<PAGE>
Registration No. 33-8340
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 253
B.
Names of Depositors:
SMITH BARNEY INCORPORATED
KIDDER, PEABODY & CO. INCORPORATED
<TABLE>
<S> <C>
C. Complete addresses of depositors' principal executive
offices:
SMITH BARNEY KIDDER, PEABODY & CO.
INCORPORATED
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.
Incorporated 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 November 15,
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>
<PAGE>
<PAGE>
SERIES 253
[S] [C]
In the opinion of counsel, under existing law interest income to the
Trusts and, with certain exceptions, to Unit holders is exempt from
all Federal income tax. In addition, in the opinion of counsel, the
interest income of each State Trust is similarly exempt from state
income taxes in the state for which such Trust is named. Capital
gains, if any, are subject to tax. Investors should retain both parts
of this Prospectus for future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS
HAS BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE
ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSORS EITHER BY PURCHASE FROM
THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR
IN THE SECONDARY MARKET. SEE PART B, "RIGHTS OF
UNIT HOLDERS--REDEMPTION OF UNITS--PURCHASE BY
THE SPONSORS OF UNITS TENDERED FOR REDEMPTION"
AND "MARKET FOR UNITS". THE PRICE AT WHICH THE
UNITS OFFERED HEREBY WERE ACQUIRED WAS NOT LESS
THAN THE REDEMPTION PRICE DETERMINED AS PROVIDED
HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS--
REDEMPTION OF UNITS--COMPUTATION OF REDEMPTION
PRICE PER UNIT".
THE TAX EXEMPT SECURITIES TRUST, SERIES 253 consists of
six underlying separate unit investment trusts (the "Trusts" or "State
Trusts") designated as the California Trust 74, Connecticut Trust 74,
Missouri Trust 72, New Jersey Trust 75, New York Trust 76 and
Pennsylvania Trust 74, each formed for the purpose of obtaining for its
Unit holders tax-exempt interest income through investment in a fixed
portfolio consisting primarily of long term municipal bonds rated at the
time of deposit A or better by Standard & Poor's Corporation or
Moody's Investors Service, with certain ratings being provisional or
conditional. (See "Portfolio of Securities".) Each State Trust is
comprised of a fixed portfolio of interest bearing obligations issued
primarily by or on behalf of the State for which such Trust is named and
counties, municipalities, authorities and political subdivisions thereof.
The interest on all bonds in each State Trust is, in the opinion of
recognized bond counsel to the issuers of the obligations, exempt from
all Federal income tax (except in certain instances depending upon the
Unit holders) under existing law and from state income taxes in the State
for which such Trust is named. See "Tax Status" regarding proposals
with respect to the Federal income tax treatment of interest on municipal
bonds.
THE PUBLIC OFFERING PRICE of the Units of each State Trust is
equal to the aggregate bid price of the underlying Securities in the State
Trust's portfolio divided by the number of Units outstanding in such
State Trust, plus a sales charge equal to 5%, 3.25%, 3.25%, 5%, 3.25%
and 5% of the Public Offering Price (5.263%, 3.359%, 3.359%,
5.263%, 3.359% and 5.263% of the aggregate bid price of the Securities
per Unit) for the California Trust, Connecticut Trust, Missouri Trust,
New Jersey Trust, New York Trust and Pennsylvania Trust, respectively.
A proportional share of accrued and undistributed interest on the
Securities at the date of delivery of the Units to the purchaser is also
added to the Public Offering Price.
THE SPONSORS, although not obligated to do so, intend to maintain
a market for the Units of the Trusts at prices based upon the aggregate
bid price of the underlying Securities, as more fully described in Part B,
"Market for Units". If such a market is not maintained, a Unit holder
may be able to dispose of his Units only through redemption at prices
based upon the aggregate bid price of the underlying Securities.
MONTHLY DISTRIBUTIONS of principal and interest received by the
Trusts will be made on or shortly after the fifteenth day of each month
to holders of record on the first day of that month. For further
information regarding the distributions by the Trust, see the "Summary
of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Part A dated November 15, 1994
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.<PAGE>
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
SUMMARY OF ESSENTIAL INFORMATION AS OF AUGUST
29, 1994+
Sponsors: SMITH BARNEY INC. and
KIDDER, PEABODY & CO. INCORPORATED
Trustee: UNITED STATES TRUST COMPANY OF NEW
YORK
Evaluator: KENNY S&P EVALUATION SERVICES
CaliforniaMissouriNew JerseyNew YorkPennsylvania
Trust 74Trust 72Trust 75Trust 76Trust 74
<S> <C> <C> <C>
Principal Amount of Securities in Trust
$ 3,015,000
$1,845,000 $2,250,000
$3,975,000 $2,520,000
Number of Units
3,7922,4142,8763,9792,999
Fractional Undivided Interest in Trust per Unit
1/3,7921/2,4141/2,8761/3,9791/2,999
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less than. . . . . . . . . . . . .
$2,000,000 $1,500,000
$1,500,000 $2,000,000
$1,500,000
Trust must be terminated if Principal Amount is less than
$1,000,000 $750,000
$750,000 $1,000,000
$750,000
Principal Amount of Securities in Trust per Unit
$ 795.09
$764.29
$782.33
$ 998.99
$ 840.28
Public Offering Price per Unit#*
$. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825.76
$ 839.25
$ 843.85
$ 1,079.53
$ 895.81
Sales Charge (5% of Public Offering Price)#
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.28
41.96
42.19
53.97
44.79
Approximate Redemption and Sponsors' Repurchase Price
per Unit (per Unit Bid Price of Securities)#**
$. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784.48
$ 797.29
$801.66
$ 1,025.56
$ 851.02
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit
$. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61.11
$ 52.83
$ 57.91
$ 77.01
$ 61.87
Less Estimated Annual Expenses per Unit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.36
1.54
1.53
1.77
1.58
Estimated Net Annual Income per Unit
$. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59.75
$ 51.29
$ 56.38
$ 75.24
$ 60.29
Monthly Income Distribution per Unit
$. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.97
$ 4.27
$4.69
$6.27
$5.02
Daily Rate (360-day basis) of Income Accrual per Unit
$. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1659
$ .1424
$ .1566
$ .2090
$ .1674
Estimated Current Return Based on Public Offering Price#
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.23%
6.11%
6.68%
6.96%
6.73%
Estimated Long-Term Return#
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.68%
5.00%
5.60%
5.62%
5.58%
<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 $12.69, $11.00, $14.26, $14.22 and $13.80 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 California Trust, Missouri Trust, New Jersey Trust, New
York Trust and Pennsylvania Trust, respectively, through the
expected date of settlement (five business days after August 29,
1994).
** Plus $16.50, $14.27, $17.85, $19.06 and $16.65 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 California Trust, Missouri Trust, New Jersey Trust, New
York Trust and Pennsylvania Trust, respectively, as of August 29,
1994 on a pro rata basis. (See "Redemption of Units-Computation
of Redemption Price per Unit".)
<PAGE>
</TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
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: October 7, 1986
Mandatory Termination Date: January 1, 2035
Trustee's Annual Fee: $1.05 per $1,000 principal
amount of bonds ($14,286 per year on the basis of bonds in the
principal amount of $13,605,000) plus expenses.
Evaluator's Fee: $.30 per bond per evaluation
As of August 29, 1994, 9 (82%) of the Bonds in the California
Trust were rated by Standard & Poor's Corporation (37% being rated
AAA, 22% being rated AA, 20% being rated A and 3% being rated
BBB) and 2 (18%) were rated by Moody's Investors Service (9%
being rated Aa and 9% being rated A); 6 (84%) of the Bonds in the
Missouri Trust were rated by Standard & Poor's (44% being rated
AAA and 40% being rated AA) and 1 (16%) was rated Aaa by
Moody's: 9 (91%) of the Bonds in the New Jersey Trust were rated
by Standard & Poor's (53% being rated AAA and 38% being rated
A) and 1 (9%) was rated Aa by Moody's; 9 (82%) of the Bonds in
the New York Trust were rated by Standard & Poor's (51% being
rated AAA, 27% being rated A and 4% being rated BBB) and 4
(18%) were rated by Moody's Investors Service (15% being rated Aaa
and 3% being rated Baa); 7 (72%) of the Bonds in the Pennsylvania
Trust were rated by Standard & Poor's (62% being rated AAA and
10% being rated A) and 3 (28%) were rated by Moody's Investors
Service (14% being rated A and 14% being rated Baa). 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 18% and
20% of the Bonds in the California Trust and Missouri Trust,
respectively, consist of general obligation bonds. Approximately 26%,
33%, 26% and 7% of the Bonds in the California Trust, New Jersey
Trust, New York Trust and Pennsylvania Trust, respectively, consist
of hospital revenue bonds (including obligations of health care
facilities). Approximately 30%, 30%, 4% and 13% of the Bonds in
the Missouri Trust, New Jersey Trust, New York Trust and
Pennsylvania Trust, respectively, consist of obligations of municipal
housing authorities. Approximately 16% and 12% of the Bonds in
the Missouri Trust and New Jersey Trust, respectively, consist of
bonds which are subject to the Mortgage Subsidy Bond Tax Act of
1980. Approximately 34% and 26% of the Bonds in the California
Trust and Missouri Trust, respectively, consist of bonds in the power
facilities category. Obligations of issuers located in the
Commonwealth of Puerto Rico represent approximately 15% of the
Bonds in the New York Trust. (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 August 29,
1994.
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
<TABLE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
Income Principal
Units Net
Asset Distributions
Distributions
Period Ended Outstanding Value
Per Unit Per Unit Per
Unit
<C> <S> <C> <C>
July 31, 1992 California 3,900 $
1,067.88 $ 76.20 $ -
Missouri 2,976
1,054.81 68.78 -
New Jersey 2,906
968.30 68.82 61.77
New York 4,000
1,091.77 75.72 -
Pennsylvania 3,000
1,057.43 73.44 -
July 31, 1993 California 3,863 $
1,053.18 $ 75.72 $ 3.00
Missouri 2,976
1,043.50 68.72 2.03
New Jersey 2,906
938.99 65.46 36.48
New York 4,000
1,092.72 75.60 -
Pennsylvania 3,000
941.41 69.17 118.41
July 31, 1994 California 3,792 $
807.15 $ 67.72 $ 194.13
Missouri 2,414
809.26 67.38 198.37
New Jersey 2,876
902.07 63.69 8.60
New York 4,000
1,049.29 75.60 -
Pennsylvania 2,999
865.94 61.78 44.01
<PAGE>
</TABLE>
TABLE
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
BALANCE SHEETS
July 31, 1994
ASSETS
CaliforniaMissouriNew JerseyNew YorkPennsylvania
Trust 74Trust 72Trust 75Trust 76Trust 74
<S><C><C><C>
Investments in tax exempt bonds, at market value
(Cost $3,013,397, $1,795,952, $2,220,059, $4,043,460 and
$2,473,815, respectively) (Note 3 to Portfolio of Securities)
$2,991,143
$1,916,559
$2,305,627
$4,119,431
$2,545,480
Accrued interest 39,38824,27337,39128,94837,144
Cash 30,652 13,041 251,736 49,419
14,771
Total Assets
$3,061,183
$1,953,873
$2,594,754
$4,197,798
$2,597,395
LIABILITIES AND NET ASSETS
Accrued expenses
$ 470$ 306
$ 390
$ 603
$ 417
Net Assets (Units of fractional undivided
interest outstanding - 3,792, 2,414, 2,876,
4,000, and 2,999 respectively):
Original cost to investors (Note 1)
4,194,891
3,135,169
3,145,164
4,222,9353,104,761
Less initial underwriting commission (sales charge)
(Note 1) 178,283
133,245 133,669
179,475
131,952
4,016,6083,001,924
3,011,4954,043,4602,972,809
Cost of bonds sold or redeemed since
date of deposit (October 7, 1986)
(1,003,211)
(791,436)
- -
(498,994)
Net unrealized market appreciation (depreciation)
(22,254) 120,607
85,568 75,971
71,665
2,991,143
1,916,559
2,305,6274,119,431
2,545,480
Unidistributed net investment income
64,545
35,877
52,64077,764
51,475
Undistributed proceeds from bonds sold or redeemed 5,025
1,131 236,097 - 23
Net Assets 3,060,713 1,953,567 2,594,364
4,197,195
2,596,978
Total Liabilities and Net Assets$3,061,183
$1,953,873$2,594,754
$4,197,798
$2,597,395
Net asset value per unit
$807.15
$809.26
$902.07
$1,049.29
$865.94
The accompanying Notes to Financial Statements are an integral
part of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
CALIFORNIA TRUST 74
STATEMENTS OF OPERATIONS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
<S><C><C><C>
Investment Income-interest (Note 2)$ 248,052$ 300,688$
302,333
Less expenses:
Trustee's fees and expenses 4,5665,3755,598
Evaluator's fees 989 1,249 1,073
Total expenses 5,555 6,624 6,671
Net investment income 242,497 294,064 295,662
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5)
(30,655)(4,311)(658)
Net (increase) decrease in unrealized market
depreciation (150,843) (40,373) 169,939
Net gain (loss) on investments (181,498) (44,684) 169,281
Net increase in net assets resulting from operations$60,999$249,380
$464,943
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$242,497$294,064$295,662
Net realized loss on securities transactions (Note 5)
(30,655)(4,311)(658)
Net (increase) decrease in unrealized market
depreciation (150,843) (40,373) 169,939
Net increase in net assets resulting from operations 60,999
249,380 464,943
Distributions to Unit Holders:
Net investment income (Note 4) (259,138)(294,610) (297,180)
Proceeds from securities sold or redeemed (744,220) (11,700)
-
Total Distributions (1,003,358) (306,310) (297,180)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (1,164)(730)-
Value of Units at date of redemption (64,199) (38,661) -
Total Redemptions (65,363) (39,391) -
Increase (decrease) in net assets (1,007,722)(96,321)167,763
Net Assets:
Beginning of year 4,068,435 4,164,756 3,996,993
End of year (including undistributed net
investment income of $64,545, $82,350
and $83,626, respectively)$3,060,713$4,068,435$4,164,756
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
MISSOURI TRUST 72
STATEMENTS OF OPERATIONS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Investment Income-interest (Note 2)$ 181,228$ 209,287$
210,272
Less expenses:
Trustee's fees and expenses 3,5073,9184,217
Evaluator's fees 779 881 751
Total expenses 4,286 4,799 4,968
Net investment income 176,942 204,488 205,304
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) (21,404)8,000(418)
Net increase (decrease) in unrealized market
appreciation (66,690) (35,578) 222,122
Net gain (loss) on investments (88,094) (27,578) 221,704
Net increase in net assets resulting from
operations$88,848$176,910$427,008
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$176,942$204,488$205,304
Net realized gain (loss) on securities transactions
(Note 5) (21,404)8,000(418)
Net increase (decrease) in unrealized market
appreciation (66,690) (35,578) 222,122
Net increase in net assets resulting from operations 88,848
176,910 427,008
Distributions to Unit Holders:
Net investment income (Note 4) (194,105)(204,511)(204,781)
Proceeds from securities sold or redeemed (571,873) (6,042)
-
Total Distributions (765,978) (210,553) (204,781)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (6,907)- (55)
Value of Units at date of redemption (467,873) -
(3,945)
Total Distributions (474,780) - (4,000)
Increase (decrease) in net assets (1,151,910)(33,643)218,227
Net Assets:
Beginning of year 3,105,477 3,139,120 2,920,893
End of year (including undistributed net
investment income of $35,877, $59,947
and $59,970, respectively)$1,953,567$3,105,477$3,139,120
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
NEW JERSEY TRUST 75
STATEMENTS OF OPERATIONS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Investment Income-interest (Note 2)$ 188,097$ 195,204$
203,493
Less expenses:
Trustee's fees and expenses 3,9074,1424,572
Evaluator's fees 948 1,027 941
Total expenses 4,855 5,169 5,513
Net investment income 183,242 190,035 197,980
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) (21,706)3,346(11,657)
Net increase (decrease) in unrealized market
appreciation (58,932) 17,689 116,792
Net gain (loss) on investments (80,638) 21,035 105,135
Net increase in net assets resulting from
operations$102,604$211,070$303,115
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$183,242$190,035$197,980
Net realized gain (loss) on securities transactions
(Note 5) (21,706)3,346(11,657)
Net increase (decrease) in unrealized market
appreciation (58,932) 17,689 116,792
Net increase in net assets resulting from operations 102,604
211,070 303,115
Distributions to Unit Holders:
Net investment income (Note 4) (185,083)(190,227)(200,038)
Proceeds from securities sold or redeemed (24,992) (106,010)
(179,561)
Total Distributions (210,075) (296,237) (379,599)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (465)- (56)
Value of Units at date of redemption (26,416) -
(2,896)
Total Redemptions (26,881) - (2,952)
Decrease in net assets (134,352)(85,167)(79,436)
Net Assets:
Beginning of year 2,728,716 2,813,883 2,893,319
End of year (including undistributed net
investment income of $52,640, $54,946
and $55,138, respectively)$2,594,364$2,728,716$2,813,883
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
NEW YORK TRUST 76
STATEMENTS OF OPERATIONS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Investment Income-interest (Note 2)$ 308,669$ 308,669$
308,669
Less expenses:
Trustee's fees and expenses 6,1026,2226,588
Evaluator's fees 1,110 1,154 993
Total expenses 7,212 7,376 7,581
Net investment income 301,457 301,293 301,088
Realized and unrealized gain (loss) on investments:
Net increase (decrease) in unrealized market
appreciation (172,772) 4,916 281,256
Net gain (loss) on investments (172,772) 4,916 281,256
Net increase in net assets resulting from
operations$128,685$306,209$582,344
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$301,457$301,293$301,088
Net increase (decrease) in unrealized market
appreciation (172,772) 4,916 281,256
Net increase in net assets resulting from operations 128,685
306,209 582,344
Distributions to Unit Holders:
Net investment income (Note 4) (302,400) (302,400) (302,880)
Total Distributions (302,400) (302,400) (302,880)
Increase (decrease) in net assets (173,715)3,809279,464
Net Assets:
Beginning of year 4,370,910 4,367,101 4,087,637
End of year (including undistributed net
investment income of $77,764, $78,707
and $79,814, respectively)$4,197,195$4,370,910$4,367,101
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
PENNSYLVANIA TRUST 74
STATEMENTS OF OPERATIONS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Investment Income-interest (Note 2)$ 186,373$ 211,049$
225,180
Less expenses:
Trustee's fees and expenses 4,0184,4584,972
Evaluator's fees 864 1,025 909
Total expenses 4,882 5,483 5,881
Net investment income 181,491 205,566 219,299
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) 1,140(11,959)-
Net increase (decrease) in unrealized market
appreciation (91,678) 21,090 165,180
Net gain (loss) on investments (90,538) 9,131 165,180
Net increase in net assets resulting from operations$90,953$214,697
$384,479
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$181,491$205,566$219,299
Net realized gain (loss) on securities transactions
(Note 5) 1,140(11,959)-
Net increase (decrease) in unrealized market
appreciation (91,678) 21,090 165,180
Net increase in net assets resulting from operations 90,953
214,697 384,479
Distributions to Unit Holders:
Net investment income (Note 4) (185,284)(207,510) (220,320)
Proceeds from securities sold or redeemed (131,986) (355,230)
-
Total Distributions (317,270) (562,740) (220,320)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (17)- -
Value of Units at date of redemption (936) - -
Total Redemptions (953) - -
Increase (decrease) in net assets (227,270)(348,043)164,159
Net Assets:
Beginning of year 2,824,248 3,172,291 3,008,132
End of year (including undistributed net
investment income of $51,475, $55,285
and $57,229, respectively)$2,596,978$2,824,248$3,172,291
The accompanying Notes to Financial Statements are an integral part
of these statements.
