<PAGE>
Registration No. 33-4024
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 8
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
SERIES 242
B.
Names of Depositors:
SMITH BARNEY SHEARSON INCORPORATED
KIDDER, PEABODY & CO. INCORPORATED
<TABLE>
<S> <C>
C. Complete addresses of depositors' principal executive
offices:
SMITH BARNEY SHEARSON KIDDER,
PEABODY & CO.
SHEARSON INC.
INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York 10005
D. Names and complete addresses of agents for service:
STEPHEN J. TREADWAY GILBERT R. OTT, JR.
Smith Barney Kidder, Peabody & Co.
Shearson Inc. Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York 10005
</TABLE>
It is proposed that this filing will become effective May 27,
1994
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
SUMMARY OF ESSENTIAL INFORMATION AS OF MARCH
7, 1994+
Sponsors: SMITH BARNEY SHEARSON INC. and
KIDDER, PEABODY & CO. INCORPORATED
Trustee: UNITED STATES TRUST COMPANY OF NEW
YORK
Evaluator: KENNY S&P EVALUATION SERVICES
Missouri
New York
Pennsylvania
Trust 70
Trust 72
Trust 71
<S> <C> <C> <C>
Principal Amount of Securities in Trust
$1,510,000
$3,755,000
$2,110,000
Number of Units 2,337
4,141 3,330
Fractional Undivided Interest in Trust per Unit
1/2,337
1/4,141
1/3,330
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less than
$1,500,000
$2,250,000
$1,750,000
Trust must be terminated if Principal Amount is less than
$750,000
$1,125,000
$875,000
Principal Amount of Securities in Trust per Unit
$646.12
$906.78
$633.63
Public Offering Price per Unit #*
$681.69
$ 976.52 $ 671.17
Sales Charge (3.25% of Public Offering Price)#
22.15 31.73 21.81
Approximate Redemption and Sponsors' Repurchase
Price per Unit
(per Unit Bid Price of Securities)#**
$659.54 $944.79 $ 649.36
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit
$47.66 $ 69.52 $ 47.98
Less Estimated Annual Expenses per Unit
1.43 1.48 1.52
Estimated Net Annual Income per Unit
$46.23 $ 68.04 $ 46.46
Monthly Income Distribution per Unit
$3.85 $5.67 $ 3.87
Daily Rate (360-day basis) of Income Accrual per Unit
$.1284 $ .1890 $ .1290
Estimated Current Return Based on Public Offering Price#
6.78% 6.96% 6.92%
Estimated Long-Term Return#
5.77% 4.98% 5.43%
<FN>
# Subject to changes in the prices of the underlying securities.
The aggregate bid price of the securities is determined on each
business day as of the Evaluation Time.
* Plus $10.90, $15.20 and $10.97 per Unit, representing
accrued interest and the net of cash on hand, accrued expenses
and amounts distributable to Unit holders, attributable to the
Units of Missouri Trust, New York Trust and Pennsylvania Trust,
respectively, through the expected date of settlement (five
business days after March 7, 1994).
The sales charge was previously reduced because prerefundings
of Portfolio securities have shortened the average life of the
Trust.
** Plus $10.00, $13.88 and $10.07 per Unit, representing
accrued interest and the net of cash on hand, accrued expenses
and amounts distributable to Unit holders, attributable to the
Units of Missouri Trust, New York Trust and Pennsylvania Trust,
respectively, as of March 7, 1994 on a pro rata basis. (See
"Redemption of Units-Computation of Redemption Price per
Unit".)
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
Record Dates: The 1st day of each month
Distribution Dates: The 15th day of each month
Evaluation Time: Close of trading on the
New York Stock Exchange
(currently 4:00 P.M. New York Time)
Date of Deposit and
Trust Agreement:April 2, 1986
Mandatory Termination Date:January 1, 2035
Trustee's Annual Fee:
$1.26 per $1,000 principal amount of bonds
($9,293 per year on the basis of bonds in the
principal amount of $7,375,000) plus expenses.
Evaluator's Fee:$.30 per bond per evaluation
As of March 7, 1994, 5 (100%) of the Bonds in the Missouri
Trust were rated by Standard & Poor's Corporation (43% being rated
AAA and 57% being rated AA); 14 (85%) of the Bonds in the New
York Trust were rated by Standard & Poor's (73% being rated AAA
and 12% being rated A) and 3 (15%) were rated by Moody's (8%
being rated Aa and 7% being rated A); 7 (80%) of the Bonds in the
Pennsylvania Trust were rated by Standard & Poor's (28% being
rated AAA, 18% being rated AA, 19% being rated A and 15% being
rated BBB) and 2 (20%) were rated by Moody's (4% being rated A
and 16% being rated Ba). Ratings assigned by rating services are
subject to change from time to time.
Additional Considerations - Investment in any Trust should be
made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates. Approximately 20% of
the Bonds in the Pennsylvania Trust consist of general obligation
bonds. Approximately 30%, 14% and 54% of the Bonds in the
Missouri Trust, New York and Pennsylvania Trust, respectively,
consist of hospital revenue bonds (including obligations of health care
facilities). Approximately 57% and 30% of the Bonds in the Missouri
Trust and New York Trust, respectively, consist of obligations of
municipal housing authorities. Approximately 8% of the Bonds in
the New York Trust consist of bonds in the power facilities category.
Approximately 8% of the Bonds in the New York Trust respectively,
consist of bonds issued for the financing of nuclear power plants.
(See Part B "Tax Exempt Securities Trust-Portfolio" for a brief
summary of additional considerations relating to certain of these
issues.)
+ The percentages referred to in this summary are each computed
on the basis of the aggregate bid price of the Bonds as of March 7,
1994.
<PAGE>
<PAGE>TAX EXEMPT SECURITIES TRUST, SERIES 242
<TABLE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
<C> <S> <C> <C> <C>
<C>
Income Principal
Units Net
Asset Distributions
Distributions
Period Ended Outstanding Value
Per Unit Per Unit Per
Unit
February 15, 1992 Missouri 2,926 $
917.87 $ 68.55 $ 15.53
New York 4,141
964.78 70.41 3.65
Pennsylvania 3,490
935.99 70.57 -
February 15, 1993 Missouri 2,871 $
916.40 $ 66.45 $ -
New York 4,141
983.27 68.36 6.69
Pennsylvania 3,457
951.83 70.33 -
February 15, 1994 Missouri 2,337 $
679.80 $ 58.07 $ 217.88
New York 4,141
969.50 67.92 -
Pennsylvania 3,330
669.28 60.87 265.48
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
BALANCE SHEETS
February 15, 1994
ASSETS
MissouriNew YorkPennsylvania
Trust 70Trust 72Trust 71
<S><C><C><C>
Investments in tax exempt bonds, at market value
(Cost $1,490,944, $3,786,485 and $2,091,626, respectively)
(Note 3 to Portfolio of Securities)
$1,560,377
$3,951,449
$2,191,473
Accrued interest
32,761
51,287
39,216
Cash
-
12,371
-
Total Assets
$1,593,138
$4,015,107
$2,230,689
LIABILITIES AND NET ASSETS
Overdraft payable
$4,072
$-
$ 1,576
Accrued expenses
367
386
405
Total Liabilities
4,439
386
1,981
Net Assets (Units of fractional undivided interest
outstanding - 2,337, 4,141 and 3,330, respectively):
Original cost to investors (Note 1)
3,231,621 4,816,554 3,729,326
Less initial underwriting commission (sales charge)
(Note 1)
137,344
204,704
158,496
3,094,277 4,611,850 3,570,830
Cost of bonds sold or redeemed since date of
deposit
(April 2, 1986)
(1,603,333)
(825,365
)(1,479,204
)
Net unrealized market appreciation
69,433
164,964 99,847
1,560,377 3,951,449 2,191,473
Undistributed net investment income
26,462
63,234
37,231
Undistributed proceeds from bonds sold or
redeemed
1,860
38
4
Net Assets
1,588,699
4,014,721
2,228,708
Total Liabilities and Net Assets
$1,593,138
$4,015,107
$2,230,689
Net asset value per unit
$679.80 $969.50 $ 669.28
The accompanying Notes to Financial Statements are an
integral part of these balance sheets.
<PAGE>TAX EXEMPT SECURITIES TRUST, SERIES 242
MISSOURI TRUST 70
STATEMENTS OF OPERATIONS
For the years ended February 15, 1994, 1993 and 1992
1994
1993
1992
<S> <C> <C>
<C>
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 142,828$
198,576 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,572
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .3,1603,8243,315
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 419
535 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 3,579
4,359 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,326
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . 139,249
194,217 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,246
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(45,171
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(5,095) 1,889
Net increase in unrealized market appreciation . . . . . . . . . . . . 8,254
257 . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,042
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . (36,917
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,838)
31,931
Net increase in net assets resulting from operations . . . . . . . . . $102,332$189,379
$ 227,177
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended February 15, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $139,249$194,217
$ 195,246
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(45,171
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(5,095) 1,889
Net increase in unrealized market appreciation . . . . . . . . . . . . 8,254
257 . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,042
Net increase in net assets resulting from operations . . . . . . . . . 102,332
189,379 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,177
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(149,106
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(193,827) (200,577
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . (547,966
) . . . . . . . . . . . . . . . . . . . . . . . . . . -
(45,441 )
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (697,072
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (193,827)
(246,018)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . (8,517
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(871)-
Value of Units at date of redemption . . . . . . . . . . . . . . . . .
(439,043 )
(49,377) -
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . .
(447,560 )
(50,248) -
Decrease in net assets . . . . . . . . . . . . . . . . . . . . . . . .(1,042,300
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54,696) (18,841
)
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,630,999
2,685,695 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,704,536
End of year (including undistributed net
investment income of $26,462, $44,836
and $45,317, respectively) . . . . . . . . . . . . . . . . . . . . . $1,588,699$
2,630,999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,685,695
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
<PAGE>TAX EXEMPT SECURITIES TRUST, SERIES 242
NEW YORK TRUST 72
STATEMENTS OF OPERATIONS
For the years ended February 15, 1994, 1993 and 1992
1994
1993
1992
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 287,889$
289,680 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 293,965
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .6,0676,1435,158
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345
1,553 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 7,412
7,696 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,226
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . 280,477
281,984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,739
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
(2,079 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8,065
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,229
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,449 58,657
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . (56,229
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,370 66,722
Net increase in net assets resulting from operations . . . . . . . . . $224,248$387,354
$ 354,461
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended February 15, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $ 280,477 $
281,984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,739
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .- (2,079
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,065
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,229
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,449 58,657
Net increase in net assets resulting from operations . . . . . . . . . 224,248
387,354 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,461
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(281,257
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(283,079) (295,059
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . -
(27,703 )
(15,312)
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (281,257
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (310,782)
(310,371)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . .- - (943
)
Value of Units at date of redemption . . . . . . . . . . . . . . . . . - -
(51,858 )
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . . - -
(52,801 )
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .(57,009
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76,572 (8,711
)
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,071,730
3,995,158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,003,869
End of year (including undistributed net
investment income of $63,234, $64,014
and $65,109, respectively) . . . . . . . . . . . . . . . . . . . . . $4,014,721$
4,071,730 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,995,158
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
<PAGE>TAX EXEMPT SECURITIES TRUST, SERIES 242
PENNSYLVANIA TRUST 71
STATEMENTS OF OPERATIONS
For the years ended February 15, 1994, 1993 and 1992
1994
1993
1992
Investment Income-interest (Note 2) . . . . . . . . . . . . . . . . . . . $ 194,663$
251,202 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 251,369
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . .4,4804,8944,388
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 958
939 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 5,438
5,833 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,422
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . 189,225
245,369 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,947
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5). . . . . . . . .(50,415
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,363) -
Net increase in unrealized market appreciation . . . . . . . . . . . . 9,207
58,347. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,375
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . (41,208
) . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,984 64,375
Net increase in net assets resulting from operations . . . . . . . . . $148,017$300,353
$ 310,322
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended February 15, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $189,225$245,369
$ 245,947
Net realized loss on securities transactions (Note 5). . . . . . . . .(50,415
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(3,363) -
Net increase in unrealized market appreciation . . . . . . . . . . . . 9,207
58,347. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,375
Net increase in net assets resulting from operations . . . . . . . . . 148,017
300,353 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,322
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . .(204,929
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (245,259)
(246,289)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . .
(891,016 ) -
-
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (1,095,945
) . . . . . . . . . . . . . . . . . . . . . . . . . . . (245,259)
(246,289)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . (1,895
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(496)-
Value of Units at date of redemption . . . . . . . . . . . . . . . . .
(111,964 ) (30,724
) -
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . .
(113,859 ) (31,220
) -
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . .(1,061,787
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23,874 64,033
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,290,495
3,266,621 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,202,588
End of year (including undistributed net
investment income of $37,231, $54,830
and $55,216, respectively) . . . . . . . . . . . . . . . . . . . . . $2,228,708$
3,290,495 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,266,621
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
February 15, 1994
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (April 2, 1986),
exclusive of accrued interest, computed on the basis of the aggregate
offering price of the securities. The initial underwriting commission
(sales charge) was 4.25% of the aggregate public offering price
(4.439% of the aggregate offering price of the securities).
(2) Interest income represents interest earned on the Trust's portfolio
and has been recorded on the accrual basis.
(3) 589 Units, 54 Units and 160 Units in the Missouri Trust, New York
Trust and Pennsylvania Trust, respectively, were redeemed by the
Trustee during the three years ended February 15, 1994 (534 Units
and 127 Units in the Missouri Trust and Pennsylvania Trust,
respectively, being redeemed in 1994. 55 Units and 33 Units in the
Missouri Trust and Pennsylvania Trust being redeemed in 1993. 54
Units in the New York Trust being redeemed in 1992).
(4) Interest received by the Trust is distributed to Unit holders on the
fifteenth day of each month, after deducting applicable expenses.
(5) The gain (loss) from the sale or redemption of securities is
computed on the basis of the average cost of the issue sold or
redeemed.
(6) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of
each Trust and is responsible for establishing and maintaining a
system of internal control directly related to, and designed to
provide reasonable assurance as to the integrity and reliability of,
financial reporting of each Trust. The Trustee is also responsible
for all estimates of expenses and accruals reflected in each Trust's
financial statements. The Evaluator determines the price for each
underlying Bond included in each Trust's Portfolio of Securities on
the basis set forth in Part B, "Public Offering - Offering Price".
Under the Securities Act of 1933, as amended (the "Act"), the
Sponsors are deemed to be issuers of each Trust's Units. As such,
the Sponsors have the responsibility of issuers under the Act with
respect to financial statements of each Trust included in the
Registration Statement.
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsors and Trustee of
Tax Exempt Securities Trust, Series 242
We have audited the accompanying balance sheets of Tax Exempt
Securities Trust, Series 242 (comprising, respectively, Missouri Trust 70,
New York Trust 72 and Pennsylvania Trust 71), including the portfolios
of securities, as of February 15, 1994, and the related statements of
operations and changes in net assets for each of the years in the three-
year period ended February 15, 1994. These financial statements are the
responsibility of the Trustee (see Note 6). 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 securities owned as of February 15, 1994 by
correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustee,
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 each of the
respective Trusts constituting Tax Exempt Securities Trust, Series 242 as
of February 15, 1994, and the results of their operations and changes in
their net assets for each of the years in the three-year period ended
February 15, 1994, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK
New York, New York
April 22, 1994
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
PORTFOLIO OF SECURITIES - February 15, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
<S> <C> <C> <C>
<C>
Missouri Trust 70:
Missouri Housing Development
Commission, Federally Insured AA 3/15/94 @
102 1/4 $ 580,000$594,280
Mortgage Loans, 7.00% due 9/15/2022 S.F.
9/15/05 @ 100
Little Blue Valley Sewer District,
Refunding Sewer System Revenue AAA --
180,000195,378
Bonds, 5.70% due 10/1/2001
Health and Educational Facilities Authority
Revenue Bonds, Christian Health Services
Development Corporation-Christian Hospital
Northeast-Northwest Issue, AAA 5/1/94 @
103 210,000219,137
9.25% due 11/1/2015 (p)
Missouri Housing Development
Commission, Mortgage Purchase AA 8/15/94 @
101 1/2 300,000301,140
Bonds, 6.30% due 8/15/2010 S.F.
8/15/97 @ 100
Health and Educational Facilities
Authority Revenue Bonds, Christian
Health Services Development
Corporation, Village North, Inc. AAA 5/1/94 @
103 240,000 250,442
Issue, 9.25% due 11/1/2013 (p)
$1,510,000$1,560,377
The accompanying Notes are an integral part of this Portfolio.
<PAGE>A-10<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
PORTFOLIO OF SECURITIES - February 15, 1994
(Continued)
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
New York Trust 72:
New York City Housing Development
Corporation, General Housing Bonds,
6.50% due 5/1/2022 A 3/14/94 @
102 $ 330,000$337,689
S.F.
Currently @ 100
5.60% due 11/1/2015 A 5/1/94 @
102 125,000123,901
New York City, Public Housing Agency
Bonds, 3.75% due 1/1/2006 AAA 7/1/94 @
102 285,000264,243
3.75% due 1/1/2006 AAA 7/1/94 @
102 130,000120,532
New York State Housing Finance
Agency, Hospital and Nursing Home A* 3/14/94 @
103 75,00077,283
Project Bonds, 5.50% due 11/1/2009
New York State Housing Finance Agency,
State University Construction Refunding AAA 11/1/95 @
102 240,000266,386
Bonds, 8.875% due 5/1/2012 (p)
New York State Medical Care
Facilities Finance Agency, Hospital
and Nursing Home Project Revenue A* 3/14/94 @
103 205,000211,708
Bonds, 7.40% due 11/1/2016 S.F.
11/1/04 @ 100
New York State Medical Care Facilities
Agency, Insured Hospital Mortgage Revenue AAA 1/15/96 @
102 320,000355,738
Bonds, 8.625% due 1/15/2006 (p)
Dormitory Authority of The State
of New York Cornell University AAA 7/1/95 @
102 450,000491,017
Revenue Bonds, 8.75% due 7/1/2015 (p)
Islip Resource Recovery Agency,
Resource Recovery System Revenue AAA 9/1/95 @
103 200,000220,940
Facility Bonds, 8.50% due 9/1/2007 S.F. 9/1/02
@ 100
Metropolitan Transportation Authority
Transit Facilities Service Contract AAA (c) 7/1/94 @
102 125,000130,868
Bonds, 9.875% due 7/1/2017 (p)
Metropolitan Transportation Authority
Commuter Facilities Service Contract AAA (c) 7/1/94 @
102 120,000125,633
Bonds, 9.875% due 7/1/2017 (p)
Power Authority of the State of New York,
General Purpose Revenue Refunding Bonds, Aa* 3/14/94 @
100 300,000300,000
6.00% due 1/1/2018
Triborough Bridge & Tunnel Authority,
General Purpose Revenue Bonds,
9.50% due 1/1/2005 (p) AAA 1/1/95 @
102 145,000155,456
9.50% due 1/1/2015 (p) AAA 1/1/95 @
102 55,00058,966
<PAGE>A-11
TAX EXEMPT SECURITIES TRUST, SERIES 242
PORTFOLIO OF SECURITIES - February 15, 1994
(Continued)
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
New York Trust 72 (cont'd):
Triborough Bridge & Tunnel Authority,
Convention Center Project Bonds,
9.00% due 1/1/2011 (p) AAA (c) 7/1/95 @
102 $ 340,000$372,225
8.875% due 1/1/2005 (p) AAA (c) 7/1/95 @
102 310,000 338,864
$3,755,000$3,951,449
The accompanying Notes are an integral part of this Portfolio.
A-12
PAGE
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
PORTFOLIO OF SECURITIES - February 15, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Pennsylvania Trust 71:
Commonwealth of Pennsylvania,
General Obligation Bonds,
4.00% due 3/15/2002 AA- 3/14/94 @
102 $ 290,000$281,019
4.00% due 6/1/2002 A1* 3/16/94 @
102 1/4 100,00096,834
4.00% due 4/15/2000 AA- 3/14/94 @
101 3/4 115,000113,448
Beaver County, Industrial Development
Authority, St. Joe Minerals A 3/14/94 @
100 200,000200,596
Corporation, 6.00% due 5/1/2007
Centre County Hospital Authority,
Hospital Revenue Bonds,
Centre Community Hospital, A 3/14/94 @
100 225,000222,779
7.125% due 7/1/2007
Lycoming County Authority, Hospital
Revenue Bonds, The Williamsport AAA 11/1/95 @
102 225,000251,188
Hospital, 9.375% due 11/1/2015 (p)
City of Philadelphia, Airport
Revenue Bonds, Philadelphia BBB 6/15/95 @
103 300,000326,244
Airport System, 9.00% due 6/15/2015
The Hospital and Higher Education
Facilities Authority of Philadelphia,
Hospital Revenue Bonds, Nazareth Ba1* 7/1/95 @
102 325,000339,180
Hospital Project, 9.375% due 7/1/2015
The Hospital and Higher Education
Facilities Authority of
Philadelphia, Hospital Revenue
Bonds, Albert Einstein Medical AAA 4/1/95 @
102 330,000 360,185
Center, 10.00% due 4/1/2011 (p)
$2,110,000$2,191,473
The accompanying Notes are an integral part of this Portfolio.
A-13
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 242
PORTFOLIO OF SECURITIES - February 15, 1994
(Continued)
At February 15, 1994 the net unrealized market appreciation of all
tax exempt bonds was comprised of the following:
Missouri New York
Pennsylvania
Trust 70 Trust 72
Trust 71
<S> <C> <C> <C>
Gross unrealized market appreciation $ 99,745 $253,367 $
159,664
Gross unrealized market depreciation (30,312) (88,403
)
(59,817 )
Net unrealized market appreciation $ 69,433 $164,964 $
99,847
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but
not below par. "S.F." indicates a sinking fund has been or will
be established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may
or may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolio, including bonds not listed as being subject to
redemption provisions, 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. For example, see
discussion of obligations of municipal housing authorities under
"Tax Exempt Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of February 15, 1994 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(p) It is anticipated that these bonds will be redeemed prior to
their scheduled maturity, pursuant to a pre-refunding, as
reflected under the column "Redemption Provisions".
(c) Continuance of the rating is contingent upon Standard &
Poor's Corporation's receipt of an executed copy of the
escrow agreement or closing documentation confirming
investments and cash flows.
A-14
<PAGE>
[TEXT]
Note: Part B of this Prospectus may not be distributed
unless accompanied by Part A
TAX EXEMPT SECURITIES TRUST
Each State Trust is one of a series of similar but separate unit
investment trusts created under the laws of the State of New York by a
Trust Indenture and Agreement and related Reference Trust Agreement
(collectively, the "Trust Agreement"), dated the Date of Deposit, among
the sponsors, United States Trust Company of New York, as trustee (the
"Trustee"), and Kenny Information Systems, Inc., as evaluator (the
"Evaluator"). As of the date of this
Prospectus, the sponsors include Smith Barney Shearson Inc. and Kidder,
Peabody & Co. Incorporated (the "Sponsors" or "Co-Sponsors"). Each
trust contains Bonds of a State for which such Trust is named herein (a
"State Trust"). On the Date of Deposit the Sponsors deposited with the
Trustee interest-bearing obligations (the "Bonds"), including contracts for
the purchase of certain such obligations and, in the case of some State
Trusts, Units of previously issued series of Tax Exempt Securities Trust,
Multistate Series or Umbrella Series (the "Deposited Units") (such Bonds
and Deposited Units being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsors registered
certificates of beneficial interest (the "Certificates") representing the units
(the "Units") comprising the entire ownership of each State Trust. The
initial public offering of Units in each State Trust has been completed.
The Units offered hereby are issued and outstanding
Units which have been acquired by the Sponsors either by purchase from
<PAGE>
the Trustee of Units tendered for redemption or in the secondary market.
References to multiple Trusts in Part B herein should be read as
references to a single Trust if Part A indicates the creation of only one
Trust. See "Rights of Unit Holders -- Redemption of Units -- Purchase
by the Sponsors of Units Tendered for Redemption" and "Public
Offering -- Market for Units."
Objectives
The objectives of each State Trust are tax-exempt income and
conservation of capital through an investment in a diversified portfolio
of municipal bonds. There is, of course, no guarantee that a Multistate
Trust's or Umbrella Series' objectives will be achieved since the payment
of interest and the preservation of principal are dependent upon the
continued ability of the issuers of the Bonds to meet such obligations.
Portfolio
The following factors, among others, were considered in
selecting the Bonds for each State Trust: (1) all the Bonds deposited in
a State Trust are obligations of the State for which such State Trust is
named or of the counties or municipalities of such State, territories or
possessions of the United States, and authorities or political subdivisions
thereof, so that the interest on them will,
in the opinion of recognized bond counsel to the issuing governmental
authorities given on the date of the original delivery of the Bonds, be
exempt from Federal income tax under existing law and from state
income taxes in the state for which
such Trust is named in each case to the extent indicated in "Tax Exempt
Securities Trust - Tax Status", (2) the Bonds are diversified as to purpose
of issue, and (3) in the opinion of the Sponsors, the Bonds are fairly
valued relative to other bonds of comparable quality and maturity. The
rating of each issue is also set forth in Part A, "Portfolio of Securities."
For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's and Moody's, see "Ratings." It should
be emphasized, however, that the ratings of
Standard & Poor's and Moody's represent their opinions as to the quality
of the Bonds which they undertake to rate, and that these ratings are
general and are not absolute standards of quality.
The Bonds in the Portfolio of a State Trust were chosen in part
on the basis of their respective maturity dates. The Bonds in each State
Trust will have a dollar-weighted average portfolio maturity as
designated in Part A. For the actual maturity date of each of the Bonds
contained in a State Trust, which date may be earlier or later than the
dollar-weighted average portfolio maturity
of the State Trust. A sale or other disposition of a Bond by the Trust
prior to the maturity of such Bond may be at a price which results in a
loss to the State Trust. The inability of an issuer to pay the principal
<PAGE>
amount due upon the maturity of a Bond would result in a loss to the
State Trust.
Additional Considerations Regarding the Trusts
Certain Bonds in a State Trust may have been purchased by
the Sponsors on a "when, as and if issued" basis; that is, they had not
yet been issued by their governmental entity on the Date of Deposit
(although such governmental entity had committed to issue such Bonds).
Contracts relating to such "when, as and if
issued" Bonds are not expected to be settled by the first settlement date
for Units. In the case of these and/or certain other Bonds, the delivery
of the Bonds may be delayed ("delayed delivery") or may not occur.
Unit holders who purchased their Units of a State Trust prior to the date
such Bonds are actually delivered to the Trustee may have to make a
downward adjustment in the tax basis of their Units for interest accruing
on such "when, as and if issued" or
"delayed delivery" Bonds during the interval between their purchase of
Units and delivery of such Bonds, since the State Trust and the Unit
holders will not be reimbursing the Sponsors for interest accruing on
such "when, as and if issued" or "delayed delivery" Bonds during the
period between the settlement date for
the Units and the delivery of such Bonds into the State Trust. (See
"Taxes.") Such adjustment has been taken into account in computing the
Estimated Current Return and Estimated Long-Term Return set forth
herein, which is slightly lower
than Unit holders may receive after the first year. (See Part A,
"Summary of Essential Information.") To the extent that the delivery of
such Bonds is delayed beyond their respective expected delivery dates,
the Estimated Current Return and Estimated Long-Term Return for the
first year may be lower than indicated in the "Summary of Essential
Information" in Part A.
Most of the Bonds in the Portfolio of a State Trust are subject
to redemption prior to their stated maturity date pursuant to sinking fund
or call provisions. (See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to
the particular State Trust described therein.) In general, a call or
redemption provision is more likely to be exercised when the offering
price valuation of a bond is higher than its call or redemption price, as
it might be in periods of declining interest rates, than when such price
valuation is less than the bond's call or redemption price. To the extent
that a Bond was deposited in a State Trust at a price higher than the price
at which it is redeemable, redemption will result in a loss of capital when
compared with the original public offering price of the Units.
Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price
of the Units. Monthly distributions will generally be reduced by the
<PAGE>
amount of the income which would otherwise have been paid with
respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units
may be affected by such redemptions. Each Portfolio of Securities in Part
A contains a listing of the sinking fund and call provisions, if any, with
respect to each of the Bonds in a State Trust. Because certain of the
Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in
accordance with their terms and the proceeds from such events will be
distributed to Unit holders and will not be reinvested, no assurance can
be given that a State Trust
will retain for any length of time its present size and composition.
Neither the Sponsors nor the Trustee shall be liable in any way for any
default, failure or defect in any Bond.
The Portfolio of the State Trust may consist of some Bonds
whose current market values were below face value on the Date of
Deposit. A primary reason for the market value of such Bonds being less
than face value at maturity is that the interest coupons of such Bonds are
at lower rates than the current market interest rate for comparably rated
Bonds, even though at the time of the issuance of such Bonds the interest
coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds
selling at market discounts tend to increase in market value as they
approach maturity when the principal amount is payable. A market
discount tax-exempt Bond held to maturity will have a larger portion of
its total return in the form of taxable ordinary income and less in the
form of tax-exempt income than a comparable
Bond bearing interest at current market rates. Under the provisions of the
Internal Revenue Code in effect on the date of this Prospectus any
ordinary income attributable to market discount will be taxable but will
not be realized until maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit",
the State Trust may contain or be concentrated in one or more of the
classifications of Bonds referred to below. A State Trust is considered to
be "concentrated" in a particular category when the Bonds in that
category constitute 25% or more of the aggregate value of the Portfolio.
(See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to the particular State Trust described
therein.) An investment in Units of the State Trust should be made with
an understanding of the risks that these investments may entail, certain
of which are described below.
General Obligation Bonds. Certain of the Bonds in the
Portfolio may be general obligations of a governmental entity that are
secured by the taxing power of the entity. General obligation bonds are
backed by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. However, the taxing power of any
<PAGE>
governmental entity may be limited by provisions of state constitutions
or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both
their revenues and expenditures, as well as other factors, many state and
local governments are confronting deficits and potential deficits which
are the most severe in recent years. Many issuers are facing highly
difficult choices about significant tax increases and/or spending
reductions in order to restore budgetary balance. Failure to implement
these actions on a timely basis could force the issuers to depend upon
market access to finance deficits or cash flow needs.
In addition, certain of the Bonds in the State Trust may be
obligations of issuers (including California issuers) who rely in whole or
in part on ad valorem real property taxes as a source of revenue. Certain
proposals, in the form of state legislative proposals or voter initiatives,
to limit ad valorem real property taxes have been introduced in various
states, and an amendment to the constitution of the State of California,
providing for strict limitations on ad valorem real property taxes, has had
a significant impact on the taxing powers of local governments and on
the financial conditions of school districts and local governments in
California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on
their abilities to make future payments on their outstanding debt
obligations.
Industrial Development Revenue Bonds ("IDRs"). IDRs,
including pollution control revenue bonds, are tax-exempt securities
issued by states, municipalities, public authorities or similar entities
("issuers") to finance the cost of acquiring, constructing or improving
various projects, including pollution control facilities and certain
industrial development facilities. These projects are usually operated by
corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers
are only obligated to pay amounts due on the IDRs to the extent that
funds are available from the unexpended proceeds of the IDRs or receipts
or revenues of the issuer under arrangements between the issuer and the
corporate operator of a project. These arrangements 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 IDRs.
<PAGE>
IDRs are generally issued under bond resolutions, agreements
or trust indentures pursuant to which the revenues and receipts payable
under the issuer's arrangements with the corporate operator of a
particular project have been assigned and pledged to the holders of the
IDRs or a trustee for the benefit of the holders of the IDRs. In certain
cases, a mortgage on the underlying project has been assigned to the
holders of the IDRs or a trustee as additional security for the IDRs. In
addition, IDRs are frequently directly guaranteed by the corporate
operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely
dependent upon the creditworthiness of the corporate operator of the
project or corporate guarantor. Corporate operators or guarantors that are
industrial companies 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 (including that
of low-cost foreign companies), unfunded pension fund liabilities or
off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of the
IDRs in the Portfolio may be additionally insured or secured by letters
of credit issued by banks or otherwise guaranteed or secured to cover
amounts due on the IDRs in the event of default in payment by an issuer.
Hospital and Health Care Facility Bonds. The ability of
hospitals and other health care facilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the level of payments received from private third-party
payors and government programs and the cost of providing health care
services.
A significant portion of the revenues of hospitals and other
health care facilities is derived from private third-party payors and
government programs, including the Medicare and Medicaid programs.
Both private third-party payors and government programs have
undertaken cost containment measures designed
to limit payments made to health care facilities. Furthermore,
government programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government
funding restrictions, all of which may
materially decrease the rate of program payments for health care
facilities. There can be no assurance that payments under governmental
programs will remain at levels comparable to present levels or will, in
the future, be sufficient to cover the costs allocable to patients
participating in such programs. In addition, there can be no assurance
that a particular hospital or other health
care facility will continue to meet the requirements for participation in
such programs.
<PAGE>
The costs of providing health care services are subject to
increase as a result of, among other factors, changes in medical
technology and increased labor costs. In addition, health care facility
construction and operation is subject to federal, state and local regulation
relating to the adequacy of medical care, equipment, personnel,
operating policies and procedures, rate-setting, and compliance with
building codes and environmental laws. Facilities are subject to periodic
inspection by governmental and other authorities to assure continued
compliance with the various standards necessary
for licensing and accreditation. These regulatory requirements are subject
to change and, to comply, it may be necessary for a hospital or other
health care facility to incur substantial capital expenditures or increased
operating expenses to effect changes in its facilities, equipment,
personnel and services.
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. The
Clinton Administration may impose regulations which could limit price
increases for hospitals or the level of reimbursements for third-party
payors or other measures to reduce health care costs and make health
care available to more individuals, which would reduce profits for
hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a
hospital cannot adjust to the new system by reducing expenses or raising
rates, financial difficulties may arise. Also, Blue Cross has denied
reimbursement for some hospitals for services other than emergency
room services. The lost volume would reduce revenues unless
replacement patients were found.
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, if the hospital becomes subject to ad valorem
taxation, or in various other circumstances. For example, certain
hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to
perform procedures against specified religious principles or to disclose
information that is considered confidential or privileged. Certain
FHA-insured bonds may provide that all or a portion of these 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
<PAGE>
and the limited alternative uses to which a hospital can be put may
severely reduce its collateral value.
