, with respect to each of the debt obligations. Extraordinary
optional redemptions and mandatory redemptions result from the happening of
certain events. Generally, events that may permit the extraordinary optional
redemption of Municipal Bonds or may require the mandatory redemption of
Municipal Bonds include, among others: a final determination that the interest
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on the Municipal Bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the Municipal
Bonds were used; an exercise by a local, State or Federal governmental unit of
its power of eminent domain to take all or substantially all of the project for
which the proceeds of the Municipal Bonds were used; changes in the economic
availability of raw materials, operating supplies or facilities or
technological or other changes which render the operation of the project for
which the proceeds of the Municipal Bonds were used uneconomic; changes in law
or an administrative or judicial decree which renders the performance of the
agreement under which the proceeds of the Municipal Bonds were made available
to finance the project impossible or which creates unreasonable burdens or
which imposes excessive liabilities, such as taxes, not imposed on the date the
Municipal Bonds are issued on the issuer of the Municipal Bonds or the user of
the proceeds of the Municipal Bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the project
financed with the proceeds of the Municipal Bonds; an overestimate of the costs
of the project to be financed with the proceeds of the Municipal Bonds
resulting in excess proceeds of the Municipal Bonds which may be applied to
redeem Municipal Bonds; or an underestimate of a source of funds securing the
Municipal Bonds resulting in excess funds which may be applied to redeem
Municipal Bonds. The Sponsor is unable to predict all of the circumstances
which may result in such redemption of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way
for any default, failure or defect in any Municipal Bond.
PORTFOLIO RISK INFORMATION. An investment in the Units of a
State Trust should be made with an understanding of the risks which an
investment in fixed rate debt obligations may entail, including the risk that
the value of the portfolio and hence of the State Trusts will decline with
increases in interest rates. The value of the underlying Municipal Bonds will
fluctuate inversely with changes in interest rates. The uncertain economic
conditions of recent years, together with the fiscal measures adopted to
attempt to deal with them, have resulted in wide fluctuations in interest rates
and, thus, in the value of fixed rate debt obligations generally and long term
obligations in particular. The Sponsor cannot predict whether such
fluctuations will continue in the future.
Certain of the Municipal Bonds in the State Trusts may be
general obligations of a governmental entity that are backed by the taxing
power of such entity. All other Municipal Bonds in the State Trusts are
revenue bonds payable from the income of a specific project or authority and
are not supported by the issuer's power to levy taxes. General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. Revenue bonds, on the other hand,
are payable only from the revenues derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. There are, of course, variations in the security of
the different Municipal Bonds in the State Trusts, both within a particular
classification and between classifications, depending on numerous factors.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from services provided by
hospitals and other health care facilities, including nursing homes. Ratings
of bonds issued for health care facilities are often based on feasibility
studies that contain projections of occupancy levels, revenues and expenses. A
facility's gross receipts and net income available for debt service will be
affected by future events and conditions including, among other things, demand
for services and the ability of the facility to provide the services required,
physicians' confidence in the facility, management's
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capabilities, economic developments in the service area, competition, efforts
by insurers and governmental agencies to limit rates, legislation establishing
state rate-setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar
third party payor programs, and government regulation. Federal legislation has
been enacted which implement a system of prospective Medicare reimbursement
which may restrict the flow of revenues to hospitals and other facilities which
are reimbursed for services provided under the Medicare program. Future
legislation or changes in the areas noted above, among other things, would
affect all hospitals to varying degrees and, accordingly, any adverse changes
in these areas may adversely affect the ability of such issuers to make payment
of principal and interest on Municipal Bonds held in the State Trusts. Such
adverse changes also may adversely affect the ratings of the Municipal Bonds
held in the State Trusts.
Hospitals and other health care facilities are subject to
claims and legal actions by patients and others in the ordinary course of
business. Although these claims are generally covered by insurance, there can
be no assurance that a claim will not exceed the insurance coverage of a health
care facility or that insurance coverage will be available to a facility. In
addition, a substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health care facility.
Certain hospital bonds may provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity or in
other circumstances. For example, certain hospitals may have the right to call
bonds at par if the hospital may legally be required because of the bonds to
perform procedures against specified religious principles. Certain FHA-insured
bonds may provide that all or a portion of those bonds, otherwise callable at a
premium, can be called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid receivables
may be uncertain and, if the bond obligation is secured by the hospital
facilities, legal restrictions on the ability to foreclose upon the facilities
and the limited alternative uses to which a hospital can be put may reduce
severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be
single family mortgage revenue bonds, which are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences located within the issuer's boundaries and owned by persons of low
or moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgaged premises, default, condemnation or casualty loss. Because these
Municipal Bonds are subject to extraordinary mandatory redemption in whole or
in part from such prepayments of mortgage loans, a substantial portion of such
Municipal Bonds will probably be redeemed prior to their scheduled maturities
or even prior to their ordinary call dates. The redemption price of such
issues may be more or less than the offering price of such Municipal Bonds.
Extraordinary mandatory redemption without premium could also result from the
failure of the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some cases, from the
sale by the Municipal Bond issuer of the mortgage loans. Failure of the
originating financial institutions to make mortgage loans would be due
principally to the interest rates on mortgage loans funded from other sources
becoming competitive with the interest rates on the mortgage loans funded with
the proceeds of the single family mortgage revenue bonds. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. Single family mortgage revenue bonds issued after December 31,
1980 were issued under Section 103A of the Internal Revenue Code of 1954, which
Section contains certain ongoing requirements relating to the use of the
proceeds of such Municipal Bonds in order for the interest on such Municipal
Bonds to retain its tax-exempt status. In each case, the issuer of the
Municipal Bonds has covenanted to comply with applicable ongoing requirements
and bond counsel to such issuer has issued an opinion that the interest on the
Municipal Bonds is exempt from Federal income tax under existing laws and
regulations. There can be no assurances that the ongoing requirements will be
met.
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The failure to meet these requirements could cause the interest on the
Municipal Bonds to become taxable, possibly retroactively from the date of
issuance.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from mortgage loans
to housing projects for low to moderate income families. The ability of such
issuers to make debt service payments will be affected by events and conditions
affecting financed projects, including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income,
increases in taxes, employment and income conditions prevailing in local labor
markets, utility costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends affecting the
localities in which the projects are located. The occupancy of housing
projects may be adversely affected by high rent levels and income limitations
imposed under Federal and State programs. Like single family mortgage revenue
bonds, multi-family mortgage revenue bonds are subject to redemption and call
features, including extraordinary mandatory redemption features, upon
prepayment, sale or non-origination of mortgage loans as well as upon the
occurrence of other events. Certain issuers of single or multi-family housing
bonds have considered various ways to redeem bonds they have issued prior to
the stated first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the State Trusts, the Sponsor has not had any
direct communications with any of the issuers thereof, but at the Initial Date
of Deposit it was not aware that any of the respective issuers of such
Municipal Bonds were actively considering the redemption of such Municipal
Bonds prior to their respective stated initial call dates. However, there can
be no assurance that an issuer of a Municipal Bond in the State Trusts will not
attempt to so redeem a Municipal Bond in the State Trusts.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from the sale of water and/or
sewerage services. Water and sewerage bonds are generally payable from user
fees. Problems faced by such issuers include the ability to obtain timely and
adequate rate increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs, the limitations
on operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees.
Because of the relatively short history of solid waste
disposal bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing environmental
regulation on the Federal, State and local level has a significant impact on
waste disposal facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and changing equipment
standards and required methods of operation and the cost of disposing of the
waste residue that remains after the disposal process in an environmentally
safe manner. In addition, waste disposal facilities frequently face
substantial opposition by environmental groups and officials to their location
and operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the facilities'
services. Finally, waste disposal facilities are concerned with many of the
same issues facing utilities insofar
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as they derive revenues from the sale of energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from the sale of
electric energy or natural gas. Utilities are generally subject to extensive
regulation by state utility commissions which, among other things, establish
the rates which may be charged and the appropriate rate of return on an
approved asset base. The problems faced by such issuers include the difficulty
in obtaining approval for timely and adequate rate increases from the governing
public utility commission, the difficulty in financing large construction
programs, the limitations on operations and increased costs and delays
attributable to environmental considerations, increased competition, recent
reductions in estimates of future demand for electricity in certain areas of
the country, the difficulty of the capital market in absorbing utility debt,
the difficulty in obtaining fuel at reasonable prices and the effect of energy
conservation. Issuers may have experienced these problems in varying degrees.
In addition, Federal, state and municipal governmental authorities may from
time to time review existing and impose additional regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal Bonds to make
payments of principal and/or interest on such Municipal Bonds.
The ability of state and local joint action power agencies
to make payments on bonds they have issued is dependent in large part on
payments made to them pursuant to power supply or similar agreements. Courts
in Washington and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter into
the agreements. While these decisions are not specifically applicable to
agreements entered into by public entities in other states, they may cause a
reexamination of the legal structure and economic viability of certain projects
financed by joint action power agencies, which might exacerbate some of the
problems referred to above and possibly lead to legal proceedings questioning
the enforceability of agreements upon which payment of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts may be
industrial revenue bonds ("IRBs"), including pollution control revenue bonds,
which are tax-exempt securities issued by states, municipalities, public
authorities or similar entities to finance the cost of acquiring, constructing
or improving various industrial projects. These projects are usually operated
by corporate entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended proceeds of the
IRBs or receipts or revenues of the issuer under an arrangement between the
issuer and the corporate operator of a project. The arrangement may be in the
form of a lease, installment sale agreement, conditional sale agreement or loan
agreement, but in each case the payments to the issuer are designed to be
sufficient to meet the payments of amounts due on the IRBs. Regardless of the
structure, payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project or corporate guarantor. Corporate operators
or guarantors may be affected by many factors which may have an adverse impact
on the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from
leveraged buy-outs or takeovers. The IRBs in the State Trusts may be subject
to special or extraordinary redemption provisions which may provide for
redemption at par or, with respect to original issue discount bonds, at issue
price plus the amount of original issue discount accreted to the redemption
date plus, if applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in the State
Trusts prior to the stated maturity of such Municipal Bonds.
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Certain of the Municipal Bonds in the State Trusts may be
obligations which are payable from and secured by revenues derived from the
ownership and operation of facilities such as airports, bridges, turnpikes,
port authorities, convention centers and arenas. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Municipal Bonds related to other facilities is
dependent on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers which are, or which govern the operation of, schools,
colleges and universities and whose revenues are derived mainly from ad valorem
taxes, or for higher education systems, from tuition, dormitory revenues,
grants and endowments. General problems relating to school bonds include
litigation contesting the state constitutionality of financing public education
in part from ad valorem taxes, thereby creating a disparity in educational
funds available to schools in wealthy areas and schools in poor areas.
Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trust. General problems
relating to college and university obligations would include the prospect of a
declining percentage of the population consisting of "college" age individuals,
possible inability to raise tuition and fees sufficiently to cover increased
operating costs, the uncertainty of continued receipt of Federal grants and
state funding and new government legislation or regulations which may adversely
affect the revenues or costs of such issuers. All of such issuers have been
experiencing certain of these problems in varying degrees.
In addition, the ability of universities and colleges to
meet their obligations is dependent upon various factors, including the size
and diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, geographic location, geographic diversity and quality of
student body, quality of the faculty and the diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts may be
Urban Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the URBs. Regardless of the structure,
payment of the URBs is solely dependent upon the creditworthiness of the
operator of the project.
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Certain of the Municipal Bonds in the State Trusts may be
lease revenue bonds whose revenues are derived from lease payments made by a
municipality or other political subdivision which is leasing equipment or
property for use in its operation. The risks associated with owning Municipal
Bonds of this nature include the possibility that appropriation of funds for a
particular project or equipment may be discontinued. The Sponsor cannot
predict the likelihood of nonappropriation of funds for these types of lease
revenue Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be
"zero coupon" bonds, i.e., an original issue discount bond that does not
provide for the payment of current interest. Zero coupon bonds are purchased
at a deep discount because the buyer receives a final payment at the maturity
of the bond and does not receive any periodic interest payments. The effect of
owning deep discount bonds which do not make current interest payments (such as
the zero coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. For the Federal
tax consequences of original issue discount bonds such as the zero coupon
bonds, see "Federal Tax Status of the State Trusts."
Investors should be aware that many of the Municipal Bonds
in the State Trusts are subject to continuing requirements such as the actual
use of Municipal Bond proceeds or manner of operation of the project financed
from Municipal Bond proceeds that may affect the exemption of interest on such
Municipal Bonds from Federal income taxation. Although at the time of issuance
of each of the Municipal Bonds in the State Trusts an opinion of bond counsel
was rendered as to the exemption of interest on such obligations from Federal
income taxation, there can be no assurance that the respective issuers or other
obligers on such obligations will fulfill the various continuing requirements
established upon issuance of the Municipal Bonds. A failure to comply with
such requirements may cause a determination that interest on such obligations
is subject to Federal income taxation, perhaps even retroactively from the date
of issuance of such Municipal Bonds, thereby reducing the value of the
Municipal Bonds and subjecting Unitholders to unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Certain issues of the Municipal Bonds in the State Trusts
represent "moral obligations" of another governmental entity. In the event
that the issuer of the Municipal Bond defaults in the repayment thereof, such
other governmental entity lawfully may, but is not obligated to, discharge the
obligation of the issuer to repay such Municipal Bond.
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If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such Municipal Bonds becomes a moral commitment
but not a legal obligation of the State or municipality in question. Even
though the State may be called on to restore any deficits in capital reserve
funds of the agencies or authorities which issued the bonds, any restoration
generally requires appropriation by the State legislature and accordingly does
not constitute a legally enforceable obligation or debt of the State. The
agencies or authorities generally have no taxing power.
To the best of the Sponsor's knowledge, as of the date of
this Prospectus, there is no litigation pending with respect to any Municipal
Bond which might reasonably be expected to have a material adverse effect on
the Trust or any State Trust. Although the Sponsor is unable to predict
whether any litigation may be instituted, or if instituted, whether such
litigation might have a material adverse effect on the Trust, the Trust
received copies of the opinions of bond counsel given to the issuing
authorities at the time of original delivery of each of the Municipal Bonds to
the effect that the Municipal Bonds had been validly issued and that the
interest thereon is exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolio of the State Trusts are
insured as to the scheduled payment of interest and principal, when due, by
policies obtained directly by the Trust from Financial Guaranty Insurance
Company ("Financial Guaranty") or by the Sponsor or by the issuer from
Financial Guaranty or other insurers. The insurance policies obtained by the
Trust for a Series are non-cancelable and will continue in force so long as
such State Trust is in existence, Financial Guaranty remains in business and
the Municipal Bonds described in the policy continue to be held in such State
Trusts. The premium for any insurance policy or policies obtained by an issuer
of Municipal Bonds has been paid in advance by such issuer and any such policy
or policies are non-cancelable and will remain in force so long as the
Municipal Bonds so insured are outstanding and the insurer and/or insurers
referred to below remain in business. A monthly premium is paid by each State
Trust for the insurance obtained by the Trust, which is payable from the
interest received by such State Trust. In those instances where Municipal Bond
insurance is obtained by the issuer directly from an insurer, no premiums for
insurance are paid by the State Trust and such bonds are not covered by the
State Trust's policy. Nonpayment of premiums on the policy obtained by the
State Trust will not result in the cancellation of such insurance but will
force the insurer to take action against the Trustee to recover premium
payments due it. Premium rates for each issue of Municipal Bonds protected by
the policy obtained by the Trust are fixed for the life of the appropriate
State Trusts.
The aforementioned insurance guarantees the timely payment
of principal and interest on the Municipal Bonds of each State Trust as they
fall due. It does not guarantee the market value of the Municipal Bonds or the
value of the Units of a State Trust. The insurance obtained by the Trust is
only effective as to Municipal Bonds owned by and held in a State Trust and the
price which an individual pays on acquisition of Units, or receives on
redemption or resale of Units, does not, except as indicated below, include any
element of value for the insurance obtained by the Trust. Unitholders should
recognize that in order to receive any benefit from the portfolio insurance
obtained by the State Trust, they must be owners of the Units of a State Trust
at the time the Trustee becomes entitled to receive any payment from the
insurer for such State Trust. Insurance obtained by the issuer of a Municipal
Bond is effective so long as the Municipal Bond is outstanding, whether or not
held by the State Trust.
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<PAGE> 14
Pursuant to an irrevocable commitment of Financial Guaranty,
the Trustee, upon the sale of a Municipal Bond under the Trust's insurance
policy, has the right to obtain permanent insurance with respect to such
Municipal Bond (i.e., insurance to the maturity of the Municipal Bond
regardless of the identity of the holder thereof) (the "Permanent Insurance")
upon the payment of a single predetermined insurance premium from the proceeds
of the sale of such Municipal Bond. Accordingly, every Municipal Bond in the
Trust is eligible to be sold on an insured basis. It is expected that the
Trustee will exercise the right to obtain Permanent Insurance with respect to
Municipal Bonds in the State Trust only if upon such exercise the Trust would
receive net proceeds (i.e., the value of such Municipal Bond if sold as an
insured Municipal Bond less the insurance premium attributable to the Permanent
Insurance) from such sale in excess of the sale proceeds if such Municipal Bond
was sold on an uninsured basis. The insurance premium with respect to each
Municipal Bond is determined based upon the insurability of each Municipal Bond
as of the Date of Deposit and will not be increased or decreased for any change
in the creditworthiness of such Municipal Bond's issuer.
Insurance obtained for a State Trust, under normal
circumstances, has no effect on the price or redemption value of Units. It is
the present intention of the Evaluator to attribute a value to such insurance
for the purpose of computing the price or redemption value of Units only in
circumstances where the credit quality of an underlying Municipal Bond has
significantly deteriorated. Insurance obtained by the issuer of a Municipal
Bond is effective so long as such Municipal Bond is outstanding. Therefore,
any such insurance may be considered to represent an element of market value in
regard to the Municipal Bonds thus insured, but the exact effect, if any, of
this insurance on such market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an
amount equal to the excess, if any, by which the net proceeds realizable from
the sale of the Municipal Bond on an insured basis exceeds the sum of (i) the
net proceeds receivable from the sale of the Municipal Bonds on an uninsured
basis plus (ii) the insurance premium attributable to the Permanent Insurance.
Insurance obtained by the issuer of a Municipal Bond is effective so long as
such Municipal Bond is outstanding. Therefore, any such insurance may be
considered to represent an element of market value in regard to the Municipal
Bonds thus insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
Under the provisions of the aforementioned insurance,
Financial Guaranty unconditionally and irrevocably agrees to pay to Citibank,
N.A., or its successor, as its agent (the "Fiscal Agent"), that portion of the
principal of and interest on the covered Municipal Bonds which shall become due
for payment but shall be unpaid by reason of nonpayment by the issuer of the
Municipal Bonds. The term "due for payment" means, when referring to the
principal of a Municipal Bond, its stated maturity date or the date on which it
shall have been called for mandatory sinking fund redemption and does not refer
to any earlier date on which payment is due by reason of call for redemption
(other than by mandatory sinking fund redemption), acceleration or other
advancement of maturity and means, when referring to interest on a Municipal
Bond, the stated date for payment of interest. When the interest on a
Municipal Bond shall have been determined, as provided in the underlying
documentation relating to such Municipal Bond, to be subject to Federal income
taxation, "due for payment" also means, when referring to the principal of such
Municipal Bond, the date on which such Municipal Bond has been called for
mandatory redemption as a result of such determination of taxability, and when
referring to interest on such Municipal Bond, the accrued interest at the rate
provided in such documentation to the date on which such Municipal Bond has
been called for such mandatory redemption, together with any applicable
redemption premium.
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<PAGE> 15
Financial Guaranty will make such payments to the Fiscal
Agent on the date such principal or interest becomes due for payment or on the
business day next following the day on which Financial Guaranty shall have
received notice of nonpayment, whichever is later. The Fiscal Agent will
disburse to the Trustee the face amount of principal and interest which is then
due for payment but is unpaid by reason of nonpayment and interest which is
then due for payment but is unpaid by reason of nonpayment by the issuer but
only upon receipt by the Fiscal Agent of (i) evidence of the Trustee's right to
receive payment of the principal or interest due for payment and (ii) evidence,
including any appropriate instruments of assignment, that all of the rights to
payment of such principal or interest due for payment shall thereupon vest in
Financial Guaranty. Upon such disbursement, Financial Guaranty shall become
the owner of the Municipal Bond, appurtenant coupon or right to payment of
principal or interest on such Municipal Bond and shall be fully subrogated to
all the Trustee's rights thereunder, including the right to payment thereof.
FINANCIAL GUARANTY INSURANCE COMPANY. The policy obtained
by the Trust was issued by Financial Guaranty, a New York stock insurance
company. Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation,
a Delaware holding company (the "Corporation"). The Corporation is a wholly
owned subsidiary of General Electric Capital Corporation ("GECC"). Neither the
Corporation nor GECC is obligated to pay the debts of or the claims against
Financial Guaranty. Financial Guaranty is domiciled in the State of New York
and is subject to regulation by the State of New York Insurance Department. As
of June 30, 1993 the total capital and surplus of Financial Guaranty was
approximately $686,140,000. Copies of Financial Guaranty's financial
statements, prepared on the basis of statutory accounting principles, and the
Corporation's financial statements, prepared on the basis of generally accepted
accounting principles, may be obtained by writing to Financial Guaranty at 175
Water Street, New York, New York 10038, Attention: Communications Department.
Financial Guaranty's telephone number is (212) 607-3000.
In addition, Financial Guaranty is currently authorized to
write with insurance in 49 states and the District of Columbia.
The information relating to Financial Guaranty contained
above has been furnished by such corporation. The financial information
contained herein with respect to such corporation is unaudited but appears in
reports or other materials filed with state insurance regulatory authorities
and is subject to audit and review by such authorities. 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 but the Sponsor is not aware that the information herein is inaccurate
or incomplete.
In determining whether to insure bonds, Financial Guaranty
has applied its own standards, which are not necessarily the same as the
criteria used in regard to the selection of bonds by the Sponsor. This
decision is made prior to the Date of Deposit, as bonds not covered by such
insurance are generally not deposited in the Trust. The insurance obtained by
the Trust covers Municipal Bonds deposited in each State Trust and physically
delivered to the Trustee in the case of bearer bonds or registered in the name
of the Trustee or its nominee for Municipal Bonds held in book-entry form.
Contracts to purchase Municipal Bonds are not covered by the insurance obtained
by the Trust, although Municipal Bonds underlying such contracts are covered by
insurance upon physical delivery to the Trustee.
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<PAGE> 16
The contract of insurance relating to the State Trusts and
the negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Trust. Otherwise, neither Financial Guaranty nor
its parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, direct or indirect, with the Trust or the Sponsor, except that
Kemper Reinsurance Co., an affiliate of the Sponsor, has participated to a very
limited extent, pursuant to an exemptive order obtained from the Securities and
Exchange Commission, in the reinsurance program of Financial Guaranty. Neither
the State Trusts, the related Units nor the portfolios of such State Trusts are
otherwise insured directly or indirectly by FGIC Corporation.
AMBAC INDEMNITY CORPORATION. AMBAC Indemnity Corporation
("AMBAC") is a Wisconsin-domiciled stock insurance company, regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin, and licensed
to do business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets (unaudited) of approximately $1,725,000,000
and statutory capital (unaudited) of approximately $963,000,000 as of March 31,
1993. Statutory capital consists of AMBAC Inc., a 100% publicly-held company.
Moody's Investors Service, Inc. and Standard & Poor's Corporation have both
assigned a AAA claims-paying ability rating to AMBAC. Copies of AMBAC's
financial statements prepared in accordance with statutory accounting standards
are available from AMBAC. The address of AMBAC's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340. AMBAC has entered into quota share reinsurance
agreements under which a percentage of the insurance underwritten pursuant to
certain municipal bonds insurance programs of AMBAC has been and will be
assumed by a number of foreign and domestic unaffiliated reinsurers.
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION. Municipal
Bond Investors Assurance Corporation ("MBIA Corporation") is the principal
operating subsidiary of MBIA, Inc., a New York Stock Exchange listed company.
MB0IA, Inc. is not obligated to pay the debts of or claims against MBIA
Corporation. MBIA Corporation, which commenced municipal bond insurance
operations on January 5, 1987, is a limited liability corporation rather than
a several liability association. MBIA 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, 1993 MBIA Corporation had admitted assets of
$2.9 billion (unaudited), total liabilities of $1.9 billion (unaudited), and
total capital and surplus of $45 million (audited) prepared in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. Standard & Poor's Corporation has rated the claims paying ability
of MBIA "AAA" Copies of MBIA Corporation's financial statements prepared in
accordance with statutory accounting practices are available from MBIA
Corporation. The address of MBIA Corporation is 113 King Street, Armonk, New
York 10504.
Effective December 31, 1989 MBIA Inc. acquired Bond
Investors Group, Inc. On January 5,1990, the Insurer acquired all of the
outstanding stock of Bond Investors Group, Inc., The parent of BIG, now known
as MBIA Insurance Corp. of Illinois. Though a reinsurance agreement, BIG has
ceded all of its net insured risks, as well as its unearned premium and
contingency reserves, to the Insurer and the Insurer has reinsured BIG's net
outstanding exposure.
Moody's Investors Service rates all bonds issues insured by
MBIA "Aaa" and short-term loans "MIG1," both designated to be of the highest
quality. Standard & Poor's Corporation rates all new issues insured by
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<PAGE> 17
MBIA "AAA."
FINANCIAL SECURITY ASSURANCE. Financial Security Assurance
("Financial Security" or "FSA") is monoline insurance company incorporated on
March 16, 1984 under the laws of the State of New York. The operations of
Financial Security commenced on July 25, 1985, and Financial Security received
its New York State insurance license on September 23, 1985. Financial Security
and its two wholly owned subsidiaries are licensed to engage in financial
guaranty insurance business in 47 states, the District of Columbia and Puerto
Rico.
Financial Security and its subsidiaries are engaged
exclusively in the business of writing financial guaranty insurance,
principally in respect of asset-backed and other collateralized securities
offered in domestic and foreign markets. Financial Security and its
subsidiaries also write financial guaranty insurance in respect of municipal
and other obligations and reinsure financial guaranty insurance policies
written by other leadings insurance companies. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities, thereby enhancing the credit rating of these securities,
in consideration for payment of a premium to the insurer.
Financial Security is 91.6% owned by U.S. West, Inc., and
8.4% owned by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine").
U.S. West, Inc. operates businesses involved in communications, data solutions,
marketing services and capital assets, including the provision of telephone
services in 14 states in the western and Midwestern United States. Tokio
Marine is the largest property and casualty insurance company in Japan. No
shareholder of Financial Security is obligated to pay any debt of Financial
Security on any claim under any insurance policy issued by Financial Security
or to make any additional contribution to the capital of Financial Security.
As of September 30, 1992, the total policyholders' surplus
and contingency reserves and the total unearned premium reserve, respectively,
of Financial Security and its consolidated subsidiaries were, in accordance
with statutory accounting principles, approximately $456,840,000 (unaudited)
and $231,686,000 (unaudited), and the total shareholder's equity and the
unearned premium reserve, respectively of financial security and its
consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $615,376,000 (unaudited) and $213,838,000
(unaudited).
Copies of Financial Security's financial statements may be
obtained by writing to Financial Security at 350 Park Avenue, New York, New
York, 10022, Attention Communications Department. Financial Security's
Telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written by Financial Security or either of its
subsidiaries are insured among such companies at an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security reinsurers a portion of its liabilities under certain of its financial
guaranty insurance policies with unaffiliated reinsurers under various quota
share treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit
Financial Security's
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<PAGE> 18
obligations under any financial guaranty insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by
Moody's Investors Service, Inc., and "AAA" by Standard & Poor's Corporation,
Nippon Investors Service Inc., Duff & Phelps Inc. and Australian Ratings Pty.
Ltd. Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies.
CAPITAL GUARANTY INSURANCE COMPANY. Capital Guaranty
Insurance Company ("Capital Guaranty") was incorporated in Maryland on June 25,
1986, and is wholly owned subsidiary of Capital Guaranty Corporation, a
Maryland insurance holding company.
Capital Guaranty Corporation is owned by the following
investors: Constellation Investments, Inc., an affiliate of Baltimore Gas and
Electric; Fleet/Norstar Financial Group, Inc.; Safeco Corporation; Sibag
Finance Corporation, an affiliate of Siemens A.G. and United States Fidelity
and Guaranty Company and management.
Capital Guaranty, headquartered in San Francisco, is a
monoline financial guaranty insurer engaged in the underwriting and development
of financial guaranty insurance. Capital Guaranty insures general obligation,
tax supported and revenue bonds structured as a tax-exempt and taxable
securities as well as selectively insures taxable corporate/asset backed
securities. Standard & Poor's rates the claims paying the ability of Capital
Guaranty "AAA".
Capital Guaranty's insured portfolio currently includes over
$9 billion in total principal and interest insured. As of December 31, 1990,
the total policyholders' surplus of Capital Guaranty was $103,802,396
(audited), and the total admitted assets were $180,118,227 (audited) as
reported to the Insurance Department of the State of Maryland. Financial
statements for Capital Guaranty Insurance Company, that have been prepared in
accordance with statutory insurance accounting standards, are available upon
request. The address of Capital Guaranty's headquarters is Steuart Tower, 22nd
Floor, One Market Plaza, San Francisco, CA 941-5-1413 and the telephone number
is (415) 995-8000.
Because the Municipal Bonds are insured as to the scheduled
payment of principal and interest and on the basis of the financial condition
and the method of operation of the insurance companies referred to above,
Standard & Poor's has assigned to the State Trusts' Units its "AAA" investment
rating and, in addition, Moody's has assigned its "Aaa" investment rating to
each of the Municipal Bonds covered by the Financial Guaranty policy while held
in the Trust. These are the highest ratings assigned to securities by such
rating agencies. See "Description of Securities Ratings" herein. These
ratings should not be construed as an approval of the offering of the Units by
Standard & Poor's or Moody's or as a guarantee of the market value of the State
Trusts or the Units. There is no guarantee that the "AAA" or "Aaa" investment
ratings will be maintained.
On the date shown under "Essential Information" in Part Two,
the Estimated Long-Term and Current Returns per Unit for the Trust, after
payment of the insurance premium, were as indicated. The Estimated Long-Term
and Current Returns per Unit for a trust with an identical portfolio without
the insurance obtained
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by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the
Trust is to obtain a higher yield on the portfolio of the Series of the Trust
than would be available if all the Municipal Bonds in such portfolios had
Standard & Poor's "AAA" rating and/or Moody's "Aaa" rating(s), and at the same
time to have the protection of insurance of prompt payment of interest and
principal, when due, on the Municipal Bonds. There is, of course, no certainty
that this result will be achieved. Municipal Bonds in a Series of the Trust
which have been insured by the issuer (all of which are rated "AAA" by Standard
& Poor's and/or "Aaa" by Moody's) may or may not have a higher yield than
uninsured bonds rated "AAA" by Standard & Poor's or "Aaa" by Moody's. In
selecting such Municipal Bonds for the portfolio, the Sponsor has applied the
criteria described above.
In the event of nonpayment of interest or principal, when
due, in respect of a Municipal Bond, the appropriate insurer shall make such
payment not later than 30 days after it has been notified that such nonpayment
has occurred or is threatened (but not earlier than the date such payment is
due). The insurer, as regards any payment it may make, will succeed to the
rights of the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling
which holds, in effect, that insurance proceeds representing maturing interest
on defaulted municipal obligations paid to municipal bond funds substantially
similar to the Trust, under policy provisions substantially identical to the
policies described herein, will be excludable from Federal gross income under
Section 103(a)(1) of the Internal Revenue Code. Holders of Units in the State
Trust should discuss with their tax advisers the degree of reliance which they
may place on this letter ruling. Furthermore, Chapman and Cutler, counsel for
the Sponsor, has given an opinion to the effect that such payment of proceeds
would be excludable from Federal gross income to the same extent that such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. See "Federal Tax Status of the State Trusts."