/TABLE
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
NOTES TO PORTFOLIO OF SECURITIES
July 31, 1994
(1)The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (October 7, 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)108 Units, 566 Units, 33 Units and 1 Unit in the California Trust,
Missouri Trust, New Jersey Trust and Pennsylvania Trust, respectively,
were redeemed by the Trustee during the three years ended July 31,
1994 (71 Units, 562 Units, 30 Units and 1 Unit in the California Trust,
Missouri Trust, New Jersey Trust and Pennsylvania Trust, respectively,
being redeemed in 1994. 37 Units in the California Trust being
redeemed in 1993. 4 Units and 3 Units in the Missouri Trust and New
Jersey Trust, respectively, 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 253:
We have audited the accompanying balance sheets of Tax Exempt
Securities Trust, Series 253 (comprising, respectively, California Trust 74,
Missouri Trust 72, New Jersey Trust 75, New York Trust 76 and
Pennsylvania Trust 74), including the portfolios of securities, as of July
31, 1994, and the related statements of operations and changes in net
assets for each of the years in the three-year period ended July 31, 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 July 31, 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 253 as of July 31,
1994, and the results of their operations and changes in their net assets
for each of the years in the three-year period ended July 31, 1994, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
October 24, 1994
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
CALIFORNIA TRUST 74 - PORTFOLIO OF SECURITIES - July 31,
1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
<S><C><C><C>
California Health Facilities
Authority, St. Joseph Health System AAA7/1/95 @
101$300,000$317,880
Revenue Bonds, 9.875% due 7/1/2014 (p)
California State University, San
Jose State University, Student Union A*11/1/96 @ 103250,000269,933
Revenue Bonds, 7.60% due 11/1/2010
Glendale, California, Hospital
Revenue Bonds, Verdugo HillsA1/1/95 @ 102450,000469,678
Hospital, 10.125% due 1/1/2015S.F. 1/1/02 @ 100
Los Angeles County, California,
Transportation Commission, SalesAA-7/1/96 @ 100250,000249,688
Tax Revenue Bonds, 6.25% due 7/1/2016S.F. 7/1/13 @ 100
Northern California Power Agency,
Geothermal Project Number 3 AAA7/1/95 @ 102325,000347,136
Revenue Bonds, 9.75% due 7/1/2008 (p)
Riverside Unified School District,
Capital Facilities Corporation,
Certificates of Participation, A-p7/15/95 @ 103120,000130,775
9.00% due 7/15/2000S.F. Currently @ 100
Sacramento Municipal Utility District,
Subordinated Electric Revenue Bonds, BBB+8/29/94 @
10085,00085,416
8.00% due 11/15/2010
The City of San Diego, California,
Industrial Development Revenue
Bonds, San Diego Gas & Electric Aa3*9/1/95 @ 102250,000268,930
Company, 9.25% due 9/1/2020
Southern California Public Power
Authority, Transmission ProjectAA7/1/96 @ 100365,000302,205
Revenue Bonds, 5.00% due 7/1/2021
Metropolitan Water District
of Southern California Bonds, AAA8/29/94 @ 102500,000437,570
5.25% due 3/1/2022S.F. 3/1/12 @ 100
Turlock, California, IrrigationAA1/1/95 @ 100 120,000 111,932
District Bonds, 4.20% due 7/1/2001
$3,015,000$2,991,143
The accompanying Notes are an integral part of this Portfolio.
A-12
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
MISSOURI TRUST 72 - PORTFOLIO OF SECURITIES - July 31,
1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
Missouri Environmental Improvement
Energy Resources Authority, Pollution
and Control Revenue Bonds, National
Rural Utilities Cooperative Finance AA-6/4/96 @
103$470,000$508,930
Corporation, 8.25% due 11/15/2014S.F. Currently @ 100
Missouri Housing Development
Commission, Federally InsuredAA9/15/94 @ 102160,000163,525
Mortgage Loans, 7.00% due 9/15/2021S.F. 9/15/05 @ 100
Missouri Housing Development
Commission, General Mortgage Aaa*12/15/94 @ 102
1/2300,000304,089
Purchase, 6.375% due 12/15/2007S.F. 12/15/95 @ 100
Missouri Housing Development
Commission, Housing DevelopmentAA+1/15/95 @ 101
3/4110,000111,750
Bonds, 6.60% due 7/15/2021S.F. 7/15/04 @ 100
Kansas City, Missouri, Public HousingAAA12/1/94 @
103375,000367,631
Agency, Bonds, 5.00% due 6/1/2003
Kansas City, Missouri, Community
College Building Corporation AAA7/1/96 @ 101250,000267,323
Revenue Bonds, 7.75% due 7/1/2006
Little Blue Valley Sewer District,
Missouri, Sewer Revenue Bonds, AAA10/1/98 @ 100 180,000
193,311
7.25% due 10/1/2007
$1,845,000$1,916,559
The accompanying Notes are an integral part of this Portfolio.
A-13<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
NEW JERSEY TRUST 75 - PORTFOLIO OF SECURITIES - July
31, 1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
New Jersey Health Care Facilities
Authority Revenue Bonds, Dover
General Hospital and Medical A7/1/95 @ 102$500,000$534,110
Center Issue, 9.00% due 7/1/2012 (p)
New Jersey Health Care Facilities
Authority Revenue Bonds, The
Mountainsides Hospital Issue, Aa*8/1/95 @ 102205,000218,034
9.00% due 8/1/2025 (p)
New Jersey Housing Finance Agency,
General Housing Loan Bonds, A+8/29/94 @ 100200,000179,648
5.40% due 11/1/2013
New Jersey Housing Finance Agency,
Mortgage Revenue Bonds, A+8/29/94 @ 100 160,000158,366
6.375% due 5/1/2026S.F. 5/1/01 @ 100
New Jersey Housing Finance
Agency, Multifamily MortgageAAA --90,00087,691
Bonds, 6.00% due 11/1/2023S.F. 11/1/18 @ 100
New Jersey Housing and Mortgage Finance
Agency, Home Mortgage Purchase Revenue AAA10/1/96 @
103250,000264,868
Bonds, 7.875% due 10/1/2016S.F. 10/1/07 @ 100
New Jersey Turnpike Authority,
Turnpike Revenue Bonds,
5.125% due 1/1/2008AAA --115,000113,186
10.375% due 1/1/2003AAA --105,000127,252
S.F. Currently @ 100
Cape May County Municipal Utilities
Authority, Solid Waste Revenue
Bonds, Landfill Project, AAA8/1/96 @ 102200,000216,338
7.80% due 8/1/2003 (p)
Mercer County, New Jersey Improvement
Authority, State Justice Complex Revenue AAA -- 425,000
406,134
Bonds, 5.80% due 1/1/2018S.F. 1/1/99 @ 100
$2,250,000$2,305,627
The accompanying Notes are an integral part of this Portfolio.
A-14<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
NEW YORK TRUST 76 - PORTFOLIO OF SECURITIES - July 31,
1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
New York State Medical Care
Facilities Finance Agency,
Insured Mortgage Hospital Revenue AAA1/15/96 @
102$500,000$540,015
Bonds, 8.375% due 1/15/2006 (p)
New York State Medical Care
Facilities Finance Agency, Nursing
Home Insured Mortgage Revenue A-8/29/94 @ 102500,000512,750
Bonds, 10.50% due 1/15/2024S.F. 1/15/03 @ 100
New York State, Urban Development
Corporation, Correctional Facilities
Revenue Refunding Bonds, Aaa*1/1/96 @ 102250,000265,713
7.75% due 1/1/2000 (p)
Dormitory Authority of The State
of New York, City University
System Consolidated Revenue Baa1*7/1/96 @ 100150,000150,201
Bonds, 6.50% due 7/1/2015
Metropolitan Transportation Authority,
Transit Facilities Service ContractBBB+7/1/96 @ 102150,000143,613
Bonds, 6.00% due 7/1/2014S.F. 7/1/12 @ 100
Metropolitan Transportation
Authority, Transit Facilities AAA 7/1/96 @ 100500,000463,395
Revenue Bonds, 5.50% due 7/1/2013
Triborough Bridge and Tunnel
Authority, Convention CenterAAA (c)7/1/95 @ 102205,000217,398
Project Bonds, 8.875% due 1/1/2005 (p)
Triborough Bridge and Tunnel
Authority, General Purpose RevenueAAA 1/1/95 @
102500,000524,970
Bonds, 9.375% due 1/1/2005 (p)
United Nations Development Corporation
Bonds, 7.875% due 7/1/2026 (p)Aaa*7/1/96 @ 102225,000244,519
5.90% due 5/1/2023Aaa* --110,000108,637
Wantagh Union Free School District,
New York, School District Bonds, AAA --305,000352,821
7.625% due 10/1/2002
Puerto Rico Water Resource
Authority, Electric Revenue Bonds, A8/29/94 @ 101165,000165,911
5.90% due 1/1/2007
Puerto Rico Water Resources
Authority, Power Revenue A-8/29/94 @ 101 440,000 429,488
Bonds, 6.00% due 7/1/2014S.F. 7/1/07 @ 100
$4,000,000$4,119,431
The accompanying Notes are an integral part of this Portfolio.
A-15
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
PENNSYLVANIA TRUST 74 - PORTFOLIO OF SECURITIES - July
31, 1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
Pennsylvania Turnpike Commission,
Pennsylvania Turnpike Revenue A1*12/1/96 @ 100$250,000$239,980
Bonds, 6.00% due 12/1/2017
Beaver County, Pennsylvania,
Public Housing Agency Bonds, AAA12/1/94 @ 102100,00094,471
4.875% due 6/1/2005
Beaver County, Pennsylvania, Industrial
Development Authority, Atlantic Richfield
Company Project, Pollution Control A10/15/94 @ 100
1/275,00075,864
Revenue Bonds, 6.40% due 4/15/2009S.F. 4/15/04 @ 100
Beaver County, Pennsylvania, Industrial
Development Authority, Pollution Control
Revenue Bonds, Duquesne Light Company,
Beaver Valley Project, AAA12/1/94 @ 103500,000530,845
11.625% due 12/1/2014
Delaware County, Pennsylvania,
Industrial Development Authority
Bonds, Sun Oil Company, Inc., Baa1*12/1/94 @ 100 370,000356,477
5.90% due 12/1/2006S.F. 12/1/97 @ 100
Philadelphia, Pennsylvania, Parking
Authority, Airport Parking Revenue A*8/29/94 @ 100115,000113,268
Bonds, 7.30% due 9/1/2003
City of Philadelphia, Pennsylvania,
Water and Sewer Revenue Bonds,
6.00% due 7/1/2016 (p)AAA7/1/96 @ 100250,000257,050
7.25% due 7/1/2014 (p)AAA7/1/96 @ 101250,000264,850
Pittsburgh Water and Sewer Authority,
Water and Sewer System, Revenue AAA --450,000441,333
Refunding Bonds, 6.00% due 9/1/2016
Scranton-Lackawanna Health and Welfare
Authority, Hospital Revenue Bonds, St.
Joseph's Hospital, Carbondale, A+12/15/96 @ 101 160,000
171,342
Pennsylvania Project, 7.75% due 12/15/2015S.F. 12/15/07 @ 100
$2,520,000$2,545,480
The accompanying Notes are an integral part of this Portfolio.
A-16<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 253
PORTFOLIO OF SECURITIES - July 31, 1994
(Continued)
At July 31, 1994 the net unrealized market appreciation
(depreciation) for all tax exempt bonds was comprised of the
following:
CaliforniaMissouriNew JerseyNew YorkPennsylvania
Trust 74Trust 72Trust 75Trust 76Trust 74
<S><C><C><C><C><C>
Gross unrealized market
appreciation$132,017$120,925$119,931$215,753$182,585
Gross unrealized market depreciation (154,271) (318) (34,363)
(139,782) (110,920)
Net unrealized market appreciation
(depreciation)$(22,254)$120,607$85,568$75,971$71,665
</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 portfolios, 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 July 31, 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-17
<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 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 for the State Trusts and all other
Trusts (hereinafter referred to as the 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 and Umbrella Series 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 State Trusts 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.