The Internal Revenue Service is currently engaged in a
program of intensive audits of certain large tax-exempt hospital and
health care facility organizations. Although these audits have not yet
been completed, it has been reported that the tax-exempt status of some
of these organizations may be revoked. At this time, it is uncertain
whether any of the hospital and health care facility bonds held by the
State Trust will be affected by such audit
proceedings.
Single Family and Multi-Family Housing Bonds. Multi-family
housing revenue bonds and single family mortgage revenue bonds are
state and local housing issues that have been issued to provide financing
for various housing projects. Multi-family housing revenue bonds are
payable primarily from the revenues derived from mortgage loans to
housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the
purpose of acquiring from originating financial institutions notes secured
by mortgages on residences.
Housing obligations are not general obligations of the issuer
although certain obligations may be supported to some degree by
Federal, state or local housing subsidy programs. Budgetary constraints
experienced by these programs as well as the failure by a state or local
housing issuer to satisfy the qualifications required for coverage under
these programs or any legal or administrative determinations that the
coverage of these programs is not available to a housing issuer, probably
will result in a decrease or elimination of subsidies available for payment
of amounts due on the issuer's obligations. The ability of housing issuers
to make debt service payments on their obligations will also be affected
by various economic and non-economic developments including, among
other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single family
issues and the ability of mortgage insurers to pay claims, employment
and income conditions prevailing in local markets, increases in
construction costs, taxes, utility costs and other operating expenses, the
managerial ability of project managers, changes in laws and
governmental regulations and economic trends
generally in the localities in which the projects are situated. Occupancy
of multi-family housing projects may also be adversely affected by high
rent levels and income limitations imposed under Federal, state or local
programs.
All single family mortgage revenue bonds and certain
multi-family housing revenue bonds are prepayable over the life of the
underlying mortgage or mortgage pool, and therefore the average life of
<PAGE>
housing obligations cannot be determined. However, the average life of
these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part
from prepayments on underlying mortgage loans; mortgage loans are
frequently partially or completely prepaid prior to their final stated
maturities as a result of events such as declining interest rates, sale of the
mortgaged premises, default, condemnation or casualty loss. Multi-family
issues are characterized by mandatory redemption at par upon the
occurrence of monetary defaults or breaches or covenants by the project
operator. Additionally, housing obligations are generally subject to
mandatory partial redemption at par to the extent that proceeds from the
sale of the obligations are not
allocated within a stated period (which may be within a year of the date
of issue). To the extent that these obligations were valued at a premium
when a Holder purchased Units, any prepayment at par would result in
a loss of capital to the Holder and, in any event, reduce the amount of
income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends
on qualification under Section 143 of the Internal Revenue Code of 1986,
as amended (the "Code"), in the case of single family mortgage revenue
bonds or Section 142(a)(7) of the Code or other provisions of Federal
law in the case of certain multi-family housing revenue bonds (including
Section 8 assisted bonds). These sections of the Code or other provisions
of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of
the residences financed with the proceeds of the single family mortgage
revenue bonds and the income levels of tenants of the rental projects
financed with the proceeds of the multi-family housing revenue bonds.
While the issuers of the bonds and other parties, including the originators
and servicers of the single-family mortgages and the owners of the rental
projects financed with the
multi-family housing revenue bonds, generally covenant to meet these
ongoing requirements and generally agree to institute procedures
designed to ensure that these requirements are met, there can be no
assurance that these ongoing requirements will be consistently met. The
failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly
retroactively from the date of issuance, thereby reducing the value of the
bonds, subjecting the Holders to unanticipated tax liabilities and possibly
requiring the Trustee to sell the bonds at reduced values. Furthermore,
any failure to meet these ongoing requirements might not constitute an
event of default under the applicable mortgage or permit the holder to
accelerate payment of the bond or require the issuer to redeem the bond.
In any event, where the mortgage is insured by the Federal Housing
Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage
bonds.
<PAGE>
Power Facility Bonds. The ability of utilities to meet their
obligations with respect to revenue bonds issued on their behalf is
dependent on various factors, including the rates they may charge their
customers, the demand for a utility's services and the cost of providing
those services. Utilities, in particular investor-owned utilities, are subject
to extensive regulations relating to the rates which they may charge
customers. Utilities can experience regulatory, political and consumer
resistance to rate increases. Utilities engaged in long-term capital projects
are especially sensitive to regulatory lags in granting rate increases. Any
difficulty in obtaining timely and adequate rate increases could adversely
affect a utility's results of operations.
The demand for a utility's services is influenced by, amoung
other factors, competition, weather conditions and economic conditions.
Electric utilities, for example, have experienced increased competition as
a result of the availability of other energy sources, the effects of
conservation on the use of electricity, self-generation by industrial
customers and the generation of electricity by co-generators and other
independent power producers. Also, increased competition will result if
federal regulators determine that utilities must open their transmission
lines to competitors. Utilities which distribute natural gas also are subject
to competition from alternative fuels, including fuel oil, propane and
coal.
The utility industry is an increasing cost business making the
cost of generating electricity more expensive and heightening its
sensitivity to regulation. A utility's costs are influenced by the utility's
cost of capital, the availability and cost of fuel and other factors. In
addition, natural gas pipeline and distribution companies have incurred
increased costs as a result of long-term natural gas purchase contracts
containing "take or pay" provisions which require that they pay for
natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on
these increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future
they will also incur increasing capital and operating expenses to comply
with environmental legislation such as the Clean Air Act of 1990, and
other energy, licensing and other laws and regulations relating to, among
other things, air emissions, the quality of drinking water, waste water
discharge, solid and hazardous substance handling and disposal, and
siting and licensing of facilities. Environmental legislation and
regulations are changing rapidly and are the subject of current public
policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic
fields associated with electric transmission and distribution lines as well
as emissions of carbon dioxide and other so-called greenhouse gases
<PAGE>
associated with the burning of fossil fuels. Compliance with these
requirements may limit a utility's operations or require substantial
investments in new equipment and, as a result, may adversely affect a
utility's results of operations.
The electric utility industry in general is subject to various
external factors including (a) the effects of inflation upon the costs of
operation and construction, (b) substantially increased capital outlays and
longer construction periods for larger and more complex new
generating units, (c) uncertainties in predicting future load requirements,
(d) increased financing requirements coupled with limited availability of
capital, (e) exposure to cancellation and penalty charges on new
generating units under construction, (f) problems of cost and availability
of fuel, (g) compliance with rapidly changing and complex
environmental, safety and licensing
requirements, (h) litigation and proposed legislation designed to delay or
prevent construction of generating and other facilities, (i) the uncertain
effects of conservation on the use of electric energy, (j) uncertainties
associated with the development of a national energy policy, (k)
regulatory, political and consumer resistance to rate increases and (l)
increased competition as a result of the availability of other energy
sources. These factors may delay the construction and increase the cost
of new facilities, limit the use of, or necessitate costly modifications to,
existing facilities, impair the access of electric utilities to credit markets,
or substantially increase the cost of credit for electric generating
facilities. The Sponsors cannot predict at this time the ultimate effect of
such factors on the ability of any issuers to meet their obligations with
respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law
in October, 1992, makes it mandatory for a utility to permit non-utility
generators of electricity access to its transmission system for wholesale
customers, thereby increasing competition for electric utilities. NEPA
also mandated demand-side management policies to be considered by
utilities. NEPA prohibits the Federal Energy Regulatory Commission
from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric
generation to provide electricity to retail customers (particularly
industrial retail customers) of a utility. However, under NEPA, a state
can mandate retail wheeling under certain conditions.
There is concern by the public, the scientific community, and
the U.S. Congress regarding environmental damage resulting from the
use of fossil fuels. Congressional support for the increased regulation of
air, water, and soil contaminants is building and there are a number of
pending or recently enacted legislative proposals which may affect the
electric utility industry. In particular, on November 15, 1990, legislation
was signed into law that substantially revises the Clean Air Act (the
"1990 Amendments"). The 1990 Amendments seek to improve the
<PAGE>
ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the
reduction of sulphur dioxide and nitrogen oxide emissions caused by
electric utility power plants, particularly those fueled by coal. Under the
1990 Amendments the U.S. Environmental Protection Agency ("EPA")
must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in
two phases. Phase I addresses specific generating units named in the
1990 Amendments. In Phase II the total U.S. emissions will be capped
at 8.9 million tons by the year 2000. The 1990 Amendments contain
provisions for allocating allowances to power plants based on historical
or calculated levels. An allowance is defined as the authorization to emit
one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further
regulation of toxic air emissions from electric generating units pending
the results of several federal government studies to be conducted over the
next three to four years with respect to anticipated hazards to public
health, available corrective technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants
are exposed to risks inherent in the nuclear industry. These risks include
exposure to new requirements resulting from extensive federal and state
regulatory oversight, public controversy, decomissioning costs, and spent
fuel and radioactive waste disposal issues. While nuclear power
construction risks are no longer of paramount concern, the emerging
issue is radioactive waste disposal. In addition, nuclear plants typically
require substantial capital additions and modifications throughout their
operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade
various plant systems. The high degree of regulatory monitoring and
controls imposed on
nuclear plants could cause a plant to be out of service or on limited
service for long periods. When a nuclear facility owned by an
investor-owned utility or a state or local municipality is out of service or
operating on a limited service basis, the utility operator or its owners
may be liable for the recovery of replacement power costs. Risks of
substantial liability also arise from the operation of nuclear facilities and
from the use, handling, and possible radioactive emissions associated
with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in
connection with the ownership and operation of a nuclear plant and
severe financial consequences could result from a significant accident or
occurrence. The Nuclear Regulatory Commission has promulgated
regulations mandating the establishment of funded reserves to assure
financial capability for the eventual decommissioning of licensed nuclear
facilities. These funds are to be accrued from revenues in amounts
currently estimated to be sufficient to pay
for decommissioning costs.
<PAGE>
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, Oregon 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
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.
Water and Sewer Revenue Bonds. Water and sewer bonds are
generally payable from user fees. The ability of state and local water and
sewer authorities to meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed by
these authorities, economic or population decline and resulting decline in
revenue from user charges, rising construction and maintenance costs and
delays in construction of facilities, impact of environmental requirements,
failure or inability to raise user charges in response to increased costs,
the difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no growth" zoning
ordinances. In some cases this ability may be affected by the continued
availability of Federal and state financial assistance and of municipal
bond insurance for future bond issues.
University and College Bonds. 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, demographic trends, geographic location,
geographic diversity and quality of the student body, quality of the
faculty and the diversity of program offerings.
Legislative or regulatory action in the future at the Federal,
state or local level may directly or indirectly affect eligibility standards
or reduce or eliminate the availability of funds for certain types of
student loans or grant programs, including student aid, research grants
and work-study programs, and may affect indirect assistance for
education.
<PAGE>
Lease Rental Bonds. Lease rental bonds are issued for the
most part by governmental authorities that have no taxing power or other
means of directly raising revenues. Rather, the authorities are financing
vehicles created solely for the construction of buildings (administrative
offices, convention centers and prisons, for example) or the purchase of
equipment (police cars and computer systems, for example) that will be
used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness
of the lessee government to meet its lease rental payments which include
debt service on the bonds. Willingness to pay may be subject to changes
in the views of citizens and government officials as to the essential nature
of the finance project. Lease rental bonds are subject, in almost all cases,
to the annual appropriation risk, i.e., the lessee government is not legally
obligated to budget and appropriate for the rental payments beyond the
current fiscal year. These bonds are also subject to the risk of abatement
in many states-rental bonds cease in the event that damage, destruction
or condemnation of the project prevents its use by the lessee. (In these
cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the
lessee government, in the event it defaults on its rental payments, from
the purchase or use of similar equipment for a certain period of time.
This safeguard is designed to insure that the lessee government will
appropriate the necessary funds even though it is not legally obligated to
do so, but its legality remains untested in most, if not all, states.
Capital Improvement Facility Bonds. The Portfolio of a State
Trust may contain Bonds which are in the capital improvement facilities
category. Capital improvement bonds are bonds issued to provide funds
to assist political subdivisions or agencies of a state through acquisition
of the underlying debt of a state or local political subdivision or agency
which bonds are secured by the proceeds of the sale of the bonds,
proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or
failure of payment of proceeds on and default of the underlying debt.
Solid Waste Disposal Bonds. Bonds issued for solid water
disposal facilities are generally payable from tipping fees and from
revenues that may be earned by the facility on the sale of electrical
energy generated in the combustion of waste products. The ability of
solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful
and efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
<PAGE>
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction
and maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental
regulations. Because of the relatively short history of this type of
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, for incinerators or waste-to-energy facilities, 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-to-energy facilities are concerned with
many of the same issues facing utilities insofar as they derive revenues
from the sale of energy to local power utilities (see Power Facility Bonds
above).
Moral Obligation Bonds. The State Trust may also include
"moral obligation" bonds. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of the 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.
Refunded Bonds. Refunded Bonds are typically secured by
direct obligations of the U.S. Government, or in some cases obligations
guaranteed by the U.S. Government, placed in an escrow account
maintained by an independent trustee until maturity or a predetermined
redemption date. These obligations are generally noncallable prior to
maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought
to be escrowed to maturity have been called for redemption prior to
<PAGE>
maturity.
Airport, Port and Highway Revenue Bonds. Certain facility
revenue bonds are payable from and secured by the revenues from the
ownership and operation of particular facilities, such as airports
(including airport terminals and maintenance facilities), bridges, marine
terminals, turnpikes and port authorities. For example, the major portion
of gross airport operating income is generally derived from fees received
from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy
of certain terminal space, facilities, service fees, concessions and leases.
Airport operating income may therefore be affected by the ability of the
airlines to meet their obligations under the use agreements. The air
transport industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased aviation
fuel, deregulation, traffic constraints, the current recession and other
factors. As a result, several airlines are experiencing severe financial
difficulties. Several airlines including America West Airlines have sought
protection from their creditors under Chapter 11 of the Bankruptcy Code.
In addition, other airlines such as Midway Airlines, Inc., Eastern
Airlines, Inc. and Pan American Corporation have been liquidated.
However, within the past few months Northwest
Airlines, Continental Airlines and Trans World Airlines have emerged
from bankruptcy. The Sponsors 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 bonds related to other facilities is
dependent on revenues from the projects, such as use 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 and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable from and
secured by the revenues derived by a municipality from a particular tax
such as a tax on the rental of a hotel room, on the purchase of food and
beverages, on the rental of automobiles or on the consumption of liquor.
Special tax bonds are not secured by the general tax revenues of the
municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special
tax bonds may not be adversely affected by a reduction in revenues
realized from the underlying special tax due to a general decline in the
local economy or population or due to a decline in the consumption, use
or cost of the goods and services that are subject to taxation. Also,
should spending on the particular
goods or services that are subject to the special tax decline, the
<PAGE>
municipality may be under no obligation to increase the rate of the
special tax to ensure that sufficient revenues are raised from the
shrinking taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically
secured by incremental tax revenues collected on property within the
areas where redevelopment projects, financed by bond proceeds are
located ("project areas"). Such payments are expected to be made from
projected increases in tax revenues derived from higher assessed values
of property resulting from development in the particular project area and
not from an increase in tax rates. Special risk considerations include:
reduction of, or a less than anticipated increase in, taxable values of
property in the project area, caused
either by economic factors beyond the Issuer's control (such as a
relocation out of the project area by one or more major property owners)
or by destruction of property due to natural or other disasters; successful
appeals by property owners of assessed valuations; substantial
delinquencies in the payment of property taxes; or imposition of any
constitutional or legislative property tax
rate decrease.
Transit Authority Bonds. Mass transit is generally not
self-supporting from fare revenues. Therefore, additional financial
resources must be made available to ensure operation of mass transit
systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or
a pledge of a special tax such as a sales tax or a property tax. If fare
revenues or the additional financial resources do not increase
appropriately to pay for rising operating expenses, the ability of the
issuer to adequately service the debt may be adversely affected.
Convention Facility Bonds. The Portfolio of a State Trust may
contain Bonds of issuers in the convention facilities category. Bonds in
the convention facilities category include special limited obligation
securities issued to finance convention and sports facilities payable from
rental payments and annual governmental appropriations. The
governmental agency is not obligated to
make payments in any year in which the monies have not been
appropriated to make such payments. In addition,
these facilities are limited use facilities that may not be used for purposes
other than as convention centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of issuers which
will be affected by general economic conditions in Puerto Rico. Puerto
Rico's unemployment rate remains significantly higher than the U.S.
unemployment rate. Furthermore, the economy is largely dependent for
its development upon U.S.policies and programs that are being reviewed
and may be eliminated.
<PAGE>
The Puerto Rican economy is affected by a number of
Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal
Revenue Code (the "Code") provides for a credit against Federal income
taxes for U.S. companies operating on the island if certain requirements
are met. The Omnibus Budget Reconciliation Act of 1993 imposes limits
on such credit, effective for tax years beginning after 1993. In addition,
from time to time proposals are introduced in Congress which, if enacted
into law, would eliminate some or all of the benefits of Section 936.
Although no assessment can be made at this time
of the precise effect of such limitation, it is expected that the limitation
of Section 936 credits would have a negative impact on Puerto Rico's
economy.
Aid for Puerto Rico's economy has traditionally depended
heavily on Federal programs, and current Federal budgetary policies
suggest that an expansion of aid to Puerto Rico is unlikely. An adverse
effect on the Puerto Rican economy could result from other U.S.
policies, including a reduction of tax benefits
for distilled products, further reduction in transfer payment programs
such as food stamps, curtailment of military spending and policies which
could lead to a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican
electorate chose to continue Puerto Rico's Commonwealth status.
Previously proposed legislation, which was not enacted, would have
preserved the federal tax exempt status of
the outstanding debts of Puerto Rico and its public corporations
regardless of the outcome of the referendum, to the extent that similar
obligations issued by states are so treated and subject to the provisions
of the Code currently in effect. There can be no assurance that any
pending or future legislation finally enacted will include the same or
similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both
direct and indirect consequences on such matters as the basic
characteristics of future Puerto Rico debt obligations, the markets for
these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing
and future debt obligations. Such possible consequences include, without
limitation, legislative proposals seeking restoration of the status of
Section 936 benefits otherwise subject to the limitations discussed above.
However, no assessment can be made at this time of the economic and
other effects of a change in federal laws affecting Puerto Rico as a result
of the November 1993 plebiscite.
Litigation and Legislation. To the best knowledge of the
Sponsors, there is no litigation pending as of the Initial Date in respect
of any Bonds which might reasonably be expected to have a material
adverse effect upon the State Trust.
<PAGE>
At any time after the Initial Date of Deposit, litigation may be initiated
on a variety of grounds, or legislation may be enacted, with respect to
Bonds in the Trust. Litigation, for example, challenging the issuance of
pollution control revenue bonds under environmental protection statutes
may affect the validity of Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely
predicted, opinions of bond counsel are delivered on the date of issuance
of each Bond to the effect that the Bond has been validly issued and that
the interest thereon is exempt from Federal income tax. In addition,
other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due
on the Bonds.
Under the Federal Bankruptcy Act, a political subdivision or
public agency or instrumentality of any state, including municipalities,
may proceed to restructure or otherwise alter the terms of its obligations,
including those of the type comprising the State Trust's Portfolio. The
Sponsors are unable to predict
what effect, if any, this legislation might have on the State Trust.
From time to time Congress considers proposals to tax the
interest on state and local obligations, such as the Bonds. The Supreme
Court clarified in South Carolina v. Baker (decided April 20, 1988) that
the U.S. Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
Tax Exemption. In the opinion of bond counsel rendered on
the date of issuance of each Bond, the interest on each Bond is
excludable from gross income under existing law for regular Federal
income tax purposes (except in certain circumstances depending on the
Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of
the Bonds may become subject to regular Federal income tax, perhaps
retroactively to their date of issuance, as a result of changes in Federal
law or as a result of the failure of issuers (or other users of the proceeds
of the Bonds) to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on June
14, 1993 that it will be expanding its examination program with respect
to tax-exempt bonds.The expanded examination program will consist of,
among other measures, increased enforcement against abusive
transactions, broader audit coverage (including the
expected issuance of audit guidelines) and expanded compliance achieved
by means of expected revisions to the tax-exempt bond information
return forms. At this time, it is uncertain whether the tax exempt status
of any of the Bonds would be affected by such proceedings, or whether
<PAGE>
such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on the
Bond should ultimately be determined to be taxable, the Bond would
become due and payable by its issuer, and, in addition, may provide that
any related letter of credit or other security could be called upon if the
issuer failed to satisfy all or part of its obligation. In other cases,
however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter
of credit or other security upon a determination of taxability. In those
cases in which a Bond does not provide for acceleration or redemption
or in which both the issuer and the bank or other entity issuing the letter
of credit or other security are unable to meet their obligations to pay the
amounts due on the Bond as a result of a determination of taxability, the
Trustee would be obligated to sell the Bond and, since it would be sold
as a taxable security, it is expected that it would have to be sold at a
substantial discount from current market price. In addition, as mentioned
above, under certain circumstances Holders could be required to pay
income tax on interest received prior to the date on which the interest is
determined to be taxable.
Moreover, the California Trust, the Connecticut Trust, the
Florida Trust, the Maryland Trust, the Massachusetts Trust, the
Minnesota Trust, the Missouri Trust, the New Jersey Trust, the New
York Trust, the North Carolina Trust, the Ohio Trust, the Pennsylvania
Trust and the Texas Trust are subject to certain additional state risk
factors:
California Trust
California's economy is the largest among the 50 states. The
State's January 1, 1992 population of 31 million represented
approximately 12.0% of the total United States population. Total
employment was about 14 million, the majority of which was in the
service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced
the worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, have all been severely affected. Job losses have
been the worst of any post-war recession. Employment levels are
expected to stabilize by late 1993. However,
pre-recession job levels are not expected to be reached for several more
years. Unemployment reached 10% in November 1992 and is expected
to remain above 9% through 1993 and 1994. According to the
Department of Finance, recovery from the recession in California is not
expected in meaningful terms until late 1993 or 19994, notwithstanding
signs of recovery elsewhere in the nation.
<PAGE>
After three years of recession, California's economy seems to
be stabilizing, however, economic signals remain mixed. On the plus
side, nonfarm employment in April was essentially unchanged from the
December level. The unemployment rate seems to be moving down,
although the large April drop, from 9.4% to 8.6%, probably exaggerates
the improvement. Personal income growth is improving gradually, from
gains of 2% or less in 1991 to slightly over 3% at the beginning of 1993,
and taxable sales are stabilizing after a lengthy decline.
There are still ample signs of weakness. Manufacturing
employment continues to decline, with deep losses in aerospace,
reflecting defense cuts and weak commercial markets. Despite strong
output and sales gains, electronics firms continue to cut payrolls. All
manufacturing industries,
with the exception of apparel and textiles, are posting employment
losses. Housing, usually an engine of recovery, remains in a slump.
Permit volume has averaged a 95,000 unit annual rate in recent months,
actually somewhat below
1992's 98,000 total. Nonresidential construction continues to hit new
recession lows, reflecting oversupplied commercial office, retail and
hotel markets. Employment continues to decline in normally stable
industries such as banking,
the utilities and most segments of wholesale and retail trade. Food,
department and apparel stores are shedding jobs and government
employment is down 30,000 jobs over the past year.
The department of Finance, in its May 1993 Revision of the
Governor's 1993-94 Budget, states that it expects this essentially flat
pattern of economic activity to persist throughout 1993, with employment
by year end only marginally higher than in April. Gains in service
industries, mainly health care,
temporary agencies (in business services), motion picture production and
amusements are expected to continue. There should be modest increases
in wholesale and retail trade. The finance and transportation and utilities
groups will be stable to down slightly. Assuming a modest pickup in
homebuilding, construction employment will also be flat this year.
Against these, manufacturing and government will continue to lose jobs.
The largest losses in
percentage terms will be in aerospace manufacturing and the Federal
Department of Defense, reflecting cuts in the military budget. Budget
constraints will also affect State and local government.
The recession has seriously affected State tax revenues, which
basically mirror economic conditions. It has also caused increased
expenditures for health and welfare programs. The State is also facing
a structural imbalance in its budget with the largest programs supported
by the General Fund--K-14 education (kindergarten through community
college), health, welfare and
<PAGE>
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 chronic 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, 1993, the State's
General Fund had an accumulated deficit, on a budget basis, of
approximately $2.75 billion.
Further consequence of the larger budget imbalances over the last three
fiscal years has been that the State depleted its available cash resources
and has had to use a series of external borrowings to meet its cash needs.
The 1992-93 Governor's Budget proposed expenditures of
$56.3 billion in General and Special Funds for the 1992-93 fiscal year,
a 1.6% increase over corresponding figures for the 1991-92 fiscal year.
General Fund expenditures were projected at $43.8 billion, an increase
of 0.2% over the 1992-93 Revised Governor's Budget. The Budget
estimated $45.7 billion of revenues
and transfers for the General Fund (a 4.7% increase over 1991-92) and
$12.4 billion for Special Funds (a 9.6% increase over 1991-92). To
balance the proposed budget, program reductions totaling $4.365 billion
and revenue and
transfer increases of $872 million were proposed for the 1991-92 and
1992-93 fiscal years. By the time of the Governor's May Revision issued
on May 20, 1992, the Administration estimated that the 1992-93 Budget
needed to address a gap of about $7.9 billion, much of which was needed
to repay the accumulated budget deficits of the previous two years.
The severity of the budget actions needed led to a long delay
in adopting the budget. With the failure to adopt a budget by July 1,
1992, which would have allowed the State to carry out its normal annual
cash flow borrowing, the Controller was forced to issue registered
warrants to pay a variety of obligations representing prior year's or
continuing appropriations, and
mandates from court orders. Available funds were used to make
constitutionally-mandated payments, such as debt service on bonds and
revenue anticipations warrants. After that date, all remaining outstanding
registered warrants (about $2.9 billion) were called for redemption from
proceeds of the issuance of 1992 Interim Notes after the budget was
adopted.
The 1992-93 Budget Act provided for expenditures of $57.4
billion, consisting of General Fund expenditures of $40.8 billion and
Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimates
there will be a balance in the Special Fund for Economic Uncertainties
of $28 million on June 30, 1993.
<PAGE>
<PAGE>
The $7.9 billion budget gap was closed through a combination
of increased revenues and transfers and expenditure cuts such as:
1. General fund savings in health and welfare programs
totaling $1.6 billion.
2. General fund reductions of $1.9 billion for K-12
schools and community colleges.
3. General fund savings of $1.3 billion by revising the
State aid program to local governments originally enacted after
Proposition 13.
4. Program cuts for higher education totaling $415
million.
5. A total of $1.6 billion of transfers and accelerated
collections of State revenues.
6. Approximately $1.0 billion from various additional
program reductions.
Shortly after the 1992-93 Budget Act was enacted, it became
evident the economic conditions in the State were not beginning to
improve in the second half of 1992, as assumed by the Department of
Finance's May 1992 economic estimates. This was exacerbated by
enactment of an initiative measure in November 1992 repealing a sales
tax for certain candy, snack foods and
bottled water, reducing revenues by about $300 million for a full fiscal
year ($200 million in 1992-93). The Governor's Budget proposal for
1993-94, released on January 8, 1993 (the "January Governor's
Budget"), confirmed the
earlier forecasts about the State's economy and the 1992-93 Budget Act.
The January Governor's Budget projected that the economy would not
start meaningful recovery from the recession until late 1993 or 1994.
With the economy continuing in recession throughout the 1992-93 fiscal
year, revenues were projected about $2.5 billion lower than anticipated
when the 1992-93 Budget Act was signed, leading to a projected $2.1
billion budget deficit at June
30, 1993 (compared to the Budget Act projection of a $28 million
balance). That deficit amount was projected if, by March 1993, the
Legislature adopted
several actions proposed by the Governor to save about $475 million in
the 1992-93 fiscal year. The Legislature did not adopt any of the
Governor's proposals.
<PAGE>
<PAGE>
On May 20. 1993, the Department of Finance released its May
Revision to the January Governor's Budget (the "May Revision"),
updating revenue and expenditure projections and proposals for the
1992-93 and 1993-94 fiscal years. The May Revision projected that the
General Fund will end the fiscal year on June 30, 1993 with an
accumulated budget deficit of about $2.8
billion, and a negative fund balance of about $2.2 billion ( the difference
being certain reserves for encumbrances and school funding costs). The
Governor projected revenues for 1992-93 of $41.0 billion, $1.0 billion
less than in the 1991-92 fiscal year. On the expenditure side, the
continued recession increased
health and welfare costs above the original Budget Act projections.
Also, property tax receipts at the local level were less than projected, so
that the State will not get the full $1.3 billion benefit from the property
tax shift enacted in the 1992-93 Budget Act. Overall, the May Revision
projected total General Fund
expenditures of $1.1 billion for the 1992-93 fiscal year, about $300
million higher than the Budget Act and $2.2 billion less than fiscal year
1991-92.
The January Governor's Budget had projected that, because of
severely reduced revenues, the State would face a cash flow shortfall in
May 1993, necessitating additional external borrowing. The State met
this cash flow need by issuing $3.0 billion of revenue anticipation notes
on April 26, 1993, which matured on June 24, 1993. The State also
issued the 1993 Revenue Participation Warrants in the principal amount
of $2.0 billion to meet cash flow
requirements for the end of the 1992-93 fiscal year and the start of the
1993-94 fiscal year.
The 1993-94 fiscal year represents the third consecutive year
the Governor and the Legislature were faced with a very difficult budget
environment, requiring revenue actions and expenditure cuts totalling
multiple billions of dollars to produce a balanced budget.
The Governor's budget introduced on January 8, 1993
proposed General Fund Expenditures of $37.33 billion, with projected
revenues of $39.87 billion. It also proposed Special Fund expenditures
of $12.35 billion and Special
Fund Revenues of $12.10 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts
from local government, reliance on increased federal aid and reductions
in State spending.
The May Revision of the Governor's Budget, released on May
20, 1993, indicated that the revenue projections of the January Budget
Proposal were tracking well, with full year 1992-93 about $80 million
higher than the January projection. Personal Income tax revenue was
higher than projected, sales tax was close to target, and bank and
<PAGE>
corporation taxes were lagging behind projections. The May Revision
projected the State would have about
$2.7 billion accumulated deficit by June 30, 1993. The Governor
proposed to repay this deficit over an 18-month period. He also agreed
to retain the 0.5% sales tax scheduled to expire June 30 for a six-month
period, dedicated to local
public safety purposes, with a November election to determine a
permanent extension. Unlike previous years, the Governor's Budget and
May Revision did not calculate a "gap" to be closed, but rather set forth
revenue and expenditure forecasts and proposals designed to produce a
balanced budget.
The 1993-94 Budget Act, signed by the Governor on June 30,
1993, is predicated on revenue and transfer estimates of $40.6 billion,
about $700 million higher than the January Governor's Budget, but still
about $400 million below 1992-93 (and the second consecutive year of
actual decline). The principal reasons for this decline are the continued
weak economy and the expiration (or repeal) of three fiscal steps taken
in 1991-a half cent temporary
sales tax (which generates about $1.5 billion annually), a deferral of
operating loss carry forwards ($440 million), and repeal by initiative of
a sales tax on candy and snack foods ($300 million). The Governor also
proposes a number of fiscal steps (tax credits and the like) to stimulate
job growth, which could result in short-term revenue costs. The 1993-94
Budget Act assumes Special Fund revenues of $11.8 billion, an increase
of 5.0% over 1992-93.
The 1993-94 Budget Act includes General Fund expenditures
of $38.5 billion (a 6.5% reduction from projected 1992-93 expenditures
of $41.2 billion), in order to keep a balanced budget within the available
revenues. The Budget also includes Special Fund expenditures of $12.1
billion, a 4.2% increase. The Budget Act reflects the following major
adjustments:
1. Changes in local government financing to
shift about $2.6 billion in property taxes
from cities, counties, special districts and
redevelopment agencies to school and
community districts.
2. The Budget keeps K-12 Proposition 98
funding on a cash basis at the same per-
pupil level as 1992-93 by providing schools
a loan payable from future years' Proposition
98 funds.
3. Receipt in 1993-94 of about $550 million
in aid from the federal government to offset
health and welfare costs associated with
<PAGE>
foreign immigrants living in the State, which
would reduce a like amount of General Fund
expenditures.
4. Reductions of $0.3 billion in health and
welfare programs.
5. Reductions of $400 million in support for
higher education.
6. A 2 year suspension of the renters' tax
credit ($390 million expenditure reduction in
1993-94).
7. Various miscellaneous cuts (totalling
approximately $150 million ) in Sate
government services in many agencies, up to
15%.
8. Miscellaneous one-time items, including
deferral of payment to the Public Employees
Retirement Fund and a change in accounting
for debt service from accrual to cash basis,
saving $107 million.
A key feature of the 1993-94 Budget Act is a plan to retire the
projected $2.8 billion accumulated deficit over an 18 month period by
the use of external borrowing. The Budget Act estimates that about $1.6
billion of the deficit elimination loan would be repaid by December 23,
1993 from the proceeds of the $2.0 billion Revenue Anticipation
Warrants issued on June 23, 1993.
The 1993-94 Budget Act continues to predict that population
growth in the 1990's will keep upward pressure on major State
programs, such as K-14 education, health, welfare and corrections,
outstripping projected revenue growth
in an economy only very slowly emerging from a deep recession. The
Governor's health, welfare and local government reductions continue his
efforts to keep expenditures in line with resources in the long term. The
Budget Act also proposes significant restructuring of State government,
with elimination and consolidation of several agencies and numerous
smaller boards, and change to
a "performance budgeting" concept which would be more efficient and
cost-effective (with a pilot project to be implemented in 1994-95). The
Governor also proposes initiatives in the fields of information technology
to increase governmental productivity.
On June 2, 1993, the Commission on State Finance ("COSF")
issued its Quarterly General Fund Forecast, which assessed the
<PAGE>
Governor's May Revision. The COSF report projected stagnant
economic conditions through
1994, and agreed generally with the Governor's economic projections,
although the COSF showed slightly lower growth than the Governor in
some California economic factors. The COSF projects lower revenues
and higher expenditures in 1993-94 than the May Revision, and notes
that the May Revision continues
the uses of off-bookloans to schools and has no built-in protection against
downside risk.
The COSF projects about $700 million lower revenues in
1993-94 than the May Revision, principally because COSF believes most
of the increase in personal income taxes seen late in 1992-93 came from
a one-time income shift, rather than reflecting a permanent base of
greater tax revenues. COSF
also knows other major taxes (and local property taxes) a little weaker
than the May Revision, with a resulting increase in expenditures to make
up the property tax shortfall for school financing. Altogether, COSF
projects in its "primary
forecast" that the fund balance at June 30,1994 would be over $800
million more negative than the May Revision forecast, and the negative
difference would grow to $1.9 billion by June 30, 1995.