DISTRIBUTION REINVESTMENT
Kemper Financial Services, Inc. ("KFS"), an affiliate of the
Sponsor, is the Investment Manager and Principal Underwriter of Kemper
Municipal Bond Fund ("KMBF") and Tax-Exempt Portfolio of Cash Equivalent Fund
("TEPCE"). Each of these funds invests in obligations issued by or on behalf
of states, territories and possessions of the United States and the District
of Columbia and their political subdivisions, agencies and instrumentalities,
the interest from which is exempt from Federal income taxes, although it may be
subject to State and local taxes. TEPCE may not invest in such obligations
having a maturity of more than one year (except for variable rate obligations
with a demand feature) and it has a net asset value which is sought to be
maintained at $1.00 per share. KFS is also the Investment Manager and
Principal Underwriter of the Kemper California Tax-Fee Income Fund ("KCF").
KCF invests a minimum of 50% and may invest up to 100% of its assets in
municipal securities issued by California entities, thereby enabling it to pay
dividends, which are partially or wholly exempt from California income taxes,
to California residents. Each Unitholder of a State Trust may elect to have
distributions of principal (including capital gains, if any) or interest or
both automatically invested without charge in shares of any other mutual fund
underwritten or advised by Kemper Financial Services, Inc., an affiliate of the
sponsor (the "Kemper Funds") which are registered in the Unitholder's State of
Residence, other than those Kemper Funds sold with a contingent deferred sales
charge. Since the portfolio securities and investment objectives of such
Kemper Funds may
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differ significantly from that of the Trust, Unitholders should carefully
consider the consequences, including the fact that distributions from such
Kemper Funds may be taxable, before selecting such Kemper Funds for
reinvestment. Detailed information with respect to the investment objectives
and the management of the Funds is contained in their respective prospectuses,
which can be obtained from the Sponsor, and many investment firms, upon
request. An investor should read the appropriate prospectus prior to making
the election to reinvest.
A Unitholder who desires to have such distributions
automatically reinvested without change should file a written notice of
election with the Program Agent referred to below. Such election must be
received by the Program Agent at least ten days prior to the Record Date
applicable to any distribution in order to be in effect for such Record Date.
Any such election shall remain in effect until a subsequent notice is received
by the Program Agent. See "Unitholders - Distributions to Unitholders."
The Program Agent is Investors Fiduciary Trust Company. All
inquiries concerning participation in distribution reinvestment should be
directed to the Kemper Service Company, service agent for the Program Agent at
P.O. Box 419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST AND ESTIMATED CURRENT AND LONG-TERM RETURNS
As of the opening of business on the date indicated therein,
the Estimated Current Returns and the Estimated Long-Term Returns for each
State Trust were as set forth under "Essential Information" for the applicable
State Trust in Part Two of this Prospectus. Estimated Current Returns are
calculated by dividing the estimated net annual interest income per Unit by the
Public Offering Price. The estimated net annual interest income per Unit will
vary with changes in fees and expenses of the Trustee , the Sponsor and the
Evaluator and with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with changes in
the offering price of the underlying Securities; therefore, there is no
assurance that the present Estimated Current Returns will be realized in the
future. Estimated Long-Term Returns are calculated using a formula which (1)
takes into consideration, and determines and factors in the relative weightings
of, the market values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated retirements of all of
the Securities in the State Trust and (2) takes into account the expenses and
sales charge associated with each State Trust Unit. Since the market values
and estimated retirements of the Securities and the expenses of the State Trust
will change, there is no assurance that the present Estimated Long-Term Returns
will be realized in the future. Estimated Current Returns and Estimated
Long-Term Returns are expected to differ because the calculation of Estimated
Long-Term Returns reflects the estimated date and amount of principal returned
while Estimated Current Returns calculations include only net annual interest
income and Public Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts were
accompanied by copies of opinions of bond counsel given to the issuers thereof
at the time of original delivery of the Municipal Bonds to the effect that the
interest thereon is exempt from all Federal income taxes. In addition, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest on such Municipal Bonds, when held by residents of the state in which
the issuers of such Municipal Bonds are located, from State income taxes and,
where applicable, local income taxes. Gain realized on the sale or redemption
of the Municipal Bonds by the Trustee
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or of a Unit by a Unitholder is, however, includable in gross income for
Federal income tax purposes as capital gain, which gain may be long or short
term. Such gain does not include any amounts received in respect of accrued
interest or earned original issue discount. It should be noted that under
recently enacted legislation described below that subjects accretion of market
discount on tax-exempt bonds to taxation as ordinary income, gain realized on
the sale or redemption of Municipal Bonds by the Trustee or of Units by a
Unitholder that would have been treated as capital gain under prior law is
treated as ordinary income to the extent it is attributable to accretion of
market discount. Market discount can arise based on the price a Trust Fund
pays for Municipal Bonds or the price a Unitholder pays for his or her Units.
In connection with the offering of Units of the State
Trusts, neither the Sponsor, the Trustee, the Auditors nor their respective
counsel have made any review of the proceedings relating to the issuance of the
Municipal Bonds or the bases for such opinions.
At the time of the closing for each Trust, Chapman and
Cutler, counsel for the Sponsor, rendered an opinion under then existing law
substantially to the effect that:
Each State Trust is not an association taxable as a
corporation for Federal income tax purposes and interest and accrued original
issue discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986 (the "Code") will retain its status when
distributed to Unitholders, except to the extent such interest is subject to
the alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted below.
Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective State Trust in the proportion that the
number of Units of such Trust held by him bears to the total number of Units
outstanding of such State Trust under subpart E, subchapter J of chapter 1 of
the Code and will have a taxable event when such State Trust disposes of a
Bond, or when the Unitholder redeems or sells his Units. Unitholders must
reduce the tax basis of their Units for their share of accrued interest
received by a State Trust, if any, on Bonds delivered after the Unitholders pay
for their Units to the extent that such interest accrued on such Bonds during
the period from the Unitholder's settlement date to the date such Bonds are
delivered to a State Trust and, consequently, such Unitholders may have an
increase in taxable gain or reduction in capital loss upon the disposition of
such Units. Gain or loss upon the sale or redemption of Units is measured by
comparing the proceeds of such sale or redemption with the adjusted basis of
the Units. If the Trustee disposes of Bonds (whether by sale, payment on
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder. The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition with
the Unitholder's basis for his or her fractional interest in the asset disposed
of. In the case of a Unitholder who purchases Units, such basis (before
adjustment for earned original issue discount and amortized bond premium, if
any) is determined by apportioning the cost of the Units among each of the
State Trust's assets ratably according to the value as of the date of
acquisition of the Units. The tax cost reduction requirements of the Code
relating to amortization of bond premium may, under some circumstances, result
in the Unitholder realizing a taxable gain when his Units are sold or redeemed
for an amount equal to his original cost.
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Sections 1288 and 1272 of the Internal Revenue Code of 1986
(the "Code") provide a complex set of rules governing the accrual of original
issue discount. These rules provide that original issue discount accrues
either on the basis of a constant compound interest rate or ratably over the
term of the Municipal Bond, depending on the date the Municipal Bond was
issued. In addition, special rules apply if the purchase price of a Municipal
Bond exceeds the original issue price plus the amount of original issue
discount which would have previously accrued based upon its issue price (its
"adjusted issue price"). The application of these rules will also vary
depending on the value of the Municipal Bond on the date a Unitholder acquires
his Units, and the price the Unitholder pays for his Units. Investors with
questions regarding these Code sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") was
recently enacted. The Tax Act subjects tax-exempt bonds to the market discount
rules of the Code effective for bonds purchased after April 30, 1993. In
general, market discount is the amount (if any) by which the stated redemption
price at maturity exceeds an investor's purchase price (except to the extent
that such difference, if any, is attributable to original issue discount not
yet accrued). Under the Tax Act, accretion of market discount is taxable as
ordinary income; under prior law the accretion had been treated as capital
gain. Market discount that accretes while a Trust Fund holds a Municipal Bond
would be recognized as ordinary income by the Unitholders when principal
payments are received on the Municipal Bond, upon sale or at redemption
(including early redemption), or upon the sale or redemption of his or her
Units, unless a Unitholder elects to include market discount in taxable income
as it accrues. The market discount rules are complex and Unitholders should
consult their tax advisers regarding these rules and their application.
In the case of all Unitholders (both individuals and
corporations), interest on all or certain Bonds held by the respective State
Trusts may be treated as an item of tax preference for purposes of computing
the alternative minimum tax. Accordingly, investments in Units may subject
Unitholders to (or result in increased liability under) the alternative minimum
tax. Due to the complexity of the alternative minimum tax, Unitholders are
urged to consult their tax advisers regarding the impact, if any, of the
alternative minimum tax.
In the case of certain corporations, the alternative minimum
tax and the Superfund Tax depend upon the corporation's alternative minimum
taxable income, which is the corporation's taxable income with certain
adjustments. One of the adjustment items used in computing the alternative
minimum taxable income and the Superfund Tax of a corporation (other than an S
Corporation, Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such corporation's "adjusted
net book income" over an amount equal to its alternative minimum taxable income
(before such adjustment item and the alternative tax net operating loss
deduction). For taxable years beginning after 1989, such adjustment item will
be 75% of the excess of such corporation's "adjusted current earnings" over an
amount equal to its alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction). "Adjusted current
earnings" includes all tax-exempt interest, including interest on all the Bonds
in a State Trust. Unitholders are urged to consult their tax advisers with
respect to the particular tax consequences to them including the corporate
alternative minimum tax, the Superfund Tax and the branch profits tax imposed
by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section
265 of the Code, interest on indebtedness incurred or continued to purchase or
carry Units of a State Trust is not deductible for Federal income tax purposes.
The Internal Revenue Service has taken the position that such indebtedness need
not be directly
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traceable to the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to purchase or improve a
personal residence). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units. Investors with
questions regarding these issues should consult with their tax advisers.
In the case of certain Municipal Bonds in the State Trusts,
the opinions of bond counsel indicate that interest on such securities received
by a "substantial user" of the facilities being financed with the proceeds of
these securities or persons related thereto, for periods while such securities
are held by such a user or related person, will not be excludable from Federal
gross income, although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes that he
or she may be a "substantial user" or a "related person" as so defined should
contact his or her tax adviser.
Under existing law, the State Trusts are not associations
taxable as a corporation and the income of the Trust Funds will be treated as
the income of the Unitholders under the income tax laws of the State of
Missouri.
All statements of law in the Prospectus concerning exclusion
from gross income for Federal, State or other tax purposes are the opinions of
counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exclusion of interest thereon from
Federal gross income are rendered by bond counsel to the respective issuing
authorities. Neither the Sponsor nor Chapman and Cutler has made any special
review for the State Trusts of the proceedings relating to the issuance of the
Bonds or of the basis for such opinions.
For taxpayers other than corporations, net capital gains are
presently subject to a maximum marginal stated tax rate of 28 percent.
However, it should be noted that legislative proposals are introduced from time
to time that affect tax rates and could affect relative differences at which
ordinary income and capital gains are taxed.
Under the Code, taxpayers must disclose to the Internal
Revenue Service the amount of tax-exempt interest earned during the year.
Section 86 of the Code, in general, provides that fifty
percent of Social Security benefits are includible in gross income to the
extent that the sum of "modified adjusted gross income" plus fifty percent of
the Social Security benefits received exceeds a "base amount." The base amount
is $25,000 for unmarried taxpayers, $32,000 for married taxpayers filing a
joint return and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified adjusted gross
income is adjusted gross income determined without regard to certain otherwise
allowable deductions and exclusions from gross income and by including tax
exempt interest. To the extent that Social Security benefits are includible in
gross income, they will be treated as any other item of gross income.
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In addition, under the Tax Act, for taxable years beginning
after December 31, 1993, up to 85 percent of Social Security benefits are
includible in gross income to the extent that the sum of "modified adjusted
gross income" plus fifty percent of Social Security benefits received exceeds
an "adjusted base amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the taxable year
and who file separate returns.
Although tax-exempt interest is included in modified
adjusted gross income solely for the purpose of determining what portion, if
any, of Social Security benefits will be included in gross income, no
tax-exempt interest, including that received from the Trust Fund, will be
subject to tax. A taxpayer whose adjusted gross income already exceeds the
base amount must include fifty percent of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A taxpayer whose
modified adjusted gross income (after inclusion of tax-exempt interest) does
not exceed the base amount need not include any Social Security benefits in
gross income.
For a discussion of the State tax status of income earned on
Units of a State Trust, see the discussion of tax status for the applicable
trust. Except as noted therein, the exemption of interest on State and local
obligations for Federal income tax purposes discussed above does not
necessarily result in exemption under the income or other tax laws of any State
or city. The laws of the several States vary with respect to the taxation of
such obligations.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ALABAMA TRUSTS. Alabama's economy has experienced a major
trend toward industrialization over the past two decades. By 1990,
manufacturing accounted for 26.7% of Alabama's Real Gross State Product (the
total value of goods and services produced in Alabama). During the 1960s and
1970s the State's industrial base became more diversified and balanced, moving
away from primary metals into pulp and paper, lumber, furniture, electrical
machinery, transportation equipment, textiles (including apparel), chemicals,
rubber and plastics. Since the early 1980s, modernization of existing
facilities and an increase in direct foreign investments in the State has made
the manufacturing sector more competitive in domestic and international
markets.
Among several leading manufacturing industries have been
pulp and papers and chemicals. In recent years Alabama has ranked as the fifth
largest producer of timber in the nation. The State's growing chemical
industry has been the natural complement of production of wood pulp and paper.
Mining, oil and gas production and service industries are also important to
Alabama's economy. Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant
growth potential include the research and medical training and general health
care industries, most notably represented by the University of Alabama medical
complex in Birmingham and the high technology research and development
industries concentrated in the Huntsville area.
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Real Gross State Product. Real Gross State Product (RGSP)
is a comprehensive measure of economic performance for the State of Alabama.
Alabama's RGSP is defined as the total value of all final goods and services
produced in the State in constant dollar terms. Hence, changes in RGSP reflect
changes in final output. From 1984 to 1990 RGSP originating in manufacturing
increased by 22.99% whereas RGSP originating in all the non-manufacturing
sectors grew by 17.88%.
Those non-manufacturing sectors exhibiting large percentage
increases in RGSP originating between 1984 and 1990 were 1) Services; 2) Trade;
3) Farming; and 4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP
originating in Services Increased by 35.07%; Trade grew by 21.53%; Farming
Increased by 19.78%; and the gain in Finance, Insurance and Real Estate was
19.19%. The present movement toward diversification of the State's
manufacturing base and a similar present trend toward enlargement and
diversification of the service industries in the State are expected to lead to
increased economic stability.
Employment. The recent national economic recession was felt
severely in Alabama. The manufacturing growth described above reached a peak
in 1979, and was followed by a decrease in activity. The national economic
recession was principally responsible for this decline. The State's industrial
structure is particularly sensitive to high interest rates and monetary policy,
and the resulting unemployment during 1981-1984 was acute. Unemployment rates
have improved as the impact of the national economic recovery has benefited the
State. The economic recovery experienced on the national level since 1982 has
been experienced in Alabama as well, but to a different degree and with a time
lag.
Among other risks, the State of Alabama's economy depends
upon cyclical industries such as iron and steel, natural resources, and timber
and forest products. As a result, economic activity may be more cyclical than
in certain other Southeastern states. The national economic recession in the
early 1980s caused a decline in manufacturing activity and natural resource
consumption, and Alabama's unemployment rate was 14.4% in 1982, significantly
higher than the national average. Unemployment remains high in some rural
areas of the State. A trend towards diversification of the State's economic
base and an expansion of service industries may lead to improved economic
stability in the future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited
taxing authority. In addition, the Alabama Supreme Court has held that a
governmental unit may first use its taxes and other revenues to pay the
expenses of providing governmental service before paying debt service on its
bonds, warrants or other indebtedness. The State has statutory budget
provisions which result in a proration procedure in the event estimated budget
resources in a fiscal year are insufficient to pay in full all appropriations
for that year. Proration has a materially adverse effect on public entities
that are dependent upon State funds subject to proration.
Deterioration of economic conditions could adversely affect
both tax and other governmental revenues, as well as revenues to be used to
service various revenue obligations, such as industrial development
obligations. Such difficulties could affect the market value of the bonds held
by the Alabama Trust and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary
of some of the financial difficulties which may impact certain issuers of Bonds
and does not purport to be a complete or exhaustive description of all
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<PAGE> 26
adverse conditions to which the issuers In the Alabama Trust are subject.
Additionally, many factors including national economic social and environmental
policies and conditions, which are not within the control of the issuers of
Bonds, could affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located in the
State. The sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Alabama Trust to pay Interest on or principal of the
Bonds.
At the time of the closing for each Alabama Trust, Special
Counsel to the Fund for Alabama tax matters rendered an opinion under then
existing Alabama income tax law applicable to taxpayers whose income is subject
to Alabama income taxation substantially to the effect that:
(1) the Alabama Trust is not taxable as a corporation for
purposes of the Alabama income tax;
(2) income of the Alabama Trust, to the extent it is
taxable, will be taxable to the Unitholders, not the
Alabama Trust;
(3) each Unitholder's distributive share of the Alabama
Trust's net income will be treated as the income of
the Unitholder for purposes of the Alabama income tax;
(4) interest on obligations held by the Alabama Trust which
is exempt from the Alabama income tax will retain its
tax-exempt character when the distributive share
thereof is distributed or deemed distributed to each
Unitholder;
(5) any proceeds paid to the Alabama Trust
under insurance policies issued to the Sponsor or under
individual policies obtained by the Sponsor, the issuer
or underwriter of the respective obligations which
represent maturing interest on defaulted obligations
held by the Trustee will be exempt from Alabama
income tax if and to the same extent as such interest
would be exempt from such taxes if paid directly by
the issuer of such obligations;
(6) each Unitholder will, for purposes of the
Alabama income tax, treat his distributive share of
gains realized upon the sale or other disposition of
the Bonds held by the Alabama Trust as though the
Bonds were sold or disposed of directly by the
Unitholders; and
(7) gains realized on the sale or redemption
of Units by Unitholders, who are subject to the Alabama
income tax will be includable in the Alabama income of
such Unitholders.
ARIZONA TRUSTS. Arizona is the nation's sixth largest state
in terms of area and ranks among the leading states in three economic indices
of growth. For the ten year period 1978-88, Arizona ranked second nationally
in both population growth and growth in employment and third in growth of
personal income.
According to figures reported by the Arizona Department of
Economic Security, Arizona has been one of the fastest growing states in the
nation. While the United States' population increased 11 percent between 1970
and 1980, Arizona realized a 53 percent growth rate. More recently this growth
has slowed to a more manageable rate. The population of Arizona has grown
consistently at a rate between 2.2% and 2.4% annually during the years 1988
through 1990, and is predicted to remain in that range through 1992. The 1990
census
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results indicate that the population of Arizona rose 35% between 1980 and 1990,
a rate exceeded only in Nevada and Alaska. Nearly 950,000 residents were added
during this period.
Arizona's main economic sectors include services, tourism
and manufacturing. Mining and agriculture are also significant, although they
tend to be more capital than labor intensive. Services is the single largest
economic sector. Many of these jobs are directly related to tourism. The need
to provide services for these visitors has contributed substantially to
employment gains in the State.
In 1988, unemployment In the State was 6.3%. Unemployment in
Arizona decreased to 5.2% in 1989 and increased slightly to 5.3% in 1990.
Arizona's unemployment rates in 1989 and 1990 were very similar to the national
rates of 5.3% and 5.4% respectively. Arizona's 5.2% unemployment rate in
September of 1991 increased to 6.2% in October and 7.3% in November, surpassing
the national rate in November of 6.8%. The unemployment rate in Arizona for
1991 as a whole is estimated at 5.5%, compared to a national rate estimated at
6.8%, and is forecasted to remain relatively constant for the next two years.
On June 27, 1991, America West Airlines filed a Chapter 11 reorganization
petition in bankruptcy. America West is the sixth largest employer in Maricopa
County, employing approximately 10,000 persons within the county, and 15,000
nationwide. At the first meeting of creditors, representatives of the airline
stated that as many as 1,500 employees might be laid off over the next few
months, most in Phoenix and Las Vegas. Over 300 employees have received
lay-off notices. The effect of the America West bankruptcy on the state
economy and, more particularly, the Phoenix economy, is uncertain.
Similarly, jobs will be lost by the anticipated closing of
Williams Air Force Base in Chandler, Arizona, in 1993. Williams Air Force Base
was selected as one of the military Installations to be closed as a
cost-cutting measure by the Defense Base Closure and Realignment Commission,
whose recommendations were subsequently approved by the President and the
United States House of Representatives. Williams Air Force Base injects
approximately $340 million in the local economy annually, and employs 1,851
civilians.
Growth in the number of jobs in Arizona has been consistent
for the last few years at the rate of 2.4% to 2.5%. Job growth for 1991 is
estimated at 1.8%, but should improve slightly in 1992. As of September of
1991, only fifteen states were experiencing job growth greater than one
percent, and several were experiencing job losses at or near a three percent
annualized rate. In Arizona, the two sectors that have been consistency strong
during the last several years are government and services. Jobs were lost in
the manufacturing sector, for the third straight year, and in the construction
industry, for the fifth consecutive year.
The deterioration of Arizona banks and savings and loans,
apparent in 1988 and especially marked in 1989, continued through 1990. Slower
construction and real estate activity is at the heart of Arizona's financial
industry's current weakness. In the early 1980s, Phoenix and other
metropolitan areas of Arizona began experiencing an economic and population
"boom," and Arizona's institutions aggressively pursued many facets of real
estate lending. By 1986, the metropolitan areas of Arizona were overbuilt in
many categories of construction and were burdened with excessive levels of
completed inventory. The tax law amendments in 1986 exacerbated the financial
impact of the saturated market. The elimination of certain tax benefits
associated with income-producing properties contributed to the decline in
growth. Further, the value of real estate in Arizona began a downward spiral,
reflective of the overbuilt market and inventory which continues today. These
problems translated into a cumulative $488 million loss for Arizona banks and a
cumulative
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$2.329 billion loss for Arizona savings and loans in 1989.
In the near future, Arizona's financial institutions are
likely to continue to experience problems until the excess inventories of
commercial and residential properties are absorbed. Longer-term prospects are
brighter, since population growth is still strong by most standards, and
Arizona's climate and tourist industry still continue to stimulate the State's
economy. However, the previously robust place of growth by financial
institutions is not likely to be repeated over an extended period.
Arizona operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1992 refers to the year ending June 30, 1992.
Total General Fund revenues of $3.5 billion are expected
during fiscal year 1992. Approximately 43.2% of this budgeted revenue comes
from sales and use taxes, 36.0% from income taxes (both individual and
corporate) and 5.3% from property taxes. All taxes total approximately $3.3
billion, or 93% of the General Fund revenues. Non-tax revenue includes items
such as income from the state lottery, licenses, fees and permits, and
interest. Lottery income totals approximately 34.6% of non-tax revenue.
For fiscal year 1992, the budget calls for expenditures of
$3.5 billion. Major appropriation include $1.3 billion to the Department of
Education (for K-12), $369.9 million for the administration of the Arizona
Health Care Cost Containment System program ("AHCCCS") (the State's alternative
to Medicaid), $357.4 million to the Department of Economic Security, and
$255.9 million to the Department of Corrections. The budget for fiscal year
1991 also totalled approximately $3.5 billion, and the budget for fiscal year
1990 totalled $3.17 billion.
Most or all of the Bonds of the Arizona Trust are not
obligations of the State of Arizona, and are not supported by the State's
taxing powers. The particular source of payment and security for each of the
Bonds is detailed in the instruments themselves and in related offering
materials. There can be no assurances, however, with respect to whether the
market value of marketability of any of the Bonds issued by an entity other
than the State of Arizona will be affected by the financial or other condition
of the State or of any entity located within the State. In addition, it should
be noted that the State of Arizona, as well as counties, municipalities,
political subdivisions and other public authorities of the state, are subject
to limitations imposed by Arizona's constitution with respect to ad valorem
taxation, bonded indebtedness and other matters. For example, the legislature
cannot appropriate revenues in excess of 7% of the total personal income of the
state in any fiscal year. These limitations may affect the ability of the
issuers to generate revenues to satisfy their debt obligations.
Local governments have experienced many of the same fiscal
difficulties for many of the same reasons and, in several cases, have been
prevented by Constitutional limitations on bonded indebtedness from securing
necessary funds to undertake street, utility and other Infrastructure
expansions, improvements and renovations in order to meet the needs of rapidly
increasing populations. In this regard, the voters of the cities of Phoenix
and Tucson in 1984 authorized the issuance of general obligation and revenue
bonds aggregating $525 million and $330 million, respectively, and in May
1986, the voters of Maricopa County, in which the City of Phoenix is located,
and Pima County, in which the City of Tucson is located, authorized the
issuance of bonds
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aggregating $261 million and $219.4 million, respectively, to finance various
short- and long-term capital projects, including infrastructure expansions,
improvements and replacements. Also, in 1986, the voters in Maricopa and Pima
Counties voted a 1/2% increase in the State sales taxes to pay for highway
construction in those counties. In April 1988 the voters of the City of
Phoenix authorized the issuance of general obligation bonds aggregating $1.1
billion.
Although most of the Bonds in the Arizona Trust are revenue
obligations of local governments or authorities in the State, there can be no
assurance that the fiscal and economic conditions referred to above will not
affect the market value or marketability of the Bonds or the ability of the
respective obligers to pay principal of and interest on the Bonds when due.
The State of Arizona was recently sued by fifty-four school
districts within the state, claiming that the State's funding system for school
buildings and equipment is unconstitutional. The lawsuit does not seek
damages, but requests that the court order the State to create a new financing
system that sets minimum standards for buildings and furnishings that apply on
a statewide basis. The complaint alleges that some school districts have
sufficient funds to build outdoor swimming pools, while others have classrooms
that leak in the rain. It is unclear, at this time, what affect any judgment
would have on state finances or school district budgets.
The U.S. Department of Education recently determined that
Arizona's educational funding system did not meet federal requirements of
equity. This determination could mean a loss in federal funds of approximately
$50 million.
Certain other circumstances are relevant to the market
value, marketability and payment of any hospital and health care revenue bonds
in the Arizona Trust. The Arizona Legislature attempted unsuccessfully in its
1984 regular and special sessions to enact legislation designed to control
health care costs, ultimately adopting three referenda measures placed on the
November 1984 general election ballot which in various ways would have
regulated hospital and health care facility expansions, rates and revenues. At
the same time, a coalition of Arizona employers proposed two initiatives voted
on in the November 1984 general election which would have created a State
agency with power to regulate hospital and health care facility expansions and
rates generally. All of these referenda and initiative propositions were
rejected by the voters in the November 1984 general election. Pre-existing
State certificate-of-need laws regulating hospital and health care facilities'
expansions and services have expired, and a temporary moratorium prohibiting
hospital bed Increases and new hospital construction projects and a temporary
freeze on hospital rates and charges at June 1984 levels has also expired.
Because of such expirations and increasing health care costs, it is expected
that the Arizona Legislature will at future sessions continue to attempt to
adopt legislation concerning these matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increases and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally administered
Medicaid program. Instead, the state administers an alternative program,
AHCCCS, which provides health care to indigent persons meeting certain
financial eligibility requirements, through managed care programs. In fiscal
year 1992, AHCCCS will be financed approximately 52.7% by federal funds, 33.1%
by state funds, and 13.6% by county funds.
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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. After the dismissal of the bankruptcy
petition, the Arizona Corporation Commission approved a permanent 15% rate
hike. The rate increase had been approved by the Commission on an interim
basis several months earlier, pending the dismissal or withdrawal of the
bankruptcy petitions. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public utility to
secure necessary rate increases could adversely affect, to an indeterminable
extent, its ability to pay debt service on its pollution control revenue bonds.
At the time of the closing for each Arizona Trust, Special
Counsel to the Fund for Arizona tax matters rendered an opinion under then
existing Arizona income tax law applicable to taxpayers whose income is subject
to Arizona income taxation substantially to the effect that:
(1) For Arizona income tax purposes, each Unitholder will be
treated as the owner of a pro rata portion of the Arizona Trust, and
the income of the Trust therefore will be treated as the income of the
Unitholder under State law;
(2) For Arizona income tax purposes, interest on the Bonds
which is excludable from Federal gross income and which is exempt
from Arizona income taxes when received by the Arizona Trust, and
which would be excludable from Federal gross income and exempt from
Arizona income taxes if received directly by a Unitholder, will retain
its status as tax-exempt interest when received by the Arizona Trust
and distributed to the Unitholders;
(3) To the extent that interest derived from the Arizona Trust
by a Unitholder with respect to the Bonds is excludable from Federal
gross income, such interest will not be subject to Arizona income
taxes;
(4) Each Unitholder will receive taxable gain or loss for
Arizona income tax purposes when Bonds held in the Arizona Trust are
sold, exchanged, redeemed or paid at maturity, or when the Unitholder
redeems or sells Units, at a price that differs from original cost as
adjusted for amortization of Bond discount or premium and other basis
adjustments, including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later;
(5) Amounts paid by the Insurer under an insurance policy or policies
issued to the Trust, if any, with
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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 extend as, such interest
would have been so exempt if paid by the issuer of the defaulted
obligations;
(6) Arizona law does not permit a deduction for interest paid
or incurred on indebtedness incurred or continued to purchase or
carry Units In the Arizona Trust, the interest on which is exempt from
Arizona Income taxes; and
(7) Neither the Bonds nor the Units will be subject to Arizona
property taxes, sales tax or use tax.
CALIFORNIA TRUSTS. The Trust will invest substantially all of its assets in
California Municipal Obligations. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information provides
only a brief summary of the complex factors affecting the financial situation
in California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No Independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of California
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligers to make timely payments of debt service on (or relating to)
those obligations.
California's economy is the largest among the 50 states and
one of the largest in the world. The State's population of over 30 million
represents 12% of the total United States population and grew by 27% in the
1980s. Total personal income in the State, at an estimated $630 billion in
1991, accounts for 13% of all personal income in the nation. Total employment
is almost 14 million, the majority of which Is In the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and the
Commission on State Finance (the "COSF") indicate that the State's economy is
suffering its worst recession since the 1930s, with prospects for recovery
slower than for the nation as a whole. The State has lost over 800,000 jobs
since the start of the recession and additional significant job losses are
expected before an upturn begins. The largest job losses have been in Southern
California, led by declines in the aerospace and construction industries.
Weaknesses statewide occurred in manufacturing, construction, services and
trade. Unemployment was 7.5% for 1991 (compared to 6.7% nationally), and is
expected to be higher than the national average in the near future. The
State's economy is only expected to pull out of the recession slowly once the
national recovery has begun. Delay In recovery will exacerbate shortfalls in
State revenues.
Certain California municipal obligations may be obligations
of issuers which rely in whole or in part, directly or indirectly, on ad
valorem property taxes as a source of revenue. The taxing powers of California
local governments and districts are limited by Article XIIIA of the California
Constitution, enacted by the
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voters in 1978 and commonly known as "Proposition 13." Briefly, Article XIIIA
limits to 1% of full cash value the rate of ad valorem property taxes on real
property and generally restricts the reassessment of property to 2% per year,
except upon new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above the 1%
limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is
applied against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier), subject to certain
adjustments. This system has resulted in widely varying amounts of tax on
similarly situated properties. Several lawsuits have been flied challenging
the acquisition-based assessment system of Proposition 13 and on June 18, 1992
the U.S. Supreme Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising
revenues through ad valorem property taxes above the 1% limit; it also requires
voters of any governmental unit to give approval to levy any "special tax."
However, court decisions allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions,
the voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to reenact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
The State and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California Constitution,
enacted by the voters in 1979 and significantly amended by Propositions 98 and
111 in 1988 and 1990, respectively. Article XIIIB prohibits the State or any
covered local government from spending "appropriations subject to limitation"
in excess of the appropriations limit imposed. "Appropriations subject to
limitation" are authorizations to spend proceeds of taxes," which consists of
tax revenues and certain other funds, including proceeds from regulatory
licenses, user charges or other fees to the extent that such proceeds exceed
the cost of providing the product or service, but "proceeds of taxes" excludes
most State subventions to local governments. No limit is imposed on
appropriations of funds which are not "proceeds of taxes" excludes most State
subventions to local governments. No limit is imposed on appropriations or
funds which are not "proceeds of taxes," such as reasonable user charges or
fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the voters,
(2) appropriations arising from certain emergencies declared by the Governor,
(3) appropriations for certain capital outlay projects, (4) appropriations by
the State of post-1989 increases in gasoline taxes and vehicle weight fees, and
(5) appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually
to reflect changes in cost of living and population, and any transfers of
service responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to more closely follow
growth in California's economy.