References to State Trusts, in the following discussion, also relate to
other Trusts comprising Umbrella Series.
The Bonds in the Portfolio of a State Trust were chosen in part
on the basis of their respective maturity dates. The actual maturity date
of each of the Bonds contained in a State Trust is indicated in Part A. A
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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
amount due upon the maturity of a Bond would result in a loss to the
State Trust or Umbrella Series.
Additional Considerations Regarding the Trusts
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
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
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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
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,
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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.
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.
<PAGE>
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
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,
<PAGE>
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
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
<PAGE>
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.
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,
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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
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.
<PAGE>
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.
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
<PAGE>
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.
Insurance. Certain Bonds (the "Insured Bonds") may be insured
or guaranteed by AMBAC Indemnity Corporation ("AMBAC"), Asset
Guaranty Reinsurance Company ("Asset Guaranty"), Capital Guaranty
Insurance Company ("CGIC"), Capital Markets Assurance Corp.
("CAPMAC"), Connie Lee Insurance Company ("Connie Lee"),
Financial Guaranty Insurance Company "Financial Guaranty"), Financial
Security Assurance Inc. ("FSA"), or Municipal Bond Investors
Assurance Corporation ("MBIA") (collectively, the "Insurance
Companies"). The claims-paying ability of each of these companies,
unless otherwise indicated, is rated AAA by Standard & Poor's or
another acceptable national rating service. The ratings are subject to
change at any time at the discretion of the rating agencies. In determining
whether to insure bonds, the Insurance Companies severally apply their
own standards. The cost of this insurance is borne either by the issuers
or previous owners of the bonds or by the Sponsors. The insurance
policies are non-cancellable and will continue in force so long as the
Insured Bonds are outstanding and the insurers remain in business. The
insurance policies guarantee the timely payment of principal and interest
on but do not guarantee the market value of the Insured Bonds or the
value of the Units. The insurance policies generally do not provide for
accelerated payments of principal or, except in the case of any portfolio
insurance policies, cover redemptions resulting from events of taxability.
If the issuer of any Insured Bond should fail to make an interest or
<PAGE>
principal payment, the insurance policies generally provide that the
Trustee or its agent shall give notice of nonpayment to the Insurance
Company or its agent and provide evidence of the Trustee's right to
receive payment. The Insurance Company is then required to disburse
the amount of the failed payment to the Trustee or its agent and is
thereafter subrogated to the Trustee's right to receive payment from the
issuer.
The following are brief descriptions of certain of the insurance
companies that may insure or guarantee certain Bonds. The financial
information presented for each company has been determined on a
statutory basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance company,
regulated by the Insurance Department of the State of Wisconsin, and
licensed to do business in various states, with admitted assets of
approximately $1,956,000,000 and policyholders' surplus of
approximately $737,000,000 as of December 31, 1993. AMBAC is a
wholly-owned subsidiary of AMBAC Inc., a financial holding company
which is publicly owned following a complete divestiture by Citibank
during the first quarter of 1992.
Asset Guaranty is a New York State insurance company licensed
to write financial guarantee, credit, residual value and surety insurance.
Asset Guaranty commenced operations in mid-1988 by providing
reinsurance to several major monoline insurers. Asset Guaranty also
issued limited amounts of primary financial guaranty insurance, but not
in direct competition with the primary mono-line companies for which
it acts as a reinsurer. The parent holding company of Asset Guaranty,
Asset Guarantee Inc. (AGI), merged with Enhance Financial Services
(EFS) in June, 1990 to form Enhance Financial Services Group Inc.
(EFSG). The two main, 100%-owned subsidiaries of EFSG, Asset
Guaranty and Enhance Reinsurance Company (ERC), share common
management and physical resources. After an initial public offering
completed in February 1992 and the sale by Merrill Lynch & Co. of its
stake, EFSG is 49.8%-owned by the public, 29.9% by US West
Financial Services, 14.1% by Manufacturers Life Insurance Co. and
6.2% by senior management. Both ERC and Asset Guaranty are rated
"AAA" for claims paying ability by Duff & Phelps. ERC is rated
triple-A for claims-paying ability by both S&P and Moody's. Asset
Guaranty received a "AA" claims-paying-ability rating from S&P during
August 1993, but remains unrated by Moody's. As of December 31,
1993 Asset Guaranty had admitted assets of approximately $138,000,000
and policyholders' surplus of approximately $73,000,000.
CAPMAC commenced operations in December 1987, as the
second mono-line financial guaranty insurance company (after FSA)
organized solely to insure non-municipal obligations. CAPMAC, a New
York corporation, is a wholly-owned subsidiary of CAPMAC Holdings,
<PAGE>
Inc. (CHI), which was sold in 1992 by Citibank (New York State) to a
group of 12 investors led by the following: Dillon Read's Saratoga
Partners Il; L.P. (Saratoga), an acquisition fund; Caprock Management,
Inc., representing Rockefeller family interests; Citigrowth Fund, a
Citicorp venture capital group; and CAPMAC senior management and
staff. These groups control approximately 70% of the stock of CHI.
CAPMAC had traditionally specialized in guaranteeing consumer loan
and trade receivable asset-backed securities. Under the new ownership
group CAPMAC intends to become involved in the municipal bond
insurance business, as well as their traditional non-municipal business.
As of December 31, 1993 CAPMAC's admitted assets were
approximately $182,000,000 and its policyholders' surplus was
approximately $146,000,000.
CGIC, a monoline bond insurer headquartered in San Francisco,
California, was established in November 1986 to assume the financial
guaranty business of United States Fidelity and Guaranty Company
("USF&G'). It is a wholly-owned subsidiary of Capital Guaranty
Corporation ("CGC") whose stock is owned by: Constellation
Investments, Inc., an affiliate of Baltimore Gas & Electric, Fleet/Norstar
Financial Group, Inc., Safeco Corporation, Sibag Finance Corporation,
an affiliate of Siemens AG, and USF&G, the 8th largest
property/casualty company in the U.S. as measured by net premiums
written, and CGC management. As of December 31, 1993, CGIC had
total admitted assets of approximately $285,000,000 and policyholders'
surplus of approximately $168,000,000.
Connie Lee is a wholly owned subsidiary of College Construction
Loan Insurance Association ("CCLIA"), a government-sponsored
enterprise established by Congress to provide American academic
institutions with greater access to low-cost capital through enhancement.
Connie Lee, the operating insurance company, was incorporated in 1987
and began business as a reinsurer of tax-exempt bonds of colleges,
universities, and teaching hospitals with a concentration on the hospital
sector. During the fourth quarter of 1991 Connie Lee began underwriting
primary bond insurance which will focus largely on the college and
university sector. CCLIA's founding shareholders are the U.S.
Department of Education, which owns 36% of CCLIA, and the Student
Loan Marketing Association ("Sallie Mae"), which owns 14%. The other
principal owners are: Pennsylvania Public School Employees' Retirement
System, Metropolitan Life Insurance Company, Kemper Financial
Services, Johnson family funds and trusts, Northwestern University,
Rockefeller & Co., Inc. administered trusts and funds, and Stanford
University. Connie Lee is domiciled in the state of Wisconsin and has
licenses to do business in 47 states and the District of Columbia. As of
December 31, 1993, its total admitted assets were approximately
$182,000,000 and policyholders' surplus was approximately
$105,000,000.
<PAGE>
Financial Guaranty, a New York stock insurance company, is a
wholly-owned subsidiary of FGIC Corporation which is wholly-owned
by General Electric Capital Corporation. The investors in the FGIC
Corporation are not obligated to pay the debts of or the claims against
Financial Guaranty. Financial Guaranty commenced its business of
providing insurance and financial guarantees for a variety of investment
instruments in January 1984 and is currently authorized to provide
insurance in 49 states and the District of Columbia. It files reports with
state regulatory agencies and is subject to audit and review by those
authorities. As of December 31, 1993, its total admitted assets were
approximately $1,947,000,000 and its policyholders' surplus was
approximately $777,000,000.
FSA is a monoline property and casualty insurance company
incorporated in New York in 1984. It is a wholly-owned subsidiary of
Financial Security Assurance Holdings Ltd., which was acquired in
December 1989 by US West, Inc., the regional Bell Telephone Company
serving the Rocky Mountain and Pacific Northwestern states. U.S. West
is currently seeking to sell FSA. FSA is licensed to engage in the surety
business in 42 states and the District of Columbia. FSA is engaged
exclusively in the business of writing financial guaranty insurance on
both tax-exempt and non-municipal securities. As of December 31, 1993,
PSA had policyholders' surplus of approximately $357,000,000 and total
admitted assets of approximately $748,000,000.
MBIA is the principal operating subsidiary of MBIA Inc. The
principal shareholders of MBIA Inc. were originally Aetna Casualty and
Surety Company, The Fund American Companies, Inc., subsidiaries of
CIGNA Corporation and Credit Local de France, CAECL, S.A. These
principal shareholders now own approximately 13% of the outstanding
common stock of MBIA Inc., following a series of four public equity
offerings over a five-year period. As of December 31. 1993, MBIA had
admitted assets of approximately $3,051,000,000 and policyholders'
surplus of approximately $978,000,000.
Insurance companies are subject to regulation and supervision in
the jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate,
among other things, to: the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature of and
limitations on investments; deposits of securities for the benefit of
policyholders;
approval of policy forms and premium rates; periodic examinations of
the affairs of insurance companies; annual and other reports required to
be filed on the financial condition of insurers or for other purposes; and
requirements regarding reserves for unearned premiums, losses and other
matters. Regulatory agencies require that premium rates not be excessive,
inadequate or unfairly discriminatory. Insurance regulation in many states
<PAGE>
also includes "assigned risk" plans, reinsurance facilities, and joint
underwriting associations, under which all insurers writing particular
lines of insurance within the jurisdiction must accept, for one or more of
those lines, risks unable to secure coverage in voluntary markets. A
significant portion of the assets of insurance companies is required by
law to be held in reserve against potential claims on policies and is not
available to general creditors.
Although the Federal government does not regulate the business
of insurance, Federal initiatives can significantly impact the insurance
business. Current and proposed Federal measures which may
significantly affect the insurance business include pension regulation
(ERISA), controls on medical care costs, minimum standards for no-fault
automobile insurance, national health insurance, personal privacy
protection, tax law changes affecting life insurance companies or the
relative desirability of various personal investment vehicles and repeal of
the current antitrust exemption for the insurance business. (If this
exemption is eliminated, it will substantially affect the way premium
rates are set by all property-liability insurers.) In addition, the Federal
government operates in some cases as a co-insurer with the private sector
insurance companies.
Insurance companies are also affected by a variety of state and
Federal regulatory measures and judicial decisions that define and extend
the risks and benefits for which insurance is sought and provided. These
include judicial redefinitions of risk exposure in areas such as products
liability and state and Federal extension and protection of employee
benefits, including pension, workers' compensation, and disability
benefits. These developments may result in short-term adverse effects on
the profitability of various lines of insurance. Longer-term adverse
effects can often be minimized through prompt repricing of coverages
and revision of policy terms. In some instances, these developments may
create new opportunities for business growth. All insurance companies
write policies-and set premiums based on actuarial assumptions about
mortality, injury, the occurrence of accidents and other insured events.
These assumptions, while well supported by past experience, necessarily
do not take account of future events. The occurrence in the future of
unforeseen circumstances could affect the financial condition of one or
more insurance companies. The insurance business is highly competitive
and with the deregulation of financial service businesses, it should
become more competitive. In addition, insurance companies may expand
into non-traditional lines of business which may involve different types
of risks.
The above financial information relating to the Insurance
Companies has been obtained from publicly available information. No
representation is made as to the accuracy or adequacy of the information
or as to the absence of material adverse changes since the information
was made available to the public.
<PAGE>
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.
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
<PAGE>
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
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.
Potential purchasers of the Units of a State Trust should consider
the fact that the Trust's Portfolio consists primarily of Bonds issued by
the state for which such State Trust is named or its municipalities or
authorities and realize the substantial risks associated with an investment
in such Bonds. 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. The Sponsors believe the discussions of risk factors summarized
below describe some of the more significant aspects of the State Trusts.
The sources of such information are the official statements of issuers 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. Investments
in a State Trust or an Umbrella Series containing State Trusts should be
made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates.
<PAGE>
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 and have continued through the
end of 1993. Employment levels are expected to stabilize before net
employment starts to increase and pre-recession job levels are not
expected to be reached for several more years. Unemployment is
expected to remain above 9% through 1994.
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 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 $2.8 billion.
(Special Funds account for revenues obtained from specific revenue
sources, and which are legally restricted to expenditures for specific
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction
Plan to repay this deficit over two years. The original budget for
1993-94 reflected revenues which exceeded expenditures by a
approximately $2.8 billion. As a result of continuing recession, the
excess of revenues over expenditures for the fiscal year is now expected
to be only about $500 million. Thus, the accumulated budget deficit at
June 30, 1994 is now estimated by the Department of Finance to be
approximately $2 billion, and the deficit will not be retired by June 30,
1995 as planned. The accumulated budget deficits over the past several
years, together with expenditures for school funding which have not been
reflected in the budget, and the reduction of available internal borrowable
funds, have combined to significantly depleted the State's cash resources
to pay as ongoing expenses. In order to meet its cash needs, the State
has had to rely for several years on a series of external borrowings,
including borrowings past the end of a fiscal year.
<PAGE>
The State's tax revenue clearly reflects sharp declines in
employment, income and retail sales on a scale not seen in over 50
years. The May 1994 revision to the 1994-95 Governor's Budget (the
"May Revision"), released May 20, 1994, assumes that the State will
start recovery from recessionary conditions in 1994, with a modest
upturn beginning in 1994 and continuing into 1995, a year later than
predicted in the May 1993 Department of Finance economic projection.
Pre-recession job levels are not expected to be reached until 1997.
However, there is growing evidence that California is showing
signs of an economic turnaround, and the May Revision is revised
upward from the Governor's January Budget forecast. Since the
Governor's January Budget forecast, 1993 non-farm employment has
been revised upward by 31,000 jobs. Employment in the early months
of 1994 has shown encouraging signs of growth, several months sooner
than was contemplated in the January Budget forecast. Between
December 1993 and April 1994, payrolls are up by 50,000 jobs.
On January 17, 1994 the Northridge earthquake, measuring an
estimated 6.8 on the Richter Scale, struck Los Angeles. Significant
property damage to private and public facilities occurred in a four-county
area including northern Los Angeles County, Ventura County, and parts
of Orange and San Bernadino Counties, which were declared as State and
federal disaster areas by January 18. Current estimates of total property
damage (private and public) are in the range of $20 billion or more, but
these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of
structures in the areas, including large manufacturing and commercial
buildings and all modern high-rise offices, survived the earthquake with
minimal or no damage, validating the cumulative effect of strict building
codes and thorough preparation for such emergency by the State and
local agencies.
Damage to State-owned facilities included transportation
corridors and facilities such as Interstate Highways 5 and 10 and State
Highways 14, 118 and 210. Most of the major highways (Interstates 5
and 10) have now been reopened. The campus at California State
University Northridge (very near the epicenter) suffered an estimated
$350 million damage, resulting in the temporary closure of the campus.
lt reopened using borrowed facilities elsewhere and many temporary
structures. There was also some damage to the University of California
at Los Angeles and to the Van Nuys State Office Building (now open
after a temporary closure). Overall, except for the temporary road and
bridge closures, and CSU-Northridge, the earthquake did not and is not
expected to significantly affect State government operations.