The COSF report includes two alternative forecasts based on
either continued recession, or stronger recovery. The pessimistic
forecast is $3.8 billion worse at June 30, 1995 than the Primary
Forecast, and the optimistic forecast is about $3.8 billion better. The
COSF also expressed concern that the
proposed $2.6 billion shift of property taxes could materially impact
local government's fiscal stability.
THE FOREGOING DISCUSSION OF THE 1993-94 FISCAL
YEAR BUDGET IS BASED IN LARGE PART ON STATEMENTS
MADE IN A RECENT "PRELIMINARY OFFICIAL STATEMENT"
DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT
DOCUMENT, THE STATE INDICATED THAT ITS DISCUSSION OF
THE 1993-94 FISCAL YEAR BUDGET WAS BASED ON
ESTIMATES AND PROJECTIONS OF REVENUES AND
EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST
NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE
NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS
ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS
FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN
THE STATE AND THE NATION, AND THAT THERE CAN BE NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
<PAGE>
<PAGE>
The State is subject to an annual appropriations limit imposed
by Article XIIIB of the State Constitution (the "Appropriations Limit"),
and is prohibited from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. Article XIIIB, originally adopted in
1979, was modified substantially by Propositions 98 and 111 in 1988 and
1990, respectively. "Appropriations subject to limitation" are
authorizations to spend "proceeds of
taxes", which consist 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 reasonable cost of providing the regulation, product
or service. The Appropriations Limit is based on the limit for the prior
year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of
taxes received over such two-
year period above the combined Appropriation Limits for those two years
is divided equally between transfers to K-14 districts and refunds to
taxpayers.
Exempted from the Appropriations Limit are debt service costs
of certain bonds, court or federally mandated costs, and, pursuant to
Proposition 111, qualified capital outlay projects and appropriations or
revenues derived from any increase in gasoline taxes and motor vehicle
weight fees above January 1, 1990 levels. Some recent initiatives were
structured to create new tax
revenues dedicated to specific uses and expressly exempted from the
Article XIIIB limits. The Appropriations Limit may also be exceeded
in cases of emergency arising from civil disturbance or natural disaster
declared by the Governor and approved by two-thirds of the Legislature.
If not so declared and
approved, the Appropriations Limit for the next three years must be
reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8,
1988, also establishes a minimum level of state funding for school and
community college districts and requires that excess revenues up to a
certain limit be transferred to schools and community college districts
instead of returned to the taxpayers. Determination of the minimum
level of funding is based on several
tests set forth in Proposition 98. During fiscal year 1991-92 revenues
were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the
1991-92 and 1992-93 fiscal
years without exceeding it, the Legislature enacted legislation to reduce
1991-92 appropriations. The amount budgeted to schools but which
exceeded the reduced appropriation was treated as a non-Proposition 98
short-term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion
of the amount budgeted to K-14 schools was designated to "repay" the
<PAGE>
prior year loan, thereby reducing cash outlays in 1992-93 by that
amount.
Because of the complexities of Article XIIIB, the ambiguities
and possible inconsistencies in its terms, the applicability of its
exceptions and exemptions and the impossibility of predicting future
appropriations, the Sponsor cannot predict the impact of this or related
legislation on the Bonds in the California Trust Portfolio. Other
Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If
any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate
revenues as mandated
by such initiatives. Propositions such as Proposition 98 and others that
may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources available
for other State programs, especially to the extent the Article XIIIB
spending limit would restrain the
State's ability to fund such other programs by raising taxes.
As of June 30, 1993, the State had over $17.64 billion
aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately
$7.24 billion remained unissued as of June 30, 1993. The State also
builds and acquires capital facilities
through the use of lease purchase borrowing. As of June 30, 1992, the
State had approximately $2.88 billion of outstanding Lease-Purchase
Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $21.87 billion aggregate principal amount
of revenue bonds and notes outstanding as of March 31, 1993. Revenue
bonds represent both obligations payable from State revenue-producing
enterprises and projects, which are not payable from the General Fund,
and conduit obligations payable only from revenues paid by private users
of facilities financed by such
revenue bonds. Such enterprises and projects include transportation
projects, various public works and exposition projects, education
facilities (including the
California State University and University of California systems),
housing health facilities and pollution control facilities.
The State is a party to numerous legal proceedings, many of
which normally occur in governmental operations. In addition, the State
is involved in certain other legal proceedings that, if decided against the
State, might require the State to make significant future expenditures or
impair future revenue sources. Examples of such cases include
challenges to the State's method of
taxation of certain businesses, challenges to certain vehicle license fees,
<PAGE>
and challenges to the State's use of Public Employee Retirement System
funds to offset future State and local pension contributions. Other cases
which could significantly impact revenue or expenditures involve
reimbursement to school
districts for voluntary school desegregation and state mandated costs,
challenges to Medi-Cal eligibility, recovery for flood damages, and
liability for toxic waste cleanup. Because of the prospective nature of
these proceedings, it is not
presently possible to predict the outcome of such litigation or estimate
the potential impact on the ability of the State to pay debt service on its
obligations.
On November 1, 1993 the United States Supreme Court
agreed to review the California court decisions in Barclays Bank
International, Ltd. v. Franchise Tax Board and Colgate-Palmolive
Company, Inc. v. Franchise Tax
Board which upheld California's worlwide combined reporting
("WWCR") method of taxing corporations engaged in a unitary business
operation against challenges under the foreign commerce and due process
clauses. In1983, in Container Corporation v. Franchise Tax Board, the
Supreme Court held that the
WWCR method did not violate the foreign commerce clause in the case
of a domestic-based unitary business group with foreign-domiciled
subsidiaries, but specifically left open the of whether a different result
would obtain for a foreign-based multi-national unitary business.
Barclays concerns a foreign-based multinational and Colgate-Palmolive
concerns a domestic-based multinational in
light of federal foreign policy developments since 1983. In a brief filed
at the Supreme Court's request, the Clinton Administration had argued
that the Court should not hear the Barclay's case, even though there are
"serious questions" about the California Supreme Court's analysis and
holdings, because the recent changes in the law noted below means the
issue in Barclays "lacks substantial recurring importance". The Clinton
Administration had previously decided not
to become involved in the Barclays petition. the United States
Government under the Bush Administration, along with various foreign
Governmnets, had appeared as amicus on behalf of Barclays before the
California Courts. The Clinton Administration has filed an amicus on
behalf of Barclays before the California Courts. The Clinton
Administration has filed an amicus brief on the merits
supporting the California Franchise Tax Board, arguing that the Court
should judge WWCR by lookingat federal policies in effect at the time
the taxes were collected and stating that the federal government had not
indicated to the States
during the 1970s and 1980s that it objected to WWCR. The fiscal impact
on the State of Caliornia has not been reported as follows: the State
would have a refund $1.730 billion to taxpayers ($530 million due to
Barclays; $41.2 billion due to Colgate), and cancel anohter$2.35 billion
of pending assessments ($350
<PAGE>
million due to Barclays; $1.9 billion due to Colgate), if the Supreme
Court ultimately strikes down the WWCR method and rules its decision
has retrospective effect.
As a result of the deterioration in the State's budget and cash
situation in fiscal year 1991-92, and the delay in adopting the 1992-93
budget which resulted in issuance of registered warrants (I.O.U.s), rating
agencies reduced the State's credit rating. Between November 1991 and
September 30, 1992, the rating on the State's general obligation bonds
was reduced by Standard & Poor's Corporation from "AAA" to "A+",
by Moody's Investors Service,
Inc. from "Aaa" to "Aa", and by Fitch Investors Service, Inc. from
"AAA" to "AA". There can be no assurance that such ratings will
continue for any given period of time or that they will not in the future
be further revised or withdrawn.
The January 1994 Los Angeles earthquake may negatively
impact the ability of certain issuers to make scheduled interest and
principal payments, for example, if the specific project for which bonds
were issued is damaged or if revenues backing certain bonds decline. In
addition, the impact on tourism and
business spending resulting from earthquake damaage and any delay in
its repair could negatively impact the ability of certain issuers to make
timely debt payments. Further, as with October 1989 Loma Prieta
earthquake that struck San Francisco, lawsuits may be filed against state
agencies. Both Moody's Investors Service and Standard & Poor's
Corporation have said that it is too soon to offer official assessments of
the damage and its effect on bondholders. However, Moody's has also
stated that because the pledge to make debt service
payments for general obligation bonds and essential purpose revenue
bonds is absolute and unconditional, it does not expect any rating
adjustment over the short-term for such bonds. The Sponsors are unable
to predict the effects of this
earthquake or any other future natural disaster on the bonds in the
Portfolio of the California Trust.
Connecticut Trust
Potential purchasers of the Units of the Connecticut Trust
should consider the fact that the Trust's Portfolio consists primarily of
Bonds issued by the State of Connecticut (the "State") or its
municipalities or authorities, and realize the substantial risks associated
with an investment in such Bonds.
Connecticut's manufacturing industry has historically been of
prime economic importance to Connecticut. The manufacturing industry
is diversified, with transportation equipment (primarily aircraft engines,
helicopters and submarines) dominant followed by fabricated metal
products, non-electrical machinery and electrical machinery. From 1970
<PAGE>
to 1992, however, there was a rise in employment in service-related
industries. During this period,
manufacturing employment declined 30.8%, while employment in non-
agricultural establishments (including government) increased 60.8%,
particularly in the service, trade and finance categories. In 1992,
manufacturing accounted for only 20.1% of total non-agricultural
employment in Connecticut. Defense-related business plays an important
role in the Connecticut economy. On a per
capita basis, defense awards to Connecticut have traditionally been
among the highest in the nation. Reductions in defense spending have
had a substantial adverse impact on Connecticut's economy. Moreover,
the State's largest defense contractors have announced substantial labor
force reductions scheduled to occur over the next four years.
The annual average unemployment rate (seasonally adjusted)
in Connecticut decreased from 6.9% in 1982 to a low of 3.0% in 1988
but rose to 7.2% in 1992. While these rates were lower than those
recorded for the U.S. as a whole for the same periods, as of May, 1993,
the estimated rate of unemployment in Connecticut in connection on a
seasonally adjusted basis was 7.4%, compared to only 6.9 % for the
United States as a whole, and pockets of
significant unemployment and poverty exist in some of Connecticut's
cities and towns. Moreover, Connecticut is now in a recession the depth
and duration of which is uncertain.
The State derives over seventy percent of its revenues from
taxes imposed by the State. The two major taxes have been the sales and
use taxes and the corporation business tax, each of which is sensitive to
changes in the level of economic activity in the State, but the Connecticut
income tax on individuals, trusts and estates enacted in 1991 is expected
to supersede each of them in importance.
The State's General Fund budget for fiscal year 1986-87
(ending June 30) anticipated appropriations and revenues of
approximately $4,300,000,000. The General Fund ended fiscal year
1986-87 with a surplus of $365,200,000. The General Fund budget for
fiscal year 1987-88 anticipated appropriations and revenues of
approximately $4,915,800,000. However, the
General Fund ended fiscal year 1987-88 with a deficit of approximately
$115.6 million. The General Fund budget for fiscal year 1988-89
anticipated that General Fund expenditures of $5,551,000,000 and certain
educational expenses of $206,700,000 not previously paid through the
General Fund would be financed in part from surpluses of prior years
and in part from higher tax revenues projected to result from tax laws in
effect for fiscal year 1987-88 and
stricter enforcement thereof; a substantial deficit was projected during the
third quarter of fiscal year 1988-89, but, largely because of tax law
changes that took effect before the end of the fiscal year, the deficit was
kept to $28,000,000.
<PAGE>
The General Fund budget for fiscal year 1989-90 anticipated
appropriations of approximately $6,224,500,000 and, by virtue of tax
increases enacted to take effect generally at the beginning of the fiscal
year, revenues slightly exceeded such amount. However, largely because
of tax revenue shortfalls, the General
Fund ended fiscal year 1989-90 with a deficit for the year of
$259,000,000, wiping out reserves for such events built up in prior
years. The General Fund ended fiscal year 1990-91 with a deficit of
$809,000,000, primarily because of
significant declines in tax revenues and unanticipated expenditures
reflective of economic adversity.
A General Fund was not enacted for fiscal year 1991-92 until
August 22, 1991. This budget anticipated General Fund expenditures of
$ 7,007,861,328 and revenues of $ 7,426,390,000. Anticipated
decreases in revenues resulting from a 25% reduction in the sales tax rate
effective October 1, 1991, the repeal of the taxes on the capital gains and
interest and dividend income of resident individuals for years starting
after 1991, and the phase-out
of the corporation business tax surcharge over two years commencing
with years starting after 1991 were expected to be more than offset by
a new general income tax imposed at effective rates not to exceed 4.5%
on the Connecticut taxable income of resident and non-resident
individuals, trusts and estates. The
Comptroller's annual report for fiscal year 1991-92 reflected a General
Fund operating surplus of $110,000,000. A General Fund budget for
fiscal year 1992-93 anticipated General Fund expenditures of
$7,372,062,859 and revenues of $7,372,210,000 and the General Fund
ended fiscal year 1992-93 with an
operating surplus of $113,500,000. Balanced General Fund budgets for
the biennium ending June 30, 1995, have been adopted appropriating
expenditures of $7,828,900,000 for fiscal year 1993-94 and
$8,266,000,000 for fiscal year 1994-95.
The primary method for financing capital projects by the State
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. As of October
1, 1993, there was a total legislatively authorized bond indebtedness of
$9,140,275,363, of which $7,384,654,455 had been approved for
issuance by the State Bond Commission and $6,355,937,037 had been
issued.
To fund operating cash requirements, prior to fiscal year
1991-92 the State borrowed up to $750,000,000 pursuant to authorization
to issue commercial paper, and on July 29, 1991, it issued $200,000,000
General Obligation Temporary Notes, none of which temporary
borrowings were outstanding as of July 1, 1993. To fund the cumulative
General Fund deficit for fiscal years 1989-90 and 1990-91, the legislation
enacted August 22, 1991, authorized the State Treasurer to issue
<PAGE>
Economic Recovery Notes up to the aggregate amount of such deficit,
which must be payable no later than June 30,
1996; at least $50,000,000 of such Notes, but no more than a cap
amount, is to be retired each fiscal year commencing with fiscal year
1991-92, and any unappropriated surplus up to $205,000,000 in the
General Fund at the end of
each of the three fiscal years commencing with fiscal year 1991-92 must
be applied to retire such Notes as may remain outstanding at those times.
On September 25, 1991 and October 24, 1991, the State issued
$640,710,000 and $325,002,000, respectively, of such Economic
Recovery Notes, of which $705,610,000 were outstanding as of October
1, 1993, and are shown in the
outstanding state general obligation bond indebtedness shown above.
To meet the need for reconstructing, repairing, rehabilitating,
and improving the State transportation system (except Bradley
International Airport), the State adopted legislation which provides for,
among other things, the issuance of special tax obligation ("STO") bonds
the proceeds of which will be used to pay for improvements to the
State's transportation system. The STO
bonds are special tax obligations of the State payable solely from
specified motor fuel taxes, motor vehicle receipts and licenses, permit
and fee revenues pledged therefor and deposited in the special
transportation fund. The ten-year cost of
the infrastructure program which began in 1984, to be met from federal,
state and local funds, is currently estimated at $9.5 billion. To finance
a portion of the State's share of such cost, the State expects to issue $3.7
billion of STO bonds over the ten-year period.
As of October 1, 1993, the General Assembly has authorized
STO bonds for the program in the aggregate amount of $3,604,363,104,
of which $2,794,650,752 had been issued. It is anticipated that
additional STO bonds will be authorized by the General Assembly
annually in an amount necessary to finance and to complete the
infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged
coverage requirements of the STO indenture controlling the issuance of
such bonds are met. The State expects to continue to offer bonds for this
program.
The State, its officers and employees are defendants in
numerous lawsuits. According to the Attorney General's Office, an
adverse decision in any of the cases which are summarized herein could
materially affect the State's financial position: (i) an action in which eight
retarded persons claim denial of equal protection rights on behalf of all
retarded persons between ages 19 and 61
who require daily care but are ineligible for admission to a group home;
(ii) litigation on behalf of black and hispanic school children in the City
of Hartford seeking "integrated education" within the greater Hartford
<PAGE>
metropolitan area; (iii) litigation involving claims by Indian tribes to less
than 1/10 of 1% of the State's land area; (iv) litigation challenging the
State's method of financing elementary and secondary public schools on
the ground that it denies equal
access to education; (v) an action in which two retarded persons seek
placement outside a State hospital, new programs and damages on behalf
of themselves and all mentally retarded patients at the hospital; (vi)
litigation involving claims for refunds of taxes by several cable television
companies; (vii) an action on behalf
of all persons with retardation or traumatic brain injury, claiming that
their constitutional rights are violated by placement in State hospitals
alleged not to provide adequate treatment and training, and seeking
placement in community residential settings with appropriate support
services; (viii) an action by the
Connecticut Hospital Association and 33 hospitals seeking to require the
State to reimburse hospitals for in-patient medical services on a basis
more favorable to them; (ix) a class action by the Connecticut Criminal
Defense Lawyers Association claiming a campaign of illegal surveillance
activity and seeking damages and injunctive relief; (x) two actions for
monetary damages brought by
a former patient at a state mental hospital stemming from an attempted
suicide that left her brain-damaged; (xi) an action challenging the validity
of the State's imposition of surcharges on hospital charges to finance
certain uncompensated care costs incurred by hospitals and (xii) an action
to enforce the spending cap provision of the State's constitution by
seeking to require that the General
Assembly define certain terms used therein and to enjoin certain
increases in "general budget expenditures" until this is done.
As a result of the State's budget problems, the ratings of its
general obligation bonds were reduced by Standard & Poor's from AA+
to AA on March 29, 1990, and by Moody's from Aa1 to Aa on April 9,
1990. Moreover, because of these problems, on February 5, 1991,
Standard & Poor's placed the State's general obligation bonds and certain
other obligations that depend in part on the creditworthiness of the State
on CreditWatch with negative implications. On March 7, 1991,
Moody's downgraded its ratings of the
revenue bonds of four Connecticut hospitals because of the effects of the
State's restrictive controlled reimbursement environment under which
they have been operating. On September 13, 1991 the ratings of the
State's general obligation bonds and certain other obligations were
lowered by Standard & Poor's from AA to AA- and removed from
CreditWatch.
General obligation bonds issued by Connecticut municipalities
are payable primarily only from ad valorem taxes on property subject to
taxation by the municipality. Certain Connecticut municipalities have
experienced severe fiscal difficulties and have reported operating and
accumulated deficits in recent years. The most notable of these is the
<PAGE>
City of Bridgeport, which filed a bankruptcy petition on June 7, 1991;
the State opposed the petition. The United
States Bankruptcy Court for the District of Connecticut has held that
Bridgeport had authority to file such a petition but that its petition should
be dismissed on the grounds that Bridgeport was not insolvent when the
petition was filed. Regional economic difficulties, reductions in revenues,
and increased expenses could lead to further fiscal problems for the State
and its political subdivisions,
authorities, and agencies. This could result in declines in the value of
their outstanding obligations, increases in their future borrowing costs,
and impairment of their ability to pay debt service on their obligations.
Florida Trust
The State's economy in the past has 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 the State's economy continues to
diversify. Florida nevertheless has a dynamic construction industry, with
single and multi-family housing starts accounting for 9.48% of total U.S.
housing starts in 1991 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 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,
some factors that have adversely affected the construction industry's
performance include:
(i) Federal tax reform legislation that has eliminated tax
deductions for owners of three or more residential real
estate properties and the lengthening of depreciation schedules on
investment and commercial properties;
(ii) Costs of financing that have been relatively high in recent
years; and
(iii)Economic growth and existing supplies of commercial
buildings and homes also contribute to the level of
<PAGE>
construction activities in the State.
Since 1980, the State's job creation rate is well over twice the
rate for the nation as a whole, and its growth rate in new non-agricultural
jobs is the fastest of the 11 most populous states and second only to
California in the absolute number of new jobs created. Contributing to
the State's rapid rate of growth in employment and income is
international trade. In addition, since
1980, the State's unemployment rate has generally tracked below that of
the Nation's unemployment rate. However, in the last two years, the
State's jobless rate moved ahead of the national average of approximately
7.2%. According to Florida's Office of Planning & Budgeting Revenue
and Economic Analysis Unit ("Office of Planning & Budget"), the State's
unemployment rate was 5.9% during 1990. The State's unemployment
rate had increased to 7.3% for 1991.
The State forecasts that the unemployment rate will be 8.2% in 1992.
Unemployment is projected to be 7.3% of the labor force in 1992-93 and
6.8% in 1993-94. The State's non-farm job growth rate is expected to
mirror the path
of employment growth of the nation (decline 1.3% in 1992-93 and rise
4.3% in 1993-94). The State's two largest and fastest growing private
employment categories are the service and trade sectors. Employment
in these sectors is expected to decline 3.6% for trade and growth and
1.5% for services in 1991-92
and are expected to grow 0.7% and 3.7% in 1992-93, respectively.
Together, they account for more than half of the total non-farm
employment growth over the next two years. The service sector has
overtaken the trade sector and is now the State's largest employment
category.
The number of tourists coming to the State has stabilized. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its seasonality.
Approximately 40.9 million people visited the State in 1992. During
1992-93, tourist arrivals are expected to be approximately 42 million.
The State's per capita personal income in 1992 of $19,397 was
slightly below the national average of $19,841 and significantly ahead of
that for the southeast United States, which was $17,661. Growth in real
personal income in the State follows a course similar to that of the
nation. Real personal income is estimated to increase 0.7% in 1992-93
and increasing 5.1% in 1993-94. The decrease in the 1992-93 level is
due to property loses resulting from Hurricane Andrew.
Compared to other states, Florida has a proportionately greater
retirement age population, which comprises 18.3% of the State's
population, and is forecast to grow at 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
<PAGE>
income) are relatively more important
sources of income. For example, Florida's total wages and salaries and
other labor income in 1990 and 1991 was 54.9% and 54.8%,
respectively of total income, while a similar figure for the nation for
1990 and 1991 was 64.8% and 64.4%, respectively. Transfer payments
are typically less sensitive to the
business cycle than employment income and, therefore, act as stabilizing
forces in weak economic periods; however, these payments, which have
increased approximately 8.6% annually from 1985-90, may also be
subject to greater risks from inflation.
In fiscal year 1990-91, approximately 64% of the State's total
direct revenue to its four operating funds were 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 year
1991, approximately $4.45 billion in principal amount of debt secured
by the full faith and credit of the State was outstanding. Since July 1,
1991 through August 1992, the State has issued $965 million in principal
amount of full faith and credit bonds.
Fiscal year 1991-92 General Revenue plus Working Capital
funds available total $11,253.1 million. Compared to 1991-92 General
Revenue effective appropriations of $11,066.1 million.
Estimated fiscal year 1992-93 General Revenue plus Working
Capital funds available total $12,255.9 million, a 9.1% increase over
1991-92. The amount reflects a transfer of $228.8 million, out of an
estimated $233.5 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief
trust fund. The $12,004.1 million Estimated Revenues (excluding the
Hurricane Andrew impacts) represent an increase of 10.1% over the
previous year's Estimated Revenues. With effective General Revenue
plus Working Capital Fund appropriations at $11,804.5 million,
unencumbered reserves at the end of the fiscal year are estimated at
$441.4 million.
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. In response to
the deficits projected for fiscal 1990-91,
<PAGE>
the State established mandatory budget holdbacks of $479.9 million and
$270 million. To effectuate the holdbacks, and thus prevent a deficit,
the State has undertaken significant budget reducing and revenue
increasing measures, including, but not limited to, layoffs of State
employees and curtailments of
State services. While there can be no assurance that such measures will
eliminate the State budget deficit, as of early January 1991, the 1990-91
revenue shortfall was reported to be forecast at approximately $270
million, and the State has indicated since such forecast that, based on
projected revenues and further budget reductions, there will be no
shortfall.
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 municipalities. In addition to this distribution, local
governments may (by referendum) assess a 0.5% or a 1.0% discretionary
sales surtax within their county. Proceeds from this local option sales
tax are earmarked for funding local infrastructure programs and
acquiring land for public recreation or conservation or protection of
natural resources as provided under Florida law.
Certain charter counties have other taxing powers in addition. For the
fiscal year ended June 30, 1992, estimated sales and use tax receipts
(exclusive of the tax on gasoline and special fuels) totalled $8,375.5
million, an increase of 2.7% over fiscal year 1990-91.
The State imposes an alcoholic beverage wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's major tax
sources, with revenues totalling $435.2 million in fiscal year ending June
30, 1992. Alcoholic beverage tax receipts declined 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
Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For the
fiscal year ended June 30, 1992, receipts from this source were $801.3
million, a increase of 14.2% from fiscal year 1990-91.
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 $472.4 million
during fiscal year 1991-92, a 0.5% increase from the previous fiscal
<PAGE>
year. For the fiscal year 1991-92, 76.21% of the documentary stamp tax
revenues were deposited to the General Revenue Fund. Beginning in
fiscal year 1992-93, 71.29% of these taxes are to be deposited to the
General Revenue Fund.
On January 12, 1988, the State began its own lottery. State
law requires that lottery revenues be distributed 50% to the public in
prizes, 37.5% for use in enhancing education, and the balance, 12.5%,
to retailers as commissions for their services and for administration of
the lottery. Additionally, the 1990 State Legislature decreased the
allocation for administrative costs to 12.0% for fiscal year 1990-91.
Lottery ticket sales totalled $2.19 billion in fiscal 1991-92, providing
education with $835.4 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 effect on the State's financial position.
In the wake of the U.S. Supreme Court decision holding that
a Hawaii law unfairly discriminated against out-of-state liquor producers,
suits have been filed in the State's courts contesting a similar State law
(in effect prior to 1985), that seek $384 million in tax refunds. A trial
court, in a ruling that was subsequently upheld by the State'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, 2nd Judicial District. That court will hear
affected parties response to the Department's proposed collection of the
tax at the higher rate charged to out-of-staters.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged the
constitutionality of this tax 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
<PAGE>
taxes imposed on premiums received for certain motor vehicle service
agreements. These four cases and pending refund claims total about
$200 million.
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 $20-30 billion. 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. It is estimated that about
$15.0 billion of these losses are insured. In addition, a major funding
package totalling $10.6 billion from the federal government will provide
additional funding to help offset these losses. However, the Revenue
Estimating Conference has estimated additional non-recurring General
Revenues totalling $645.8 million during fiscal years 1992-93, 1993-94
and 1994-95 as a result of increased economic activity. In a December
1992 special session, the Legislature enacted a law that sets aside an
estimated $630.4 million of the $645.8 million hurricane revenue
windfall to be used by State and local
government agencies to defray a wide array of expenditures related to
Hurricane Andrew.
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 source from which such series derives funds for
repayment. While these ratings
and some of the information presented above may 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 Bonds in
the portfolio of the Florida Trust 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.
Maryland Trust
State Debt. The Public indebtedness of the State of Maryland
and its instrumentalities is divided into three general types. The State
issues general obligation bonds for capital improvements and for various
State projects, to the payment of which the State ad valorem property tax
is exclusively pledged. In addition, the Maryland Department of
<PAGE>
Transportation issues for transportation purposes its limited, special
obligation bonds payable primarily from specific,
fixed-rate excise taxes and other revenues related mainly to highway use.
Certain authorities issue obligations payable solely from specific non-tax,
enterprise fund revenues and for which the State has no liability and has
given no moral obligation assurance.
General obligation bonds of the State are authorized and issued
primarily to provide funds for State-owned capital improvements,
including institutions of higher learning, and the construction of locally
owned public schools. Bonds have also been issued for local government
improvements, including grants and loans for water quality improvement
projects and correctional facilities, to provide funds for repayable loans
or outright grants to private, non-profit cultural or educational
institutions, and to fund certain loan
and grant programs.
The Maryland Constitution prohibits the contracting of State
debt unless it is authorized by a law levying an annual tax or taxes
sufficient to pay the debt service within 15 years and prohibiting the
repeal of the tax or taxes or
their use for another purpose until the debt is paid. As a uniform
practice, each separate enabling act which authorizes the issuance of
general obligation bonds for a given object or purpose has specifically
levied and directed the collection
of an ad valorem property tax on all taxable property in the State. The
Board of Public Works is directed by law to fix by May 1 of each year
the precise rate of such tax necessary to produce revenue sufficient for
debt service requirements of the next fiscal year, which begins July 1.
However, the taxes levied need not
be collected if or to the extent that funds sufficient for debt service
requirements in the next fiscal year have been appropriated in the annual
State budget. Accordingly, the Board, in annually fixing the rate of
property tax after the end of the regular legislative session in April, takes
account of appropriations of general funds for debt service.
In the opinion of counsel, the courts of Maryland have
jurisdiction to entertain proceedings and power to grant mandatory
injunctive relief to (i) require the Governor to include in the annual
budget a sufficient appropriation
to pay all general obligation bond debt service for the ensuing fiscal
year; (ii) prohibit the General Assembly from taking action to reduce any
such appropriation below the level required for that debt service; (iii)
require the Board of Public Works to fix and collect a tax on all property
in the State subject to assessment for State tax purposes at a rate and in
an amount sufficient to make such payments to the extent that adequate
funds are not provided in the
annual budget; and (iv) provide such other relief as might be necessary
to enforce the collection of such taxes and payment of the proceeds of
<PAGE>
the tax collection to the holders of general obligation bonds, pari passu,
subject to the inherent constitutional limitations referred to below.
It is also the opinion of counsel that, while the mandatory
injunctive remedies would be available and while the general obligation
bonds of the State are entitled to constitutional protection against the
impairment of the obligation
of contracts, such constitutional protection and the enforcement of such
remedies would not be absolute. Enforcement of a claim for payment of
the principal of or interest on the bonds could be subject to the
provisions of any statutes that
may be constitutionally enacted by the United States Congress or the
Maryland General Assembly extending the time for payment or imposing
other constraints upon enforcement.
There is no general debt limit imposed by the Maryland
Constitution or public general laws, but a special committee created by
statute annually submits to the Governor an estimate of the maximum
amount of new general obligation debt that prudently may be authorized.
Although the committee's responsibilities are advisory only, the
Governor is required to give due consideration to the committee's
findings in preparing a preliminary
allocation of new general debt authorization for the next ensuing fiscal
year.
Consolidated Transportation Bonds are limited obligations
issued by the Maryland Department of Transportation, the principal of
which must be paid within 15 years from the date of issue, for highway,
port, transit, rail or aviation facilities or any combination of such
facilities. Debt service on Consolidated Transportation Bonds is payable
from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax,
all mandatory motor vehicle registration fees, motor carrier fees, and the
corporate income tax as are credited to the Maryland Department of
Transportation, plus all departmental operating revenues and receipts.
Holders of such bonds are not entitled to look to other sources for
payment.
The Maryland Department of Transportation also issues its
bonds to provide financing of local road construction and various other
county transportation projects and facilities. Debt service on these bonds
is payable from the subdivisions' share of highway user revenues held to
their credit in a special State fund.
The Maryland Transportation Authority operates certain
highway, bridge and tunnel toll facilities in the State. The tolls and other
revenues received from these facilities are pledged as security for
revenue bonds of the Authority issued under and secured by a trust
agreement between the Authority and a corporate trustee.
<PAGE>
Certain other instrumentalities of the State government are
authorized to borrow money under legislation which expressly provides
that the loan obligations shall not be deemed to constitute a debt or a
pledge of the faith and credit of the State. The Community Development
Administration of the Department of Housing and Community
Development, the Board of Trustees of
St. Mary's College of Maryland, the Maryland Environmental Service,
the Board of Regents of the University of Maryland System, the Board
of Regents of Morgan State University, and the Maryland Food Center
Authority have issued and have outstanding bonds of this type. The
principal of and interest on
bonds issued by these bodies are payable solely from various sources,
principally fees generated from use of the facilities or enterprises
financed by the bonds.
Under a Comprehensive Plan of Financing, as amended, of the
Maryland Stadium Authority, the Authority is authorized to finance the
acquisition and construction of sports facilities at a site within the City
of Baltimore. Under the Plan of Financing, the Authority proposes to
engage in a series of borrowings, together with certain equity
contributions, to finance acquisitions of the site, construction of a
baseball stadium and ancillary facilities,
and if a lease agreement is executed between the Authority and a
professional football franchise, a football stadium.
The Authority's financings as well as any future financings for
a football stadium are leased-backed revenue obligations, payment of
which is secured by among other things, an assignment of revenues to be
received under a lease of the sports facilities from the Authority to the
State of Maryland; rental payments due from the State under that lease
will be subject to annual appropriation by the Maryland General
Assembly. The State anticipates that
revenues to fund the lease payments will be generated from a variety of
sources, including in each year sports lottery revenues, the net operating
revenues of the Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered by
the Water Quality Financing Administration in the Department of the
Environment. The Fund may be used to provide loans, subsidies and
other forms of financial
assistance to local government units for wastewater treatment projects as
contemplated by the 1987 amendments to the Federal Water Pollution
Control Act. The Administration is authorized to issue bonds secured by
revenues of the Fund, including loan repayments, federal capitalization
grants, and matching State grants.
The University of Maryland System, Morgan State University,
and St. Mary's College of Maryland are authorized to issue revenue
bonds for the purpose of financing academic and auxiliary facilities.
<PAGE>
Auxiliary facilities are
any facilities that furnish a service to students, faculty, or staff, and that
generate income. Auxiliary facilities include housing, eating,
recreational, campus, infirmary, parking, athletic, student union or
activity, research laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order
assigning to the Department of Budget and Fiscal Planning responsibility
to review certain proposed issuances of revenue and enterprise debt other
than private activity bonds. The Executive Order also provides that the
Governor may establish a ceiling of such debt to be issued during the
fiscal year, which ceiling may be amended by the Governor.
Although the State has authority to make short-term
borrowings in anticipation of taxes and other receipts up to a maximum
of $100 million, in the
past it has not issued short-term tax anticipation and bond anticipation
notes or made any other similar short-term borrowings. However, the
State has recently issued certain obligations in the nature of bond
anticipation notes for the purpose
of assisting several savings and loan associations in qualifying for
Federal insurance and in connection with the assumption by a bank of the
deposit liabilities of an insolvent savings and loan association.