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"Excess" revenues are measured over a two-year cycle. Local
governments must return any excess to taxpayers by rate reduction. The State
must refund 50% of any excess, with the other 50% paid to schools and community
colleges. With more liberal annual adjustment factors since 1988, and
depressed revenues since 1990 because of the recession, few governments are
currently operating near their spending limits, but this condition may change
over time. Local governments may by voter approval exceed their spending
limits for up to four years.
During fiscal year 1986-87, State receipts from proceeds of
taxes exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Appropriations subject to limitation were under the State limit by
$1.2 billion, $259 million, $1.6 million, $7.5 billion and $5.2 billion for the
five most recent fiscal years ending with 1991-92. State appropriations are
expected to be $5.1 billion under the limit for Fiscal Year 1992-93.
Because of the complex nature of Articles XIIIA and XIIIB of
the California Constitution (described briefly above), the ambiguities and
possible inconsistencies in their terms, and the impossibility of predicting
future appropriations or changes in population and cost of living, and the
probability of continuing legal challenges, it is not currently possible to
determine fully the impact of Article XIIIA or Article XIIIB on California
Municipal Obligations or on the ability of the State or local governments to
pay debt service on such California Municipal Obligations. It is not presently
possible to predict the outcome of any pending litigation with respect to the
ultimate scope, impact or constitutionality of either Article XIIIA or Article
XIIIB, or the impact of any such determinations upon State agencies or local
governments, or upon their ability to pay debt service on their obligations.
Future initiative or legislative changes in laws or the California Constitution
may also affect the ability of the State or local issuers to repay their
obligations.
As of November 6, 1992, California had approximately $16.7
billion of general obligation bonds outstanding, and $8.6 billion remained
authorized but unissued. In addition, at June 30, 1992, the State had
lease-purchase obligations, payable from the State's General Fund, of
approximately $2.9 billion. Of the State's outstanding general obligation
debt, approximately 28% is presently self liquidating (for which program
revenues are anticipated to be sufficient to reimburse the General Fund for
debt service payments). Three general obligation bond propositions, totalling
$3.7 billion were approved by voters in 1992. In fiscal year 1991-92, debt
service on general obligation bonds and lease-purchase debt was approximately
3.2% of General Fund revenues. The State has paid the principal of and
interest on its general obligation bonds, lease-purchase debt and short-term
obligations when due.
The principal sources of General Fund revenues are the
California personal income tax (45% of total revenues), the sales tax (35%),
bank and corporation taxes (12%), and the gross premium tax on insurance (3%).
The State maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished as soon
as sufficient revenues are available. Year-end balances in the Economic
Uncertainties Fund are included for financial reporting purposes in the General
Fund balance. In recent years, the State has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but essentially no
reserve is budgeted in 1992-93.
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Throughout the 1980s, State spending increased rapidly as
the State population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest State program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of State General Fund revenues
(currently about 37%).
Since the start of 1990-91 Fiscal Year, the State has faced
adverse economic, fiscal and budget conditions. The economic recession
seriously affected State tax revenues. It also caused increased expenditures
for health and welfare programs. The State is also facing a structural
imbalance in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State entered a period of budget imbalance, with
expenditures exceeding revenues for four of the last five fiscal years.
Revenues declined in 1990-91 over 1989-90, the first time since the 1930s. By
June 30, 1992, the State's General Fund had an accumulated deficit, on a budget
basis, of approximately $2.2 billion.
As the 1990-91 fiscal year ended in the midst of a
continuing recession and very weak revenues, the Governor estimated that a
"budget gap" of $14.3 billion would have to be resolved in order to reconcile
the excess of projected expenditures for existing programs, at currently
mandated growth rates, over expected revenues, the need to repay the 1990-91
budget deficit, and the need to restore a budget reserve. This budget gap was
closed through a combination of temporary and permanent changes in laws and
one-time budget adjustments. The major features of the budget compromise were
program funding reductions totalling $5.0 billion; a total of $5.1 billion of
increased State revenues; savings of $2.1 billion from transferring certain
health and welfare programs to counties to be funded by increased sales tax and
vehicle license fees to be given directly to counties; and additional
miscellaneous savings and revenue gains and one time accounting charges
totalling $2.1 billion.
The 1991-92 Budget Act was based on economic forecasts that
recovery from the recession would begin in the summer or fall of 1991, but as
the severity of the recession increased, revenues lagged significantly and
continually behind projections from the start of the fiscal year. As a result,
revenues for the 1991-92 Fiscal Year were more than $4 billion lower than
originally projected and expenditures were higher than originally projected.
As a consequence of the large budget imbalances built up
over two consecutive years, the State used up all of its available cash
resources. In late June 1992, the State was required to issue $475 million of
short-term revenue anticipation warrants to cover obligations coming due on
June 30 and July 1. These warrants were repaid on July 24, 1992.
At the outset of the 1992-93 Fiscal Year, the State
estimated that approximately $7.9 billion of budget actions would be required
to end the 1992-93 Fiscal Year. With the failure to enact a budget by July 1,
1992, the State had no legal authority to pay many of its vendors until the
budget was passed; nevertheless, certain obligations (such as debt service,
school apportionments, welfare payments and employee salaries) were payable
because of continuing or special appropriations or court orders. However, the
State Controller did not
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have enough cash to pay all of these ongoing obligations as they came due, as
well as valid obligations incurred in the prior fiscal year.
Starting on July 1, 1992, the Controller was required to
issue "registered warrants" in lieu of normal warrants backed by cash to pay
many State obligations. Available cash was used to pay constitutionally
mandated and priority obligations. Between July 1 and September 3, 1992, the
Controller issued an aggregate of approximately $3.8 billion of registered
warrants, all of which were called for redemption by September 4, 1992
following enactment of the 1992-93 Budget Act and issuance by the State of $3.3
billion of Interim Notes.
The Legislature enacted the 1992-93 Budget Bill on August
29, 1992, and it was signed by the Governor on September 2, 1992. The 1992-93
Budget Act provides for expenditures of $57.4 billion and consists of General
Fund expenditures of $40.8 billion and Special Fund and Bond Fund expenditures
of $16.6 billion. The Department of Finance estimated there would be a balance
In the Special Fund for Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gap was closed through a combination of increased
revenues and transfers and expenditure cuts. The principle reductions were in
health and welfare, K-12 schools and community colleges, State aid to local
governments, higher education (partially offset by increased student fees) and
various other programs. In addition, funds were transferred from special
funds, collections of State revenues were accelerated, and other adjustments
were made.
The 1992-93 Budget was prepared and the estimate that it
will be in balance (with a reserve of $28 million at June 30, 1993) was based
upon economic assumptions made by the Department of Finance in May, 1992, which
projected, among other things, gradual recovery beginning in the latter part of
1992. In October the COSF reported that conditions were worse than the May
forecast, with a stagnant economy now predicted for up to another two years.
The COSF predicted that, if no corrective actions were taken, the 1992-93
Fiscal Year budget could be approximately $2.4 billion out of balance.
The State's severe financial difficulties for the current
and upcoming budget years will result in continued pressure upon various local
governments, particularly school districts and counties which depend on State
aid. Despite efforts in recent years to increase taxes and reduce governmental
expenditures, there can be no assurance that the State will not face budget
gaps in the future.
State general obligation bonds are currently rated "Aa" by
Moody's and "A+" by S&F. Both of these ratings were recently reduced from
"AAA" levels which the State held until late 1991. There can be no assurance
that such ratings will be maintained in the future. It should be noted that
the creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The State is involved in certain legal proceedings
(described in the State's recent financial statements) that, if decided against
the State, may require the State to make significant future expenditures or may
substantially impair revenues.
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Property tax revenues received by local governments declined
more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund totaled approximately $33
billion in fiscal year 1991-92 (about 75% of General Fund expenditures) and has
been budgeted at $31.1 billion for fiscal year 1992-93, including the effect of
implementing reductions in certain aid programs. To the extent the State
should be constrained by its Article XIIIB appropriations limit, or its
obligation to conform to Proposition 98, or other fiscal considerations, the
absolute level, or the rate of growth, of State assistance to local governments
may be reduced. Any such reductions in State aid could compound the serious
fiscal constraints already experienced by many local governments, particularly
counties. At least one rural county (Butte) publicly announced that it might
enter bankruptcy proceedings in August 1990, although such plans were
apparently put off after the Governor approved legislation to provide
additional funds for the county. Other counties have also indicated that their
budgetary condition is extremely grave. The Richmond United School District
(Contra Costa County) entered bankruptcy proceedings in May 1991, but the
proceedings have been dismissed.
California Municipal Obligations which are assessment bonds
or Mello-Roos bonds may be adversely affected by a general decline in real
estate values or a slowdown in real estate sales activity. In many cases, such
bonds are secured by land which is undeveloped at the time of issuance but
anticipated to be developed within a few years after issuance. In the event of
such reduction or slowdown, such development may not occur or may be delayed,
thereby increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of the
owners of the property assessed, the lien on the property is the only security
for the bonds. Moreover, in most cases the issuer of these bonds is not
required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve fund
established for the bonds.
Certain California long-term lease obligations, though
typically payable from the general fund of the municipality, are subject to
"abatement" in the event the facility being leased is unavailable for
beneficial use and occupancy by the municipality during the term of the lease.
Abatement is not a default, and there may be no remedies available to the
holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common causes of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g., due to earthquake). In the event abatement occurs with respect to a
lease obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago the Richmond United School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain funds
to cover operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a State receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State was a named defendant (on the grounds
that it controlled the District's finances). One of the defenses raised in
answer to this lawsuit was the invalidity of the original lease transaction.
The case is still in very preliminary stages, and it is not known how it will
be resolved. If the case goes to trial, a judgment against the Trustee may
have adverse implications for lease transactions of a similar nature by other
California entities.
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The repayment of industrial Development Securities secured
by real property may be affected by California laws limiting foreclosure rights
of creditors. Health Care and Hospital Securities may be affected by changes
in State regulations governing cost reimbursements to health care providers
under Medi-Cal (the State's Medicaid program), including risks related to the
policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly
affect "tax allocation" bonds issued by California redevelopment agencies.
Such bonds are secured solely by the increase in assessed valuation of a
redevelopment project area after the start of redevelopment activity. In the
event that assessed values in the redevelopment project decline (for example,
because of a major natural disaster such as an earthquake), the tax increment
revenue may be insufficient to make principal and interest payments on these
bonds. Both Moody's and S&P suspended ratings on California tax allocation
bonds after the enactment of Article XIIIA and Article XIIIB, and only resumed
such ratings on a selective basis.
Proposition 87, approved by California voters in 1988,
requires that all revenues produced by a tax rate increase go directly to the
taxing entity which increased such tax rate to repay that entity's general
obligation indebtedness. As a result, redevelopment agencies (which,
typically, are the Issuers of Tax Allocation Securities) no longer receive an
increase in tax increment when taxes on property in the project area are
increased to repay voter-approved bonded indebtedness.
The effect of these various constitutional and statutory
changes upon the ability of California municipal securities issuers to pay
interest and principal on their obligations remains unclear. Furthermore,
other measures affecting the taxing or spending authority of California or its
political subdivisions may be approved or enacted in the future. Legislation
has been or may be introduced which would modify existing taxes or other
revenue-raising measures or which either would further limit or, alternatively,
would increase the abilities of state and local governments to impose new taxes
or increase existing taxes. It is not presently possible to determine the
impact of any such legislation on California Municipal Obligations in which the
Fund may invest future allocations of state revenues to local governments or
the abilities of state or local governments to pay the interest on, or repay
the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic
region subject to major seismic activity. Any California Municipal Obligation
in the Portfolio could be affected by an interruption of revenues because of
damaged facilities, or, consequently, income tax deductions for casualty losses
or property tax assessment reductions. Compensatory financial assistance could
be constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage at reasonable rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii) the Federal
or State government to appropriate sufficient funds within their respective
budget limitations.
At the time of the closing for each California Trust,
Special Counsel to each California Trust for California tax matters, rendered
an opinion under then existing California income tax law applicable to
taxpayers whose income is subject to California income taxation substantially
to the effect that:
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(1) The California Trust is not an association taxable as a
corporation and the income of the California Trust will be treated as
the income of the Unitholders under the Income tax laws of California;
(2) amounts treated as interest on the underlying Securities
in the California Trust which are exempt from tax under California
personal income tax and property tax laws when received by the
California Trust will, under such laws, retain their status as
tax-exempt interest when distributed to Unitholders. However,
interest on the underlying Securities attributed to a Unitholder which
is a corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal income
tax and which is treated as an item of tax preference for purposes of
the federal alternative minimum tax pursuant to Section 57(a)(5) of
the Internal Revenue Code of 1986 may also be treated as an Item of
tax preference that must be taken into account in computing such
Unitholder's alternative minimum taxable income for purposes of the
California alternative minimum tax enacted by 1987 California
Statutes, chapter 1138. However, because of the provisions of the
California Constitution exempting the interest on bonds issued by the
State of California, or by local governments within the state, from
taxes levied on income, the application of the new California
alternative minimum tax to Interest otherwise exempt from the
California personal income tax in some cases may be unclear;
(3) under California income tax law, each Unitholder in the
California Trust will have a taxable event when the California Trust
disposes of a Security (whether by sale, exchange, redemption, or
payment at maturity) or when the Unitholder redeems or sells Units.
Because of the requirement that tax cost basis be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder
may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost of
each Unit in the California Trust to a Unitholder is allocated among
each of the Bond issues held in the California Trust (in accordance
with the proportion of the California Trust comprised by each Bond
issue) in order to determine his per Unit tax cost for each Bond
issue; and the tax cost reduction requirements relating to
amortization of bond premium will apply separately to the per Unit
tax cost of each Bond issue. Unitholders' bases in their Units, and
the bases for their fractional interest in each Trust asset, may have
to be adjusted for their pro rata share of accrued interest received,
if any, on Securities delivered after the Unitholders' respective
settlement dates;
(4) under the California personal property tax laws, bonds
(including the Securities in the California Trust) or any interest
therein is exempt from such tax;
(5) any proceeds paid under the insurance policy issued to the
California Trust with respect to the Securities which represent
maturing interest on defaulted obligations held by the Trustee will be
exempt from California personal income tax if, and to the same extent
as, such interest would have been so exempt if paid by the issuer of
the defaulted obligations; and
(6) under Section 17280(b)(2) of the California Revenue and
Taxation Code, interest on indebtedness incurred or continued to
purchase or carry Units of the California Trust is not deductible for
the purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of Interest costs for this purpose. The Franchise Tax
Board has not yet proposed or prescribed such regulations. In
interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the
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position that such indebtedness need not be directly traceable
to the purchase or carrying of Units (although the Service has not
contended that a deduction for interest on indebtedness incurred to
purchase or improve a personal residence or to purchase goods or
services for personal consumption will be disallowed). In the absence
of conflicting regulations or other California authority, the
California Franchise Tax Board generally has interpreted California
statutory tax provisions in accord with Internal Revenue Service
interpretations of similar Federal provisions.
At the respective times of issuance of the Securities,
opinions relating to the validity thereof and to the exemption of interest
thereon from Federal income tax and California personal income tax are rendered
by bond counsel to the respective issuing authorities. Except in certain
instances in which Special Counsel acted as bond counsel to issuers of
Securities, and as such made a review of proceedings relating to the issuance
of certain Securities at the time of their issuance, Special Counsel has not
made any special review for the California Trusts of the proceedings relating
to the issuance of the Securities or of the basis for such opinions.
COLORADO TRUSTS. The State Constitution requires that
expenditures for any fiscal year not exceed revenues for such fiscal year. By
statute, the amount of General Fund revenues available for appropriation is
based upon revenue estimates which, together with other available resources,
must exceed annual appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve has varied in
recent fiscal years, having been set by 5% for fiscal year 1986 and fiscal year
1987, 6% for fiscal year 1988 and 4% thereafter. However, the State reduced
the Unappropriated Reserve requirement for fiscal year 1991 and fiscal year
1992 to 3% to enable it to respond to prison overcrowding. For fiscal year
1992 and thereafter, General Fund appropriations are also limited to an amount
equal to the cost of performing certain required reappraisals of taxable
property plus an amount equal to the lesser of (i) five percent of Colorado
personal income or (ii) 106% of the total General Fund appropriations for the
previous fiscal year. This restriction does not apply to any General Fund
appropriations which are required as a result of a new federal law, a final
state or federal court order or moneys derived from the increase in the rate or
amount of any tax or fee approved by a majority of the registered electors of
the State voting at any general election. In addition, the limit on the level
of General Fund appropriations may be exceeded for a given fiscal year upon the
declaration of a State fiscal emergency by the State General Assembly.
Based on the State's December 1991 estimates, the 1991
fiscal year end fund balance was $16.3 million, and the State estimates a
balance of approximately $56 million at the end of the 1992 fiscal year. For
both years, such fund balances are less than the 3% Unappropriated Reserve
requirement. See "State Finances" below.
There is a statutory restriction on the amount of annual
increases in taxes that the various taxing jurisdictions in Colorado can levy
without electoral approval. This restriction does not apply to taxes levied to
pay general obligation debt. Periodic attempts have been made to limit further
the amount of annual increases in taxes that can be levied without voter
approval. Initiated amendments to the State constitution affecting local
government financing were defeated at the general elections in 1986, 1988 and
1990. Legislation is introduced in the Colorado General Assembly from time to
time providing, in part, for similar limitations. Such initiated or
legislative proposals have contained provisions limiting increases in taxes as
well as rates and charges and imposing spending limits on various levels of
government. Although no such proposal has been enacted to date at the State
level, it is possible that if such a proposal were enacted, there would be an
adverse impact on State or local government financing. It is not possible to
predict whether any such
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proposals will be enacted in the future or, if enacted, their possible impact
on State or local government financing.
On January 27, 1992, the Colorado Secretary of State
certified initiated petitions proposing a constitutional amendment (the
"Amendment") for inclusion on the ballot at the general election to be held on
November 3, 1992. If adopted by the voters, the Amendment would, in general,
be effective December 31, 1992, and could severely restrict the ability of the
State and local governments to increase revenues and impose taxes. The
Amendment would apply to the State and all local governments, including home
rule entities ("Districts"). Enterprises, defend as government-owned
businesses authorized to issue revenue bonds and receiving under 10% of annual
revenue in grants from all Colorado state and local governments combined, are
excluded from the provisions of the Amendment
The provisions of the Amendment are unclear and would
probably require judicial interpretation if adopted. Among other provisions,
beginning November 4, 1992, the Amendment would require voter approval prior to
tax increases, creation of debt, or mill levy or valuation for assessment ratio
increases. The Amendment would also limit increases in government spending and
property tax revenues to specified percentages. The Amendment would require
that District property tax revenues yield no more than the prior year's
revenues adjusted for inflation, voter approved changes and (except with regard
to school districts) changes in assessment rolls. School districts would be
allowed to adjust tax levies for changes in student enrollment. Pursuant to
the Amendment, local government spending would be limited by the same formula,
and State spending would be limited by inflation plus the percentage change in
State population in the prior calendar year. The bases for future spending and
revenue limits are 1992 fiscal year spending and 1991 property taxes collected
in 1992. Debt service changes, reductions and voter-approved revenue changes
are excluded from the calculation bases. The Amendment would also prohibit new
or increased real property transfer tax rates, new State real property taxes
and local District income taxes.
As the State experienced revenue shortfalls in the
mid-1980s, it adopted various measures, including impoundment of funds by the
Governor, reduction of appropriations by the General Assembly, a temporary
increase in the sales tax, deferral of certain tax reductions and inter-fund
borrowings. On a GAAP basis, the State had unrestricted General Fund balances
at June 30 of approximately $4.4 million in fiscal year 1986, $45.1 million in
fiscal year 1987, $100.3 million in fiscal year 1988, $134.8 million in fiscal
year 1989 and $35.1 million in fiscal year 1990; for fiscal year 1991, the
State had a zero balance for unrestricted funds in the General Fund.
The adopted budget for fiscal year 1993 projects General
Fund revenues of $3.1 billion and appropriated $3.0 billion. Based upon the
estimated fiscal year 1992 carryover surplus, the State has projected a $135.6
million year end balance for fiscal year 1993. This amount is greater than the
required 3.0% reserve of $88.6 million. The principal General Fund revenue
sources are the individual income tax (53.8% of total estimated 1992 fiscal
year receipts), excise taxes (33.8%) and the corporate income tax (4.2%).
The State Constitution prohibits the State from incurring
debt except for limited purposes, for limited periods of time and in
inconsequential amounts. The State courts have defined debt to mean any
obligation of the State requiring payment out of future years' general
revenues. As a consequence, the State has no outstanding general obligation
debt.
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The State's economy is reliant upon several significant
factors such as mining, tourism, agriculture, construction, manufacture of high
technology products and durable goods and trade. Activities related to tourism
have grown during the past several years, while sectors of the economy related
to mining and construction have contracted. Employment in manufacturing,
transportation, retail trade, services, government and finance, insurance and
real estate have shown modest gains from 1986 through 1990. Construction of
the new international airport in Denver is expected to have a positive effect
on the State's economy.
The growth of the State economy has historically exceeded
that of the national economy. Statewide, real personal income increased 1.6%
between 1989 and 1990. According to the most current information available
from the Colorado Department of Revenue, retail trade sales increased 6.4% from
approximately $42.6 billion to $45.4 billion from 1989 to 1990. For the first
nine months of 1991, retail trade sales totaled $35.7 billion, an increase of
7.8% over sales during the same time period in 1990. Figures supplied by the
Colorado Division of Employment and Training indicate that for the years 1986
through 1989 the State's unemployment rate exceeded the national rate; however,
this trend was reversed for 1990 and 1991. In 1991, the State's annual average
unemployment rate was 5.0% (compared to a national unemployment rate of 5.5%).
The seasonally adjusted unemployment rate for April 1992 for the State was 5.6%
as compared to 7.1% for the United States.
Economic conditions in the State may have continuing effects
on other governmental units within the State (including issuers of the Bonds in
the Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors. At the time
of the closing for each Colorado Trust, Special Counsel to the Fund for
Colorado tax matters rendered an opinion under then existing Colorado income
tax law applicable to taxpayers whose income is subject to Colorado income
taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal
law, the Colorado Trust is not an association taxable as a corporation for
purposes of Colorado income taxation. With respect to Colorado Unitholders, in
view of the relationship between Federal and Colorado tax computations
described above:
(1) Each Colorado Unitholder will be treated as owning a pro
rata share of each asset of the Colorado Trust for Colorado income
tax purposes in the proportion that the number of Units of such Trust
held by the Unitholder bears to the total number of outstanding Units
of the Colorado Trust, and the income of the Colorado Trust will
therefore be treated as the income of each Colorado Unitholder under
Colorado law in the proportion described;
(2) interest on Bonds that would not be includable in Colorado
adjusted gross income when paid directly to a Colorado Unitholder
will be exempt from Colorado income taxation when received by the
Colorado Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder;
(3) any proceeds paid under an insurance policy or policies
issued to the Colorado Trust with respect to the Bonds in the
Colorado Trust which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Colorado
adjusted gross income if, and to the same extent as, such interest
would have been so excludable if paid by the issuer of the defaulted
obligations;
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(4) any proceeds paid under individual policies obtained by
issuers of Bonds in the Colorado Trust which represent maturing
interest on defaulted obligations held by the Trustee will be
excludable from Colorado adjusted gross income if, and to the same
extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations;
(5) each Colorado Unitholder will realize taxable gain or loss
when the Colorado Trust disposes of a Bond (whether by sale,
exchange, redemption, or payment at maturity) or when the Colorado
Unitholder redeems or sells Units at a price that differs from
original cost as adjusted for amortization of bond discount or premium
and other basis adjustments (including any basis reduction that may be
required to reflect a Colorado Unitholder's share of interest, if any,
accruing on Bonds during the interval between the Colorado
Unitholder's settlement date and the date such Bonds are delivered to
the Colorado Trust, if later);
(6) tax cost reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost; and
(7) if interest on indebtedness incurred or continued by a
Colorado Unitholder to purchase Units in the Colorado Trust is not
deductible for Federal income tax purposes, it also will be
nondeductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest,
including their share of interest on the Bonds paid to the Colorado Trust, is
taken into account for purposes of determining eligibility for the Colorado
Property Tax/Rent/Heat Rebate.
FLORIDA TRUSTS. Florida's economy has in the past been
highly dependent on the construction industry and construction related
manufacturing. This dependency has declined in recent years and continues to
do so as a result of continued diversification of the State's economy. For
example, in 1980 total contract construction employment as a share of total
non-farm employment was just over seven percent and in 1990 the share had edged
downward to six percent. This trend is expected to continue as Florida's
economy continues to diversify. Florida, nevertheless, has a dynamic
construction industry with single and multi-family housing starts accounting
for 10.6% of total U.S. housing starts in 1990 while the State's population is
5.3% of the U.S. total population.
A driving force behind the State's construction industry has
been the State's rapid rate of population growth. Although Florida currently
is the fourth most populous state, its annual population growth is now
projected to decline as the number of people moving into the State is expected
to hover near the mid 200,000 range annually well into the 1990s. This
population trend should provide plenty of fuel for business and home builders
to keep construction activity lively in Florida for some time to come.
However, other factors do influence the level of construction in the State.
For example, Federal tax reform in 1986 and other changes to
the Federal income tax code have eliminated tax deductions for owners of two or
more residential real estate properties 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.
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Since 1980, the State's job creation rate is well over twice
the rate for the nation as a whole, and its growth rate in new non-agricultural
jobs is the fastest of the 11 most populous states and second only to
California in the absolute number of new jobs created. Since 1980, the State's
unemployment rate has generally been below that of the U.S. Only in the last
two years has the State's unemployment rate moved ahead of the national
average. According to the Florida Department of Labor and Employment Security
and the Florida Consensus Economic Estimating Conference (together the
"Organization") the State's unemployment rate was 5.9% during 1990. As of
August 1991, the organization forecasts that when final numbers are in, the
unemployment rate for 1991 will be 7.2% and estimates that it will be 6.7% for
1992. The State's non-farm job growth rate is expected to mirror the path of
employment growth of the nation. The State's two largest and fastest growing
private employment categories are the service and trade sectors. Together,
they are expected to account for more than 80% of the total non-farm employment
growth between 1990-91 and 1992-93. Employment in these sectors is expected to
grow 0.8% and 3.7% in 1991-92 and 3.3% and 5.3% in 1992-93, respectively. The
service sector has overtaken the trade sector and is now the State's largest
employment category.
Tourism is one of the State's most important industries.
Tourist arrivals by car and air in the State will experience difficulties in
1991-92. By the end of 1991-92, 38.8 million domestic and international
tourists are expected to have visited the State, a decrease of 4.9% from the
40.8 million who visited in 1990-91. During 1992-93 tourist arrivals are
expected to approximate 40 million.
The State's per capita personal income in 1990 of $18.539
was slightly below the national average of $18,696 and significantly ahead of
that for the southeast United States, which was $16,514. Growth in real
personal income in the State is expected to follow a course similar to that of
the nation, growing at 0.3% in 1991-92 and 2.7% in 1992-93. Between 1990-91
and 1992-93, real personal income per capita in the State is expected to
average 0.5% less than the 1990-91 level.
Compared to other states, Florida has a proportionately
greater retirement age population which comprises 18.3% (as of April 1, 1991)
of the State's population and is forecast to grow at an average annual rate of
over 1.96% through the 1990s. Thus, property income (dividends, interest, and
rent) and transfer payments (Social Security and pension benefits, among other
sources of income) are relatively more important sources of income. For
example, Florida's total wages and salaries and other labor income in 1990 was
54.9% of total income, while a similar figure for the nation for 1990 was
64.8%. Transfer payments are typically less sensitive to the business cycle
than employment income and, therefore, act as stabilizing forces in weak
economic periods. While many of the U.S.'s senior citizens choose the State as
their place of retirement, the State is also recognized as attracting a
significant number of working age people. Since 1980, the prime working age
population (18-44) has grown at an average annual rate of 3.6%.
In fiscal year 1990-91, approximately 64% of the State's
total direct revenue to its three operating funds will be derived from State
taxes, with federal grants and other special revenue accounting for the
balance. State sales and use tax, corporate income tax, and beverage tax
amounted to 66%, 7% and 5%, respectively, of total receipts by the General
Revenue Fund during fiscal 1990-91. in that same year, expenditures for
education, health and welfare, and public safety amounted to 55%, 27% and 8%,
respectively, of total expenditures from the General Revenue Fund. At the end
of fiscal 1990, approximately $4.45 billion in principal amount of debt secured
by the full faith and credit of the State was outstanding. In addition, since
July 1, 1991, through August 1992, the State issued about $965 million in
principal amount of full faith and
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credit bonds.
On August 24, 1992, the State was hit with a major
hurricane, Hurricane Andrew. Published speculation estimates total damage to
the southern portion of the State to be $20 billion or more. The actual
economic impact to the State is unknown at this time, but, in published
reports, the director of economic and demographic research for the Joint
Legislative Management Committee of the State's Legislature estimates that the
State's revenues from sales tax collection will exceed the estimates prior to
Andrew. The director said that the State is expecting $7 to $8 billion of
insurance, and $10 billion in federal disaster assistance, and up to $1 billion
from other sources to repair the damage caused by Andrew. The director
estimates that a substantial portion, maybe even half, of those monies will be
spent over the next year or two on items subject to the State's sales tax. In
addition, the director estimates that the State will collect documentary stamp
taxes in excess of the amount currently projected. The director foresees
property owners using insurance money to pay off mortgages on buildings that
have been destroyed and then borrowing to rebuild or remodel a home. The
director estimates that the additional spending will more than offset losses
from tax revenues as a result of the decline in sales in areas where businesses
have been destroyed and closed. In addition, a senior advisor to the State's
governor in published reports has said that the State's nearly $30 billion
budget may end up having to absorb an additional $82 million as a result of
Andrew.
The State Constitution and statutes mandate that the State
budget, as a whole, and each separate fund within the State budget, be kept in
balance from currently available revenues each fiscal year. If the Governor or
Comptroller believes a deficit will occur in any State fund, by statute, he
must certify his opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund.
Estimated fiscal year 1991-92 General Revenue plus Working
Capital funds available total $11,228.1 million. Compared to 1991-92 Estimated
General Revenues of $11,138.6 million, the State was left with unencumbered
reserves of $89.5 million at the end of its fiscal year. Estimated fiscal year
1992-93 General Revenue plus Working Capital funds available total $11,980.1
million, a 6.7% increase over 1991-1992. The $11,859.2 million in combined
Estimated Revenues and revenue generating measures represents an increase of
9.5% over the previous year's Estimated Revenues. In a June 1992 Special
Session of the State Legislature, the Legislature passed a number of tax rate
and base increases to raise an additional $378.5 million in the State's 1992-93
fiscal year. With effective General Revenue appropriations at $11,861.9
million, unencumbered reserves at the end of the fiscal year are estimated at
$118.2 million. Current estimates make it likely that this figure will
increase when revenue collections for 1991-92 are finalized.
The State's sales and use tax (6%) currently accounts for
the State's single largest source of tax receipts. Slightly less than 10% of
the State's sales and use tax is designated for local governments and is
distributed to the respective counties in which collected for such use by such
counties and the municipalities therein. In addition to this distribution,
local governments may (by referendum) assess a 0.5% or a 1.0% discretionary
sales tax within their county. Proceeds from this local option sales tax are
earmarked for funding local infrastructure programs and acquiring land for
public recreation or conservation or protection of natural resources as
provided under Florida law. Certain charter counties have other taxing powers
in addition, and non-consolidated counties with a population in excess of
800,000 may levy a local option sales tax to fund indigent health care. It
alone cannot exceed 0.5% and when combined with the infrastructure surtax
cannot exceed 1.0%. For the fiscal year ended June 30, 1991, sales and use tax
receipts (exclusive of the tax on
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gasoline and special fuels) totalled $8,152.0 million, a decline of 0.9% over
fiscal year 1989-90.
The State imposes an alcoholic beverage wholesale tax
(excise tax) on beer, wine, and liquor. This tax is one of the State's major
tax sources, with revenues totalling $445.4 million in the fiscal year ending
June 30, 1991. Alcoholic beverage tax receipts declined 1.0% over the previous
year. The revenues collected from this tax are deposited into the State's
General Revenue Fund.