<PAGE>
<PAGE>
The State in conjunction with the federal government is
committed to providing assistance to local governments, individuals and
businesses suffering damage as a result of the earthquake, as well as to
provide for the repair and replacement of State owned facilities. The
federal government has provided substantial earthquake assistance. The
President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners
and small businesses, and costs for repair of damaged public facilities.
lt is now estimated that the overall effect of the earthquake on the
regional and State economy will not be serious. The earthquake may
have dampened economic activity briefly during late January and
February, but the rebuilding efforts are now adding a small measure of
stimulus.
Sectors which are now contributing to California's recovery
include construction and related manufacturing, wholesale and retail
trade, transportation and several service industries such as amusements
and recreation, business services and management consulting. Electronics
is showing modest growth and
the rate of decline in aerospace manufacturing is slowly diminishing.
These trends are expected to continue, and by next year, most of the
restructuring in the finance and utilities industries should be nearly
completed. As a result of these factors, average 1994 non-farm
employment is now forecast to maintain 1993 levels compared to a
projected 0.6% decline in the Governor's January Budget forecast. 1995
employment is expected to be up 1.6% compared to 0.7% in the January
Budget forecast.
The Northridge earthquake resulted in a downward revision of
this year's personal income growth from 4% in the Governor's January
Budget forecast to 3.6%. However, this decline is more than explained
by the $5.5 billion charge against rental and proprietor's income---equal
to 0.8% of total income reflecting uninsured damage from the quake.
Next year, without the quake's effects, income is projected to grow 6.1%
compared to 5% projected in the January Budget forecast. Without the
quake's effects, income was little changed in the May Revision compared
to the January Budget forecast.
The housing forecast remains essentially unchanged from the
January Budget forecast. Although existing sales have strengthened and
subdivision surveys indicated increased new home sales, building permits
are up only slightly from recession lows. Gains are expected in the
months ahead, but higher mortgage interest rates will dampen the upturn.
Essentially, the Northridge earthquake adds a few thousand housing units
to the forecast, but this effect is offset by higher interest rates.
<PAGE>
Interest rates represent one of several downside risks to the
forecast. The rise in interest rates has occurred more rapidly than
contemplated in the Governor's January Budget forecast. In addition to
affecting housing, higher rates may also dampen consumer spending,
given the high percentage of California homeowners with adjustable-rate
mortgages. The May Revision forecast includes a further rise in the
Federal Funds rate to nearly 5% by the beginning of 1995. Should rates
rise more steeply, housing and consumer spending would be adversely
affected.
The unemployment upturn is still tenuous. The Employment
Development Department revised down February's employment gain and
March was revised to a small decline. Unemployment rates in California
have been volatile since January, ranging from 10.1% to a low of 8.6%,
with July's figure at 9%. The small sample size coupled with changes
made to the survey instrument in January contributed to this volatility.
1993-94 Budget
The Governor's Budget, introduced on January 8, 1993,
proposed General Fund expenditures of $37.3 billion, with projected
revenues of $39 9 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, projected the State would have an accumulated deficit of about
$2.75 billion by June 30,1993, essentially unchanged from the prior
year. The Governor proposed to eliminate this deficit over an 18-month
period. Unlike previous
years, the Govenor'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 was signed by the Governor on June
30, 1993, along with implementing legislation. The Governor vetoed
about $71 million in spending. With enactment of the Budget Act, the
State carried out its regular cash flow borrowing program for the fiscal
year with the issuance of $ billion of revenue anticipation notes maturing
June 28, 1994.
The 1993-94 Budget Act was predicated on revenue and transfer
estimates of $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining
revenue were the continued weak economy and the expiration (or repeal)
of three fiscal steps taken in 1991 a half cent temporary sales tax, a
deferral -of operating loss carryforwards, and repeal by initiative of a
sales tax on candy and snack foods.
<PAGE>
The 1993-94 Budget Act also assumed Special Fund revenues of
$11.9 billion, an increase of 2.9% over 1992-93. The 1993-94 Budget
Act included General Fund expenditures of $38.5 billion (a 6.3%
reduction from projected 1992-93 expenditures of $41.1 billion), in order
to keep a balanced budget within the available revenues. The Budget also
included Special Fund expenditures of $12.1 billion, a 4.2% increase.
The Budget Act reflected 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 college districts.
The property tax losses for cities and counties were offset in part by
additional sales tax revenues and relief from some state mandated
programs. Litigation by local governments challenging this shift has so
far been unsuccessful. In November 1993 the voters approved the
permanent extension of the 0.5% sales tax for local public safety
purposes.
2. The Budget projected K-12 Proposition 98
funding on a cash basis at the same per-pupil level as 1992-93
by-providing schools a $609 million loan payable from future years'
Proposition 98 funds.
3. The Budget assumed receipt of $692 million in
aid to the State from the federal government to offset health and welfare
costs associated with foreign immigrants living in the State. About $411
million of this amount was one-time funding. Congress ultimately
appropriated only $450 million.
4. Reductions of $600 million in health and welfare
programs.
5. A 2-year suspension of the renters' tax credit
($390 million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of
payment to the Public Employees Retirement Fund ($339 million) and a
change in
<PAGE>
accounting for debt service from accrual to cash basis, saving $107
million.
Administration reports during the course of the 1993-94 fiscal
year have indicated that, although economic recovery appears to have
started in the second half of the fiscal year, recessionary conditions
continued longer than had been anticipated when the 1993-94 Budget Act
was adopted. Overall, revenues for the 1993-94 fiscal year were about
$800 million lower than original projections, and expenditures were
<PAGE>
about $780 million higher, primarily because of higher health and
welfare caseloads, lower property taxes, which require greater State
support for K-14 education to make up the shortfall, and lower than
anticipated federal government payments for immigration-related costs.
The most recent reports, however, in May and June 1994, indicated that
revenues in the second half of the 1993-94 fiscal year have been very
close to the projections made in the Governor's Budget of January 10,
1994, which is consistent with a slow turnaround in the economy.
During the 1993-94 fiscal year, the State implemented the Deficit
Reduction Plan, which was a part of the 1993-94 Budget Act, by issuing
$1.2 billion of revenue anticipation warrants in February 1994, maturing
December 21, 1994. This borrowing reduced the cash deficit at the end
of the 1993-94 fiscal year. Nevertheless, because of the $1.5 billion
variance from the original Budget Act assumption, the General Fund
ended the fiscal year at June 30, 1994 carrying forward an accumulated
deficit of approximately $2 billion. Because of the revenue shortfall and
the State's reduced internal borrowing cash resources, in addition to the
$1-2 billion of revenue anticipation warrants issued as part of the Deficit
Reduction Plan, the State issued an additional $2 billion of revenue
anticipation warrants, maturing July 26,1994. which were needed to fund
the State's obligations and expenses through the end of the 1993-94 fiscal
year.
1994-95 Budget
The 1994-95 fiscal year represents the fourth consecutive year
the Governor and Legislature were faced with a very difficult budget
environment to produce a balanced budget. Many program cuts and
budgetary adjustments have already been made in the last three years.
The Governor's May Revision to his Budget proposal recognized that the
accumulated deficit could not be repaid in one year, and proposed a
two-year solution. The May Revision sets forth revenue and expenditure
forecasts and revenue and expenditure proposals which result in
operating surpluses for the budget for both 1994-95 and 1995-96, and
lead to the elimination of the accumulated deficit, estimated at about $2
billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projects revenues and transfers of $41.9 billion, about $2.1 billion
higher than revenues in 1993-94. This reflects the Administration's
forecast of an improved economy. Also included in this figure is the
projected receipt of about $360 million from the Federal Government to
reimburse the State for the cost of incarcerating undocumented
immigrants. The State will not know how much the Federal Government
will actually provide until the Federal fiscal year 1995 Budget is
completed, which is expected to be by October 1994. The Legislature
took no action on a proposal in the Governor s January Budget to
undertake expansion of the transfer of certain programs to counties,
<PAGE>
which would also have transferred to counties 0.5% of the State current
sales tax. The Budget Act projects Special Fund revenues of $12.1
billion, a decrease of 2.4% from 1993-94 estimated levels.
The 1994-95 Budget Act projects General Fund expenditures of
$40.9 billion, an increase of $1.6 billion over 1993-94. The Budget Act
also projects Special Fund expenditures of $13.7 billion, a 5.4% increase
over 1993-94 estimated expenditures. The principal features of the
Budget Act were the following:
1. Receipt of additional federal aid in 1994-95 of
about $400 million for costs of refugee assistance and medical care for
undocumented aliens, thereby offsetting a similar General Fund cost. The
State will not know how much of these funds it will receive until the
Federal fiscal year 1994 Budget is passed.
2. Reductions of approximately $l.l billion in health
and welfare programs.
3. A General Fund increase of approximately $38
million in support for the University of California and $65 million for
the California State University. It is anticipated that student fees for the
U.C. and the C.S.U will increase up to 10%.
4. Proposition 98 funding for K-14 schools is
increased by $526 million from the 1993-94 levels, representing an
increase for enrollment growth and inflation. Consistent with previous
budget agreements, Proposition 98 funding provides approximately
$4,217 per student for K-12 schools, equal to the level in the past three
years.
5. Legislation enacted with the Budget Act clarifies
laws passed in 1992 and 1993 requiring counties and other local agencies
to transfer funds to local school districts, thereby reducing State aid.
Some counties had implemented programs providing less moneys to
schools if there were redevelopment agencies projects. The legislation
bans this method of transfers.
6. The Budget Act provides funding for anticipated
growth in the State's prison inmate population, including provisions for
implementing recent legislation (the so-called "Three Strikes" law) which
requires mandatory life sentences for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and
fund transfers ($255 million) totalling in the aggregate approximately
$755 million.
The 1994-95 Budget Act contains no tax increases. Under
legislation enacted for the 1993-94 Budget, the renters' tax credit was
<PAGE>
suspended for 1993 and 1994. A ballot proposition to permanently
restore the renters' credit after this year failed at the June 1994 election.
The Legislature enacted a further one-year suspension of the renters' tax
credit, saving about $390 million in the 1995-96 fiscal year. The 1994-95
Budget assumes that the State will use a cash flow borrowing program
in 1994-95 which combines one-year notes and warrants. Issuance of the
warrants allows the State to defer repayment of approximately $1 billion
of its accumulated budget deficit into the 1995-96 fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94 AND
1994-1995 FISCAL YEAR BUDGETS 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 1994-95 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.
The State is subject to an annual appropriations limit imposed by
Article XIII B 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
<PAGE>
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
prior year loan, thereby reducing cash outlays in 1992-93 by that
amount.
To maintain per-average daily attendance ("ADA") funding, the 1992-93
Budget included loans of $732 million to K-12 schools and $241 million
to community colleges, to be repaid from future Proposition 98
entitlements. The 1993-94 Budget also provided new loans of $609
million to K-12 schools and $178 million to community colleges to
maintain ADA funding. These loans have been combined with the 1992-
93 fiscal year loans into one loan of $1.760 billion, to be repaid from
future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools. A
Sacramento County Superior Court in California Teachers' Association,
et al. v. Gould, et al., has ruled that the 1992-93 loans to K-12 schools
and community colleges violate Proposition 98. The impact of the
court's ruling on the State budget and funding for schools is unclear
and will remain unclear until the Court's written ruling, which is
currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4 billion of
Proposition 98 funds for K-14 schools, exceeding the minimum
Proposition 98 guaranty by $8 million to maintain K-12 funds per pupil
at $4,217. Based upon State revenues, growth rates and inflation factors,
the 1994-95 Budget Act appropriations an additional $286 million within
Proposition 908 for the 1993-94 fiscal year to reflect a need in
appropriations for school district and county officers of education, as
well as an anticipated deficiency in special education funding.
<PAGE>
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 July 1, 1994, the State had over $18.34 billion aggregate
amount of its general obligation bonds outstanding. General obligation
bond authorizations in the aggregate amount of approximately $5.16
billion remained unissued as of July 1, 1994. The State also builds and
acquires capital facilities through the use of lease purchase borrowing.
As of June 30, 1994, the State had approximately $5.09 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, 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
<PAGE>
litigation or estimate the potential impact on the ability of the State to
pay debt service on its obligations.
On June 20, 1994, the United States Supreme Court, in two
companion cases, upheld the validity of California's prior method of
taxing multinational corporations under a "unitary" method of accounting
for their worldwide earnings, thus avoiding tax refunds of approximately
$1.55 billion by the State, and enabling the State to collect $620 million
in previous assessments. Barclays Bank PLC v. Franchise Tax Board
concerning foreign corporations, and Colgate-Palmmolive v. Franchise
Tax Board concerned domestic corporations.
Ratings
On July 15, 1994, Standard Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"),and Fitch
Investors Service, Inc. ("Fitch") all downgraded their ratings of
California's general obligation bonds. These bonds are usually sold in
20- to 30-year increments and used to finance the construction of
schools, prisons, water systems and other projects. The ratings were
reduced by Standard & Poor's from "A+" to "A", by Moody's from
"Aa" to "A1", and by Fitch from "AA" to "A". Since 1991, when it
had a "AAA" rating, the State's rating has been downgraded three times
by all three ratings agencies. All three agencies cite the 1994-95 Budget
Act's dependence on a "questionable" federal bailout to pay for the cost
of illegal immigrants, the Propositions 98 guaranty of a minimum portion
of State revenues for kindergarten through community college, and the
persistent deficit requiring more borrowing as reasons for the reduced
rating. Another concern was the State's reliance on a standby
mechanism which could trigger across-the-board reductions in all State
programs, and which could disrupt State operations, particularly in fiscal
year 1995-96. However, a Standard & Poor's spokesman stated that,
although the lowered ratings means California is aa riskier borrower,
Standard & Poor's anticipates that the State will pay off its debts and not
default. 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.
The Sponsor believes the information summarized about
described some of the more significant aspects relating to the California
Trust. The sources of such information are Preliminary Official
Statements and Official Statements relating to the State's general
obligation bonds and the State's revenue anticipation notes, or obligations
of other issuers located in the State of California, or other publicly
available documents. Although the Sponsor has not independently
verified this information, it has no reason to believe that such
information is not correct in all material respects.
<PAGE>
Connecticut Trust
The Sponsors believe the information summarized below
describes some of the more significant aspects of the Connecticut
Trust.The sources of such information are the official statements of
issuers as well as other publicly available documents. While the Sponsors
have not independently verified this information, they no reason to
believe that such information is not correct in all material respects.
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 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
<PAGE> 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. 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 budget 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
<PAGE>
$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
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
twelve-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 twelve-year period.
As of March 2, 1994, the General Assembly has authorized STO
bonds for the program in the aggregate amount of $3,604,363,104,
of which $2,944,650,752 had been issued. It is anticipated that
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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
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, as the State's economic growth has slowed from its previous
highs, the State's unemployment rate has tracked above the national
average. The average rate in Florida since 1980 has been 6.5% while
the national average is 7.1%. According to the U.S. Department of
Commerce, the Florida Department of Labor and Employment Security,
and the Florida Consensus Economic Estimating Conference (together
the "Organization") the State's unemployment rate was 8.2% during
1992. As of January 1994, the Organization estimates that the
unemployment rate will be 6.7% for 1993-94 and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector has
exceeded that of the U.S. From the beginning of 1980 through 1993, the
state added over 50,100 new manufacturing jobs, an 11.7% increase.
During the same period, national manufacturing employment declined ten
out of the fourteen years, for a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase
2.7% in 1993-94 and rise 3.8% in 1994-95. Trade and services, the two
largest, account for more than half of the total non-farm employment.
Employment in the service sectors should experience an increase of 3.9%
in 1993-94, while growing 4.9% in 1994-95. Trade is expected to
expand 2.2% in 1994 and 3.4% in 1995. The service sector is now the
<PAGE>
State's largest employment category.