The State has financed the construction and acquisition of
various facilities through unconditional purchase, sale-leaseback, and
similar transactions. By statute, all of the lease payments under these
arrangements are subject to an annual appropriation by the Maryland
General Assembly. In the event that appropriations are not made, the
State may not be held contractually liable for the payments.
Savings and Loan matters. During the first half of calendar
year 1985, several State-chartered savings and loans associations, the
savings accounts of which were privately insured, experienced unusually
heavy withdrawals of funds by depositors. The resulting decline in the
associations' liquid assets led to the appointment of receivers for the
assets of six associations
and the creation of an agency of the State to succeed, by statutory
merger, the private insurer. The savings accounts of all savings and loan
associations operating in the State of Maryland must be insured by either
the State agency or the Federal Savings and Loan Insurance Corporation.
The State agency assumed
the insurance liabilities of the private insurance agency with respect to
deposits made prior to May 18, 1985, and insures amounts deposited
after that date up to the amount insured by the Federal Savings and Loan
Insurance Corporation. The legislation establishing the insurance agency
provides that "It is the policy
of this State that funds will be appropriated to the (insurance agency) to
the extent necessary to protect holders of savings accounts in member
<PAGE>
associations". As of December 31, 1989, depositors of all insured
accounts at associations in receivership have been paid in full. Because
the amount of the losses incurred by the State Insurance Agency are
estimated and because numerous lawsuits
involving the Agency are pending, the ultimate outcome of the savings
and loan situation is uncertain.
Local Subdivision Debt. The counties and incorporated
municipalities in Maryland issue general obligation debt for general
governmental purposes. The general obligation debt of the counties and
incorporated municipalities is generally supported by ad valorem taxes
on real estate, tangible personal property and intangible personal property
subject to taxation. The issuer typically pledges its full faith and credit
and unlimited taxing power to the prompt payment of the maturing
principal and interest on
the general obligation debt and to the levy and collection of the ad
valorem taxes as and when such taxes become necessary in order to
provide sufficient funds to meet the debt service requirements. The
amount of debt which may be authorized may in some cases be limited
by the requirement that it not exceed
a stated percentage of the assessable base upon which such taxes are
levied.
In the opinion of counsel, the issuer may be sued in the event
that it fails to perform its obligations under the general obligation debt
to the holders of the debt, and any judgments resulting from such suits
would be enforceable against the issuer. Nevertheless, a holder of the
debt who has obtained any such
judgment may be required to seek additional relief to compel the issuer
to levy and collect such taxes as may be necessary to provide the funds
from which a judgment may be paid. Although there is no Maryland law
on this point, it is the opinion of counsel that the appropriate courts of
Maryland have jurisdiction
to entertain proceedings and power to grant additional relief, such as
mandatory injunction, if necessary, to enforce the levy and collection of
such taxes and payment of the proceeds of the collection of the taxes to
the holders of general obligation debt, pari passu, subject to the same
constitutional limitations on enforcement, as described above, as apply
to the enforcement of judgments against the State.
Local subdivisions, including counties and municipal
corporations, are also authorized by law to issue special and limited
obligation debt for certain purposes other than general governmental
purposes. The source of payment of
that debt is limited to certain revenues of the issuer derived from
commercial activities operated by the issuer, payments made with respect
to certain facilities or loans, and any funds pledged for the benefit of the
holders of the debt. That special and limited obligation debt does not
constitute a debt of the State, the issuer or any other political subdivision
<PAGE>
of either within the meaning of any constitutional or statutory limitation.
Neither the State nor the issuer or any other political subdivision of
either is obligated to pay the debt or interest on the
debt except from the revenues of the issuer specifically pledged to the
payment of the debt. Neither the faith and credit nor the taxing power
of the State, the issuer or any other political subdivision of either is
pledged to the payment of the debt. The issuance of the debt is not
directly or indirectly or contingently an obligation, moral or other, of the
State, the issuer or any other political subdivision of either to levy any
tax for its payment.
Washington Suburban Sanitary District Debt. The Washington
Suburban Sanitary District operates as a public corporation of the State
to provide, as authorized, water, sewerage and drainage systems,
including water supply, sewage disposal, and storm water drainage
facilities for Montgomery County, Maryland and Prince George's
County, Maryland. For the purpose of
paying the principal of and interest on bonds of the District, Maryland
law provides for the levy, annually, against all the assessable property
within the District by the County Council of Montgomery County and
the County Council of Prince Georges County of ad valorem taxes
sufficient to pay such principal and interest when due and payable.
Storm water drainage bonds for specific projects are payable
from ad valorem tax upon all of the property assessed for county tax
purposes within the portion of the District situated in the county in which
the storm water project
was, or is to be, constructed. Storm water drainage bonds of the District
are also guaranteed by such county, which guaranty operates as a pledge
of the full faith and credit of the county to the payment of the bonds and
obligates the county council to the extent that the tax revenues referred
to above and any
other money available or to become available are inadequate to provide
the funds necessary to pay the principal of and the interest on the bonds,
to levy upon all property subject to taxation within the county ad valorem
taxes in rate and in amount sufficient to make up any such deficiency.
Substantially all of the debt service on the bonds, except storm
water drainage bonds, is being paid from revenues derived by the
District from water consumption charges, from foot benefit charges, and
sewage usage charges. Notwithstanding the payment of principal of and
interest on those bonds from those charges, the underlying security of all
bonds of the District is the levy of ad valorem taxes on the assessable
property as stated above.
Special Authority Debt. The State and local governments have
created several special authorities with the power to issue debt on behalf
or the State of local government for specific purposes, such as providing
facilities for non-profit health care and higher educational institutions,
<PAGE>
facilities for the disposal of solid waste, funds to finance single family
and low-to-moderate
income housing, and similar purposes. The Maryland Health and Higher
Educational Facilities Authority, the Northeast Maryland Waste Disposal
Authority, the Housing Opportunities Commission of Montgomery
County, and the Housing Authority of Prince Georges County are some
of the special authorities which have issued and have outstanding debt of
this type.
The debts of the authorities issuing debt on behalf of the State
and the local governments are limited obligations of the authorities
payable solely from and secured by a pledge of the revenues derived
from the facilities or loans financed with the proceeds of the debt and
from any other funds and receipts pledged under an indenture with a
corporate trustee. The debt does not
constitute a debt, liability or pledge of the faith and credit of the State or
of any political subdivision or of the authorities. Neither the State nor
any political subdivision thereof nor the authorities shall be obligated to
pay the debt or the
interest on the debt except from such revenues, funds and receipts.
Neither the faith and credit nor the taxing power of the State or of any
political subdivision of the State or the authorities is pledged to the
payment of the principal of or the interest on such debt. The issuance
of the debt is not directly or indirectly an
obligation, moral or other, of the State or of any political subdivision of
the State or of the authority to levy or to pledge any form of taxation
whatsoever, or to make any appropriation, for their payment. The
authorities have no taxing power.
Hospital Bonds. The rates charged by non-governmental
Maryland hospitals are subject to review and approval by the Maryland
Health Services Cost Review Commission. Maryland hospitals subject
to regulation by the Commission are not permitted to charge for services
at rates other than those established by the Commission. In addition, the
Commission is required to permit any nonprofit institution subject to its
jurisdiction to charge reasonable
rates which will permit the institution to provide, on a solvent basis,
effective and efficient service in the public interest.
Under an agreement between Medicare and the Commission,
Medicare agrees to pay Maryland hospitals on the basis of Commission-
approved rates, less a 6% differential. Under this so-called "Medicare
Waiver", Maryland hospitals are exempt from the Medicare Prospective
Payment System which pays hospitals fixed amounts for specific services
based upon patient diagnosis. No assurance can be given that Maryland
will continue to meet any current or future tests for the continuation of
the Medicare Waiver.
<PAGE>
<PAGE>
In setting hospital rates, the Commission takes into account
each hospital's budgeted volume of services and cash financial
requirements for the succeeding year. It then establishes the rates of the
hospital for the succeeding year based upon the projected volume and
those financial requirements of the
institution which the Commission has deemed to be reasonable.
Financial requirements allowable for inclusion in rates generally include
budgeted operating costs, a "capital facilities allowance", other financial
considerations (such as charity care and bad debts) and discounts allowed
certain payers for prompt payment. Variations from projected volumes
of services are reflected
in the rates for the succeeding year. The Commission, on a selective
basis by the application of established review criteria, grants Maryland
hospitals increases in rates to compensate for inflation experienced by
hospitals and for other factors beyond the hospitals' control.
Regulations of the Commission provide that overcharges will
in certain circumstances be deducted from prospective rates. Similarly,
undercharges will in certain circumstances not be recoverable through
prospective rates.
The Commission has entered into agreements with certain
hospitals to adjust rates in accordance with a prospectively approved,
guaranteed inpatient
revenue per admission program. Those agreements are in addition to the
rate adjustment methodology discussed above. Under the program, a
hospital's revenue per admission is compared to the revenue per
admission, as adjusted, for a base year. Variations from the adjusted
base year revenues per admission are added or deducted, as the case may
be, from the hospital's gross revenue and rates for the following year.
There can be no assurance that the Commission will continue
to utilize its present rate-setting methodology or approve rates which will
be sufficient to ensure payment on an individual hospital's obligations.
Future actions by the Commissions or the loss of the Medicare Waiver
may adversely affect the operations of individual hospitals.
Changes in economic conditions in or governmental policies
of the state of Maryland could have a significant impact on the
performance of the Maryland Trust. For example, services (including
mining), wholesale and retail trade, government, and manufacturing
(primarily printing and publishing, food
and kindred products, instruments and related products, electronic
equipment, industrial machinery and transportation equipment), are the
leading areas of employment in the State of Maryland. In contrast to the
nation as a whole, more people in Maryland are employed in government
than in manufacturing. The relatively high concentration of governmental
employment in Maryland makes the state potentially vulnerable spending.
Recent Maryland executive branch projections show a budgetary deficit
<PAGE>
for the fiscal year ending June 30,
1991. The Governor of Maryland has recently acted to curtail spending
in response to the projected deficit for that fiscal year.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The continued strength in those
sectors is subject to question given recent disclosures indicating financial
weakness in major banking and insurance companies having their
corporate headquarters in
Maryland and the general regional decline in real estate activity and
values.
The State is the subject of numerous legal proceedings relating
to normally recurring governmental operations in which the State is a
defendant and where monetary damages sought are substantial. These
proceedings could adversely affect the financial condition of the State for
the present or any future fiscal year.
Massachusetts Trust
In the past, the Commonwealth of Massachusetts, and certain
of its public bodies and municipalities, including the City of Boston,
have faced serious financial difficulties which have adversely affected the
credit standing and borrowing abilities of Massachusetts and the
respective entities.
The recurrence of such financial difficulties could result in
declines in the market values of, or default on, existing obligations,
including Bonds deposited in the Massachusetts Trust. The following
constitutes only a brief
summary of the most significant financial problems of the
Commonwealth of Massachusetts and issues related to its financial
condition and does not purport to be complete.
On June 30, 1991 the legislature approved a fiscal 1992 budget
of $12.994 billion. The budget as passed represents a substantial
reduction in levels of spending for a variety of programs, including a
reduction in local aid of approximately $328 million. As signed by the
Governor on July 10, 1991,
the budget for fiscal 1992 was based on estimated total revenues of
$13.032 billion (including estimated tax revenues of $8.292 billion,
which was $703 million less than tax revenues for fiscal 1991) and total
estimated expenditures of $13.177 billion (including, at that time,
approximately $537 million in
anticipated supplemental appropriations). The fiscal 1992 budget was
projected to end the year with a small positive balance through the use
of $145 million in estimated positive balances from fiscal 1991.
<PAGE>
With regard to revenues, the fiscal 1992 budget as signed
depended on non-tax and one-time revenue sources, such as the sale of
certain assets, the availability of which was subject to certain
contingencies. The fiscal 1992
budget as signed assumed continued federal reimbursements related to
uncompensated care payments. The federal Health Care Financing
Administration has published regulations to become effective October 1,
1992 that are not expected to materially affect these reimbursements in
fiscal 1992 and it is currently expected that the amount of such federal
reimbursements in fiscal 1992 will be $195 million.
With regard to spending, the budget made large reductions in
appropriations for certain programs such as Medicaid, General Relief,
and Group Health Insurance, where spending has been difficult to control
in the past.
Budgeted revenues and other sources for fiscal 1992 were
$13.728 billion, including projected tax revenues of $9.484 billion.
Budgeted revenues and other sources increased by approximately 0.7%
from fiscal 1991 to fiscal 1992, while tax revenues increased by 5.4%
for the same period.
Budgeted expenditures were approximately $13.420 billion in
fiscal 1992, which is $238.7 million, or 1.7%, lower than fiscal 1991
budgeted expenditures. Final fiscal 1992 budgeted expenditures were
approximately $300 million higher than the initial July 1991 estimates of
budgeted expenditures. While certain expenditures were less than
originally estimated, spending for
certain human services programs, in particular, was higher than initially
estimated, including an increase of $268.7 million for the Medicaid
program and $50.0 million for mental retardation consent decree
requirements. Fiscal 1992 budgeted expenditures for Medicaid were
$2.818 billion, or 1.9% higher than
fiscal 1991. This increase compares favorably with the 19.0% average
annual growth rate of Medicaid expenditures for fiscal years 1988 and
1991.
Overall, the budgeted operating funds ended 1992 with an
excess of revenues and other sources over expenditures and other uses
of $312.3 million and with positive fund balances of $549.4 million,
when such excess is added to the fund balances of $237.1 million carried
forward from fiscal 1991.
Total fiscal 1992 spending authority continued into fiscal 1993 is $231.0
million.
After payment in full of the quarterly Local Aid distribution
of $514.0 million due on June 30, 1992, retirement of the
Commonwealth's outstanding commercial paper (except for
approximately $50 million of bond anticipation notes) and certain other
<PAGE>
short-term borrowings, as of June 30, 1992, the Commonwealth showed
a year-end cash position of approximately $731.0 million. The fiscal
1992 ending balance compares favorably with the cash balance of $182.3
million at the end of fiscal 1991.
On January 22, 1992, the Governor submitted his fiscal 1993
budget recommendation of $13.992 billion. The Governor's budget
recommendation is based on a tax revenue estimate of $9.150 billion, a
decrease of approximately $75 million, or less than 1%, from estimated
fiscal 1992 tax revenues of $9.225 billion. The reduction in estimated
tax revenues in fiscal 1993 is attributable in part to reduction in the
Commonwealth's personal income tax rate on earned income and certain
other income from 6.25% to 5.95%, which took effect on January 1,
1992, and on the assumption that a proposed
further reduction in that rate to 5.75% will be adopted retroactive to the
same date; the rate reductions are estimated to decrease fiscal 1993 tax
revenues by $210 million and $140 million, respectively. The fiscal
1993 reduction in estimated tax revenues is also attributable in part to
proposed new tax credits which are estimated to reduce tax revenues by
approximately $52 million in fiscal 1993.
On November 17, 1992, the Legislature authorized the partial
funding of certain collective bargaining agreements between the
Commonwealth and its employees. These agreements, which were
originally scheduled to take effect in January 1991, included a three year
increase in wage levels for Commonwealth employees of approximately
13.7%. The legislative authorization effectively increases wage levels by
6% during the remainder of fiscal 1993, and by approximately an
additional 7% for fiscal 1994. This action
increases the Commonwealth's compensation obligations by
approximately $39.8 million for fiscal 1993 and $173.8 million for fiscal
1994. The Governor vetoed the legislation authorizing such funding due
to then current fiscal conditions. However, the veto was overridden by
the Legislature and the pay raise was implemented effective December
21, 1992.
The fiscal 1993 budget is based on estimated budgeted revenue
and other sources of $14.641 billion (including the current tax revenue
estimate of $9.940 billion). Concurrently with signing the fiscal 1993
budget, the Governor vetoed or reduced approximately $315.0 million
in line-item appropriations. In addition, the Governor vetoed certain
legislative riders to the fiscal 1993 budget which affected the ability of
the Commonwealth to collect an estimated $69.0 million of non-tax
revenues otherwise available for fiscal 1993. The Legislature
has overridden the Governor's veto of approximately $200.3 million of
fiscal 1993 budgetary spending authority. In addition, the Legislature
has extended certain fiscal 1992 spending authority to fiscal 1993. These
actions will increase fiscal 1993 spending by $231.0 million. The fiscal
1993 budget, as signed by the Governor and including the additional
<PAGE>
spending authority noted above, is based upon budgeted expenditures of
$14.976 billion, which is $1.556 billion or
11.6% higher than fiscal 1992 budgeted expenditures. The fiscal 1993
budget presently anticipates that the difference between estimated
revenues and other sources and expenditures and other uses be provided
for by application of $319.4 million of the estimated $549.4 million
beginning fund balance for fiscal 1993 to produce an estimated ending
fund balance for fiscal 1993 of approximately $230.0 million.
In September 1992, the Governor submitted legislation
proposing various tax and other incentives for businesses to locate or
remain in the Commonwealth. The legislation included a phase-out of
the capital gains tax and up to $50 million of indirect loan guarantees.
The legislation was not enacted during the 1992 legislative session.
However, portions of the legislation
were refiled in January 1993, and the Legislature is now considering a
different version of the original legislation, including provisions for
increasing the investment tax credit for businesses, establishing a fund to
assist biotechnology firms and various tax incentives to business.
On January 27, 1993, the Governor submitted his fiscal 1994
budget recommendation which called for budgeted expenditures of
approximately $15.208 billion. This recommended spending level is
approximately $232.2 million, or 1.6%, over estimated budgeted
expenditures for fiscal 1993 of
$14.976 billion. Proposed budgeted revenues for fiscal 1994 would
exceed proposed budgeted expenditures by approximately $20.5 million.
The Governor's recommendation projects a fiscal 1994 ending fund
balance of $250.7 million, of which $198.8 million will be in the
Stabilization Fund. The Governor's budget recommendation is based on
a tax revenue estimate of $10.460 billion, an increase of approximately
$520 million, or approximately 5.2%, as compared to currently estimated
fiscal 1993 tax revenues of $9.940
billion. This increase from fiscal 1993 to fiscal 1994 is based on
estimates of real economic growth of approximately 1.75% and inflation
of 2.75%, as well as additional fiscal 1994 revenues from the newly
increased cigarette tax. The
Governor's fiscal 1994 budget submission also proposes tax reductions
aggregating $30 million, including a tax credit for credit for certain
college tuition payments and a tax credit for health insurance premiums
paid by the elderly.
Unemployment has been decreasing since January 1993 and,
as of July, 1993 was 6.3%, as compared to 6.0% for June, 1993 and
8.4% for July, 1992. The United States unemployment rate in July,
1993 was 6.8%, as compared to 7.0% for June, 1993 and 7.6% for July,
1992. In addition, per capita personal income is currently growing at a
rate lower than the national average.
<PAGE>
Prior to 1980, property taxes on residential property were
substantially higher in Massachusetts than in most states. In 1979, the
property tax was virtually the only source of tax revenues available for
use by Massachusetts cities and towns to meet local costs and represented
46% of all state and local taxes in Massachusetts. The pressures to
reduce the levels of
taxation in Massachusetts, particularly the property tax, culminated in the
adoption on November 4, 1980 by the voters of an initiative petition,
known as
Proposition 2.5 , designed to cut property taxes sharply and to reduce
governmental spending. The reduction in local revenues caused by
Proposition 2 .5 varied considerably among the cities and towns.
Proposed reductions in personnel and services created strong demand
from the cities and towns for
substantial increases in local aid from State government. These demands
lead to significant increases in local aid from fiscal 1981 to fiscal 1989.
Because of
decreased Commonwealth revenues, local aid declined slightly in fiscal
1990, decreased by approximately $330 million more in fiscal 1991 and
decreased by
$240 million more in fiscal 1992. Accordingly, substantial reductions
in personnel and services may be required in certain localities and local
capital expenditures may have to be further deferred.
Limitations on state tax revenues have been established by
legislation approved by the Governor on October 25, 1986 and by an
initiative petition approved by the voters on November 4, 1986. The
two measures are inconsistent in several respects, including the methods
of calculating the limits
and the exclusions from the limits. The initiative petition, unlike its
legislative counterpart, contains no exclusion for debt service on
Commonwealth bonds and
notes. Under both measures, excess revenues are returned to taxpayers
in the form of lower taxes. It is not yet clear how differences between
the two measures will be resolved. State tax revenues in fiscal 1988
through fiscal 1992 did not exceed the limit imposed either by the
initiative petition or the legislative
enactment. The Executive Office for Administration and Finance
currently estimates that state tax revenues in fiscal 1993 will not reach
the limit imposed by either of these statutes.
The Commonwealth's two retirement systems historically have
been operated on a pay-as-you-go basis, resulting in a significant
unfunded pension liability. In January 1988, comprehensive pension
reform legislation was
approved which will require the Commonwealth to fund future pension
liabilities on a current basis and to amortize over a 40-year period its
existing unfunded liabilities for the two state retirement systems and for
the cost-of-living adjustments for local systems. The new legislation also
<PAGE>
provides for state aid to local pension systems which also commit to
eliminating their unfunded liabilities over a 40-year period. Total
pension expenditures increased at an
average annual rate of 5.8% from $600.2 million in fiscal 1988 to
$751.5 million in 1992. In November 1992, the Legislature overrode the
Governor's veto of approximately $14.9 million of spending authority
passed by the
Legislature to fund 5% cost of living adjustments for certain
Commonwealth, county and municipal retirees for the period January 1,
1992 through June 30,
1992, which spending authority is included within fiscal 1992 pension
expenditures. The estimated pension expenditures (inclusive of current
benefits and pension reserves) for fiscal 1993 are $873.8 million,
representing an
increase of 16.2% over fiscal 1992 expenditures.
Capital spending by the State in the State bond funds was
approximately $595 million in fiscal 1987, $632 million in fiscal 1988,
$971 million in fiscal 1989, $936 million in fiscal 1990, $847.1 million
in fiscal 1991 and $694 million in fiscal 1992. Capital expenditures are
projected to increase to $821 million in fiscal 1993.
The Commonwealth maintains financial information on a
budgetary basis. Since fiscal year 1986, the Comptroller also has
prepared annual financial statements in accordance with generally
accepted accounting principles
(GAAP) as defined by the Government Accounting Standards Board. On
a GAAP basis all budgeted operating funds of the Commonwealth had
deficits of $51.6 million, $946.2 million, $1.896 billion, $761.2 million
and $381.6 million at the end of fiscal years 1988, 1989, 1990, 1991 and
1992, respectively.
Many factors affect the financial condition of the
Commonwealth, including many social, environmental and economic
conditions which are beyond the control of the Commonwealth. As with
most urban states, the continuation
of many of the Commonwealth's programs, particularly its human
services programs, is in significant part dependent upon continuing
federal reimbursements which have been declining. Recent federal
legislation has effected substantial reductions in direct federal payments
and in grants to states
and municipalities for programs in social service, water pollution control
and other areas. The loss of grants to the state and the cities and towns
could slow economic development and cause programs to be curtailed or
cause the recipients of such funding to find other revenue sources.
Reductions in state revenues, reductions in federal aid, the rehabilitation
of public facilities and
meeting environmental requirements for clean water and clean air and
solid and hazardous waste disposal are expected to be the principal
<PAGE>
challenges for the Commonwealth and its local governments in the near
future.
The Sponsors are unable to predict what effect, if any, such
factors may have on the Bonds in the Massachusetts Trust. Nevertheless,
investors should be aware that if there should be a financial crisis
relating to Massachusetts, its public bodies or municipalities (including
the city of Boston), the market value and marketability of all outstanding
bonds issued by the Commonwealth and its public authorities or
municipalities, including the Bonds in the Massachusetts Trust, could be
adversely affected.
Minnesota Trust
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 payments of State aid, including appropriations for and aids
to local governmental units. The State's fiscal problems affected other
governmental units within the State, such as local 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 of 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 and reducing expenditures, including aid to
political subdivisions and higher education and making other budgetary
adjustments. A budget forecast released by the Department of Finance
on February 27, 1992 projected a $569 million budget shortfall,
primarily attributable to reduced
<PAGE>
income tax receipts, for the biennium ending June 30, 1993. Planning
estimates for the 1994-95 biennium project a budget shortfall of $1.75
billion (less a $400 million reserve). The State responded by enacting
legislation that made substantial accounting changes, reduced the budget
reserve (cash flow account) by $160 million to $240 million, reduced
appropriations for state agencies and
higher education, imposed a sales tax on purchases by local
governmental units,
and adopted other tax and spending changes. A revised forecast released
by the Department of Finance on November 24, 1992 reflects these
legislative changes and projects a $217 million General Fund surplus at
the end of the current
biennium, June 30, 1993, plus a $240 million cash flow account, against
a total budget for the biennium of approximately $14.6 billion, and
planning estimates
for the 1994-95 biennium project a budget shortfall of $986 million (less
the $217 million balance carried forward and the $240 million cash flow
account). Although Standard & Poor's has affirmed its rating on the
State's general obligation bonds in connection with a July, 1992 issue,
it has revised its outlook
for the rating to "negative." The projections generally do not include
increases for inflation or operating costs, except where Minnesota law
requires them.
Tax refund actions for 1979-83 have been filed by over 170
Minnesota banks, alleging that the Minnesota bank excise tax was invalid
because the State of Minnesota excluded interest on certain obligations
of the State and its political subdivisions from the computation of the tax
while including interest on federal obligations. The Ramsey County
District Court tried this issue on a test case basis, and found in favor of
plaintiffs. The court held the Minnesota bank excise tax unlawful on the
grounds that it discriminated
against federal obligations and that the tax is an income tax rather than
a franchise tax. The District Court judgments have been reversed by
the Minnesota Supreme Court on the grounds that (1) the bank excise tax
is a franchise tax, (2) the banks should be estopped from asserting their
challenge to the tax, since they accepted the benefits of the exemption for
interest on State of Minnesota obligations, and (3) the invalid provisions
should be severed from the statute. On June 28, 1993, however, the
United States Supreme Court
vacated the judgment of the Minnesota Supreme Court and remanded the
case for further consideration in light of the recent decision in HARPER
V. VIRGINIA DEPARTMENT OF TAXATION. The taxes and interest
in suit are estimated to be in excess of $188 million for the tax at issue,
1979-1983. Another District Court decision has held that the State may
not tax the portion of certain federal retirement annuities that is
attributable to interest earned by the
retirement fund from investments in federal obligations. This judgment
has been reversed by the Minnesota Supreme Court, but plaintiffs have
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indicated that they
plan to seek review of this case by the United States Supreme Court.
The amount at issue is approximately $8 million, plus per tax year. The
State of Minnesota is also a party to a variety of other civil actions which
could adversely affect the State's general fund. A Minnesota District
Court has held
certain elements of the State's financing system for public education
unconstitutional under the State equal protection clause and has ordered
the development of appropriate changes to such financing system. It is
not possible to predict what effect this decision will have on the
budgetary situations of the State and local school districts.
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 of the issuer and
not general obligations of the State, there can be no assurance that the
fiscal problems referred to above will not adversely affect the market
value or marketability of the Bonds or the ability of the respective
obligors to pay interest on and principal of the Bonds.
Missouri Trust
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 1991 with 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.
The economy of Missouri is diverse and includes
manufacturing, retail and wholesale trade, services, agriculture, tourism,
and mining. According to the Business and Public Administration
Research Center of the College of Business and Public Administration,
University of Missouri at Columbia, real per capita personal income in
Missouri, adjusted for inflation, is projected to increase 5.9% during
<PAGE>
1993. As a result of the State's weak
economic outlook, Missouri General Fund Revenues are currently
projected to increase by only 3.1% for the 1992-1993 fiscal year.
According to the Missouri
Department of Labor and Industrial Relations, the unemployment rate in
Missouri for December 1992 was 5.3 percent, compared to 6.0 percent
in December 1991, and 4.8 percent in November 1992. There can be
no assurance that the general economic conditions or the financial
circumstances of Missouri
or its political subdivisions will not adversely affect the market value of
the Bonds or the ability of the obligor to pay debt service on such Bonds.
Currently, Moody's Investors Service rates Missouri general
obligation bonds "Aaa" and Standard & Poor's Corporation rates
Missouri general obligation bonds "AAA". Although these ratings
indicate that the State of Missouri is in relatively good economic health,
there can be, of course, no assurance that this will continue or that
particular bond issues may not be adversely affected by changes in the
State or local economic or political conditions.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of Bonds
and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers of obligations held by the
Missouri Trust are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are
not within the control of the issuers of the Bonds, could affect or could
have an adverse impact on the financial condition of the State and various
agencies and political subdivisions located in the State. It is not possible
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.
New Jersey Trust
Risk Factors: Prospective investors should consider the recent
financial difficulties and pressures which the State of New Jersey (the
"State") and certain of its public authorities have undergone.
The State's 1994 fiscal year budget became law on June 30,
1993.
The economic recovery is likely to be slow and uneven in both
New Jersey and the nation. Some sectors, like commercial and industrial
construction, will undoubtedly lag because of continued excess capacity.
Also, employers in rebounding sectors can be expected to remain
<PAGE>
cautious about hiring until they become convinced that improved business
will be sustained. Other firms will continue to merge or downsize to
increase profitability. As a result,
job gains will probably come grudgingly and unemployment will recede
at a corresponding slow pace.
Pursuant to the State Constitution, no money may be drawn
from the State Treasury except for appropriations made by law. In
addition, all monies for the support of State purposes must be provided
for in one general appropriation law covering one and the same fiscal
year.
In addition to the Constitutional provisions, the New Jersey
statutes contain provisions concerning the budget and appropriation
system. Under these provisions, each unit of the State requests an
appropriation from the Director of
Division of Budget and Accounting, who reviews the budget requests and
forwards them with his recommendation to the Governor. The Governor
then transmits his recommended expenditures and sources of anticipated
revenue to the legislature, which reviews the Governor's Budget Message
and submits an appropriations bill to the Governor for his signing by July
1 of each year. At the time of signing the bill, the Governor may revise
appropriations or anticipated revenues. That action can be reversed by
a two-thirds vote of each
House. No supplemental appropriation may be enacted after adoption of
the act, except where there are sufficient revenues on hand or
anticipated, as certified
by the Governor, to meet the appropriation. Finally, the Governor may,
during the course of the year, prevent the expenditure of various
appropriations when revenues are below those anticipated or when he
determines that such expenditure is not in the best interest of the State.
State Aid to Local Governments is the largest portion of fiscal
year 1994 appropriations. In fiscal year 1994, $6,562.0 million of the
State's appropriations consisted of funds which are distributed to
municipalities, counties and school districts. The largest State Aid
appropriation, in the amount
of $4,824.1 million, was provided for local elementary and secondary
education programs. Of this amount, $2,538.2 million is provided as
foundation aid to school districts by formula based upon the number of
students and the ability of
a school district to raise taxes from its own base. In addition, the State
provided $582.5 million for special education programs for children with
disabilities. A $293 million program was also funded for pupils at risk
of educational failure,
including basic skills improvement. The State appropriated $767.2
million on behalf of school districts as the employer share of the
teachers' pension and
benefits programs, $263.8 million to pay for the cost of pupil
<PAGE>
transportation and $57.4 million for transition aid, which guaranteed
school districts a 6.5% increase over the aid received in fiscal year 1991
and is being phased out over four years.
Appropriations to the Department of Community Affairs total
$650.4 million in State Aid monies for fiscal year 1994. The principal
programs funded were the Supplemental Municipal Property Tax Act
($365.7 million); the Municipal Revitalization Program ($165.0 million);
municipal aid to urban communities to maintain and upgrade municipal
services ($40.4 million); and the Safe and Clean Neighborhoods Program
($58.9 million). Appropriations to the State Department of the Treasury
total $312.5 million in State Aid monies for fiscal year 1994. The
principal programs funded by these
appropriations were payments under the Business Personal Property Tax
Replacement Programs ($158.7 million); the cost of senior citizens,
disabled and
veterans property tax deductions and exemptions ($41.7 million); aid to
densely populated municipalities ($33.0 million); Municipal Purposes Tax
Assistance ($30.0 million); and payments to municipalities for services
to state owned property ($34.9 million).
Other appropriations of State aid in fiscal year 1994 include:
welfare programs ($477.4 million); aid to county colleges ($114.6
million); and aid to county mental hospitals ($88.0 million).
The second largest portion of appropriations in fiscal 1994 is
applied to Direct State Services: the operation of State government's 19
departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In fiscal 1994, appropriations for Direct
State Services aggregate $4,574.6 million. Some of the major
appropriations for Direct State Services during fiscal 1994 are detailed
below.
$602.3 million was appropriated for programs administered by
the Department of Human Services. The Department of Labor is
appropriated $51.4 million for the administration of programs for
workers' compensation, unemployment and disability insurance,
manpower development, and health safety inspection.
The Department of Health was appropriated $37.6 million for
the prevention and treatment of diseases, alcohol and drug abuse
programs, regulation of health care facilities, and the uncompensated
care program.
$673.0 million was appropriated to the Department of Higher
Education for the support of eight State colleges, Rutgers University, the
New Jersey Institute of Technology, and the University of Medicine and
Dentistry of New Jersey.
<PAGE>
$932.6 million was appropriated to the Department of Law and
Public Safety and the Department of Corrections.
$99.8 million was appropriated to the Department of
Transportation for the various programs it administers, such as the
maintenance and improvement of the State highway systems and
subsidies for railroads and bus companies.
$156.4 million was appropriated to the Department of
Environmental Protection for the protection of air, land, water, forest,
wildlife and shellfish resources and for the provision of outdoor
recreational facilities.
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. State tax
revenues and certain
other fees are pledged to meet the principal and interest payments
required to pay the debt fully. No general obligation debt can be issued
by the State without prior voter approval, except that no voter approval
is required for any law authorizing the creation of a debt for the purpose
of refinancing all or a portion
of outstanding debt of the State, so long as such law requires that the
refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for
State bond authorizations are subject to the review and recommendation
of the New Jersey Commission on Capital Budgeting and Planning. This
permanent commission was established in November, 1975, and is
charged with the preparation of the State Capital Improvement Plan,
which contains proposals for State spending for capital projects.
The aggregate outstanding general obligation bonded
indebtedness of the State as of June 30, 1993 was $3.549.7 billion. The
debt service obligation for outstanding indebtedness is $119.9 million for
fiscal year 1994.
