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File No. 33-12017 CIK #810759
Securities and Exchange CommissionWashington, D. C. 20549
Post-Effective
Amendment No. 9
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
Kemper Tax-Exempt Income Trust Multi-State, Series 33
Name and executive office address of Depositor:
Kemper Unit Investment Trusts
(a service of Kemper Securities, Inc.)
77 West Wacker - 29th Floor
Chicago, Illinois 60601
Name and complete address of agent for service:
Robert K. Burke
77 West Wacker - 29th Floor
Chicago, Illinois 60601
( X ) Check box if it is proposed that this filing will
become effective at 2:00 p.m. on August 28, 1995
pursuant to paragraph (b) of Rule 485.
KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
PART ONE
THE DATE OF THIS PART ONE IS THAT DATE
WHICH IS SET FORTH IN PART TWO
OF THE PROSPECTUS
Each State Trust of the Kemper Tax-Exempt Income Trust, Multi-State Series,
Ohio Tax-Exempt Bond Trust, Series 1-10 and Kemper Defined Funds (Tax-Exempt
Portfolio) was formed for the purpose of gaining interest income free from
Federal, State and, where applicable, local income taxes and/or property taxes
while conserving capital and diversifying risks by investing in fixed portfolios
of Municipal Bonds consisting of obligations issued primarily by or on behalf of
the State for which such Trust is named or counties, municipalities, authorities
or political subdivisions thereof.
Units of the Trust are not deposits or obligations of, or guaranteed by, any
bank, and Units are not federally insured or otherwise protected by the Federal
Deposit Insurance Corporation and involve investment risk including loss of
principal.
This Prospectus is in two parts. Read and retain both parts for future
reference.
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SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,
A SERVICE OF KEMPER SECURITIES, INC.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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SUMMARY................................ 3
The Trust.............................. 3
Public Offering Price.................. 4
Interest and Principal Distributions... 4
Reinvestment........................... 4
Estimated Current Return and
Estimated Long-Term Return............ 4
Market for Units....................... 5
Risk Factors........................... 5
THE TRUST.............................. 6
PORTFOLIOS............................. 7
Risk Factors........................... 8
DISTRIBUTION REINVESTMENT.............. 14
INTEREST, ESTIMATED LONG-TERM RETURN
AND ESTIMATED CURRENT RETURN.......... 15
FEDERAL TAX STATUS OF THE STATE
TRUSTS................................. 15
DESCRIPTION AND STATE TAX STATUS OF
THE STATE TRUSTS....................... 19
Arizona Trusts........................ 19
Arkansas Trusts....................... 22
California Trusts..................... 25
Colorado Trusts....................... 33
Kansas Trusts......................... 37
Kentucky Trusts....................... 39
Michigan Trusts....................... 40
Minnesota Trusts...................... 43
Missouri Trusts....................... 45
New Jersey Trusts..................... 48
New York Trusts....................... 53
North Carolina Trusts................. 64
Ohio Trusts........................... 71
South Carolina Trusts................. 75
Virginia Trusts....................... 78
PUBLIC OFFERING OF UNITS............... 81
Public Offering Price.................. 81
Accrued Interest....................... 83
Purchased and Daily Accrued Interest... 83
Public Distribution of Units........... 84
Profits of Sponsor..................... 84
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MARKET FOR UNITS....................... 85
REDEMPTION............................. 85
Computation of Redemption Price........ 86
UNITHOLDERS............................ 87
Ownership of Units..................... 87
Distributions to Unitholders........... 87
Statements to Unitholders.............. 89
Rights of Unitholders.................. 90
INVESTMENT SUPERVISION................. 90
ADMINISTRATION OF THE TRUST............ 91
The Trustee............................ 91
The Evaluator.......................... 92
Amendment and Termination.............. 92
Limitations on Liability............... 92
EXPENSES OF THE TRUST.................. 93
THE SPONSOR............................ 94
LEGAL OPINIONS......................... 94
INDEPENDENT AUDITORS................... 95
DESCRIPTION OF SECURITIES
RATINGS................................ 95
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Essential Information*
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedule of Investments*
Notes to Financial Statements*
*INFORMATION ON THESE ITEMS APPEARS IN PART TWO FOR THE APPROPRIATE STATE TRUST
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KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
SUMMARY
THE TRUST. Kemper Tax-Exempt Income Trust, Multi-State Series, Ohio Tax-
Exempt Bond Trust, Series 1-10 and Kemper Defined Funds (Tax-Exempt Portfolio)
(collectively, the "Trust") are each a unit investment trust consisting of a
number of diversified portfolios designated as the State Trusts. Each State
Trust consists of obligations ("Municipal Bonds", "Securities" or "Bonds")
issued primarily by or on behalf of the State for which such State Trust is
named or counties, municipalities, authorities or political subdivisions
thereof.
Each State Trust's investment objective is interest income which is exempt
from Federal, State and, where applicable, local income taxes and/or property
taxes, while conserving capital and diversifying risks by investing in fixed
portfolios of Municipal Bonds consisting of obligations issued primarily by or
on behalf of the State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof. There is, of
course, no guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in the
category "BBB" or better by Standard & Poor's Ratings Group ("Standard &
Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's") on
the Date of Deposit or were unrated. However, if any Municipal Bonds were
unrated on the Date of Deposit, they must have had, in the opinion of the
Sponsor, credit characteristics equivalent to Bonds rated at least "BBB" or
"Baa." Municipal Bonds which are rated "BBB" or "Baa" are regarded as having an
adequate capacity to pay interest and repay principal but may lack outstanding
credit characteristics and, in fact, have speculative characteristics as well.
Ratings of the Municipal Bonds may have changed since the Date of Deposit. See
"Description of Securities Ratings" herein and the "Schedule of Investments" in
Part Two.
The Units, each of which represents a pro rata undivided fractional interest
in the principal amount of Municipal Bonds deposited in the appropriate Trust,
are issued and outstanding Units which have been reacquired by the Sponsor
either by purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf of a State
Trust and any profit or loss realized on the sale of Units will accrue to the
Sponsor and/or the firm reselling such Units. Offerees in the States of
Indiana, Virginia and Washington may only purchase Units of an Indiana, Virginia
or Washington Trust, respectively.
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PUBLIC OFFERING PRICE. The Public Offering Price per Unit of each State Trust
is equal to a pro rata share of the aggregate bid prices of the Municipal Bonds
in such State Trust plus or minus a pro rata share of cash, if any, in the
Principal Account, held or owned by the State Trust plus, in the case of Kemper
Defined Funds, Purchased Interest, plus a sales charge shown under "Public
Offering of Units." In addition, there will be added to each transaction in a
State Trust an amount equal to the accrued interest ("Daily Accrued Interest" in
the case of Kemper Defined Funds) from the last Record Date of such State Trust
to the date of settlement (five business days after order). The sales charge is
reduced on a graduated scale as indicated under "Public Offering of Units -
Public Offering Price."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated annual
interest income to be received by each State Trust, after deduction of estimated
expenses, will be made monthly unless the Unitholder elects to receive such
distributions quarterly or semi-annually. In the case of Kemper Defined Funds,
distributions of the estimated annual interest income to be received by each
State Trust will be made monthly. Distributions will be paid on the
Distribution Dates to Unitholders of record of such State Trust on the Record
Dates set forth for the applicable option. See "Essential Information" in Part
Two. Only monthly distributions of estimated annual interest income will be
available of Kemper Defined Funds Unitholders.
The distribution of funds, if any, in the Principal Account of each State
Trust, will be made as provided in "Unitholders - Distribution to Unitholders."
REINVESTMENT. Each Unitholder of a Trust Fund offered herein may elect to
have distributions of principal or interest or both automatically invested
without charge in shares of certain mutual funds sponsored by Kemper Financial
Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return is calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price of such State Trust. The estimated
net annual interest income per Unit will vary with changes in fees and expenses
of such State Trust and with the principal prepayment, redemption, maturity,
exchange or sale of Securities while the Public Offering Price will vary with
changes in the bid price of the underlying Securities and with changes in
Purchased Interest for Kemper Defined Funds; therefore, there is no assurance
that the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all of the Securities
in the State Trust and (2) takes into account the expenses and sales charge
associated with each State Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the State Trust will change,
there is no assurance that the present Estimated Long-Term Return will be
realized in the future. Estimated Current Return and Estimated Long-Term Return
are expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only net annual interest income and Public
Offering Price.
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MARKET FOR UNITS. While under no obligation to do so, the Sponsor intends to
and certain of the other Underwriters may, subject to change at any time,
maintain a market for the Units of each State Trust and to continuously offer to
repurchase such Units at prices which are based on the aggregate bid side
evaluation of the Municipal Bonds in each State Trust plus accrued interest
(which, in the case of Kemper Defined Funds, consists of Purchased Interest and
Daily Accrued Interest). If such a market is not maintained and no other over-
the-counter market is available, Unitholders will still be able to dispose of
their Units through redemption by the Trustee at prices based upon the aggregate
bid price of the Municipal Bonds in such State Trust. See "Redemption."
RISK FACTORS. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other factors,
the inability of the issuer to pay the principal of or interest on a bond when
due, volatile interest rates, early call provisions, and changes to the tax
status of the Securities. See "Portfolios - Risk Factors."
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KEMPER TAX-EXEMPT INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 1-10
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
THE TRUST
Each State Trust Fund is one of a series of unit investment trusts created by
the Sponsor under the name Ohio Tax-Exempt Bond Trust, or under the name Kemper
Tax-Exempt Income Trust, Multi-State Series or under the name Kemper Defined
Funds (Tax-Exempt Portfolio), all of which are similar, and each of which was
created under the laws of the State of Missouri pursuant to a Trust Agreement/1/
(the "Agreement") (such "State Trusts" being collectively referred to herein as
the "Trust"). Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., acts as Sponsor and Evaluator and Investors Fiduciary Trust Company acts
as Trustee.
The State Trusts may be an appropriate investment vehicle for investors who
desire to participate in a portfolio of tax-exempt, fixed income securities with
greater diversification than they might be able to acquire individually. In
addition, Municipal Bonds of the type deposited in the State Trusts are often
not available in small amounts.
Each State Trust's investment objective is interest income which is exempt
from Federal, State and, where applicable, local income and/or property taxes,
while conserving capital and diversifying risks by investing in fixed portfolios
of Municipal Bonds consisting of obligations issued primarily by or on behalf of
the State for which such State Trust is named or counties, municipalities,
authorities or political subdivisions thereof. There is, of course, no
guarantee that the State Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in the
category "BBB" or better by either Standard & Poor's Ratings Group ("Standard &
Poor's") or "Baa" or better by Moody's Investors Service, Inc. ("Moody's") on
the Date of Deposit or were unrated. However, if any Municipal Bonds were
unrated on the Date of Deposit, they must have had, in the opinion of the
Sponsor, credit characteristics equivalent to Municipal Bonds rated at least
"BBB" or "Baa". Municipal Bonds which are rated "BBB" or "Baa" are regarded as
having an adequate capacity to pay interest and repay principal but may lack
outstanding credit characteristics and, in fact, have speculative
characteristics as well. Ratings of the Municipal Bonds may have changed since
the Date of Deposit. See "Description of Securities Ratings" herein and the
"Schedule of Investments" in Part Two.
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/1/ Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in their entirety by the provisions of said Trust
Agreement.
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Proceeds of the maturity, redemption or sale of the Municipal Bonds in a State
Trust, unless used to pay for Units tendered for redemption, will be distributed
to Unitholders thereof and will not be utilized to purchase additional Municipal
Bonds.
The Units, each of which represents a pro rata undivided fractional interest
in the principal amount of Municipal Bonds deposited in the appropriate State
Trust, are issued and outstanding Units which have been reacquired by the
Sponsor either by purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf of the State
Trusts and any profit or loss realized on the sale of Units will accrue to the
Sponsor and/or the firm reselling such Units. To the extent that Units of any
State Trust are redeemed, the principal amount of Municipal Bonds in such State
Trust will be reduced and the undivided fractional interest represented by each
outstanding Unit of such State Trust will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based largely upon
the experience and judgment of the Sponsor. In making such selections the
Sponsor considered the following factors, among others, to be of primary
importance: (a) Standard & Poor's or Moody's ratings of the Municipal Bonds;
(b) the price of the Municipal Bonds relative to other issues of similar quality
and maturity; (c) the diversification of the Municipal Bonds as to purpose of
issue; (d) the income to the Unitholders of the State Trust; and (e) the dates
of maturity of the Bonds. Subsequent to the Date of Deposit, a Municipal Bond
may have ceased to be rated or its rating may have been reduced below the
minimum required as of the Date of Deposit. Neither event requires the
elimination of such investment from a State Trust, but may be considered in the
Sponsor's determination to direct the Trustee to dispose of such investment.
See "Investment Supervision" herein and the "Schedule of Investments" in Part
Two.
The Sponsor may not alter the portfolio of a State Trust except that certain
of the Municipal Bonds may be sold upon the happening of certain extraordinary
circumstances described under "Investment Supervision." Certain of the
Municipal Bonds in the State Trusts are subject to redemption prior to their
stated maturity date, call or redemption pursuant to sinking fund provisions,
call provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call provisions
are more likely to be exercised when the offering side valuation is at a premium
over par than when it is at a discount from par. Accordingly, any such call,
redemption, sale or maturity will reduce the size and diversity of such Series,
and the net annual interest income of the Series and may reduce the Estimated
Long-Term Return and/or Estimated Current Return. See "Interest and Estimated
Long-Term and Current Returns." Each Trust portfolio contains a listing of the
sinking fund and call provisions, if any, with respect to each of the debt
obligations. Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events that may permit
the extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the project
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for which the proceeds of the Municipal Bonds were used; an exercise by a local,
State or Federal governmental unit of its power of eminent domain to take all or
substantially all of the project for which the proceeds of the Municipal Bonds
were used; changes in the economic availability of raw materials, operating
supplies or facilities or technological or other changes which render the
operation of the project for which the proceeds of the Municipal Bonds were used
uneconomic; changes in law or an administrative or judicial decree which renders
the performance of the agreement under which the proceeds of the Municipal Bonds
were made available to finance the project impossible or which creates
unreasonable burdens or which imposes excessive liabilities, such as taxes, not
imposed on the date the Municipal Bonds are issued on the issuer of the
Municipal Bonds or the user of the proceeds of the Municipal Bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the
Municipal Bonds; an overestimate of the costs of the project to be financed with
the proceeds of the Municipal Bonds resulting in excess proceeds of the
Municipal Bonds which may be applied to redeem Municipal Bonds; or an
underestimate of a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any default,
failure or defect in any Municipal Bond.
RISK FACTORS. An investment in Units of a Series of the State Trusts should
be made with an understanding of the risks which an investment in fixed rate
debt obligations may entail, including the risk that the value of the portfolio
and hence of the Units will decline with increases in interest rates. The value
of the underlying Municipal Bonds will fluctuate inversely with changes in
interest rates. The uncertain economic conditions of recent years, together
with the fiscal measures adopted to attempt to deal with them, have resulted in
wide fluctuations in interest rates and, thus, in the value of fixed rate debt
obligations generally and long-term obligations in particular. The Sponsor
cannot predict whether such fluctuations will continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general obligations
of a governmental entity that are backed by the taxing power of such entity.
All other Municipal Bonds in the State Trusts are revenue bonds payable from the
income of a specific project or authority and are not supported by the issuer's
power to levy taxes. General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Revenue bonds, on the other hand, are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. There
are, of course, variations in the security of the different Municipal Bonds in
the State Trusts, both within a particular classification and between
classifications, depending on numerous factors.