Construction
The State's economy has in the past been highly dependent on the
construction industry and construction related manufacturing This
dependency has declined in recent years and continues to do so as a
result of continued diversification of the State's economy. The State is
still somewhat at the mercy of the construction and construction related
manufacturing industries. For example, in 1980, total contract
construction employment as a share of total non-farm employment was
just over 7%, and in 1993, the share had edged downward to 5%. 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 8.5% of total
U.S. housing starts in 1993 while the State's population is 5.3% of the
U.S. total population. Florida's housing starts since 1980 have
represented an average of 11.0% of the U.S.'s total annual starts, and
since 1980, total housing starts have averaged 156,450 a year.
A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although the State currently
is the fourth most populous state, its annual population growth is now
projected to decline as the number of people moving into the State is
expected to hover near the mid 250,000 range annually throughout the
1990s. This population trend should provide fuel for business and home
builders to keep construction activity lively in Florida for some time to
come. However, other factors do influence the level of construction in
the State. For example, federal tax reform in 1986 and other changes to
the federal income tax code have eliminated tax deductions for owners
of more than two residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties.
Economic growth and existing supplies of homes also contribute to the
level of construction in the State. Also, while interest rates remain low
currently, an increase in interest rates could significantly adversely
impact the financing of new construction with the State, thereby
adversely impacting unemployment and other economic factors within the
State. In addition, available commercial office space has tended to remain
high over the past few years. So long as this glut of commercial rental
space continues, construction of this be of space will likely continue to
remain slow.
Hurricane Andrew left some parts of south Florida devastated.
Post-Andrew clean up and rebuilding have changed the outlook for the
State's economy. Single and multi-family housing starts in 1993-94 are
projected to reach a combined level of 18,000, increasing to 134,300
next year. Lingering recessionary effects on consumers and tight credit
are some of the reasons for relatively slow core construction activity, as
well as lingering effects from the 1986 tax reform legislation discussed
<PAGE>
above. However, construction is one of the sectors most severely affected
by Andrew. Low interest rates and pent up demand combined with
improved consumer confidence should lead to improved housing starts.
The construction figures above include additional housing starts as a
result of destruction by Andrew. Total construction expenditures are
forecasted to increase 15.6% this year and increase 13.3% next year.
Tourism
Tourism is one of State's most important industries.
Approximately 41.1 million tourists visited the State in 1993, as reported
by the Florida Department of Commerce. In terms of business activities
and state tax revenues, tourists in Florida in 1993 represented an
estimated 4.5 million additional residents. Visitors to the State tend to
arrive equally by air and car. The State's tourist industry over the years
has become more sophisticated, attracting visitors year-round and, to a
degree, reducing its seasonality. The dollar's depreciation has enhanced
the State's tourism industry. Tourist arrivals are expected to decline by
almost two percent this year, but are expected to recover next year with
5.0% growth. Tourist arrivals to Florida by air and car are expected to
diverge from each other, air decreasing 5.6% and auto increasing 1.6%.
By the end of the State's current fiscal year, 41.0 million domestic and
international tourists are expected to have visited the State. In 1994-95,
tourist arrivals should approximate 43.0 million.
Revenues and Expenses
Estimated fiscal year 1993-94 General Revenue plus Working
Capital funds available to the State total $13,582.7 million, an 8.4%
increase over 1992-93. This reflects a transfer of $190 million, out of an
estimated $220.0 million in non-recurring revenue due to Andrew, to a
hurricane relief trust fund. Of the total General Revenue plus Working
Capital funds available to the State, $12,943.5 million of that is
Estimated Revenues (excluding the Andrew impact) which represents an
increase of 7.3% over the previous year's Estimated Revenues. With
effective General Revenues plus Working Capital Fund appropriations at
$13,276.9 million, unencumbered reserves at the end of 1993-94 are
estimated at $302.8 million. Estimated, fiscal year 1994-95 General
Revenue plus Working Capital and Budget Stabilization funds available
total $14,573.7 million. a 7.3% increase over 1993-94. This amount
reflects a transfer of $159.0 million in non-recurring revenue due to
Hurricane Andrew, to a hurricane relief trust fund. The $13,860.8
million in Estimated Revenues (excluding the Hurricane Andrew Impact)
represent an increase of 7.1% over the previous year's Estimated
Revenues. The massive effort to rebuild and replace destroyed or
damaged property in the wake of Andrew is responsible for the
substantial positive revenue impacts shown here. Most of the impact is
in the increase in the State's sales tax.
<PAGE>
In fiscal year 1992-93, approximately 62% of the State's total
direct revenue to its three 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, intangible
personal property tax, and beverage tax amounted to 68%, 7%, 4%
and 4%, respectively, of total General Revenue Funds available during
fiscal 1992-93. In that same year, expenditures for education, health
and welfare, and public safety amounted to approximately 49%, 30%,
and 11%, respectively, of total expenditures from the General Revenue
Fund.
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than 10% of
the State's sales and use tax is designated for local governments and is
distributed to the respective counties in which collected for use by the
counties, and the municipalities therein. In addition to this distribution,
local governments may (by referendum) assess a 0.5% or a 1.0%
discretionary sales 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 applicable Florida law. Certain
charter counties have other taxing powers. In addition, and non-
consolidated counties with a population in excess of 800,000 may levy
a local option sales tax to fund indigent health care. It alone cannot
exceed 0.5% and when combined with the infrastructure surtax cannot
exceed 1.0%. For the fiscal year ended June 30, 1993, sales and use
tax receipts (exclusive of the tax on gasoline and special fuels) totalled
$9,426.0 million, an increase of 12.5% over fiscal year 1991-1992.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated trust
funds for specific purposes and are not included in the State's General
Revenue Fund.
The State imposes an alcoholic beverage, wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's major tax
sources, with revenues totalling $442.2 million in fiscal year ending June
30, 1993. Alcoholic beverage tax receipts increased 1.6% from the
previous year's total. The revenues collected from this tax are deposited
into the State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For the
fiscal year ended June 30, 1993, receipts from this source were $846.6
million, and increase of 5.6% from fiscal year 1991-92.
The State imposes a documentary stamp tax on deeds and other
documents relating to realty, corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge
<PAGE>
accounts. The documentary stamp tax collections totalled $639.0 million
during fiscal year 1992-93, a 27.0% increase from the previous fiscal
year. Beginning in fiscal year 1992-93,71.29% of these taxes are to be
deposited to the General Revenue Fund.
The State imposes an intangible personal property tax on
stocks, bonds, including bonds secured by liens in Florida real property,
notes, governmental leaseholds, and certain other intangibles, not
secured by alien on Florida real property. The annual rate of tax is 2
mils. Second, the State imposes a non-recurring 2 mil tax on mortgages
and other obligations secured by liens on Florida real property. In fiscal
year 1992-93, total intangible personal property tax collections were
$783.4 million, a 33% increase over the prior year. Of the tax
proceeds, 66.5% are distributed to the General Revenue Fund.
The State's severance tax taxes, oil, gas and sulphur production,
as well as the severance of phosphate rock and other solid minerals.
Total collections from severance taxes total $64.5 million during fiscal
year 1992-93, down 4.0% from the previous year. Currently, 60% of
this amount is transferred to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50% to the public in prizes, 38.0% for
use in enhancing education, and the balance, 12.0% for costs of
administering the lottery. Fiscal year 1992-93 lottery ticket sales totalled
$2.13 billion, providing education with approximately $810.4 million.
Debt-Balanced Budget Requirement
At the end of fiscal 1993, approximately $5.61 billion in
principal amount of debt secured by the full faith and credit of the State
was outstanding. In addition, since July 1, 1993, the State issued about
$1.13 billion in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be kept in
balance form 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. Additionally, the
State Constitution prohibits issuance of State obligations to fund State
operations.
Litigation
Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any of
<PAGE>
such matters, individually or in the aggregate, will not have a immaterial
adverse affect on the State's financial position.
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 Florida Supreme Court ruled in favor of the State. This
case and others, along with pending refund claims, total about $150
million.
The State imposes a $295 fee on the issuance of certificates of
title for a motor vehicles previously titled outside the State. The State
has been sued by plaintiffs alleging that this fee violates the Commerce
Clause of the U.S. Constitution. The Circuit Court in which the case
was filed has granted summary judgment for the plaintiffs and has
enjoined further collection of the impact fee and has ordered refunds to
all those who have paid the fee since the collection of the fee went into
effect. The State has appealed the lower Court's decision and an
automatic stay has been granted to the State allowing it to continue to
collect the fee. The potential refund exposure to the State if it should
lose the case may be in excess off $100 million.
The State maintains a rating of Aa and AA from Moody's
Investors Service and Standard & Poors 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 revenues source from which such series derives funds
for repayment. While these ratings and some of the information
presented above indicate that the State is in satisfactory economic health,
there can be no assurance that there will not be a decline in economic
conditions or that particular conditions or that particular Bonds purchased
by the Trust will not be adversely affected by any such changes.
The sources for the information presented 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 Transportation issues
for transportation purposes its limited, special obligation bonds payable
<PAGE>
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
<PAGE>
be necessary to
enforce the collection of such taxes and payment of the proceeds of
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.
<PAGE>
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.
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.
<PAGE>
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. 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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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, 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.
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
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
Risk Factors, The Commonwealth of Massachusetts and certain
of its cities and towns have at certain times in the recent past undergone
serious financial difficulties which have adversely affected and, to some
degree, continue to adversely affect their credit standing. These financial
difficulties could adversely affect the market values and marketability of,
or result in default
in payment on, outstanding bonds issued by the Commonwealth or
its public authorities or municipalities, including the Bonds deposited in
the Trust. The
following description highlights some of the more significant
financial problems of the Commonwealth and the steps taken to
strengthen its financial condition.
The effect of the factors discussed below upon the ability of
Massachusetts issuers to pay interest and principal on their
obligations remains unclear and in any event may depend on whether the
obligation is a general or
revenue obligation bond (revenue obligation bonds being payable
from specific sources and therefore generally less affected by such
factors) and on what type
of security is provided for the bond. In order to constrain future
debt service costs, the Executive Office for Administration and Finance
established in November, 1988 an annual fiscal year limit on capital
spending of $925 million,
effective fiscal 1990. In January, 1990, legislation was enacted to
impose a limit on debt service in Commonwealth budgets beginning in
fiscal 1991. The law provides that no more than 10% of the total
appropriations in any fiscal year
may be expended for payment of interest and principal on general
obligation debt of the Commonwealth (excluding the Fiscal Recovery
Bonds discussed below). It should also be noted that Chapter 62F of the
Massachusetts General Laws establishes a state tax revenue growth limit
and does not exclude principal
and interest due on Massachusetts debt obligations from the scope of
the limit. It is possible that other measures affecting the taxing or
spending authority of Massachusetts or its political subdivisions may be
approved or enacted in the future.
The Commonwealth has waived its sovereign immunity and
consented to be sued under contractual obligations including bonds and
notes issued by it.
<PAGE>
However, the property of the Commonwealth is not subject to
attachment or levy to pay a judgment, and the satisfaction of any
judgment generally requires
legislative appropriation. Enforcement of a claim for payment of
principal of or interest on bonds and notes of the Commonwealth may
also be subject to
provisions of federal or Commonwealth statutes, if any, hereafter
enacted extending the time for payment or imposing other constraints
upon enforcement, insofar as the same may be constitutionally applied.
The United
States Bankruptcy Code is not applicable to states.
Cities and Towns. During recent years limitations were placed
on the taxing authority of certain Massachusetts governmental entities
that may impair the ability of the issuers of some of the Bonds in the
Massachusetts Trust to
maintain debt service on their obligations. Proposition 2.5, passed
by the voters in 1980, led to large reductions in property taxes, the
major source of income for cities and towns. As a result, between fiscal
1981 and fiscal 1989, the aggregate property tax levy declined in real
terms by 15.6%.
Since Proposition 2.5 did not provide for any new state or local
taxes to replace the lost revenues, in lieu of substantial cuts in local
services, the Commonwealth began to increase local aid expenditures.
In 1981 constant dollars, total direct local aid expenditures increased by
58.5% between fiscal years 1981 and 1989, or 5.9% per year. During
the same period, the total of
all other local revenue sources declined by 5.87% or 0.75% per
year. Despite the substantial increases in local aid from fiscal 1981 to
fiscal 1989, local
spending increased at an average rate of 1% per year in real terms.
Direct local aid for fiscal 1987, 1988, and 1989 was $2.601 billion,
$2.769 billion, and $2.961 billion, respectively. Direct local aid
declined in the three subsequent years to $2.937 billion in fiscal 1990,
$2.608 billion in 1991 and $2.328 billion
in 1992 and increased to $2.547 billion in 1993. It is estimated that
fiscal 1994 expenditures for direct local aid will be $2.737 billion, which
is an increase of approximately 7.5% above the fiscal 1993 level. The
additional amount of indirect local aid provided over and above the direct
local aid is estimated to have been $1.313 billion in fiscal 1991, $1.265
billion in fiscal 1992 and $1.717
billion in fiscal 1993 and is estimated to be approximately $1.717
billion in fiscal 1994.
Many communities have responded to the limitations imposed by
Proposition 2.5 through statutorily permitted overrides and
exclusions. Override activity peaked in fiscal 1991, when 182
communities attempted votes on one
<PAGE>
of the three types of referenda questions (override of levy limit,
exclusion of debt service, or exclusion of capital expenditures) and 100
passed at least one question, adding $58.5 million of their levy limits.
In fiscal 1992, 67 of 143
communities had successful votes totalling $31.0 million. In fiscal
1993, 83 communities attempted a vote; two-thirds of them (56) passed
questions aggregating $16.4 million.
A statewide voter initiative petition which would effectively
mandate that, commencing with fiscal 1992, no less than 40% of receipts
from personal income taxes, sales and use taxes, corporate excise taxes
and lottery fund
proceeds be distributed to certain cities and towns in local aid was
approved in the general election held November 6, 1990. Pursuant to
this petition, the local
aid distribution to each city or town was to equal no less than 100%
of the total local aid received for fiscal 1989. Distributions in excess of
fiscal 1989 levels
were to be based on new formulas that would replace the current
local aide distribution formulas. If implemented in accordance with its
terms (including
appropriation of the necessary funds), the petition as approved would
shift several hundred million dollars to direct local aid. However, local
aid payments explicitly remain subject to annual appropriation, and fiscal
1992 and fiscal 1993
appropriations for local aid did not meet, and fiscal 1994
appropriations for local aid do not meet, the levels set forth in the
initiative law.
Pension Liabilities. The Commonwealth had funded its two
pension systems on essentially a pay-as-you-go basis. The funding
schedule is based on actuarial valuations of the two pension systems as
of January 1, 1990, at which time the unfunded accrued liability for such
systems operated by the Commonwealth (and including provision for
Boston teachers) totalled $8.865
billion. The unfunded liability for the Commonwealth related to cost
of living increases for local retirement systems was estimated to be an
additional $2.004 billion as of January 1, 1990. An actuarial valuation
as of January 1, 1992
shows that, as of such date, the total unfunded actuarial liability for
such systems, including cost-of-living allowances, was approximately
$8.485 billion representing a reduction of approximately $2.383 billion
from January 1, 1990.
The amount in the Commonwealth's pension reserve, established
to address the unfunded liabilities of the two state systems, has
increased significantly in recent years due to substantial appropriations
and changes in law relating to investment of retirement system assets.
Total appropriations and transfers to the reserve in fiscal years 1985,
<PAGE>
1986, 1987 and 1988 amounted to approximately $680 million.
Comprehensive pension legislation approved in
January 1988 committed the Commonwealth, beginning in fiscal
1989, to normal cost funding of its pension obligations and to a 40-year
amortization schedule for
its unfunded pension liabilities. Total pension costs increased from
$659.7 million in fiscal 1989 to $868.2 million in fiscal 1993. Pension
funding is estimated to be $951.0 million in fiscal year 1994. As of June
30, 1993, the Commonwealth's pension reserves had grown to
approximately $3.877 billion.