The second largest source of State tax receipts is the tax
on motor fuels. However, these revenues are almost entirely dedicated trust
funds for specific purposes and are not included in the State's General Revenue
Fund. The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year ended
June 30, 1990, receipts from this source were $701.6 million, a decrease of
13.2% from fiscal year 1989-90.
The State also imposes a stamp tax on deeds and other
documents relating to realty, corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge accounts.
The documentary stamp tax collections totaled $470.0 million during fiscal
year 1990-91, a 9.4% increase from the previous fiscal year. For the fiscal
year 1990-91, 70.4% of the documentary stamp tax revenues were deposited to the
General Revenue Fund. Beginning in fiscal year 1991-92, 76.21% of these taxes
are to be deposited to the General Revenue Fund.
On January 12, 1988, the State began its own lottery. State
law requires that lottery revenues be distributed 50% to the public in prizes,
38% for use in enhancing education, and the balance, 12.0% for costs of
administering the lottery. Fiscal year 1990-91 lottery commissions for ticket
sales totalled $2.19 billion, providing education with $833.5 million.
Currently under litigation are several issues relating to State actions or
State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse affect on
Florida's financial position.
In the wake of the U.S. Supreme Court decision holding that
a Hawaii law unfairly discriminated against out-of-state liquor producers,
suits have been filed in the State's courts contesting a similar State law (in
effect prior to 1985) that seek $384 million in tax refunds. A trial court, in
a ruling that was subsequently upheld by the State's Supreme Court, found the
State law in question to be unconstitutional but made its ruling operate
prospectively, thereby denying any tax refunds. The issue of whether the
unconstitutionality of the tax should be applied retroactively was recently
decided by the United States Supreme Court. The Supreme Court found in favor
of the taxpayers. On remand from the U.S. Supreme Court, the Florida Supreme
Court, on January 15, 1991, mandated further proceedings to fashion a "clear
and certain remedy" consistent with constitutional restrictions and the opinion
of the U.S. Supreme Court. The Florida Department of Revenue has proposed to
the Florida Supreme Court that the Department be allowed to collect back tax
from those who received a tax preference under the prior law. If the
Department's proposal is rejected and tax refunds are ordered to all potential
claimants, a liability of approximately $298 million could result. The case is
now before the Florida Circuit Court, Second Judicial District. That court
will hear the affected parties' response to the Department's proposed
collection of the tax at the higher rate charged to out-of-staters.
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Florida law provides preferential tax treatment to Insurers
who maintain a home office in the State. Certain insurers challenged the
constitutionality of this tax preference and sought a refund of taxes paid.
Recently, the State Supreme Court ruled in favor of the State. Similar issues
have been raised in other cases where insurers have challenged taxes imposed on
premiums received for certain motor vehicle service agreements. These four
cases and pending refund claims total about $200 million.
Florida maintains a bond rating of Aa and AA from Moody's
Investors Service and Standard & Poor's Corporation, respectively, on the
majority of its general obligation bonds, although the rating of a particular
series of revenue bonds relates primarily to the project, facility, or other
revenue sources from which such series derives funds for repayment. While
these ratings and some of the information presented above indicate that Florida
is in satisfactory economic health, there can be no assurance that there will
not be a decline in economic conditions or that particular Municipal
Obligations purchased by the Fund will not be adversely affected by any such
changes.
The sources for the information above include official
statements and financial statements of the State of Florida. While the Sponsor
has not independently verified this information, the Sponsor has no reason to
believe that the information is not correct in all material respects. At the
time of the closing for each Florida Trust, Chapman and Cutler, Counsel to each
Florida Trust for Florida tax matters, rendered an opinion under then existing
Florida income tax law applicable to taxpayers whose income is subject to
Florida income taxation substantially to the effect that:
(1) For Florida state income tax purposes, the Florida Trust
will not be subject to the Florida income tax imposed by Chapter 220,
Florida Statutes. In addition, Florida does not impose any income
taxes at the local level;
(2) Because Florida does not impose an income tax on
individuals, non-corporate Unitholders residing in Florida will not be
subject to any Florida income taxation on income realized by the
Florida Trust. Any amounts paid to the Florida Trust or to
non-corporate Unitholders residing in Florida under an insurance
policy issued to the Florida Trust or the Sponsor which represent
maturing interest on defaulted obligations held by the Trustee will
not be subject to the Florida income tax imposed by Chapter 220,
Florida Statutes;
(3) Corporate Unitholders with commercial domiciles in Florida
will be subject to Florida income or franchise taxation on income
realized by the Florida Trust and on payments of interest pursuant to
any insurance policy. Other corporate Unitholders will be subject to
Florida income or franchise taxation on income realized by the Florida
Trust (or on payments of interest pursuant to any insurance policy)
only to the extent that the income realized does not constitute "non-
business income" as defined by Chapter 220;
(4) Units will be subject to Florida estate tax only if held
by Florida residents. However, the Florida estate tax is limited to
the amount of the credit for state death taxes provided for in Section
2011 of the Internal Revenue Code; and
(5) Neither the Bonds nor the Units will be subject to the
Florida ad valorem property tax, the Florida intangible personal
property tax or Florida sales or use tax.
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LOUISIANA TRUSTS. The following discussion regarding the
financial condition of the state government may not be relevant to general
obligation or revenue bonds issued by political subdivisions of and other
issuers in the State of Louisiana (the "State"). Such information, and the
following discussion regarding the economy of the State, is based upon
information about general economic conditions that may or may not affect
issuers of the Louisiana obligations. The Sponsor has not independently
verified any of the information contained in such publicly available documents,
but is not aware of any facts which would render such information inaccurate.
On December 19, 1990 the State received a rating upgrade on
its general obligation bonds to the current Standard & Poor rating of A from
BBB-plus and was placed on Standard & Poor's Corporation's positive credit
watch. Standard & Poor's cited improvements in the State's cash flow and
fiscal reforms approved by voters in the fall of 1990. The current Moody's
rating on the State's general obligation bonds remains unchanged at BBB-plus.
There can be no assurance that the economic conditions on which these ratings
were based will continue or that particular bond issues may not be adversely
affected by changes in economic or political conditions.
The Revenue Estimating Conference (the "Conference") was
established by Act No. 814 of the 1987 Regular Session of the State
Legislature. The Conference was established by the Legislature to provide an
official estimate of anticipated State revenues upon which the executive budget
shall be based, to provide for a more stable and accurate method of financial
planning and budgeting and to facilitate the adoption of a balanced budget as
is required by Article VII, Section 10(B) of the State Constitution. Act No.
814 provides that the Governor shall cause to be prepared an executive budget
presenting a complete financial and progammatic plan for the ensuing fiscal
year based only upon the official estimate of anticipated State revenues as
determined by the Revenue Estimating Conference. Act No. 814 further provides
that at no time shall appropriations or expenditures for any fiscal year exceed
the official estimate of anticipated State revenues for that fiscal year.
During the 1990 Regular Session of the Louisiana Legislature a constitutional
amendment was approved (Act No. 1096), which was approved by the State
electorate, granting constitutional status to the existence of the Revenue
Estimating Conference without altering its structure, powers, duties and
responsibilities which are currently provided by statute.
The State General Fund is the principal operating fund of
the State, and was established administratively to provide for the distribution
of funds appropriated by the State Legislature for the ordinary expenses of the
State government. Revenue is provided from the direct deposit of federal
grants and the transfer of State revenues from the Bond Security and Redemption
Fund after general obligation debt requirements are met. The Revenue
Estimating Conference met in February of 1991 and reported a projected $437.5
million State General Fund surplus for the fiscal year ending June 30, 1991.
This surplus will be available for expenditures during the Fiscal Year 1991-92.
The beginning State General Fund surplus for fiscal year 1990-1991 was $702.3
million. The official recurring State General Fund estimate for Fiscal Year
1990-91 (Revenue Estimating Conference February 1991 as revised April 1991) is
$4,173.5 million.
The Transportation Trust Fund was established pursuant to
(i) Section 27 of Article VII of the State Constitution and (ii) Act No. 16 of
the First Extraordinary Session of the Louisiana Legislature for the year 1989
(collectively the "Act") for the purpose of funding construction and
maintenance of state and federal roads and bridges, the statewide flood-control
program, ports, airports, transit and state police traffic control projects and
to fund the Parish Transportation Fund. The Transportation Trust Fund is
funded by a levy of
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$0.20 per gallon on gasoline and motor fuels and on special fuels (diesel,
propane, butane and compressed natural gas) used, sold or consumed in the state
(the "Gasoline and Motor Fuels Taxes and Special Fuels Taxes"). This levy was
increased from $0.16 per gallon (the "Existing Taxes") to the current $0.20 per
gallon pursuant to Act No. 16 of the First Extraordinary Session of the
Louisiana Legislature for the year 1989, as amended. The additional tax of
$0.04 per gallon (the "Act 16 Taxes") became effective January 1, 1990 and will
expire on the earlier of January 1, 2005 or the date on which obligations
secured by the Act No. 16 taxes are no longer outstanding. The Transportation
Infrastructure Model for Economic Development Account (the "TIME Account") was
established in the Transportation Trust Fund. Moneys in the TIME Account will
be expended for certain projects identified in the Act aggregating $1.4 billion
and to fund not exceeding $160 million of additional capital transportation
projects. The State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue
Bonds, 1990 Series A, dated April 15, 1990 payable from the (i) Act No. 16
Taxes, (ii) any Act No. 16 Taxes and Existing Taxes deposited in the
Transportation Trust Fund, and (iii) any additional taxes on gasoline and motor
fuels and special fuels pledged for the payment of said Bonds.
The Louisiana Recovery District (the "Recovery District")
was created pursuant to Act No. 15 of the First Extraordinary Session of the
Legislature of Louisiana of 1988 to assist the State in the reduction and
elimination of a deficit existing at the time and the delivery of essential
services to its citizens and to assist parishes, cities and other units of
local government experiencing cash flow difficulties. The Recovery District is
a special taxing district the boundaries of which are coterminous with the
State and is a body politic and corporate and a political subdivision of the
State. The Recovery District issued $979,125,000 of Louisiana Recovery
District Sales Tax Bonds, Series 1988, dated July 1, 1988, secured by (i) the
revenues derived from the District's 1% statewide sales and use tax remaining
after the costs of collection and (ii) all funds and accounts held under the
Recovery District's General Bond Resolution and all investment earnings on such
funds and accounts. As of June 30, 1990, the principal amount outstanding was
$851,880,000.
The Legislature passed tax measures which are projected to
raise approximately $418 million in additional revenues for Fiscal Year
1990-91, the most important of which include the following: sales tax--$328.3
million; hazardous waste tax--$41.3 million; severance tax--$39.2 million;
income tax--$14.9 million; and tobacco tax--$14.0 million. The Legislature
also passed several constitutional amendments which were approved by the state
electorate, resulting in comprehensive budgetary reforms mandating that: both
proposed and adopted budgets be balanced in accordance with the official
forecast of the Revenue Estimating Conference; any new tax proposal be tied to
specific expenditures; all mineral revenues earned by the State in excess of
$750 million be placed in the Revenue Stabilization Mineral Trust Fund, to be
used as a "rainy day fund"; and the regular legislative session must end prior
to the completion of the fiscal year in order to streamline budgetary reporting
and planning. The Legislature also adopted a proposed constitutional amendment
which was approved by the State electorate permitting the creation of a
Louisiana lottery. The lottery is projected to generate approximately $111
million per year in net revenues for the State.
Only local governmental units levy ad valorem taxes at
present. Under the 1921 State Constitution a 5.75 mills ad valorem tax was
being levied by the State until January 1, 1973 at which time a constitutional
amendment to the 1921 Constitution abolished the ad valorem tax. Under the
1974 State Constitution a State ad valorem tax of up to 5.75 mills was provided
for but is not presently being levied. The property tax is underutilized at
the parish level due to a constitutional homestead exemption from the property
tax applicable to the first $75,000 of the full market value of single family
residences. Homestead exemptions do not apply to ad valorem property taxes
levied by municipalities, with the exception of the City of New Orleans. Since
local governments are also prohibited from levying an individual income tax by
the constitution, their reliance
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(1)on State government is increased under the existing tax structure.
The foregoing information constitutes only a brief summary
of some of the financial difficulties which may impact certain issuers of Bonds
and does not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of the Louisiana 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 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
Louisiana Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust Special
Counsel to each Louisiana Trust for Louisiana tax matters rendered an opinion
under then existing Louisiana income tax law applicable to taxpayers whose
income is subject to Louisiana income taxation substantially to the effect
that:
(1) The Louisiana Trust will be treated as a trust for
Louisiana income tax purposes and not as an association taxable as a
corporation;
(2) The Louisiana income tax on resident individuals is
imposed upon the "tax table Income" of resident individuals. The
calculation of the "tax table income" of a resident individual begins
with federal adjusted gross income. Certain modifications are
specified, but no such modification requires the addition of interest
on obligations of the State of Louisiana and its political
subdivisions, public corporations created by them and constitutional
authorities thereof authorized to issue obligations on their behalf.
Accordingly, amounts representing interest excludable from gross
income for federal income tax purposes received by the Louisiana Trust
with respect to such obligations will not be taxed to the Louisiana
Trust or, except as provided below, to the resident individual
Unitholder, for Louisiana income tax purposes. In addition to the
foregoing, interest on the respective Securities may also be exempt
from Louisiana income taxes pursuant to the statutes authorizing their
issuance;
(3) To the extent that gain from the sale, exchange or other
disposition of obligations held by the Louisiana Trust (whether as a
result of a sale or exchange of such obligations by the Louisiana
Trust or as a result of a sale or exchange of a Unit by a Unitholder)
is includable in the federal adjusted gross income of a resident
individual, such gain will be included in the calculation of the
Unitholder's Louisiana taxable Income; and
(4) Gain or loss on the Unit or as to underlying bonds for
Louisiana income tax purposes would be determined by taking into
account the basis adjustments for federal income tax purposes
described in this Prospectus.
As no opinion is expressed regarding the Louisiana tax
consequences of Unitholders other than individuals who are Louisiana residents,
tax counsel should be consulted by other prospective Unitholders. The Internal
Revenue Code of 1986, as amended (the "1986 Code"), contains provisions
relating to investing in tax-exempt obligations (including, for example,
corporate minimum tax provisions which treat certain tax-exempt interest and
corporate book income which may include tax-exempt interest, as tax preference
items,
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provisions reducing the deductibility of interest expense by financial
institutions) which could have a corresponding effect on the Louisiana tax
liability of the Unitholders.
In rendering the opinions expressed above, counsel has
relied upon the opinion of Chapman and Cutler that the Louisiana Trust is not
an association taxable as a corporation for Federal income tax purposes, that
each Unitholder of the Louisiana Trust will be treated as the owner of a pro
rata portion of such Louisiana Trust under the 1986 Code and that the income of
the Louisiana Trust will be treated as income of the Unitholders under the 1986
Code.
Tax counsel should be consulted as to the other Louisiana
tax consequences not specifically considered herein, and as to the Louisiana
tax status of taxpayers other than resident individuals who are Unitholders in
the Louisiana Trust. In addition, no opinion is being rendered as to Louisiana
tax consequences resulting from any proposed or future federal or state tax
legislation.
MASSACHUSETTS TRUSTS. Between 1982 and 1988, the
Massachusetts economy generally outperformed the national economy. More
recently, however, the Massachusetts economy has been experiencing a slowdown.
While Massachusetts has benefited from an annual job growth rate of
approximately 2% since the early 1980s, by 1989, employment had started to
decline. Nonagricultural employment declined 0.7% in 1989 and 4.0% in 1990. A
comparison of total, nonagricultural employment in January, 1991 with that in
January, 1992 indicates a decline of 2.5%. The Commonwealth's unemployment rate
continues to exceed the national unemployment rate. Per capita personal income
growth has slowed, after several years during which the per capita personal
income growth rate in Massachusetts was among the highest in the nation.
Between the third quarter of 1990 and the third quarter of 1991, aggregate
personal income in Massachusetts increased 0.2%, as compared to 2.8% for the
nation as a whole.
In part due to the onset of this slowdown, the
Commonwealth's tax revenue forecasting proved to be substantially more
optimistic than the actual results during each of fiscal years 1988 through
1991. This revenue shortfall combined with steadily escalating costs during
the same period contributed to serious budgetary and financial difficulties
which have affected the credit standing and borrowing abilities of
Massachusetts and certain of its public bodies and municipalities, and may have
contributed to higher interest rates on debt obligations recently issued.
While more conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and a reduction is
budgeted program expenditures for fiscal 1992 have moderated these
difficulties, the continuation, or worsening, of the present slowdown and its
effect on the financial condition of the Commonwealth and its public
authorities and municipalities could result in a decline in the market values
of, or default on existing obligations including the Bonds deposited in the
Massachusetts Trust.
The foregoing information constitutes only a brief summary
of some of the general factors which may impact certain issuers of Bonds and
does not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of obligations held by a Massachusetts Trust
are subject. Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within the control of
the issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of
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the Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by a Massachusetts Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust
Special Counsel to each Massachusetts Trust for Massachusetts tax matters,
rendered an opinion under then existing Massachusetts income tax law applicable
to taxpayers whose income is subject to Massachusetts income taxation
substantially to the effect that:
(1) For Massachusetts income tax purposes, a Massachusetts
Trust will be treated as a corporate trust under Section 8 of Chapter
62 of the Massachusetts General Laws and not as a grantor trust under
Section 10(e) of Chapter 62 of the Massachusetts General Laws;
(2) A Massachusetts Trust will not be held to be engaging in
business in Massachusetts within the meaning of said Section 8 and
will, therefore, not be subject to Massachusetts income tax;
(3) Massachusetts Unitholders who are subject to Massachusetts
income taxation under Chapter 62 of Massachusetts General Laws will
not be required to include their respective shares of the earnings of
or distributions from a Massachusetts Trust in their Massachusetts
gross income to the extent that such earnings or distributions
represent tax-exempt interest for Federal income tax purposes received
by a Massachusetts Trust on obligations issued by Massachusetts, its
counties, municipalities, authorities, political subdivisions or
instrumentalities, or issued by United States territories or
possessions;
(4) Any proceeds of insurance obtained by the Trustee of the
Trust or by the issuer of a Bond held by a Massachusetts Trust which
are paid to Massachusetts Unitholders and which represent maturing
interest on defaulted obligations held by the Trustee will be
excludable from Massachusetts gross income of a Massachusetts
Unitholder if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted Bond;
(5) A Massachusetts Trust's capital gains and/or capital
losses realized upon disposition of Bonds held by it will be
includable pro rata in the Federal gross income of Massachusetts
Unitholders who are subject to Massachusetts income taxation under
Chapter 62 of the Massachusetts General Laws, and such gains and/or
losses will be included as capital gains and/or losses in the
Massachusetts Unitholder's Massachusetts gross income, except where
capital gain is specifically exempted from income taxation under acts
authorizing issuance of said Bonds;
(6) Gains or losses realized upon sale or redemption of Units
by Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of the Massachusetts General Laws will be
includable in their Massachusetts gross income;
(7) In determining such gain or loss Massachusetts Unitholders
will, to the same extent required for Federal tax purposes, have to
adjust their tax bases for their Units for accrued interest received,
if any, on Bonds delivered to the Trustee after the Unitholders pay
for their Units and for amortization of premiums, if any, on
obligations held by a Massachusetts Trust; and
(8) The Units of a Massachusetts Trust are not subject to any
property tax levied by Massachusetts or any political subdivision
thereof, nor to any income tax levied by any such political
subdivision. They are includable in the gross estate of a deceased
Massachusetts Unitholder who is a resident
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of Massachusetts for purposes of the Massachusetts Estate Tax.
MICHIGAN TRUSTS. Investors should be aware that the economy
of the State of Michigan has, in the past, proven to be cyclical, due primarily
to the fact that the leading sector of the State's economy is the manufacturing
of durable goods. While the State's efforts to diversify its economy have
proven successful, as reflected by the fact that the share of employment in the
State in the durable goods sector has fallen from 33.1 percent in 1960 to 17.9
percent in 1990, durable goods manufacturing still represents a sizable portion
of the State's economy. As a result, any substantial national economic
downturn is likely to have an adverse effect on the economy of the State and on
the revenues of the State and some of its local governmental units.
In May 1986, Moody's Investors Service raised the State's
general obligation bond rating to "A1." In October 1989, Standard & Poor's
Corporation raised its rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes
in the auto industry, notably consolidation and plant closings resulting from
competitive pressures and over-capacity. Such actions could adversely affect
State revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
General Motors Corporation has announced the scheduled
closing of several of its plants in Michigan in 1993 and 1994. The impact
these closures will have on the State's revenues and expenditures is not
currently known. The impact on the financial condition of the municipalities
in which the plants are located may be more severe than the impact on the State
itself.
In recent years, the State has reported its financial
results in accordance with generally accepted accounting principles. For each
of the five fiscal years ending with the fiscal year ended September 30, 1989,
the State reported positive year-end General Fund balances and positive cash
balances in the combined General Fund/School Aid Fund. For the fiscal years
ending September 30 1990 and 1991, the State reported negative year-end General
Fund Balances of $310.4 million and $169.4 million, respectively. A positive
cash balance in the combined General Fund/School Aid Fund was recorded at
September 30, 1990. Since 1991 the State has experienced deteriorating cash
balances which have necessitated short term borrowing and the deferral of
certain scheduled cash payments. The State borrowed $700 million for cash flow
purposes in the 1992 fiscal year. The State has a Budget Stabilization Fund
which, after a transfer of $230 million to the General Fund for the 1991 State
fiscal year, had an accrued balance of $182 million as of September 30, 1991.
In the 1991-92 State fiscal year, mid-year actions were
taken to avoid a State general fund budget deficit, including expenditure
reductions, deferrals of scheduled payment dates of various types of State aid
into the 1992-93 state fiscal year, a $150 million transfer from the State's
Budget Stabilization Fund, and accounting and retirement funding changes.
While current estimates indicate the State may have ended the 1991-92 fiscal
year with a general fund deficit in the range of $50 million to $100 million,
the State has not yet produced its year-end financial reports and the actual
results are not known.
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While the 1992-93 State budget has been adopted, current
projections indicate a deficit may occur without additional actions being
taken, and ongoing reviews of spending patterns will be conducted in
departments (such as Corrections, Social Services and Military Affairs) that
have been identified as possibly underfunded. If later estimates match the
initial assessments, additional actions will be required to be taken to address
any projected negative balance in the 1992-93 fiscal year.
The Michigan Constitution of 1963 limits the amount of total
revenues of the State raised from taxes and certain other sources to a level
for each fiscal year equal to a percentage of the State's personal income for
the prior calendar year. In the event that the State's total revenues exceeds
the limit by 1 percent or more, the Michigan Constitution of 1963 requires that
the excess be refunded to taxpayers.
In April 1991, the State enacted legislation which
temporarily froze assessed values on existing real property in 1992 by
requiring that the assessment as equalized for the 1991 tax year be used on the
1992 assessment roll and be adjusted only to reflect additions, losses, splits
and combinations. Additional property tax relief measures have been proposed,
some of which could adversely affect either the amount or timing of the receipt
of property tax revenue by local units of government.
Although all or most of the Bonds in each Michigan Trust are
revenue obligations or general obligations of local governments or authorities
rather than general obligations of the State of Michigan itself, there can be
no assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligers to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of bonds
issued by the State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to meet debt service
requirements upon such bonds. In the 1991 fiscal year, the State deferred
certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year and $34.4 million in
the 1992 fiscal year.
The Michigan Trust may contain general obligation bonds of
local units of government pledging the full faith and credit of the local unit
which are payable from the levy of ad valorem taxes on taxable property within
the jurisdiction of the local unit. Such bonds issued prior to December 22,
1978, or issued after December 22, 1978 with the approval of the electors of
the local unit, are payable from property taxes levied without limitation as to
rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of the
local unit for debt service purposes is subject to constitutional, statutory
and charter tax rate limitations. In addition, several major industrial
corporations have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State. If successful,
such challenges could have an adverse impact on the ad valorem tax bases of
such units which could adversely affect their ability to raise funds for
operating and debt service requirements.
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At the time of the closing for each Michigan Trust, Special
Counsel to each Michigan Trust for Michigan tax matters rendered an opinion
under then existing Michigan income tax law applicable to taxpayers whose
income is subject to Michigan income taxation substantially to the effect that:
(1) A Michigan Trust and the owners of Units will be treated
for purposes of the Michigan income tax laws and the Single Business
Tax in substantially the same manner as they are for purposes of the
Federal income tax laws, as currently enacted. Accordingly, we have
relied upon the opinion of Chapman and Cutler as to the applicability
of Federal income tax under the Internal Revenue Code of 1986 to a
Michigan Trust and the Holders of Units;
(2) Under the income tax laws of the State of Michigan, a
Michigan Trust is not an association taxable as a corporation; the
income of a Michigan Trust will be treated as the income of the
Unitholders and be deemed to have been received by them when received
by a Michigan Trust. Interest on the underlying Bonds which is exempt
from tax under these laws when received by a Michigan Trust will
retain its status as tax exempt interest to the Unitholders;
(3) For purposes of the foregoing Michigan tax laws, each
Unitholder will be considered to have received his pro rata share of
Bond interest when it is received by a Michigan Trust and each
Unitholder will have a taxable event when a Michigan Trust disposes of
a Bond (whether by sale, exchange, redemption or payment at maturity)
or when the Unitholder redeems or sells his Certificate to the extent
the transaction constitutes a taxable event for Federal income tax
purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in
the same manner as such cost is established and allocated for Federal
income tax purposes;
(4) Under the Michigan Intangibles Tax, a Michigan Trust is
not taxable and the pro rata ownership of the underlying Bonds, as
well as the interest thereon, will be exempt to the Unitholders to the
extent the Michigan Trust consists of obligations of the State of
Michigan or its political subdivisions or municipalities, or of
obligations of possessions of the United States;
(5) The Michigan Single Business Tax replaced the tax on
corporate and financial institution income under the Michigan Income
Tax, and the Intangible Tax with respect to those intangibles of
persons subject to the Single Business Tax the income from which would
be considered in computing the Single Business Tax. Persons are
subject to the Single Business Tax only if they are engaged in
"business activity", as defined in the Act. Under the Single Business
Tax, both interest received by a Michigan Trust on the underlying
Bonds and any amount distributed from a Michigan Trust to a
Unitholder, if not included in determining taxable income for Federal
income tax purposes, is also not included in the adjusted tax base
upon which the Single Business Tax is computed, of either a Michigan
Trust or the Unitholders. If a Michigan Trust or the Unitholders have
a taxable event for Federal income tax purposes when a Michigan Trust
disposes of a Bond (whether by sale, exchange, redemption or payment
at maturity) or the Unitholder redeems or sells his Certificate, an
amount equal to any gain realized from such taxable event which was
included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual
realized in connection with such event but excluded in computing that
individual's Federal taxable income) will be included in the tax base
against which, after allocation, apportionment and other adjustments,
the Single Business Tax is computed. The tax base will be reduced by
an amount equal to any capital loss realized from such a taxable
event, whether or not the capital loss was deducted in computing
Federal taxable income in the year the loss occurred. Unitholders
should consult their tax advisor as to their status under
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Michigan law;
(6) Any proceeds paid under an insurance policy issued to the
Trustee of a Trust, or paid under individual policies obtained by
issuers of Bonds, which, when received by the Unitholders, represent
maturing interest on defaulted obligations held by the Trustee, will
be excludable from the Michigan income tax laws and the Single
Business Tax if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted obligations.
While treatment under the Michigan Intangibles Tax is not premised
upon the characterization of such proceeds under the Internal Revenue
Code, the Michigan Department of Treasury should adopt the same
approach as under the Michigan income tax laws and the Single Business
tax; and
(7) As the Tax Reform Act of 1986 eliminates the capital gain
deduction for tax years beginning after December 31, 1986, the federal
adjusted gross income, the computation base for the Michigan Income
Tax, of a Unit Holder will be increased accordingly to the extent such
capital gains are realized when the Michigan Trust disposes of a Bond
or when the Unit Holder redeems or sells a Unit, to the extent such
transaction constitutes a taxable event for Federal income tax
purposes.
MINNESOTA TRUSTS. In the early 1980s, the State of
Minnesota experienced financial difficulties due to a downturn in the State's
economy resulting from the national recession. As a consequence, the State's
revenues were significantly lower than anticipated in the July 1, 1979 to June
30, 1981 biennium and the July 1, 1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened
and increased the State sales tax, increased income taxes (by increasing rates
and eliminating deductions) and reduced appropriations and deferred payment of
State aid, Including appropriations for and aids to local governmental units.
The State's fiscal problems affected other governmental units within the State,
such as local government, school districts and state agencies, which, in
varying degrees, also faced cash flow difficulties. In certain cases, revenues
of local governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's
Corporation reduced its rating on the State's outstanding general obligation
bonds from AAA to AA+ in August 1981 and to AA in March 1982. Moody's
Investors Service, Inc. lowered its rating on the State's outstanding general
obligation bonds from Aaa to Aa In April 1982. The State's economy recovered
in the July 1, 1983 to June 30, 1985 biennium, and substantial reductions in
the individual Income tax were enacted in 1984 and 1985. Standard & Poor's
raised Its rating on the State's outstanding general obligation bonds to AA+ in
January 1985. In 1986, 1987 and 1991, legislation was required to eliminate
projected budget deficits by raising additional revenue, reducing expenditures,
including aid to political subdivisions and higher education, and making other
budgetary adjustments. A budget forecast released by the Minnesota Department
of Finance on February 27, 1992 projected a $569 million budget shortfall,
primarily attributable to reduced income tax receipts, for the biennium ending
June 30, 1993. Planning estimates for the 1994-95 biennium projected a budget
shortfall of $1.75 million (less a $300 million reserve). (The projections
generally do not include increases for inflation or operating costs, except
where Minnesota law requires them.) The State responded by enacting legislation
that made substantial accounting changes, reduced the budget reserve by $160
million to $240 million, reduced appropriations for state agencies and higher
education, and imposed a sales tax on purchases by local governmental units. A
revised forecast released by the Department of Finance on November 24, 1992
reflects these legislative changes and projects a $217 million General Fund
surplus at the end of the current biennium,
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June 30, 1993, plus a $240 million cash flow account, against a total budget
for the biennium of approximately $14.6 billion, and planning estimates for the
1994-95 biennium project a budget shortfall of $986 million (less the $217
million balance carried forward and the $240 million cash flow account).
Although Standard & Poor's affirmed its rating on the State's general
obligation bonds in connection with a July 1992 issue, it revised its outlook
for the rating to "negative."
State grants and aids represent a large percentage of the
total revenues of cities, towns, counties and school districts in Minnesota.
Even with respect to bonds that are revenue obligations and not general
obligations of the issuer, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability
of the bonds or the ability of the respective obligers to pay interest on and
principal of the bonds.
At the time of the closing for each Minnesota Trust, Special
Counsel to each Minnesota Trust for Minnesota tax matters rendered an opinion
under then existing Minnesota income tax law applicable to taxpayers whose
income is subject to Minnesota income taxation substantially to the effect
that:
(1) We understand that a Minnesota Trust will have no income
other than (i) interest income on bonds issued by the State of
Minnesota and its political and governmental subdivisions,
municipalities and governmental agencies and instrumentalities and on
bonds issued by possessions of the United States which would be exempt
from Federal and Minnesota income taxation when paid directly to an
individual, trust or estate (and the term "Bonds" as used herein
refers only to such Bonds), (ii) gain on the disposition of such
Bonds, and (iii) proceeds paid under certain insurance policies issued
to the Trustee or to the issuers of the Bonds which represent maturing
interest or principal payments on defaulted Bonds held by the Trustee.
"Taxable income" for Minnesota income tax purposes is
the same as "taxable Income" for Federal income tax purposes with certain
modifications that (with one exception) do not apply to the present
circumstances. The exception is that corporations must add to Federal taxable
income the amount of any interest received on the obligations of states and
their agencies and instrumentalities, political and governmental subdivisions,
and municipalities. The terms "trust" and "corporation" have the same meanings
for Minnesota income tax purposes, as relevant to the Minnesota tax status of a
Minnesota Trust, as for Federal income tax purposes.