Certain Series of the State Trusts contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services provided by
hospitals and other health care facilities, including nursing homes. In view of
this an investment in such Series should be made with an understanding of the
characteristics of such issuers and the risks that such an investment may
entail. Ratings of bonds issued for health care facilities are often based on
feasibility studies that contain projections of occupancy levels, revenues and
expenses. A facility's gross receipts and net income available for debt service
will be affected by future events and
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conditions including, among other things, demand for services and the ability of
the facility to provide the services required, physicians' confidence in the
facility, management capabilities, economic developments in the service area,
competition, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation. Federal legislation has been enacted which implemented a system of
prospective Medicare reimbursement which may restrict the flow of revenues to
hospitals and other facilities which are reimbursed for services provided under
the Medicare program. Future legislation or changes in the areas noted above,
among other things, would affect all hospitals to varying degrees and,
accordingly, any adverse changes in these areas may adversely affect the ability
of such issuers to make payment of principal and interest on Municipal Bonds
held in such Series. Such adverse changes also may adversely affect the ratings
of the Municipal Bonds held in such State Trusts. Hospitals and other health
care facilities are subject to claims and legal actions by patients and others
in the ordinary course of business. Although these claims are generally covered
by insurance, there can be no assurance that a claim will not exceed the
insurance coverage of a health care facility or that insurance coverage will be
available to a facility. In addition, a substantial increase in the cost of
insurance could adversely affect the results of operations of a hospital or
other health care facility. Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital facilities to a
non-affiliated entity or in other circumstances. For example, certain hospitals
may have the right to call bonds at par if the hospital may legally be required
because of the bonds to perform procedures against specified religious
principles. Certain FHA-insured bonds may provide that all or a portion of
those bonds, otherwise callable at a premium, can be called at par in certain
circumstances. If a hospital defaults upon a bond obligation, the realization
of Medicare and Medicaid receivables may be uncertain and, if the bond
obligation is secured by the hospital facilities, legal restrictions on the
ability to foreclose upon the facilities and the limited alternative uses to
which a hospital can be put may reduce severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single family
mortgage revenue bonds, which are issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these Municipal Bonds
are subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such Municipal Bonds
will probably be redeemed prior to their scheduled maturities or even prior to
their ordinary call dates. The redemption price of such issues may be more or
less than the offering price of such Municipal Bonds. Extraordinary mandatory
redemption without premium could also result from the failure of the originating
financial institutions to make mortgage loans in sufficient amounts within a
specified time period or, in some cases, from the sale by the Municipal Bond
issuer of the mortgage loans. Failure of the originating financial institutions
to make mortgage loans would be due principally to the interest rates on
mortgage loans funded from other sources becoming competitive with the interest
rates on the mortgage loans funded with the proceeds of the single family
mortgage revenue bonds. Additionally, unusually high rates of default on the
underlying mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single family
mortgage revenue bonds issued after December 31, 1980 were issued under Section
103A of the Internal Revenue Code, which Section contains certain ongoing
requirements relating to the use of the proceeds of such Municipal Bonds in
order for the interest on such Municipal Bonds to retain its tax-exempt status.
In each case, the issuer of the Municipal
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Bonds has covenanted to comply with applicable ongoing requirements and bond
counsel to such issuer has issued an opinion that the interest on the Municipal
Bonds is exempt from Federal income tax under existing laws and regulations.
There can be no assurances that the ongoing requirements will be met. The
failure to meet these requirements could cause the interest on the Municipal
Bonds to become taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. The ability of such issuers to
make debt service payments will be affected by events and conditions affecting
financed projects, including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income, increases
in taxes, employment and income conditions prevailing in local labor markets,
utility costs and other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the appropriation of
subsidies and social economic trends affecting the localities in which the
projects are located. The occupancy of housing projects may be adversely
affected by high rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds, multi-family
mortgage revenue bonds are subject to redemption and call features, including
extraordinary mandatory redemption features, upon prepayment, sale or non-
origination of mortgage loans as well as upon the occurrence of other events.
Certain issuers of single or multi-family housing bonds have considered various
ways to redeem bonds they have issued prior to the stated first redemption dates
for such bonds. In connection with the housing Municipal Bonds held by the
State Trusts, the Sponsor has not had any direct communications with any of the
issuers thereof, but at the initial Date of Deposit it was not aware that any of
the respective issuers of such Municipal Bonds were actively considering the
redemption of such Municipal Bonds prior to their respective stated initial call
dates. However, there can be no assurance that an issuer of a Municipal Bond in
the State Trusts will not attempt to so redeem a Municipal Bond in the State
Trusts.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or sewerage
services. Water and sewerage bonds are generally payable from user fees.
Problems faced by such issuers include the ability to obtain timely and adequate
rate increases, a decline in population resulting in decreased user fees, the
difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced these problems in
varying degrees. Because of the relatively short history of solid waste
disposal bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding those
associated with most municipal enterprise projects. Increasing environmental
regulation on the Federal, State and local level has a significant impact on
waste disposal facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and complex
regulatory requirements, the cost of obtaining construction and operating
permits, the cost of conforming to prescribed and changing equipment standards
and required methods of operation and the cost of disposing of the waste residue
that remains after the disposal process in an environmentally safe manner. In
addition, waste disposal facilities frequently face substantial opposition by
environmental groups and officials to their location and operation, to the
possible adverse effects upon the public health and the environment that may be
caused by wastes disposed of at the facilities and to alleged improper operating
procedures. Waste disposal facilities benefit from laws which require waste to
be disposed
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of in a certain manner but any relaxation of these laws could cause a decline in
demand for the facilities' services. Finally, waste disposal facilities are
concerned with many of the same issues facing utilities insofar as they derive
revenues from the sale of energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from the sale of electric energy or
natural gas. Utilities are generally subject to extensive regulation by state
utility commissions which, among other things, establish the rates which may be
charged and the appropriate rate of return on an approved asset base. The
problems faced by such issuers include the difficulty in obtaining approval for
timely and adequate rate increases from the governing public utility commission,
the difficulty in financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, increased competition, recent reductions in estimates of future
demand for electricity in certain areas of the country, the difficulty of the
capital market in absorbing utility debt, the difficulty in obtaining fuel at
reasonable prices and the effect of energy conservation. Issuers may have
experienced these problems in varying degrees. In addition, Federal, State and
municipal governmental authorities may from time to time review existing and
impose additional regulations governing the licensing, construction and
operation of nuclear power plants, which may adversely affect the ability of the
issuers of such Municipal Bonds to make payments of principal and/or interest on
such Municipal Bonds. The ability of State and local joint action power
agencies to make payments on bonds they have issued is dependent in large part
on payments made to them pursuant to power supply or similar agreements.
Courts in Washington and Idaho have held that certain agreements between the
Washington Public Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter into
the agreements. While these decisions are not specifically applicable to
agreements entered into by public entities in other states, they may cause a
reexamination of the legal structure and economic viability of certain projects
financed by joint action power agencies, which might exacerbate some of the
problems referred to above and possibly lead to legal proceedings questioning
the enforceability of agreements upon which payment of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts may be industrial revenue
bonds ("IRBs"), including pollution control revenue bonds, which are tax-exempt
securities issued by states, municipalities, public authorities or similar
entities to finance the cost of acquiring, constructing or improving various
industrial projects. These projects are usually operated by corporate entities.
Issuers are obligated only to pay amounts due on the IRBs to the extent that
funds are available from the unexpended proceeds of the IRBs or receipts or
revenues of the issuer under an arrangement between the issuer and the corporate
operator of a project. The arrangement may be in the form of a lease,
installment sale agreement, conditional sale agreement or loan agreement, but in
each case the payments to the issuer are designed to be sufficient to meet the
payments of amounts due on the IRBs. Regardless of the structure, payment of
IRBs is solely dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues
and earnings, regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from leveraged buy-outs or takeovers. The
IRBs in the State Trusts may be subject to special or extraordinary redemption
provisions which may provide for redemption at par or, with respect to original
issue discount bonds, at issue price plus the amount of original issue discount
accreted to the redemption date plus, if applicable, a premium. The Sponsor
cannot predict the causes or
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likelihood of the redemption of IRBs or other Municipal Bonds in the State
Trusts prior to the stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be obligations which
are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for leases,
occupancy of certain terminal space and service fees. Airport operating income
may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic constraints
and other factors, and several airlines are experiencing severe financial
difficulties. The Sponsor cannot predict what effect these industry conditions
may have on airport revenues which are dependent for payment on the financial
condition of the airlines and their usage of the particular airport facility.
Similarly, payment on Municipal Bonds related to other facilities is dependent
on revenues from the projects, such as user fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be adversely
affected by reduction in revenues due to such factors as increased cost of
maintenance, decreased use of a facility, lower cost of alternative modes of
transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes, or for
higher education systems, from tuition, dormitory revenues, grants and
endowments. General problems relating to school bonds include litigation
contesting the state constitutionality of financing public education in part
from ad valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation or
legislation on this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating to college and
university obligations would include the prospect of a declining percentage of
the population consisting of "college" age individuals, possible inability to
raise tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding and new
government legislation or regulations which may adversely affect the revenues or
costs of such issuers. All of such issuers have been experiencing certain of
these problems in varying degrees. In addition, the ability of universities and
colleges to meet their obligations is dependent upon various factors, including
the size and diversity of their sources of revenues, enrollment, reputation,
management expertise, the availability and restrictions on the use of endowments
and other funds, the quality and maintenance costs of campus facilities, and, in
the case of public institutions, the financial condition of the relevant state
or other governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, geographic location, geographic diversity and quality of
student body, quality of the faculty and the diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban Redevelopment
Bonds ("URBs"). URBs have generally been issued under bond resolutions pursuant
to which the revenues and receipts payable under the arrangements with the
operator of a particular project have been assigned and pledged to purchasers.
In some cases, a mortgage on the underlying project may have been granted as
security for the URBs. Regardless
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of the structure, payment of the URBs is solely dependent upon the
creditworthiness of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease revenue bonds
whose revenues are derived from lease payments made by a municipality or other
political subdivision which is leasing equipment or property for use in its
operation. The risks associated with owning Municipal Bonds of this nature
include the possibility that appropriation of funds for a particular project or
equipment may be discontinued. The Sponsor cannot predict the likelihood of
nonappropriation of funds for these types of lease revenue Municipal Bonds.
Lease revenue Municipal Bonds may also be subject to the risk of abatement in
many states -- rental obligations cease in the event that damage, destruction or
condemnation of the project prevents its use by the lessee. (In these cases,
insurance provisions designed to alleviate this risk become important credit
factors.) In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the re-letting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event its defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate even though it is
not legally obligated to do so, but its legality remains untested in most, if
not all, states.
Certain of the Municipal Bonds in the State Trusts may be "zero coupon" bonds,
i.e., an original issue discount bond that does not provide for the payment of
current interest. Zero coupon bonds are purchased at a deep discount because
the buyer receives only the right to receive a final payment at the maturity of
the bond and does not receive any periodic interest payments. The effect of
owning deep discount bonds which do not make current interest payments (such as
the zero coupon bonds) is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount earned during the life of such
obligation. This implicit reinvestment of earning at the same rate eliminates
the risk of being unable to reinvest the income on such obligation at a rate as
high as the implicit yield on the discount obligation, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. For the Federal
tax consequences of original issue discount bonds such as the zero coupon bonds,
see "Federal Tax Status of the State Trusts."
Investors should be aware that many of the Municipal Bonds in the State Trusts
are subject to continuing requirements such as the actual use of Municipal Bond
proceeds or manner of operation of the project financed from Municipal Bond
proceeds that may affect the exemption of interest on such Municipal Bonds from
Federal income taxation. Although at the time of issuance of each of the
Municipal Bonds in the State Trusts an opinion of bond counsel was rendered as
to the exemption of interest on such obligations from Federal income taxation,
there can be no assurance that the respective issuers or other obligors on such
obligations will fulfill the various continuing requirements established upon
issuance of the Municipal Bonds. A failure to comply with such requirements may
cause a determination that interest on such obligations is subject to Federal
income taxation, perhaps even retroactively from the date of issuance of such
Municipal Bonds, thereby reducing the value of the Municipal Bonds and
subjecting Unitholders to unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be
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authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivision or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent "moral
obligations" of a governmental entity. In the event that the issuer of the
Municipal Bond defaults in the repayment thereof, the governmental entity
lawfully may, but is not obligated to, discharge the obligation of the issuer to
repay such Municipal Bond. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such Municipal Bonds becomes a moral
commitment but not a legal obligation of the State or municipality in question.
Even though the State may be called on to restore any deficits in capital
reserve funds of the agencies or authorities which issued the bonds, any
restoration generally requires appropriation by the State legislature and
accordingly does not constitute a legally enforceable obligation or debt of the
State. The agencies or authorities generally have no taxing power.
To the best of the Sponsor's knowledge, as of the date of this Prospectus,
there is no litigation pending with respect to any Municipal Bond which might
reasonably be expected to have a material adverse effect on the Trust or any
State Trust. Although the Sponsor is unable to predict whether any other
litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the Trust, the Trust received copies of the
opinions of bond counsel given to the issuing authorities at the time of
original delivery of each of the Municipal Bonds to the effect that the
Municipal Bonds had been validly issued and that the interest thereon is exempt
from Federal income taxes.
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have distributions of principal
(including capital gains, if any) or interest or both automatically invested
without charge in shares of any mutual fund underwritten or advised by Kemper
Financial Services, Inc., an affiliate of the Sponsor, (the "Kemper Funds")
which are registered in the Unitholder's state of residence, other than those
Kemper Funds sold with a contingent deferred sales charge. Since the portfolio
securities and investment objectives of such Kemper Funds may differ
significantly from that of the Trust, Unitholders should carefully consider the
consequences, including the fact that distributions from such Kemper Funds may
be taxable, before selecting such Kemper Funds for reinvestment. Detailed
information with respect to the investment objectives and the management of the
Kemper Funds is contained in their respective prospectuses, which can be
obtained from the Sponsor upon request. An investor should read the appropriate
prospectus prior to making the election to reinvest.
Unitholders who are receiving distributions in cash may elect to participate
in distribution reinvestment by filing with the Program Agent an election to
have such distributions reinvested without charge. Such election must be
received by the Program Agent at least ten days prior to the Record Date
applicable to any distribution in order to be in effect for such Record Date.
Any such election shall remain in effect until a subsequent notice is received
by the Program Agent. See "Unitholders - Distributions to Unitholders."
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The Program Agent is Investors Fiduciary Trust Company. All inquiries
concerning participation in distribution reinvestment should be directed to the
Kemper Service Company, a service agent for the Program Agent at P.O. Box
419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST, ESTIMATED LONG-TERM RETURN AND ESTIMATED CURRENT RETURN
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each State Trust were as
set forth under "Essential Information" for the applicable State Trust in Part
Two of this Prospectus. Estimated Current Returns are calculated by dividing
the estimated net annual interest income per Unit by the Public Offering Price.
The estimated net annual interest income per Unit will vary with changes in fees
and expenses of the Trustee, the Sponsor and the Evaluator and with the
principal prepayment, redemption, maturity, exchange or sale of Securities while
the Public Offering Price will vary with changes in the offering price of the
underlying Securities and with the changes in Purchased Interest in the case of
Kemper Defined Funds; therefore, there is no assurance that the present
Estimated Current Returns will be realized in the future. Estimated Long-Term
Returns are calculated using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market values, yields
(which takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in the State Trust
and (2) takes into account the expenses and sales charge associated with each
State Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the State Trust will change, there is no
assurance that the present Estimated Long-Term Returns will be realized in the
future. Estimated Current Returns and Estimated Long-Term Returns are expected
to differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current Returns
calculations include only net annual interest income and Public Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts were accompanied by copies
of opinions of bond counsel to the issuers thereof, given at the time of
original delivery of the Municipal Bonds, to the effect that the interest
thereon is excludable from gross income for Federal income tax purposes. In
addition, bond counsel to the issuing authorities rendered opinions as to the
exemption of interest on such Municipal Bonds, when held by residents of the
State in which the issuers of such Municipal Bonds are located, from State
income taxes and, where applicable, local income taxes. Gain realized on the
sale or redemption of the Municipal Bonds by the Trustee or of a Unit by a
Unitholder is, however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in respect of accrued
interest or earned original issue discount. It should be noted that under
legislation described below that subjects accretion of market discount on tax-
exempt bonds to taxation as ordinary income, gain realized on the sale or
redemption of Municipal Bonds by the Trustee or of Units by a Unitholder that
would have been treated as capital gain under prior law is treated as ordinary
income to the extent it is attributable to accretion of market discount. Market
discount can arise based on the price a Trust Fund pays for Municipal Bonds or
the price a Unitholder pays for his or her Units.
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In connection with the offering of Units of the State Trusts, neither the
Sponsor, the Trustee, the Auditors nor their respective counsel have made any
review of the proceedings relating to the issuance of the Municipal Bonds or the
bases for such opinions.
At the time of the closing for each Trust, except with respect to the various
series of Ohio Tax-Exempt Bond Trust, Chapman and Cutler, counsel for the
Sponsor, rendered an opinion under then existing law substantially to the
effect that:
Each State Trust is not an association taxable as a corporation for Federal
income tax purposes and interest and accrued original issue discount on Bonds
which is excludable from gross income under the Internal Revenue Code of 1986
(the "Code") will retain its status when distributed to Unitholders, except to
the extent such interest is subject to the alternative minimum tax, an
additional tax on branches of foreign corporations and the environmental tax
(the "Superfund Tax"), as noted below.