Aside from its general obligation bonds, the State's "moral
obligation" backs certain obligations issued by the New Jersey Housing
and Mortgage Finance Agency, the South Jersey Port Corporation (the
"Corporation") and the Higher Education Assistance Authority. As of
June 30, 1992, there was outstanding in excess of $1 billion of moral
obligation bonded indebtedness issued by such entities, for which the
maximum annual debt service
was over $101 million as of such date. The State provides the
Corporation with funds to cover debt service and property tax
requirements when earned revenues
are anticipated to be insufficient to cover these obligations. For the
calendar years 1986 through 1992, the State has appropriated
<PAGE>
$12,237,565.00 to cover property tax shortfalls of the Corporation.
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 Tort Claims Act, N.J.S.A. 59:1-1 et seq. In
addition, at any given time there are various contract claims against the
State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for
these claims and cases. An independent study estimated an aggregate
potential exposure of $50 million for claims pending, as of January 1,
1982. It is estimated that were a similar study made of claims currently
pending, the amount of such estimated exposure would be somewhat
higher. New Jersey is involved in a number of lawsuits in which adverse
decisions could materially affect revenues or expenditures. Such cases
include challenges to its system of
educational funding, the methods by which the State Department of
Human Services shares with county governments the maintenance
recoveries and costs for residents in State psychiatric hospitals and
residential facilities for the developmentally disabled.
Other lawsuits that could materially affect revenue or
expenditures include a suit by a number of taxpayers seeking refunds of
taxes paid to the Spill Compensation Fund pursuant to N.J.S.A.
58:10-23.11; a suit alleging that unreasonably low Medicaid payment
rates have been implemented for long-term
care facilities in New Jersey; a suit alleging unfair taxation on interstate
commerce; a suit by Essex County seeking to invalidate the State's
method of funding the medical system and a suit seeking return of
moneys paid by various counties for maintenance of Medicaid or
Medicare eligible residents of
institutions and facilities for the developmentally disabled, and a suit
challenging the imposition of premium tax surcharges on insurers doing
business in New Jersey, and assessments upon property and casualty
liability insurers pursuant to the Fair Automobile Insurance Reform Act.
Legislation approved June 30, 1992, effective immediately,
called for revaluation of several public employee pension funds,
authorized an adjustment to the assumed rate of return on investment and
refunds $773 million in public employer contributions to the State from
various pension funds, to be
reflected as a revenue source for Fiscal Year 1992 and $226 million in
Fiscal Year 1993 and each fiscal year thereafter. Several labor unions
filed suit seeking a judgment directing the State Treasurer to refund all
monies transferred from the pension funds and paid into the General
Fund. An adverse determination would have a significant impact on
Fiscal Years 1992 and 1993 revenue estimates.
<PAGE>
<PAGE>
Bond Ratings: Citing a developing pattern of reliance on non-
recurring measures to achieve budgetary balance, four years of financial
operations marked by revenue shortfalls and operating deficits, and the
likelihood that financial pressures will persist, on August 24, 1992
Moody's lowered from Aaa to Aa1 the rating assigned to New Jersey
general obligation
bonds. Currently, Standard & Poor's rates New Jersey general
obligation bonds
AA+. On July 6, 1992, Standard & Poor's affirmed its AA+ ratings
on New Jersey's general obligation and various lease and appropriation
backed debt, but
its ratings outlook was revised to negative for the longer term horizon
(beyond four months) for resolution of two items: (i) the Federal Health
Care Facilities
Administration ruling concerning retroactive Medicaid hospital
reimbursements and (ii) the State's uncompensated health care funding
system, which is under
review in the U.S. Supreme Court.
New York Trust
New York State
The national and regional economic recession has caused a
substantial reduction in State tax receipts. This reduction is the principal
cause of the imbalance between recurring receipts and disbursements that
faced the Governor and Legislature in the adoption of the budget for the
1992-1993 fiscal year.
Consequently, the State took various actions for its 1992 fiscal
year, which included increases in certain State taxes and fees, substantial
decreases in certain expenditures from previously projected levels,
including cuts in State
operations and reductions in State aid to localities, and the sale of $531
million of short-term deficit notes prior to the end of the State's 1992
fiscal year. The
State's 1992-93 budget was passed on time, closing an estimated $4.8
billion imbalance resulting primarily from the national and regional
economic recession.
Major budgetary actions included a freeze in the scheduled reduction in
the personal income tax and business tax surcharge, adoption of
significant Medicaid cost containment or revenue initiatives, and
reductions in both agency operations
and grants to local governments from previously anticipated levels. the
State completed its 1993 fiscal year with a positive margin of $671
million in theGeneral Fund which was adopted into a tax refund reserve
account.
<PAGE>
The Governor released the recommended Governor's
Executive Budget for the 1993-94 fiscal year on January 19, 1993. The
recommended 1993-94 State Financial Plan projected a balanced General
Fund. General Fund
receipts and transfers from other funds were projected at $31.6 billion,
including $184 million carried over from the State's 1993 fiscal year.
Disbursements and
transfers from other funds were projected at $31.5 billion, not including
a $67 million repayment to the State's Tax Stabilization Reserve Fund.
To achieve General Fund budgetary balance in the 1994 State fiscal year,
the Governor
recommended various actions. These included proposed spending
reductions and other actions that would reduce General Fund spending
($1.6 billion); continuing
the freeze on personal income and corporate tax reductions and on
hospital assessments (41.3 billion); retaining moneys in the General Fund
that would otherwise have been deposited in dedicated highway and
transportation funds
($516 million); a 21-cent increase in the cigarette tax ($180 million); and
new revenues from miscellaneous sources ($91 million). The
recommended Governor's 1993-94 Executive Budget included reductions
in anticipated aid to all levels of local government.
In comparison to the recommended 1993-94 Executive Budget,
the 1993-94 State budget, as enacted, reflects increases in both receipts
and disbursements in the general Fund of $811 million.
The $811 million increase in projected receipts reflects (i) an
increase of $487 million, from $184 million to $671 million, in the
positive year-end margin at March 31, 1993, which resulted primarily
from improving economic conditions and higher-than-expected tax
collections, (ii) an increase of
$269 million in projected receipts, $211 million resulting from the
improved 1992-93 results and the expectation of an improving economy
and the balance from improved auditing and enforcement measures and
other miscellaneous items, (iii) additional payments of $200 million from
the Federal government to
reimburse the State for the cost of providing indigent medical care, and
(iv) the payment of an additional $50 million of personal income tax
refunds in the 1993-94; offset by (v) $195 million of revenue raising
recommendations in the Executive Budget that were not enacted in the
budget and thus are not included in the 1993-94 State Financial Plan.
The $811 million increase in projected disbursements reflects
(i) an increase of $252 million in projected school-aid payments, after
applying estimated receipts from the State Lottery allocated to school aid,
(ii) an increase of $194 million in projected payments for Medicaid
assistance and other social service programs, (iii) additional spending on
the judiciary ($56 million) and
<PAGE>
criminal justice ($48 million), (iv) a net increase in projected
disbursements for all other programs and purposes, including mental
hygiene and capital projects,
of $161 million, after reflecting certain re-estimates in spending, and (v)
the transfer of $100 million to a newly established contingency reserve.
The 1993-94 State budget, as enacted, included $400 million
less in State actions that the City had anticipated. Reform of education
aid formulas
was achieved which brought an additional 145 million education dollars
to New York City. However, the State legislature failed to enact a
takeover of local Medicaid cost containment items proposed by the
Governor, which would have
provided the City with savings. The adopted State budget cut aid for
probation services, increased sanctions on social service programs,
eliminated the pass-through of a State surcharge on parking tickets, cut
reimbursement for CHIPS
transportation operating dollars, and required a large contribution in City
funds to hold the MTA fare at the current level. In the event of any
significant reduction in projected State revenues or increases in projected
State expenditures
from the amounts currently projected by the State, there could be an
adverse impact on the timing and amounts of State aid payments to the
City in the future.
In certain prior fiscal years, the State has failed to enact a
budget prior to the beginning of the State's fiscal year. A delay in the
adoption of the
State's budget beyond the statutory April 1 deadline and the resultant
delay in the State's Spring borrowing has in certain prior years delayed
the projected receipt by the City of State aid, and there can be no
assurance that State budgets
in the future fiscal years will be adopted by the April 1 statutory
deadline.
The State has noted that its forecasts of tax receipts have been
subject to variance in recent fiscal years. As a result of these
uncertainties and other factors, actual results could differ materially and
adversely from the State's current projections and the State's projections
could be materially and adversely changed from time to time.
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
<PAGE>
disbursements in future fiscal years.
Ratings on general obligation bonds of the State of New York
were lowered by Standard & Poor's Corporation and Moody's Investors
Service during 1990 from AA- to A and Aa to A, respectively. On
January 6, 1992, Moody's Investors Service lowered its rating on certain
appropriations-backed debt of New York State to Baa1 from A. The
agency cited the failure of Governor Mario M. Cuomo and New York
State lawmakers to close New York's current year budget gap. Moody's
Investors Services also placed the
general obligation, State guaranteed and New York local Municipal
Assistance Corporation Bonds under review for possible downgrade in
coming months. In addition, on January 13, 1992, Standard & Poor's
Corporation lowered its rating on general obligation debt and guaranteed
debt to A- from A. Standard & Poor's Corporation also downgraded its
rating on variously rated debt, State
moral obligations, contractual obligations, lease purchase obligations and
other State guarantees. Additional reductions in ratings could result in
a loss to Unit holders.
State Authorities
The fiscal stability of the State is related to the fiscal stability
of its authorities, which generally have responsibility for financing,
constructing, and operating revenue-producing benefit facilities. Certain
authorities of the State, including the State Housing Finance Agency
("HFA"), the Urban Development
Corporation ("UDC") and the Metropolitan Transportation Authority
("MTA") have faced and continue to experience substantial financial
difficulties which could adversely affect the ability of such authorities to
make payments of interest
on, and principal amounts of, their respective bonds. Should any of its
authorities default on their respective obligations, the State's access to
public credit markets could be impaired. The difficulties have in certain
instances caused the State (under its so-called "moral obligation") to
appropriate funds on
behalf of the authorities. Moreover, it is expected that the problems
faced by these authorities 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
authorities having financial difficulties to
meet their obligations (including HFA, UDC and MTA) could result in
a default by one or more of the authorities. 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 authority. In addition, any default in payment of any general
obligation of any authority whose bonds contain a moral obligation
provision could constitute a failure of
<PAGE>
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.
The MTA oversees the operation of New York City's subway
and bus lines by its affiliates, the New York City Transit Authority and
the Manhattan and Bronx Surface Transit operating (collectively, the
"Transit Authority" or the "TA"). Through MTA's subsidiaries, the
Long Island Railroad Company, the Metro-North Commuter Railroad
Company and the Metropolitan Suburban Bus Authority, the MTA
operates certain commuter rail
and bus lines in the New York metropolitan area. In addition, the Staten
Island Rapid Transit Operating Authority, an MTA subsidiary, operates
a rapid transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll
bridges and tunnels. Because fare revenues are not sufficient to finance
the mass transit portion of these operations, the MTA has depended and
will continue to depend
for operating support upon a system of Federal, State, local government
and TBTA support, including loans, grants and operating subsidies.
Over the past several years, the State has enacted several taxes, including
a surcharge on the
profits of banks, insurance corporations and general business
corporations doing
business in the 12-county region served by the MTA (the"Metropolitan
Transportation Region") and a special one-quarter of 1% regional sales
and use tax, that provide additional revenues for mass transit purposes
including assistance to the MTA, the surcharge, which expires in
November 1995, yielded
$507 million in calendar year 1992, of which the MTA was entitled to
receive approximately 90 percent, or approximately $456 million.
For 1993, the TA is currently projecting a budget gap of about
$266 million. The MTA Board approved an increase in TBTA tolls
which took effect January 31, 1993. Since the TBTA operating surplus
helps subsidize TA operations, the January toll increase on TBTA
facilities, and other developments, reduced the projected gap to
approximately $241 million.
Legislation passed in April 1993 relating to the MTA's 1992-1996
Capital Program reflected a plan for closing this gap without raising
fares. A major
element of the plan provides that the TA receive a significant share of
the petroleum business tax which will be paid directly to MTA for its
agencies. The plan also relies on certain City actions that have not yet
been taken. The plan
also relies on certain City resources projected to be available to help
close the gap. If any of the assumptions used in making these
projections prove incorrect, the TA's gap could grow, and the TA would
<PAGE>
be required to seek additional State assistance, raise fares or take other
actions.
A subway fire on December 28, 1990, which caused fatalities
and many injuries, has given rise to substantial claims for damages
against both the TA and the City. A subway derailment on August 28,
1991, which caused fatalities and many injuries, may give rise to
additional claims.
The Stat's experience has been that if an Authority suffers
serious financial difficulties, both the ability of the State and the
Authorities to obtain financing in the public credit markets and the
market price of the State's outstanding bonds and notes may be adversely
affected. The Housing Finance Agency ("HFA") and the Urban
Development Corporation ("UDC") have in the
past required substantial amounts of assistance from the State to meet
debt service costs or to pay operating expenses. Further assistance,
possibly in increasing amounts, may be required for these, or other,
Authorities in the future. In addition, certain statutory arrangements
provide for State local
assistance payments otherwise payable to localities whose local assistance
payments otherwise payable to localities to be made under certain
circumstances to certain Authorities. The State has no obligation to
provide additional
assistance to localities whose local assistance payments have been paid
to Authorities under these arrangements. However, in the event that
such local assistance payments are so diverted, the affected localities
could seek additional State funds.
New York City and Other Localities
The fiscal health of the State is closely related to the fiscal
health of its localities, particularly The City of New York (the "City"),
which has required and continues to require significant financial
assistance from the State. The City's independently audited operating
results for each of its 1981 through
1992 fiscal years show a General Fund surplus reported in accordance
with GAAP. The City has eliminated the cumulative deficit in its net
General Fund position. In addition, the City's financial statements for
the 1992 fiscal year received an unqualified opinion from the City's
independent auditors, the tenth consecutive year the City has received
such an opinion.
In response to the City's fiscal crisis in 1975, the State took
a number of steps to assist the City in returning to fiscal stability.
Among these actions, the State created the Municipal Assistance
Corporation for The City of New York ("MAC") to provide financing
<PAGE>
assistance to the City. The State also enacted the New York State
Financial Emergency Act for The City of New York (the "Financial
Emergency Act") which, among other things, established
the New York State Financial Control Board (the "Control Board") to
oversee the City's financial affairs. The State also established the Office
of the State
Deputy Comptroller for The City of New York ("OSDC") to assist the
Control Board in exercising its powers and responsibilities. On June 30,
1986, the Control Board's powers of approval over the City's Financial
Plan were suspended pursuant to the Financial Emergency Act.
However, the Control Board, MAC and OSDC continue to exercise
various monitoring functions
relating to the City's financial position. The City operates under a
four-year financial plan which is prepared annually and is periodically
updated. The City submits its financial plans as well as the periodic
updates to the Control Board for its review.
The City's economy, whose rate of growth slowed
substantially over the past three years, is currently in recession. During
the 1990 and 1991
fiscal years, as a result of the slowing economy, the City has experienced
significant shortfalls in almost all of its major tax sources and increases
in social services costs, and has been required to take actions to close
substantial budget gaps in order to maintain balanced budgets in
accordance with the Financial Plan.
Beginning in 1992, the improvement in the national economy
helped stabilize conditions in the City. The City now projects, and its
current four-year financial plan assumes, that the City's economy will
continue to improve during calendar year 1993 and that a modest
economic recovery will begin during the second half of this calendar
year.
On July 6, 1993, the City prepared the Financial Plan for the
1994 through 1997 fiscal years, which relates to the City, the Board of
Education ("BOE") and the City University of New York ("CUNY").
The City is in the process of preparing a more detailed financial plan,
which will conform to the Financial Plan, and which the City expects to
submit to the Control Board in August 1993.
The 1994-97 Financial Plan projects revenues and expenditures
for the 1994 fiscal year balanced in accordance with GAAP. The
1994-1997 Financial Plan sets forth actions to close a previously
projected gap of approximately $2.0 billion in the 1994 fiscal year. The
gap-closing actions for the 1994 fiscal year included agency actions
aggregating $666 million, including
productivity savings and savings from restructuring the delivery of City
services; service reductions aggregating $274 million; the sale of
delinquent real property tax receivables for $215 million; discretionary
<PAGE>
transfers from the 1993 fiscal year of $110 million; reduced debt service
costs aggregating $187 million,
resulting from refinancings and other actions; $150 million in proposed
increased Federal assistance; a proposed continuation of the personal
income tax surcharge, resulting in revenues of $143 million; $80 million
in proposed increased State aid, of which approximately $35 million may
be subject to
approval by the Governor and State Legislature; and revenue actions
aggregating $173 million. The projected expenditures, for the 1994
fiscal year reflect the
$131 million of expenditure reductions announced subsequent to the
adoption of the budget on June 14, 1993, including a $50 million
reduction in BOE expenditures, a $30 million reduction in personal
service costs and a $25 million reduction in other than personal services.
The Financial Plan also sets forth projections for the 1995
through 1997 fiscal years and outlines a proposed gap-closing program
to close projected budget gaps of $1.3 billion, $1.8 billion and $2.0
billion for the 1995 through
1997 fiscal years, respectively. The projections include $150 million of
increased Federal assistance in each of the 1995 through 1997 fiscal
years and $131 million, $291 million and $291 million of increased State
assistance in the 1995, 1996 and 1997 fiscal years, respectively, which
could include savings
from the proposed State assumption of certain Medicaid costs or various
proposed mandate relief measures and include the continuation of the
personal income tax surcharge, resulting in revenues of $420, $446
and$471 million in the 1995, 1996 and 1997 fiscal years, respectively.
The proposed gap-closing
actions include City actions aggregating $287 million,$564 million and
$645 million in the 1995 through 1997 fiscal years respectively; $100
million and $200 million in proposed additional Federal assistance in the
1996 and 1997 fiscal years, respectively; savings from various proposed
mandate relief
measures and the proposed reallocation of State education aid among
various localities, aggregating $175 million, $325 million and $475
million in the 1995
through 1997 fiscal years, respectively; and other unspecified Federal,
State or City actions of $800 million, $800 million and $700 million in
the 1995 through 1997 fiscal years, respectively.
Various actions proposed in the Financial Plan, including the
proposed continuation of the personal income tax surcharge beyond
December 31, 1995 and the proposed increase in State aid, are subject
to approval by the Governor and the State Legislature, and the proposed
increase in Federal aid, is subject to approval by Congress and the
President. The State Legislature has
in previous legislative sessions failed to approve proposals for the State
assumption of certain Medicaid costs, mandate relief and reallocation of
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State education aid, thereby increasing the uncertainty as to the receipt
of the State assistance included in the Financial Plan. If these actions
can not be implemented, the City will be required to take other actions
to decrease expenditures or increase revenues to maintain a balance
financial plan. The State Legislature has approved the continuation of the
personal income tax surcharge
through December 31, 1995, and the Governor is expected to approve
this continuation. The Financial Plan has been the subject of extensive
public comment and criticism particularly regarding the sale of
delinquent property tax
receivables, the sale of the New York City Off-Track Betting
Corporation, the amount of State and Federal aid included in the
Financial Plan and the inclusion of non-recurring actions.
The City Comptroller issued a statement on June 14, 1993 that
identified problems totalling $476 million in the fiscal year 1994 budget.
The problems included the uncertainty of (1) receiving all the Federal aid
anticipated, (ii) completing the sale or reorganization of OTB in fiscal
year 1994 and (iii) winning approval to eliminate preparation time of
certain teachers. The City Comptroller is expected to issue reports on
the Financial Plan in the near future.
Although the City has maintained balanced budgets in each of
its last twelve fiscal years, and is projected to achieve balanced operating
results for the 1993 fiscal year, there can be no assurance that the
gap-closing actions proposed in the Financial Plan can be successfully
implemented or that the City will maintain a balanced budget in future
years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.
The 1994-97 Financial Plan is based on numerous
assumptions, including the recovery of the City's and the region's
economy early in the
calendar year 1993. The 1994-97 Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the
annual increases
assumed for the 1994 through 1997 fiscal years; continuation of the 9%
interest earnings assumptions for pension fund assets affecting the City's
required pension fund contributions; the willingness and the ability of the
State to provide
the aid contemplated by the Financial Plan and to take various other
actions to assist the City, including the proposed State takeover of certain
Medicaid costs and State mandate relief, the ability of HHC, BOE and
other agencies to maintain budget balance; the willingness of the Federal
government to provide Federal aid; approval of the proposed
continuation of the personal income tax
<PAGE>
surcharge and the State budgets; adoption of the City's budgets by the
City Council; the ability of the City to implement contemplated
productivity and
service and personnel reduction programs and the success with which
the City controls expenditures; additional expenditures that may be
incurred due to the requirements of certain legislation requiring minimum
levels of funding for education; the City's ability to market its securities
successfully in the public credit markets; the level of funding required to
comply with the Americans with
Disabilities Act of 1990; and additional expenditures that may be
incurred as a result of deterioration in the condition of the City's
infrastructure. Certain of these assumptions have been questioned by the
City Comptroller and other public officials.
Estimates of the City's revenues and expenditures are based on
numerous assumptions and the subject to various uncertainties. If
expected Federal or State aid is not forthcoming, if unforeseen
developments in the economy significantly reduce revenues derived from
economically sensitive taxes or necessitate increased expenditures for
public assistance, if the City provided
for in the City's Financial Plan of if other uncertainties materialize that
reduce expected revenues or increase projected expenditures then, to
avoid operating deficits, the City may be required to implement
additional actions, including
increases in taxes and reductions in essential City services. The City
might also seek additional assistance from the State.
The City depends on the State for State aid both to enable the
City to balance its budget and to meet its cash requirements. For its
1993 fiscal year, the State, before taking any remedial action, reported
a potential budget deficit of $4.8 billion (before providing for repayment
of the deficit notes as described below). If the State experiences revenue
shortfalls or spending increases beyond its projections during its 1993
fiscal year or subsequent years,
such developments could result in reductions in projected State aid to the
City. In addition, there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline and that
there will not be adverse effects on the City's cash flow and additional
City expenditures as a result of such delays.
Implementation of the Financial Plan is also dependent upon
the City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1994-97
contemplates issuance of $10.8 billion of general obligation bonds
primarily to reconstruct and rehabilitate
the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to
reimburse the City's general fund for capital expenditures already
incurred. In addition, the City
<PAGE>
issues revenue and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City bonds
and notes will
be subject to prevailing market conditions at the time of the sale, and no
assurance can be given that such sales will be completed. 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.
Substantially all of the City's full-time employees are members
of labor unions. The Financial Emergency Act requires that all
collective bargaining agreements entered into by the City and the
Covered Organizations be consistent with the City's current financial
plan, except under certain circumstances, such as awards arrived at
through impasse procedures.
On January 11, 1993, the City announced a settlement with a
coalition of municipal unions, including Local 237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District Council
37") and other unions covering approximately 44% of the City's
workforce. The settlement, which has been ratified by the unions,
includes a total net expenditure increase
of 8.25% over a 39-month period, ending March 31, 1995 for most of
these employees. On April 9, 1993 the City announced an agreement
with the Uniformed Fire Officers Association (the"UFOA") which is
consistent with the coalition agreement. The agreement has been
ratified. The Financial Plan reflects the costs associated with these
settlements and provides for similar increases for all other City-funded
employees.
The Financial Plan provides no additional wage increases for
City employees after their contracts expire in the 1995 fiscal year. Each
1% wage increase for all employees commencing in the 1995 fiscal year
would cost the
City an additional $56 million for the 1995 fiscal year and $152 million
for the 1996 fiscal year and each year thereafter above the amounts
provided for in the Financial Plan.
The terms of eventual wage settlements could be determined
through the impasse procedure in the New York City Collective
Bargaining Law, which can impose a binding settlement.
MAC was organized in 1975 to provide financing assistance
for the City and also to exercise certain review functions with respect to
the City's finances. MAC bonds are payable out of certain State sales
and compensating use taxes imposed within the City, State stock transfer
taxes and per capita State
aid to the City. Any balance from these sources after meeting MAC debt
service and reserve fund requirements and paying MAC's operating
<PAGE>
expenses is remitted to the City or, in the case of stock transfer taxes,
rebated to the taxpayers. The State is not, however, obligated to
continue the imposition of such taxes or to continue appropriation of the
revenues therefrom to MAC, nor
is the State obligated to continue to appropriate the State per capita aid
to the City which would be required to pay the debt service on certain
MAC obligations. MAC has not taxing power and MAC bonds do not
create an enforceable obligation of either the State or the City. As of
March 31, 1993, MAC had outstanding an aggregate of approximately
$5.463 billion of its bonds.
On February 11, 1991, Moody's Investors Service lowered
its rating on the City's general obligation bonds from A to Baa1. On July
2, 1993, Standard & Poor's reconfirmed its A- rating of City bonds,
continued its
negative rating outlook assessment and stated that maintenance of such
ratings depended upon the City's making further progress towards
reducing budget gaps in the outlying years.
Certain localities in addition to New York City could also have
financial problems leading to requests for additional State assistance
during the State's 1992-93 fiscal year and thereafter. 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. Fiscal
difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the
Financial Control Board for the City of Yonkers (the "Yonkers Board")
by the State in 1984. The Yonkers Board is charged with oversight of
the fiscal affairs of Yonkers. Future actions taken by the Governor or
the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1991, the total indebtedness of
all localities in the State was approximately $31.6 billion, of which $16.8
billion was debt of New York City (excluding $6.7 billion in MAC
debt); a small portion (approximately $39 million) of the $31.6 billion
of indebtedness represented borrowing to finance budgetary deficits and
was issued pursuant to enabling
State legislation. In 1992, an unusually large number of local
government units requested authorization for deficit financings.
Although the comptroller has indicated that the level of deficit financing
requests is unprecedented, such
developments are not expected to have a material adverse effect on the
financial conditions of the State. Certain proposed Federal expenditure
reductions would reduce, or in some cases affected localities. If the
<PAGE>
State, New York City or any
of the Authorities 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 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 problems of declining urban
population, increasing expenditures,
and other economic trends could adversely affect localities and require
increasing State assistance in the future.
Litigation
The State is the subject of numerous legal proceedings relating
to State finances, State programs and miscellaneous tort, real property
and contract claims in which the State is a defendant and where monetary
damages sought are substantial. These proceedings could adversely
affect the financial condition of
the State in the 1991-92 fiscal years or thereafter.
Among the more significant of these litigations, which are at
various procedural stages, are those that challenge: (i) the validity of
agreements and treaties by which various Indian tribes transferred title
to the State of certain
land in central New York; (ii) certain aspects of the State's Medicaid
rates and regulations, including reimbursements to providers of
mandatory and optional
Medicaid services; (iii) contamination in the Love Canal area of Niagara
Falls; (iv) an action against State and New York City officials alleging
that the present level of shelter allowance for public assistance recipients
is inadequate under statutory standards to maintain proper housing; (v)
alleged employment discrimination by the State and its agencies; (vii)
challenges to the practice of
reimbursing certain Office of Mental Health patient care expenses from
the client's Social Security benefits; (vii) a challenge to the methods by
which the State reimburses localities for the administrative costs of food
stamp programs;
(viii) a challenge to the State's possession of certain funds taken pursuant
to the State's Abandoned Property Law; (ix) alleged responsibility of
State officials to
assist in remedying racial segregation in the City of Yonkers; (x) an
action in which the State is a third party defendant, for injunctive or
other appropriate relief concerning liability for the maintenance of stone
groins constructed along
certain areas of Long Island's shoreline; (xi) actions challenging the
constitutionality of legislation enacted during the 1990 legislative session
which changed the actuarial funding methods for determining
contributions to State employee retirement systems; (xii) actions
<PAGE>
challenging legislation enacted in
1990 which requires the withholding of certain amounts of pay from
State employees until their separation from State employment; (xiii) a
challenge to the constitutionality of specified financial programs
authorized by Chapter 190 of
the laws of 1990 and which seeks the recall and refunding of obligations
of certain public authorities issued pursuant to such legislation; (xiv)
challenges to the constitutionality of financial programs of the Thruway
Authority authorized
by Chapters 166 and 410 of the Laws of 1991, and to the sufficiency of
the fiscal year 1991-92 judiciary budget; (xv) challenges to the
constitutionality of
sections 1, 2, 3 and 10 of Chapter 220 of the Laws of 1990 which relate
to the creation and operation of the New York Local Governmental
Assistance Corporation ("LGAC") and of the issuance of bonds by
LGAC; (xvi) challenges
to the constitutionality of the State's statutory scheme relating to excess
medical malpractice insurance; (xvii) an action challenging the
constitutionality of a
proposal by the Governor for a multi-year fiscal plan for the State's
1991-92 and 1992-93 fiscal years and the "continuous issuance,
retirement and reissuance of
the temporary revenue anticipation notes (TRANS)"; (xviii) challenges
to the delay by the State Department of Social Services in making two
one-week Medicaid payments to the service providers; (xxi) challenges
to portions of Chapter 55 of the laws of 1992 requiring hospitals to
impose and remit to the
State an 11% surcharge on hospital bills paid by commercial insurers;
(xx) challenges promulgated by the State Department of Social Services
of a home assessment resource review instrument used to determine
eligibility for and nature of home care services for Medicaid recipients;
and (xxi) challenges to programs implemented under Section 62 of
Chapter 41 of the Laws of 1992 to
reduce Medicaid benefits to certain home-relief Medicaid recipients.
Economy
A national recession commenced in mid-1990. The State has
suffered a more severe economic downturn. The national recession has
been exacerbated in the State by a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an
overbuilt real estate market.
Over the long term, serious potential economic problems may
continue to aggravate State and local financial conditions. For decades,
the State economy has grown more slowly than the nation as a whole,
resulting in the gradual erosion of the State's relative economic affluence
and tax base, and the relocation of certain manufacturing operations and
<PAGE>
executive offices outside the
State. The causes of this relative decline are varied and complex, in
many cases involving national and international developments beyond the
State's control.
Part of the reason for the long-term relative decline in the State economy
has been attributed to the combined state and local tax burden, which is
among the highest in the nation. The existence of this tax burden limits
the State's ability to impose higher taxes in the event of future financial
difficulties.
If during the existence of the New York Trust, the City of
New York, the State, or any of its agencies or municipalities, because of
its or their own financial difficulties, become unable to meet regular
commitments or if there should be a default, moratorium or other
interruption of
payments of interest or principal on any obligation issued by New York
City, the State, or a municipality or other authority in the State, the
market value and marketability of Bonds in the New York Trust, the
asset value of Units of the New York Trust, and the interest income to
the New York Trust, could be adversely affected.
North Carolina Trust
The Sponsors believe the information summarized below
describes some of the more significant developments relating to
Securities of (i)
municipalities or other political subdivisions or instrumentalities of the
State of North Carolina (the "State") which rely, in whole or in part, on
ad valorem real
property taxes and other general funds of such municipalities or political
subdivisions or (ii) the State of North Carolina, which are general
obligations of the State payable from appropriations from the State's
General Fund. The
sources of such information include official reports from the Department
of the Treasurer, as well as other publicly available documents. The
Sponsors have
not independently verified any of the information contained in such
official reports, but are not aware of any facts which would render such
information inaccurate.
State Economic Profile. North Carolina is basically a rural
state, having only five municipalities with populations in excess of
100,000. The economic profile of North Carolina consists of a
combination of industry,
agriculture, and tourism. Nonagricultural wage and salary employment
accounted for approximately 3,203,500 jobs as of August 1993. The
largest nonagricultural segment of jobs was the approximately 733,600
persons employed in trade, with textiles as the largest manufacturing
<PAGE>
segment employing approximately 204,900 people. The United States
Department of Labor estimates that as of June, 1993, North Carolina
ranked tenth among the states
in nonagricultural employment, eighth in manufacturing employment, and
eleventh in trade. During the period 1980 through 1992, per capita
income in North Carolina grew from $7,999 to $17,667, an increase of
approximately 121%. The North Carolina Employment Security
Commission estimated the unadjusted unemployment rate in September
1993, to be 3.7% of the labor
force, as compared with an unemployment rate of 6.4% nationwide.
Gross agricultural income (excluding farm forest products) in 1992 was
$5.182 billion. This places North Carolina tenth in the nation in gross
agricultural income. Tobacco production is the leading source of
agricultural crop income in the State, accounting for approximately
20.3% of gross agricultural income in 1992.
State Financial Condition. The State's two principal operating
accounts are the General Fund and the Highway Fund. The principal
sources of General Fund tax revenues are the income tax and the sales
and use tax. The State Constitution limits the income tax to a rate of
10% of total net income; the State actually imposed a maximum rate of
7.75% during the 1992 calendar year.
The State had (audited) General Fund balances at the June 30th
year-end of approximately $541 million, $254 million, $124 million,
$112 million (deficit balance), and $235 million for, respectively, the
1988, 1989, 1990, 1991 and 1992 fiscal years. For the year ended June
30, 1992, the State had total budgeted appropriations from the General
Fund of approximately $9.980 billion.
The State Highway Fund had an ending credit balance of
approximately $348 million as of June 30, 1992, with total expenditures
of approximately $1.252 billion.
State Debt. As of June 30, 1992, approximately $549 million
aggregate principal amount of the State's general obligation bonds and
$119 million of its highway fund general obligation bonds were
outstanding. The highway fund bonds are payable from the Highway
Fund.
In addition, 16 constituent institutions of the University of
North Carolina and 9 agencies or public authorities of the State had
approximately $8.947 billion principal amount of revenue bonds
outstanding as of June 30, 1992. There are no bonds of the State
outstanding, and no State statutes which would authorize the issuance of
any bonds, which contemplate the appropriation
by the General Assembly of such amount as would be necessary to make
up any deficiency in a debt service reserve fund.
<PAGE>
Local governmental units in the State had approximately
$4.323 billion principal amount of general obligation bonds and $1.331
billion of revenue bonds (excluding industrial revenue bonds of county
authorities) outstanding as of June 30, 1992. The State has no financial
responsibility with respect to this debt.
Ohio Trust
The Ohio Trust will invest substantially all of its net assets in
Ohio Obligations. The Ohio Trust is therefore susceptible to political,
economic and regulatory factors that may affect issuers of Ohio
Obligations. The following
information constitutes only a brief summary of some of the complex
factors that
may affect the financial situation of issuers in Ohio, and is not applicable
to "conduit" obligations on which the public issue itself has no financial
responsibility.