In view of the relationship between Federal and
Minnesota law described in the preceding paragraph and the opinion of Chapman
and Cutler with respect to Federal tax treatment of a Minnesota Trust and its
Unitholders: (1) a Minnesota Trust will be treated as a trust rather than a
corporation for Minnesota income tax purposes and will not be deemed the
recipient of any Minnesota taxable income; (2) each Unitholder of a Minnesota
Trust will be treated as the owner of a pro rata portion of a Minnesota Trust
for Minnesota income tax purposes and the income of a Minnesota Trust will
therefore be treated as the income of the Unitholders under Minnesota law; (3)
interest on the Bonds will be exempt from Minnesota income taxation of
Unitholders who are individuals, trusts and estates when received by a
Minnesota Trust and attributed to such Unitholders and when distributed to such
Unitholders (except as hereinafter provided with respect to "industrial
development bonds" and "private activity bonds" held by "substantial users");
(4) interest on the Bonds will be includible in the Minnesota taxable income
(subject to allocation and apportionment) of Unitholders that are corporations;
(5) each Unitholder will realize taxable gain or loss when a Minnesota Trust
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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 a Minnesota Trust, if later); (6) tax cost reduction
requirements relating to amortization of bond premium may, under some
circumstances, result in Unitholders realizing taxable gain when their Units
are sold or redeemed for an amount equal to or less than their original cost;
(7) any proceeds paid under the insurance policy issued to the Trustee with
respect to the Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be excludible from Minnesota gross income if, and to
the same extent as, such interest would have been so excludible if paid by the
issuer of the defaulted obligations; (8) any proceeds paid under individual
insurance policies obtained by issuers of Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be excludible from
Minnesota gross income if, and to the same extent as, such interest would have
been so excludible if paid in the normal course by the issuer of the defaulted
obligations; (9) net capital gains of Unitholders attributable to the Bonds
will be fully includible in the Minnesota taxable income of Unitholders
(subject to allocation and apportionment In the case of corporate Unitholders);
and (10) interest on Bonds includible in the computation of "alternative
minimum taxable income" for Federal income tax purposes will also be includible
in the computation of "alternative minimum taxable income" for Minnesota income
tax purposes. Interest income attributable to Bonds that are "industrial
development bonds" or "private activity bonds," as those terms are defined in
the Internal Revenue Code, will be taxable under Minnesota law to a Unitholder
who is a "substantial user" of the facilities financed by the proceeds of such
Bonds (or a "related person" to such a "substantial user") to the same extent
as if such Bonds were held by such Unitholder.
MISSOURI TRUSTS. The following discussion regarding
constitutional limitations and the economy of the State of Missouri is Included
for the purpose of providing general information that may or may not affect
Issuers of the Bonds In Missouri.
In November 1981, the voters of Missouri adopted a tax
limitation amendment to the constitution of the State of Missouri (the
"Amendment"). The Amendment prohibits increases in local taxes, licenses or
fees by political subdivisions without approval of the voters of such political
subdivision. The Amendment also limits the growth in revenues and expenditures
of the State to the rate of growth in the total personal income of the citizens
of Missouri. The limitation may be exceeded if the General Assembly declares
an emergency by a two-thirds vote. The Amendment did not limit revenue growth
at the State level in fiscal 1982 through 1988 with the exception of fiscal
1984. Management Report No. 85-20, which was issued on March 5, 1985 by State
Auditor Margaret Kelly, indicates that state revenues exceeded the allowable
increase by $30.52 million in fiscal 1984, and a taxpayer lawsuit has been
filed pursuant to the Amendment seeking a refund of the revenues in excess of
the limit.
The economy of Missouri is diverse and includes
manufacturing, retail and wholesale trade, services, agriculture, tourism and
mining. In recent years, growth in the wholesale and retail trade has offset
the more slowly growing manufacturing and agricultural sectors of the economy.
In 1991, the unemployment rate in Missouri was 6.6%, and according to
preliminary seasonally adjusted figures, the rate dropped to 5.4% in December
1992. There can be no assurance that general economic conditions or the
financial circumstances of Missouri or its political subdivisions will not
adversely affect the market value of the Bonds or the ability of the obligor to
pay debt service on such Bonds.
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Currently, Moody's Investors Service rates Missouri general
obligation bonds "Aaa" and Standard & Poor's Corporation rates Missouri general
obligation bonds "AAA". Although these ratings indicate that the State of
Missouri is in relatively good economic health, there can be, of course, no
assurance that this will continue or that particular bond issues may not be
adversely affected by changes in the State or local economic or political
conditions.
The foregoing information constitutes only a brief
summary of some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers of obligations held by the Missouri
Trust are subject. Additionally, many factors including national economic,
social and environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Missouri Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special
Counsel for Missouri tax matters rendered an opinion under then existing
Missouri income tax law applicable to taxpayers whose income is subject to
Missouri income taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt
obligations issued by or on behalf of the State of Missouri (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Missouri Bonds") or by the Commonwealth of Puerto Rico, Guam and the United
States Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently
examined the Bonds to be deposited in and held in the Missouri Trust. However,
although no opinion is expressed herein regarding such matters, it is assumed
that: (i) the Bonds were validly issued, (ii) the interest thereon is
excludable from gross income for Federal income tax purposes and (iii) interest
on the Missouri Bonds, if received directly by a Unitholder, would be exempt
from the Missouri income tax applicable to individuals and corporations
("Missouri state income tax"). The opinion set forth below does not address
the taxation of persons other than full time residents of Missouri. No opinion
is expressed regarding whether the gross earnings derived from the Units is
subject to intangible taxation imposed by counties, cities and townships
pursuant to present Kansas law. In the opinion of Chapman and Cutler, counsel
to the Sponsor under existing law:
(1) The Missouri Trust is not an association taxable as a
corporation for Missouri income tax purposes, and each Unitholder of
the Missouri Trust will be treated as the owner of a pro rata portion
of the Missouri Trust and the income of such portion of the Missouri
Trust will be treated as the income of the Unitholder for Missouri
state income tax purposes;
(2) Interest paid and original issue discount, if any, on the
Bonds which would be exempt from the Missouri state income tax if
received directly by a Unitholder will be exempt from the Missouri
state income tax when received by the Missouri Trust and distributed
to such Unitholder; however, no opinion is expressed herein regarding
taxation of interest paid and original issue discount, if any, on the
Bonds received by the Missouri Trust and distributed to Unitholders
under any other
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tax imposed pursuant to Missouri law, including but not limited
to the franchise tax imposed on financial institutions pursuant to
Chapter 148 of the Missouri Statutes;
(3) To the extent that interest paid and original issue
discount, if any, derived from the Missouri Trust by a Unitholder with
respect to Possession Bonds is excludable from gross income for
Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a, and 48 U.S.C. Section 1403, such interest paid
and original issue discount, if any, will not be subject to the
Missouri state income tax; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri IM-IT Trust and distributed
to Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes;
(4) Each Unitholder of the Missouri Trust will recognize gain
or loss for Missouri state income tax purposes if the Trustee disposes
of a bond (whether by redemption, sale, or otherwise) or if the
Unitholder redeems or sells Units of the Missouri Trust to the extent
that such a transaction results in a recognized gain or loss to such
Unitholder for Federal income tax purposes. Due to the amortization
of bond premium and other basis adjustments required by the Internal
Revenue Code, a Unitholder under some circumstances, may realize
taxable gain when his or her Units are sold or redeemed for an amount
equal to their original cost;
(5) Any insurance proceeds paid under policies which represent
maturing interest on defaulted obligations which are excludable from
gross income for Federal income tax purposes will be excludable from
Missouri state income tax to the same extent as such interest would
have been paid by the issuer of such Bonds held by the Missouri Trust;
however, no opinion is expressed herein regarding taxation of interest
paid and original issue discount, if any, on the Bonds received by the
Missouri Trust and distributed to Unitholders under any other tax
imposed pursuant to Missouri law, including but not limited to the
franchise tax imposed on financial institutions pursuant to Chapter
148 of the Missouri Statutes;
(6) The Missouri state income tax does not permit a deduction
of interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Trust, the interest on which is exempt
from such Tax; and
(7) The Missouri Trust will not be subject to the Kansas City,
Missouri Earnings and Profits Tax and each Unitholder's share of
income of the Bonds held by the Missouri Trust will not generally be
subject to the Kansas City, Missouri Earnings and Profits Tax or the
City of St Louis Earnings Tax (except in the case of certain
Unitholders, including corporations, otherwise subject to the St.
Louis City Earnings Tax).
NEW JERSEY TRUSTS. Each New Jersey Trust consists of a
portfolio of Bonds. The Trust is therefore susceptible to political, economic
or regulatory factors affecting issuers of the Bonds. The following
information provides only a brief summary of some of the complex factors
affecting the financial situation in New Jersey (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in New Jersey. No independent verification has been made of any
of the following information.
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New Jersey is the ninth largest state in population and the
fifth smallest in land area. With an average of 1,046 people per square mile,
it is the most densely populated of all the states. The state's economic base
is diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita income has been
well above the national average, and in 1991 the State ranked second among
States in per capita personal income ($25,372).
The New Jersey Economic Policy Council, a statutory arm of
the New Jersey Department of Commerce and Economic Development, has reported in
New Jersey Economic Indicators, a monthly publication of the New Jersey
Department of Labor, Division of Labor Market and Demographic Research, that in
1988 and 1989 employment in New Jersey's manufacturing sector failed to benefit
from the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum. In
the meantime, the prolonged fast growth in the State in the mid 1980s resulted
in a tight labor market situation, which has led to relatively high wages and
housing prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures. New Jersey is currently experiencing a recession and,
as a result of the factors described above, such recession could last longer
than the national recession, although signs of a slow recovery both on the
national and State level have been reported.
The onset of the national recession (which officially began
in July 1990 according to the National Bureau of Economic Research) caused an
acceleration of New Jersey's job losses in construction and manufacturing. In
addition, the national recession caused an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking and warehousing. Reflecting the downturn, the rate of
unemployment in the State rose from a low of 3.6% during the first quarter of
1989 to an estimated 8% in December 1992, which is below the national average
of 7.3% in December 1992. Economic recovery is likely to be slow and uneven in
New Jersey, with unemployment receding at a correspondingly slow pace, due to
the fact that some sectors may lag due to continued excess capacity. In
addition, employers even in rebounding sectors can be expected to remain
cautious about hiring until they become convinced that improved business will
be sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of
capital projects is through the sale of the general obligation bonds of the
State. These bonds are backed by the full faith and credit of the State tax
revenues and certain other fees are pledged to meet the principal and interest
payments and if provided, redemption premium payments, if any, required to
repay the bonds. As of June 30, 1992, there was a total authorized bond
indebtedness of approximately $6.96 billion, of which $3.32 billion was issued
and outstanding, $2.6 billion was retired (including bonds for which provision
for payment has been made through the sale and issuance of refunding bonds) and
$1.04 billion was unissued. The debt service obligation for such outstanding
indebtedness is $444.3 million for fiscal year 1993.
New Jersey's Budget and Appropriation System. The State
operates on a fiscal year beginning July 1 and ending June 30. At the end of
fiscal year 1989, there was a surplus in the State's general fund (the fund
into which all State revenues not otherwise restricted by statute are deposited
and from which appropriations are made) of $411.2 million. At the end of
fiscal year 1990, there was a surplus In the general fund of $1 million. It is
estimated that New Jersey closed its fiscal year 1992 with a surplus of $762.9
million.
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In order to provide additional revenues to balance future
budgets, to redistribute school aid and to contain real property taxes, on June
27, 1990, and July 12, 1990, Governor Florio signed into law legislation which
was estimated to raise approximately $2.8 billion in additional taxes
(consisting of $1.5 billion in sales and use taxes and $1.3 billion in income
taxes), the biggest tax hike in New Jersey history. There can be no assurance
that receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990,
with the increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional revenue.
Projections and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January 1,
1991, in the form of an increased state income tax on individuals. At the time
of enactment, it was projected that this increase would raise approximately
$1.3 billion in additional income taxes to fund a new school aid formula, a new
homestead rebate program and state assumption of welfare and social services
costs. Projections and estimates of receipts from income taxes, however, have
also been subject to variance in recent fiscal years. Under the legislation,
income tax rates increased from their previous range of 2% to 3.5% to a new
range of 2% to 7%, with the higher rates applying to married couples with
incomes exceeding $70,000 who file joint returns, and to individuals filing
single returns with incomes of more than $35,000.
The Florio administration has contended that the income tax
package will help reduce local property tax increases by providing more state
aid to municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion is proposed
to be sent by the State to school districts beginning in 1991, thus reducing
the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate
decreased from 7% to 6%.
On June 30, 1992, the New Jersey Legislature adopted a $14.9
billion State budget for fiscal year 1993 by overriding Governor Florio's veto
of the spending plan. The budget reflected a $1.1 billion cut from Governor
Florio's proposed $16 billion budget, including a $385 million reduction in the
State homestead rebate program and $421 million in cuts in salaries and other
spending by the State bureaucracy and including the prospect of 1,400 to 6,300
layoffs of State employees. The budget also reflects the loss of revenue,
projected at $608 million, as a result of the reduction in the sales and use
tax rate from 7% to 6% effective July 1, 1992 and the use of $1.3 billion in
pension savings to balance the budget, with $770 million available only in
fiscal 1993 and $569 million that will recur annually in the future.
Litigation. The State is a party in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to,
claims asserted
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against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are cases challenging the
following: the formula relating to State aid to public schools, the method by
which the State shares with its counties maintenance recoveries and costs for
residents in State institutions, unreasonably low Medicaid payment rates for
long-term facilities in New Jersey, the obligation of counties to maintain
Medicaid or Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, the 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, 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, and the exercise of
discretion by State agencies in making certain personnel reductions. Adverse
judgments in these and other matters could have the potential for either a
significant loss of revenue or a significant unanticipated expenditure by the
State. Adverse judgments in these and other matters could have the potential
for either a significant loss of revenue or a significant unanticipated
expenditure by the State.
At any given time, there are various numbers of claims and
cases pending against the State, State agencies and employees seeking recovery
of monetary damages that are primarily paid out of the fund created pursuant to
the New Jersey Tort Claims Act. In addition, at any given time, there are
various numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure for
these claims.
Debt Ratings. For many years, both Moody's Investors
Service, Inc. and Standard and Poor's Corporation rated New Jersey general
obligation bonds Aaa and "AAA", respectively. Currently, Moody's Investors
Service, Inc. rates New Jersey general obligation bonds Aaa. On July 3, 1991,
however, Standard and Poor's Corporation downgraded New Jersey general
obligation bonds to "AA+." On June 4, 1992, Standard and Poor's Corporation
placed New Jersey general obligation bonds on CreditWatch with negative
implications, citing as its principal reason for its caution the unexpected
denial by the federal government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These funds were
critical to closing a $1 billion gap in the State's $15 billion budget for
fiscal year 1992 which ended on June 30, 1992. Under New Jersey state law, the
gap in the budget must be closed before the new budget year begins on July 1,
1992. Standard and Poor's suggested the State could close fiscal 1992's budget
gap and help fill fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed
its "AA+" rating for New Jersey general obligation bonds and removed the debt
from its CreditWatch list, although it stated that New Jersey's long-term
financial outlook is negative. Standard and Poor's Corporation is concerned
that the State is entering fiscal 1993 with a slim $26 million surplus and
remains concerned about whether the sagging State economy will recover quickly
enough to meet lawmakers' revenue projections. It also remains concerned about
the recent federal ruling leaving in doubt how much the State is due in
retroactive Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital patients.
There can be no assurance that these ratings will continue or that particular
bond issues may not be adversely affected by changes in the State or local
economic or political conditions.
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On August 24, 1992, Moody's Investors Service, Inc.
downgraded New Jersey general obligation bonds to "Aa1," stating that the
reduction reflects a developing pattern of reliance on nonrecurring measures to
achieve budgetary balance, four years of financial operations marked by revenue
shortfalls and operating deficits, and the likelihood that serious financial
pressures will persist.
At the time of the closing for each New Jersey Trust Special
Counsel to each New Jersey Trust for New Jersey tax matters rendered an opinion
under then existing New Jersey income tax law applicable to taxpayers whose
income is subject to New Jersey income taxation substantially to the effect
that:
(1) Each New Jersey Trust will be recognized as a trust and
not an association taxable as a corporation. Each New Jersey Trust
will not be subject to the New Jersey Corporation Business Tax or the
New Jersey Corporation Income Tax;
(2) With respect to the non-corporate Unitholders who are
residents of New Jersey, the income of a New Jersey Trust which is
allocable to each such Unitholder will be treated as the income of
such Unitholder under the New Jersey Gross Income Tax. Interest on
the underlying Bonds which would be exempt from New Jersey Gross
Income Tax if directly received by such Unitholder will retain its
status as tax-exempt interest when received by the New Jersey Trust
and distributed to such Unitholder. Any proceeds paid under the
insurance policy issued to the Trustee of a New Jersey Trust with
respect to the Bonds or under individual policies obtained by issuers
of Bonds which represent maturing interest on defaulted obligations
held by the Trustee will be exempt from New Jersey Gross Income Tax
if, and to the same extent as, such interest would have been so exempt
if paid by the issuer of the defaulted obligations;
(3) A non-corporate Unitholder will not be subject to the New
Jersey Gross Income Tax on any gain realized either when a New Jersey
Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity), when the Unitholder redeems or sells his Units
or upon payment of any proceeds under an insurance policy issued to
the Trustee of a New Jersey Trust with respect to the Bonds or under
individual policies obtained by issuers of Bonds which represent
maturing principal on defaulted obligations held by the Trustee. Any
loss realized on such disposition may not be utilized to offset gains
realized by such Unitholder on the disposition of assets the gain on
which is subject to the New Jersey Gross Income Tax;
(4) Units of a New Jersey Trust may be taxable on the death of
a Unitholder under the New Jersey Transfer Inheritance Tax Law or the
New Jersey Estate Tax Law; and
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in a New Jersey Trust which is allocable to
such corporation will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax, less any interest expense incurred to carry
such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by
such corporation on the disposition of the Bonds by a New Jersey Trust
or on the disposition of its Units will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax. Any proceeds paid under an insurance
policy issued to the Trustee of a New Jersey Trust with respect to the
Bonds or under individual policies obtained by issuers of Bonds which
represent maturing interest or maturing principal on defaulted
obligations held by the Trustee will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax or New
Jersey
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Corporation Income Tax if, and to the same extent as, such
interest or proceeds would have been so included if paid by the
issuer of the defaulted obligations.
NEW YORK TRUSTS. The portfolio includes certain Bonds
issued by New York State (the "State"), by its various public bodies (the
"Agencies"), and/or by other entities located within the State, including the
City of New York (the "City").
Some of the more significant events relating to the
financial situation in New York are summarized below. This section provides
only a brief summary of the complex factors affecting the financial situation
in New York and is based in part on official statements issued by, and on other
information reported by, the State, the City and the Agencies in connection
with the issuance of their respective securities.
There can be no assurance that future statewide or regional
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of New York
Municipal Obligations held in the portfolio of the New York Trust or the
ability of particular obligers to make timely payments of debt service on (or
relating to) those obligations.
The State has historically been one of the wealthiest states
in the nation. For decades, however, the State economy has grown more slowly
than that of the nation as a whole, gradually eroding the State's relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx
of generally less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and the West have
had in attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high State and local
tax burden relative to other states. The burden of State and local taxation,
in combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn
continued throughout the 1991 calendar year. After a period of modest growth
in the first half of calendar 1992, the Division of the Budget projects slower
growth thereafter in the 1992 calendar year and the first half of the 1993
calendar year. The State has suffered a more severe economic downturn. The
national recession has been more severe in the State because of factors such
as a significant retrenchment in the financial services industry, cutbacks in
defense spending, and an overbuilt real estate market.
On January 21, 1992, the Governor released the recommended
1992-93 Executive Budget which included the revised 1991-92 State Financial
Plan (the "Revised 1991-92 State Financial Plan") indicating a projected $531
million General Fund cash basis operating deficit in the 1991-92 fiscal year.
The projected $531 million deficit was met through tax and revenue anticipation
notes (the "1992 Deficit Notes") which were issued on March 30, 1992 and are
required by law to be repaid in the State's 1992-93 fiscal year. The $531
million projected deficit follows $407 million in administrative actions taken
by the Governor intended to
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reduce 1991-92 disbursements and to increase revenues.
The recommended 1992-93 Executive Budget contains
projections for the 1992-93 State fiscal year which began on April 1, 1992.
The Governor indicated that, for the 1992-93 fiscal year, the State faced a
$4.8 billion budget gap, including the $531 million needed in the 1992-93
fiscal year to repay the 1992 Deficit Notes. The recommended 1992-93 Executive
Budget reflects efforts to achieve budgetary balance by reducing disbursements
by $3.5 billion and increasing revenues by $1.3 billion from levels previously
anticipated.
The 1992-93 State budget was enacted by the Legislature on
April 2, 1992 and was balanced through a variety of spending cuts and revenue
increases, as reflected in the State Financial Plan for the 1992-93 fiscal year
(the "1992-93 State Financial Plan") announced on April 13, 1992. The 1992-93
State Financial Plan projects that General Fund receipts and transfers from
other funds will total $31.382 billion, after provision to repay the 1992
Deficit Notes. The 1992-93 State Financial Plan includes increased taxes and
other revenues, deferral of scheduled personal income and corporate tax
reductions, significant reductions from previously projected levels in aid to
localities and State operations and other budgetary actions that limit the
growth in General Fund disbursements.
Pursuant to statute. the State updates the State Financial
Plan at least on a quarterly basis. The first quarterly revision to the State
Financial Plan for the State's 1992-93 fiscal year was Issued on July 30, 1992
(the "Revised 1992-93 State Financial Plan"). Although the Revised 1992-93
State Financial Plan is based on an economic projection that the State's
economy will perform more poorly than the nation as a whole, there can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1992-93 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements. This, in
turn, could adversely affect the State's ability to achieve a balanced budget
on a cash basis for such fiscal year.
In addition, the State's projections are subject to certain
risks, including adverse decisions in pending litigations, particularly those
involving Federal Medicaid reimbursements and payments by hospitals and health
maintenance organizations, potential changes in the timing of Federally
mandated estimated tax payments that would require parallel changes at the
State level, and further deterioration in the national economy.
The 1992-93 State Financial Plan results in sharp reductions
in aid to all levels of local governmental units from amounts expected. There
can be no assurance, however, that localities that suffer cuts will not be
adversely affected, leading to further requests for State financial assistance.
There can be no assurance that the State will not face
substantial potential budget gaps in future years resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the spending required to maintain State programs at current levels. To
address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements.
For a number of years the State has encountered difficulties
in achieving a balance of expenditures and revenues. The 1991-92 fiscal year
was the fourth consecutive year in which the State incurred a cash-basis
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operating deficit in the General Fund and issued deficit notes. There can be
no assurance that the State will not continue to face budgetary difficulties in
the future, due to a number of factors including economic, fiscal and political
factors, and that such difficulties will not lead to further adverse
consequences for the State.
As a result of changing economic conditions and information,
public statements or reports may be released by the Governor, members of the
State Legislature, and their respective staffs, as well as others involved in
the budget negotiation process from time to time. Those statements or reports
may contain predictions, projections or other items of information relating to
the State's financial condition as reflected in the 1992-93 State Financial
Plan, that may vary materially and adversely from the information provided
herein.
As of June 30, 1992, the total amount of long-term State
general obligation debt authorized but unissued stood at $3.0 billion, of which
approximately $1.5 billion was part of a general obligation bond authorization
for highway and bridge construction and rehabilitation. As of the same date,
the State had approximately $5.0 billion in general obligation bonds and $224
million in bond anticipation notes outstanding. The State issued $3.9 billion
in tax and revenue anticipation notes ("TRANS") on June 21, 1991, $531 million
In 1992 Deficit Notes on March 30, 1992 and $2.3 billion in TRANS on April 28,
1992.
The State anticipates that its borrowings for capital
purposes in 1992-93 will consist of approximately $863 million in general
obligation bonds. The State also expects to issue approximately $178 million
in general obligation bonds for the purpose of redeeming outstanding bond
anticipation notes. The Legislature has also authorized the issuance of up to
$105 million in certificates of participation for equipment purchases and real
property purposes during the State's 1992-93 fiscal year. The projection of
the State regarding its borrowings for the 1992-93 fiscal year may change if
actual receipts fall short of State projections or if other circumstances
require.
In June 1990, legislation was enacted creating the "New York
Local Government Assistance Corporation" ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
To date, LGAC has issued its bonds to provide net proceeds of $2.75 billion.
LGAC has been authorized to issue additional bonds to provide net proceeds of
$975 million during the State's 1992-93 fiscal year, of which $350 million has
been issued to date.
The $2.3 billion in TRANs issued by the State in April 1992
were rated SP-1 by S&F and MIG-2 by Moody's. The $3.9 billion in TRANs issued
by the State in June, 1991 were rated the same. S&P in so doing stated that
the outlook is changed to "negative" from "stable." The $4.1 billion in TRANs
issued by the State in June, 1990 and the $775 million in TRANs issued by the
State in March, 1990 were rated the same. In contrast, the $3.9 billion of
TRANs issued by the State in May, 1989 had been rated SP-1+ by S&P and MIG-1 by
Moody's.
As of the date of this prospectus, Moody's rating of the
State general obligation bonds stood at A, but under review for possible
downgrade and S&P's rating stood at A- with a negative outlook. Moody's placed
the bonds under review on January 6, 1992. Previously, Moody's lowered its
rating to A on June 6, 1990, its rating having been A1 since May 27, 1986. S&P
lowered its rating from A to A on January 13, 1992. S&P's
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previous ratings were A from March 1990 to January 1992, AA- from August, 1987
to March, 1990 and A+ from November, 1982 to August, 1987.
On September 18, 1992, Moody's in placing the bonds under
review for possible downgrade stated: Chronic financial problems weigh most
heavily in the evaluation of New York State's credit. In the past five years,
the State has been unable to maintain a balanced budget and has had to issue
deficit notes in each of the past four years. The budget for the fiscal year
which began April 1, 1992 was adopted nearly on time, relies somewhat less on
non-recurring actions, and provides for some expenditure reductions, mainly due
to a planned reduction in the size of the State workforce. However, although
growth in major aid programs to local governments is modest, major structural
reform of State programs which would provide enduring budget relief has not
been enacted. The State budget is still narrowly balanced and the State could
face additional fiscal pressure if the economy performs worse than anticipated
or cost-reduction programs fail to generate anticipated savings.
On November 16, 1992, S&P, in affirming its A- rating and
negative outlook of the State's general obligation bonds, stated:
The rating reflects ongoing economic weakness, four years of
operating deficits and a large accumulated deficit position.
The ratings outlook is "negative," as budget balance remains
fragile. The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways.
In February 1975, the New York State Urban Development
Corporation ("UDC"), which had approximately $1 billion of outstanding debt,
defaulted on certain of its short-term notes. Shortly after the UDC default
the City entered a period of financial crisis. Both the State Legislature and
the United States Congress enacted legislation in response to this crisis.
During 1975, the State Legislature (i) created the Municipal Assistance
Corporation ("MAC") to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and City four-year financial plans (the financial plans also apply to
certain City-related public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in
the City has slowed substantially, and the City's economy is currently in
recession. The City projects, and its current five-year financial plan
assumes, a continuation of the recession in the New York City region in the
1992 calendar years with a recovery early in the 1993 calendar year. The Mayor
is responsible for preparing the City's four-year financial plan, including the
City's current financial plan. The City Comptroller has issued reports
concluding that the recession of the City's economy will be more severe and
last longer than is assumed in the Financial Plan.
For each of the 1981 through 1991 fiscal years, the City
achieved balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP") and expects to achieve balanced
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operating results for the 1992 fiscal year. During its 1991 fiscal year, as a
result of the recession, the City experienced significant shortfalls from its
July 1990 projections in virtually every major category of tax revenues. The
City was required to close substantial budget gaps in its 1990 and 1991 fiscal
years in order to maintain balanced operating results. 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. The City Comptroller has issued reports that have warned
of the adverse effects on the City's economy of the tax increases that were
imposed during fiscal years 1991 and 1992.
Pursuant to State law, the City prepares a four-year annual
financial plan which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections. The City is
required to submit its financial plans to review bodies, including the Control
Board. If the City were to experience certain adverse financial circumstances,
including the occurrence or the substantial likelihood and imminence of the
occurrence of an annual operating deficit of more than $100 million or the loss
of access to the public credit markets to satisfy the City's capital and
seasonal financing requirements, the Control Board would be required by State
law to exercise certain powers, including prior approval of City financial
plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable
the City to balance its budget and to meet its cash requirements. As a result
of the national and regional economic recession, the State's projections of tax
revenues for its 1991 and 1992 fiscal years were substantially reduced. For
its 1993 fiscal year, the State, before taking any remedial action reflected in
the State budget enacted by the State Legislature on April 2, 1992 reported a
potential budget deficit of $4.8 billion. If the State experiences revenue
shortfalls or spending increases beyond its projections during its 1993 fiscal
year or subsequent years, such developments could also result in reductions in
projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow and
additional City expenditures as a result of such delays.
The City's projections set forth in the Financial Plan are
based on various assumptions and contingencies which are uncertain and which
may not materialize. Changes in major assumptions could significantly affect
the City's ability to balance its budget as required by State law and to meet
its annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future City
budgets by the New York City Council, and approval by the Governor or the State
Legislature and the cooperation of MAC, with respect to various other actions
proposed in such financial plan.
The City's ability to maintain a balanced operating budget
is dependent on whether it can implement necessary service and personnel
reduction programs successfully. The financial plan submitted to the Control
Board on June 11, 1992 contains substantial proposed expenditure cuts for the
1993 through 1996 fiscal years. The proposed expenditure reductions will be
difficult to implement because of their size and the substantial expenditure
reductions already imposed on City operations in the past two years.
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Attaining a balanced budget is also dependent upon the
City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1993 through 1996
contemplates issuance of $13.3 billion of general obligation bonds primarily to
reconstruct and rehabilitate the City's infrastructure and physical assets and
to make primarily capital investments. A significant portion of such bond
financing is used to reimburse the City's general fund for capital expenditures
already incurred. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The terms and
success of projected public sales of City general obligation bonds and notes
will be subject to prevailing market conditions at the time of the sale, and no
assurance can be given that the credit markets will absorb the projected
amounts of public bond and note sales. In addition, future developments
concerning the City and public discussion of such developments, the City's
future financial needs and other issues may affect the market for outstanding
City general obligation bonds and notes. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the
Office of the State Deputy Comptroller for the City of New York (the "OSDC")
and other agencies and public officials have issued reports and made public
statements which, among other things, state that projected revenues may be less
and future expenditures may be greater than those forecast in the financial
plan. In addition, the Control Board and other agencies have questioned
whether the City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide necessary
services. It is reasonable to expect that such reports and statements will
continue to be issued and to engender public comment.
The City achieved balanced operating results as reported in
accordance with GAAP for the 1991 fiscal year. During the 1990 and 1991 fiscal
years, the City implemented various actions to offset a projected budget
deficit of $3.2 billion for the 1991 fiscal year, which resulted from declines
in City revenue sources and increased public assistance needs due to the
recession. Such actions included $822 million of tax increases and substantial
expenditure reductions.
The most recent quarterly modification to the City's
financial plan submitted to the Control Board on May 7, 1992 (the "1992
Modification") projects a balanced budget in accordance with GAAP for the 1992
fiscal year after taking into account a discretionary transfer of $455 million
to the 1993 fiscal year as the result of a 1992 fiscal year surplus. In order
to achieve a balanced budget for the 1992 fiscal year, during the 1991 fiscal
year, the City proposed various actions for the 1992 fiscal year to close a
projected gap of $3.3 billion in the 1992 fiscal year.
On June 11, 1992, the City submitted to the Control Board
the Financial Plan for the 1993 through 1996 fiscal years, which relates to the
City, the Board of Education ("BOE") and the City University of New York
("CUNY") and is based on the City's expense and capital budgets for the City's
1993 fiscal year. The 1993-1996 Financial Plan projects revenues and
expenditures for the 1993 fiscal year balanced in accordance with GAAP.
The 1993-1996 Financial Plan sets forth actions to close a
previously projected gap of approximately $1.2 billion In the 1993 fiscal year.
The gap-closing actions for the 1993 fiscal year include $489 million of
discretionary transfers from a City surplus in the 1992 fiscal year.