Exemption of interest and accrued original issue discount on any Municipal
Bonds for Federal income tax purposes does not necessarily result in tax-
exemption under the laws of the several states as such laws vary with respect
to the taxation of such securities and in many states all or part of such
interest and accrued issue discount may be subject to tax.
Each Unitholder is considered to be the owner of a pro rata portion of each
asset of the respective State Trust in the proportion that the number of
Units of such Trust held by him bears to the total number of Units
outstanding of such State Trust under subpart E, subchapter J of chapter 1 of
the Code and will have a taxable event when such State Trust disposes of a
Bond, or when the Unitholder redeems or sells his Units. Unitholders must
reduce the tax basis of their Units for their share of accrued interest
received by a State Trust, if any, on Bonds delivered after the Unitholders
pay for their Units to the extent that such interest accrued on such Bonds
during the period from the Unitholder's settlement date to the date such Bonds
are delivered to a State Trust and, consequently, such Unitholders may have an
increase in taxable gain or reduction in capital loss upon the disposition of
such Units. Gain or loss upon the sale or redemption of Units is measured by
comparing the proceeds of such sale or redemption with the adjusted basis of
the Units. If the Trustee disposes of Bonds (whether by sale, payment on
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder. The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition with
the Unitholder's basis for his or her fractional interest in the asset
disposed of. In the case of a Unitholder who purchases Units, such basis
(before adjustment for earned original issue discount and amortized bond
premium, if any) is determined by apportioning the cost of the Units among
each of the State Trust's assets ratably according to the value as of the date
of acquisition of the Units. The basis of each Unit and of each Municipal
Bond which was issued with original issue discount must be increased by the
amount of the accrued original issue discount and the basis of each Unit and
of the Unitholder's interest in each Municipal Bond which was acquired by such
Unitholder at a premium must be reduced by the annual amortization of
Municipal Bond premium. The tax cost reduction requirements of the Code
relating to amortization of bond premium may,
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under some circumstances, result in the Unitholder realizing a taxable gain
when his Units are sold or redeemed for an amount equal to his original cost.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the "Code")
provide a complex set of rules governing the accrual of original issue discount.
These rules provide that original issue discount accrues either on the basis of
a constant compound interest rate or ratably over the term of the Municipal
Bond, depending on the date the Municipal Bond was issued. In addition, special
rules apply if the purchase price of a Municipal Bond exceeds the original issue
price plus the amount of original issue discount which would have previously
accrued based upon its issue price (its "adjusted issue price"). The
application of these rules will also vary depending on the value of the
Municipal Bond on the date a Unitholder acquires his Units, and the price the
Unitholder pays for his Units. Investors with questions regarding these Code
sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax-exempt
bonds to the market discount rules of the Code effective for bonds purchased
after April 30, 1993. In general, market discount is the amount (if any) by
which the stated redemption price at maturity exceeds an investor's purchase
price (except to the extent that such difference, if any, is attributable to
original issue discount not yet accrued) subject to a statutory "de minimis
rule". Market discount can arise based on the price a Trust pays for Municipal
Bonds or the price a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under prior law the
accretion had been treated as capital gain. Market discount that accretes while
a Trust Fund holds a Municipal Bond would be recognized as ordinary income by
the Unitholders when principal payments are received on the Municipal Bond, upon
sale or at redemption (including early redemption), or upon the sale or
redemption of his or her Units, unless a Unitholder elects to include market
discount in taxable income as it accrues. The market discount rules are complex
and Unitholders should consult their tax advisers regarding these rules and
their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax depend upon the corporation's alternative minimum taxable income,
which is the corporation's taxable income with certain adjustments. One of the
adjustment items used in computing the alternative minimum taxable income and
the Superfund Tax of a corporation (other than an S Corporation, Regulated
Investment Company, Real Estate Investment Trust, or REMIC) is an amount equal
to 75% of the excess of such corporation's "adjusted current earnings" over an
amount equal to its alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction). "Adjusted current
earnings" includes all tax-exempt interest, including interest on all the
Municipal Bonds in a State Trust. Unitholders are urged to consult their tax
advisers with respect to the particular tax consequences to them including the
corporate alternative minimum tax, the Superfund Tax and the branch profits tax
imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units of a
State Trust is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase or
improve a personal residence or to purchase goods or services for personal
consumption). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would
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generally not be able to deduct any of the interest expense attributable to
ownership of such Units. Investors with questions regarding these issues should
consult with their tax advisers.
In the case of certain Municipal Bonds in the State Trusts, the opinions of
bond counsel indicate that interest on such securities received by a
"substantial user" of the facilities being financed with the proceeds of these
securities or persons related thereto, for periods while such securities are
held by such a user or related person, will not be excludable from Federal gross
income, although interest on such securities received by others would be
excludable from Federal gross income. "Substantial user" and "related person"
are defined under U.S. Treasury Regulations. Any person who believes that he or
she may be a "substantial user" or a "related person" as so defined should
contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35% effective for long-term capital gains realized in taxable
years beginning on or after January 1, 1993. For taxpayers other than
corporations, net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of tax-
exempt interest earned during the year.
With respect to the various series of Ohio Tax-Exempt Bond Trust, Squire,
Sanders & Dempsey rendered an opinion at the time of each closing for each Ohio
Trust which was substantially similar to the foregoing.
Under existing law, the State Trusts are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income of
the Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, State or other tax purposes are the opinions of counsel and are to
be so construed.
At the respective times of issuance of the Municipal Bonds, opinions relating
to the validity thereof and to the exclusion of interest thereon from Federal
gross income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
State Trusts of the proceedings relating to the issuance of the Municipal Bonds
or of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of Social
Security benefits are includable in gross income to the extent that the sum of
"modified adjusted gross income" plus fifty percent of the Social Security
benefits received exceeds a "base amount." The base amount is $25,000 for
unmarried taxpayers, $32,000 for married taxpayers filing a joint return and
zero for married taxpayers who do not live apart at all times during the taxable
year and who file separate returns. Modified adjusted gross income is adjusted
gross income determined without regard to certain otherwise allowable deductions
and exclusions from gross income and by including tax exempt interest. To the
extent that Social Security benefits are includable in gross income, they will
be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after December 31,
1993, up to 85 percent of Social Security benefits are includable in gross
income to the extent that the sum of "modified adjusted gross
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income" plus fifty percent of Social Security benefits received exceeds an
"adjusted base amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the taxable year and
who file separate returns.
Although tax-exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income, no tax-exempt interest, including
that received from the Trust Fund, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount or the adjusted base
amount must include fifty percent or eighty-five percent, respectively of his
Social Security benefits in gross income whether or not he receives any tax-
exempt interest. A taxpayer whose modified adjusted gross income (after
inclusion of tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
For a discussion of the State tax status of income earned on Units of a State
Trust, see the discussion of tax status for the applicable trust. Except as
noted therein, the exemption of interest on State and local obligations for
Federal income tax purposes discussed above does not necessarily result in
exemption under the income or other tax laws of any state or city. The laws of
the several states vary with respect to the taxation of such obligations.
All statements in the Prospectus concerning exemption from Federal, state or
other taxes are the opinions of counsel and are to be so construed.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ARIZONA TRUSTS. The following brief summary regarding the economy of Arizona
is based upon information drawn from publicly available sources and is included
for the purpose of providing the information about general economic conditions
that may or may not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic sectors include services, tourism and manufacturing. Mining and
agriculture are also significant, although they tend to be more capital than
labor intensive. Services is the single largest economic sector. Many of these
jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may be
adversely affected by the closing of a major air force base near Phoenix and the
bankruptcy of several major employers, including America West Airlines.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting surplus
of completed inventory. This decline adversely affected both the construction
industry and those Arizona financial institutions which had aggressively pursued
many facets of real estate lending. In the neat future, Arizona's financial
institutions are likely to continue to experience problems until the excess
inventories of commercial and residential properties are absorbed. The
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problems of the financial institutions have adversely affected employment and
economic activity. Longer prospects are brighter. Arizona has been, and is
projected to continue to be, one of the fastest growing areas in the United
States. Over the last several decades the State has outpaced most other regions
of the country in virtually every major category of growth, including
population, personal income, gross state product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ending June 30, 1995.
General Fund revenues of $4.3 billion are expected during fiscal year 1995.
Approximately 44.5% of this budgeted revenue comes from sales and use taxes,
44.4% from income taxes (both individual and corporate) and 4.4% from property
taxes. All taxes total approximately $4.0 billion, or 93% of General Funds
revenues. Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest.
For fiscal year 1994 the budget called for expenditures of approximately $4.1
billion. These expenditures fell into the following major categories: education
(47.4%), health and welfare (26.3%), protection and safety (4.0%), general
government (15.5%) and inspection and regulation, natural resources and
transportation (6.8%). The States's general fund expenditures for fiscal year
1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value of marketability
of any of the Bonds issued by an entity other than the State of Arizona will be
affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by Arizona's
constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the legislature cannot appropriate revenues in excess of
7% of the total personal income of the state in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in Roosevelt
Elementary School District Number 66, et al. v. Dianne Bishop, et al. (the
"Roosevelt Opinion"). In this opinion, the Arizona Supreme Court held that the
present statutory financing scheme for public education in the State of Arizona
does not comply with the Arizona constitution. Subsequently, the Arizona School
Boards Association, with the approval of the appellants and the appellees to the
Roosevelt Opinion, and certain Arizona school districts, filed with the Arizona
Supreme Court motions for clarification of the Roosevelt Opinion, specifically
with respect to seeking prospective application of the Roosevelt Opinion. On
July 29, 1994, the Arizona Supreme Court clarified the Roosevelt Opinion to hold
that such opinion will have prospective effect only.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona Trust.
The Arizona Legislature has in the past sought to enact health care cost
control legislation. Certain other health care regulatory laws have expired.
It is expected that the Arizona legislature will at future sessions continue to
attempt to adopt legislation concerning health care
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cost control and related regulatory matters. The effect of any such legislation
or of the continued absence of any legislation restricting hospital bed
increased and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, Arizona Health Care Cost
Containment System ("AHCCCS"), which provides health care to indigent persons
meeting certain financial eligibility requirements, through managed care
programs. In fiscal year 1994, AHCCCS was financed approximately 60% by federal
funds, 29% by state funds, and 11% by county funds.
Under state law, hospitals retain the authority to raise with notification and
review by, but not approval from, the Department of Health Services. Hospitals
in Arizona have experienced profitability problems along with those in other
states. At least two Phoenix based hospitals have defaulted on or reported
difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases needed
to cover operating costs and debt service are subject to regulation by the
Arizona Corporation Commission, the only significant exception being the Salt
River Project Agricultural Improvement and Power District which, as a Federal
instrumentality, is exempt from rate regulation. On July 15, 1991, several
creditors of Tucson Electric Power Company ("Tucson Electric") filed involuntary
petitions under Chapter 11 of the U.S. Bankruptcy Code to force Tucson Power to
reorganize under the supervision of the bankruptcy court. On December 31, 1991,
the Bankruptcy Court approved the utility's motion to dismiss the July petition
after five months of negotiations between Tucson Electric and its creditors to
restructure the utility's debts and other obligations. In December 1992, Tucson
Electric announced that it had completed its financial restructuring. In
January 1993, Tucson Electric asked the Arizona Corporation Commission for a
9.3% average rate. Tucson Electric serves approximately 270,000 customers,
primarily in the Tucson area. Inability of any regulated public utility to
secure necessary rate increases could adversely affect, to an indeterminable
extent, its ability to pay debt service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment will
be made over a four-year period beginning with approximately $14.6 million in
tax refunds in fiscal year 1994. A combination of tax refunds and tax credits
will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
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For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes;
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for amortization of Bond discount
or premium and other basis adjustments, including any basis reduction that may
be required to reflect a Unitholder's share of interest, if any, accruing on
Bonds during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust with represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation tat the issuer of the obligations, rather that the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
ARKANSAS TRUSTS. The Constitution of Arkansas specifically prohibits the
creation of any State general obligation debt unless authorized in a Statewide
general election. Although the State of Arkansas defaulted on some of its
general obligation debt during the depression in the later 1930's, it has not
failed to pay the principal and interest on any of its general obligations when
due since that time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development Act of
1981" ("Act 496"), authorized the issuance of State Water Resources Development
General Obligation Bonds by the State of Arkansas, acting by and through the
Arkansas Soil and Water Conservation Commission. The issuance of bonds pursuant
to Act 496 was approved by the electors of the State at the general election on
November 2, 1982. The total principal amount of bonds issued during any fiscal
biennium may not exceed $15,000,000, and the total principal of all bonds issued
under Act 496 may not exceed $100,000,000. All Bonds to be issued under Act 496
shall be direct general obligations of the State, the principal and interest of
which are payable from the general revenues of the State. Pursuant to Act 496,
the State of Arkansas has issued and outstanding two series of bonds in the
aggregate principal amount of $36,645,000 under Act 496 as of June 30, 1993.
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Act 686 of 1987, the "Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987" ("Act 686"), authorizes the issuance of
Arkansas Waste Disposal and Pollution Abatement Facilities General Obligation
Bonds by the State of Arkansas, acting by and through the Arkansas Soil and
Water Conservation Commission. The issuance of bonds pursuant to Act 686 was
approved by the electors of the State at the general election on November 8,
1988. The total principal amount of bonds issued during any fiscal biennium may
not exceed $50,000,000, and the total principal of all bonds issued under Act
686 may not exceed $250,000,000. All bonds to be issued under Act 686 shall be
direct general obligations of the State, the principal and interest of which are
payable from the general revenues of the State. The State of Arkansas has
outstanding two series of bonds in the aggregate principal amount of
approximately $25,100,000 under Act 686 as of June 30, 1993.
Act 683 of 1989, the "Arkansas College Saving Bond Act of 1989" ("Act 683"),
authorizes the issuance of Arkansas College Savings General Obligation Bonds by
the State of Arkansas, acting by and through the Arkansas Development Finance
Authority. The issuance of bonds pursuant to Act 683 was approved by the
electors of the State at the general election on November 6, 1990. The total
principal amount of bonds issued during any fiscal biennium may not exceed
$100,000,000, and the total principal of all bonds issued under Act 683 may not
exceed $300,000,000. All bonds to be issued under Act 683 shall be direct
general obligations of the State, the principal and interest of which are
payable from the general revenues of the State. The State of Arkansas has
outstanding four series of bonds in the aggregate principal amount of
approximately $161,751,000 under Act 683 as of April 1, 1994.
Deficit spending has been prohibited by statute in Arkansas since 1945. The
Revenue Stabilization Law requires that before any State spending can take
place, there must be an appropriation by the General Assembly and there must be
funds available in the fund from which the appropriation has been made. The
State is prohibited from borrowing money to put into any State fund from which
appropriations can be paid.
Information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in Arkansas. The Arkansas economy represents
approximately 2.0% of the total United States' economy. Its small size causes
the Arkansas economy to follow the national economy. Fluctuations in the
national economy are often mirrored by coinciding or delayed fluctuations in the
Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based. Thus, the
State of Arkansas feels the full force of the business cycle and also sees the
growth swing from positive to negative as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas economy regardless of
the phase the business cycle was in. In recent years, agricultural employment
in Arkansas has been on the decline. From 1988 to 1989 and from 1989 to 1990,
agricultural employment declined by 1.6%.
Employment in Arkansas' construction industry decreased by 1.8% from 1989 to
1990 and by 4.4% from 1990 to 1991. This followed a 2.3% decline from 1988 to
1989.
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During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. Manufacturing employment in Arkansas grew by
0.56% from 1990 to 1991 versus 3.7% at the national level. The diversification
of economic interests has lessened Arkansas' cyclical sensitivity to impact by
any single sector. From 1990 to 1991, total employment decreased by 1.9% and
total nonagricultural wage and salary employment increased by 1.4%. Total
employment growth in Arkansas exceeded the growth rate of total employment in
the United States. The average unemployment rate decreased from 7.2% in 1992 to
6.2% in 1993. Total personal income increased by 7.2% from 1988 to 1989, 6.7%
from 1989 to 1990 and by 5.2% from 1990 to 1991. Per capita personal income
increased by 7.1% from 1988 to 1989, 6.4% from 1989 to 1990 and by 4.3% from
1990 to 1991. Retail sales increased by 1.3% from 1990 to 1991.