State Budget and Revenues. The Commonwealth's Constitution
requires, in effect, that its budget be balanced each year. The
Commonwealth's fiscal year ends June 30. The General Fund is the
Commonwealth's primary
operating fund; it also functions as a residuary fund to receive
otherwise unallocated revenues and to provide monies for transfers to
other funds as required. The condition of the General Fund is generally
regarded as the principal indication of whether the Commonwealth's
operating revenues and expenses are in balance; the other principal
operating funds (the Local Aid Fund and the Highway Fund) are
customarily funded to at least a zero balance.
Limitations on Commonwealth tax revenues have been
established by enacted legislation and by public approval of an initiative
petition which has become law. The two measures are inconsistent in
several respects, including the methods of calculating the limits and the
exclusions from the limits. The
initiative petition does not exclude debt service on the
Commonwealth's notes and bonds from the limits. State tax revenues in
fiscal 1988 through fiscal 1993
were lower than the limits. The Executive Office for Administration
and Finance currently estimates that state tax revenues will not reach the
limit imposed by either the initiative petition or the legislative enactment
in fiscal 1994.
Budgeted expenditures for fiscal 1989 totalled approximately
$12.643 billion. Budgeted revenues totalled approximately $11.970
billion, approximately $672.5 million less than total expenditures. Under
the budgetary basis of accounting, after taking account of certain fund
balances, fiscal 1989 ended with a deficit of $319.3 million. Under the
GAAP basis of accounting,
excluding fiduciary accounts and enterprise funds, the
Commonwealth ended fiscal 1989 with a deficit of $946.2 million. This
deficit reflected an operating
gain in the capital projects funds due to the additional borrowings to
reduce prior year deficits. If the capital project funds are excluded, the
Comptroller calculated a GAAP deficit of $1.002 billion in fiscal 1989.
<PAGE>
Fiscal 1989 tax revenues were adversely affected by the
economic slowdown that began in mid-1988. In June, 1988, the fiscal
1989 tax revenue estimate was for 10.9% growth over fiscal 1988.
Fiscal 1989 ended with actual tax revenue growth of 6.5%.
The fiscal 1989 budgetary deficit caused a cash deficit in the
Commonwealth operating accounts on June 30, 1989 in the amount
of approximately $450 million. The State Treasurer was forced to defer
until early July certain fiscal 1989 expenditures including the payment of
approximately $305 million in local aid due June 30, and with legislative
authorization, issued temporary notes in July in the amount of $1.1
billion to pay fiscal 1989 and
fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of approximately
$13.260 billion. Budgeted revenues and other services for fiscal 1990
were approximately $12.008 billion. Tax revenues for fiscal 1990 were
approximately $8.517 billion, a decrease of approximately $314
million or 3.6% from fiscal 1989. The Commonwealth suffered an
operating loss of approximately $1.25 billion and ended fiscal 1990 with
a budgetary deficit of
$1.104 billion. The Commonwealth had a cash surplus of $99.2
million on June 30, 1990 as a result of deferring until fiscal 1991 the
payment of approximately $1.26 billion of local aid due June 30, 1990.
On July 28, 1990, the legislature enacted Chapter 151 which
provides, among other matters, for the Commonwealth Fiscal Recovery
Loan Act of 1990 and grants authorization for the Commonwealth to
issue bonds in an aggregate
amount up to $1.42 billion for purposes of funding the
Commonwealth's fiscal 1990 deficit and certain prior year Medicaid
reimbursement payments. Chapter
151 also provides for the establishment of the Commonwealth Fiscal
Recovery Fund, deposits for which are derived from a portion of the
Commonwealth's personal income tax receipts, are dedicated for this
purpose and are to be deposited in trust and pledged to pay the debt
service on these bonds. Under
Chapter 151, the Commonwealth issued $1.363 billion of Dedicated
Income Tax Bonds to cover the anticipated fiscal 1990 deficit.
Total expenditures for fiscal 1991 are estimated to have been
$13.659 billion. Total revenues for fiscal 1991 are estimated to have
been $13.634 billion, resulting in an estimated $21.2 million operating
loss. Application of the adjusted fiscal 1990 fund balances of $258.3
million resulted in a final fiscal 1991 budgetary surplus of $237.1
million. State finance law required that
approximately $59.2 million of the fiscal year surplus be placed in
the Stabilization Fund described above. Amounts credited to the
Stabilization Fund are not generally available to defray current year
<PAGE>
expenses without subsequent specific legislative authorization.
After payment in full of the local aid distribution of $1.018
billion due on June 28, 1991, retirement of all of the Commonwealth's
outstanding commercial paper and repayment of certain other short-term
borrowings, as of the period of fiscal 1991, the Commonwealth had a
cash balance of $182.3 million. The fiscal 1991 year-end cash position
compared favorably to the
Commonwealth's cash position at the end of the prior fiscal year,
June 30, 1990, when the Commonwealth's cash shortfall would have
exceeded $1.1 billion had payment of local aid not been postponed.
Upon taking office in January 1991, the new Governor undertook
a comprehensive review of the Commonwealth's budget. Based on
projected spending of $14.105 billion, it was then estimated that $850
million in budget
balancing measures would be needed prior to the close of fiscal
1991. At that time, estimated tax revenues were revised to $8.845
billion, $903 million less than was estimated at the time the fiscal 1991
budget was adopted.
The Governor proposed a series of legislative and administrative actions,
designed to eliminate the projected deficit. The legislature adopted a
number of the Governor's recommendations and the Governor took
certain other administrative
actions, not requiring legislative approval, including $65 million in
savings from the adoption of a state employee furlough program. It is
estimated that spending
reductions achieved through savings incentives and withholding of
allotments totalled $484.3 million in the aggregate for fiscal 1991.
In addition to recommending spending reductions to close the
projected budget deficit, the administration, in May 1991, filed an
amendment to its Medicaid state plan that enabled it to claim 50%
Federal reimbursement on uncompensated care payments provided to
certain hospitals in the Commonwealth.
In fiscal 1992, Medicaid accounted for more than half of the
Commonwealth's appropriations for health care. It is the largest
item in the Commonwealth's budget. It has also been one of the fastest
growing budget items. During fiscal years 1989, 1990 and 1991,
Medicaid expenditures were $1.83 billion, $2.12 billion and $2.77
billion, respectively. A substantial
amount of expenditures in recent years was provided through
supplemental appropriations, repeating the experience that Medicaid
expenditures have exceeded initial appropriation amounts. These annual
amounts, however, do not
take account of the practice of retroactive settlement of many
provider payments after audit review and certification by the Rate Setting
Commission.
<PAGE>
In fiscal 1990, payments of approximately $488 million were made to
hospitals and nursing homes for rate settlements dating back as far as
1980, through the
Medical Assistance Liability Fund established to fund certain
Medicaid liabilities incurred, but not certified for payment, in prior
years. This amount is not
factored into the annual totals for Medicaid expenditures listed
above. Including retroactive provider settlements, Medicaid expenditures
for fiscal 1992 were $2.818 billion and for fiscal 1993 were $3.151
billion. The Executive Office
for Administration and Finance estimates that fiscal 1994 Medicaid
expenditures will be approximately $3.252 billion, an increase of 3.9%
over fiscal 1993 expenditures. For fiscal 1994, no supplemental
Medicaid appropriations are
currently expected to be necessary. The Governor had proposed a
managed care program to be implemented commencing in January, 1992
in order to address the considerable annual cost increases in the Medicaid
program. Medicaid is presently 50% funded by federal reimbursements.
In fiscal 1992, total revenues and other sources of the budgeted
operating funds totalled $13.728 billion, an increase over fiscal 1991
revenues of .7%. (Actual fiscal 1992 tax revenues exceeded original
estimates and totalled $9.484 billion, an increase over fiscal 1991
collections of 5.4%). Fiscal 1992 expenditures and other uses of
budgeted operating funds totalled
approximately $13.420 billion, a decrease from fiscal 1991
expenditures by 1.7%. Fiscal year 1992 revenues and expenditures
resulted in an operating gain of $312.3 million. Through the use of the
prior year ending fund balances of
$312.3 million, fiscal 1992 budgetary fund balances totalled $549.4
million. 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 million due on June 30, 1992, retirement of the Commonwealth's
outstanding commercial paper (except for approximately $50 million of
bond anticipation
notes) and certain other short-term borrowings, as of June 30, 1992,
the Commonwealth showed a year-end cash position of approximately
$731 million for fiscal year 1992. The ending balance compares
favorably with the cash
balance of $182.3 million at the end of fiscal 1991. As of June
1993, the Commonwealth showed a year-end cash position of $622.2
million for fiscal year 1993. As of January 19, 1994, the
Commonwealth estimates a 1994 year-end cash position of approximately
$725.4 million.
The budgeted operating funds of the Commonwealth ended fiscal
1993 with a surplus of revenues and other sources over expenditures and
<PAGE>
other uses of $13.1 million and aggregate ending fund balances in the
budgeted operating
funds of the Commonwealth of approximately $562.5 million.
Budgeted revenues and other sources for fiscal 1993 totalled
approximately $14.710
billion, including tax revenues of $9.930 billion. Total revenues and
other sources increased by approximately 6.9% from fiscal 1992 to fiscal
1993, while tax revenues increased by 4.7% for the same period. In
July 1992, tax revenues
had been estimated to be approximately $9.685 billion for fiscal
1993. This amount was subsequently revised during fiscal 1993 to
$9.940 billion.
Commonwealth budgeted expenditures and other used in fiscal
1993 totalled approximately $14.696 billion, which is $1.280 billion or
approximately 9.6% higher than fiscal 1992 expenditures and other uses.
Fiscal 1993 budgeted expenditures were $23 million lower than the initial
July 1992 estimates of fiscal 1993 budget expenditures.
On July 19, 1993, the Governor signed into law the budget for
fiscal 1994, totalling $15.463 billion. This represented a $694 million
increase over the then estimated budgeted expenditures of $14.976 billion
for fiscal 1993. On January 14, 1994, the Governor signed into law
supplemental appropriations
totalling approximately $157.9 million. Including an additional $8.1
million in fiscal 1994 supplemental appropriation recommendations that
the Governor plans to file, and an approximate $100 million contingency
reserve in fiscal 1994 for
possible additional spending, fiscal 1994 budgeted expenditures are
currently estimated to be approximately $15.716 billion. Budgeted
revenues and other sources to be collected in fiscal 1994 are estimated
to be approximately $15.535 billion, which includes tax revenues of
approximately $10.694 billion (as
compared to $9.930 billion in fiscal 1993). This budget includes
$175 million as part of an education reform bill passed by the legislature.
The fiscal 1994 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured. As of January
10, 1994, the Legislature had
overridden $21.0 million of the Governor's vetoes relating to the
fiscal 1994 budget. Commonwealth expenditures and other uses in fiscal
1994 are currently estimated to be approximately $15.500 billion, which
is $788 million or
approximately 5.36% higher than those of fiscal 1993. Based on
currently estimated revenues and expenditures, the Executive Office for
Administration and Finance projects a fiscal 1994 ending balance of
approximately $382.0 million, of which approximately $315.5 million
will be in the Stabilization Fund.
<PAGE>
<PAGE>
On July 19, 1993, a 60-day hiring freeze on all executive branch
agencies was instituted to help ensure that agency expenditures
remain within their fiscal 1994 budget authorizations. On August 16,
1993, the Commonwealth announced that approximately 1,280 state
employees would be
laid off in the near future, in addition to approximately 350
employees already laid off in fiscal 1994.
On January 21, 1994, the Governor presented his Budget
Submission for fiscal year 1995 providing for expenditures of $16.14
billion, a $424 million,
or 2.7%, increase over current fiscal year 1994 projections. These
proposed expenditures for fiscal year 1995 include direct local aid of
$2.997 billion. This
budget is based on total anticipated revenues of $16.144 billion,
which represents a $609 million, or 3.9%, increase over fiscal year 1994
estimates. The Governor's budget recommendation is based on a tax
revenue estimate of
$11.226 billion, an increase of approximately 5.0%, as compared to
currently estimated fiscal 1994 tax revenues of $10.694 billion.
The liabilities of the Commonwealth with respect to outstanding
bonds and notes payable as of January 1, 1994 totalled $12.555 billion.
These liabilities consisted of $8.430 billion of general obligation debt,
$1.036 billion of dedicated income tax debt (the Fiscal Recovery Bonds),
$104 million of special obligation debt, $2.742 billion of supported debt,
and $243 million of guaranteed debt.
Capital spending by the Commonwealth was approximately $595
million in fiscal 1987, $632 million in fiscal 1988 and $971 million in
fiscal 1989. In November 1988, the Executive Office for Administration
and Finance established an administrative limit on state financed capital
spending in the Capital Projects Funds of $925.0 million per fiscal year.
Capital expenditures decreased to $936 million, $847 million, $694.1
million and $575.9 million in fiscal 1990, 1991, 1992 and 1993,
respectively. Capital expenditures
are projected to increase to $886.0 million in fiscal 1994. The growth
in capital spending accounts for a significant rise in debt service during
the period. Payments for the debt service on Commonwealth general
obligation bonds and notes have risen at an average annual rate of 20.4%
from $649.8 million in fiscal 1989 to $942.3 million in fiscal 1991.
Debt Service payments in fiscal
1992 were $898.3 million, representing a 4.7% decrease from fiscal
1991. This decrease resulted from a $261 million one-time reduction
achieved through the
issuance of refunding bonds in September and October of 1991.
Debt service expenditures were $1.139 billion for fiscal 1993 and are
projected to be $1.220 billion for fiscal 1994. These amounts represent
debt service payments on direct
<PAGE>
Commonwealth debt and do not include debt service on notes issued
to finance the fiscal 1989 deficit and certain Medicaid-related liabilities,
which were paid in full from non-budgeted funds. Also excluded are
debt service contract
assistance to certain state agencies and the municipal school building
assistance program projected to total of $359.7 million in the aggregate
in fiscal 1994. In addition to debt service on bonds issued for capital
purposes, the Commonwealth is obligated to pay the principal of and
interest on the Fiscal
Recovery Bonds described above. The estimated debt service on
such bonds currently outstanding (a portion of which were issued as
variable rate bonds)
ranges from approximately $279 million (interest only) in fiscal 1994
through fiscal 1997 and approximately $130 million in fiscal 1998, at
which time the entire amount of the Fiscal Recovery Bonds will be
retired.
In January 1990 legislation was enacted to impose a limit on debt
service in Commonwealth budgets beginning in fiscal 1991. The law
provides that no more than 10% of the total appropriations in any fiscal
year may be expended for payment of interest and principal on general
obligation debt
(excluding the Fiscal Recovery Bonds) of the Commonwealth. This
law may be amended or appealed by the legislature or may be superseded
in the General
Appropriation Act for any year. From fiscal year 1987 through
fiscal year 1994 estimated this percentage has been substantially below
the limited established by this law.
Legislation enacted in December 1989 imposes a limit on the
amount of outstanding direct bonds of the Commonwealth. The limit for
fiscal 1994 is $7.872 billion. The law provides that the limit for each
subsequent fiscal year shall be 105% of the previous fiscal year's limit.
The Fiscal Recovery Bonds will not be included in computing the amount
of bonds subject to this limit.
In August 1991, the Governor announced a five-year capital
spending plan. The plan, which represents the Commonwealth's first
centralized multi- year capital plan, sets forth, by agency, specific
projects to receive
capital spending allocations over the next five fiscal years and annual
capital spending
limits. Capital spending by the Commonwealth, which exceeded
$900 million annually in fiscal 1989, 1990 and 1991, declined to $694.1
million in fiscal 1992
and $575.9 in fiscal 1993. For fiscal 1994 through 1998, the plan
forecasts annual capital spending for the Commonwealth of between $813
million and $886 million per year, exclusive of spending by the
Massachusetts Bay Transit Authority. Total expenditures are forecast at
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$4.25 billion, an amount less than
the total amount of agency capital spending requests for the same
period. Planned spending is also significantly below legislatively
authorized spending levels.