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The Financial Plan also sets forth projections and outlines
a proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps. On August 26, 1992, the City modified the 1993-96
Financial Plan. As modified, the Financial Plan projects a balanced budget for
fiscal year 1993 based upon revenues of $29.6 billion but projects budget gaps
of $1.3 billion, $1.2 billion and $1.7 billion, respectively, in the 1994
through 1996 fiscal years.
Various actions proposed in the Financial Plan are subject
to approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. In addition, MAC has set conditions upon its cooperation in the
City's realization of the proposed transitional funding contained in the
Financial Plan for the 1994 fiscal year. If these actions cannot be
implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial plan.
The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
torts, breaches of contracts and other violations of law and condemnation
proceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out its financial plan. As of June 30, 1991, legal claims in excess of
$322 billion were outstanding against the City for which the City estimated its
potential future liability to be $2.1 billion.
As of the date of this prospectus, Moody's rating of the
City's general obligation bonds stood at Baa1 and S&P's rating stood at A-.
On February 11, 1991, Moody's lowered its rating from A. On October 19, 1992,
in confirming its Baa1 rating, Moody's noted that:
Financial operations continue to be satisfactorily
maintained. Nevertheless, significant gaps in the later years of the (four
year financial) plan remain and have not changed from prior projections. The
ability of the City to successfully close those gaps, as well as fully
implement all currently planned gap closing measures without slippage will be
a politically and financially complex task.
On October 1992, S&P affirmed its A- rating with a negative
outlook, stating that:
Per capita debt remains high, and debt service as a portion of total spending
will continue to grow above 10% as the city issues $3-4 billion of new bonds
for the next several years. Economically, the City is in one of its deepest
recessions, with additional job losses this year expected to approach 130,000
before moderating in 1993. Long-term job growth is expected to be slow.
City financial plans will continue to be burdened by weak
economic factors and continued risks to State and federal actions that the City
is relying on to balance future budgets.
The outlook remains negative. Labor negotiations also
present some risk, given City assumptions of no wage increase in 1993-1994.
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The City projected balanced fiscal 1992 financial operations
in the financial plan presented to the Financial Control Board on November 6,
1991. Modification to the 1992-1996 plan fell short of establishing structural
balance over the plan period. It focused more on finding additional monies to
support current spending levels than on aligning the scope of government
services within the constraints of what is affordable from ongoing revenues.
City officials are revising and expanding details of the plan to be revealed in
the preliminary budget submission scheduled for January 16, 1992. S&P expects
the plan to provide substantial details on how the City will bring recurring
expenditures more in line with recurring revenues.
Previously, Moody's had raised its rating to A in May, 1988,
to Baa1 in December, 1985, to Baa in November, 1983 and to Ba1 in November,
1981. S&P had raised its rating to A- in November, 1987, to BBB+ in July, 1985
and to BBB in March, 1981.
On May 9, 1990, Moody's revised downward its rating on
outstanding City revenue anticipation notes from MIG-1 to MIG-2 and rated the
$900 million Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed
its MIG-2 rating for the outstanding revenue anticipation notes and for the
$1.25 billion in notes then being sold. On April 29, 1991, S&P revised
downward its rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had, respectively,
$15.6 billion and $5.2 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial
financial difficulties which could adversely affect the ability of such
Agencies to make payments of interest on, and principal amounts of, their
respective bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue and will
require increasing amounts of State assistance in future years. Failure of the
State to appropriate necessary amounts 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, 1991, the State reported that there were
eighteen Agencies that each had outstanding debt of $100 million or more.
These eighteen Agencies had an aggregate of $57.1 billion of outstanding debt,
including refunding bonds, of which the State was obligated under
lease-purchase, contractual obligation or moral obligation provisions on $23.6
billion.
The State is a defendant in numerous legal proceedings
pertaining to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are a number of cases
challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social
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welfare programs primarily involving the State's mental hygiene programs.
Adverse judgments in these matters generally could result in injunctive relief
coupled with prospective changes in patient care which could require
substantial increased financing of the litigated programs in the future.
The State is also engaged in a variety of contract and tort
claims wherein significant monetary damages are sought. Actions commenced by
several Indian nations claim that significant amounts of land were
unconstitutionally taken from the Indians in violation of various treaties and
agreements during the eighteenth and nineteenth centuries. The claimants seek
recovery of approximately six million acres of land as well as compensatory and
punitive damages.
Adverse developments in the foregoing proceedings or new
proceedings could adversely affect the financial condition of the State in the
1992-93 fiscal year or thereafter.
Certain localities in addition to New York City could have
financial problems leading to requests for additional State assistance. The
1992-93 State Financial Plan includes a significant reduction in State aid to
localities in such programs as revenue sharing and aid to education from
projected base-line growth in such programs. It is expected that such
reductions will result in the need for localities to reduce their spending or
increase their revenues. The potential impact on the State of such actions by
localities is not included in projections of State revenues and expenditures in
the State's 1992-93 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the creation of the Financial Control Board for the
City of Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board
is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1990, the total
indebtedness of all localities in the State was approximately $26.9 billion, of
which $13.5 billion was debt of New York City (excluding $7.1 billion in MAC
debt). State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during the period
that such deficit financing is outstanding. Seventeen localities had
outstanding indebtedness for State financing at the close of their fiscal year
ending in 1990. In 1992, an unusually large number of local government units
requested authorization for deficit financings. According to the Comptroller,
ten local government units have been authorized to issue deficit financing in
the aggregate amount of $131.1 million. Certain proposed Federal expenditure
reductions could reduce, or in some cases eliminate, Federal funding of some
local programs and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City or any of the
Agencies were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes and
bonds issued by localities within the State, including bonds in the New York
Trust, could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial
decisions, and long-range economic trends. The longer-range potential problems
of declining urban population, increasing expenditures, and other economic
trends could adversely affect certain localities and require increasing State
assistance in the future.
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At the time of the closing for each New York Trust, Special
Counsel to each New York Trust for New York tax matters rendered an opinion
under then existing New York income tax law applicable to taxpayers whose
income is subject to New York income taxation substantially to the effect that:
(1) Each New York Trust is not an association taxable as a
corporation and the income of a New York Trust will be treated as the
income of the Unitholders under the income tax laws of the State and
the City of New York. Individuals who reside in New York State or
City will not be subject to State and City tax on interest income
which is exempt from Federal income tax under section 103 of the
Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be
subject to New York State and City tax with respect to any gains
realized when such obligations are sold, redeemed or paid at maturity
or when any such Units are sold or redeemed.
NORTH CAROLINA TRUSTS. 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-agricultural payroll employment accounted for approximately 3,147,800 jobs
in December 1992, the largest segment of which was the approximately 838,200 in
manufacturing. During the period 1985 to 1990, per capita income in North
Carolina grew from approximately $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 1991 was $4.9 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 $7.3 billion was spent on
tourism in the State (up 12.3% from 1989). The Department also estimated that
approximately 252,000 people as of 1992 were employed in tourism-related jobs.
The North Carolina Employment Security Commission estimated
the North Carolina unemployment rate in December 1992 to be 5.3% of the labor
force (not seasonally adjusted) and 5.5% (seasonally adjusted), as compared
with an unemployment rate nationwide of 7.0% (not seasonally adjusted) and 7.3%
(seasonably 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 conditions in which these ratings, or the ratings
of the other bonds in the Portfolio, 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 North Carolina departments or agencies
and has not been independently verified. Investors are encouraged to consult
the Schedule of Investments at Date of Deposit for the North Carolina Trust and
their own investment advisors regarding the merits of particular bonds in the
Portfolio.
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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").
At the time of the closing for each North Carolina Trust,
Special Counsel to the Fund for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers whose
income is subject to North Carolina income taxation substantially to the effect
that:
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 North Carolina 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 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 accrued 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.
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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. The Ohio Trust will invest substantially all
of its net assets in obligations (or in certificates of participation in
obligations) issued by or on behalf of the State of Ohio, political
subdivisions thereof, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Trust is therefore
susceptible to political, economic or regulatory factors that may affect
issuers of Ohio Obligations. (The timely payment of principal of, and interest
on, certain Ohio Obligations in the Ohio Trust has been guaranteed by bond
insurance purchased by the issuers, the Ohio Trust or other parties. The
timely payment of debt service on Ohio Obligations that are so insured may not
be subject to the factors referred to in this section of the Prospectus.) The
following information constitutes only a brief summary of some of the complex
factors that may affect the financial situation of issuers in Ohio, and is not
applicable to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
published in connection with the issuance of securities of certain Ohio issuers
and from other publicly available documents, and is believed to be accurate.
No independent verification has been made of any of the following information.
The creditworthiness of Ohio Obligations of local Ohio
issuers is generally unrelated to that of obligations issued by the State
itself, and generally there is no responsibility on the part of the State to
make payments on those local obligations. There may be specific factors that
are from time to time applicable in connection with investment in particular
Ohio Obligations or in those obligations of particular Ohio issuers, and it is
possible the investment will be in particular Ohio Obligations or in those
Obligations of particular issuers as to which those factors apply. However,
the information set forth below is intended only as a general summary and not
as a discussion of any specific factors that may affect any particular issue or
issuer of Ohio Obligations.
Ohio is the seventh most populous state, with a 1990 Census
count of 10,847,000 indicating a 0.5% population increase from 1980.
The Ohio economy, while diversifying more into the service
and other non-manufacturing areas, continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity in Ohio, as in many other industrially-developed states, tends to be
more cyclical than in some other states and in the nation as a whole.
Agriculture also is an important segment of the economy, with over half the
State's area devoted to farming and approximately 20% of total employment is in
agribusiness.
The State's overall unemployment rate is commonly somewhat
higher than the national figure (for example, the reported 1990 average monthly
rate was 5.7%, compared to the national figure of 5.5%; however, for both 1991
and 1992 that State rate was below the national rate, the State rates were 6.4%
and 7.2%, and the national rates 6.7% and 7.4%). The unemployment rate, and its
effects, vary among particular geographic areas of the State.
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There can be no assurance that future state-wide or regional
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the portfolio of the Ohio Trust or the ability of the
particular obligers 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 completing a
fiscal year ending June 30 (FY) or biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which
personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the FY-ending balance reduced during less
favorable national economic periods and increased during more favorable
economic periods. The State has established procedures for, and has timely
taken, necessary actions to ensure a resource/expenditure balance during less
favorable economic periods. These include general and selected reductions in
appropriations spending; none have been applied to appropriations needed for
debt service or lease rentals on any State obligations.
Key end of biennium fund balances at June 30, 1989 were
$475.1 million (GRF) and $353 million in the Budget Stabilization Fund (BSF, a
cash and budgetary management fund). In the latest complete biennium,
necessary corrective steps were taken in FY 1991 to respond to lower receipts
and higher expenditures in certain categories than earlier estimated. Those
steps included selected reductions in appropriations spending and the transfer
of $64 million from the BSF to the GRF. The State reported 1991
biennium-ending fund balances of $135.3 million (GRF) and $300 million (BSF).
To allow time to complete the resolution of certain Senate
and House differences in the budget and appropriations for the current biennium
(beginning July 1, 1991), an interim appropriations act was enacted, effective
July 1, 1991; it included debt service and lease rental appropriations for the
entire 1992-93 biennium, while continuing most other appropriations for 31 days
at 97% of FY 1991 monthly levels. The general appropriations act for the
entire biennium was passed on July 11, 1991 and signed by the Governor. It
authorized the transfer, which has been made, of $200 million from the BSF to
the GRF and provided for transfers in FY 1993 back to the BSF if revenues are
sufficient for the purpose (which the State Office of Budget and Management,
OBM, at present thinks unlikely).
Based on updated FY financial results and the economic
forecast for the State, both in light of the continuing uncertain nationwide
economic situation, OBM projected, and there was timely addressed, an FY 1992
imbalance in GRF resources and expenditures. GRF receipts were significantly
below original forecasts, a shortfall resulting primarily from lower
collections of certain taxes, particularly sales and use taxes. Higher than
earlier projected expenditure levels resulted from higher spending in certain
areas, particularly human services including Medicaid. As an initial action,
the Governor ordered most State agencies to reduce GRF appropriations spending
in the final six months of the FY 1992 by a total of approximately $196 million
(debt service and lease rental obligations were not affected). The General
Assembly authorized the transfer, made late in the FY, to the GRF the $100.4
million BSF balance and additional amounts from certain other funds, and made
adjustments in the timing of certain tax payments. Other administrative
revenue and spending actions resolved the remaining GRF imbalance. The
administration and the General Assembly are reviewing the longer term fiscal
situation, particularly that through the June 30, 1993 end of the current
biennium; a significant shortfall is currently projected for FY 1993, to be
addressed by appropriate legislative and administrative actions. As a first
step the Governor ordered, effective July 1, 1992, selected GRF
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appropriations spending reductions totalling $315.6 million.
The incurrence or assumption of debt by the State without a
popular vote is, with limited exceptions, prohibited by current provisions of
the State Constitution. The State may incur debt to cover casual deficits or
failures in revenues or to meet expenses not otherwise provided for, but
limited in amount to $750,000. The Constitution expressly precludes the State
from assuming the debts of any local government or corporation. (An exception
in both cases is for any debt incurred to repel invasion, suppress insurrection
or defend the State in war.)
By 12 constitutional amendments (the last adopted in 1987),
Ohio voters have authorized the incurrence of State debt to which taxes or
excises were pledged for payment. At October 21, 1992, $396 million (excluding
certain highway bonds payable primarily from highway use charges) of this debt
was outstanding, with the only such State debt then still authorized to be
incurred being portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be outstanding at
any one time ($38.6 million outstanding); and (b) of $1.2 billion of
obligations for local infrastructure improvements, no more than $120 million
may be issued in any calendar year ($312.5 million outstanding, $840 million
remaining to be issued.)
The Constitution also authorizes the issuance of State
obligations for certain purposes the owners of which are not given the right to
have excises or taxes levied to pay debt service. Those special obligations
include bonds and notes issued by, among others, the Ohio Public Facilities
Commission and the Ohio Building Authority; $3.7 billion of those obligations
were outstanding at January 2, 1993.
A 1990 constitutional amendment authorizes greater State and
political subdivision participation in the provision of individual and family
housing, including borrowing for that purpose. The General Assembly may for
that purpose authorize the issuance of State obligations secured by a pledge of
all or such portion as it authorizes of State revenues or receipts, although
the obligations may not be supported by the State's full faith and credit.
State and local agencies issue revenue obligations that are
payable from revenues from or relating to certain facilities, which obligations
are not "debt" within constitutional provisions or payable from taxes. In
general, payment obligations under lease-purchase agreements of Ohio public
agencies (in which certificates of participation may be issued) are limited in
duration to the issuer's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion
(on a state-wide basis, recently approximately 46%) of their operating moneys
from State subsidies, but are dependent on local property taxes, and in 88
districts income taxes, for significant portions of their budgets. Litigation
has recently been filed, similar to that in other states, questioning the
constitutionality of Ohio's system of school funding. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school district
cash need borrowing directly from commercial lenders, with diversion of State
subsidy distributions to repayment if needed; in FY 1991 under this program 26
districts borrowed a total of $41.8 million (including over $27 million by one
district), and in FY 1992 borrowings
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totaled $61.9 million (including $46.6 million for one district). FY 1993
loan approvals (through January 19, 1993) total $92 million for 22 districts
(including $75 million for one district).
Ohio's 943 incorporated cities and villages rely primarily
on property and municipal income taxes for their operations, and, with other
local governments, receive local government support and property tax relief
moneys distributed by the State. For those few municipalities that on occasion
have faced significant financial problems, established procedures provide for a
joint State/local commission to monitor the municipality's fiscal affairs, and
for development of a financial plan developed to eliminate deficits and cure
any defaults. Since inception in 1979, these procedures have been applied to
22 cities and villages, in 16 of which the fiscal situation has been resolved
and the procedures terminated.
At present the State itself does not levy any ad valorem
taxes on real or tangible personal property. Those taxes are levied by
political subdivisions and other local taxing districts. The Constitution has
since 1934 limited the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, to 1% of true
value in money, and statutes limit the amount of that aggregate levy to 10
mills per $1 of assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are payable from
property taxes unlimited as to amount or rate.
At the time of the closing for each Ohio Trust, Special
Council to each Ohio Trust for Ohio tax matters rendered an opinion under then
existing Ohio income tax law applicable to taxpayers whose income is subject to
Ohio income taxation substantially to the effect that:
(1) An Ohio Trust is not taxable as a corporation or otherwise
for purposes of the Ohio personal income tax, the Ohio corporation
franchise tax or the Ohio dealers in intangibles tax;
(2) Income of an Ohio Trust will be treated as the income of
the Unitholders for purposes of the Ohio personal income tax, Ohio
municipal income taxes and the Ohio corporation franchise tax in
proportion to the respective interest therein of each Unitholder;
(3) Interest on obligations issued by or on behalf of the
State of Ohio, political subdivisions thereof, or agencies or
instrumentalities thereof ("Ohio Obligations"), or by the governments
of Puerto Rico, the Virgin Islands or Guam ("Territorial Obligations")
held by the Trust is exempt from the Ohio personal income tax and Ohio
school district income taxes, and is excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed
distributed to Unitholders;
(4) Proceeds paid to an Ohio Trust under insurance policies
representing maturing interest on defaulted obligations held by the
Ohio Trust will be exempt from Ohio income tax, Ohio municipal income
taxes and the net income base of the Ohio corporation franchise tax
if, and to the same extent as, such interest would be exempt from such
taxes if paid directly by the issuer of such obligations; and
(5) Gains and losses realized on the sale, exchange or other
disposition by an Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the Ohio
personal income tax, Ohio municipal income taxes and Ohio school
district income taxes,
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and are excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to Unitholders.
PENNSYLVANIA TRUSTS. Investors should be aware of certain
factors that might affect the financial conditions of the Commonwealth of
Pennsylvania. Pennsylvania historically has been identified as a heavy
industry state although that reputation has changed recently as the industrial
composition of the Commonwealth diversified when the coal, steel and railroad
industries began to decline. The major new sources of growth in Pennsylvania
are in the service sector, including trade, medical and the health services,
education and financial institutions. Pennsylvania's agricultural industries
are also an important component of the Commonwealth's economic structure,
accounting for more than $3.6 billion in crop and livestock products annually,
while agribusiness and food related industries support $38 billion in economic
activity annually.
Non-agricultural employment in the Commonwealth declined by
5.1 percent during the recessionary period from 1980 to 1983. In 1984, the
declining trend was reversed as employment grew by 2.9 percent over 1983
levels. Since 1984, Commonwealth employment has continued to grow each year,
increasing an additional 9.1 percent from 1984 to 1991. The growth in
employment experienced in Pennsylvania is comparable to the growth in
employment in the Middle Atlantic Region which has occurred during this period.
As a percentage of total non-agricultural employment within the Commonwealth,
non-manufacturing employment has increased steadily since 1980 to its 1991
level of 80.8 percent of total employment. Consequently, manufacturing
employment constitutes a diminished share of total employment within the
Commonwealth. In 1991, the service sector accounted for 28.6 percent of all
non- agricultural employment while the trade sector accounted for 22.8 percent.
While economic indicators in Pennsylvania have generally
matched or exceeded national averages since 1983, the Commonwealth is currently
facing a slowdown in its economy. Moreover, economic strengths and weaknesses
vary in different parts of the Commonwealth. In November 1992 the seasonally
adjusted unemployment rate for the Commonwealth was 7.1 percent and 7.2 percent
for the United States.
It should be noted that the creditworthiness of obligations
issued by local Pennsylvania issuers may be unrelated to the creditworthiness
of obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local
obligations in the event of default.
Financial information for the General Fund is maintained on
a budgetary basis of accounting. A budgetary basis of accounting is used for
the purpose of ensuring compliance with the enacted operating budget and is
governed by applicable statutes of the Commonwealth and by administrative
procedures. The Commonwealth also prepares annual financial statements in
accordance with generally accepted accounting principles ("GAAP"). The
budgetary basis financial information maintained by the Commonwealth to monitor
and enforce budgetary control is adjusted at fiscal year-end to reflect
appropriate accruals for financial reporting in conformity with GAAP.
Fiscal 1991 Financial Results. GAAP Basis: During fiscal
1991 the General Fund experienced an $861.2 million operating deficit resulting
in a fund balance deficit of $980.9 million at June 30, 1991. The
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operating deficit was a consequence of the effect of a national recession that
restrained budget revenues and pushed expenditures above budgeted levels. At
June 30, 1991, a negative unreserved-undesignated balance of $1,146.2 million
was reported. During fiscal 1991 the balance in the Tax Stabilization Reserve
Fund was used to maintain vital state spending and only a minimal balance
remains in that fund.
Budgetary Basis: A deficit of $453.6 million was recorded by
the General Fund at June 30, 1991. The deficit was a consequence of higher
than budgeted expenditures and lower than estimated revenues during the fiscal
year brought about by the national economic recession that began during the
fiscal year. A number of actions were taken throughout the fiscal year by the
Commonwealth to mitigate the effects of the recession on budget revenues and
expenditures. Actions taken, together with normal appropriation lapses,
produced $871 million in expenditure reductions and revenue increases for the
fiscal year. The most significant of these actions were a $214 million
transfer from the Pennsylvania Industrial Development Authority, a $134 million
transfer from the Tax Stabilization Reserve Fund, and a pooled financing
program to match federal Medicaid funds replacing $145 million of state funds.
Fiscal 1992 Financial Results. GAAP Basis: During fiscal
1992 the General Fund reported a $1.1 billion operating surplus. This
operating surplus was achieved through legislated tax rate increases and tax
base broadening measures enacted in August 1991 and by controlling expenditures
through numerous cost reduction measures implemented throughout the fiscal
year. As a result of the fiscal 1992 operating surplus, the fund balance has
increased to $87.5 million and the unreserved-undesignated deficit has dropped
to $138.6 million from its fiscal 1991 level of $1,146.2 million.
Budgetary Basis: Eliminating the budget deficit carried into
fiscal 1992 from fiscal 1991 and providing revenues for fiscal 1992 budgeted
expenditures required tax revisions that are estimated to have increased
receipts for the 1992 fiscal year by over $2.7 billion. Total revenues for the
fiscal year were $14,516.8 million, a $2,654.5 million increase over cash
revenues during fiscal 1991. Originally based on forecasts for an economic
recovery, the budget revenue estimates were revised downward during the fiscal
year to reflect continued recessionary economic activity. Largely due to the
tax revisions enacted for the budget, corporate tax receipts totalled $3,761.2
million, up from $2,656.3 million in fiscal 1991, sales tax receipts increased
by $302 million to $4,499.7 million, and personal income tax receipts totalled
$4,807.4 million, an increase of $1,443.8 million over receipts in fiscal 1991.
As a result of the lowered revenue estimate during the
fiscal year, increased emphasis was placed on restraining expenditure growth
and reducing expenditure levels. A number of cost reductions were implemented
during the fiscal year and contributed to $296.8 million of appropriation
lapses. These appropriation lapses were responsible for the $8.8 million
surplus at fiscal year-end, after accounting for the required ten percent
transfer of the surplus to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely
accounted for by increases for education, social services and corrections
programs. Commonwealth funds for the support of public schools were increased
by 9.8 percent to provide a $438 million increase to $4.9 billion for fiscal
1992. The fiscal 1992 budget provided additional funds for basic and special
education and included provisions designed to help restrain the annual increase
of special education costs, an area of recent rapid cost increases. Child
welfare appropriations supporting county operated child welfare programs were
increased $67 million, more than 31.5
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percent over fiscal 1991. Other social service areas such as medical and cash
assistance also received significant funding increases as costs have risen
quickly as a result of the economic recession and high inflation rates of
medical care costs. The costs of corrections programs, reflecting the marked
increase in the prisoner population, increased by 12 percent. Economic
development efforts, largely funded from bond proceeds in fiscal 1991, were
continued with General Fund appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled
financing transactions. These pooling transactions replaced $135 million of
Commonwealth funds, allowing total spending under the budget to increase by an
equal amount.
Fiscal 1993 Budget. The adopted fiscal 1993 budget is
balanced within the official revenue estimate and a planned draw-down of the
$8.8 million beginning budgetary basis surplus carried forward from fiscal
1992. The budget appropriates $14.046 billion for spending during fiscal 1993,
an increase of $32.1 million, or less than one-quarter of one percent over
total appropriations for fiscal 1992. This small increase in expenditures was
the result of revenues being constrained by a personal income tax rate
reduction effective July 1, 1992, a low rate of economic growth, higher tax
refund reserves to cushion against adverse decisions on pending tax
litigations, and $71.3 million of appropriation line-item vetoes by the
Governor. The appropriation line-item vetoes made by the Governor prior to
approving the fiscal 1993 budget were made to meet the constitutional
requirement for a balanced budget by reducing spending in several programs from
amounts authorized by the General Assembly to amounts the Governor originally
recommended in his budget proposal, and by eliminating certain grants that
could not be funded within available resources. In approving the fiscal 1993
budget, the Governor indicated that authorized spending approved by the General
Assembly for some programs was below his recommendation and may be insufficient
to carry costs for the full fiscal year. Several of the Governor's cost
containment proposals, particularly those to contain expenditure increases in
the medical assistance and cash assistance programs, were not enacted by the
General Assembly. Many of the cost containment efforts now are being
implemented through the regulatory process potentially reducing budgeted
current fiscal year savings.
The adopted fiscal 1993 budget eliminated funding for a
number of private educational institutions that normally receive state
appropriations. Also eliminated were certain grants to the counties to help
pay operating costs of the local judicial system. The counties will need to
replace these grant funds with other revenue sources in order to pay judicial
system costs. Any restoration of these appropriations for the fiscal year or
funding increases to cover program cost shortfalls require action by the
General Assembly.
In December 1992, the Governor gave the General Assembly
preliminary estimates of projected fiscal 1993 supplemental appropriations and
proposed restorations of selective appropriations vetoed when the fiscal 1993
budget was adopted. The projected supplemental appropriations generally
represent budget adjustments necessary to offset amounts of savings included in
the budget but not enacted when the budget was adopted and to restore operating
appropriations to full year funding. These potential supplemental
appropriations and restorations total approximately $149 million and would be
funded, when enacted, by lapses of current and prior appropriation balances and
reductions of reserves for refunds due to revisions to estimated refunds
payable.
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Commonwealth revenue sources are estimated for the fiscal
1993 budget to total $14.587 billion, a $69.9 million increase over actual
fiscal 1992 revenues, representing less than one-half of one percent increase.
The projected low revenue growth for fiscal 1993 is caused by the
Commonwealth's expectation that current weak growth in employment, consumer
income, and retail sales will continue, and by the reduction in the personal
income tax rate from 3.1% to 2.8% on July 1, 1992. In addition, tax refund
reserves were increased by $209 million to $548 million for fiscal 1993 to
allow for potential tax refunds that might be payable from any adverse judicial
decision in a number of pending tax litigations. Some of those reserves are
believed to be in excess of amounts that will be paid during fiscal 1993 and
may be used to fund supplemental appropriations for the fiscal year described
above. Through November 1992, total General Fund collections of revenue were
below estimated revenues by one-third of one percent ($16.6 million). Small
revenue shortages were recorded from the sales tax and from the personal income
tax, but were mostly offset by higher collections from corporation and liquor
taxes and by higher miscellaneous revenue collections. The Commonwealth
believes its current fiscal 1993 General Fund revenue estimate is appropriate
and does not expect to substantially revise its estimate based on economic
factors.
All outstanding general obligation bonds of the Commonwealth
are rated AA- by S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings
must be obtained from the rating agencies. There is no assurance that any
ratings will continue for any period of time or that they will not be revised
or withdrawn.
The City of Philadelphia is the largest city in the
Commonwealth with an estimated population of 1,585,577 according to the 1990
Census. Philadelphia functions both as a City and a first-class County for the
purpose of administering various governmental programs.
Legislation providing for the establishment of the
Pennsylvania Intergovernmental Cooperation Authority ("PICA") to assist first
class cities in remedying fiscal emergencies was enacted by the General
Assembly and approved by the Governor in June 1991. PICA is designed to
provide assistance through the issuance of funding debt to liquidate budget
deficits and to make factual findings and recommendations to the assisted city
concerning its budgetary and fiscal affairs. An intergovernmental cooperation
agreement between Philadelphia and PICA was approved by City Counsel on January
3, 1992, and approved by the PICA Board and signed by the Mayor on January 8,
1992. At this time, Philadelphia is operating under a revised five-year plan
approved by PICA on May 18, 1992. The five-year plan is designed to produce a
balanced budget over a five-year period through a combination of personnel and
budget initiatives, productivity improvements, cost containments and revenue
enhancements. Full implementation of the five-year plan was delayed due to
labor negotiations that were not completed until October 1992, three months
after the expiration of the old labor contracts. The terms of the new labor
contracts are estimated to cost approximately $144.0 million more than what was
budgeted in the original five-year plan. Philadelphia is presently amending
the plan to bring it back in balance.
Philadelphia experienced a series of operating deficits in
its General Fund beginning in fiscal year 1987. For the fiscal year ended June
30, 1991, Philadelphia experienced a cumulative General Fund balance deficit of
$153.5 million. Philadelphia received a grant from PICA in June 1992 which
eliminated the deficit through
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June 30, 1991. Philadelphia experienced a deficit through June 30, 1992 of
$71.4 million (unaudited). Philadelphia is receiving additional grants from
PICA to eliminate the General Fund balance deficit at June 30, 1992. $64.3
million, which is ninety percent of the $71.4 million, was paid to Philadelphia
on October 30, 1992, and the remaining ten percent is expected to be paid to
Philadelphia once the final audit for the fiscal year ended June 30, 1992 has
been completed. Philadelphia is projecting a budget deficit for fiscal year
1993 of $1.8 million.
As of the date hereof, the ratings on the City's long-term
obligations supported by payments from the City's General Fund are rated B by
Moody's and B by S&P. Any explanation concerning the significance of such
ratings must be obtained from the rating agencies. There is no assurance that
any ratings will continue for any period of time or that they will not be
revised or withdrawn.
The foregoing information constitutes only a brief summary
of some of the financial difficulties which may impact certain issuers of bonds
and does not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of the Bonds in the Pennsylvania Trust are
subject Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located in the State.
The sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Pennsylvania Trust to pay interest on or principal of the
Bonds.
At the time of the closing for each Pennsylvania Trust,
Special Counsel to each Pennsylvania Trust for Pennsylvania tax matters
rendered an opinion under then existing Pennsylvania income tax law applicable
to taxpayers whose income is subject to Pennsylvania income taxation
substantially to the effect that:
(1) Units evidencing fractional undivided interest in a
Pennsylvania Trust, which are represented by obligations issued by the
Commonwealth of Pennsylvania, any public authority, commission, board
or other agency created by the Commonwealth of Pennsylvania, any
political subdivision of the Commonwealth of Pennsylvania or any
public authority created by any such political subdivision are not
taxable under any of the personal property taxes presently in effect
in Pennsylvania;
(2) distributions of interest income to Unitholders are not
subject to personal income tax under the Pennsylvania Tax Reform Code
of 1971; nor will such interest be taxable under the Philadelphia
School District Investment Income Tax imposed on Philadelphia resident
individuals;
(3) a Unitholder may have a taxable event under the
Pennsylvania state and local income taxes referred to in the preceding
paragraph upon the redemption or sale of his Units but not upon the
disposition of any of the Securities in a Pennsylvania Trust to which
the Unitholder's Units relate; Units will be taxable under the
Pennsylvania inheritance and estate taxes;
(4) Units are subject to Pennsylvania inheritance and estate
taxes;
(5) a Unitholder which is a corporation may have a taxable
event under the Pennsylvania Corporate Net Income Tax when it redeems
or sells its Units. Interest income distributed to Unitholders which
are corporations is not subject to Pennsylvania Corporate Net Income
Tax or Mutual Thrift
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Institutions Tax. However, banks, title insurance companies
and trust companies may be required to take the value of the Units
into account in determining the taxable value of their Shares subject
to Shares Tax;
(6) any proceeds paid under the insurance policy issued to the
Trustee or obtained by issuers of the Bonds with respect to the Bonds
which represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Pennsylvania gross income if, and to
the same extent as, such interest would have been so excludable if
paid by the issuer of the defaulted obligations; and
(7) the Fund is not taxable as a corporation under
Pennsylvania tax laws applicable to corporations.