Counties and municipalities may issue general obligation bonds (pledging an ad
valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but as
in all cases of revenue bonds, neither the full faith and credit nor the taxing
power of the State of Arkansas or any municipality or county thereof is pledged
to the repayment of those bonds. Revenue bonds can be issued only for public
purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete description of all adverse conditions to which the
issuers in the Arkansas Trust are subject. Additionally, many factors including
national economic, social and environmental policies and conditions, which are
not within the control of the issuers of Bonds, could affect or could have an
adverse impact on the financial condition of the State, various agencies and
political subdivisions and private businesses located in the State. The Sponsor
is unable to predict whether or to what extent such factors or other factors may
affect the issuers of Bonds, the market value or marketability of the Bonds or
the ability of the respective issuers of the Bonds acquired by the Arkansas
Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Arkansas Trust Special Counsel to each
Arkansas Trust for Arkansas tax matters rendered an opinion under then existing
Arkansas income tax law applicable to taxpayers whose income is subject to
Arkansas income taxation substantially to the effect that:
The Arkansas Trust is not an association taxable as a corporation or otherwise
for purposes of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata portion of
the Arkansas Trust for Arkansas income tax purposes, and will have a taxable
event when the Arkansas Trust disposes of a Bond or when the Unitholder sells,
exchanges, redeems or otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption or other
disposition of Bonds held by the Arkansas Trust resulting in the distribution
of income to Arkansas Unitholders will be subject to Arkansas income taxation
if the Bonds were held, sold, exchanged, redeemed or otherwise disposed of by
the Arkansas Unitholders; and
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Interest on Bonds, issued by the State of Arkansas, or by or on behalf of
political subdivisions, thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt from
Arkansas income taxation when received by the Arkansas Trust and attributed to
such Arkansas Unitholder and when distributed to such Arkansas Unitholder.
CALIFORNIA TRUSTS. The Trust will invest substantially all of its assets in
California Municipal Obligations. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information provides
only a brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from various
State and local agencies in California or contained in official statements for
various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of over 30 million represents 12% of the
total United States population and grew by 27% in the 1980s. Total personal
income in the State, at an estimated $662 billion in 1991, accounts for 13% of
all personal income in the nation. Total employment is almost 14 million, the
majority of which is in the service, trade and manufacturing sectors.
Reports issued by the State Department of Finance and other sources indicate
that the State's economy is suffering its worst recession since the 1930s, with
prospects for recovery slower than for the nation as a whole. The State has
lost over 800,000 jobs since the start of the recession in mid 1990 and
additional job losses are expected before an upturn begins. The largest job
losses have been in Southern California, led by declines in the aerospace and
construction industries. Weaknesses statewide occurred in manufacturing,
construction, services and trade and will be hurt in the next few years by
continued cuts in federal defense spending and base closures. Unemployment is
expected to remain well above the national average in 1994. The State's economy
is only expected to pull out of the recession slowly, following the national
recovery which has begun. Delay in recovery will exacerbate shortfalls in State
revenues.
Certain California Municipal Obligations may be obligations of issuers which
rely in whole or in part, directly or indirectly, on ad valorem property taxes
as a source of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California Constitution, enacted
by the voters in 1978 and commonly known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of ad valorem property taxes on
real property and generally restricts the reassessment of property to 2% per
year, except upon new construction or change of ownership (subject to a number
of exemptions).
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Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of March
1, 1975, if acquired earlier), subject to certain adjustments. This system has
resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court announced
a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax."
However, court decisions allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy general
taxes, except by receiving majority local voter approval. Significant elements
of this initiative, "Proposition 62", have been overturned in recent court
cases. An initiative proposed to reenact the provisions of Proposition 62 as a
constitutional amendment was defeated by the voters in November 1990, but such a
proposal may be renewed in the future.
California and its local governments are subject to an annual "appropriations
limit" imposed by Article XIIIB of the California Constitution, enacted by the
voters in 1979 and significantly amended by Propositions 98 and 111 in 1988 and
1990, respectively. Article XIIIB prohibits the State or any covered local
government from spending "appropriations subject to limitation" in excess of the
appropriations limit imposed. "Appropriations subject to limitation" are
authorizations to spend" proceeds of taxes," which consists of tax revenues and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed the cost of providing the
product or service, but "proceeds of taxes" excludes most State subventions to
local governments. No limit is imposed on appropriations or funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January 1,
1979, or subsequently authorized by the voters, (2) appropriations arising from
certain emergencies declared by the Governor, (3) appropriations for certain
capital outlay projects, (4) appropriations by the State of post-1989 increases
in gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service responsibilities
between government units. The definitions for such adjustments were liberalized
in 1990 by Proposition 111 to follow more closely growth in California's
economy.
"Excess" revenues are measured over a two-year cycle. Local governments must
return any excess to taxpayers by rate reduction. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues since
1990 because of the recession, few governments are currently operating near
their spending limits, but this
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condition may change over time. Local governments may by voter approval exceed
their spending limits for up to four years.
During fiscal year 1986-87, State receipts from proceeds of taxes exceeded its
appropriations limit by $1.1 billion, which was returned to taxpayers. Since
that year, appropriations subject to limitation have been under the State limit.
State appropriations are expected to be $3.7 billion under the limit for Fiscal
Year 1993-94.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Municipal Obligations or on the ability of the State or
local governments to pay debt service on such California Municipal Obligations.
It is not presently possible to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality of either
Article XIIIA or Article XIIIB, or the impact of any such determinations upon
State agencies or local governments, or upon their ability to pay debt service
on their obligations. Future initiative or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
As of April 1, 1994, California had approximately $18.1 billion of general
obligation bonds outstanding, and $5.6 billion remained authorized but unissued.
In addition, at June 30, 1993, the State had lease-purchase obligations, payable
from the State's General Fund, of approximately $4.0 billion. Of the States's
outstanding general obligation debt, approximately 28% os presently self-
liquidating (for which program revenues are anticipated to be sufficient to
reimburse the General Fund for debt service payments). Four general obligation
bond propositions, totalling $5.9 billion, will be on the June, 1994 ballot. In
Fiscal Year 1992-93, debt service on general obligation bonds and lease-purchase
debt was approximately 4.1% of General Fund revenues. The State has paid the
principal of and interest on its general obligation bonds, lease-purchase debt
and short-term obligations when due.
The principal sources of General Fund revenues in 1992 - 93 were the
California personal income tax (44% of total revenues), the sales tax (38%),
bank and corporation taxes (12%), and the gross premium tax on insurance (3%).
California maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished as soon
as sufficient revenues are available. Year-end balances in the Economic
Uncertainties Fund are included for financial reporting purposes in the General
Fund balance. In recent years, California has budgeted to maintain the Economic
Uncertainties Fund at around 3% of General Fund expenditures but essentially no
reserve is budgeted in 1992-93 or 1993-94 because reserves have been reduced by
the recession.
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many assistance
programs to local governments, which were constrained by Proposition 13 and
other laws. The largest State program is assistance to local public school
districts. In 1988, an initiative (Proposition 98) was enacted which (subject
to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 34%).
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Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (K-14 education, health,
welfare and corrections) growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As a result, the
State entered a period of budget imbalance, with expenditures exceeding revenues
for four of the last five fiscal years through 1991-92.
As the State fell into a deep recession in the summer of 1990, the State
budget fell sharply out of balance in the 1990-91 and 1991-92 fiscal years,
despite significant expenditure cuts and tax increases. The State has
accumulated a $2.8 billion budget deficit by June 30, 1992. This deficit also
severely reduced the State's cash resources, so that it had to rely on external
borrowing in the short-term markets to meet its cash needs.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed; nevertheless,
certain obligations (such as debt service, school apportionments, welfare
payments and employee salaries) were payable because of continuing or special
appropriations or court orders. However, the State Controller did not have
enough cash to pay all of these ongoing obligations as they came due, as well as
valid obligations incurred in the prior fiscal year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants, all of
which were called for redemption by September 4, 1992 following enactment of the
1992-93 Budget Act and issuance by the State of $3.3 billion of Interim Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate the
State's accumulation deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of expenditures.
Thus, the State continued to carry its $2.8 billion budget deficit at June 30,
1993.
The 1993-94 Budget Act was similar to the prior year in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a two-year
plan to eliminate the accumulated deficit by borrowing into the 1994-95 fiscal
year. With the recession still continuing longer than expected, the 1994-95
Governor's Budget now projects that in the 1993-94 Fiscal Year, the General Fund
will have $900 million less revenue and $800 million higher expenditures than
budgeted. As a result revenues will only exceed expenditures by about $400
million. If this projection is met, it will be the first operating surplus in
four years; however, some budget analysts outside the Department of Finance
project revenues in the balance of 1993-94 will not even meet the revised, lower
projection. In addition, the General Fund may have some unplanned costs for
relief related to the January 17, 1994 Northward earthquake.
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The State has implemented its short-term borrowing as part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap of
around $5 billion by June 30, 1995. Over $3.1 billion of this amount is being
requested from the federal government as increased aid, particularly for costs
associated with incarcerating, educating and providing health and welfare
services to undocumented immigrants. However, President Clinton has not
included these costs in his proposed Fiscal 1995 Budget. The rest of the budget
gap is proposed to be closed with expenditure cuts and projected $600 million of
new revenue assuming the State wins a tax case presently pending in the U.S.
Supreme Court. Thus the State will once again face significant uncertainties
and very difficult choices in the 1994-95 budget, as tax increases are unlikely
and many cuts and budget adjustments have been made in the past three years.
The State's severe financial difficulties for the current and upcoming budget
years will result in continued pressure upon various local governments,
particularly school districts and counties which depend on State aid. Despite
efforts in recent years to increase taxes and reduce governmental expenditures,
there can be no assurance that the State will not face budget gaps in the
future.
State general obligation bonds are currently rated "A1" by Moody's and "A" by
S&P. Both of these ratings were recently reduced from "Aa" and "A+" levels,
respectively. There can be no assurance that such ratings will be maintained in
the future. It should be noted that the creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and that there is no obligation
on the part of the State to make payment on such local obligations in the event
of default.
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require the
State to make significant future expenditures or may substantially impair
revenues.
On December 7, 1994, Orange County, California (the "County"), together with
its pooled investment fund (the "Fund") filed for protection under Chapter 9 of
the federal Bankruptcy Code, after reports that the Fund had suffered
significant market losses in its investments which caused a liquidity crisis for
the Fund and the County. Approximately 180 other public entities, most but
not all located in the County, were also depositors in the Fund. As of December
13, 1994, the County indicated that the Fund had lost about 27% of its initial
deposits of approximately $7.4 billion. There County may suffer further losses
as it sells investments to restructure the Fund. Many of the entities which kept
moneys in the Fund, including the County, are facing cash flow difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects.
The State of California has no obligations with respect to any bonds or other
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate.
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Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. Total local assistance from the
State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years, including the effect of implementing reductions in
certain aid programs. To reduce State General Fund support school districts,
the 1992-93 and 1993-94 Budget Acts caused local governments to transfer $3.9
billion of property tax revenues to school districts, representing loss of the
post-Proposition 13 "bailout" aid. Local governments have in return received
greater revenues and greater flexibility to operate health and welfare programs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be reduced. Any such reductions in State
aid could compound the serious fiscal constraints already experienced by many
local governments, particularly counties. The Richmond United School District
(Contra Costa County) entered bankruptcy proceedings in May 1991, but the
proceedings have been dismissed.
California Municipal Obligations which are assessment bonds may be adversely
affected by a general decline in real estate values or a slowdown in real estate
sales activity. In many cases, such bonds are secured by land which is
undeveloped at the time of issuance but anticipated to be developed within a few
years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed, the
lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds in
the event of delinquency in the payment of assessments or taxes, except from
amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically payable from
the general fund of the municipality, are subject to "abatement" in the event
the facility being leased is unavailable for beneficial use and occupancy by the
municipality during the term of the lease. Abatement is not a default, and
there may be no remedies available to the holders of the certificates evidencing
the lease obligation in the event abatement occurs. The most common causes of
abatement are failure to complete construction of the facility before the end of
the period during which lease payments have been capitalized and uninsured
casualty losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease payments may be
interrupted (if all available insurance proceeds and reserves are exhausted) and
the certificates may not be paid when due.
Several years ago the Richmond United School District (the "District") entered
into a lease transaction in which certain existing properties of the District
were sold and leased back in order to obtain funds to cover operating deficits.
Following a fiscal crisis in which the District's finances were taken over by a
State receiver (including a brief period under bankruptcy court protection), the
District failed to make rental payments on this lease, resulting in a lawsuit by
the Trustee for the Certificate of Participation holders, in which the State was
a named defendant (on the grounds that it controlled the District's finances).
One of the defenses raised in answer to this lawsuit was the invalidity of the
original lease transaction. The trial court has upheld the validity of the
District's lease, and the case has been settled. Any judgment in any future
case against the position
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asserted by the Trustee in the Richmond case may have adverse implications for
lease transactions of a similar nature by other California entities.
The repayment of Industrial Development Securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the Issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore. other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to determine the impact of any such legislation on
California Municipal Obligations in which the Fund may invest, future
allocations of state revenues to local governments or the abilities of state or
local governments to pay the interest on, or repay the principal of, such
California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Any California Municipal Obligation in the Portfolio
could be affected by an interruption of revenues because of damaged facilities,
or, consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance coverage
at reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the Federal or State government to
appropriate sufficient funds within their respective budget limitations.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
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(1) the California Trust is not an association taxable as a corporation and
the income of the California Trust will be treated as the income of the
Unitholders under the income tax laws of California;
(2) amounts treated as interest on the underlying Securities in the
California Trust which are exempt from tax under California personal
income tax and property tax laws when received by the California Trust
will, under such laws, retain their status as tax-exempt interest when
distributed to Unitholders. However, interest on the underlying
Securities attributed to a Unitholder which is a corporation subject to
the California franchise tax laws may be includable in its gross income
for purposes of determining its California franchise tax. Further,
certain interest which is attributable to a Unitholder subject to the
California personal income tax and which is treated as an item of tax
preference for purposes of the federal alternative minimum tax pursuant
to Section 57(a)(5) of the Internal Revenue Code of 1986 may also be
treated as an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the provisions of
the California Constitution exempting the interest on bonds issued by the
State of California, or by local governments within the state, from taxes
levied on income, the application of the new California alternative
minimum tax to interest otherwise exempt from the California personal
income tax in some cases may be unclear;
(3) under California income tax law, each Unitholder in the California Trust
will have a taxable event when the California Trust disposes of a
Security (whether by sale, exchange, redemption, or payment at maturity)
or when the Unitholder redeems or sells Units. Because of the requirement
that tax cost basis be reduced to reflect amortization of bond premium,
under some circumstances a Unitholder may realize taxable gains when
Units are sold or redeemed for an amount equal to, or less than, their
original cost. The total cost of each Unit in the California Trust to a
Unitholder is allocated among each of the Bond issues held in the
California Trust (in accordance with the proportion of the California
Trust comprised by each Bond issue) in order to determine his per Unit
tax cost for each Bond issue; and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per
Unit tax cost of each Bond issue. Unitholders' bases in their units, and
the bases for their fractional interest in each Trust asset, may have to
be adjusted for their pro rata share of accrued interest received, if
any, on Securities delivered after the Unitholders' respective settlement
dates;
(4) under the California personal property tax laws, bonds (including the
Securities in the California Trust) or any interest therein is exempt
from such tax;
(5) any proceeds paid under the insurance policy issued to the California
Trust with respect to the Securities which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from California
personal income tax if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations;
and
(6) under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units
of the California Trust is not deductible for the purposes of the
California personal income tax. While there presently is no California
authority
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interpreting this provision, Section 17280(b)(2) directs the California
Franchise Tax Board to prescribe regulations determining the proper
allocation and apportionment of interest costs for this purpose. The
Franchise Tax Board has not yet proposed or prescribed such regulations.
In interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (although the
Service has not contended that a deduction for interest on indebtedness
incurred to purchase or improve a personal residence or to purchase goods
or services for personal consumption will be disallowed). In the absence
of conflicting regulations or other California authority, the California
Franchise Tax Board generally has interpreted California statutory tax
provisions in accord with Internal Revenue Service interpretations of
similar Federal provisions.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such made
a review of proceedings relating to the issuance of certain Securities at the
time of their issuance, Special Counsel has not made any special review for the
California Trust of the proceedings relating to the issuance of the Securities
or of the basis for such opinions.