Unemployment. From 1980 to 1989, the Massachusetts
unemployment rate was significantly lower than the national average.
The Massachusetts
unemployment rate averaged 9.0%, 8.5% and 6.9% in calendar
1991, 1992 and 1993, respectively. The Massachusetts unemployment
rate in December, 1993
was 6.3% as compared to 6.6% for November, 1993 and 8.6% for
December of 1992, although the rate has been volatile throughout this
period. The Massachusetts unemployment rate in January and February,
1994 was 7.2% and 6.4%, respectively; these rates are not comparable
to prior rates due to a new
rate computation which became effective in 1994.
The balance in the Massachusetts Unemployment Compensation
Trust Fund had been exhausted as of September 1991 due to the
continued high levels of unemployment. As of December 31, 1992, the
Massachusetts Unemployment Compensation Trust Fund balance was in
deficit by $377 million.
As of November 30, 1993, the Fund was in deficit by $163 million. The
deficit is now expected to be approximately $120 million by the end of
calendar 1993. Benefit payments in excess of contributions are being
financed by use of
repayable advances from the federal unemployment loan account.
Legislation enacted in May 1992 increased employer contributions in
order to reduce
advances from the federal loan account. The additional increases in
contributions provided by the new legislation should result in a
positive balance in the Unemployment Compensation Trust Fund by the
end of December 1994 and rebuild reserves in the system to over $1
billion by the end of 1996.
Litigation. The Attorney General of the Commonwealth is not
aware of any cases involving the Commonwealth which in his opinion
would affect materially its financial condition. However, certain cases
exist containing substantial claims, among which are the following:
The United States has brought an action on behalf of the U.S.
Environmental Protection Agency alleging violations of the Clean
Water Act and seeking to enforce the clean-up of Boston Harbor. The
Massachusetts Water Resources Authority (the "MWRA") has assumed
primary responsibility for
developing and implementing a court approved plan and time table
for the construction of the treatment facilities necessary to achieve
compliance with the federal requirements. The MWRA currently
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projects that total cost of
construction of the waste water facilities required under the court's
order as approximately $3.5 billion in current dollars. Under the Clean
Water Act, the Commonwealth may be liable for any costs of complying
with any judgment in
this case to the extent that the MWRA or a municipality is prevented
by state law from raising revenues necessary to comply with such a
judgment.
In a recent suit filed against the Department of Public Welfare,
plaintiffs allege that the Department has unlawfully denied personal
care attendant services to severely disabled Medicaid recipients. The
Court has denied plaintiffs' motion for a preliminary injunction and has
not yet acted on
plaintiffs' motion for reconsideration of that decision. If plaintiffs
prevail on their claims, the suit could cost the Commonwealth as much
as $200 million.
In a suit filed against the Commissioner of Revenue, plaintiffs
challenge the inclusion of income from tax exempt obligations in the
measure of the bank excise tax. The Appellate Tax Board issued a
finding of fact and report in favor
of the Commissioner of Revenue on September 30, 1993. An appeal
has been filed. Approximately $400 million is at issue.
There are also several tax matters in litigation which may result
in an aggregate liability in excess of $195 million.
Ratings. Beginning on May 17, 1989, Standard & Poor's
downgraded its ratings on Massachusetts general obligation bonds and
certain agency issues
from AA+ to AA. The ratings were downgraded three additional
times to a low of BBB on December 31, 1989. On July 14, 1989,
Standard & Poor's also downgraded its rating on temporary general
obligation notes and various agency
notes from SP-1 + to SP-1 and on general obligation short-term
notes and on short-term agency debt from SP-1 to SP-2. Bonds rated
BBB may have speculative characteristics. The rating remained at BBB
until September 9, 1992 when Standard & Poor's raised its rating to A.
At this same time, such bonds were removed from CreditWatch. On
October 14, 1993, Standard & Poor's
raised its rating from A to A+.
On June 21, 1989, Moody's Investors Service downgraded its
rating on Massachusetts general obligation bonds Aa to A. The ratings
were further reduced on two occasions to a low on March 19, 1990 of
Baa where it
remained until September 10, 1992 when Moody's increased its
rating to A.
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Fitch Investors Service, Inc. lowered its rating on the
Commonwealth's bonds from AA to A on September 29, 1989. As of
December 5, 1991, its
qualification of the bonds changed from Uncertain Trends to
Stabilizing Credit Trend. On October 13, 1993, Fitch Investors raised
its rating from A to A+.
Ratings may be changed at any time and no assurance can be
given that they will be not be revised or withdrawn by the rating
agencies, if in their
respective judgments, circumstances should warrant such action.
Any downward revision or withdrawal of a rating could have an adverse
effect on market prices
of the bonds.
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
The State of Minnesota (the "State") relies heavily on a
progressive individual income tax and a retail sales tax for revenue,
which results in a
fiscal system that is sensitive to economic conditions. 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.
<PAGE>
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, 1991, 1992 and 1993 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 March 1, 1994 projected a
balanced General Fund for the end of
the current biennium at June 30, 1995, plus an increase in the State's
cash flow account from $360 million to $500 million. Total projected
expenditures and transfers for the biennium are $17.0 billion. The
forecast also projects, however, a shortage of $29.5 million in the Local
Government Trust Fund at June 30, 1995, against total projected
expenditures from the Fund of $1.8 billion for the biennium.
The Minnesota Supreme Court held on April 1, 1994 that
numerous banks are entitled to refunds of Minnesota bank excise taxes
paid for tax years 1979 through 1983, on the grounds that interest on
federal obligations
was unlawfully included in the computation of the tax for such years.
The trial court has been directed to calculate the amounts to be refunded.
The taxes and interest are estimated to be in excess of $188 million. The
State will be permitted to pay the refunds over a four-year period. the
State of Minnesota also is a party to a variety of other civil actions which
could adversely affect the State's General Fund.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in 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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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).
<PAGE>
<PAGE>
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.
$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.
<PAGE>
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.
On January 18, 1994, Christine Todd-Whitman replaced James
Florio as Governor of the State. As a matter of public record, Governor
Whitman, during her campaign, publicized her intention to reduce taxes
in the State. Effective January 1, 1994, the State's personal income tax
rates were reduced by 5% for all taxpayers. Effective January 1,1995,
the State's personal income tax rates will be reduced by an additional
10% for most taxpayers. The effect of the tax reduction cannot be
evaluated at this time.
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 $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
<PAGE>
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.
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 State's current fiscal year commenced on April 1, 1994, and
ends in March 31, 1995, and is referred to herein as the State's
1994-95 fiscal year. The State's budget for the 1994-95 fiscal year was
enacted by the Legislature on June 7, 1994, more than two months after
the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State
operations and other purposes, including all necessary appropriations
for debt service. The State Financial Plan for the 1994-95 fiscal year
was formulated on June 16, 1994 and is based on the State's budget as
enacted by the Legislature and signed into law by the Governor.
The economic and financial condition of the State may be
affected by various financial, social, economic and political factors.
Those factors can be very complex, may vary from fiscal year to fiscal
year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal
government, that are not under the control of the State.
The State Financial Plan is based upon forecasts of national and
State economic activity. Economic forecasts have frequently failed to
predict accurately the timing and magnitude of changes in the national
and the State
economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending,
Federal financial and monetary policies, the availability of credit, and the
condition of the world economy, which could have an adverse effect on
the State. There can be no assurance that the State economy will not
experience results in the
current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
The State Division of the Budget ("DOB") believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are
reasonable. Actual results, however, could differ materially and
adversely from the
projections set forth below, and those projections may be changed
materially and adversely from time to time.
As noted above, the financial condition of the State is affected by
several factors, including the strength of the State and regional
economy and actions of the Federal government, as well as State actions
affecting the level
<PAGE>
of receipts and disbursements. Owing to these and other factors, the
State may, in future years, face substantial potential budget gaps resulting
from a significant disparity between tax revenues projected from a lower
recurring receipts base and the future costs of maintaining State programs
at current levels. Any such recurring imbalance would be exacerbated
if the State were to use a significant amount of nonrecurring resources
to balance the budget in
a particular fiscal year. To address a potential imbalance for a given
fiscal year, the State would be required to take actions to increase
receipts and/or
reduce disbursements as it enacts the budget for that year, and under
the State Constitution the Governor is required to propose a balanced
budget each year. To correct recurring budgetary imbalances, the State
would need to take significant actions to align recurring receipts and
disbursements in future
fiscal years. There can be no assurance, however, that the State's
actions will be sufficient to preserve budgetary balance in a given fiscal
year or to align recurring receipts and disbursements in future fiscal
years.
The 1994-95 State Financial Plan contains actions that provide
nonrecurring resources or savings, as well as actions that impose
nonrecurring losses of receipts or costs. It is believed that the net
positive effect of nonrecurring actions represents considerably less than
one-half of one percent of the State's General Fund, an amount
significantly lower than
the amount included in the State Financial Plans in recent years; it
is believed that those actions do not materially affect the financial
condition of the State.
In addition to those nonrecurring actions, the 1994-95 State Financial
Plan reflects the use of $1.026 billion in the positive cash margin carried
over from the prior fiscal year, resources that are not expected to be
available in the State's 1995-96 fiscal year.
The General Fund is the general operating fund of the State and
is used to account for all financial transactions, except those required
to be accounted for in another fund. It is the State's largest fund and
receives almost all State taxes and other resources not dedicated to
particular purposes. In the State's 1994-95 fiscal year, the General Fund
is expected to
account for approximately 52 percent of total governmental-fund
receipts and 51 percent of total governmental-fund disbursements.
General Fund moneys
are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types.
New York State's financial operations have improved during
recent fiscal years. During the period 1989-90 through 1991-92, the
State incurred General Fund operating deficits that were closed with
<PAGE>
receipts from the issuance of tax and revenue anticipation notes
("TRANs"). First, the national
recession, and then the lingering economic slowdown in the New
York and regional economy, resulted in repeated shortfalls in receipts
and three budget deficits. For its 1992-93 and 1993-94 fiscal years, the
State recorded balanced budgets on a cash basis, with substantial fund
balances in each year as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its
Contingency Reserve Fund ("CRF") and $134 million in its Tax
Stabilization Reserve Fund. These fund balances were primarily the
result of an improving national economy, State employment growth, tax
collections that exceeded
earlier projections and disbursements that were below expectations.
Deposits to the personal income tax refund reserve have the effect of
reducing reported personal income tax receipts in the fiscal year when
made and withdrawals from such reserve increase receipts in the fiscal
year when made. The balance in the tax refund service account will be
used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account,
$1.026 billion was available for budgetary planning purposes in the
1994-95 fiscal year. The remaining $114 million will be redeposited in
the tax refund reserve account at the end of the State's 1994-95 fiscal
year to continue the process of restructuring the State's cash flow as part
of the Local Government Assistance Corporation ("LGAC") program.
The balance in the CRF will be used to meet the cost of litigation facing
the State. The Tax
Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95 fiscal
year.
Before the deposit of $1.140 billion in the tax refund service
account, General Fund receipts in 1993-94 exceeded those originally
projected when the State Financial Plan for that year was formulated
on April 16, 1993 by $1.002 billion. Greater-than-expected receipts in
the personal income tax, the bank tax, the corporation franchise tax and
the estate tax accounted for most of this variance, and more than offset
weaker-than-projected collections from the sales and use tax and
miscellaneous receipts.
Collections from individual taxes were affected by various factors
including changes in Federal business laws, sustained profitability of
banks, strong performance of securities firms, and higher-than-expected
consumption of tobacco products following price cuts.
Disbursements and transfers from the General Fund were $303
million below the level projected in April 1993, an amount that
<PAGE>
would have been $423 million had the State not accelerated the payment
of Medicaid billings, which in the April 1993 State Financial Plan were
planned to be
deferred into the 1994-95 fiscal year. Compared to the estimates
included in the State Financial Plan formulated in April 1993, lower
disbursements resulted from lower spending for Medicaid, capital
projects, and debt service
(due to refundings) and $114 million used to restructure the State's
cash flow as part of the LGAC program. Disbursements were
higher-than-expected for general support for public schools, the State
share of income maintenance, overtime for prison guards, and highway
snow and ice removal.
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
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
<PAGE>
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.
As of March 31, 1994, the State had approximately $5.370
billion in general obligation bonds, excluding refunding bonds and $294
million in bond anticipation notes outstanding. On May 24, 1993, the
State issued $850 million in tax and revenue anticipation notes, all of
which matured on December 31, 1993. Principal and interest due on
general obligation bonds and interest due on bond anticipation notes and
on tax and revenue anticipation notes were $782.5 million for the
1993-94 fiscal year, and are
estimated to be $786.3 million for the 1994-95 fiscal year. These
figures do not include interest on refunding bonds issued in July 1992,
to the extent that such interest is to be paid from escrowed funds.
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
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.
<PAGE>
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 public benefit facilities.
The authorities are not subject to the constitutional restrictions on the
incurrence of debt which
apply to the State itself and may issue bonds and notes within the
amounts of, and as otherwise restricted by, their legislative authorization.
As of September 30, 1992, there were 18 authorities that had outstanding
debt of $100 million or more. The aggregate outstanding debt, including
bonds, of these 18 authorities was 63.5 billion as of September 30, 1993.
As of March 31, 1994, aggregate public auhtority debt outstanding as
State supported debt was $21.1 billion as State-related debt was $29.4
billion.
The authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges,
highway tolls and rentals for dormitory rooms and housing. In recent
years, however, the State has provided financial assistance through
appropriations, in some
cases of a recurring nature, to certain of the 18 authorities for
operating and other expenses and, in fulfillment of its commitments on
moral obligation indebtedness or otherwise for debt service. This
assistance is expected to continue to be required in future years.
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
<PAGE>
million in calendar year 1992, of which the MTA was entitled to
receive approximately 90 percent, or approximately $456 million. For
the 1994-95 State fiscal year, total State assistance to the MTA is
estimated at approximately $1.3 billion.
In 1993, State legislation authorized the refunding of a five-year
$9.56 billion MTA capital plan for the five-year period, 1992
through 1996 (the "1992-96 Capital Program"). The MTA has received
approval of the 1992-96 Capital Program based on this legislation from
the 1992-96 Capital
Program Review Board, as State law requires. This is the third
five-year plan since the Legislature authorized procedures for the
adoption, approval and amendment of a five-year plan in 1981 for a
capital program designed to
upgrade the performance of the MTA's transportation systems and
to supplement, replace and rehabilitate facilities and equipment. The
MTA, the TBTA and the TA are collectively authorized to issue an
aggregate of $3.1
billion of bonds (net of certain statutory exclusions) to finance a
portion of the 1992-96 Capital Program. The 1992-96 Capital Program
is expected to be financed in significant part through the dedication of
State petroleum business taxes.
There can be no assurance that all the necessary governmental
actions for the Capital Program will be taken, that funding sources
currently identified will not be decreased or eliminated, or that the
1992-96 Capital Program, or parts thereof, will not be delayed or
reduced. Furthermore, the power of the MTA to issue certain bonds
expected to be supported by the
appropriation of State petroleum business taxes is currently the
subject of a court challenge. If the Capital Program is delayed or
reduced, ridership and
fare revenues may decline, which could, among other things, impair
the MTA's ability to meet its operating expenses without additional State
assistance.
The State'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
<PAGE>
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 City, with a population of approximately 7.3 million, is an
international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life
insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's
total employment earnings. Additionally, the City is the nation's leading
tourist destination.
The City's manufacturing activity is conducted primarily in apparel
and publishing.