In rendering its opinion, Special Counsel has not, for
timing reasons, made an independent review of proceedings related to the
issuance of the Bonds. It has relied on Van Kampen Merritt Inc. for assurance
that the Bonds have been issued by the Commonwealth of Pennsylvania or by or on
behalf of municipalities or other governmental agencies within the
Commonwealth.
TEXAS TRUSTS. 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 in 1986 and a 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 in the relative importance of the State's
taxes in terms of their contribution to the State's revenue in any year. Sales
taxes remain the State's main revenue source, accounting for 28.8% of State
revenues during fiscal year 1992. Federal grants remain the State's second
largest revenue source, accounting for approximately 28.4% of total revenue
during fiscal year 1992. The motor fuels tax is now the State's third largest
revenue source and the second largest tax, accounting for approximately 6.6% of
total revenue during fiscal year 1992. Licenses, fees and permits, the State's
third largest revenue source, accounted for 6.4% of the total revenue in fiscal
year 1991. Interest and investment income is the fourth largest revenue source
accounting for 5.9% of total State revenue for fiscal year 1991. Interest and
investment income is the fifth largest revenue source also accounting for 6.3%
of total State revenues for fiscal year 1992. The remainder of the State's
revenues are derived primarily from other excess taxes. The State has no
personal or corporate income tax. The State does however impose a corporate
franchise tax based in certain circumstances in part on a corporation's
profits.
Heavy reliance on the energy and agricultural sectors for
jobs and income resulted in a general downturn in the Texas economy beginning
in 1982 as those industries suffered significantly. The effects of this
downturn continue to adversely affect the State's real estate industry and its
financial institutions. As a result of these problems, the general revenue
fund had a $231 million cash deficit at the beginning of the 1987 fiscal year
and ended the 1987 fiscal year with a $745 million cash deficit. In 1987, the
Texas economy began to move toward a period of recovery. The expansion
continued in 1988 and 1989. In fiscal year 1988, the State ended the year with
a general revenue fund cash surplus of $113 million. In fiscal year 1989, the
State ended the year with a general revenue fund cash surplus of $297 million.
In fiscal year 1990, the State ended the year with a general revenue fund
surplus of $767 million. In fiscal 1991, the ending cash balance was $1.005
billion. In fiscal year 1992, the ending cash balance was $609 million. Since
fiscal year 1987, however, these cash deficits and surpluses have included
approximately $300 million in dedicated oil overcharge funds, which can be
spent for only specific energy conservation projects.
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The 71st Texas Legislature meeting in 1989 passed a record
budget totaling $47.4 billion in spending. Six special legislative sessions in
1989 and 1990 relative to workers' compensation and school financing resulted
in the need to raise an additional $512.3 million in revenue, the majority of
which came from an increase in the State sales tax and taxes on tobacco
products.
The 72nd Legislature meeting in special session in the
summer of 1991 approved for the Governor's signature an approximately $9.4
billion budget increase for the fiscal 1992-93 biennium to be financed in part
by approximately $3.4 billion in new revenue measures.
The $3.4 billion in new revenues to finance the new budget
came from several new sources. A tax and fee bill raised a total of $2.1
billion in new revenues for the state. A fiscal management bill added another
$779 million. Legislative approval of a lottery is expected to add another
$462 million. Finally, another $50 million was added through a change in the
Permanent School Fund investment strategy, which will make additional
short-term earnings available to help fund public schools during the biennium.
The most important component of the tax bill was a major
overhaul of the state's franchise tax, which includes a new measure of business
activity referred to as "earned surplus." A part of the change was a lowering
of the tax rate on capital from $5.25 to $2.50 per $1,000. An additional
surtax on "earned surplus," which includes federal net corporate income and
officers' and directors' compensation of 4.5 percent, was added. Essentially,
corporations pay a tax on capital or a tax on "earned surplus," whichever is
higher. The revised franchise tax is expected to raise an additional $789.3
million over currently projected franchise tax collections during the 1992-93
biennium.
The Texas Constitution prohibits the State from levying ad
valorem taxes on property for general revenue purposes and limits the rate of
such taxes for other purposes to $.35 per $100 of valuation. The Constitution
also permits counties to levy, in addition to all other ad valorem taxes
permitted by the Constitution, ad valorem taxes on property within the county
for flood control and road purposes in an amount not to exceed $.30 per $100 of
valuation. The Constitution prohibits counties, cities and towns from levying
a tax rate exceeding $.80 per $100 of valuation for general fund and other
specified purposes.
With certain specific exceptions, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State unless
the voters of the State, by constitutional amendment, authorize the issuance of
debt (including general obligation indebtedness backed by the State's taxing
power and full faith and credit). In excess of $8.28 billion of general
obligation bonds have been authorized in Texas and almost $2.89 billion of such
bonds are currently outstanding. Of these, approximately 70% were issued by
the Veterans' Land Board and the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged
for the payment of all general obligations issued by the State, much of that
indebtedness is designed to be eventually self-supporting from fees, payments,
and other sources of revenues; in some instances, the receipt of such revenues
by certain issuing agencies has been in sufficient amounts to pay the principal
of and interest on the issuer's outstanding bonds without requiring the use of
appropriated funds.
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<PAGE> 86
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as
presently amended, the net effective interest rate for any issue or series of
Bonds in the Texas Trust is limited to 15%.
From the time Standard & Poor's Corporation began rating
Texas general obligation bonds in 1956 until early 1986, that firm gave such
bonds its highest rating, "AAA". In April 1986, in response to the State
economic problems, Standard & Poor's downgraded its rating of Texas general
obligation bonds to "AA+". Such rating was further downgraded in July 1987 to
"AA". Moody's Investors Service, Inc. has rated Texas bonds since prior to the
Great Depression. Moody's upgraded its rating of Texas general obligation
bonds in 1962 from "Aa" to "Aaa", its highest rating, following the imposition
of a statewide sales tax by the Legislature. Moody's downgraded such rating to
"Aa" in March 1987. No prediction can be made concerning future changes in
ratings by national rating agencies of Texas general obligation bonds or
concerning the effect of such ratings changes on the market for such issues.
The same economic and other factors affecting the State of
Texas 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 in the mid-1980s 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. Standard & Poor's Corporation and Moody's Investors Service,
Inc. 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.
On April 15, 1991, the Governor signed into law Senate Bill
351, the School Finance Reform Bill. This bill sets a minimum local property
tax rate which guarantees the local school districts a basic state allotment of
a specified amount per pupil. The funding mechanism is based on tax base
consolidation and creates 188 new taxing units, drawn largely along county
lines. Within each taxing unit, school districts will share the revenue raised
by the minimum local property tax. Local school districts are allowed to
"enrich" programs and provide for facilities construction by levying an
additional tax. In January 1992 the Texas Supreme Court declared the School
Finance Reform Bill unconstitutional because the community education districts
are in essence a state property tax. The legislature was given until September
1, 1993 to pass a new school finance reform bill. The Supreme Court said that,
in the meantime, the county education districts could continue to levy and
collect property taxes. Several taxpayers have filed suit challenging the
right of such districts to collect a tax that has been declared
unconstitutional by the Supreme Court. In connection with formulating a new
school finance bill the legislature is expected to consider several proposals,
some of which could fundamentally change the State's tax structure including a
state income tax.
The Comptroller has estimated that total revenues for fiscal
1993 will be $29.66 billion, compared to actual revenues of $27.56 billion for
fiscal 1992. The revenue estimate for fiscal 1993 is based on an assumption
that the Texas economy will show a gradual but steady growth.
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, Bonds in the Texas Trust. The Impact of such laws and
regulations on particular Bonds may vary depending upon numerous factors
including, among others, the particular type of Bonds involved, the public
purpose funded by the Bonds and the nature and extent of insurance or other
security for payment of principal and interest on the Bonds. For example,
Bonds in the
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<PAGE> 87
Texas Trust 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. Bonds in the Texas Trust, 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, Bonds in the Texas Trust, 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 Bonds. 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
Bonds in the Texas Trust and, therefore, on the Units.
The foregoing information constitutes only a brief summary
of some of the financial difficulties which may impact certain issuers of Bonds
in the Texas Trust and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers in the Texas 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 the
Bond, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Texas Trust to pay interest on
or principal of the Bonds.
At the time of closing for each Texas Trust, Special Counsel
to the Fund for Texas tax matters rendered an opinion under then existing Texas
law substantially to the effect that:
(1) Neither the State nor any political subdivision of the
State currently imposes an income tax on individuals. Therefore, no
portion of any distribution received by an individual Unitholder of
the Trust in respect of his Units, including a distribution of the
proceeds of Insurance in respect of such units, is subject to income
taxation by the State or any political subdivision of the State;
(2) except in the case of certain transportation businesses,
savings and loan associations and insurance companies, no Unit of the
Trust is taxable under any property tax levied in the State;
(3) 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 the Trust included
in the estate of such Unitholder; and
(4) with respect to any Unitholder which is subject to the
State corporate franchise tax, Units in the 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, one of the bases by which such franchise tax is
currently measured (the other being a corporation's "net capital
earned surplus," which is, generally, its net corporate income plus
officers and directors income).
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<PAGE> 88
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are
offered at the Public Offering Price, plus accrued interest to the expected
settlement date. The Public Offering Price per Unit is equal to the aggregate
bid side evaluation of the Municipal Bonds in the State Trust's portfolio (as
determined pursuant to the terms of a contract with the Evaluator, by Kenny
Information Services, Inc., a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable securities), plus or
minus cash, if any, in the Principal Account, held or owed by the State Trust,
divided by the number of outstanding Units of the State Trust, plus the sales
charge applicable to a Unit of such State Trust. The sales charge is based
upon the dollar weighted average maturity of the State Trust and is determined
in accordance with the table set forth below. For purposes of this
computation, Municipal Bonds will be deemed to mature on their expressed
maturity dates unless: (a) the Municipal Bonds have been called for redemption
or funds or securities have been placed in escrow to redeem them on an earlier
call date, in which case such call date will be deemed to be the date upon
which they mature; or (b) such Municipal Bonds are subject to a "mandatory
tender", in which case such mandatory tender will be deemed to be the date upon
which they mature. The effect of this method of sales charge computation will
be that different sales charge rates will be applied to the State Trust based
upon the dollar weighted average maturity of such State Trust's portfolio, in
accordance with the following schedule:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF NET
DOLLAR WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- -------------- ----------------
<S> <C> <C>
0 to 3.99 years . . . . . . . . . . . . . . . . . . . . . 2.00% 2.041%
4 to 7.99 years . . . . . . . . . . . . . . . . . . . . . 3.50 3.627
8 to 14.99 years . . . . . . . . . . . . . . . . . . . . 4.50 4.712
15 or more years . . . . . . . . . . . . . . . . . . . . 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*2
(4 TO 7.99 8 TO 14.99 15 OR MORE)
--------------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . 3.50% 4.50% 5.50%
$100,000 to $499,999 . . . . . . . . . . . 3.25 4.25 5.00
$500,000 to $999,999 . . . . . . . . . . . 3.00 4.00 4.50
$1,000,000 or more . . . . . . . . . . . . 2.75 3.75 4.00
</TABLE>
The reduced sales charges as shown on the preceding charts will
apply to all purchases of Units on any one day by the same person from the same
firm in the amounts stated herein, and for this purpose, purchases of Units of
a State Trust will be aggregated with concurrent purchases of Units as any
other unit investment trust that may be offered by the Sponsor. Additionally,
Units purchased in the name of a spouse or child (under 21) of such purchaser
will be deemed to be additional purchases by such purchaser. The reduced sales
____________________________
* If the dollar weighted average maturity of a State Trust is
under 3.99 years, the sales charge is 2% and 1.5% of the Public
Offering Price for purchases of $1 to $249,999 and $250,000 or
more, respectively.
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<PAGE> 89
charges will also be applicable to a trust or other fiduciary purchasing for a
single trust estate or single fiduciary account.
The Sponsor intends to permit officers, directors and employees of
the Sponsor and Evaluator, and at the discretion of the Sponsor, registered
representatives of selling firms to purchase Units of the Trust without a sales
charge, although a transaction processing fee may be imposed on such trades.
The Public Offering Price per Unit of a State Trust on the date
shown on the cover page of Part Two of the Prospectus or on any subsequent date
will vary from the amounts stated under "Essential Information" in Part Two due
to fluctuations in the prices of the underlying Municipal Bonds. The aggregate
bid sale evaluation of the Municipal Bonds shall be determined (a) on the basis
of current bid prices of the Municipal Bonds, (b) if bid prices are not
available for any particular Municipal Bonds, on the basis of current bid
prices for comparable bonds, (c) by determining the value of the Municipal
Bonds on the bid side of the market by appraisal, or (d) by any combination of
the above. Except as described in "Insurance on the Portfolios" above, the
Evaluator will not attribute any value to the insurance obtained by a State
Trust. On the other hand, the value of insurance obtained by an issuer of
Municipal Bonds or by the Sponsor is reflected and included in the market value
of such Municipal Bonds.
In any case, the Evaluator will consider the ability of an insurer
to meet its commitments under the Trust's insurance policy (if any). For
example, if a State Trust were to hold a municipality's Municipal Bonds which
had significantly deteriorated in credit quality, the Evaluator would first
consider in its evaluation the market price of the Municipal Bonds at their
lower credit rating. The Evaluator would also attribute a value to the
insurance feature of the Municipal Bonds which would be equal to the difference
between the market value of such Municipal Bonds and the market value of bonds
of a similar nature which were of investment grade rating. It is the position
of the Sponsor that this is a fair method of valuing insured Municipal Bonds
and reflects a proper valuation method in accordance with the provisions of the
Investment Company Act of 1940. For a description of the circumstances under
which a full or partial suspension of the right of Unitholders to redeem their
Units may occur, see "Redemption" below.
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "Essential Information" in Part Two, on each
business day effective for all sales made during the preceding 24-hour period,
and for purposes of resales and repurchases of Units.
The interest on the Municipal Bonds in each State Trust, less the
related estimated fees and expenses, is estimated to accrue in the annual
amounts per Unit set forth under "Essential Information" in Part Two. The
amount of net interest income which accrues per Unit may change as Municipal
Bonds mature or are redeemed, exchanged or sold, or as the expenses of a State
Trust change or as the number of outstanding Units of such State Trust changes.
Payment for Units must be made on or before the fifth business day
following purchase (the "settlement date"). A purchaser becomes the owner of
Units on the settlement date. If a Unitholder desires to have certificates
representing Units purchased, such certificates will be delivered on the fifth
business day following a written request therefor, or shortly thereafter. For
information with respect to redemption of Units purchased,
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<PAGE> 90
but as to which certificates requested have not been received, see "Redemption"
below.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified Units of
each State Trust for sale in the State for which such State Trust is named.
Units will be sold through dealers who are members of the National Association
of Securities Dealers, Inc. and through others. Sales may be made to or
through dealers at prices which represent discounts from the Public Offering
Price as set forth in the table below. Certain commercial banks are making
Units of the Trust available to their customers on an agency basis. A portion
of the sales charge paid by their customers is retained by or remitted to the
banks, in an amount not exceeding the discounts shown in the table below.
Under the Glass-Steagall Act, banks are prohibited from underwriting Trust
Units; however, the Glass-Steagall Act does permit certain agency transactions
and the banking regulators have indicated that these particular agency
transactions are permitted under such Act. In addition, state securities laws
on this issue may differ from the interpretations of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to State law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*3
4 TO 7.99 8 TO 14.99 15 OR MORE
----------------------------------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
- --------------------
<S> <C> <C> <C>
$1 to $99,999 . . . . . . . . . . . . . . . . . . . . 2.00% 3.00% 4.00%
$100,000 to $499,999 . . . . . . . . . . . . . . . . 1.75 2.75 3.50
$500,000 to $999,999 . . . . . . . . . . . . . . . . 1.50 2.50 3.00
$1,000,000 or more . . . . . . . . . . . . . . . . . 1.25 2.25 2.50
</TABLE>
In addition to such discounts, the Sponsor may, from time to time,
pay or allow an additional discount, in the form of cash or other compensation,
to dealers employing registered representatives who sell, during a specified
time period, a minimum dollar amount of Units of the Trust and other unit
investment trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of discounts at
any time. The difference between the discount allowed to firms and the sales
charge will be retained by the Sponsor.
The Sponsor reserves the right to reject, in whole or in part, any
order for the purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion of the sales
charge on each Unit sold representing the difference between the Public
Offering Price of the Units and the discounts allowed to firms selling such
Units. The Sponsor may realize additional profit or loss as a result of the
possible change in the daily evaluation of the Municipal Bonds in the State
Trusts, since the value of its inventory of Units may increase or decrease.
_____________________________________
* If the dollar weighted average maturity of a Trust is under
3.99 years, the concession or agency commission is 1.00% of the
Public Offering Price.
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<PAGE> 91
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to
change at any time, maintain a market for Units of the State Trusts offered
hereby and to offer to purchase said Units at prices, as determined by the
Evaluator, based on the aggregate bid prices of the underlying Municipal Bonds
of such State Trusts, together with accrued interest to the expected date of
settlement. Accordingly, Unitholders who wish to dispose of their Units should
inquire of their broker or bank as to current market prices of the Units in
order to determine whether there is in existence any price in excess of the
redemption price and, if so, the amount there of prior to making a tender for
redemption to the Trustee.
REDEMPTION
A Unit holder who does not dispose of Units in the secondary market
described above may cause their Units to be redeemed by the Trustee by making a
written request to the Trustee, Investors Fiduciary Trust Company, P.O. Box
419430, Kansas City, Missouri 64173-0216 and, in the case of Units evidenced by
a certificate, by tendering such certificate to the Trustee, properly endorsed
or accompanied by a written instrument or instruments of transfer in a form
satisfactory to the Trustee. Unitholders must sign such written request, and
such certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to be
redeemed. If the amount of the redemption is $25,000 or less and the proceeds
are payable to the Unitholder(s) of record at the address of record, no
signature guarantee is necessary for redemptions by individual account owners
(including joint owners). Additional documentation may be requested, and a
signature guarantee is always required, from corporation, executors,
administrators, trustees, guardians or associations. The signatures must be
guaranteed by a commercial bank or trust company, savings and loan association
or by a member firm of a national securities exchange. A certificate should
only be sent by registered or certified mail for the protection of the
Unitholder. Since tender of the certificate is required for redemption when
one has been issued, Units represented by a certificate cannot be redeemed
until the certificate representing the Units has been received by the
purchaser.
Redemption shall be made by the Trustee on the seventh calendar day
following the day on which a tender for redemption is received, or if the
seventh calendar day is not a business day, on the first business day prior
thereto (the "Redemption Date"), by payment of cash equivalent to the
Redemption Price for such State Trust, determined as set forth below under
"Computation of Redemption Price," as of the Evaluation Time stated under
"Essential Information" in Part Two, next following such tender, multiplied by
the number of Units being redeemed. The price received upon redemption might
be more or less than the amount paid by the Unitholder depending on the value
of the Municipal Bonds in the State Trust's portfolio at the time of
redemption. Any Units redeemed shall be cancelled and any undivided fractional
interest in the State Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the
Trustee is required to withhold a specified percentage of the principal amount
of a Unit redemption if the Trustee has not been furnishing the redeeming
Unitholder's tax identification number in the manner required by such
regulations. Any amount so withheld is transmitted to the Internal Revenue
Service and may be recovered by the Unitholder only when filing a tax return.
Under normal circumstances the Trustee obtains the Unitholder's tax
identification number from the selling broker. However, any time a Unitholder
elects to tender Units for redemption, such Unitholder should make sure that
the Trustee has been provided a certified tax identification number in order to
avoid this possible "back-up withholding." In the event the Trustee has not
been previously provided such number, one
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<PAGE> 92
must be provided at the time redemption is requested.
Any amounts paid on redemption representing interest shall be
withdrawn from the Interest Account of such State Trust to the extent that
funds are available for such purpose. All other amounts paid on redemption
shall be withdrawn from the Principal Account for such State Trust. The
Trustee is empowered to sell Municipal Bonds from the portfolio of a State
Trust in order to make funds available for the redemption of Units of such
State Trust. Such sale may be required when Municipal Bonds would not
otherwise be sold and might result in lower prices than might otherwise be
realized. To the extent Municipal Bonds are sold, the size and diversity of
such State Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase any Units tendered for redemption, in lieu
of redeeming such Units, to sell such Units in over-the-counter market for the
account of tendering Unitholders at prices which will return to such
Unitholders amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price for such
Units. In the event of any such sale, the Trustee shall pay the net proceeds
thereof to the Unitholders on the day they would otherwise be entitled to
receive payment of the Redemption Price.
The right of redemption may be suspended and payment postponed (1)
for any period during which the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or during which (as determined by the
Securities and Exchange Commission) trading on the New York Stock Exchange is
restricted; (2) for any period during which an emergency exists as a result of
which disposal by the Trustee of Municipal Bonds is not reasonably practicable
or it is not reasonably practicable to fairly determine the value of the
underlying Municipal Bonds in accordance with the Agreement; or (3) for such
other period as the Securities and Exchange Commission may by order permit.
The Trustee is not liable to any person in any way for any loss or damage which
may result from any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of
each State Trust is computed by the Evaluator as of the Evaluation Time stated
under "Essential Information" on Part Two next occurring after the tendering of
a Unit for redemption and on any other business day desired by it, by;
A. adding (1) the principal cash on hand held or owed by the State
Trust; (2) the aggregate value of the Municipal Bonds held in the State Trust,
as determined by the Evaluator on the basis of bid prices therefor; (3)
interest accrued and unpaid on the Municipal Bonds in the State Trust as of the
date of computation; and
B. deducting therefrom (1) amounts representing any applicable
taxes or governmental charges payable out of the State Trust and for which no
deductions have been previously made for the purpose of additions to the
Reserve Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of the State Trust including, but not
limited to, unpaid fees and expenses of the Trustee (including legal and
auditing fees and insurance costs), the Evaluator, the Sponsor and bond
counsel, if any; (3) cash held for distribution to Unitholders of record as of
the business day prior to the evaluation being made; and (4) other liabilities
incurred by the State Trust; and
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<PAGE> 93
C. finally, dividing the results of such computation by the number
of Units of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State Trust will not
be evidenced by a certificate unless a Unitholder or the Unitholder's
registered broker/dealer or the clearing agent for such broker/dealer makes a
written request to the Trustee. Units are transferable by making a written
request to the Trustee and, in the case of Units evidenced by a certificate,
presenting and surrendering such certificate to the Trustee properly endorsed
or accompanied by a written instrument or instruments of transfer. Unitholders
must sign such written request, and such certificate or transfer instrument,
exactly as their names appear on the records of the Trustee and on any
certificate representing the Units to be transferred. Such signatures must be
guaranteed by a commercial bank or trust company, savings and loan association
or by a member firm of a national securities exchange.
Units may be purchased and certificates, if requested, will be
issued in denominations of one Unit or any multiple thereof subject to any
minimum investment requirement established by the Sponsor from time to time.
Any certificate issued will be numbered serially for identification, issued in
fully registered form and will be transferable only on the books of the
Trustee. The Trustee may require a Unitholder to pay a fee for each
certificate reissued or transferred, and to pay any governmental charge that
may be imposed in connection with each such transfer or interchange. The
Trustee at the present time does not intend to charge for the normal transfer
or interchange of certificates. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity (generally amounting to not more than 3% of the market value of the
Units), affidavit of loss, evidence of ownership and payment of expenses
incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest received by each State
Trust, including any portion of the proceeds (including insurance proceeds)
from a disposition of Municipal Bonds which represents accrued interest, is
credited by the Trustee to the Interest Account for such State Trust. All
other receipts are credited by the Trustee to a separate Principal Account for
such State Trust. During each year the distributions to the Unitholders of the
State Trusts as of each Record Date (see "Essential Information" in Part Two)
will be made on the following Distribution Date or shortly thereafter and shall
consist of an amount substantially equal to one-twelfth, one-fourth or one-half
(depending on the distribution option selected) of such holders' pro rata share
of the estimated annual income to the Interest Account for such State Trust,
after deducting estimated expenses. In addition, the Trustee will distribute
on each semi-annual Distribution Date or shortly thereafter, to each Unitholder
of record of a State Trust on the preceding Record Date, an amount
substantially equal to such holders' pro rata share of the cash balance, if
any, in the Principal Account of such State Trust computed as of the close of
business on the preceding Record Date. However, no distribution will be
required if the balance in the Principal Account of the State Trust is less
than $1.00 per Unit; if such balance is between $5.00 and $10.00 per Unit,
distributions will be made on each quarterly Distribution Date; and if such
balance exceeds $10.00 per Unit, such amounts will be distributed on the next
monthly Distribution Date. Persons who purchase Units of a State Trust between
a Record Date and a Distribution Date will receive their first distribution on
the second Distribution Date following their purchase of Units. All
distributions of principal and interest will be paid in cash unless a
Unitholder has elected to reinvest principal and/or interest payments in shares
of one of the reinvestment funds. See "Distribution Reinvestment." Interest
distributions per Unit for each State Trust will be in the amounts shown under
"Essential Information" in the applicable Part Two and may change as underlying
Municipal Bonds in such State Trust are redeemed, paid or sold, or as expenses
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<PAGE> 94
of the State Trust change or the number of outstanding Units of the State Trust
changes.
Since interest on Municipal Bonds in each of the State Trusts is
payable at varying intervals, usually in semiannual installments, and
distributions of income are made to Unitholders of the State Trusts at what may
be different intervals from receipt of interest, the interest accruing to the
State Trusts may not be equal to the amount of money received and available for
distribution from the Interest Account of such Series. Therefore, on each
Distribution Date the amount of interest actually on deposit in the Interest
Account of such State Trust and available for distribution may be slightly more
or less than the interest distribution made. In order to eliminate
fluctuations in interest distributions resulting from such variances, the
Trustee is authorized by the Agreement to advance such amounts as may be
necessary to provide interest distributions or approximately equal amounts.
The Trustee will be reimbursed, without interest, for any such advances from
funds available in the interest Account of such State Trust.
Because the interest to which Unitholders of the State Trusts are
entitled will at most times exceed the amount available for distributions,
there will almost always remain an item of accrued interest that is accounted
for daily and added to the value of the Units of such State Trust. If
Unitholders of a State Trust sell or redeem all or a portion of their Units
they will be paid for their proportionate share of the accrued interest of such
State Trust to, but not including, the fifth business day after the date of a
sale or to the date of tender in the case of a redemption.
Unitholders purchasing Units will initially receive distributions in
accordance with the election of the prior owner. Unit holders desiring to
change their distribution option may do so by sending written notice to the
Trustee, together with their certificate (if one was issued). Certificates
should only be sent by registered or certified mail to minimize the possibility
of loss. If written notice and any certificate are received by the Trustee not
later than January 1 of a year, the change will become effective on January 2
for distributions commencing with February 15 of that year. If notice is not
received by the Trustee, the Unitholder will be deemed to have elected to
continue with the same option for the subsequent twelve months.
STATEMENTS TO UNITHOLDERS. With each distribution, the Trustee will
furnish each Unitholder a statement of the amount of interest and the amount of
other receipts, if any, which are being distributed, expressed in each case as
a dollar amount per Unit.
The accounts of each State Trust are required to be audited annually
by independent certified public accountants designated by the Sponsor, unless
the Trustee determines that such an audit would not be in the best interest of
the Unitholders of such State Trust. The accountants' report will be furnished
by the Trustee to any Unitholder of such State Trust upon written request.
Within a reasonable period of time after the end of each calendar
year, the Trustee shall furnish to each person who at any time during the
calendar year was a Unitholder of a State Trust a statement covering the
calendar year, setting forth:
A. As to the Interest Account:
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1. The amount of interest received on the Municipal Bonds in
such State Trust, and the percentage of such amount by states and
territories in which the issuers of such Municipal Bonds are
located;
2. The amount paid from the Interest Account of such State
Trust representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such State
Trust for applicable taxes, if any, fees and expenses (including
insurance costs and auditing fees) of the Trustee, the Evaluator,
the Sponsor and of bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account
for such State Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and
deductions, expressed both as a total dollar amount and a dollar
amount per Unit outstanding on the last business day of such
calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of
any of the Municipal Bonds in such State Trust and the net proceeds
received therefrom excluding any portion credited to the Interest
Account;
2. The amount paid from the Principal Account of such Series
representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such Series
for payment of applicable taxes, if any, fees and expenses
(including insurance costs and auditing expenses) of the Trustee,
the Evaluator, the Sponsor and of bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account
for such Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal
and deductions, expressed both as a dollar amount and as a dollar
amount per Unit outstanding on the last business day of such
calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust as of
the last business day of such calendar year;
2. The number of Units of such State Trust outstanding on
the last business day of such calendar year;
3. The Redemption Price of such State Trust based on the
last Trust Fund Evaluation made during such calendar year; and
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4. The amount actually distributed during such calendar
year from the Interest and Principal Accounts of such State Trust
separately stated, expressed both as total dollar amounts and as
dollar amounts per Unit of such State Trust outstanding on the
Record Date for each such distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to
the Trustee for redemption. No Unitholder of a State Trust shall have the
right to control the operation and management of the Trust or such State Trust
in any manner, except to vote with respect to amendment of the Agreement or
termination of the Trust or such State Trust. The death or incapacity of any
Unitholder will not operate to terminate the Trust or any State Trust nor
entitle legal representatives or heirs to claim an accounting or to bring any
action or proceeding in any court for partition or winding up of the Trust or
any State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the
purchase, sale or substitution of Municipal Bonds, except in the special
circumstances noted below. Thus, with the exception of the redemption or
maturity of Municipal Bonds in accordance with their terms, and/or the sale of
Municipal Bonds to meet redemption requests, the assets of the State Trusts
will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the
value of which has been affected by certain adverse events, including
institution of certain legal proceedings, a decline in their price or the
occurrence of other market factors, including advance refunding, so that in the
opinion of the Sponsor the retention of such Municipal Bonds in a State Trust
would be detrimental to the interest of its Unitholders. The proceeds from any
such sales, exclusive of any portion which represents accrued interest, will be
credited to the Principal Account of such Trust Fund for distribution to its
Unitholders.
The Trustee is permitted to utilize the option to obtain Permanent
Insurance only in circumstances where the value added to the Municipal Bonds
exceeds the costs of acquiring such Permanent Insurance. Unless such Permanent
Insurance may be obtained at an acceptable price, the Sponsor will not direct
the Trustee to dispose of Municipal Bonds which are in default or imminent
danger of default but to retain such Municipal Bonds in the portfolio so that
the Trust may realize the benefits of the insurance on the portfolio.
The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of the Municipal Bonds to issue new obligations in exchange
or substitution for any of such Municipal Bonds pursuant to a refunding
financing plan.
The Trustee may sell Municipal Bonds, designated by the Sponsor,
from a State Trust for the purpose of redeeming Units of such State Trust
tendered for redemption and the payment of expenses. To the extent that
Municipal Bonds are sold which are current in payment of principal and interest
by one of the Insured Trust Funds in order to meet redemption requests and
defaulted Municipal Bonds are retained in the portfolio of an Insured Trust
Fund in order to preserve the related insurance protection applicable to said
Municipal Bonds, the overall quality of the Municipal Bonds remaining in such
Insured Trust Fund's portfolio will tend to diminish. Because of such
restrictions on the Trustee, under certain circumstances the Sponsor may seek
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a full or partial suspension of the right of Unitholders to redeem their Units.
See "Redemption."
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a
trust company specializing in investment related services, organized and
existing under the laws of Missouri, having its trust office at 127 West 10th
Street, Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the Federal
Deposit Insurance Corporation. Investors Fiduciary Trust Company is jointly
owned by DST Systems, Inc. and Kemper Financial Services, Inc., an affiliate of
the Sponsor.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Trust Fund. For information
relating to the responsibilities of the Trustee under the Agreements, reference
is made to the material set forth under "Unitholders."