The creditworthiness of obligations issued by local Ohio
issuers may be unrelated to the creditworthiness of obligations issued by
the State, 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 applicable
in connection with investment in particular Ohio Obligations or in the
obligations of particular Ohio issuers, and it is possible the investment
will be in Ohio Obligations or in obligations of particular issuers as to
which such specific
factors are applicable. However, the information set forth below is
intended only as a general summary and not a discussion of any such
specific factors that may affect any particular issuer or issue 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 economy of Ohio, while diversifying more into the service
and other non-manufacturing areas, continues to rely in part on durable
goods manufacturing, which is 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 in the State,
and the State has instituted
several programs to provide financial assistance to farmers. The State's
economy, has had varying effects on different geographic areas of the
State and the political subdivisions located within those geographic areas.
<PAGE>
In prior years, the State's overall unemployment rate is
commonly somewhat higher than the national average. In January 1993
and February 1993,
the unemployment rate was 8.2 and 7.8, respectively, compared to the
national rates 7.9 and 7.7 respectively. However, for both 1991 and
1992 the 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% respectively. The unemployment rate, and
its effects, vary among particular geographic areas of the State.
There can be no assurance that future state-wide or regional
economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value
of Ohio Obligations held in the portfolio of the Ohio Trust or the ability
of the particular obligors to make timely payments of debt service on (or
lease payments relating to) those obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending a
fiscal year or biennium in a deficit position. Most operations are
financed through the General Reserve Fund (GRF), with personal income
and sales-use taxes being the major GRF sources.
Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with the June
30 (end of fiscal year) balance reduced during less favorable national
economic periods and increased during more favorable economic times.
Key end of biennium fund balances at June 30, 1991 were
$135,365,000 (unaudited) (GRF) and approximately $300,000,000
(Budget Stabilization Fund (BSF), a cash and budgetary management
fund). Necessary corrective steps were taken in fiscal year 1991 to
respond to lower than estimated receipts and higher expenditures in
certain categories. Those steps included the transfer of $64,000,000
from the BSF to the GRF. The State reported biennium ending fund
balances of $135.3 million (GRF) and $300 million (BSF).
The State has established procedures for, and has timely taken,
necessary actions to ensure a resource/expenditures 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.
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; it included debt service and lease rental appropriations for the
<PAGE>
entire 1992-93 biennium, while continuing most other appropriations for
31 days at 97% of fiscal year 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 fiscal year 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 fiscal year financial results and economic
forecast for the State, in light of the continuing uncertain nationwide
economic situation,
OBM projected, and was timely addressed, a fiscal year 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 totalling approximately $143,000,000 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 fiscal year 1992 by a total of approximately
$184 million (debt service and lease rental obligations were not affected).
The General Assembly authorized,and OBM made in June 1992, the
transfer to the GRF of the $100.4 million BSF balance and additional
amounts from certain other funds. Other administrative revenue and
spending actions resolved the
remaining GRF imbalance, resulting in positive GRF fiscal year 1992
ending fund and cash balances.
A significant GRF shortfall, approximately $520 million, was
then projected for fiscal year 1993. It had been addressed by appropriate
legislative and administrative actions. As a first step the Governor
ordered, effectively
July 1, 1992, $300 million in selected GRF spending reductions.
Executive and
legislative action in December 1992 (a combination of tax revisions and
additional appropriations spending reductions) is projected by OBM to
balance GRF resources and expenditures in this biennium and provide a
better base for the appropriations for the next biennium. Those actions
included tax revisions estimated to produce an additional $194,500,000
this fiscal year, and additional
appropriations spending reductions totalling approximately $50,000,000
are provided for in that legislation and subsequent action by the
Governor.
Litigation filed on February 1, 1993 seeks to have a new tax
on soft drinks, included in those tax revisions, declared invalid and its
<PAGE>
collection enjoined. The trial court's preliminary injunction has been
stayed by the Ohio
Supreme Court on procedural grounds, and that tax is for now being
collected.
OBM had estimated approximately $18,500,000 being collected from that
tax this fiscal year, representing less than 10% of the projected additional
tax revenues. Several bases for invalidity were asserted, including a
claim that the bill in which this and other elements of the tax package (
as well as certain
capital appropriations and financing authorizations ) were included did
not comply with a constitutional "one-subject" procedural requirement.
Supplementing the general authorization for the Governor's
spending reduction orders described above and exercised several times
in this biennium, the biennial appropriations act authorizes the OBM
Director to implement up to 1% fiscal year reduction in GRF amounts
appropriated if on March 1 of either fiscal year of the biennium receipts
for that fiscal year are for
any reason more than $150,000,000 under estimates and the then
estimated GRF
ending fund balance is less than $50,000,000. Expressly, excerpted from
this cutback authorization are debt service and lease rental
appropriations. In light
of the other corrective actions described above, this supplemental
spending reduction authorization was not implemented in fiscal year 1992
and is not expected to be implemented in fiscal year 1993.
The general appropriations process for the next biennium (beginning July
1, 1993) has commenced with the Governor's presentation of a proposed
GRF budget to the General Assembly. That budget document and the
related appropriations bill as introduced and passed by the House include
all necessary GRF appropriations for biennial State debt service and lease
rental payments.
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 State is expressly precluded from assuming
the debts of any
local government or corporation. (An exception in both cases is made
for any debt incurred to repel invasion, suppress insurrection, or defend
the State in war.)
By twelve constitutional amendments (the last adopted in
1987), Ohio voters have authorized the incurrence of State debt to which
taxes or excesses were pledged for payment; $514 million of this debt
was outstanding at February 23, 1993. The only such State debt still
<PAGE>
authorized to be incurred at February 23, 1993 are portions of the
highway obligations bonds, and
portions of the following bonds: (a) up to $100,000,000 of State full faith
and credit obligations for coal research and development may be
outstanding at any
one time (with $36,000,000 outstanding); and (b) $1.2 billion of State
full faith and credit obligations are authorized for local infrastructure
improvements, with
no more than $120,000,000 to be issued in any calendar year
($432,000,000 outstanding, and $720,000,000 remain to be issued).
The Constitution also authorized the issuance, for certain
purposes, of State obligations, 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. A total of $3.91 billion of those
obligations were outstanding at February 23, 1993.
A 1990 constitutional amendment authorized greater State and
political subdivision participation in the provision of individual and
family housing, including borrowing for this purpose. The General
Assembly may 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 of revenue-producing facilities or categories of
facilities, which obligations are not "debt" within constitutional
provisions or payable from taxes.
In general, lease payment obligations under lease-purchase agreements
of Ohio issuers (in connection with 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 periods.
Local school districts in Ohio receive a major portion (on a
statewide basis, historically approximately 46%) of their operating
moneys from State subsidies ( known as the Foundation Program ), but
are dependent on local
ad valorem 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 (Emergency School Advancement Fund ) provides for school
district cash-need borrowing directly from commercial lenders, with State
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diversion of subsidy distributions to repayment if needed; 26 districts
borrowed a total of $41.8
million in fiscal year 1991 under this program, in fiscal year 1992,
borrowings totalled $61.9 million (including over $46.6 million by one
district) and in fiscal
year 1993 26 districts borrowed approximately $94.3 million (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 monies distributed by the State. Procedures have been established
for those few municipalities that have on occasion faced significant
financial problems, which
include establishment of a joint State/local commission to monitor the
municipality's fiscal affairs, with 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 of ad valorem property
taxes, without a vote of the electors or municipal charter provision, to
1% of true value in
money, and statutes limit the amount of the aggregate levy without a vote
or charter provision 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.
Although revenue obligations of the State or its political
subdivisions may be payable from a specific project or source, including
lease rentals, there can be no assurance that future economic difficulties
and the resulting impact on State and local government finances will not
adversely affect the market value of Ohio obligations held in the portfolio
of the Trust or the
ability of the respective obligors to make timely payments of principal
and interest on such obligations.
The outstanding Bonds issued by the Sinking Fund are rated
Aa by Moody's Investors Service ("Moody's") and AAA by Standard &
Poor's Corporation ("S&P"). In January 1982, S&P adjusted its rating
on certain of the State's general obligation bonds from AA+ to AA.
Previously, in November 1979, the ratings on general obligation debt of
the State were changed by Moody's and S&P from Aaa and AAA to Aa
and AA+, respectively. S&P did not at either time change its AAA
ratings on the Bonds.
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The outstanding State Bonds issued by the Ohio Public Facilities
Commission and the Ohio Building Authority are rated A+ by S&P and
A by Moody's.
Pennsylvania Trust
Potential purchasers of Units of the Trust should consider the
fact that the Trust's portfolio consists primarily of securities issued by
the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and
authorities and should realize the substantial risks associated with an
investment in such securities. Although the Commonwealth had a
positive budgetary balance at the end of each fiscal year from fiscal 1984
to fiscal 1989, the positive balance in the General Fund of the
Commonwealth (the principal
operating fund of the Commonwealth) declined to a zero balance at the
close of fiscal 1989, and a negative balance was experienced in 1990 and
1991, tax increases and spending decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million. The deficit
in the Commonwealth's
unreserved/undesignated funds was also reduced, from $1.1462 million
at June 30, 1991 to $138.6 million at June 30, 1992.
Pennsylvania's economy historically has been dependent upon
heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural
workers, followed by the
categories of trade and manufacturing. Future economic difficulties in
any of these industries could have an adverse impact on the finances of
the Commonwealth or its municipalities, and could adversely affect the
market value
of the Bonds in the Pennsylvania Trust or the ability of the respective
obligors to make payments of interest and principal due on such Bonds.
Certain litigation is pending against the Commonwealth that
could adversely affect the ability of the Commonwealth to pay debt
service on its
obligations, including suits relating to the following matters: (i) the
ACLU has filed suit in federal court demanding additional funding for
child welfare
services; the Commonwealth settled a similar suit in the Commonwealth
Court of Pennsylvania and is seeking the dismissal of the federal suit,
inter alia, because of that settlement; in April 1993, the federal court
<PAGE>
granted in part and denied in part the Commonwealth's motion for
summary judgment (no available estimates of potential liability); (ii) in
1987, the Supreme Court of Pennsylvania
held that the statutory scheme for county funding of the judicial system
to be in conflict with the Constitution of the Commonwealth but stayed
judgment pending enactment by the legislature of funding consistent with
the opinion and the legislature has yet to consider legislation
implementing the judgment; (iii)
several banks have filed suit against the Commonwealth contesting the
constitutionality of a law enacted in 1989 imposing a bank shares tax
(potential liability estimated at $1.023 billion plus interest); (iv) in
January 1992, the Pennsylvania Commonwealth Court held that dividends
received by a corporate taxpayer and accounted for under the equity
method of accounting are not
included in the tax base for purposes of the capital stock/franchise
tax--the Commonwealth of Pennsylvania has appealed the decision but
believes the likelihood of an unfavorable outcome is reasonably possible,
and has provided sufficient reserves to fund the potential loss (potential
lost revenue to the
Commonwealth estimated at $30 million annually); (v) litigation has been
filed in both state and federal court by an association of rural and small
schools and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case and the state case is in the pre-trial state (no available estimate of
potential liability); (vi) litigation has been filed in state court by a variety
of plaintiffs challenging the validity of a
number of provisions in the 1991 tax legislation, including the tax on
leased vehicles the sales tax on periodicals, and the repeal of the
deduction for net
operating loss carryforwards (no available estimate of potential liability
for refund of taxes collected or amount of tax revenue at risk); (vii) the
ACLU has brought a class action on behalf of inmates challenging the
conditions of confinement in thirteen of the Commonwealth's correctional
institutions (no
available estimate of potential cost of complying with the injunction
sought but capital and personnel costs might cost millions of dollars) and
(viii) a consortium
of public interest law firms has filed a class action suit alleging that the
Commonwealth has not complied with a federal mandate to provide
screening, diagnostic and treatment services for all Medicaid-eligible
children under 21 (potentially liability estimated at $98 million).
The Commonwealth's general obligation bonds have been
rated AA-by Standard & Poor's and A1 by Moody's for approximately
the last five years.
The City of Philadelphia (the "City") has been experiencing
severe financial difficulties which has impaired its access to public credit
<PAGE>
markets and a long-term solution to the City's financial crisis is still
being sought. The City experienced a series of General Fund deficits for
fiscal years 1988 through 1991.
Additional deficits are expected for the 1992 and 1993 fiscal
years. The City has no legal authority to issue deficit reduction bonds on
its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority
is broadly empowered to assist cities in avoiding defaults and eliminating
deficits by encouraging the adoption of sound budgetary practices and
issuing bonds. In order for the Authority to issue bonds on behalf of the
City, the City and the
Authority entered into an intergovernmental cooperative agreement
providing the Authority with certain oversight powers with respect to the
fiscal affairs of the
City, and the Authority approved a five-year financial plan prepared by
the City. On June 16, 1992, the Authority issued a $474,555,000 bond
issue on behalf of the City. A five year plan that projects a balanced
General Fund budget in
Fiscal Year 1994 without a grant from the Authority was approved by
the Authority on April 6, 1992. 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. In March
1993, Philadelphia filed an amended five year plan with the Authority,
which projects a $6.6 million deficit in the General Fund for the fiscal
year ending June 30,
1993. The City Council and the Authority have approved a fiscal 1994
budget that projects no deficit for the fiscal year ending June 30, 1994.
In July 1993, the Authority issued $643,430,000 of bonds to refund
certain general obligation
bonds of the City and to fund additional capital projects. In September
1993, the Authority issued $178,675,000 of bonds to advance refund
certain of the bonds issued in June 1992.
Texas Trust
Potential purchasers of the Units of the Texas Trust should
consider the fact that the Texas Trust's Portfolio consists of securities
issued by the State of Texas, or its municipalities or authorities (the
"Texas Securities") and realize
the substantial risks associated with an investment in such Texas
Securities. The following information is a brief summary and does not
purport to be a complete
description of conditions, developments and risk factors that may
adversely affect the Texas Securities and hence the value of the Units.
The information is drawn principally from publicly available documents.
<PAGE>
While the Sponsors have not independently verified such information,
they have no reason to believe that such information is inaccurate.
Economic Factors. Geographic, cultural, climatic and
geological differences within the State of Texas have produced six
generally distinct geographic regions in which economic developments,
such as changes in oil prices, the value of the Mexican peso, and defense
spending can be expected to have varying effects.
Texas experienced a severe economic recession in the 1980's
commencing with a decline of the energy industry which in turn led to
a depression of the real estate industry, financial institution failures and
declines in most sectors of the Texas economy. As the Texas economy
began to level
off in the late 1980's, its dependence on certain industry segments began
to shift. The energy industry currently comprises approximately 15% of
the State's total economic output compared to a peak of 27% in 1981,
while the service
industry currently comprises approximately 15% of the State's total
economic output compared to a peak of 27% in 1981, while the service
industry (including
health and business services) comprises approximately 17% of the State's
local economic output compared to 11.9% in 1982.
Economic growth and activity in Texas are likely to be
inhibited by many factors including over-capacity in commercial and
residential real estate markets, asset sales by the Resolution Trust
Corporation, conservative lending practices owing to stricter risk-based
capital guidelines imposed on financial institutions, the national
recession, and the unstable international economic and political
environment. Continued low levels of economic growth and activity in
Texas' major industries, budgeting difficulties, constitutional limitations
on taxes, and other matters could adversely affect the Texas Securities
and hence the value of the Units in the Texas Trust. The Sponsors
cannot predict the course of economic trends in Texas.
State Finances. The State operates on a fiscal year beginning
September 1, and ending August 31. The State's accounting period is a
biennium covering two fiscal years. The State is required by law to
maintain its accounting and reporting functions on a cash basis.
The economic troubles of the 1980's caused numerous
budgeting difficulties for the State and its political subdivisions due
principally to a shrinking and changing tax base. Historically, the
primary sources of the State's revenue have been sales taxes, mineral
severance taxes and federal grants. Due
to the State's economic recession and the consequent enactment 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
<PAGE>
the relative importance of the State's taxes in terms of their contribution
to the State's total
revenue. Key revenue sources in the State of Texas for the fiscal year
ended August 31, 1992 included sales taxes (28.8% of total revenue),
federal grants (28.4% of total revenue), licenses and fees (6.3% of total
revenue), interest and investment income (6.3% of total revenue) and
motor fuels taxes. The State
imposes a corporate franchise tax based on a corporation's taxable capital
apportionable to Texas. While the State currently has no income tax, an
income tax has been and continues to be considered and may be enacted.
For the biennium ended August 31, 1989, the State of Texas
had a budget surplus of approximately $297 million (attributable, in large
part, to increased sales tax revenue), compared to a budget deficit of
approximately $745
million for the biennium ended August 31, 1987 (attributable primarily
to the decline of the energy industry which was principally a result of
lower oil and gas prices). The above biennium end balances include
approximately $300 million in oil overcharge funds which amounts are
restricted to energy
conservation projects. 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%, 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.
<PAGE>
<PAGE>
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 $7.3 billion of general obligation bonds have
been authorized in Texas and almost $2.81 billion of such bonds are
currently outstanding. Of these, over 37% were issued by the Veterans'
Land Board.
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.
From the time Standard & Poor's Corporation began rating
Texas general obligation bonds in 1956 until early 1986, the 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
<PAGE>
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.
Litigation. In October 1989, the Texas Supreme Court in
Edgewood v. Kirby unanimously held that the State public school finance
system violated provisions of the Texas Constitution. The Supreme
Court reinstated an injunction issued by the District Court (enjoining the
State from funding the public school finance system) but postponed its
effect. New legislation intended
to resolve the problem was passed, however, the District Court
subsequently held the new finance system unconstitutional. The Texas
Supreme Court was asked to review the matter, and in January 1991,
held that the new finance system violated the Texas Constitution. The
Texas Supreme Court stayed the effect of the injunction until April 1,
1991.
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.
It is not possible to predict whether the new public school
finance system will be held constitutional and, if it is, how the State will
appropriate the additional funding, and what the impact of such
appropriation will be upon the State. If the new public school system is
held unconstitutional, it is not possible
<PAGE>
to predict the legislative solution to the problems or to assess the impact
of such solution upon the financial condition of the State.
The Sponsors believe the information summarized above
describes some of the more significant aspects relating to the State
Trusts. The sources of such information are the official statements of
issuers located in each of the
respective States as well as other publicly available documents. While
the Sponsors have not independently verified this information, they have
no reason to believe that such information is not correct in all material
respects.
The Units
On the date of this Prospectus, each Unit in a State Trust
represented a fractional undivided interest in the principal and net income
of such State Trust as is set forth in the "Summary of Essential
Information" of
Part A. If any Units are redeemed after the date of this Prospectus by
the Trustee, the principal amount of the Bonds in the affected State Trust
will be reduced by an amount allocable to redeemed Units and the
fractional undivided
interest in the affected State Trust represented by each unredeemed Unit
will be increased. Units will remain outstanding until redeemed upon
tender to the Trustee by any Unit holder, which may include the
Sponsors, or until the termination of the Trust Agreement. (See
"Amendment and Termination of the
Trust Agreement--Termination".) References in this Prospectus to
"Units" are to Units which represented the fractional undivided interest
indicated in the "Summary of Essential Information" of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are
customarily offered to investors on a "yield price" basis (as contrasted
to a "dollar price"
basis) at the lesser of the yield as computed to maturity of the bonds or
to an earlier redemption date and which takes into account not only the
interest payable on the bonds but also the amortization or accretion to a
specified date
of any premium over or discount from the par (maturity) value in the
bond's purchase price. Since Units of each State Trust are offered on a
dollar price basis, the rate of return on an investment in Units of a State
Trust is stated in terms of "Estimated Current Return", computed by
dividing the Net Annual Income per Unit by the Public Offering Price
per Unit. Any change in either
the Net Annual Income per Unit or the Public Offering Price per Unit
<PAGE>
will result in a change in the Estimated Current Return. The Net Annual
Income per Unit of a State Trust is determined by dividing the total
annual interest income to such State Trust, less estimated annual fees and
expenses of the Trustee, the
Sponsor, and the Evaluator, by the number of Units of such State Trust
outstanding. The Net Annual Income per Unit of a State Trust will
change as the income or expenses of such State Trust changes and as
Bonds are redeemed,
paid, sold or exchanged. For a statement of the Net Annual Income per
Unit and the Estimated Current Return based on the Public Offering
Price, see Part A under "Summary of Essential Information".
The Estimated Long-Term Return for a State Trust is a
measure of the return to the investor over the estimated life of a State
Trust. The Estimated Long-Term Return represents an average of the
yields to maturity (or call) of the Bonds in a State Trust's portfolio
calculated in accordance with accepted
bond practice and adjusted to reflect expenses and sales charges. In
calculating Estimated Long-Term Return, the average yield for a State
Trust's portfolio is
derived by weighing each Bond's yield by the market value of the Bond
and by the amount of time remaining to the date to which the Bond is
priced. Once the average portfolio yield is computed, this figure is then
reduced to reflect estimated expenses and the effect of the maximum
sales charge paid by investors.
A State Trust may experience expenses and portfolio charges
different from those assumed in the calculation of Estimated Long-Term
Return. There thus can be no assurance that the Estimated Current
Returns or Estimated Long-Term Returns quoted for a State Trust will
be realized in the future. Since both Estimated Current Return and
Estimated Long-Term Return quoted on a given business day are based
on the market value of the underlying Bonds
on that day, subsequent calculations of these performance measures will
reflect the then-current market value of the underlying Bonds and may
be higher or lower.
<PAGE>
<PAGE>
Taxes
The following discussion addresses only the tax consequences of Units
held as capital assets and does not address the tax consequences of Units
held by dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the
Sponsors, under existing law:
The Trust is not an association taxable as a corporation for Federal
income tax purposes, and income received by the Trust will be treated
as the income of the Unit holders ("Holders") in the manner set forth
below.
Each Holder will be considered the owner of a pro rata portion of each
Bond in the State Trust under the grantor trust rules of Sections 671-679
of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to determine the face amount of a Holder's pro rata portion of each
Bond on the Date of Deposit, see "Aggregate Principal" under "Portfolio
of Securities". The total cost to a Holder of his Units, including sales
charges, is allocated to his pro rata
portion of each Bond, in proportion to the fair market values thereof on
the date the Holder purchases his Units, in order to determine his tax
basis for his pro rata portion of each Bond. In order for a Holder who
purchases his Units on the Date of Deposit to determine the fair market
value of his pro rata portion of each Bond on such date, see "Cost of
Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received the interest on his pro
rata portion of each Bond when interest on the Bond is received by the
State Trust. In the opinion of bond counsel (delivered on the date of
issuance of each Bond), such interest will be excludable from gross
income for regular Federal income tax
purposes (except in certain limited circumstances referred to below).
Amounts received by the State Trust pursuant to a bank letter of credit,
guarantee or insurance policy with respect to payments of principal,
premium or interest on a Bond in the State Trust will be treated for
Federal income tax purposes in the same
manner as if such amounts were paid by the issuer of the Bond.
The State Trust may contain Bonds which were originally issued at a
discount ("original issue discount"). The following principles will apply
to each Holder's pro rata portion of any Bond originally issued at a
discount. In general, original issue discount is defined as the difference
between the price at which a debt obligation was issued and its stated
redemption price at maturity. Original issue discount on a tax-exempt
obligation issued after September 3, 1982, is deemed to accrue as
tax-exempt interest over the life of
<PAGE>
the obligation under a formula based on the compounding of interest.
Original issue discount on a tax-exempt obligation issued before July 2,
1982 is deemed to accrue as tax-exempt interest ratably over the life of
the obligation. Original issue discount on any tax-exempt obligation
issued during the period beginning July 2, 1982 and ending September
3, 1982 is also deemed to accrue as tax-exempt interest over the life of
the obligation, although it is not clear
whether such accrual is ratable or is determined under a formula based
on the compounding of interest. If a Holder's tax basis for his pro rata
portion of a Bond issued with original issue discount is greater than its
"adjusted issue price" but less than its stated redemption price at maturity
(as may be adjusted for certain payments), the Holder will be considered
to have purchased his pro rata portion of the Bond at an "acquisition
premium." A Holder's adjusted tax basis for his pro rata portion of a
Bond issued with original issue discount will include original issue
discount accrued during the period
such Holder held his Units. Such increases to the Holder's tax basis in
his pro rata portion of the Bond resulting from the accrual of original
issue discount, however, will be reduced by the amount of any such
acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond exceeds
the redemption price at maturity thereof (subject to certain adjustments),
the Holder will be considered to have purchased his pro rata portion of
the Bond with "amortizable bond premium". The Holder is required to
amortize such bond
premium over the term of the Bond. Such amortization is only a
reduction of basis for his pro rata portion of the Bond and does not result
in any deduction against the Holder's income. Therefore, under some
circumstances, a Holder may
recognize taxable gain when his pro rata portion of a Bond is disposed
of for an amount equal to or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond is disposed of by the State Trust for an amount
greater or less than his adjusted tax basis. Any such taxable gain or loss
will be capital gain or loss, except that any gain from the disposition of
a Holder's pro rata portion of a Bond acquired by the Holder at a
"market discount" (i.e., where
the Holder's original tax basis for his pro rata portion of the Bond (plus
any original issue discount which will accrue thereon until its maturity)
is less than its stated redemption price at maturity) would be treated as
ordinary income to the extent the gain does not exceed the accrued
market discount. Capital gains are generally taxed at the same rate as
ordinary income. However, the excess of net long-term capital gains over
net short-term capital losses may be taxed at a lower rate than ordinary
income for certain noncorporate
taxpayers. A capital gain or loss is long-term if the asset is held for more
than one year and short-term if held for one year or less. The deduction
of capital losses is subject to limitations. A Holder will also be
<PAGE>
considered to have disposed of all or part of his pro rata portion of each
Bond when he sells or redeems all or some of his Units.
Under the income tax laws of the State and City of New York, the
State Trust is not an association taxable as a corporation and income
received by the State Trust will
be treated as the income of the Holders in the same manner as for
Federal income tax purposes, but will not necessarily be tax-exempt.
Under Section 265 of the Code, a Holder (except a corporate Holder)
is not entitled to a deduction for his pro rata share of fees and expenses
of the State Trust because the fees and expenses are incurred in
connection with the production of tax-exempt income. Further, if
borrowed funds are used by a Holder to purchase or carry Units of the
State Trust, interest on such indebtedness
will not be deductible for Federal income tax purposes. In addition,
under rules used by the Internal Revenue Service, the purchase of Units
may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Bonds. It is impossible to predict whether
any legislation in respect of the tax status of interest on such obligations
may be proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal and certain aspects of
New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and should
consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will
be a preference item for purposes of the alternative minimum tax
("AMT"). The Sponsors believe that interest (including any original issue
discount) on the Bonds should not be subject to the AMT for individuals
or corporations under this rule. A corporate Holder should be aware,
however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise to
an alternative minimum tax liability (or increase an existing liability)
because the interest income will be included in the corporation's
"adjusted current earnings" for purposes of the adjustment to alternative
minimum taxable income required by Section 56(g) of the Code and will
be taken into account for
purposes of the environmental tax on corporations under Section 59A of
the Code, which is based on an alternative minimum taxable income.
<PAGE>
In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income
tax. Holders are urged to consult their own tax advisers concerning an
investment in Units.
At the time of issuance of each Bond, an opinion relating to the validity
of the Bond and to the exemption of interest thereon from regular
Federal income taxes was or will be rendered by bond counsel. Neither
the Sponsors nor Davis Polk & Wardwell nor any of the special counsel
for state tax matters have made
or will make any review of the proceedings relating to the issuance of the
Bonds or the basis for these opinions. The tax exemption is dependent
upon the issuer's (and other users') compliance with certain ongoing
requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no assurance
that the issuer (and other users) will
comply with these requirements, in which event the interest on the Bond
could be determined to be taxable retroactively from the date of issuance.
In the case of certain of the Bonds, the opinions of bond counsel
indicate that interest on such Bonds received by a "substantial user" of
the facilities being financed with the proceeds of such Bonds, or persons
related thereto, for periods while such Bonds are held
by such a user or related person, will not be exempt from regular
Federal income taxes, although interest on such Bonds received by others
would be exempt from regular Federal income taxes. "Substantial user"
is defined under U.S. Treasury Regulations to include only a person
whose gross revenue derived with respect to the facilities financed by the
issuance of bonds is more than
5% of the total revenue derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities or for whom
such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" are defined to include
certain related natural persons, affiliated corporations, partners and
partnerships. Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to each
Holder an annual statement containing information relating to the interest
received by the State Trust on the Bonds, the gross proceeds received by
the Trust from the disposition of any Bond (resulting from redemption
or payment at maturity of any Bond or the sale by the State Trust of any
Bond), and the fees and expenses
paid by the State Trust. The Trustee will also furnish annual information
returns to each Holder and to the Internal Revenue Service. Holders are
required to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year.
<PAGE>
The description of Federal tax consequences applies separately
for each State Trust. Below, arranged alphabetically by state, is a
description of certain state and local tax consequences for residents of the
state and locality for which such State Trust is named.
California Trust
Messrs. Morgan, Lewis and Bockius acted as special
California counsel to California Trust 98 and all prior California Trusts.
Messrs. Adams, Duque and Hazeltine acted as special California counsel
to California Trust 99 and all subsequent California Trusts. On the Date
of Deposit for each California Trust, the respective counsel to the Trusts
rendered an opinion under then existing law substantially to the effect
that:
The California Trust is not an association taxable as a
corporation under the income tax laws of the State of California;
The income, deductions and credits against tax of the
California Trust will be treated as the income, deductions and credits
against tax of the holders of Units in the California Trust under the
income tax laws of the State of California;
Interest on the bonds held by the California Trust, and any
interest income received by the California Trust from its investments in
units of previously formed California trusts included within a Multistate
Series or Umbrella Series of Tax Exempt Securities Trust (the
"Previously Formed Trusts"), to the extent that such interest is exempt
from taxation under California law will not lose its character as
tax-exempt income merely because that income is passed through to the
holders of Units; however, a corporation subject to the California
franchise tax is required to include that interest income
in its gross income for purposes of determining its franchise tax liability;
Each holder of a Unit in the California Trust will have a
taxable event when the California Trust disposes of a bond (whether by
sale, exchange, redemption, or payment at maturity) or when the Unit
holder redeems or sells his Units. The total tax cost of each Unit to a
holder of a Unit in the California
Trust 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 the holder's 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. Therefore, under some circumstances, a holder of a Unit may
realize taxable gain when the California Trust which issued such Unit
disposes of a bond or the holder's Units are sold or redeemed for an
amount equal to or less than his original cost of the bond or Unit.
<PAGE>
Similarly, each Unit holder will have a
taxable event (i) when a Previously Formed Trust disposes of a bond,
and (ii) when the California Trust disposes of any of its ownership
interests in a Previously Formed Trust;
Each holder of a Unit in the California Trust is deemed to be
the owner of a pro rata portion of the California Trust under the personal
property tax laws of the State of California; and
The pro rata ownership of the bonds held by the California
Trust, as well as the interest income therefrom, are exempt from
California personal property taxes.
Connecticut Trust
On the Date of Deposit for each Connecticut Trust, Messrs.
Day, Berry and Howard, special Connecticut counsel on Connecticut tax
matters, rendered an opinion which was based explicitly on the opinion
of Messrs. Cahill Gordon & Reindel regarding Federal income tax
matters, under then existing Connecticut law substantially to the effect
that:
The Connecticut Trust is not subject to the Connecticut
corporation business tax or any other tax on or measured by net income
imposed by the State of Connecticut;
Interest income of the Connecticut Trust from obligations
issued by or on behalf of the State of Connecticut, any political
subdivision thereof, or any agency, instrumentality, authority, or district
of either (a "Connecticut Issuer"),
or from obligations of United States territories or possessions and their
public authorities the interest on which Federal law would prohibit
Connecticut from taxing if received directly by a Unit holder from the
issuer thereof, is not taxable under the Connecticut income tax on the
Connecticut taxable income of individuals, trusts and estates (the
"Connecticut Income Tax"), when received
by the Connecticut Trust or when distributed by it to such a Unit holder;
Gains and losses recognized by a Unit holder for Federal
income tax purposes upon the sale, redemption, or other disposition of
Units of the Connecticut Trust held by a Unit holder are taken into
account as gains or losses, respectively, for purposes of the Connecticut
Income Tax, except that,
in the case of a unit holder holding a Unit of the Connecticut Trust as a
capital asset, such gains and losses recognized upon the sale or exchange
of a Connecticut Bond held by the Connecticut Trust are excluded from
gains and losses taken into account for purposes of such tax and no
opinion is expressed as to the treatment for purposes of such tax of gains
<PAGE>
and losses recognized upon the maturity or redemption of a Connecticut
Bond held by the Connecticut Trust or, to the extent attributable to
Connecticut Bonds, of gains and losses
recognized upon the redemption, sale, or other disposition by a Unit
holder of a Unit of the Connecticut Trust held by him;
The portion of any interest or capital gain of the Connecticut
Trust that is allocable to a Unit holder that is subject to the Connecticut
corporation business tax is includible in the gross income of such Unit
holder for purposes of such tax; and
An interest in a Unit of the Connecticut Trust that is owned by
or attributable to a Connecticut resident at the time of his death is
includible in his gross estate for purposes of the Connecticut succession
tax and the Connecticut estate tax.
The Connecticut Income Tax was enacted in August 1991.
Generally, under this tax as enacted, a Unit holder recognizes gain or
loss upon the maturity, redemption, sale, or other disposition by the
Connecticut Trust of an obligation held by it, or upon the redemption,
sale, or other disposition of a Unit of the Connecticut Trust held by the
Unit holder, to the same extent that gain or loss is recognized by the
Unit holder thereupon for Federal income tax
purposes. However, on June 19, 1992, Connecticut legislation was
adopted that provides that gains and losses from the sale or exchange of
Connecticut Bonds held as capital assets will not be taken into account
for purposes of the Connecticut Income Tax for taxable years starting on
or after January 1, 1992. It is not clear whether this provision would
apply to gain or loss recognized by
a Unit holder upon the maturity or redemption of a Connecticut Bond
held by the Connecticut Trust or, to the extent attributable to Connecticut
Bonds held by the Connecticut Trust, to gain or loss recognized by a
Unit holder upon the redemption, sale, or other disposition of a Unit of
the Connecticut Trust held by
the Unit holder. Unit holders are urged to consult their own tax advisers
in this regard.
By legislation adopted May 19, 1993, as amended by
legislation adopted June 25, 1993, Connecticut enacted the net
Connecticut minimum tax,
retroactive to taxable years beginning on or after January 1, 1993, which
is applicable to individuals, trusts, and estates that are subject to the
Federal alternative minimum tax. Income of the Connecticut Trust that
is subject to the Federal alternative minimum tax in the case of such Unit
holders may also be subject to the net Connecticut minimum tax.