COLORADO TRUST. The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. By statute, the amount of
General Fund revenues available for appropriation is based upon revenue
estimates which, together with other available resources, must exceed annual
appropriations by the amount of the unappropriated reserve (the "Unappropriated
Reserve"). The Unappropriated Reserve requirement for fiscal years 1991, 1992
and 1993 was set at 3% of total appropriations from the General Fund. For
fiscal years 1994 and thereafter, the Unappropriated Reserve requirement is set
at 4%. In addition to the Unappropriated Reserve, a constitutional amendment
approved by Colorado voters in 1992 requires the State and each local government
to reserve a certain percentage of its fiscal year spending (excluding bonded
debt service) for emergency use (the "Emergency Reserve"). The minimum
Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years. For
fiscal year 1992 and thereafter, General Fund appropriations are also limited to
an amount equal to the cost of performing certain required reappraisals of
taxable property plus an amount equal to the lesser of (i) five percent of
Colorado personal income or (ii) 106% of the total General Fund appropriations
for the previous fiscal year. This restriction does not apply to any General
Fund appropriations which are required as a result of a new federal law, a final
state or federal court order or moneys derived from the increase in the rate or
amount of any tax or fee approved by a majority of the registered electors of
the State voting at any general election. In addition, the statutory limit on
the level of General Fund appropriations may be exceeded for a given fiscal year
upon the declaration of a State fiscal emergency by the State General Assembly.
The 1992 General Fund balance was $133.3 million, which was $49.1 million
below the Unappropriated Reserve requirement. The 1993 fiscal year ending
General Fund balance was $326.6 million, or $196.7 million over the required
Unappropriated Reserve and Emergency Reserve. Based on June 20, 1994 estimates,
the 1994 fiscal year ending General Fund balance is expected to be $337.7
million, or $224.3 million over the required Unappropriated Reserve and
Emergency Reserve.
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On November 3, 1992 voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31, 1992, and
which could restrict the ability of the State and local governments to increase
revenues and impose taxes. The Amendment applies to the State and all local
governments, including home rule entities ("Districts"). Enterprises, defend as
government-owned businesses authorized to issue revenue bonds and receiving
under 10% of annual revenue in grants from all Colorado state and local
governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and will probably require judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to the
Amendment, local government spending is to be limited by the same formula as the
limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in State population in the
prior calendar year. The bases for initial spending and revenue limits are
fiscal year 1992 spending and 1991 property taxes collected in 1992. The bases
for spending and revenue limits for fiscal year 1994 and later years will be the
prior fiscal year's spending and property taxes collected in the prior calendar
year. Debt service changes, reductions and voter-approved revenue changes are
excluded from the calculation bases. The Amendment also prohibits new or
increased real property transfer tax rates, new State real property taxes and
local District income taxes.
Litigation concerning several issues relating to the Amendment is pending in
the Colorado courts. The litigation deals with three principal issues: (i)
whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease purchase agreement subject to annual appropriations is an obligation which
requires voter approval prior to execution of the agreement; and (iii) what
constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September, 1994, the Colorado Supreme Court held that Districts
can increase mill levies to pay levies to pay debt service on general obligation
bonds issued after the effective date of the Amendment; litigation regarding
mill levy increases to pay general obligation bonds issued prior to the
Amendment is still pending. Various cases addressing the remaining issues are
at different stages in the trial and appellate process. The outcome of such
litigation cannot be predicted at this time.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1993-94,
June 20, 1994 (the "Economic Report"), inflation for 1992 was 3.8% and
population grew at the rate of 2.8% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will be
limited to 6.6% over expenditures during the 1993 fiscal year. The 1993 fiscal
year is the base year for calculating the limitation for the 1994 fiscal year.
The limitation for the 1995 fiscal year is projected to be 7.1%, based on
projected inflation of 4.2% for 1993 and projected population growth of 2.9%
during 1993. For the 1993 fiscal year, the General Fund revenues totalled
$3,443.3 million and program revenues (cash funds) totalled $1,617.6 million,
resulting in total estimated base revenues of $5,060.9 million. Expenditures
for the 1994
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fiscal year, therefore, cannot exceed $5,394.9 million. However, the 1994
fiscal year General Fund and program revenues (cash funds) are projected to be
only $5,242.8 million, or $152.1 million less than expenditures allowed under
the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$100.3 million in fiscal year 1988, $134.8 million in fiscal year 1989 $116.6
million in fiscal year 1990, $16.3 million in fiscal year 1991 and $133.3
million in fiscal year 1992 and $326.6 million in fiscal year 1993. The fiscal
year 1994 unrestricted General Fund is currently projected to be $337.7 million.
For fiscal year 1993, the following tax categories generated the following
respective revenue percentages of the States's $3,443.3 million total gross
receipts: individual taxes represented 51.1% of gross fiscal year 1993
receipts; sales, use and excise taxes represented 31.3% of gross fiscal year
1993 receipts; and corporate income taxes represented 4.0% of gross fiscal year
1993 receipts. The final budget for fiscal year 1994 projects general fund
revenues of approximately $3,570.8 million and appropriations of approximately
$3,556.8 million. The percentages of general fund revenue generated by type of
tax for fiscal year 1994 are not expected to be significantly different from
fiscal year 1993 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual renewal
at the option of the State. In addition, the State is authorized to issue
short-term revenue anticipation notes. Local governmental units in the State
are also authorized to incur indebtedness. The major source of financing for
such local government indebtedness is an ad valorem property tax. In addition,
in order to finance public projects, local governments in the State can issue
revenue bonds payable from the revenues of a utility or enterprise or from the
proceeds of an excise tax, or assessment bonds payable from special assessments.
Colorado local governments can also finance public projects through leases which
are subject to annual appropriation at the option of the local government.
Local governments in Colorado also issue tax anticipation notes. The Amendment
requires prior voter approval for the creation of any multiple fiscal year debt
or other financial obligation whatsoever, except for refundings at a lower rate
or obligations of an enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1993 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the State's
economy and of Denver as a regional economic and transportation hub. The
government and manufacturing sectors followed as the fourth and fifth largest
employment sectors in the State, representing approximately 17.8% and 11.3%,
respectively, of non-agricultural employment in the State in 1993.
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According to the Economic Report, the unemployment rate improved slightly from
an average of 5.9% during 1992 to 5.2% during 1993. Total retail sales
increased by 9.7% during 1993. Colorado continued to surpass the job growth
rate of the U.S. with a 3.4% rate of growth projected for Colorado in 1994, as
compared with 2.2% for the nation as a whole. However, the rate of job growth
in Colorado is expected to decline in 1995, primarily due to the completion in
1994 of large public works projects such as Denver International Airport, Coors
Baseball Field, and the Denver public Library renovation project.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In 1992,
Colorado was the twelfth fastest growing state in terms of personal income
growth. However, because of heavy migration into the state and a large increase
in low-paying retail sector jobs, per capita personal income in Colorado
increased by only 3.8% in 1992, 0.1% below the increase in per capita personal
income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the Colorado
Trust is not an association taxable as a corporation for purposes of Colorado
income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a pro rata share of
each asset of the Colorado Trust for Colorado income tax purposes in the
proportion that the number of Units of such Trust held by the Unitholder
bears to the total number of outstanding Units of the Colorado Trust, and
the income of the Colorado Trust will therefore be treated as the income
of each Colorado Unitholder under Colorado law in the proportion
described;
(2) Interest on Bonds that would not be includable in income for income tax
purposes when paid directly to a Colorado Unitholder will be exempt from
Colorado income taxation when received by the Colorado Trust and
attributed to such Colorado Unitholder and when distributed to such
Colorado Unitholder;
(3) Any proceeds paid under an insurance policy or policies issued to the
Colorado Trust with respect to the Bonds in the Colorado Trust which
represent maturing interest on defaulted obligations held by the Trustee
will be excludable from Colorado adjusted gross income if, and to the
same extent as, such interest would have been so excludable if paid in
the normal cause by the issuer of the defaulted obligations;
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(4) Any proceeds paid under individual policies obtained by issuers of Bonds
in the Colorado Trust which represent maturing interest on defaulted
obligations held by the Trustee will not be includable in income for
Colorado income tax purposes if, and to the same extent as, such interest
would have been so excludable if paid in the normal course by the issuer
of the defaulted obligations;
(5) Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange, redemption,
or payment at maturity) or when the Colorado Unitholder redeems or sells
Units at a price that differs from original cost as adjusted for
amortization of bond discount or premium and other basis adjustments
(including any basis reduction that may be required to reflect a Colorado
Unitholder's share of interest, if any, accruing on Bonds during the
interval between the Colorado Unitholder's settlement date and the date
such Bonds are delivered to the Colorado Trust, if later);
(6) Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Colorado Unitholders realizing
taxable gain when their Units are sold or redeemed for an amount equal to
or less than their original cost; and
(7) if interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not deductible for
federal income tax purposes, it also will be non-deductible for Colorado
income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into account
for purposes of determining eligibility for the Colorado Property Tax/Rent/Heat
Rebate.
KANSAS TRUSTS. Since the Kansas Trust will invest substantially all of its
assets in Kansas municipal securities, the Kansas Trust is susceptible to
political and economic factors affecting issuers of Kansas municipal securities.
As of 1991, 2,494,566 people lived in Kansas, representing a .69% increase in
population since the 1990 census. Based on these numbers, Kansas ranked thirty-
second in the nation in population size. According to the Kansas Department of
Commerce, in 1991, Kansas ranked twenty-first in the nation in terms of per
capita income. Historically, agriculture and mining according to the Kansas
Department of Commerce, in 1991 constituted the principal industries in Kansas.
Since the 1950s, however, manufacturing, governmental services and the services
industry have steadily grown, and as of 1993 approximately 15.7% of Kansas
workers were in the manufacturing sector, 20.8% in the government sector and
23.3% in the services sector (not including transportation, public utilities,
trade, finance, insurance and real estate), while the farming and mining sectors
combined for approximately 5.0% of the work force. The 1991 unemployment rate
was 4.4%, and the seasonally adjusted rate for December 1992 was 4.2%. By
constitutional mandate, Kansas must operate within a balanced budget and public
debt may only be incurred for extraordinary purposes and then only to a maximum
of $1 million. As of November 12, 1992, Kansas had no general obligation bonds
outstanding.
At the time of the closing for each Kansas Trust, Special Counsel to each
Kansas Trust for Kansas tax matters, rendered an opinion under then existing
Kansas income tax law applicable to taxpayers whose income is subject to Kansas
income taxation substantially to the effect that:
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The Trust is not an association taxable as a corporation for Kansas income tax
purposes;
Each Unitholder of the Trust will be treated as the owner of a pro rata
portion of the Trust, and the income and deductions of the Trust will therefore
be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas or any
of its political subdivisions will be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) however, interest on
Bonds issued prior to January 1, 1988 by the State of Kansas or any of its
political subdivisions will not be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) unless the laws of the
State of Kansas authorizing the issuance of such Bonds specifically exempt the
interest on the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on insurance companies under
Article 40, Chapter 28 of the Kansas statutes unless the laws of the State of
Kansas authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas; interest on the Bonds
which is exempt from Kansas income taxation when received by the Trust will
continue to be exempt when distributed to a Unitholder (other than a bank, trust
company or savings and loan association);
Each Unitholder of the Trust will recognize gain or loss for Kansas income tax
purposes if the Trustee disposes of a Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such transaction results in a recognized
gain or loss for federal income tax purposes;
Interest received by the Trust on the Bonds is exempt from intangibles
taxation imposed by any counties, cities and townships pursuant to present
Kansas law; and
No opinion is expressed regarding whether the gross earnings derived from the
Units is subject to intangibles taxation imposed by any counties, cities and
townships pursuant to present Kansas law.
KENTUCKY TRUSTS. The Commonwealth of Kentucky leads the nation in total
tonnage of coal produced and ranks among the top 10 states in the value of all
minerals produced. Tobacco is the dominant agricultural crop and Kentucky ranks
second among the states in the total cash value of tobacco raised. The
manufacturing mix in the state reflects a significant diversification. In
addition to the traditional concentration of tobacco processing plants and
bourbon distilleries, there is considerable durable goods production, such as
automobiles, heavy machinery, consumer appliances and office equipment. The
State's parks system and the horse breeding and racing industry, symbolized by
the Kentucky Derby, play an important role in an expanding tourist business in
the state.
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Current economic problems, including particularly the continuing high
unemployment rate, have had varying effects on the differing geographic areas of
the State and the political subdivisions located within such geographic areas.
Although revenue obligations of the State or its political subdivisions may be
payable from a specific source or project, there can be no assurance that
further economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value of the Bonds in
a Kentucky Trust or the ability of the respective obligors to pay debt service
of such Bonds.
Prospective investors should study with care the portfolio of Bonds in the
Kentucky Trust and should consult with their investment advisors as to the
merits of particular issues on the portfolio.
At the time of the closing for each Kentucky Trust, Special Counsel to each
Kentucky Trust for Kentucky tax matters rendered an opinion under then existing
Kentucky income tax law applicable to taxpayers whose income is subject to
Kentucky income taxation substantially to the effect that:
Because Kentucky income tax law is based upon the Federal law and in explicit
reliance upon the opinion of Chapman and Cutler referred to above, and in
further reliance on the determination letter to us of the Revenue Cabinet of
Kentucky dated May 10, 1984, it is our opinion that the application of existing
Kentucky income tax law would be as follows:
Each Kentucky Unitholder will be treated as the owner of a pro rata portion of
the Kentucky Trust for Kentucky income tax purposes, and the income of the
Kentucky Trust will therefore be treated as the income of the Kentucky
Unitholders under Kentucky law;
Interest on Bonds that would be exempt from Federal income taxation when paid
directly to a Kentucky Unitholder will be exempt from Kentucky income taxation
when: (i) received by the Kentucky Trust and attributed to such Kentucky
Unitholder; and (ii) when distributed to such Kentucky Unitholder;
Each Kentucky Unitholder will realize taxable gain or loss when the Kentucky
Trust disposes of a Bond (whether by sale, exchange, redemption or payment of
maturity) or when the Kentucky Unitholder redeems or sells Units at a price
that differs from original cost as adjusted for amortization or accrual, as
appropriate, of bond discount or premium and other basis adjustments (including
any basis reduction that may be required to reflect a Kentucky Unitholder's
share of interest, if any, accruing on Bonds during the interval between the
Kentucky Unitholder's settlement date and the date such Bonds are delivered to
the Kentucky Trust, if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Kentucky Unitholders realizing taxable gain
when their Units are sold or redeemed for an amount equal to or less than their
original cost;
Units of the Kentucky Trust, to the extent the same represent an ownership in
obligations issued by or on behalf of the Commonwealth of Kentucky or
governmental units of the Commonwealth of Kentucky, the interest on which is
exempt from Federal and Kentucky income taxation will not be subject to ad
valorem taxation by the Commonwealth of Kentucky or any political subdivision
thereof, and
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If interest on indebtedness incurred or continued by a Kentucky Unitholder to
purchase Units in the Kentucky Trust is not deductible for Federal income tax
purposes, it also will be nondeductible for Kentucky income tax purposes.
MICHIGAN TRUSTS. Investors should be aware that the economy of the State of
Michigan has, in the past, proven to be cyclical, due primarily to the fact that
the leading sector of the State's economy is the manufacturing of durable goods.
While the State's efforts to diversify its economy have proven successful, as
reflected by the fact that the share of employment in the State in the durable
goods sector has fallen from 33.1 percent in 1960 to 17.9 percent in 1990,
durable goods manufacturing still represents a sizable portion of the State's
economy. As a result, any substantial national economic downturn is likely to
have an adverse effect on the economy of the State and on the revenues of the
State and some of its local governmental units.
In May 1986, Moody's Investors Service raised the State's general obligation
bond rating to "Al". In October 1989, Standard & Poor's Ratings Group raised
its rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State revenues
and the financial impact on the local units of government in the areas in which
plants are closed could be more severe.
General Motors Corporation has announced the scheduled closing of several of
its plants in Michigan in 1993 and 1994. Some of these closings have occurred
and some have been deferred. The ultimate impact these closures may have on the
State's revenues and expenditures is not currently known. The impact on the
financial condition of the municipalities in which the plants are located may be
more severe than the impact on the State itself.