The national economic recession which began in July 1990 has
adversely impacted the City harder than almost any other political
jurisdiction in the nation. As a result, the City, with approximately 3
percent of national
employment, has lost approximately 20 percent of all U.S. jobs
during the recent economic downturn and, consequently, has suffered
erosion of its local tax base. In total, the City private sector employment
has plummeted by approximately 360,000 jobs since 1987. But, after
nearly five years of
decline, the City appears to be on the verge of a broad-based
recovery which will lift many sectors of the local economy. Most of the
nascent local recovery can be attributed to the continued improvement in
the U.S. economy, but a great deal of the strength expected in the City
economy will be due to local factors, such as the heavy concentration of
the securities and banking industries in the City. The current forecast
calls for modest employment growth of about 20,000 a year (0.6 percent)
on average through 1998 with some slowing but still positive growth in
employment in 1995-96 as U.S. growth slows (local job gains slow from
25,000 to around 10,000 per year).
During the most recent economic downturn, the City has faced
recurring extraordinary budget gaps that have been addressed by
undertaking one-time, one-shot budgetary initiatives to close then
projected gaps in order to achieve a balanced budget as required by the
laws of the State. For example, in order to achieve a balanced budget
for the 1992 fiscal year, the City increased taxes and reduced services
during the 1991 fiscal year to close
a then projected gap of $3.3 billion in the 1992 fiscal year which
<PAGE>
resulted from, among other things, lower than expected tax revenue of
approximately $1.4 billion, reduced State aid for the City of
approximately $564 million and greater than projected increases in
legally mandated expenditures of approximately $400 million, including
public assistance and Medicare expenditures. The gap-closing measures
for fiscal year 1992 included receipt of $605 million from tax increases,
approximately $1.5 billion of proposed service reductions and proposed
productivity savings of $545 million.
Notwithstanding its recurring projected budget gaps, for fiscal
years 1981 through 1993 the City achieved balanced operating results
(the City's General Fund revenues and transfers reduced by expenditures
and transfers), as reported in accordance with Generally Accepted
Accounting Principles ("GAAP"), and the City's 1994 fiscal year results
are projected to be balanced in accordance with GAAP.
The City's ability to maintain balanced budgets in the future is
subject to numerous contingencies; therefore, even though the City
has managed to close substantial budget gaps in recent years in order to
maintain balanced operating results, there can be no assurance that the
City will continue to maintain a balanced budget as required by State law
without additional tax or other revenue increases or reduction in City
services, which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares an annual
four-year financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital, revenue and expense
projections. The City
is required to submit its financial plans to review bodies, including
the New York State Financial Control Board ("Control Board"). If the
City were to experience certain adverse financial circumstances,
including the occurrence or the substantial likelihood and imminence of
the occurrence of an
annual operating deficit of more than $100 million or the loss of access
to the public
credit markets to satisfy the City's capital and seasonal financing
requirements, the Control Board would be required by State law to
exercise powers, among others, of prior approval of City financial plans,
proposed borrowings and certain contracts.
On November 23, 1993, the City submitted to the Control Board
the Financial Plan for the 1994 through 1997 fiscal years, which is a
modification to a financial plan submitted to the Control Board on
August 30, 1993 and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The
1994-1997 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
<PAGE>
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 reduction aggregating
$274 million; the sale of delinquent real property tax receivables for
$215 million; discretionary 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 continuation of the personal income tax surcharge,
resulting in revenues of $143 million; $80 million in proposed increased
State aid, which is subject to approval by the Governor; and revenue
actions aggregating $173 million.
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 $1.7 billion, $2.5 billion and $2.7
billion for the 1995 through 1997 fiscal years, respectively. City
gap-closing actions total
$640 million in the 1995 fiscal year, $814 million in the 1996 fiscal
year and $870 million in the 1997 fiscal year. These actions include
increased revenues and reduced expenditures from agency actions
aggregating $165
million, $439 million and $470 million in the 1995 through 1997
fiscal years, respectively, including productivity savings and savings
from restructuring the delivery of City services and service reductions;
possible BOE expenditure
reductions aggregating $125 million in each of the 1995 through
1997 fiscal years; and reduced other than personal service costs
aggregating $50 million in each of the 1995 through 1997 fiscal years.
State actions proposed in the gap-program total $306 million,
$616 million in each of the 1995, 1996 and 1997 fiscal years,
respectively. These
actions include savings from various proposed mandate relief
measures and the proposed reallocation of State education aid among
various localities totaling $175 million, $325 million and $475 million
in each of the 1995,
1996 and 1997 fiscal years, respectively. These actions also include
$131 million in 1995 and $291 million in each of 1996 and 1997 in
anticipated State actions which could include savings from the proposed
State assumption of certain Medicaid costs or various proposed mandate
relief measures.
The Federal actions proposed in the gap-closing program are
$100 million and $200 million in increased Federal assistance in fiscal
years 1996 and 1997, respectively.
Other Actions proposed in the gap-closing program represent
Federal, State or City actions to be specified in the future.
<PAGE>
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 reallocations of State education aid, thereby increasing the
uncertainty as to the receipt of the State assistance included in the
Financial Plan. If these
actions cannot be implemented, the City will be required to take
other actions to decrease expenditures or increase revenues to maintain
a balanced financial
plan. The 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 ("OTB"), the amount of
State and Federal aid included in the Financial Plan and the inclusions of
non-recurring actions.
Notwithstanding the proposed city, federal and state actions in
the gap-closing programs, the City Comptroller has warned in past
published reports that State and local tax increases in an economic
downturn or period
of slow economic growth can have adverse effects on the local
economy and can slow down an economic recovery. The City
Comptroller has also
previously expressed concerns about the effect on the City's economy
and budgets of rapidly increasing water and sewer rates, decreasing
rental payments in future years from the Port Authority under leases for
LaGuardia and Kennedy airports, the dependence on increased aid from
the State and Federal Governments for gap-closing programs, the
escalation cost of
judgments and claims, federal deficit reduction measures and the
increasing percentages of future years' revenues projected to be
consumed by debt service, even after reductions in the capital program.
Although the City has maintained balanced budgets in each of its
last thirteen 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
<PAGE>
and reductions in essential City services could adversely affect the
City's economic base.
In November 1993, Rudolph W. Giuliani was elected mayor of
the City, replacing the previous administration on January 1, 1994.
Mayor Giuliani's Modification No. 94-2 to the Financial Plan for the
City and Covered Organizations for fiscal years 1994-1998 (the
"Modification"), issued February 10, 1994, reports that for 1995 fiscal
year, the budget gap is
estimated at $2.26 billion, or nearly a 12 percent shortfall of existing
tax revenues over baseline expenditures. Absent gap closing initiatives,
the Modification reports that the projected budget gap will grow to
nearly $3.4 billion by 1998 fiscal year. According to the Modification,
the 1995 fiscal year budget gap is the largest that the City has faced since
1981, when the City converted to GAAP. The Modification attributes
the projected budget gaps to the lingering national recession, to a sharp
growth in expenditures during the boom years of the 1980s and the
failure of the City to reduce the City's municipal workforce. The
Modification reports that at the same time
that City employment has declined as a percentage of U.S.
employment, local government employment in the City, which exceeds
the state government
employment of the five largest states, is on the verge of an historic
high. According to the Modification, at the end of December 1993, the
City's full-time municipal workforce stood at more than 362,000
employees,and absent reductions, will reach an all-time high at the end
of fiscal year 1994.
The Modification states that in order to strengthen the City's
long-term fiscal position the City's gap-closing initiatives must be
accomplished without resorting to one-shot gap-closing measures, such
as tax increases;
instead, it must balance its budgets by reducing City spending,
reducing the size of the City's municipal workforce and reducing certain
City taxes to
encourage economic growth. Under the Modification, fiscal year
1995 spending declines by $516 million over the current fiscal year, the
lowest projected spending rate since 1975. The Modification plans to
reduce the City's municipal workforce by 15,000 positions, as compared
to the current
headcount, by the end of fiscal year 1995. The workforce reduction
will be achieved through an aggressive severance package, and, if
necessary, layoffs.
It is anticipated that these workforce reduction initiatives will save
$117 million, $144 million, $311 million, $415 million and $539 million
in fiscal years 1994 through 1998, respectively, after taking into account
an estimated $200 million in costs related to instituting the propose
severance programs which are anticipated to be financed with surplus
Municipal Assistance
<PAGE>
Corporation funds (see below for discussion of the Municipal
Assistance Corporation). The Modification also contemplates the loss of
$35 million, $186 million, $534 million and $783 million in tax revenues
in 1995 through 1998, respectively, as a result of the reduction in certain
City taxes, such as
the reduction of the hotel tax from 6 percent to 5 percent,
commercial rent tax reductions and the elimination of the 12.5 percent
personal income tax surcharge.
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 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
<PAGE>
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 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.
<PAGE>
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.
A substantial portion of the capital improvement in the City are
financed by indebtedness issued by the Municipal Assistance
Corporation of the City of New York ("MAC"). 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 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.
<PAGE>
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 1994-95 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) challenges to the practice of reimbursing certain
Office of Mental Health
patient care expenses from the client's Social Security benefits; (vi)
a challenge to the methods by which the State reimburses localities for
the administrative costs of food stamp programs; (vii) a challenge to the
State's possession of certain funds taken pursuant to the State's
Abandoned Property
Law; (viii) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; (ix) 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; (x) 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; (xi) 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; (xii) challenges to the delay by the State
Department of Social Services in making two one-week Medicaid
payments to the service providers; (xiii) challenges to provisions of
Section 2808-C of the Public
Health Law, which imposes a 13% surcharge on inpatient hospital
bills paid by commercial insurers and employee welfare benefit plans and
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; (xiv) challenges promulgated by the State Department of Social
Services of a home assessment resource review instrument used to
<PAGE>
determine eligibility for and
nature of home care services for Medicaid recipients; and (xv)
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 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
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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 3,258,300 jobs as
of January 1994. The largest
nonagricultural segment of jobs was the approximately 729,200
persons employed in trade, with textiles as the largest manufacturing
segment employing approximately 203,600 people. The United States
Department of Labor estimates that as of August, 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 February
1994, to be 5.5% of the labor force, as compared with an unemployment
rate of 7.1% 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 $254 million, $124 million, $112 million
(deficit balance), $235 million and $681 million for, respectively, the
1989, 1990, 1991, 1992 and 1993 fiscal years. For the year ended June
30, 1993, the State had total budgeted appropriations from the General
Fund of approximately $10.163 billion.
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The State Highway Fund had an ending credit balance of
approximately $308 million as of June 30, 1993, with total
expenditures of approximately $1.410 billion.
State Debt. As of June 30, 1993, approximately $494 million
aggregate principal amount of the State's general obligation bonds
and $87 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 $9.539 billion principal amount of revenue bonds
outstanding as of June 30,
1993. 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.
Local governmental units in the State had approximately $4.543
billion principal amount of general obligation bonds and $2.054
billion of revenue bonds (excluding industrial revenue bonds of county
authorities) outstanding as of June 30, 1993. 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
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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.
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
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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
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
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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
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
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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 thirteen constitutional amendments (the last adopted in 1993),
Ohio voters have authorized the incurrence of State debt to which
taxes or excesses were pledged for payment. At January 31, 1994,
$712.6 million (excluding certain highway bonds payable primarily from
highway use charges) of this debt was outstanding or awaiting delivery.
The only such State debt then still authorized to be incurred are portions
of the highway bonds and the following: (a) up to $100 million of
obligations for coal
research and development may be outstanding at any one time ($43.1
million outstanding); (b) $1.2 billion of obligations authorized for local
infrastructure improvements, no more than $120 million may be issued
in any calendar year ($645.2 million outstanding or awaiting delivery,
$480 million remaining to be issued); and (c) up to $200 million in
general obligation bonds for parks
and recreation purposes may be outstanding at any one time ( no
more than $50 million to be issued in any one year, and none have yet
been issued).
The Constitution also 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 $4.28
billion of those obligations were outstanding at January 31, 1994.
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.
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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
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 $68.6 million
(including over $46.6
million by one district);in fiscal year 1993, 43 districts borrowed
approximately $94.5 million (including $75 million for one district)
and in fiscal year 1994 loan approvals totalled at January 31, 1994,
$9.90 million for 16 districts.
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations, and, with
other local governments, receive local government support and property
tax relief 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 23 cities and villages, in 18 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
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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. 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
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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 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 through June 1993 plus interest); (iv) 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); (v)
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
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potential liability for refund of taxes collected or amount of tax revenue
at risk); (vi) 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 (vii) 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 more than the last
five years.
The City of Philadelphia (the "City") has been experiencing
severe financial difficulties which has impaired its access to public credit
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
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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. 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.
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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 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.
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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.
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
<PAGE>
obligation bonds in 1962 from "Aa" to "Aaa", its highest rating,
following the imposition of a statewide sales tax by the Legislature.
Moody's downgraded such rating to "Aa" in March 1987. No prediction
can be made concerning future changes in ratings by national rating
agencies of Texas
general obligation bonds or concerning the effect of such ratings
changes on the market for such issues.
The same economic and other factors affecting the State of Texas
and its agencies also have affected cities, counties, school districts
and other issuers of bonds located throughout the State. Declining
revenues caused by the downturn in the Texas economy in the mid-1980s
forced these various other issuers to raise taxes and cut services to
achieve the balanced budget mandated by their respective charters or
applicable State law requirements. Standard & Poor's Corporation and
Moody's Investors Service, Inc. assign separate ratings to each issue of
bonds sold by these other issuers. Such
ratings may be significantly lower than the ratings assigned by such
rating agencies to Texas general obligation bonds.
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
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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.
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:
<PAGE>
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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>
<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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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).
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).
<PAGE>
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.)
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
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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
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
<PAGE>
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.
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 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
<PAGE>
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
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.
<PAGE>
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 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
<PAGE>
(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 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.
<PAGE>
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>
<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 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 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
<PAGE>
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 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>
<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
<PAGE>
for the Sponsors. Messrs. Carter, Ledyard & Milburn, 2 Wall Street,
New York, New York 10005, act as counsel for the Trustee.
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 LLP, 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
<PAGE>
obligation in the event of bankruptcy,
reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
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-2Series 253
Financial and Statistical Information A- 4
Financial Statements A- 5
Report of Independent Public Auditors A-11
Portfolios of Securities A-12 16,060 Units
Tax Exempt Securities Trust 1
The Trust 1
Objectives 1
Portfolio 1PROSPECTUS
Additional Considerations Regarding the Trusts2
Dated November 15, 1994
State Risk Factors 15
The Units 65
Estimated Current Return and Estimated Long-Term Return65
Taxes 66
Expenses and Charges 79
Public Offering 80
Offering Price 80
Method of Evaluation 80Sponsors
Distribution of Units 81
Market for Units 81SMITH BARNEY INC.
Exchange Option 81
Reinvestment Programs 821345 Avenue of the Americas
Sponsors' Profits 82New York, New York 10105
Rights of Unit Holders 82(800) 298-UNIT
Certificates 82
Distribution of Interest and Principal 83
Reports and Records 84
Redemption of Units 85&
Sponsors 86
Limitations on Liability 88
Responsibility 88
Resignation 89
Trustee 89KIDDER, PEABODY & CO.
Limitations on Liability 89Incorporated
Resignation 89
Evaluator 90
10 Hanover Square
Limitations on Liability 90New York, New York 10005
Responsibility 90(212) 747-5951
Resignation 90
Amendment and Termination of the Trust Agreement 90
Amendment 90
Termination 91
Legal Opinions 91
Auditors 91
Bond Ratings 91
Standard & Poor's Corporation 91
Moody's Investors Service, Inc93
Fitch Investors Service, Inc94
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 Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Series 253
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-8340 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,
John R. Fitzgerald
Vice President
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 October 24, 1994 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
October 28, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Series 253,
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 28th day of October, 1994.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Inc. 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 INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
John F. Lyness
Jack L. Rivkin
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