<PAGE>
<PAGE>
Florida Trust
On the Date of Deposit for each Florida Trust, Messrs.
Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A., special Florida
counsel on Florida tax matters, rendered an opinion, under then existing
law substantially to the effect that:
The Florida Trust will not be subject to the Florida income tax
imposed by Chapter 220 so long as the Florida Trust transacts no
business in Florida or has no income subject to federal income taxation.
In addition, political subdivisions of Florida do not impose any income
taxes.
Non-Corporate Unit holders will not be subject to any Florida
income taxation on income realized by the Florida Trust. Corporate Unit
holders with commercial domiciles in Florida will be subject to Florida
income taxation on income realized by the Trust. Other corporate Unit
holders will be subject to Florida income taxation on income realized by
the Florida Trust only
to the extent that the income realized is other than "non-business income"
as defined by Chapter 220.
Florida Trust Units will be subject to Florida estate tax if
owned by Florida residents and may be subject to Florida estate tax if
owned by other decedents at death. However, the Florida estate tax is
limited to the amount of
the credit allowable under the applicable Federal Revenue Act (currently
Section 2011 [and in some cases Section 2102] of the Internal Revenue
Code of 1986, as amended) for death taxes actually paid to the several
states.
Neither the Bonds nor the Units will be subject to the Florida
ad valorem property tax or the Florida sales or use tax.
The Florida Trust will not be subject to Florida intangible
personal property tax. In addition, Units of the Florida Trust will not be
subject to Florida intangible personal property tax.
The issuance and sale of the Units by the Florida Trust will
not subject either the Florida Trust or the Unit holders to the Florida
documentary stamp tax.
The transfer of Units by a Unit holder will not be subject to
the Florida documentary stamp tax.
In the event Bonds issued by the government of Puerto Rico,
the government of Guam, or the government of the United States Virgin
Islands are included in the Florida Trust, the opinions expressed above
will be unchanged.
<PAGE>
For the purposes of the foregoing opinion, the following terms
have the following meanings:
(a) "Non-Corporate Unit holder" -- a Unit holder of the
Florida Trust who is an individual not subject to the Florida state income
tax on corporations under Chapter 220, Florida Statutes (1989 and Supp.
1990) as amended by Chapter 91-112, Laws of Florida ("Chapter 220").
(b) "Corporate Unit holder" -- a Unit holder of the Florida
Trust that is a corporation subject to the Florida state income tax on
corporations under Chapter 220.
Maryland Trust
Messrs. Venable, Baetjer and Howard acted as special
Maryland counsel to Maryland Trust 75 and all prior Maryland Trusts.
Messrs. Weinberg & Green acted as special Maryland counsel to
Maryland Trust 76 and all subsequent Maryland Trusts. On the Date of
Deposit for each Maryland Trust,
the respective counsel to the Trusts rendered an opinion for Maryland
State and local income tax purposes and under then existing law,
substantially to the effect that:
The Maryland Trust will not be treated as an association
taxable as a corporation, and the income of the Maryland Trust will be
treated as the income of the Holders. The Maryland Trust is not a
"financial institution" subject to the Maryland Franchise Tax measured
by net earnings. The Maryland Trust is not subject to Maryland
property taxes imposed on the intangible personal property of certain
corporations.
Except as described below in the case of interest paid on
private activity bonds constituting a tax preference for federal income tax
purposes, a Holder will not be required to include such Holder's pro-rata
share of the earnings of, or distributions from, the Maryland Trust in
such Holder's Maryland taxable income to the extent that such earnings
or distributions represent interest excludable from gross income for
federal income tax purposes received by the Maryland Trust on
obligations of the State of Maryland, the
Government of Puerto Rico, or the Government of Guam and their
respective political subdivisions and authorities. Interest on Debt
Obligations is subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
In the case of taxpayers who are individuals, Maryland
presently imposes an income tax on items of tax preference with
reference to such items as defined in the Internal Revenue Code, as
amended, for purposes of calculating the federal alternative minimum
<PAGE>
tax. Interest paid on certain private activity bonds is a preference item
for purposes of calculating the federal alternative minimum tax.
Accordingly, if the Maryland Trust holds such bonds,
50% of the interest on such bonds in excess of a threshold amount is
taxable by Maryland.
A Holder will recognize taxable gain or loss, except in the
case of an individual Holder who is not a Maryland resident, when the
Holder disposes of all or part of such Holder's pro-rata portion of the
Debt Obligations in the
Maryland Trust. A Holder will be considered to have disposed of all or
part of such Holder's pro-rata portion of each Debt Obligation when the
Holder sells or redeems all or some of such Holder's Units. A Holder
will also be considered to have disposed of all or part of such Holder's
pro-rata portion of a Debt Obligation when all or part of the Debt
Obligation is disposed of by the Maryland Trust or is redeemed or paid
at maturity. Gain included in the gross
income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the extent
that the gain is derived from the disposition of Debt Obligations issued
by the State of Maryland and its
political subdivisions. Profits realized on the sale or exchange of Debt
Obligations are subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to Maryland
inheritance and estate tax only if held by Maryland residents.
Neither the Debt Obligations nor the Units will be subject to
Maryland personal property tax.
The sales of Units in Maryland or the holding of Units in
Maryland will not be subject to Maryland Sales or Use Tax.
Massachusetts Trust
On the Date of Deposit for each Massachusetts Trust, Messrs.
Palmer and Dodge, special Massachusetts counsel on Massachusetts tax
matters, rendered an opinion, which is based explicitly on the opinion of
Messrs. Davis Polk & Wardwell regarding Federal income tax matters,
under then existing Massachusetts law substantially to the effect that:
Tax-exempt interest for Federal income tax purposes received
by or through the Massachusetts Trust, or by or through a Previous Trust
in which the Massachusetts Trust owns an interest, on obligations issued
by Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, by the government of Puerto Rico or
by its authority or by the government of Guam or by its authority, will
<PAGE>
not result in a Massachusetts income tax liability for the Massachusetts
Trust or for Unit holders who are subject to Massachusetts income
taxation under Massachusetts General Laws, Chapter 62.
Capital gain and capital loss realized by the Massachusetts
Trust and included in the Federal gross income of Unit holders who are
subject to Massachusetts income taxation under General Laws, Chapter
62 will be included as capital gains and losses in the Unit holder's
Massachusetts gross income,
except where capital gain is specifically exempted from income taxation
under the Massachusetts statute authorizing issuance of the obligations
held by the Massachusetts Trust or held by the Previous Trusts in which
the Massachusetts Trust owns an interest, and will not result in a
Massachusetts income tax liability for the Massachusetts Trust.
Gains and losses realized on sale or redemption of Units by
Unit holders who are subject to Massachusetts income taxation under
Massachusetts General Laws, Chapter 62 will be includible in their
Massachusetts gross income.
Minnesota Trust
On the Date of Deposit for each Minnesota Trust, Messrs.
Dorsey & Whitney, a partnership including professional corporations,
special Minnesota counsel on Minnesota tax matters, rendered an opinion
under then existing law substantially to the effect that:
The Minnesota Trust is not an association taxable as a
corporation for purposes of Minnesota income taxation. Minnesota
taxable net income is, with certain modifications, determined with
reference to federal taxable income. Each Unit holder of the Minnesota
Trust will be treated as the owner of a pro rata portion of the Minnesota
Trust (including the ownership interest of the
Minnesota Trust in property comprising previously issued Series) for
purposes of Minnesota income taxation, and the income of the Minnesota
Trust will be
treated as the income of the Unit holders under Minnesota law. Interest
on Bonds that would be excluded from Minnesota taxable net income
when paid directly to an individual, estate or trust will be excluded from
Minnesota taxable net income of Unit holders that are individuals, estates
or trusts when received by the Minnesota Trust (or by a previously
issued Series in which the Minnesota
Trust has an ownership interest) and when distributed to such Unit
holders. Interest on Bonds that would be included in Minnesota
"alternative minimum taxable income" when paid directly to a
noncorporate taxpayer will be included in Minnesota "alternative
minimum taxable income" of Unit holders that are
individuals, estates or trusts for purposes of the Minnesota alternative
<PAGE>
minimum tax.
Any such Unit holder that is subject to Minnesota income
taxation will realize taxable gain or loss when the Minnesota Trust (or
a previously issued Series in which the Minnesota Trust has an
ownership interest) disposes
of a Bond or an ownership interest in a previously issued Series (whether
by sale, exchange, redemption or payment at maturity) or when the Unit
holder redeems or sells Units at a price that differs from original cost,
as adjusted for amortization of bond premium and other basis
adjustments. The total tax cost
of each Unit to a Unit holder is allocated proportionately (by value)
among each of the Bonds held in the Minnesota Trust. Tax cost
reduction requirements relating to amortization of bond premium may,
under some circumstances, result
in the realization of taxable gain by Unit holders when their Units (or
underlying Bonds) are sold or redeemed for an amount equal to or less
than their original cost. Minnesota has repealed the favorable treatment
of capital gains, but preserved limitations on the deductibility of capital
losses.
Interest income attributable to Bonds that are "industrial
development bonds" or "private activity bonds," as such terms are
defined in the Internal Revenue Code, will be taxable under Minnesota
law to a Unit holder that is a "substantial user" of the facilities financed
by the proceeds of such Bonds (or a "related person" to such a
"substantial user") to the same extent as
if such Bonds were held directly by such Unit holder.
Minnesota law does not permit a deduction for interest on
indebtedness incurred or continued by individuals, estates and trusts to
purchase or carry Units. Minnesota law also restricts the deductibility
of other expenses allocable to Units.
With limited exceptions, interest on Bonds in the Minnesota
Trust will be included in taxable income for purposes of the Minnesota
franchise tax on corporations and financial institutions. No opinion is
expressed as to other Minnesota tax effects on Unit holders that are
corporations or financial institutions.
Missouri Trust
Messrs. Bryan, Cave, McPheeters & McRoberts acted as
special Missouri counsel to Missouri Trust 75 and all prior Missouri
Trusts. Messrs. Blackwell Sanders Matheny Weary & Lombardi acted
as special Missouri counsel to Missouri Trust 76 and all subsequent
Missouri Trusts. On the Date of Deposit for each Missouri Trust, the
respective counsel to the Trusts rendered an opinion under then existing
<PAGE>
law substantially to the effect that:
For Missouri income tax purposes under Chapters 143 of the
Missouri Revised Statutes, the Missouri Trust will be treated as having
the same organizational characteristics as it is accorded for Federal
Income Tax purposes. In reliance upon the opinion of Cahill Gordon &
Reindel as described above, we
are therefore of the opinion that the Missouri Trust is not an association
taxable as a corporation under Missouri law, that each Unit holder will
be treated as the owner of a proportionate, undivided interest in the
Missouri Trust, and the income of the Missouri Trust will be treated as
the income of such Unit holders.
Under Missouri law, interest income received by the Missouri
Trust from (i) obligations of the State of Missouri, its political
subdivisions and authorities, or (ii) bonds issued by the Government of
Puerto Rico, or by its authority, and which is excluded from Federal
gross income by Federal law or
on which Missouri is prohibited by Federal law from imposing an
income tax, will be excluded from the Missouri taxable income of the
Unit holders to the extent that the interest is exempt from income tax
under Missouri law when received by the Missouri Trust.
Gains and losses from the Missouri Trust treated for Federal
Income Tax purposes as the gains and losses of the Unit holders, to the
extent included in Federal gross income, will be included in the Missouri
taxable income of Unit holders who are individuals, except to the extent
that (i) such Unit holders are non-residents of Missouri and (ii) such
gains and losses of such non-resident Unit holders are derived from
sources wholly without Missouri.
Such gains or losses, to the extent included in determining the Federal
taxable income of a corporate Unit holder after Missouri adjustments, are
allocated or apportioned to Missouri in order to determine Missouri
taxable income.
New Jersey Trust
On the Date of Deposit for each New Jersey Trust, Messrs.
Shanley & Fisher, P.C., special New Jersey counsel on New Jersey tax
matters, rendered an opinion under then existing law substantially to the
effect that:
The proposed activities of the New Jersey Trust will not cause
it to be subject to the New Jersey Corporation Business Tax Act.
The income of the New Jersey Trust will be treated as the
income of individuals, estates and trusts who are the Holders of Units of
the New Jersey Trust for purposes of the New Jersey Gross Income Tax
Act, and interest which
<PAGE>
is exempt from tax under the New Jersey Gross Income Tax Act when
received by the New Jersey Trust will retain its status as tax-exempt in
the hands of such Unit Holders. Gains arising from the sale or
redemption by a Holder of his
Units or from the sale, exchange, redemption or payment at maturity of
a Bond by the New Jersey Trust are exempt from taxation under the New
Jersey Gross Income Tax Act (P.L. 1976 C. 47), as enacted and
construed on the date hereof, to the extent such gains are attributable to
Bonds, the interest on which is exempt from tax under the New Jersey
Gross Income Tax Act. Any loss realized on such disposition may not
be utilized to offset gains realized by such
Unit Holder on the disposition of assets the gain on which is subject to
the New Jersey Gross Income Tax Act.
Units of the New Jersey Trust may be subject, in the estates
of New Jersey residents, to taxation under the Transfer Inheritance Tax
Law of the State of New Jersey.
North Carolina Trust
In the opinion of Messrs. Petree Stockton, special North
Carolina counsel on North Carolina tax matters, with respect to the
North Carolina Trust, under then existing law applicable to persons who
are North Carolina residents:
The State of North Carolina imposes a tax upon the
taxable income of individuals, corporations, estates, and trusts.
Nonresident individuals are generally taxed only on income from
North Carolina sources. Corporations doing business within and
without North Carolina are entitled to allocate and apportion their
income if they have income from business activity which is taxable
in another state. The mere ownership of Units will not subject a
nonresident Unit holder to the tax jurisdiction of North Carolina.
Counsel has been advised that for Federal income tax
purposes the North Carolina Trust will be a grantor trust and not an
association taxable as a corporation. Upon this assumption,
counsel is of the opinion that the North Carolina Trust will be
treated as a grantor trust for North Carolina income tax purposes
and not as an association taxable as a corporation. Each participant
in the North Carolina Trust must report his share of the taxable
income of the North Carolina Trust.
The calculation of North Carolina taxable income of an
individual, corporation, estate or trust begins with Federal
taxable income. Certain modifications are specified, but no such
modification requires the addition of interest on the obligations of
the State of North Carolina, its political subdivisions, or nonprofit
<PAGE>
educational institutions organized or chartered under the laws of
North Carolina.
As a general rule, gain (or loss) from the sale of
obligations held by the North Carolina Trust (whether as a result of the
sale of such obligations by the North Carolina Trust or as a result of the
sale of a unit by a Unit holder) is includible (or deductible) in the
calculation of the Unit holder's North Carolina taxable income.
Under the language of certain enabling legislation such as the North
Carolina Hospital Authorities Act, the North Carolina Health Care
Facilities Finance Act, the North Carolina Housing Finance Agency
Act, the act establishing the North Carolina State Ports Authority,
the North Carolina Joint Municipal Electric Power and Energy Act,
the act authorizing the organization of business development
corporations, the North Carolina Higher Education Facilities
Finance Act, the North Carolina Agricultural Finance Act, and the
act establishing the North Carolina Solid Waste Management Loan
Program, profits made on the sale of obligations issued by
authorities created thereunder are made expressly exempt from
North Carolina income taxation. The exemption of such profits
from North Carolina income taxation does not require a
disallowance of any loss incurred on the sale of such obligations in
the calculation of North Carolina income taxes.
For Federal income tax purposes, interest on North
Carolina obligations that would otherwise be exempt from taxation may
in certain circumstances be taxable to the recipient. North Carolina
law provides that the interest on North Carolina obligations shall
maintain its exemption from North Carolina income taxation
notwithstanding that such interest may be subject to federal income
taxation.
North Carolina imposes a tax on persons for the privilege
of ownership of items of intangible personal property. The tax is
generally imposed at the rate of $.25 per $100 of the value of each
item of intangible personal property at December 31 of each year.
Bonds and other evidences of indebtedness of the State of North
Carolina, political subdivisions of the State, agencies of such
governmental units, or nonprofit educational institutions organized
or chartered under the laws of North Carolina are exempt from the
intangible personal property tax.
This exemption does not extend to units of ownership of
an investment trust that owns obligations which would be exempt from
the intangible personal property tax if owned directly by the Unit
holders of the investment trust. However, the North Carolina
Department of Revenue by regulation has announced that the
taxable value of units of ownership in an investment trust may be
reduced by a percentage equal to the ratio of direct obligations of
<PAGE>
the United States Government and direct obligations of the State of
North Carolina and its political subdivisions held in the trust on
December 31. Thus, if the assets then held by the North Carolina
Trust consist entirely of direct obligations of the United States
Government and direct obligations of the State of North Carolina
and its political subdivisions, the entire value of the North Carolina
Trust Units will not be subject to the intangible personal property
tax under this regulation.
North Carolina imposes a tax on transfers which occur by
reason of death or by gift. Transfers of obligations of North
Carolina, its political subdivisions, agencies of such
governmental units, or nonprofit educational institutions organized or
chartered under the laws of North Carolina are not exempt from the
North Carolina inheritance and gift taxes.
48 U.S.C. Section 745 provides that bonds issued by the
Government of Puerto Rico, or by its authority, shall be exempt from
taxation by any State or by any county, municipality, or other municipal
sudivision of any State. Accordingly, interest on any such
obligations held by the North Carolina Trust would be exempt from
the North Carolina corporate and individual income taxes. The
North Carolina Department of Revenue takes the position that gains
from the sale or other disposition of such obligations are subject to
the North Carolina corporate and individual income taxes. Such
obligations would be treated as obligations of the United States for
purposes of the intangible personal property tax and the application
of such tax to units of ownership in an investment trust.
Ohio Trust
On the Date of Deposit for each Ohio Trust, Squire, Sanders
& Dempsey, special Ohio counsel on Ohio tax matters, rendered an
opinion under then existing law substantially to the effect that:
The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district income
taxes, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
Income of the Ohio Trust will be treated as the income of the
Unit holders for purposes of the Ohio personal income tax, Ohio school
district income taxes, Ohio municipal income taxes and the Ohio
corporation franchise tax in proportion to the respective interest therein
of each Unit holder.
Interest on Ohio Obligations held by the Ohio 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
<PAGE>
franchise tax when distributed or deemed distributed to Unit holders.
Gains and losses realized on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the Ohio
personal income tax and Ohio
school district income taxes, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed
distributed to Unit holders.
Except as stated in the next sentence, Ohio municipalities may
not impose income taxes on interest on or profit made on the sale of
intangible property, including Ohio Obligations. The municipalities of
Indian Hill, Wickliffe and Wyoming are authorized by state law to, and
do, impose a tax on certain intangible income; however, it is not clear
that such municipalities may tax interest on or profit made on the sale,
exchange or other disposition of Ohio
Obligations. In addition, specific Ohio statutes authorizing the issuance
of certain Ohio Obligations generally provide that the interest on and, in
some cases, gain or profit from the sale or other disposition of such Ohio
Obligations are exempt from all taxation in the State. Interest on and
gain or profit from the sale or other disposition of obligations issued
pursuant to such statutes are exempt from all Ohio municipal income
taxes.
Pennsylvania Trust
On the Date of Deposit for each Pennsylvania Trust, Messrs.
Drinker Biddle & Reath, special Pennsylvania counsel on Pennsylvania
tax matters, rendered an opinion under then existing law substantially to
the effect that:
Units evidencing fractional undivided interests in the
Pennsylvania Trust are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent that the Trust is
comprised of bonds issued by the Commonwealth of Pennsylvania, any
public authority, commission, board or
other agency created by the Commonwealth of Pennsylvania or any
public authority created by any such political subdivision ("Pennsylvania
Bonds"). The taxes referred to include the County Personal Property
Tax imposed on residents of Pennsylvania by the Act of June 17, 1913,
P.L. 507, as amended, and the
additional personal property taxes imposed on Pittsburgh residents by the
School District of Pittsburgh under the Act of June 20, 1947, P.L. 733,
as amended, and by the City of Pittsburgh under Ordinance No. 599 of
December 28, 1967. The portion, if any, representing Pennsylvania
Bonds held by Units in a Prior Trust are also not subject to such taxes.
The portion, if any, of such Units representing bonds or other obligations
<PAGE>
issued by the Government of Guam or by its authority, bonds issued by
the Government of Puerto Rico or by its
authority, and bonds issued by the Government of the Virgin Islands or
by a municipality thereof (collectively, "Possession Bonds") is not
expressly exempt from taxation under the foregoing Pennsylvania Acts.
However, such bonds are expressly relieved from state taxation by
United States statutes. Therefore,
Units in the Pennsylvania Trust are not subject to Personal Property Tax
to the extent that the Trust is comprised of Possession Bonds.
Pennsylvania Trust Units may be subject to tax in the estate of a resident
decedent under the Pennsylvania inheritance and estate taxes.
Income received by a Unit holder attributable to interest
realized by the Pennsylvania Trust from Pennsylvania Bonds, Possession
Bonds, and Prior Trust Units is not taxable to individuals, estates or
trusts under the Personal Income Tax imposed by Article III of the Tax
Reform Code of 1971; to corporations under the Corporate Net Income
tax imposed by Article IV of the Tax Reform Code of 1971; nor to
individuals under the Philadelphia School
District Net Income Tax ("School District Tax") imposed on Philadelphia
resident individuals under the authority of the Act of August 9, 1963,
P.L. 640.
Income received by a Unit holder attributable to gain on the
sale or other disposition by the Pennsylvania Trust of Pennsylvania
Bonds, Possession Bonds and Prior Trust Units is not taxable to
individuals, estates or trusts under
the Personal Income Tax. Nor is such gain taxable under the Corporate
Net Income Tax or under the School District Tax, except that gain on the
sale or other disposition of Possession Bonds and that portion of Prior
Trust Units attributable to such bonds held for six months or less may be
taxable under the School District tax.
To the extent that gain on the disposition of a Unit represents
gain realized on Pennsylvania or Possession Bonds held by the
Pennsylvania Trust or held by Prior Trust Units, such gain may be
subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to the
School District Tax, except that gain realized with respect to a Unit held
for more than six months is not subject to the school District Tax.
No opinion is expressed regarding the extent, if any, to which
Units, or interest and gain thereon, is subject to, or included in the
measure of, the special taxes imposed by the Commonwealth of
Pennsylvania on banks and other financial institutions or with respect to
any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax).
<PAGE>
Texas Trust
The opinion of Akin, Gump, Strauss, Hauer & Feld, special
Texas counsel on Texas tax matters with respect to the Texas Trust,
given on the Date of Deposit under then existing Texas law which is
subject to change includes the following:
(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).
Expenses and Charges
Initial Expenses
At no cost to the State Trusts, the Sponsors have borne all the
expenses of creating and establishing each Multistate Trust or Umbrella
Series, including the cost of the initial preparation and execution of the
Trust Agreement, initial preparation and printing of the certificates for
Units, the fees of the Evaluator during the initial public offering, legal
expenses, advertising and selling expenses and other out-of-pocket
expenses. The costs of maintaining
the secondary market, such as printing, legal and accounting, will be
borne by the Sponsors except as otherwise provided in the Trust
Agreement.
<PAGE>
<PAGE>
Trustee's, Sponsors' and Evaluator's Fees--The Trustee will
receive for its ordinary recurring services to each Multistate Trust or
Umbrella Series an annual fee in the amount set forth in the "Summary
of Essential Information" of Part A. For a discussion of the services
performed by the Trustee pursuant to its obligations under the Trust
Agreement, see "Rights of Unit Holders". The Trustee will receive the
benefit of any reasonable cash balances in the Interest and Principal
accounts.
The Portfolio supervision fee (the "Supervision Fee"), which
is earned for Portfolio supervisory services is based upon the greatest
face amount of Bonds in the Trust at any time during the calendar year
with respect to which the fee is being computed. The Supervision Fee
has been incurred by Portfolios
which have come into existence after August 14, 1991, beginning with
Series 345, initially, and each Series, in existence, thereafter.
The Supervision Fee, which is not to exceed the amount set
forth in Part A--"Summary of Essential Information", may exceed the
actual costs ofproviding Portfolio supervisory services for such Trust, but
at no time will the total amount the Sponsors receive for Portfolio
supervisory services rendered to
all series of Tax Exempt Securities Trust in any calendar year exceed the
aggregate cost to them of supplying such services in such year. In
addition, the Sponsors may also be reimbursed for bookkeeping and
other administrative services provided to the Trust in amounts not
exceeding their costs of providing these services.
The Evaluator determines the aggregate bid price of the
underlying securities on a daily basis at a fee in the amount set forth
under Part A, "Summary of Essential Information," for each evaluation
of the Bonds in a State Trust. For a discussion of the services performed
by the Evaluator pursuant to its obligations under the Trust Agreement,
see "Evaluator--Responsibility" and "Public Offering--Offering Price".
Any of such fees may be increased without approval of the
Unit holders by amounts not exceeding proportionate increases in
consumer prices for services as measured by the United States
Department of Labor's Consumer Price Index entitled "All Services Less
Rent" or, if such Index is no longer
published, in a similar index to be determined by the Trustee and the
Sponsors. In addition, at the time of any such increase, the Trustee shall
also be entitled to charge thereafter an additional fee at a rate or amount
to be determined by the Trustee and the Sponsors based upon the face
amount of Deposited Units in a Trust, for the Trustee's services in
maintaining such Deposited Units. The
approval of Unit holders shall not be required for charging of such
additional fee.
<PAGE>
Other Charges--The following additional charges are or may
be incurred by a State Trust: all expenses of the Trustee (including fees
and expenses of counsel and auditors) incurred in connection with its
activities under the Trust Agreement, including reports and
communications to Unit holders;
expenses and costs of any action undertaken by the Trustee to protect the
Multistate Trust or Umbrella Series and the rights and interests of the
Unit holders; fees of the Trustee for any extraordinary services
performed under the Trust Agreement; indemnification of the Trustee for
any loss or liability accruing to it without gross negligence, bad faith or
willful misconduct on its part, arising out of or in connection with its
acceptance or administration of a
State Trust; in the case of certain trusts, to the extent lawful, expenses
(including legal, accounting and printing expenses) of maintaining
registration or qualification of the Units and/or a State Trust under
Federal or state securities
laws subsequent to initial registration so long as the Sponsors are
maintaining a market for the Units; and all taxes and other governmental
charges imposed upon the Bonds or any part of a State Trust (no such
taxes or charges are being levied or made or, to the knowledge of the
Sponsors, contemplated). The above
expenses, including the Trustee's fee, when paid by or owing to the
Trustee, are secured by a lien on such State Trust. In addition, the
Trustee is empowered to sell Bonds in order to make funds available to
pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the respective State
Trusts is determined by adding to the Evaluator's determination of the
aggregate bid price of the Bonds per Unit a sales charge equal to the
percentage of the Public Offering Price indicated for the Trust in Part A,
"Summary of Essential Information". The aggregate bid price of the
underlying Bonds may be expected
to be less than the aggregate offering price of the Bonds. (See "Method
of Evaluation".) A proportionate share of accrued and undistributed
interest on the Bonds in a State Trust at the date of delivery of the Units
of such State Trust to the purchaser is also added to the Public Offering
Price.
Units of a State Trust are available to employees of certain of
the Sponsors, pursuant to employee benefit plans, at a Public Offering
Price equal to the Evaluator's determination of the aggregate bid price
of Bonds of a State Trust per Unit plus a sales charge of 1.25% of the
Public Offering Price. Sales
through such plans to employees of the Sponsors require less selling
<PAGE>
effort and selling expenses than sales to the general public.
Method of Evaluation
The aggregate bid price of the Bonds (which is used to
calculate the price at which the Sponsors repurchase and sell Units in the
secondary market and the Redemption Price at which Units may be
redeemed) will be determined by the Evaluator (1) on the basis of the
current bid prices for the Bonds, (2)
if bid prices are not available for any Bonds, on the basis of current bid
prices of comparable securities, (3) by appraisal, or (4) by any
combination of the above. Such determinations will be made each
business day as of the Evaluation
Time set forth in the "Summary of Essential Information" of Part A,
effective for all sales made subsequent to the last preceding
determination. The term "business day," as used herein, shall exclude
Saturdays, Sundays and any day
on which the New York Stock Exchange is closed. The difference
between the bid and offering prices of the Bonds may be expected to
average approximately 1.5 % of principal amount. In the case of
actively traded securities, the difference may be as little as 0.5 of 1%,
and in the case of inactively traded
securities, such difference will usually not exceed 3%. The price at
which Units may be repurchased by the Sponsors in the secondary
market could be less than the price paid by the Unit holder. For
information relating to the calculation of
the Redemption Price per Unit, which is also based on the aggregate bid
price of the underlying Bonds and which may be expected to be less than
the Public Offering Price per unit, see "Rights of Unit
Holders--Redemption of Units".
Distribution of Units
Units acquired in the secondary market (see "Public Offering--
Market for Units") may be offered by this Prospectus at the Public
Offering Price determined in the manner provided above (see "Public
Offering--Offering Price"). The Sponsors will allow a discount on Units
sold to members of the National Association of Securities Dealers, Inc.
Such discount is subject to change from time to time.
Sales will be made only with respect to whole Units, and the
Sponsors reserve the right to reject, in whole or in part, any order for
the purchase of Units. A purchaser does not become a Unit holder
(Certificate holder) or become entitled to exercise the rights of a Unit
holder (including the right to redeem his Units) until he has paid for his
Units. Generally, such payment must be made within five business days
after an order for the purchase of Units has been placed. The price paid
<PAGE>
by a Unit holder is the Public Offering Price in effect at the time his
order is received, plus accrued interest (see "Public Offering--Method of
Evaluation"). This price may be different from the
Public Offering Price in effect on any other day, including the day on
which the Unit holder pays for the Units.
Market for Units
Although not obligated to do so, the Sponsors presently intend
to maintain a market for the Units of the respective State Trusts and to
continuously offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds which may be less than the
price paid by the Unit holder. For information relating to the method
and frequency of the Evaluator's
determination of the aggregate bid price of the underlying Bonds, see
"Public Offering--Method of Evaluation". The costs of maintaining the
secondary market, such as printing, legal and accounting, will be borne
by the Sponsors except as otherwise provided in the Trust Agreement.
The Sponsors may cease to maintain such a market at any time and from
time to time without notice if
the supply of Units of any of the respective State Trusts of the Multistate
Trust or Umbrella Series exceeds demand, or for any other reason. In
this event the Sponsors may nonetheless purchase Units, as a service to
Unit holders, at prices based on the current Redemption Price of those
Units. In the event that a
market is not maintained for the Units of any of the State Trusts, a Unit
holder of such State Trust desiring to dispose of his Units may be able
to do so only by tendering such Units to the Trustee for redemption at
the Redemption Price, which is also based upon the aggregate bid price
of the underlying Bonds. (See "Rights of Unit Holders--Redemption of
Units".)
Exchange Option
Unit holders may elect to exchange any or all of their Units
of this series for units of one or more of any series of Tax Exempt
Securities Trust (the "Exchange Trust") available for sale in the state in
which the Unit holder resides at a Public Offering Price for the units of
the Exchange Trust to be acquired
based on a fixed sales charge of $25 per unit. The Sponsors reserve the
right to modify, suspend or terminate this plan at any time without
further notice to Unit holders. Therefore, there is no assurance that a
market for units will in
fact exist on any given date on which a Unit holder wishes to sell his
Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected in
whole units only. Any excess proceeds from Unit holders' Units being
<PAGE>
surrendered will be returned and Unit holders will not be permitted to
advance any new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for
units of an Exchange Trust will generally constitute a "taxable event"
under the Code, i.e., a Holder will recognize a gain or loss at the time
of exchange. However, an exchange of Units of this Trust for units of
any other similar series of the
Tax Exempt Securities Trust which are grantor trusts for U.S. federal
income tax purposes will not constitute a taxable event to the extent that
the underlying securities in each trust do not differ materially either in
kind or in extent. Unit holders are urged to consult their own tax
advisors as to the tax consequences to them of exchanging Units in
particular cases.
Units of the Exchange Trust will be sold under the Exchange
Option at the bid prices of the underlying securities in the particular
portfolio involved per unit plus a fixed charge of $25 per unit. As an
example, assume that a Unit holder, who has three units of a trust with
a current price of $1,020 per unit based on the bid prices of the
underlying securities, desires to exchange
his Units for units of a series of an Exchange Trust with a current price
of $880 per unit based on the bid prices of the underlying securities. In
this example, the proceeds from the Unit holder's units will aggregate
$3,060. Since only whole units of an Exchange Trust may be purchased
under the Exchange Option, the Unit holder would be able to acquire
three units in the Exchange Trust for
a total cost of $2,715 ($2,640 for the units and $75 for the sales charge).
The remaining $345 would be returned to the Unit holder in cash.
Reinvestment Programs
Distributions of interest and principal, if any, are made to Unit
holders monthly. The Unit holder will have the option of either
receiving his monthly income check from the Trustee or participating in
one of the reinvestment programs offered by certain of the Sponsors
provided such unit holder meets the minimum qualifications of the
reinvestment program and such
program lawfully qualifies for sale in the jurisdiction in which the Unit
holder resides. Upon enrollment in a reinvestment program, the Trustee
will direct monthly interest distributions and principal distributions, if
any, to the reinvestment program selected by the Unit holder. Since
each Sponsor has
arranged for different reinvestment alternatives, Unit holders should
contact the Sponsors for more complete information, including charges
and expenses. The appropriate prospectus will be sent to the Unit
holder. The Unit holder should
read the prospectus for a reinvestment program carefully before deciding
<PAGE>
to participate. Participation in the reinvestment program will apply to all
Units of a State Trust owned by a Unit holder and may be terminated at
any time by the Unit holder, or the program may be modified or
terminated by the Trustee or the program's Sponsor.
Sponsors' Profits
For their services the Sponsors receive a gross commission
equal to a percentage of the Public Offering Price of the Units. In
maintaining a market for the Units of the respective State Trusts (see
"Public Offering--Market for Units"), the Sponsors also realize profits
or sustain losses in the amount of any difference between the price at
which they buy such Units and the price at which they resell or redeem
such Units (see "Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective State Trusts is evidenced
by registered certificates executed by the Trustee and the Sponsors. A
Certificate is transferable by presentation and surrender of the Certificate
to the Trustee properly endorsed or accompanied by a written instrument
or instruments of transfer. Certificates may be issued in denominations
of one Unit or any multiple thereof. A Unit holder may be required to
pay $2.00 per certificate reissued or transferred, and to pay any
governmental charge that may be
imposed in connection with each such transfer or interchange. For new
certificates issued to replace destroyed, stolen or lost certificates, the
Unit holder must furnish indemnity satisfactory to the Trustee and must
pay such expenses as the Trustee may incur. Mutilated certificates must
be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each State Trust will be
distributed on each Monthly Distribution Date on a pro rata basis to Unit
holders in such State Trust of record as of the preceding Record Date.