In recent years, the State has reported its financial results in accordance
with generally accepted accounting principles. For each of the five fiscal
years ending with the fiscal year ended September 30, 1989, the State reported
positive year-end General Fund balances and positive cash balances in the
combined General Fund/School Aid Fund. For the fiscal years ending September 30
1990 and 1991, the State reported negative year-end General Fund Balances of
$310.4 million and $169.4 million, respectively, but ended the 1992 fiscal year
with its general fund in balance and ended the 1993 fiscal year with a small
general lfund surplus. A positive cash balance in the combined General
Fund/School Aid Fund was recorded at September 30, 1990. In the 1991 through
1993 fiscal years the State experienced deteriorating cash balances which
necessitated short term borrowing and the deferral of certain scheduled cash
payments. The State borrowed $900 million for cash flow purposes in the 1993
fiscal year, which was repaid on September 30, 1993. The State's Budget
Stabilization Fund received a $283 million transfer from the General Fund in the
1993 State fiscal year, bringing the fund balance to $303 million at September
30, 1993.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the
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prior calendar year. In the event that the State's total revenues exceeds the
limit by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increased the State sales
ax rate from 4% to 6% and placed a cap on property assessment increases for all
property taxes. Concurrent legislation cut the State's income tax rate from
4.6% to 4.4.%, reduced some property taxes and altered local school funding
sources to a combination of property taxes and state revenues, some of which is
provided from other new or increased State taxes. The legislation also
contained other provisions that alter (and, in some cases, may reduce) the
revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted, investors
should be alert to the potential effect of such measures upon the operations
and revenues of Michigan local units of government.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of bonds
issued by the State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to meet debt service
requirements upon such bonds. In the 1991 fiscal year, the State deferred
certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year, up $34.4 million in the
1992 fiscal year, $45.5 million in the 1993 fiscal year and $64.6 million
(budgeted) in the 1994 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the local
unit, are payable from property taxes levied without limitation as to rate or
amount. With respect to bonds issued after December 22, 1978, and which were
not approved by the electors of the local unit, the tax levy of the local unit
for debt service purposes is subject to constitutional, statutory and charter
tax rate limitations. In addition, several major industrial corporations have
instituted challenges of their ad valorem property tax assessments in a number
of local municipal units in the State. If successful, such challenges could
have an adverse impact on the ad valorem tax bases of such units which could
adversely affect their ability to raise funds for operating and debt service
requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust for Michigan tax matters rendered an opinion under then existing
Michigan income tax law applicable to taxpayers whose income is subject to
Michigan income taxation substantially to the effect that:
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The Michigan Trust and the owners of Units will be treated for purposes
of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied upon
the opinion of Messrs. Chapman and Cutler as to the applicability of
Federal income tax under the Internal Revenue Code of 1986 to the Michigan
Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan Trust is
not an association taxable as a corporation; the income of the Michigan
Trust will be treated as the income of the Unitholders and be deemed to
have been received by them when received by the Michigan Trust. Interest
on the underlying Bonds which is exempt from tax under these laws when
received by the Michigan Trust will retain its status as tax exempt
interest to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable
event when the Michigan Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Unitholder redeems
or sells his Certificate to the extent the transaction constitutes a
taxable event for Federal income tax purposes. The tax cost of each unit
to a Unitholder will be established and allocated for purposes of these
Michigan tax laws in the same manner as such cost is established and
allocated for Federal income tax purposes;
Under the Michigan Intangibles Tax, the Michigan Trust is not taxable and
the pro rata ownership of the underlying Bonds, as well as the interest
thereon, will be exempt to the Unitholders to the extent the Michigan Trust
consists of obligations of the State of Michigan or its political
subdivisions or municipalities, or of obligations of possessions of the
United States.
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject to the
Single Business Tax the income from which would be considered in computing
the Single Business Tax. Persons are subject to the Single Business Tax
only if they are engaged in "business activity", as defined in the Act.
Under the Single Business Tax, both interest received by a Michigan Trust
on the underlying Bonds and any amount distributed from the Michigan Trust
to a Unitholder, if not included in determining taxable income for Federal
income tax purposes, is also not included in the adjusted tax base upon
which the Single Business Tax is computed, of either the Michigan Trust or
the Unitholders. If the Michigan Trust or the Unitholders have a taxable
event for Federal income tax purposes when the Michigan Trust disposes of
a Bond (whether by sale, exchange, redemption or payment at maturity) or
the Unitholder redeems or sells his Certificate, an amount equal to any
gain realized from such taxable event which was included in the
computation of taxable income for Federal income tax purposes (plus an
amount equal to any capital gain of an individual realized in connection
with such event but excluded in computing that individual's Federal taxable
income) will be included in the tax base against which, after allocation,
apportionment and other adjustments, the Single Business Tax is computed.
The tax base will be reduced by an amount equal to any capital loss
realized from such a taxable event, whether or not the capital loss was
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deducted in computing Federal taxable income in the year the loss occurred.
Unitholders should consult their tax advisor as to their status under
Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of the
Trust, or paid under individual policies obtained by issuers of Bonds,
which, when received by the Unitholders, represent maturing interest on
defaulted obligations held by the Trustee, will be excludable from the
Michigan income tax laws and the Single Business Tax if, and to the same
extent as, such interest would have been so excludable if paid by the
issuer of the defaulted obligations. While treatment under the Michigan
Intangibles Tax is not premised upon the characterization of such proceeds
under the Internal Revenue Code, the Michigan Department of Treasury should
adopt the same approach as under the Michigan income tax laws and the
Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for tax
years beginning after December 31, 1986, the federal adjusted gross income, the
computation base for the Michigan Income Tax, of a Unitholder will be increased
accordingly to the extent such capital gains are realized when the Michigan
Trust disposes of a Bond or when the Unitholder redeems or sells a Unit, to the
extent such transaction constitutes a taxable event for Federal income tax
purposes.
MINNESOTA TRUSTS. In the early 1980s, the State of Minnesota experienced
financial difficulties due to a downturn in the State's economy resulting from
the national recession. As a consequence, the State's revenues were
significantly lower than anticipated in the July 1, 1979 to June 30, 1981
biennium and the July 1, 1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and increased the
State sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local government, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases, revenues of local
governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation reduced
its rating on the State's outstanding general obligation bonds from AAA to AA+
in August 1981 and to AA in March 1982. Moody's Investors Service, Inc. lowered
its rating on the State's outstanding general obligation bonds from Aaa to Aa
in April 1982. The State's economy recovered in the July 1, 1983 to June 30,
1985 biennium, and substantial reductions in the individual income tax were
enacted in 1984 and 1985. Standard & Poor's raised its rating on the State's
outstanding general obligation bonds to AA+ in January 1985. In 1986, 1987,
1991, 1992, and 1993, legislation was required to eliminate projected budget
deficits by raising additional revenue, reducing expenditures, including aids to
political subdivisions and higher education, reducing the State's budget reserve
(cash flow account), imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments. A budget forecast released by
the Minnesota Department of Finance on March 1, 1994 projects a balanced General
Fund at the end of the current biennium, 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
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Government Trust Fund at June 30, 1995, against total projected expenditures
from the Fund of $1.8 billion for the biennium.
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.
At the time of the closing for each Minnesota Trust, Special Counsel to each
Minnesota Trust for Minnesota tax matters rendered an opinion under then
existing Minnesota income tax law applicable to taxpayers whose income is
subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting of
(i) interest from bonds issued by the State of Minnesota and its political
and governmental subdivisions, municipalities and governmental agencies and
instrumentalities and bonds issued by possessions of the United States
which would be exempt from federal and Minnesota income taxation when paid
directly to an individual, trust or estate (the "Bonds"), (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which
represent maturing interest or principal payments on defaulted Bonds held
by the Trustee.
Neither the Sponsor not its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion expressed
herein regarding such matters, it is assumed that: (i) the Bonds were validly
issued, (ii) the interest thereon is excludible from gross income for federal
income tax purposes and (iii) the interest thereon is exempt from income tax
imposed by Minnesota that is applicable to individuals, trusts and estates (the
"Minnesota Income Tax"). It should be noted that interest on the Bonds is
subject to tax in the case of corporations subject to the Minnesota Corporate
Franchise Tax or the Corporate Alternative Minimum Tax and is a factor in the
computation of the Minimum Fee applicable to financial institutions. The
opinion set forth below does not address the taxation of persons other than full
time residents of Minnesota.
(1) The Minnesota Trust is not an association taxable as a corporation and
each Unitholder of the Minnesota Trust will be treated as the owner of a
pro rata portion of the Minnesota Trust, and the income of such portion
of the Minnesota Trust will therefore be treated as the income of the
Unitholder for Minnesota Income Tax purposes;
(2) Income on the Bonds which is exempt from the Minnesota Income Tax when
received by a Unitholder of the Minnesota Trust and which would be exempt
from the Minnesota Income Tax if received directly by a Unitholder, will
retain its status as exempt from such tax when received by the Minnesota
Trust and distributed to such Unitholder;
(3) To the extent that interest on the Bonds, if any, which is includible
in the computation of "alternative minimum taxable income" for federal
income tax purposes, such interest will also be includible in the
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computation of "alternative minimum taxable income" for purposes of the
Minnesota Alternative Minimum Tax imposed on individuals, estates and
trusts and on corporations;
(4) Each Unitholder of the Minnesota Trust will recognize gain or loss for
Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether
by redemption, sale or otherwise) or if the Unitholder redeems or sells
Units of the Minnesota Trust to the extent that such a transaction
results in a recognized gain or loss to such Unitholder for federal
income tax purposes;
(5) Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable
gain for Minnesota Income Tax purposes when their Units are sold or
redeemed for an amount equal to or less than their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained by
issuers of Bonds or the Trustee which represent maturing interest on
defaulted obligations held by the Trustee will be excludible from
Minnesota net income if, and to the same extent as, such interest would
have been so excludible from Minnesota net income if, and to the same
extent as, such interest would have been so excludible if paid in the
normal course by the issuer of the defaulted obligation provided that, at
the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation
that the issuer of the Bonds, rather than the insurer, will pay debt
service on the Bonds; and
(7) To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is excludible from gross
income for federal income tax purposes pursuant to 48 U.S.C. Section 745,
48 U.S.C. Section 1423a and 48 U.S.C. Section 1403, such interest will
not be subject to either the Minnesota Income Tax or the Minnesota
alternative minimum tax imposed on individuals, estates and trusts. It
should be noted that interest relating to Possession Bonds is subject to
tax in the case of corporations subject to the Minnesota Corporate
Franchise Tax or the Corporate Alternative Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received directly
by a Unitholder.
MISSOURI TRUSTS. The following discussion regarding constitutional
limitations and the economy of the State of Missouri is included for the purpose
of providing general information that may or may not affect issuers of the Bonds
in Missouri.
In November 1981, the voters of Missouri adopted a tax limitation amendment to
the constitution of the State of Missouri (the "Amendment"). The Amendment
prohibits increases in local taxes, licenses, or fees by political subdivisions
without approval of the voters of such political subdivision. The Amendment
also limits the growth in revenues and expenditures of the State to the rate of
growth in the total personal income of the citizens of Missouri. The limitation
may be exceeded if the General Assembly declares an emergency by a two-thirds
vote.
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Although the June 1993 revenue estimate has been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due primarily
to delayed spending for desegregation capital projects. The downward revision
in revenues was considered necessary because of weak economic performance, and
more importantly an economic outlook for the second half of Fiscal Year 1993
which projected slower growth than was anticipated in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri will
be obtained from individual income taxes (53.1%), sales and use taxes (30.0%),
corporate income taxes (5.9%), and county foreign insurance taxes (3.0%). Major
expenditures for Fiscal Year 1994 include elementary and secondary education
(30.6%), human services (25.4%), higher education (14.8%) and desegregation
(8.9%).
The Fiscal Year 1994 budget balances resources and obligations based on the
consensus revenue and refund estimate and an opening balance resulting from
continued withholdings and delayed spending for desegregation capital projects.
The total general revenue operating budget for Fiscal Year 1994 exclusive of
desegregation is $3,844.6 million. The court-ordered desegregation estimate is
$377.7 million, an increase of $30.7 million over the revised Fiscal Year 1993
estimate.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade has offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the United
States Bureau of Labor Statistics, the 1992 unemployment rate in Missouri was
5.7% and the 1993 rate was 6.4%. Although not strictly comparable, the
preliminary seasonally adjusted rate for May of 1994 was 5.0%. 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 Ratings Group rates Missouri general obligation
bonds "AAA". Although these ratings indicate that the State of Missouri is in
relatively good economic health, there can be, of course, no assurance that this
will continue or that particular bond issues may not be adversely affected by
changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and environmental
policies and conditions, which are not within the control of the issuers of the
Bonds, could affect or could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the Bonds
acquired by the Missouri Trust to pay interest on or principal of the Bonds.
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At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income tax
law applicable to taxpayers whose income is subject to Missouri income taxation
substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State") or counties, municipalities,
authorities or political subdivisions thereof (the "Missouri Bonds") or by the
Commonwealth of Puerto Rico, Guam and the United States Virgin Islands (the
"Possession Bonds") (collectively, the "Bonds").
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for Federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income tax
applicable to individuals and corporations ("Missouri state income tax"). The
opinion set forth below does not address the taxation of persons other than full
time residents of Missouri.
(1) The Missouri Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Missouri Trust
will be treated as the owner of a pro rata portion of the Missouri Trust
and the income of such portion of the Missouri Trust will be treated as
the income of the Unitholder for Missouri state income tax purposes.
(2) Interest paid and original issue discount, if any, on the Bonds which
would be exempt from the Missouri state income tax if received directly
by a Unitholder will be exempt from the Missouri state income tax when
received by the Missouri Trust and distributed to such Unitholder;
however, no opinion is expressed herein regarding taxation of interest
paid and original issue discount, if any, on the Bonds received by the
Missouri Trust and distributed to Unitholders under any other tax imposed
pursuant to Missouri law, including but not limited to the franchise tax
imposed on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
(3) To the extent that interest paid and original issue discount, if any,
derived from the Missouri Trust by a Unitholder with respect to
Possession Bonds is excludable from gross income for Federal income tax
purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a, and
48 U.S.C. Section 1403, such interest paid and original issue discount,
if any, will not be subject to the Missouri state income tax; however, no
opinion is expressed herein regarding taxation of interest paid and
original issue discount, if any, on the Bonds received by the Missouri
Trust and distributed to Unitholders under any other tax imposed pursuant
to Missouri law, including but not limited to the franchise tax imposed
on financial institutions pursuant to Chapter 148 of the Missouri
Statutes.
(4) Each Unitholder of the Missouri Trust will recognize gain or loss for
Missouri state income tax purposes if the Trustee disposes of a bond
(whether by redemption, sale, or otherwise) or if the Unitholder redeems
or sells Units of the Missouri Trust to the extent that such a
transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes. Due
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to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an
amount equal to their original cost.
(5) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income
for Federal income tax purposes will be excludable from Missouri state
income tax to the same extent as such interest would have been paid by
the issuer of such Bonds held by the Missouri Trust; however, no opinion
is expressed herein regarding taxation of interest paid and original
issue discount, if any, on the Bonds received by the Missouri Trust and
distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax imposed on
financial institutions pursuant to Chapter 148 of the Missouri Statutes.
(6) The Missouri state income tax does not permit a deduction of interest
paid or incurred on indebtedness incurred or continued to purchase or
carry Units in the Trust, the interest on which is exempt from such Tax.
(7) The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the
Bonds held by the Missouri Trust will not generally be subject to the
Kansas City, Missouri Earnings and Profits Tax or the City of St Louis
Earnings Tax (except in the case of certain Unitholders, including
corporations, otherwise subject to the St. Louis City Earnings Tax).
NEW JERSEY TRUSTS. As described above, the New Jersey Trust consists of a
portfolio of Bonds. The Trust is therefore susceptible to political, economic
or regulatory factors affecting issuers of the Bonds. The following information
provides only a brief summary of some of the complex factors affecting the
financial situation in New Jersey (the "State") and is derived from sources that
are generally available to investors and is believed to be accurate. It is
based in part on information obtained from various State and local agencies in
New Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 people per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
Historically, New Jersey's average per capita income has been well above the
national average, and in 1993 the State ranked second among states in per capita
personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and 1989
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in the State in the mid 1980s resulted in a
tight labor
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market situation, which has led to relatively high wages and housing prices.
This means that, while the incomes of New Jersey residents are relatively high,
the State's business sector has become more vulnerable to competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to an estimated 6.6%
in November 1994, which is higher than the national average of 5.6% in November
1994. Economic recovery is likely to be slow and uneven in New Jersey, with
unemployment receding at a correspondingly slow pace, due to the fact that some
sectors may lag due to continued excess capacity. In addition, employers even
in rebounding sectors can be expected to remain cautious about hiring until they
become convinced that improved business will be sustained. Also, certain firms
will continue to merge or downsize to increase profitability.
Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain other
fees are pledged to meet the principal and interest payments and if provided,
redemption premium payments, if any, required to repay the bonds. As of June
30, 1993, there was a total authorized bond indebtedness of approximately $8.98
billion, of which $3.6 billion was issued and outstanding, $4.0 billion was
retired (including bonds for which provision for payment has been made through
the sale and issuance of refunding bonds) and $1.38 billion was unissued. The
appropriation for the debt service obligation on such outstanding indebtedness
was $103.5 million for fiscal year 1994.