In accordance with the Agreements, the Trustee shall keep proper
books of record and account of all transactions at its office. Such records
shall include the name and address of, and the number of Units held by, every
Unitholder of each Trust Fund. Such books and records shall be open to
inspection by any Unitholder of such Trust Fund at all reasonable times during
usual business hours. The Trustee shall make such annual or other reports as
may from time to time be required under any applicable State or Federal
statute, rule or regulation. The Trustee shall keep a certified copy or
duplicate original of the Agreement on file in its office available for
inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in the
State Trust. Pursuant to the Agreement, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds
comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign
and be discharged of the trust created by the Agreement by executing an
instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days before
the date specified in such notice when such resignation is to take effect. The
Sponsor upon receiving notice of such resignation is obligated to appoint a
successor trustee promptly. If, upon such resignation, no successor trustee
has been appointed and has accepted the appointment within thirty days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. In case the Trustee becomes
incapable of acting or is adjudged a bankrupt or is taken over by public
authorities, the Sponsor may remove the Trustee and appoint a successor trustee
as provided in the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by a successor trustee, all the rights, powers,
duties and obligations of the original Trustee shall vest in the successor.
The Trustee shall be a corporation organized under the laws of the
United States or any state thereof, which is authorized under such laws to
exercise trust powers. The Trustee shall have at all times an aggregate
capital, surplus and undivided profits of not less than $2,000,000.
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THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper
Securities, Inc., the Sponsor, also serves as Evaluator. The Evaluator may
resign or be removed by the Trustee, which is to use its best efforts to
appoint a satisfactory successor. Such resignation or removal shall become
effective upon acceptance of appointment by the successor evaluator. If, upon
resignation of the Evaluator no successor has accepted appointment within
thirty days after notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor. Notice of such
resignation or removal and appointment shall be mailed by the Trustee to each
Unitholder. At the present time, pursuant to a contract with the Evaluator,
Kenny Information Services, Inc., a non-affiliated firm regularly engaged in
the business of evaluating, quoting or appraising comparable securities,
provides portfolio evaluations of the Municipal Bonds in the State Trusts which
are then reviewed by the Evaluator. In the event the Sponsor is unable to
obtain current evaluations from Kenny Information Systems, Inc., it may make
its own evaluations or it may utilize the services of any other non-affiliated
evaluator or evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended by the
Trustee and the Sponsor without the consent of any of the Unitholders: (1) to
cure any ambiguity or to correct or supplement any provision which may be
defective or inconsistent; (2) to change any provision thereof as may be
required by the Securities and Exchange Commission or any successor
governmental agency; or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Agreement with respect to any
State Trust may also be amended in any respect by the Sponsor and the Trustee,
or any of the provisions thereof may be waived, with the written consent of the
holders of Units representing 66-2/3% of the Units then outstanding of such
State Trust, provided that no such amendment or waiver will reduce the interest
in the State Trust of any Unitholder thereof without the consent of such
Unitholder or reduce the percentage of Units required to consent to any such
amendment or waiver without the consent of all Unitholders of such State Trust.
In no event shall the Agreement be amended to increase the number of Units of a
State Trust issuable thereunder or to permit, except in accordance with the
provisions of the Agreement, the acquisition of any Municipal Bonds in addition
to or in substitution for those in a State Trust. The Trustee shall promptly
notify Unitholders of the substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon
the maturity, redemption or other disposition, as the case may be, of the last
of the Municipal Bonds held in such State Trust. If the value of the State
Trust shall be less than the applicable minimum value stated under "Essential
Information" in Part Two the Trustee may, in its discretion, and shall, when so
directed by the Sponsor, terminate the State Trust. A State Trust may be
terminated at any time by the holders of Units representing 66-2/3% of the
Units thereof then outstanding. Notwithstanding the foregoing, in no event
shall any State Trust continue beyond the mandatory termination date shown in
Part Two under "Essential Information" or a date which is twenty years after
the death of the last survivor of six persons named in the Agreement, whichever
occurs first. In the event of termination of a State Trust, written notice
thereof will be sent by the Trustee to all Unitholders of such State Trust.
Within a reasonable period after termination, the Trust will sell any Municipal
Bonds remaining in the State Trust and, after paying all expenses and charges
incurred by the State Trust, will distribute to Unitholders thereof (upon
surrender for cancellation of certificates for Units, if issued) their pro rata
share of the balances remaining in the Interest and Principal Accounts of such
State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for
the performance of its obligations arising from its responsibilities under the
Agreement, but will be under no liability to the Unitholders for taking any
action or refraining from any action in good faith pursuant to the Agreement or
for errors in judgment, except in cases of its own gross negligence, bad faith
or willful misconduct. The Sponsor shall not be liable
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or responsible in any way for depreciation or loss incurred by reason of the
sale of any Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be under
no liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal Bonds,
or Certificates except by reason of its own gross negligence, bad faith or
willful misconduct, nor shall the Trustee be liable or responsible in any way
for depreciation or loss incurred by reason of the sale by the Trustee of any
Municipal Bonds. In the event that the Sponsor shall fail to act, the Trustee
may act and shall not be liable for any such action taken by it in good faith.
The Trustee shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the Municipal Bonds or upon the interest
thereon. In addition, the Agreement contains other customary provisions
limiting the liability of the Trustee. The Trustee, whose duties are
ministerial, did not participate in the selection of Municipal Bonds for the
State Trusts.
The Evaluator: The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for the
accuracy thereof. The Agreement provides that the determinations made by the
Evaluator shall be made in good faith upon the basis of the best information
available to it; provided, however, that the Evaluator shall be under no
liability to the Trustee or Unitholders for errors in judgment, but shall be
liable only for its gross negligence, lack of good faith or willful misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence,
the Sponsor will not charge the Trust an advisory fee and will receive no fee
from the Trust for services performed as Sponsor. The Sponsor will charge
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series an
annual surveillance fee for services performed for such Trust Funds in an
amount not to exceed the amount shown under "Essential Information" in Part
Two, but in no event will such compensation when combined with all compensation
received from Kemper Tax-Exempt Insured Income Trust, Multi-State Series 23,
24, 32 and subsequent series, Kemper Tax-Exempt Insured Income Trust, Series
A-74 and subsequent series and Kemper Tax-Exempt Income Trust, Multi-State
Series 45 and subsequent series exceed the aggregate cost to the Sponsor for
providing such services. Such fee shall be based on the total number of Units
of such State Trust Fund outstanding as of the January Record Date for any
annual period. The Sponsor paid all the expenses of creating and establishing
the Trust, including the cost of the initial preparation, printing and
execution of the Prospectus, Agreement and the certificates, legal and
accounting expenses, advertising and selling expenses, payment of closing fees,
expenses of the Trustee, initial evaluation fees during the initial public
offering and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis
of the annual rate set forth under "Essential Information" in Part Two per
$1,000 principal amount of Municipal Bonds in each State Trust, based on the
largest aggregate principal amount of Municipal Bonds in the State Trust at any
time during the monthly, quarterly or semi-annual period, as appropriate. The
Trustee also receives indirect benefits to the extent that it holds funds on
deposit in the various non-interest bearing accounts created pursuant to the
Agreement; however, the Trustee is also authorized by the Agreement to make
from time to time certain non-interest bearing advances to the State Trusts.
See "Unitholders - Distributions to Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator
receives a fee, calculated on an
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annual rate as set forth under "Essential Information" in Part Two, based upon
the largest aggregate principal amount of Municipal Bonds in such State Trust
at any time during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State
Trusts are payable monthly on or before each Distribution Date by deductions
from the Interest Accounts thereof to the extent funds are available and then
from the Principal Accounts. Such fees may be increased without approval of
the Unitholders by amounts not exceeding a proportionate increase in the
Consumer Price Index entitled "All Services Less Rent of Shelter," published by
the United States Department of Labor, or any equivalent index substituted
therefor.
The following additional charges are or may be incurred by a State
Trust: (a) fees for the Trustee's extraordinary services; (b) expenses of the
Trustee (including legal and auditing expenses and insurance costs, but not
including any fees and expenses charged by any agent for custody and
safeguarding of Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by the Trustee
to protect the Trust or such State Trust, or the rights and interest of the
Unitholders; (e) indemnification of the Trustee for any loss, liability or
expense incurred by it in the administration of the Trust or such State Trust
without gross negligence, bad faith or willful misconduct on its part; (f)
indemnification of the Sponsor for any loss, liability or expense incurred in
acting as Sponsor of the State Trust without gross negligence, bad faith or
willful misconduct; and (g) expenditures incurred in contacting Unitholders
upon termination of the State Trust. The fees and expenses set forth herein
are payable out of the appropriate State Trust and, when owed to the Trustee,
are secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted from the
Interest Account thereof, or, to the extent funds are not available in such
Account, from the Principal Account. The Trustee may withdraw from the
Principal Account or the Interest Account of any State Trust such amounts, if
any, as it deems necessary to establish a reserve for any taxes or other
governmental charges or other extraordinary expenses payable out of the State
Trust. Amounts so withdrawn shall be credited to a separate account maintained
for the State Trust known as the Reserve Account and shall not be considered a
part of the State Trust when determining the value of the Units until such time
as the Trustee shall return all or any part of such amounts to the appropriate
account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 W.
Wacker Drive, 5th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service
of Kemper Securities, Inc., which is a wholly owned subsidiary of Kemper
Financial Companies, Inc., a financial services holding company which, in turn,
is a wholly owned subsidiary of Kemper Corporation. The Sponsor acts as
underwriter of a number of other Kemper unit investment trusts and will act as
underwriter of any other unit investment trust products created by the Sponsor
in the future. As of April 30, 1993, the total stockholders' equity of Kemper
Securities, Inc. was approximately $426,125,017 (unaudited).
If at any time the Sponsor shall fail to perform any of its duties
under the Agreement or shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or its affairs are taken over by public authorities, then
the Trustee may (a) appoint a successor sponsor at rates of compensation
deemed by the Trustee to be reasonable and not exceeding such reasonable
amounts as may be prescribed by the Securities
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and Exchange Commission, or (b) terminate the Agreement and liquidate the Trust
or any State Trust as provided therein or (c) continue to act as Trustee
without terminating the Agreement.
The foregoing financial information with regard to the Sponsor
relates to the Sponsor only and not to this Trust or any State Trust. Such
information is included in this Prospectus only for the purpose of informing
investors as to the financial responsibility of the Sponsor and its ability to
carry out its contractual obligations with respect to the State Trusts. More
comprehensive financial information can be obtained upon request from the
Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to federal tax law were originally passed upon by Chapman and Cutler,
111 West Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
AUDITORS
The statement of net assets, including the Schedule of Investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific Series of the Trust to which such
statement relates, has been audited by Ernst & Young, independent auditors, as
set forth in their report appearing in Part Two and is included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
DESCRIPTION OF SECURITIES RATINGS*4
STANDARD & POOR'S CORPORATION. - A brief description of the
applicable Standard & Poor's Corporation rating symbols and their meanings
follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment may take into consideration obligers such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
and obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
___________________________________
* As published by the rating companies.
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The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and
willingness of the obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position
of, the obligation in the event of bankruptcy, reorganization or
other arrangement, under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MOODY'S INVESTORS SERVICE, INC. - A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and their meanings
follow:
Aaa - Bonds which are rated Aaa are judged to be 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
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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 the high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuations
of protective elements may be of greater amplitude or there may be other
elements present which make the long term risks appear somewhat larger than in
Aaa securities. Their market value is virtually immune to all but money market
influences, with the occasional exception of oversupply in a few specific
instances.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to some degree by
economic performance during a sustained period of depressed business
conditions, but, during periods of normalcy, A-rated bonds frequently move in
parallel with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
A1 - Bonds which are rated A1 offer the maximum in security within
their quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the marketplace.
Baa - Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and, in fact, have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to changes in
economic circumstances and, aside from occasional speculative factors applying
to some bonds of this class, Baa market valuations move in parallel with Aaa,
Aa and A obligations during periods of economic normalcy, expect in instances
of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the
security depends upon the completion of some act or the fulfillment of some
condition. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical ratings denote probable
credit stature upon completion of construction or elimination of basis of
condition.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in certain areas of its bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
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Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Part Two
Dated March 30, 1994
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed unless
Accompanied by Part One.
<PAGE> 3
Kemper Tax-Exempt Insured Income Trust -- Multi-State Series 8
California Trust
Essential Information
As of March 1, 1994
Sponsor: Kemper Financial Services, Inc.
Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
<TABLE>
<S> <C>
GENERAL INFORMATION
Principal Amount of Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,920,000
Number of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,423
Fractional Undivided Interest in the Trust per Unit . . . . . . . . . . . . . . . . . . . . . 1/2,423
Principal Amount of Municipal Bonds per Unit . . . . . . . . . . . . . . . . . . . . . . . . $ 792.41
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio . . . . . . . . . . . . . . . . . . $ 2,114,411
Aggregate Bid Price of Municipal Bonds per Unit . . . . . . . . . . . . . . . . . . . . . $ 872.64
Cash per Unit (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --
Sales Charge 4.712% (4.5% of Public Offering Price) . . . . . . . . . . . . . . . . . . . . $ 41.12
Public Offering Price per Unit (exclusive of accrued interest) (2) . . . . . . . . . . . . $ 913.76
Redemption Price per Unit (exclusive of accrued interest) . . . . . . . . . . . . . . . . . . $ 872.64
Excess of Public Offering Price per Unit Over Redemption Price per Unit . . . . . . . . . . . $ 41.12
Minimum Value of the Trust under which Trust Agreement may be terminated . . . . . . . . . . $ 500,000
Date of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 13, 1985
Mandatory Termination Date . . . . . . . . . . . . . . . . . . . . . . December 31, 2035
</TABLE>
Annual Evaluation Fee: $.35 per $1,000 principal amount of Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units are made as
of the close of business of the Sponsor next following receipt of an order
for a sale or purchase of Units or receipt by Investors Fiduciary Trust
Company of Units tendered for redemption.
SPECIAL INFORMATION BASED ON VARIOUS DISTRIBUTION OPTIONS
<TABLE>
<CAPTION>
MONTHLY QUARTERLY SEMIANNUAL
--------------------------------------------
<S> <C> <C> <C>
Calculation of Estimated Net Annual Interest Income per
Unit (3):
Estimated Annual Interest Income . . . . . . . . . $71.3681 $71.3681 $71.3681
Less: Estimated Annual Expense,
Excluding Insurance . . . . . . . . . . . . . 1.8888 1.7127 1.4225
Annual Premium on Portfolio
Insurance . . . . . . . . . . . . . . . . . . .6020 .6020 .6020
--------------------------------------------
Estimated Net Annual Interest Income . . . . . . . $68.8773 $69.0534 $69.3436
--------------------------------------------
--------------------------------------------
Calculation of Interest Distribution per Unit:
Estimated Net Annual Interest Income . . . . . . . $68.8773 $69.0534 $69.3436
Divided by 12, 4 and 2, respectively . . . . . . . $ 5.7398 $17.2634 $34.6718
Estimated Daily Rate of Net Interest
Accrual per Unit . . . . . . . . . . . . . . . . . . $ .1913 $ .1918 $ .1926
Estimated Current Return Based on Public
Offering Price (3) . . . . . . . . . . . . . . . . . 7.54% 7.56% 7.59%
Estimated Long-Term Return (3) . . . . . . . . . . . . 3.66% 3.68% 3.71%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee): $1.8888,
$1.7127 and $1.4225 ($.8191, $.8391 and $.8159 of which represent expenses)
per Unit under the monthly, quarterly and semiannual distribution options,
respectively.
Record and Computation Dates: First day of the month, as follows: monthly --
each month; quarterly -- January, April, July and October; semiannual --
January and July.
Distribution Dates: Fifteenth day of the month, as follows: monthly -- each
month; quarterly -- January, April, July and October; semiannual -- January
and July.
i
<PAGE> 4
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering
Price.
2. Units are offered at the Public Offering Price plus accrued interest to the
date of settlement (five business days after purchase). On March 1, 1994,
there was added to the Public Offering Price of $913.76, accrued interest
to the settlement date of March 8, 1994 of $10.40, $22.07 and $22.12 for a
total price of $924.16, $935.83 and $935.88 for the monthly, quarterly and
semiannual distribution options, respectively.
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
ii
<PAGE> 5
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8 California Trust
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8 California Trust as of November 30, 1993, and the related
statements of operations and changes in net assets for each of the three years
in the period then ended. These financial statements are the responsibility of
the Trust's sponsor. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of November 30, 1993,
by correspondence with the custodial bank. An audit also includes assessing
the accounting principles used and significant estimates made by the sponsor,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Tax-Exempt Insured
Income Trust Multi-State Series 8 California Trust at November 30, 1993, and
the results of its operations and the changes in its net assets for each of the
three years in the period then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG
ERNST & YOUNG
Kansas City, Missouri
March 16, 1994
1
<PAGE> 6
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Statement of Assets and Liabilities
November 30, 1993
<TABLE>
<S> <C> <C>
ASSETS
Municipal Bonds, at value (cost $1,972,579) (Note 1) $2,182,978
Accrued interest 59,374
----------
2,242,352
LIABILITIES AND NET ASSETS
Cash overdraft 12,349
Accrued liabilities 939
----------
13,288
Net assets, applicable to 2,423 Units outstanding (Note 5):
Cost of Trust assets, exclusive of interest (Note 1) $1,972,579
Unrealized appreciation (Note 2) 210,399
Distributable funds 46,086
---------------------------
Net assets $2,229,064
----------
----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 7
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
1993 1992 1991
------------------------------------------
<S> <C> <C> <C>
Investment income -- interest $178,752 $189,870 $194,212
Expenses:
Trustee's fees and related expenses 3,822 4,079 4,098
Evaluator's fees 701 761 712
Insurance expense 1,578 1,680 1,725
------------------------------------------
Total expenses 6,101 6,520 6,535
------------------------------------------
Net investment income 172,651 183,350 187,677
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) 1,430 22,280 (75)
Unrealized appreciation (depreciation)
during the year (57,446) 2,424 32,224
------------------------------------------
Net gain (loss) on investments (56,016) 24,704 32,149
------------------------------------------
Net increase in net assets resulting
from operations $116,635 $208,054 $219,826
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 8
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
1993 1992 1991
----------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income $ 172,651 $ 183,350 $ 187,677
Realized gain (loss) on investments 1,430 22,280 (75)
Unrealized appreciation (depreciation) on investments
during the year (57,446) 2,424 32,224
---------------------------------------------
Net increase in net assets resulting
from operations 116,635 208,054 219,826
Distributions to Unitholders:
Net investment income (174,439) (186,174) (188,401)
Principal from investment transactions (52,797) (40,794) --
Capital transactions:
Redemption of Units -- (134,976) --
---------------------------------------------
Total increase (decrease) in net assets (110,601) (153,890) 31,425
Net assets:
At the beginning of the year 2,339,665 2,493,555 2,462,130
---------------------------------------------
At the end of the year (including distributable funds
applicable to Trust Units of $46,086, $45,906 and $55,721
at November 30, 1993, 1992 and 1991, respectively) $2,229,064 $2,339,665 $2,493,555
---------------------------------------------
---------------------------------------------
Trust Units outstanding at the end of the year
2,423 2,423 2,564
---------------------------------------------
---------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 9
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Schedule of Investments
November 30, 1993
<TABLE>
<CAPTION>
REDEMPTION PRINCIPAL
NAME OF ISSUER AND TITLE OF BOND(5) COUPON RATE MATURITY DATE PROVISIONS(2) RATING(1) AMOUNT(4) VALUE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Health Facilities Financing 9.25% 11/01/2015 1994 @ 100 S.F. Aa* $ 500,000 $ 564,855
Authority, Hospital Revenue Bonds 1996 @ 102
(Daughters of Charity Health Systems --
St. Vincents Medical Center, Inc.),
Series 1985A.
Section California Housing Finance 0.00 8/01/2015 2005 @ 100 S.F. Aa* 10,000 1,145
Agency, Home Mortgage Revenue Bonds, Non-Callable
1983 Series B. (7)
Section California Housing Finance 9.20 8/01/2015 2005 @ 100 S.F. AA 85,000 88,398
Agency, Home Ownership Mortgage 1995 @ 102
Bonds, Series A.
Insured Hospital Revenue Certificate 9.00 7/01/2013 1998 @ 100 S.F. A+ 100,000 108,291
of Participation (Hollywood 1995 @ 102
Presbyterian Hospital-Olmstead
Memorial), Series 1985, Installment
Payments from Sale Payments to be
made by Hollywood Presbyterian
Hospital-Olmstead Memorial.
Oxnard Redevelopment Agency (California) 8.90 6/01/2003 1995 @ 102 AAA 45,000 49,000
Central City Revitalization 6/01/2004 1995 @ 102 AAA 90,000 97,999
Project, Tax Allocation Refunding Bonds.
Insured by Municipal Bond Investors
Assurance Corporation. (6)
+Palm Desert Redevelopment Agency
(California) Project Area No. 1, as 7.90 12/01/2005 1995 @ 102 AAA 130,000 143,615
Amended (Original Territory Only)
Tax Allocation Bonds, Issue of 1985.
Insured by Financial Guaranty
Insurance Company. (6)
+Redevelopment Agency of the City of 9.00 7/01/2013 1996 @ 102 AAA 500,000 573,410
Concord (California) Central Concord
Redevelopment Project, Tax Allocation
Bonds, Series 1985. Insured by AMBAC
Indemnity Corporation (AMBAC). (6)
+Southern California Public Power 9.25 7/01/2014 1995 @ 102.5 AAA 500,000 556,265
Authority, Power Project Revenue
Bonds, 1985 Refunding, Series A
(Palo Verde Project). Insured by
AMBAC. (6)
-------------------------
$1,960,000 $2,182,978
-------------------------
-------------------------
</TABLE>
See accompanying notes to Schedule of Investments.
5
<PAGE> 10
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with
the symbol "*", in which case the rating is by Moody's Investors
Service, Inc. The symbol "NR" indicates Bonds for which no rating is
available.
2. There is shown under this heading the year in which each issue of
Bonds is initially redeemable and the redemption price for that year
or, if currently redeemable, the redemption price currently in effect;
unless otherwise indicated, each issue continues to be redeemable at
declining prices thereafter, but not below par value. In addition,
certain Bonds in the Portfolio may be redeemed in whole or in part
other than by operation of the stated redemption or sinking fund
provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of
such Bonds. "S.F." indicates a sinking fund is established with
respect to an issue of Bonds. Redemption pursuant to call provisions
generally will, and redemption pursuant to sinking fund provisions
may, occur at times when the redeemed Bonds have a valuation which
represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price
higher than the price at which they are redeemed, this will represent
a loss of capital when compared with the original Public Offering
Price of the Units. To the extent that the Bonds were acquired at a
price lower than the redemption price, this may represent an increase
in capital when compared with the original Public Offering Price of
the Units. Distributions of net income will generally be reduced by
the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units
tendered for redemption, there will be distributed to Unitholders the
principal amount and any premium received on such redemption. In this
event the estimated current return and estimated long-term return may
be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description
of the method of determining cost and value.
6
<PAGE> 11
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Schedule of Investments (continued)
4. At November 30, 1993, the Portfolio of the Trust consists of 8 obligations
issued by entities located in California. All of the issues are payable
from the income of a specific project or authority and are not supported by
an issuer's power to levy taxes. The sources of payment for the revenue
bonds are divided as follows: Electric System, 1; Hospitals and Health
Care, 2; Housing, 2; Redevelopment Agencies, 3. Approximately 26%, 31% and
39% of the aggregate principal amount of Bonds in the Trust are electric
system revenue bonds, hospital revenue bonds and redevelopment project
bonds, respectively. Approximately 99% of the aggregate principal amount
of Bonds in the Trust are subject to call by the issuers within five years
after November 30, 1993. Those securities preceded by (Section) are
Single-Family Mortgage Revenue Bonds issued under Section 103A of the
Internal Revenue Code.
5. Those securities preceded by (+) are secured by, and payable from, escrowed
U.S. Government securities.
6. Insurance on these Bonds was obtained by the issuers of such Bonds.
7. This Bond has been purchased at a discount from the par value because there
is no stated interest income thereon. Such Bond is normally described as a
"zero coupon" Bond. Over the life of the Bond the value increases, so that
upon maturity, the holders of the Bond will receive 100% of the principal
amount thereof.
See accompanying notes to financial statements.
7
<PAGE> 12
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF MUNICIPAL BONDS
Municipal Bonds (Bonds) are stated at bid prices as determined by Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the "Evaluator" of
the Trust. The aggregate bid prices of the Bonds are determined by the
Evaluator based on (a) current bid prices of the Bonds, (b) current bid prices
for comparable bonds, (c) appraisal, or (d) any combination of the above. (See
Note 5 -- Insurance.)
COST OF MUNICIPAL BONDS
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
December 13, 1985 (Date of Deposit). The premium or discount (including any
original issue discount) existing at December 13, 1985, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. UNREALIZED APPRECIATION AND DEPRECIATION
Following is an analysis of net unrealized appreciation at November 30, 1993:
Gross unrealized depreciation $ --
Gross unrealized appreciation 210,399
--------
Net unrealized appreciation $210,399
--------
--------
3. TRANSACTIONS WITH AFFILIATES
The Trustee, Investors Fiduciary Trust Company, is 50% owned by Kemper
Financial Services, Inc., the Trust's sponsor and an affiliate of Kemper Unit
Investment Trusts. Prior to July 1, 1991, the Trustee's fee (not including the
reimbursement of out-of-pocket expenses), calculated monthly, was at the annual
rate of $1.08, $.86 and $.60 under the monthly, quarterly and semiannual
distribution options, respectively, per $1,000 principal amount of Bonds in the
Trust, based on the largest aggregate principal amount of Bonds in the Trust at
any time during such
8
<PAGE> 13
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
monthly, quarterly or semiannual periods. Effective July 1, 1991, such fees
were revised to $1.35, $1.08 and $.75 under the monthly, quarterly and
semiannual distribution options, respectively. The Evaluator received a fee,
payable monthly, at an annual rate of $.30 per $1,000 principal amount of Bonds
prior to July 1, 1991 and $.35 per $1,000 principal amount of Bonds commencing
July 1, 1991, based on the largest aggregate principal amount of Bonds in the
Trust at any time during such monthly period.
4. FEDERAL INCOME TAXES
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
5. OTHER INFORMATION
COST TO INVESTORS
The cost to initial investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 4.5% of the Public Offering Price (equivalent to 4.712% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, on the date of an
investor's purchase, plus a sales charge of 4.5% of the Public Offering Price
(equivalent to 4.712% of the net amount invested).
INSURANCE
Insurance guaranteeing the payment of all principal and interest on the Bonds
in the portfolio has been obtained from an independent company by the Trust or
the issuer of the Bonds involved. All Bonds in the Trust's portfolio are
insured under the insurance policy obtained by the Trust from Financial
Guaranty Insurance Company (FGIC), except for four issues which are insured
under insurance policies obtained by the issuers of such Bonds. Insurance
obtained by the Trust
9
<PAGE> 14
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Financial Statements (continued)
5. OTHER INFORMATION (CONTINUED)
remains in effect only while the insured Bonds are retained in the Trust, while
insurance obtained by a Bond issuer is effective as long as such Bonds are
outstanding. At November 30, 1993, the value of Bonds does not include any
amount attributable to the insurance acquired by the Trust. Pursuant to an
irrevocable commitment of FGIC, in the event of a sale of a bond covered under
the Trust's insurance policy, the Trustee has the right to obtain permanent
insurance for such bond upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such bond. The insurance, in either
case, does not relate to the Units offered hereby or to their market value. As
a result of such insurance, the Units of the Trust have received a rating of
"AAA" by Standard & Poor's Corporation. No representation is made as to any
insurer's ability to meet its commitments.
DISTRIBUTIONS
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Such income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
NOVEMBER 30, 1993 NOVEMBER 30, 1992 NOVEMBER 30, 1991
DISTRIBUTION ------------------------------------------------------------------------
PLAN PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Monthly $71.94 $140,863 $72.52 $147,864 $73.13 $149,442
Quarterly 72.29 7,931 72.82 10,455 73.47 12,417
Semiannual 72.95 25,645 73.35 25,967 73.83 26,542
-------- -------- --------
$174,439 $184,286 $188,401
-------- -------- --------
-------- -------- --------
</TABLE>
10
<PAGE> 15
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Financial Statements (continued)
5. OTHER INFORMATION (CONTINUED)
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1992
------------
<S> <C>
Principal portion $134,976
Net interest accrued 1,888
--------
$136,864
--------
--------
Units 141
--------
--------
</TABLE>
11
<PAGE> 16
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 8
California Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each year -
<TABLE>
<CAPTION>
MONTHLY QUARTERLY SEMIANNUAL
YEAR ENDED NOVEMBER 30 YEAR ENDED NOVEMBER 30 YEAR ENDED NOVEMBER 30
1993 1992 1991 1993 1992 1991 1993 1992 1991
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income interest $ 73.77 $ 75.23 $ 75.75 $ 73.77 $ 75.23 $ 75.75 $ 73.77 $ 75.23 $ 75.75
Expenses 2.60 2.67 2.66 2.40 2.44 2.35 2.10 2.14 2.05
--------------------------------------------------------------------------------------------------
Net investment income 71.17 72.56 73.09 71.37 72.79 73.40 71.67 73.09 73.70
Distributions to Unitholders:
Net investment income (71.94) (72.52) (73.13) (72.29) (72.82) (73.47) (72.95) (73.35) (73.83)
Principal from investment
transactions (21.79) (16.11) - (21.79) (16.11) - (21.79) (16.11) -
Net gain (loss) on investments (23.12) 9.11 12.54 (23.12) 9.11 12.54 (23.12) 9.11 12.54
--------------------------------------------------------------------------------------------------
Change in net asset value (45.68) (6.96) 12.50 (45.83) (7.03) 12.47 (46.19) (7.26) 12.41
Net asset value:
Beginning of the year 961.76 968.72 956.22 967.94 974.97 962.50 986.24 993.50 981.09
--------------------------------------------------------------------------------------------------
End of the year, including
distributable funds $916.08 $961.76 $968.72 $922.11 $967.94 $974.97 $940.05 $986.24 $993.50
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 17
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated March 16, 1994, in this
Post-Effective Amendment to the Registration Statement (Form S-6) and related
Prospectus of Kemper Tax-Exempt Insured Income Trust Multi-State Series 8
California Trust dated March 30, 1994.
/s/ ERNST & YOUNG
ERNST & YOUNG
Kansas City, Missouri
March 30, 1994
<PAGE> 18
CONTENTS OF POST-EFFECTIVE AMENDMENT
TO REGISTRATION STATEMENT
This Post-Effective amendment to the Registration Statement comprises the
following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The
Registrant, Kemper Tax-Exempt Income Trust, Multi-State Series 8, certifies
that it meets all of the requirements for effectiveness of this registration
statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chicago, and
State of Illinois, on the 30th day of March, 1994.
KEMPER TAX-EXEMPT INCOME
TRUST MULTI-STATE, SERIES 8
Registrant
By: Kemper Unit Investment
Trusts
(a service of Kemper
Securities, Inc.)
Depositor
By /s/ C. Perry Moore
C. Perry Moore
Attorney-In-Fact
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below on March 30,
1994 by the following persons, who constitute a majority of the Board of
Directors of Kemper Securities, Inc.
SIGNATURE TITLE
James R. Boris Chairman and Chief Executive Officer
James R. Boris
Donald F. Eller Senior Executive Vice President and Director
Donald F. Eller
Stanley R. Fallis Senior Executive Vice President, Chief Financial
Stanley R. Fallis Officer and Director
Frank V. Geremia Senior Executive Vice President and Director
Frank V. Geremia
David B. Mathis Director
David B. Mathis
Robert T. Jackson Director
Robert T. Jackson
Jay B. Walters Senior Executive Vice President and Director
Jay B. Walters
Frederick C. Hosken Senior Executive Vice President and Director
Frederick C. Hosken
Charles M. Kierscht Director
Charles M. Kierscht
Arthur J. McGivern Director
Arthur J. McGivern
C. Perry Moore
C. Perry Moore
C. Perry Moore signs this document pursuant to power of attorney filed
with the Securities and Exchange Commission with (a) Amendment No. 1 to the
Registration Statement on Form S-6 for Kemper Tax-Exempt Insured Income Trust,
Series A-70 and Multi-State Series 28 and Kemper Tax-Exempt Income Trust,
Multi-State Series 42 (Registration No. 33-35425, (b) Amendment No. 1 to the
Registration Statement of Form S-6 for Kemper Tax-Exempt Insured Income Trust,
Series A-72 and Multi-State Series 30 (Registration No. 33-37178) and (c)
Amendment No. 1 to the Registration Statement of Form S-6 for Kemper Tax-Exempt
Insured Income Trust, Multi-State Series 51 (Registration No. 33-48398).