All distributions will be net of applicable expenses and funds required for
the redemption of Units and, if applicable, reimbursements to the Trustee
for interest payments advanced to Unit holders on previous Monthly
Distribution Dates. (See Part A, "Summary of Essential Information"
and "Tax Exempt Securities Trust--Expenses and Charges" and "Rights
of Unit Holders--Redemption of Units" in
this Section.)
<PAGE>
The Trustee will credit to the Interest Account of each
respective State Trust all interest received by such State Trust, including
that part of the proceeds of any disposition of Bonds of such State Trust
which represents accrued interest. Other receipts will be credited to the
Principal Account of the affected State Trust. The pro rata share of the
Interest Account and the pro rata
share of cash in the Principal Account represented by each Unit of a
Trust will be computed by the Trustee each month as of the Record
Date. (See Part A, "Summary of Essential Information".) Proceeds
received from the disposition
of any of the Bonds subsequent to a Record Date and prior to the next
succeeding Distribution Date will be held in the Principal Account and
will not be distributed until the following Distribution Date. The
distribution to Unit holders as of each Record Date will be made on the
following Distribution Date or shortly thereafter, and shall consist of an
amount substantially equal to one-twelfth of such holders' pro rata share
of the estimated annual income to the Interest Account after deducting
estimated expenses (the "Monthly Interest
Distribution") plus such holders' pro rata share of the cash balance in the
Principal Account computed as of the close of business on the preceding
Record Date. Persons who purchase Units between a Record Date and
a Distribution Date will receive their first distribution on the second
Distribution Date following their purchase of Units. No distribution
need be made from the Principal Account if the balance therein is less
than an amount sufficient to distribute $1.00 per Unit. The Monthly
Interest Distribution per Unit as of the
date shown in the "Summary of Essential Information" in Part A for the
particular State Trust will change as the income and expenses of the
respective State Trusts change and as Bonds are exchanged, redeemed,
paid or sold.
Normally, interest on the Bonds in the Portfolio of each State
Trust is paid on a semi-annual basis. Because Bond interest is not
received by the State Trusts at a constant rate throughout the year, any
Monthly Interest
Distribution may be more or less than the amount credit to the Interest
Account as of the Record Date. In order to eliminate fluctuations in
Monthly Interest Distributions resulting from such variances, the Trustee
is required by the Trust Agreement to advance such amounts as may be
necessary to provide Monthly Interest Distributions of approximately
equal amounts. The Trustee will be
reimbursed, without interest, for any such advances from funds available
from the Interest Account on the next ensuing Record Date or Record
Dates, as the case may be. If all or a portion of the Bonds for which
advances have been made subsequently fail to pay interest when due, the
Trustee may recoup advances made by it in anticipation of receipt of
interest payments on such Bonds by reducing the amount distributed per
Unit in one or more Monthly Interest Distributions. If units are
redeemed subsequent to such advances by the
<PAGE>
Trustee, but prior to receipt by the Trustee of actual notice of such
failure to pay interest, the amount of which was so advanced by the
Trustee, each remaining Unit holder will be subject to a greater pro rate
reduction in his Monthly Interest Distribution than would have occurred
absent such redemptions. Funds which are available for future
distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit
holders and are available for use by United States Trust Company of
New York, pursuant to normal banking procedures. The Trustee is
entitled to the benefit of holding any reasonable cash balances in the
Interest and Principal Accounts.
The Trustee anticipates that the average cash balance in the Interest
Account will be approximately 2% in excess of the amounts anticipated
to be required for Monthly Distributions to Unit holders. In addition,
because of the varying interest payment dates of the Bonds comprising
each State Trust portfolio,
accrued interest at any point in time will be greater than the amount of
interest actually received by a particular State Trust and distributed to
Unit holders. The excess accrued but undistributed interest amount is
known as the accrued interest carryover. If a Unit holder sells or
redeems all or a portion of his Units, a
portion of his sale proceeds will be allocable to his proportionate share
of the accrued interest carryover. Similarly, if a Unit holder redeems all
or a portion of his Units, the Redemption Price per Unit which he is
entitled to receive from the Trustee will include his accrued interest
carryover on the Bonds. (See
"Rights of Unit Holders--Redemption of Units--Computation of
Redemption Price Per Unit.")
As of the first day of each month the Trustee will deduct from
the Interest Account of each State Trust and, to the extent funds are not
sufficient therein, from the Principal Account of such State Trust,
amounts necessary to pay the expenses of such State Trust. (See "Tax
Exempt Securities Trust--Expenses and Charges".) The Trustee also may
withdraw from said accounts such amounts, if any, as it deems necessary
to establish a reserve for any governmental charges payable out of a State
Trust. Amounts so withdrawn shall
not be considered a part of a State Trust's assets until such time as the
Trustee shall return all or any part of such amounts to the appropriate
account. In addition, the Trustee may withdraw from the Interest
Account and the Principal Account such amounts as may be necessary to
cover redemption of Units by the Trustee. (See "Rights of Unit
Holders--Redemption of Units".) The Trustee
is also entitled to withdraw from the Interest Account, and, to the extent
funds are not sufficient therein, from the Principal Account, on one or
more Record Dates as may be appropriate, amounts sufficient to recoup
advances which the Trustee has made in anticipation of the receipt by a
Trust of interest in respect of Bonds which subsequently fail to pay
interest when due.
<PAGE>
Reports and Records
The Trustee shall furnish Unit holders in connection with each
distribution a statement of the amount of interest, if any, and the amount
of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit. In the event that the issuer of any of
the Bonds fails to make payment when due of any interest or principal
and such failure results in
a change in the amount that would otherwise be distributed as a monthly
distribution, the Trustee will, with the first such distribution following
such failure, set forth in an accompanying statement, the issuer and the
Bonds, the amount of the reduction in the distribution per Unit resulting
from such failure, the percentage of the aggregate principal amount of
Bonds which such Bond represents and, to the extent then determined,
information regarding any disposition or legal action with respect to such
Bond. Within a reasonable time after the end of each calendar year, the
Trustee will furnish to each person who
at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including
amounts representing interest received upon any disposition of Bonds),
deductions for payment of applicable taxes and for fees and expenses of
a State Trust, redemptions of Units
and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount
representing the pro rata
share of each Unit outstanding on the last business day of such calendar
year; (2) as to the Principal Account: the dates of disposition of any
Bonds and the
net proceeds received therefrom (excluding any portion representing
interest), deductions for payments of applicable taxes and for fees and
expenses of a State Trust, redemptions of Units, and the balance
remaining after such distributions
and deductions, expressed both as a total dollar amount and as a dollar
amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (3) a list of the Bonds held and
the number of Units
outstanding on the last business day of such calendar year; (4) the
Redemption Price per Unit based upon the last computation thereof made
during such calendar year; and (5) amounts actually distributed during
such calendar year from the Interest Account and from the Principal
Account, separately stated,
expressed both as total dollar amounts and as dollar amounts representing
the pro rata share of each Unit outstanding. The accounts of such State
Trust will be audited not less frequently than annually by independent
auditors designated by the Sponsors, and the report of such auditors shall
be furnished by the Trustee to Unit holders upon request.
<PAGE>
The Trustee shall keep available for inspection by Unit holders
at all reasonable times during usual business hours, books of record and
account of its transactions as Trustee including records of the names and
addresses of Unit holders, certificates issued or held, a current list of
Bonds in the Portfolio of a State Trust and a copy of the Trust
Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption at its unit
investment trust office at 770 Broadway, New York, New York 10003,
upon payment of any relevant tax. At the present time there are no
specific taxes related to the redemption of the Units. No redemption fee
will be charged by the Sponsors or the Trustee. Units redeemed by the
Trustee will be canceled.
Certificates for Units to be redeemed must be properly
endorsed or accompanied by a written instrument of transfer. Unit
holders must sign exactly as their name appears on the face of the
certificate with the signature guaranteed
by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain
instances the Trustee any require additional documents such as, but not
limited to, trust instruments, certificates of death, appointments as
executor or administrator or certificates of
corporate authority.
Within seven calendar days following such tender, the Unit
holder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the
Evaluation Time set forth in the "Summary of Essential Information" in
Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit".)
The "date of tender" is deemed to be the date on which Units are
received by the Trustee, except that as regards Units received after the
close of trading on the New York Stock Exchange, the date of tender is
the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered
to the Trustee on such day for redemption at the Redemption Price
computed on that day. For information relating to the purchase by the
Sponsors of Units tendered to the Trustee for redemption at prices which
may be, in certain circumstances
in excess of the Redemption Price, see "Redemption of Units--Purchase
by the Sponsors of Units Tendered for Redemption."
Accrued interest paid on redemption shall be withdrawn from
the Interest Account, or, if the balance therein is insufficient, from the
Principal Account. All other amounts paid on redemption shall be
<PAGE>
withdrawn from the Principal Account. The Trustee is empowered to
sell Bonds in order to make funds available for redemption. Such sales,
if required, could result in a sale of Bonds by the Trustee at a loss. To
the extent Bonds are sold, the size and diversity of a State Trust will be
reduced.
The Trustee reserves the right to suspend the right of
redemption and to postpone the date of payment of the Redemption Price
per Unit for any period during which the New York Stock Exchange is
closed, other than weekend and holiday closings, or trading on that
Exchange is restricted or during which (as determined by the Securities
and Exchange Commission) an emergency exists as a result of which
disposal or evaluation of the underlying
Bonds is not reasonably practicable, or for such other periods as the
Securities and Exchange Commission has by order permitted.
Computation of Redemption Price per Unit--The Redemption
Price per Unit of a State Trust is determined by the Trustee on the basis
of the bid prices of the Bonds in such State Trust as of the Evaluation
Time on the date any such determination is made. The Redemption
Price per Unit of a State Trust is each Unit's pro rata share, determined
by the Trustee, of: (1) the
aggregate value of the Bonds in such State Trust on the bid side of the
market (determined by the Evaluator as set forth under "Public
Offering--Method of
Evaluation"), (2) cash on hand in such State Trust, and accrued and
unpaid interest on the Bonds as of the date of computation, less (a)
amounts representing taxes or governmental charges payable out of such
State Trust, (b) the accrued expenses of such State Trust, and (c) cash
held for distribution to
Unit holders of such State Trust of record as of a date prior to the
evaluation.
Purchase by the Sponsors of Units Tendered for Redemption--
The Trust Agreement requires that the Trustee notify the Sponsors of any
tender of Units for redemption. So long as the Sponsors are maintaining
a bid in the secondary market, the Sponsors, prior to the close of
business on the second
succeeding business day, will purchase any Units tendered to the Trustee
for redemption at the price so bid by making payment therefor to the
Unit holder in an amount not less than the Redemption Price not later
than the day on which
the Units would otherwise have been redeemed by the Trustee. (See
"Public Offering--Market for Units".) Units held by the Sponsors may
be tendered to the Trustee for redemption as any other Units, provided
that the Sponsors shall
not receive for Units purchased as set forth above a higher price than
they paid, plus accrued interest.
<PAGE>
The offering price of any Units resold by the Sponsors will be
the Public Offering Price determined in the manner provided in this
Prospectus. (See "Public Offering--Offering Price".) Any profit resulting
from the resale of such Units will belong to the Sponsors which likewise
will bear any loss resulting from a lower offering or redemption price
subsequent to their acquisition of such Units. (See "Public
Offering--Sponsors' Profits".)
SPONSORS
Smith Barney Shearson Inc. 1345 Avenue of the Americas,
New York, New York 10105 ("Smith Barney"), was incorporated in
Delaware in 1960 and traces its history through predecessor partnerships
to 1873. Smith Barney, an investment banking and securities
broker-dealer firm, is a member
of the New York Stock Exchange, Inc. and other major securities and
commodities exchanges, the National Association of Securities Dealers,
Inc. and the Securities Industry Association. Smith Barney is an indirect
wholly-owned subsidiary of The Travelers Inc. (formerly, Primerica
Corporation).
Kidder, Peabody & Co. Incorporated, 10 Hanover Square,
New York, New York 10005 ("Kidder, Peabody"), was incorporated in
Delaware in 1956 and traces its history through predecessor partnerships
to 1865. Kidder, Peabody, an investment banking and securities
broker-dealer firm, is a member
of the New York Stock Exchange, Inc. and other major securities and
option exchanges, the National Association of Securities Dealers, Inc.
and the Securities Industry Association.
On May 26, 1989 the Commission granted Kidder, Peabody
a permanent exemption from certain provisions of the Investment
Company Act of 1940 which otherwise would have rendered Kidder,
Peabody ineligible to serve as sponsor, depositor or underwriter of the
Trust, as a result of an
injunction entered against Kidder, Peabody. The injunction arose out of
certain alleged activities of Kidder, Peabody not involving the Trust or
any other investment company and which are described below. In order
to obtain the permanent exemption, Kidder, Peabody retained a
consultant (at its own expense) to review the policies and procedures
utilized by it to prevent violations
of the federal securities laws in connection with its investment company
business, and to recommend, where appropriate, changes in policies,
procedures and staffing necessary to assure ongoing compliance. The
Commission considered the application of Kidder, Peabody for a
permanent exemption after the Commission had received a copy of the
consultant's report and recommendations and reports from Kidder,
Peabody setting forth the actions it
<PAGE>
had taken or proposed to take in respect of the implementation of the
consultant's recommendations.
On June 4, 1987 the Commission filed a complaint (the
"Complaint") in the United States District Court for the Southern District
of New York, in a civil action entitled Securities and Exchange
Commission v. Kidder, Peabody & Co. Incorporated, 87 Civ. 3869 (RO)
(the "SEC Action"). On the same day, Kidder, Peabody entered into,
and the parties filed in the SEC Action, a related Consent and
Undertakings, in which Kidder,
Peabody neither admitted nor denied any of the allegations in the
Complaint except as to jurisdiction, and pursuant to which Consent and
Undertakings the District Court entered a Final Judgment of Permanent
Injunction and other relief as to Kidder, Peabody (the "Final Judgment").
The exemption from the Act was requested by Kidder, Peabody as a
result of the Final Judgment.
The Complaint in the injunctive action brought by the
Commission alleges that Kidder, Peabody violated sections 10(b) and
14(e) of the Securities Exchange Act of 1934 (the "Exchange Act") and
rules promulgated thereunder by engaging, for its own account, in
purchases or sales of the securities of six
named companies while in the possession of material, non-public
information concerning tender offers or other extraordinary corporate
transactions concerning such companies. The Complaint asserts that such
information was obtained by
a former executive of Kidder, Peabody as part of a scheme for the
exchange of non-public information with a partner at another investment
banking firm. These allegations are directed to events in 1984 and 1985;
the executive ceased employment with Kidder, Peabody in February,
1986. Other allegations of the Complaint allege violations by Kidder,
Peabody of sections 7(c) and 17(a)(1) of
the Exchange Act and various rules promulgated thereunder and aiding
and abetting in violations by another entity of sections 15(c)(3) and
17(a)(1) of the Exchange Act and various rules promulgated thereunder.
These provisions relate to the maintenance and preservation of accurate
books and records, adherence to margin requirements prescribed by the
Federal Reserve Board and
compliance with net capital requirements applicable to broker-dealers.
The violations alleged in the Complaint with respect to all of these
provisions stem from several transactions in 1984 and 1985 involving
another broker-dealer. According to the Complaint, oral understandings
between Kidder, Peabody and
the other broker-dealer enabled the other broker-dealer to avoid
adherence to the net capital requirements and constituted an
impermissible extension of credit to such entity by Kidder, Peabody.
Among other provisions, the Final Judgment enjoins Kidder,
Peabody from engaging in certain transactions, acts, practices or courses
<PAGE>
of business which constitute or would constitute violations of Sections
7(c), 10(b),14(e) and 17(a)(1), or constitute or would constitute aiding
and abetting violations of Sections 15(c)(3) and 17(a)(1), of the
Exchange Act and various rules promulgated thereunder. The Final
Judgment also requires that Kidder,
Peabody pay a penalty of approximately $11.6 million to the U.S.
Treasury under the Insider Trading Sanctions Act of 1984, and establish
a fund of approximately $13.7 million which would be available to
compensate anyone with valid claims of injury from the conduct alleged.
Also, on June 4, 1987, the Commission instituted
administrative proceedings against Kidder, Peabody pursuant to Section
15(b)(4) of the Exchange Act, entitled In the Matter of Kidder, Peabody
& Co. Incorporated, Administrative Proceeding File No. 3-6855 (the
"SEC Order").On the same day, Kidder, Peabody filed an Offer of
Settlement (the "Offer")
with respect to the SEC Order, which was accepted by the Commission
and incorporated into the SEC Order. The Final Judgment was the basis
for the SEC Order. In the SEC Order, the Commission censured
Kidder, Peabody and ordered that Kidder, Peabody comply with its
undertakings (consisting of certain
remedial measures to be taken by Kidder, Peabody designed to prevent
future occurrence of the conduct alleged in the Complaint and to ensure
Kidder, Peabody's compliance on an ongoing basis with the federal
securities laws and the rules and regulations of self-regulatory
organizations) set forth in the Order.
None of the allegations in the Complaint relate to any of
Kidder, Peabody's activities in connection with any unit investment trust,
or any other investment company.
Smith Barney sponsors numerous open-end investment
companies and closed-end investment companies. Smith Barney also
sponsors all Series of Corporate Securities Trust, Government Securities
Trust and Harris, Upham Tax-Exempt Fund and acts as co-sponsor of
certain trusts of The Equity Income
Fund, Concept Series. Kidder, Peabody sponsors Target Corporate High
Yield Series Unit Trust and family of open-end investment companies;
Kidder, Peabody Government Money Fund, Inc., Kidder, Peabody
Premium Account Fund, Kidder, Peabody Tax Exempt Money Fund,
Inc., Kidder, Peabody Cash
Reserve Fund, Inc., Kidder, Peabody Exchange Money Fund, Kidder,
Peabody Equity Income Fund, Inc., Kidder, Peabody Government
Income Fund, Inc., Liquid Institutional Reserves, Kidder, Peabody
Global Equity Fund, Kidder,
Peabody Intermediate Term Fixed Income Fund Kidder, Peabody Asset
Allocation Fund and Kidder, Peabody California Tax Exempt Money
Fund, Inc. Kidder, Peabody Asset Management Inc., a subsidiary of
Kidder, Peabody, is the investment adviser and administrator of each of
<PAGE>
the open-end investment companies. The Sponsors have acted previously
as managing underwriters of other investment companies. In addition to
participating as a
member of various underwriting and selling groups or as agent of other
investment companies, the Sponsors also execute orders for the purchase
and sale of securities of investment companies and sell securities to such
companies in their capacities as brokers or dealers in securities.
Limitations on Liability
The Sponsors are jointly and severally liable for the
performance of their obligations arising from their responsibilities under
the Trust Agreement, but will be under no liability to Unit holders for
taking any action or refraining from any action in good faith or for
errors in judgment or responsible in any way for depreciation or loss
incurred by reason of the sale of any Bonds, except in cases of willful
misfeasance, bad faith, gross negligence
or reckless disregard of their obligations and duties. (See "Tax Exempt
Securities Trust--Portfolio" and "Sponsors--Responsibility".)
Responsibility
The Sponsors are empowered to direct the Trustee to dispose
of Bonds or deposited Units of other trusts when certain events occur
that adversely affect the value of the Bonds, including default in payment
of interest or principal, default in payment of interest or principal on
other obligations of the
same issuer, institution of legal proceedings, default under other
documents adversely affecting debt service, decline in price or the
occurrence of other market or credit factors, or decline in projected
income pledged for debt service
on revenue bonds and advanced refunding that, in the opinion of the
Sponsors, may be detrimental to the interests of the Unit holders.
The Sponsors intend to provide portfolio services for each
State Trust in order to determine whether the Trustee should be directed
to dispose of any such Bonds.
It is the responsibility of the Sponsors to instruct the Trustee
to reject any offer made by an issuer of any of the Bonds to issue new
obligations in exchange and substitution for any Bonds pursuant to a
refunding or refinancing plan, except that the Sponsors may instruct the
Trustee to accept such an offer or to take any other action with respect
thereto as the Sponsors may deem proper if the issuer is in default with
respect to such Bonds or in the
judgment of the Sponsors the issuer will probably default in respect to
such Bonds in the foreseeable future. Any obligations so received in
exchange or substitution will be held by the Trustee subject to the terms
and conditions of the Trust Agreement to the same extent as Bonds
<PAGE>
originally deposited thereunder. Within five days after the deposit of
obligations in exchange or substitution for
underlying Bonds, the Trustee is required to give notice thereof to each
Unit holder, identifying the Bonds eliminated and the Bonds substituted
therefor. Except as stated in this paragraph, the acquisition by a
Multistate Trust or Umbrella Series of any securities other than the
Bonds initially deposited in that particular State Trust is prohibited.
Smith Barney Shearson Inc. has been appointed by Kidder,
Peabody & Co. Incorporated as agent for purposes of taking any action
required or permitted to be taken by the Sponsors under the Trust
Agreement. If the Sponsors are unable to agree with respect to action
to be taken jointly by them
under the Trust Agreement and they cannot agree as to which Sponsor
shall act as sole Sponsor, then Smith Barney Shearson Inc. shall act as
sole Sponsor. If one of the Sponsors fails to perform its duties under the
Trust Agreement or becomes incapable of acting or becomes bankrupt or
its affairs are taken over by public authorities, that Sponsor is
automatically discharged under the Trust
Agreement and the remaining Sponsor acts as Sponsor.
Resignation
Any Sponsor may resign provided that at the time of such
resignation each remaining Sponsor maintains a net worth of $1,000,000
and is agreeable to such resignation. Concurrently with or subsequent
to such resignation a new Sponsor may be appointed by the remaining
Sponsors and the Trustee to assume the duties of the resigning Sponsor.
If all Sponsors resign or otherwise fail or become unable to perform their
duties under the Trust Agreement, and no express provision is made for
action by the Trustee in such event, the Trustee may appoint a successor
sponsor or terminate the Trust Agreement and liquidate the affected State
Trusts.
TRUSTEE
The Trustee is United States Trust Company of New York,
with its principal place of business at 114 West 47th Street, New York,
New York 10036. United States Trust Company of New York has,
since its establishment in 1853, engaged primarily in the management of
trust and agency accounts for individuals and corporations. The Trustee
is a member of the New York Clearing House Association and is subject
to supervision and examination by the
Superintendent of Banks of the State of New York, the Federal Deposit
Insurance Corporation and the Board of Governors of the Federal
Reserve System. In connection with the storage and handling of certain
Bonds deposited in any of the State Trusts, the Trustee may use the
<PAGE>
services of The Depository Trust Company. These services may include
safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery
services. The Depository Trust Company is a limited purpose trust
company organized under the Banking Law of the State of New York,
a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for
depreciation or loss incurred by reason of the disposition of any moneys,
securities or certificates or in respect of any evaluation or for any action
taken in good faith reliance on prima facie properly executed documents
except in cases of willful misfeasance, bad faith, gross negligence or
reckless disregard for its obligations and duties. In addition, the Trustee
shall not be personally
liable for any taxes or other governmental charges imposed upon or in
respect of any State Trust which the Trustee may be required to pay
under current or future law of the United States or any other taxing
authority having jurisdiction.
(See "Tax Exempt Securities Trust--Portfolio".) For information relating
to the responsibilities and indemnification of the Trustee under the Trust
Agreement, reference is made to the material set forth under "Rights of
Unit Holders", "Sponsors--Resignation" and "Other Charges".
Resignation
By executing an instrument in writing and filing the same with
the Sponsors, the Trustee and any successor may resign. In such an
event the Sponsors are obligated to appoint a successor trustee as soon
as possible. If the Trustee becomes incapable of acting or becomes
bankrupt or its affairs are taken
over by public authorities, the Sponsors may remove the Trustee and
appoint a successor as provided in the Trust Agreement. Such
resignation or removal
shall become effective upon the acceptance of appointment by the
successor trustee. If no successor has accepted the appointment within
thirty days after notice of resignation, the retiring trustee may apply to
a court of competent jurisdiction for the appointment of a successor.
The resignation or removal of
a trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints
a successor trustee.
<PAGE>
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc., with main offices located at 65
Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsors and Unit holders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for
the accuracy thereof. Determinations by the Evaluator under the Trust
Agreement shall be made in good faith upon the basis of the best
information available to it;
provided, however, that the Evaluator shall be under no liability to the
Trustee, the Sponsors or Unit holders for errors in judgment. But this
provision shall not protect the Evaluator in cases of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations and
duties.
Responsibility
The Trust Agreement requires the Evaluator to evaluate the
Bonds of a State Trust on the basis of their bid prices on the last business
day of June and December in each year, on the day on which any Unit
of such State Trust is tendered for redemption and on any other day such
evaluation is desired by
the Trustee or is requested by the Sponsors. For information relating to
the responsibility of the Evaluator to evaluate the Bonds on the basis of
their bid prices see "Public Offering--Offering Price."
Resignation
The Evaluator may resign or may be removed by the joint
action of the Sponsors and the Trustee, and in such event, the Sponsors
and the Trustee are to use their best efforts to appoint a satisfactory
successor. Such resignation or removal shall become effective upon the
acceptance of appointment by a
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.
<PAGE>
<PAGE>
AMENDMENT AND TERMINATION OF THE TRUST
AGREEMENT
Amendment
The Sponsors and the Trustee have the power to amend the
Trust Agreement without the consent of any of the Unit holders when
such an amendment is (1) to cure any ambiguity or to correct or
supplement any provision of the Trust Agreement which may be
defective or inconsistent with
any other provision contained therein, or (2) to make such other
provisions as shall not adversely affect the interests of the Unit holders;
provided, that the Trust Agreement is not amended to increase the
number of Units issuable
thereunder or to permit the deposit or acquisition of securities either in
addition to or in substitution for any of the Bonds initially deposited in
the respective State Trusts, except for the substitution of certain
refunding securities for such
Bonds or to permit the Trustee to engage in business or investment
activities not specifically authorized in the Trust Agreement as originally
adopted. In the event of any amendment, the Trustee is obligated to
notify promptly all Unit holders of the substance of such amendment.
Termination
The Trust Agreement provides that if the principal amount of
Bonds is less than 50% of the principal amount of the Bonds originally
deposited in such State Trust, the Trustee may in its discretion and will,
when directed by the Sponsors, terminate such State Trust. Each State
Trust may be terminated
at any time by 100% of the Unit holders. See Part A for additional
optional and mandatory termination provisions. However, in no event
may any State Trust continue beyond the Mandatory Termination Date
set forth under Part A "Summary of Essential Information." In the
event of termination, written
notice thereof will be sent by the Trustee to all Unit holders. Within a
reasonable period after termination, the Trustee will sell any Bonds
remaining in the affected State Trust, and, after paying all expenses and
charges incurred by such State Trust, will distribute to each Unit holder,
upon surrender for cancellation of his certificate for Units, his pro rata
share of the balances remaining in the Interest Account and Principal
Account of such State Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Units offered
hereby have been passed upon by Messrs. Davis Polk & Wardwell, 450
Lexington Avenue, New York, New York 10017, as special counsel for
the Sponsors.
<PAGE>
AUDITORS
The Statements of Financial Condition and Portfolios of
Securities of each State Trust included in this Prospectus have been
audited by KPMG Peat Marwick, independent auditors, as indicated in
their report with respect thereto,
and are included herein in reliance upon the authority of said firm as
experts in giving said report.
BOND RATINGS
All ratings except those identified otherwise are by Standard
& Poor's Corporation.
Standard & Poor's Corporation
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 of creditworthiness may take
into consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from
other sources it considers reliable. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of,
such information.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default--capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation; 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.
<PAGE>
A summary of the meaning of the applicable ratings symbols
as published by Standard & Poor's follows:
AAA--This is the highest rating assigned by Standard & Poor's
to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
AA--Bonds rated AA have a very strong capacity to pay
interest and repay principal, and in the majority of instances they differ
from AAA issues only in small degrees.
A--Bonds rated A have a strong capacity to pay interest and
repay principal, although they are somewhat more susceptible to the
adverse affects 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 weakened capacity to
pay interest and repay principal for bonds in this category than for bonds
in the higher-rated categories.
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC, and C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications
of credit quality, the ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" following a rating
indicates the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the issuance of the
bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
<PAGE>
<PAGE>
however, while addressing credit quality subsequent to completion,
makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his
own judgment with respect to such likelihood and risk.
Conditional rating(s), indicated by "con" are given to bonds
for which the continuance of the security rating is contingent upon
Standard & Poor's receipt of an executed copy of escrow agreement or
closing documentation confirming investments and cash flows and/or the
security rating is conditional upon the issuance of insurance by the
respective insurance company.
Moody's Investors Service
A brief description of the applicable Moody's Investors Service's
rating symbols and their meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. Aa bonds 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.
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.
Baa--Bonds which are rated Baa are considered as medium
grade obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics
and in fact have speculative characteristics as well.
<PAGE>
<PAGE>
Ba--Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period of
time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B groups
which Moody's believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1, and B1, respectively.
In addition, Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate 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. Although industrial Revenue Bonds and Environmental
Control Revenue Bonds are tax-exempt issues, they are included in the
corporate bond rating system.
Conditional ratings, indicated by "Con" are given to bonds 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 operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. A
parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
<PAGE>
<PAGE>
Fitch Investors Service, Inc.
A brief description of the applicable Fitch Investors Service,
Inc. rating symbols and their meanings is as follows:
AAA--Bonds which are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds which are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong although not quite as strong as bonds rated
AAA.
A--Bonds which are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds
with higher ratings.
BBB-Bonds which are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that these bonds
will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the 'AAA',
'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on the successful
completion of a project of the occurrence of a specific event.
NOTE: NR indicates, among other things, that no rating has been
requested, that there is insufficient information on which to base a rating,
or that Standard & Poor's Corporation, Moody's Investors Service and
Fitch Investors Service, Inc. do not rate a particular type of obligation
as a matter of policy. Subsequent to the Date of Deposit, the credit
characteristics of the Issuers of Securities may have changed. Currently,
certain of the Securities in the Portfolio of a Trust may be unrated and
have credit characteristics comparable
to securities rated below the minimum requirements of such Trust for
acquisition of a Security. See Part A--"Portfolio of Securities" herein to
ascertain the ratings on the Securities, if any, on the date of the
<PAGE>
Portfolios of Securities.
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating Co.
rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A-Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
NR- Not rated (credit characteristics comparable to A or better
on the Date of Deposit).
[/TEXT]
<PAGE>
<TABLE>
Prospectus
This Prospectus contains information concerning the Trust and
the Sponsors, but does not contain all the information set forth
in the registration statements and exhibits relating thereto, which
the Trust has filed with the Securities and Exchange Commission,
Washington, D.C. under the Securities Act of 1933 and the
Investment Company Act of 1940, and to which reference is
hereby made.
<S>
<C>
Index:
Page
Summary of Essential Information . . . . . . . . . . . . . . . . . . . . . . . . .A-
2 Series
242
Financial and Statistical Information . . . . . . . . . . . . . . . . . . . . . . A- 4
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 5
Report of Independent Public Auditors . . . . . . . . . . . . . . . . . . . . . . A- 9
Portfolios of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
9,808 Units
Tax Exempt Securities Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PROSPECTUS
Additional Considerations Regarding the Trusts. . . . . . . . . . . . . . . . . .2
Dated
May 27, 1994
State Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Estimated Current Return and Estimated Long-Term Return 49
Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Expenses and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Offering Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Method of Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Sponsors
Distribution of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Market for Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SMITH BARNEY SHEARSON INC.
Exchange Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Reinvestment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
1345 Avenue of the Americas
Sponsors' Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
New York, New York 10105
Rights of Unit Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
(800) 298-UNIT
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Distribution of Interest and Principal. . . . . . . . . . . . . . . . . . . . . 67
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 &
Sponsors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
KIDDER, PEABODY & CO.
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Incorporated
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Evaluator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
10
Hanover Square
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
New York, New York 10005
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
(212) 747-5951
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Amendment and Termination of the Trust Agreement. . . . . . . . . . . . . . . . . 74
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Bond Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Standard & Poor's Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 75
Moody's Investors Service . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Fitch Investors Service, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 78
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
</TABLE>
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Shearson
Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Series 242
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-4024 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
F.A. Shinal
Senior Vice President
Chief Financial Officer
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated April 22, 1994 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
April 25, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Series 242,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 25th day of April, 1994.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Shearson Incorporated have signed this Post-Effective
Amendment pursuant to Powers of Attorney authorizing the person
signing this Post-Effective Amendment to do so on behalf of such
members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
A majority of the members of the Board of Directors of
Kidder, Peabody & Co. Incorporated have signed this Post-
Effective Amendment pursuant to Powers of Attorney authorizing
the person signing this Post-Effective Amendment to do so on
behalf of such members. These Powers of Attorney were filed with
the Securities and Exchange Commission under the Securities Act
of 1933 as an exhibit to the Registration Statement of Tax Exempt
Securities Trust, Series 303, Post-Effective Amendment No. 1,
Registration No. 33-28378.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY SHEARSON INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Shearson Incorporated:
Steven D. Black
James S. Boshart III
Robert K. Difazio
James Dimon
Robert Druskin
Toni A. Elliot
Lewis L. Glucksman
John B. Hoffman
A. Richard Janiak, Jr.
Robert Q. Jones
Robert B. Kane
Jeffrey B. Lane
Thomas A. Maguire
Howard D. Marsh
William J. Mills II
John C. Morris
A. George Saks
Bruce D. Sargent
Melvin B. Taub
Jacques S. Theriot
Stephen J. Treadway
Paul Underwood
Philip M. Waterman, Jr.
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
<PAGE>
TAX EXEMPT SECURITIES TRUST
By Kidder, Peabody & Co. Incorporated
By
(Gilbert R. Ott, Jr.)
By the following persons*, who constitute a majority
of the directors of Kidder, Peabody & Co. Incorporated:
Edward A. Cerullo
Michael A. M. Keehner
John M. Liftin
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
By
(Gilbert R. Ott, Jr.
Attorney-in-Fact)
___
* Pursuant to Powers of Attorney previously filed.
II-4