New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. At the end of fiscal year 1989, there
was a surplus in the State's general fund (the fund into which all State
revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal year 1990,
there was a surplus in the general fund of $1 million. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus of $760.8 million. It is estimated
that New Jersey closed its fiscal year 1993 with a surplus of $937.4 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the increase
in the State's sales and use tax rate from 6% to 7% and the elimination of
exemptions for certain products and services not previously subject to the tax,
such as telephone calls, paper products (which has since been reinstated), soaps
and detergents, janitorial services, alcoholic beverages and cigarettes. At the
time of enactment, it was projected that these taxes would raise approximately
$1.5 billion in additional revenue. Projections and estimates of receipts from
sales and use taxes, however, have been subject to variance in recent fiscal
years.
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The second part of the tax hike took effect on January 1, 1991, in the form of
an increased state income tax on individuals. At the time of enactment, it was
projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead rebate
program and state assumption of welfare and social services costs. Projections
and estimates of receipts from income taxes, however, have also been subject to
variance in recent fiscal years. Under the legislation, income tax rates
increased from their previous range of 2% to 3.5% to a new range of 2% to 7%,
with the higher rates applying to married couples with incomes exceeding $70,000
who file joint returns, and to individuals filing single returns with incomes of
more than $35,000.
The Florio administration had contended that the income tax package will help
reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid by
counties and municipalities and funded by property taxes. In addition, under
the new formula for funding school aid, an extra $1.1 billion was proposed to be
sent by the State to school districts beginning in 1991, thus reducing the need
for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from 7%
to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates will take effect.
On June 30, 1994, Governor Whitman signed the New Jersey Legislature's $15.7
billion budget for Fiscal Year 1995. The balanced budget which includes $455
million in surplus, is $141 million less than the 1994 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are cases challenging the following: the
formula relating to State aid to public schools, the method by which the State
shares with its counties maintenance recoveries and costs for residents in
State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, various provisions, and
the constitutionality of the Fair Automobile Insurance Reform Act of 1990, the
State's role in a consent order concerning the construction of a resource
facility in Passaic County, actions taken by the New Jersey Bureau of Securities
against an individual, the State's actions regarding alleged chromium
contamination of State-owned property in Hudson County, the issuance of
emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement for
services rendered by doctors and dentists to Medicaid eligible children, the
Commissioner of Health's calculation of the hospital assessment required by the
Health Care Cost Reduction Act of 1991, refusal of the State to share with
Camden County federal funding the State recently received for disproportionate
share hospital payments made to county psychiatric facilities, and the
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constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection and Energy.
Adverse judgments in these and other matters could have the potential for either
a significant loss of revenue or a significant unanticipated expenditure by the
State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for these
claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds "Aaa"
and "AAA", respectively. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to "AA+." On June 4,
1992, Standard and Poor's Corporation placed New Jersey general obligation bonds
on Credit Watch with negative implications, citing as its principal reason for
its caution the unexpected denial by the federal government of New Jersey's
request for $450 million in retroactive Medicaid payments for psychiatric
hospitals. These funds were critical to closing a $1 billion gap in the State's
$15 billion budget for fiscal year 1992 which ended on June 30, 1992. Under New
Jersey state law, the gap in the budget was required to be closed before the new
budget year began on July 1, 1992. Standard and Poor's suggested the State
could close fiscal 1992's budget gap and help fill fiscal 1993's hole by a
reversion of $700 million of pension contributions to its general fund under a
proposal to change the way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+" rating
for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. However, on July 27,
1994, Standard and Poor's announced that it was changing the State's outlook
from negative to stable due to a brightening of the State's prospects as a
result of Governor Whitman's effort to trim spending and cut taxes, coupled with
an improving economy. Standard and Poor's reaffirmed its "AA+" rating at the
same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aal" stating that the reduction reflects a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures will
persist. On August 5, 1994, Moody's reaffirmed its "Aa1" rating, citing on the
positive side New Jersey's broad-based economy, high income levels, history of
maintaining a positive financial position and moderate (albeit rising) debt
ratios, and on the negative side, a continued reliance on one-time revenue and
dependence on pension-related savings to achieve budgetary balance.
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At the time of the closing for each New Jersey Trust Special Counsel to each
New Jersey Trust for New Jersey tax matters rendered an opinion under then
existing New Jersey income tax law applicable to taxpayers whose income is
subject to New Jersey income taxation substantially to the effect that:
(1) Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. Each New Jersey Trust will not be
subject to the New Jersey Corporation Business Tax or the New Jersey
Corporation Income Tax.
(2) With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of the New Jersey Trust which is allocated to each
such Unitholder will be treated as the income of such Unitholder under
the New Jersey Gross Income Tax. Interest on the underlying Bonds which
would be exempt from tax under the New Jersey Gross Income Tax if
directly received by such Unitholder will retain its status as tax-exempt
interest when received by the New Jersey Trust and distributed to such
Unitholder. Any proceeds paid under the insurance policy issued to the
Trustee of the New Jersey Trust with respect to the Bonds or under
individual policies obtained by issuers of Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from
New Jersey Gross Income Tax if, and to the same extent as, such interest
would have been so exempt if paid by the issuer of the defaulted
obligations.
(3) A non-corporate Unitholder will not be subject to the New Jersey Gross
Income Tax on any gain realized either when a New Jersey Trust disposes
of a Bond (whether by sale, exchange, redemption, or payment at
maturity), when the Unitholder redeems or sells his Units or upon payment
of any proceeds under the insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing principal on
defaulted obligations held by the Trustee. Any loss realized on such
disposition may not be utilized to offset gains realized by such
Unitholder on the disposition of assets the gain on which is subject to
the New Jersey Gross Income Tax.
(4) Units of a New Jersey Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law or the New
Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from the
Bonds in a New Jersey Trust which is allocable to such corporation will
be includable in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, less any
interest expense incurred to carry such investment to the extent such
interest expense has not been deducted in computing Federal taxable
income. Net gains derived by such corporation on the disposition of the
Bonds by a New Jersey Trust or on the disposition of its Units will be
included in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax. Any
proceeds paid under the insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will be
included in its entire net income for purposes
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of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax if, and to the same extent as, such interest or proceeds would
have been so included if paid by the issuer of the defaulted obligations.
NEW YORK TRUSTS. A resident of New York State (or New York City) will be
subject to New York State (or New York City) personal income tax with respect to
gains realized when New York Obligations held in the New York Trust are sold,
redeemed or paid at maturity or when his Units are sold or redeemed, such gain
will equal the proceeds of sale, redemption or payment less the tax basis of the
New York Obligation or Unit (adjusted to reflect (a) the amortization of premium
or discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at the
time New York Obligation was issued had original issue discount, and (c) the
deposit of New York Obligations with accrued interest in the Trust after the
Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is not a
resident of New York State (or New York City) will not be subject to New York
State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amount paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will be
excludable from income for New York State and New York City income tax purposes,
if and to the same extent as, such interest would have been excludable if paid
by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entie net income any interest or gains distributed to them even
though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State and
New York City tax purposes. The purchase of Units may be considered to have
been made with borrowed funds even though such funds are not directly traceable
to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued by New York
State (the "State"), by its various public bodies (the "Agencies"), and/or by
other entities located within the State, including the City of New York (the
"City").
Some of the more significant events relating to the financial situation in New
York are summarized below. This section provides only a brief summary of the
complex factors affecting the financial situation in New York and is based in
part on Official Statements issued by, and on other information reported by the
State, the City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York
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Municipal Obligations held in the portfolio of the Trust or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued throughout
the State's 1990-91 fiscal year and was followed by a period of weak economic
growth during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war recoveries.
For calendar year 1993, the economy is expected to grow faster than 1992, but
still at a very moderate rate as compared to other recoveries. The national
recession has been more severe in the State because of factors such as a
significant retrenchment in the financial services industry, cutbacks in defense
spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approval a
$32.08 billion budget. Following enactment of the budget the 1993-94 State
Financial Plan was formulated on April 16, 1993. This Plan projects General
Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. In comparison to
the Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
While a portion of the increased receipts was the result of a $487 million
increase in the States's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 1993-94 State Financial
Plan contains a package of mandate relief, cost containment and other proposals
to
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reduce the costs of many programs for which local governments provide funding.
There can be no assurance, however, that localities that suffer cuts will not be
adversely affected, leading to further requests for State financial assistance.
There can be no assurance that the State will not face substantial potential
budget gaps in the future resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit to
the refund reserve account of $671 million, General Fund receipts in 1992-93
would have been $716 million higher than originally projected. This year-end
deposits effectively reduced 1992-93 receipts by $671 million and made those
receipts available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income into
1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the issuance
of deficit notes or other bonds, spending cuts or other revenue raising
measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS") on April 28, 1993. The State does not project the need to issue
additional TRANS during the States's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds and
$140 million in new commercial paper issuances. In addition, the State expects
to issue $140 million in bonds for the purpose of redeeming outstanding bond
anticipation notes. The Legislature has authorized the issuance of up to $85
million in certificates of participation during the State's 1993-94 fiscal year
for personal and real property acquisitions during the State's 1993-94 fiscal
year. The projection or the State regarding its borrowing for the 1993-94
fiscal year may change if actual receipts fall short of State projections or if
other circumstances require.
In June, 1990, legislation was enacted creating the "New York Local Government
Assistance Corporation" ("LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. To date,
LGAC has
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issued its bonds to provide net proceeds of $3.28 billion. LGAC has been
authorized to issue additional bonds to provide net proceeds of $703 million
during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the first
time the State's TRANS have received these ratings since its May 1989 TRANS
issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at a A on April
23, 1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993,
an improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having been A1 since
May 27, 1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's
previous ratings were A from March 1990 to January 1992, AA- from August 1987 to
March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other actions,
the State Legislature (i) created MAC to assist with long-term financing for the
City's short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and City four-year financial plans (the financial plans also apply to
certain City-related public agencies (the "Covered Organizations").
In February 1975, the New York State Urban Development Corporation ("UDC"),
which had approximately $1 billion of outstanding debt, defaulted on certain of
its short-term notes. Shortly after the UDC default, the City entered a period
of financial crisis. Both the State Legislature and the United States enacted
legislation in response to this crisis. During 1975, the State Legislature (i)
created MAC to assist with long-term financing for the City's short-term debt
and other cash requirements and (ii) created the State Financial Control Board
(the "Control Board") to review and approve the City's budgets and City four-
year financial plans (the financial plans also apply to certain City-related
public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in the City has slowed
substantially, and the City's economy is currently in recession. The City
projects, and its current four-year financial plan assumes, a recovery early in
the 1993 calendar year. The Mayor is responsible for preparing the City's four-
year financial plan, including the City's current financial plan. The City
Comptroller has issued reports concluding that the recession of the City's
economy will be more severe and last longer than is assumed in the financial
plan.
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Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of the
State Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and revenue
and expenditures estimates which may not be achievable. The Control Board
indicated that the City's modified Financial Plan does not make progress towards
establishing a balanced budget process. The Control Board's report identified
budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and $2.6 billion in
fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-94 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent budget
cuts would be imposed. The Mayor indicated that further savings would entail
serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on "recurring revenues that fund recurring
expenditures." Given the foregoing factors, there can be no assurance that City
will continue to maintain a balanced budget, or that it can maintain a balanced
budget without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base.
Pursuant to State law, the City prepares a four-year annual financial plan
which is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections. The City is required to submit its
financial plans to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood and imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. As a result of the national and
regional economic recession, the State's projections of tax revenues for its
1991 and 1992 fiscal years were substantially reduced. For its 1993 fiscal
year, the State, before taking any remedial action reflected in the State budget
enacted by the State Legislature on April 2, 1992 reported a potential budget
deficit of $4.8 billion. If the State experiences revenue shortfalls or
spending increases beyond its projections during its 1993 fiscal year or
subsequent years, such developments could also result in reductions in projected
State aid to the City. In addition, there can be no assurance that State
budgets
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in future fiscal years will be adopted by the April 1 statutory deadline and
that there will not be adverse effects on the City's cash flow and additional
City expenditures as a result of such delays.
The City's projections set forth in the financial plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the timing
of any regional and local economic recovery, the absence of wage increases in
excess of the increases assumed in its financial plan, employment growth,
provision of State and Federal aid and mandate relief, State legislative
approval of future State budgets, levels of education expenditures as may be
required by State law, adoption of future City budgets by the New York City
Council, and approval by the Governor or the State Legislature and the
cooperation of MAC with respect to various other actions proposed in such
financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional expenditure
reductions and revenue sources to achieve balanced operating budgets for fiscal
years 1994 and thereafter. Any such proposed expenditure reductions will be
difficult to implement because of their size and the substantial expenditure
reductions already imposed on City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to reimburse
the City's general fund for capital expenditures already incurred. In addition,
the City issues revenue and tax anticipation notes to finance its seasonal
working capital requirements. The terms and success of projected public sales
of City general obligation bonds and notes will be subject to prevailing market
conditions at the time of the sale, and no assurance can be given that the
credit markets will absorb the projected amounts of public bond and note sales.
In addition, future developments concerning the City and public discussion of
such developments, the City's future financial needs and other issues may affect
the market for outstanding City general obligation bonds and notes. If the City
were unable to sell its general obligation bonds and notes, it would be
prevented from meeting its planned operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the State
Deputy Comptroller for the City of New York (the "OSDC") and other agencies and
public officials have issued reports and made public statements which, among
other things, state that projected revenues may be less and future expenditures
may be greater than those forecast in the financial plan. In addition, the
Control Board and other agencies have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services. It is reasonable to
expect that such reports and statements will continue to be issued and to
engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating
results as reported in accordance with GAAP for the 1992 fiscal year. During
the 1990 and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines
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in City revenue sources and increased public assistance needs due to the
recession. Such actions included $822 million of tax increases and substantial
expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification") projected a balanced
budget in accordance with GAAP for the 1992 fiscal year after taking into
account a discretionary transfer of $455 million to the 1993 fiscal year as the
result of a 1992 fiscal year surplus. In order to achieve a balanced budget for
the 1992 fiscal year, during the 1991 fiscal year, the City proposed various
actions for the 1992 fiscal year to close a projected gap of $3.3 billion in the
1992 fiscal year.
On November 19, 1992 the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education ("BOE")
and the City University of New York ("CUNY"). The 1993-1996 Financial Plan
projects revenues and expenditures of $29.9 billion each for the 1993 fiscal
year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal year.
The gap-closing actions for the 1993 fiscal year proposed during the 1992 fiscal
year and outlined in the City's June Financial Plan included $489 million of
discretionary transfers from the 1992 fiscal year. The 1993-1996 City Financial
Plan includes additional gap-closing actions to offset an additional potential
$81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for the fiscal
years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the proposed
increase in Federal aid is subject to approval by Congress and the President.
The State Legislature has in the past failed to approve certain proposals
similar to those that the 1993-1996 Financial Plan assumes will be approved by
the State Legislature during the 1993 fiscal year. If these actions cannot be
implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial plan.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted against
the City arising out of alleged constitutional violations, torts, breaches of
contracts, and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the proceedings and claims are
not currently predictable, adverse determinations
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in certain of them might have a material adverse effect upon the City's ability
to carry out its financial plan. As of June 30, 1992, legal claims in excess of
$341 billion were outstanding against the City for which the City estimated its
potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baal and S&P's rating stood at A-. On February 11,
1991, Moody's lowered its rating from A.
On March 30, 1993 in confirming the Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year budget
gaps, but the recurring use of one-shot actions to close gaps. One-shots
constitute a significant share of the proposed gap-closing program for fiscal
year 1994, and they represent an even larger share of those measures which the
City seems reasonably certain to attain. Several major elements of the program,
including certain state actions, federal counter cyclical aid and part of the
city's tax package, remain uncertain. However, the gap closing plan may be
substantially altered when the executive budget is offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy is
broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues with
ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing measures
that would support current spending, but defer budgetary gaps to future years,
would be viewed by S&P as detrimental to New YorkCity's single-'A-' rating.
Previously, Moody's had raised its rating to A in May 1988, to Baal in
December 1985, to Baa in November 1983 and to Bal in November 1981. S&P had
raised its rating to A- in November 1987, to BBB+ in July 1985 and to BBB in
March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million Notes
then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2 rating for
the outstanding revenue anticipation notes and for the $1.25 billion in notes
then being sold. On April 29, 1991, S&P revised downward its rating on City
revenue anticipation notes from SP-1 to SP-2.
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As of December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial difficulties
which could adversely affect the ability of such Agencies to make payments of
interest on, and principal amounts of, their respective bonds. The difficulties
have in certain instances caused the State (under so-called "moral obligation"
provisions which are non-binding statutory provisions for State appropriations
to maintain various debt service reserve funds) to appropriate funds on behalf
of the Agencies. Moreover, it is expected that the problems faced by these
Agencies will continue and will require increasing amounts of State assistance
in future years. Failure of the State to appropriate necessary amounts or to
take other action to permit those Agencies having financial difficulties to meet
their obligations could result in a default by one or more of the Agencies.
Such default, if it were to occur, would be likely to have a significant adverse
effect on investor confidence in, and therefore the market price of, obligations
of the defaulting Agencies. In addition, any default in payment on any general
obligation of any Agency whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied in connection
with Federal guarantees of City and MAC obligations and could thus jeopardize
the City's long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen Agencies
that each had outstanding debt of $100 million or more. These eighteen
Agencies had an aggregate of $62.2 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of significant
social welfare programs primarily involving the State's mental hygiene programs.
Adverse judgments in these matters generally could result in injunctive relief
coupled with prospective changes in patient care which could require substantial
increased financing of the litigated programs in the future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages on an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers of
securities held by New York-based brokers incorporated in Delaware. (State of
Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds held
in contingency reserves. The
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State's 1993-94 Financial Plan includes the establishment of a $100 million
contingency reserve fund which would be available to fund such an award which
some reports have estimated at $100-$800 million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation bonding
programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April 29,
1991 in the Supreme Court, Albany County (Schulz v. State of New York), that
petitioners had standing as voters under the State Constitution to bring such
action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to borrow
funds in the future. The State has not indicated that the temporary injunction
issued by the Supreme Court in this action will have any immediate impact on its
financial condition or interfere with projects requiring immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised 1992-93
State Financial Plan and the recommended 1993-94 State Financial Plan includes a
significant reduction in State aid to localities in such programs as revenue
sharing and aid to education from projected base-line growth in such programs.
It is expected that such reductions will result in the need for localities to
reduce their spending or increase their revenues. The potential impact on the
State of such actions by localities is not included in projections of State
receipts and expenditures in the State's 1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1991, the total indebtedness of all localities in the
State was approximately $31.6 billion, of which $16.8 billion was debt of New
York City (excluding $6.7 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for state
financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
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deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, New York City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State,
including notes or bonds in the New York Trust, could be adversely affected.
Localities also face anticipated and potential problems resulting from certain
pending litigation, judicial decisions, and long-range economic trends. The
longer-range potential problems of declining urban population, increasing
expenditures, and other economic trends could adversely affect localities and
require increasing State assistance in the future.
At the time of the closing for each New York Trust, Special Counsel to each
New York Trust for New York tax matters rendered an opinion under then existing
New York income tax law applicable to taxpayers whose income is subject to New
York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of the
Internal Revenue Code of 1986 and derived from obligations of New York State or
a political subdivision thereof, although they will be subject to New York State
and City tax with respect to any gains realized when such obligations are sold,
redeemed or paid at maturity or when any such Units are sold or redeemed.
NORTH CAROLINA TRUSTS. General obligations of a city, town or county in North
Carolina are payable from the general revenues of the entity, including ad
valorem tax revenues on property within the jurisdiction. Revenue bonds issued
by North Carolina political subdivisions include (1) revenue bonds payable
exclusively from revenue-producing governmental enterprises and (2) industrial
revenue bonds, college and hospital revenue bonds and other "private activity
bonds" which are essentially non-governmental debt issues and which are payable
exclusively by private entities such as non-profit organizations and business
concerns of all sizes. State and local governments have no obligation to
provide for payment of such private activity bonds and in many cases would be
legally prohibited from doing so. The value of such private activity bonds may
be affected by a wide variety of factors relevant to particular localities or
industries, including economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself of
the provisions of Chapter 9 of the United States Bankruptcy Code, but only with
the consent of the Local Government Commission of the State and of the holders
of such percentage or percentages of the indebtedness of the issuer as may be
required by the Bankruptcy Code (if any such consent is required). Thus,
although limitations apply, in certain circumstances political subdivisions
might be able to seek the protection of the Bankruptcy Code.
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State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the surplus
remaining in the State Treasury at the beginning of the period. The State's
fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections.
Lower than anticipated revenues coupled with increases in State spending
requirements imposed by the federal government led to projected budget deficits
for fiscal 1989-1990 and fiscal 1990-91. Consequently, the Governor ordered
cuts in budgeted State expenditures for both fiscal years.
The State, like the nation, has experienced economic recovery since 1991.
Apparently due to both increased tax and fee revenue and the previously enacted
spending reductions, the State has a budget surplus of approximately $887
million at the end of the fiscal 1993-94. After review of the 1994-95
continuation budget adopted in 1993, the General Assembly approved spending
expansion funds, in part to restore certain employee salaries to budgeted
levels, which amounts had been deferred to balance the budgets in 1989-1993, and
to authorize funding for new initiatives for economic development, education,
human services and environmental programs. (The cutback in funding for
infrastructure and social development projects had been cited by agencies rating
State obligations, following the 1991 reductions, as cause for concern about the
long-term consequences of those reductions on the economy of the State and the
State's fiscal prospects.)
Based on projected growth in State tax and fee revenues, the General Fund
balance forecast for the end of the 1994-95 fiscal year is approximately $310
million.
It is unclear what effect these developments at the State level may have on
the value of the Debt Obligations in the North Carolina Trust.
The State is subject to claims by classes of plaintiffs asserting a right to
refund of taxes paid under State statutes that allegedly discriminated against
federal retirees and armed services personnel in a manner that was
unconstitutional based on the decision by the United States Supreme court in a
1989 Michigan case involving a similar law, Davis v. Michigan Department of
Treasury ("Davis"). At the time of that decision, State income tax law exempted
retirement income paid by North Carolina State and local governments but did not
exempt retirement income paid by the federal government to its former employees.
Also, State tax law at the time provided a deduction for certain income earned
by members of the North Carolina National Guard, but did not provide a similar
deduction for members of the federal armed services.
Following the Davis decision the North Carolina legislature amended the tax
law to provide identical retirement income exclusions for former stat and
federal employees (effective for 1989), and repealed the deduction given to
members of the State National Guard. In addition, the amendments authorized a
special tax credit for federal retirees equal to the taxes paid on their
nonexcluded federal pensions in 1988 (to be taken over a three year period
beginning with returns for 1990).
Subsequent to Davis, the North Carolina plaintiffs brought an action in
federal court against the North Carolina Department of Revenue and certain
officials of the State alleging that the collection of the taxes under the prior
North Carolina tax statues was prohibited by the state and federal
constitutions, and also violated civil
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rights protections under 42 U.S.C. Section 1983, a federal statute prohibiting
discriminatory taxation of the compensation of certain federal employees (4
U.S.C. Section 111), and the principle of intergovernmental tax immunity. The
plaintiffs sought injunctive relief requiring the State to provide refunds of
the illegally collected taxes paid on federal retirement or military pay for the
years 1985-88 (covering the asserted 3 year limitations period), plus interest.
Swanson, et al. v. Powers, et al. (United States District Court for the Eastern
District of North Carolina, No. 89-282-CIV-5-H) ("Swanson Federal"). The
individual plaintiffs in Swanson Federal also brought an action in North
Carolina state court seeking refunds of the illegal taxes. Swanson, et al. v.
State of North Carolina, et al. (Wake County, North Carolina Superior Court, No.
90 CVS 3127) ("Swanson State").
The amounts claimed by federal retirees in the Swanson actions have not been
precisely calculated. Plaintiffs have asserted that the plaintiff class
contains about 100,000 taxpayers; the State estimated that as of June 30, 1994,
the claims (including interest) would then aggregate approximately $280 million.
In 1991, the North Carolina Supreme Court in Swanson State affirmed a decision
in favor of the State, holding that the U.S. Supreme Court decision in Davis was
not to have retroactive effect. Review was granted by the United States Supreme
Court and the case subsequently was remanded to the North Carolina Supreme Court
for reconsideration in light of the U.S. Supreme Court's 1993 holding in Harper
v. Virginia Dept. of Taxation ("Harper"). In Harper, which also involved the
disparate income tax treatment of retired state and federal employees and the
question of retroactive application of Davis, the U.S. Supreme Court held that
the Commonwealth of Virginia must provide "meaningful backward-looking relief"
to the plaintiffs if the Commonwealth did not have a predeprivation process
adequate to satisfy due process requirements. Harper was remanded to the
Supreme Court of Virginia to determine whether a remedy was required and, if so,
what form it would take.
Similarly, Swanson State was remanded for reconsideration of whether the North
Carolina tax laws satisfied the due process requirements of the federal
constitution and, if not, what remedy was to be provided by the State.
On remand, the North Carolina Supreme Court held in early 1994 that the
plaintiffs in Swanson State was procedurally barred from recovering refunds
because they did not comply with the State's statutory postpayment refund demand
procedure. The plaintiffs contended unsuccessfully that the postpayment demand
requirement did not meet the requirements of the federal constitution, in light
of the Harper decision, for "meaningful backward-looking relief." Plaintiffs in
Swanson State have petitioned the U.S. Supreme Court for review of the most
recent North Carolina Supreme Court decision. In December 1994, the Court
denied certiorari to the Swanson State plaintiffs. At the same time the Court
issued a decision in Reich v. Collins, a Georgia case involving similar claims,
finding for the plaintiff taxpayers, but the effect of the Reich decision on the
claims of Swanson State plaintiffs is uncertain. It is yet undetermined whether
North Carolina offers pre-deprivation procedures (payment and protest within a
specified time period) or post-deprivation remedies (tax credits especially
tailored to these claims) adequate to satisfy constitutional requirements, and
plaintiffs in Swanson State have petitioned the North Carolina Supreme Court for
a rehearing of its last decision in the case.
Following Harper, the plaintiffs in Swanson Federal again requested an
injunction requiring refunds. (Although the federal and state cases are
independent, the refund claims apparently would lead to only a single
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recovery of taxes deemed unlawfully collected.) In May 1994, the U.S. District
Court granted the State's motion to dismiss all but one claim made by the
plaintiffs, declaring that those claims were precluded by the 1994 North
Carolina Supreme Court decision in Swanson State. Plaintiffs in Swanson Federal
asserted that relief should have been granted because of the effect of the
federal District Court's 1990 opinion in Swanson Federal denying the defendants'
motion that the federal Tax Injunction Act precluded the plaintiffs' claims, in
which the court found that the statutory post-payment remedy for refund of
unlawful taxes was not "plain, speedy and efficient", as required by the law,
Swanson Federal, 1990 WL 545, 761 (E.D.N.C.), rev,d, 937 F.2d 965 (1991), cert
denied, __ U.S. __ , 112 S. Ct. 871 (1992). In its May 1994 decision, the
federal court rejected that assertion and held that its finding regarding the
federal Tax Injunction Act was jurisdictional only and was not a determination
that the statutory remedy violated the due process clause.
The plaintiffs' claim that was not dismissed with prejudice in the recent
District Court order asserts that the State continued an unlawful
discrimination, contrary to the requirements of 4 U.S.C. (S) 111 and the
doctrine of intergovernmental tax immunity, by increasing benefits to State
retirees (in order to offset the effect of the deletion of the preferential
State retirement income exemption) as part of the bill that equalized the income
exclusion of State and federal retirement payments. The claim is based on a
holding of similar effect in Sheehy v. Public Employees Retirement Div., 864 P.
2d 762 (Mont. 1993). In its May 1994 order, the District Court allowed the
plaintiffs to dismiss the Sheedy claim without prejudice. Therefore, plaintiffs
could assert those claims in another action; apparently, the relief would
require providing federal retirees with tax refunds or other payments equal to
allegedly discriminatory payments made to State retirees since 1989. The court
noted that those claims will be subject to the statutory post-deprivation
procedural requirements, and that a challenge to the legality of the remedial
statute would be precluded under the scope of the court's order dismissing the
other claims. However, the court granted plaintiffs' motion to dismiss the
Sheedy claims without prejudice because the record did not show whether the
plaintiffs had complied with statutory requirements. The plaintiffs in Swanson
State have appealed the District Court decision to the United States Court of
Appeals and a hearing is scheduled for March 1995.
Several states involved in similar suits have reached settlements.
Expressions of interest in settlement of the claims in Swanson by both the
plaintiffs and State officials have been reported in the press, but no
prediction can be made of the likelihood or amount of settlement. Although the
recent improvements in the economy and fiscal condition of the State might
better enable the State to satisfy an adverse decision without significant
consequences to the State's fiscal condition or governmental functions, because
the amount of the potential liability has not been fixed and because of the
potential that adverse fiscal or economic developments could cause a more
negative result on the State if a large amount must be paid, no assurance can be
given that the impact of the Swanson cases, if the plaintiffs ultimately
succeed, will not have an adverse impact on the Debt Obligations.
State and local government retirees also filed a class action suit in 1990 as
a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions. The North Carolina Attorney
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General's office estimates that the amount in controversy is approximately $40-
45 million annually for the tax years 1989 through 1992. The case is now
pending in state court.
Other litigation against the State include the following. None of the cases,
in the reported opinion of the Department of the Treasurer, would have a
material adverse affect on the State's ability ot meet its obligations.
Leandro et al. v. State of North Carolina and State Board of Education - In
May, 1994 students and boards of education in five counties in the State filed
suit in state court requesting a declaration that the public education system of
North Carolina, including its system of funding, violated the State constitution
by failing to provide adequate or substantially equal educational opportunities
and denying due process of law and violates various statutes relating to public
education. The suit is similar to a number of suits in other states, some of
which resulted in holdings that the respective systems of public education
funding were unconstitutional under the applicable state law. The defendants in
such suit have filed a motion to dismiss, but no answer to the complaint, and no
pretrial discovery has taken place.
Francisco Case - In August, 1994 a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and has
failed to supervise local school systems in administering programs for them.
The complaint does not allege an amount in controversy, but asks the Court to
order the defendants to fund a comprehensive program to ensure equal educational
opportunities for children with limited English proficiency.
Faulkenburg v. Teachers' and State Employees' Retirement System, Peeve v.
Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System - Plaintiffs are disability retirees
who brought class actions in state court challenging changes in the formulas for
payment of disability retirement benefits and claiming impairment of contract
rights, breach of fiduciary duty, violation of other federal constitutional
rights, and violation of state constitutional and statutory rights. The State
estimates that the cost in damages and higher prospective benefit payments to
plaintiffs and class members would probably amount to $50 million or more in
Faulkenburg, $50 million or more in Peele, and $15 million or more in Woodward,
all ultimately payable, at least initially, from the retirement system funds.
Upon review in Faulkenburg, the North Carolina Court of Appeals and Supreme
Court have held that claims made in constitutional rights brought under the
federal Civil Rights Act eight do not state a cause of action or are otherwise
barred by the statute of limitations. In 1994 plaintiffs took voluntary
dismissals of their claims for impairment of contract rights in violation of the
United States Constitution and filed new actions in federal court asserting the
same claims along with claims for violation of constitutional rights in the
taxation of retirement benefits. The remaining state court claims in all cases
are scheduled to be heard in North Carolina in October, 1994.
Fulton Case - The State's intangible personal property tax levied on certain
shares of stock has been challenged by the plaintiff on grounds that it violates
the Commerce Clause of the United States Constitution by discriminating against
stock issued by corporations that do all or part of their business outside the
State. The plaintiff in the action is a North Carolina corporation that does
all or part of its business outside the State. The plaintiff seeks to
invalidate the tax in its entirety and to recover tax paid on the value of its
shares in other
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corporations. The North Carolina Court of Appeals invalidated the taxable
percentage deduction and excised it from the statute beginning with the 1994 tax
year. The effect of this ruling is to increase collections by rendering all
stock taxable on 100% of its value. The State and the plaintiff have sought
further appellate review, and the case is pending before the North Carolina
Supreme Court. Net collections from the tax for fiscal year ended June 30, 1993
amounted to $120.6 million.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,647,351 as reported by the 1990 federal census and the State rose
from twelfth to tenth in population. The State's estimate of population as of
June 30, 1994 is 7,023,663. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only five municipalities with
populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
state has moved from as agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1994, the State labor force grew about 25% (from 2,855,200 to
3,560,000), and per capita income during the period 1980 to 1993 grew from
$7,999 to $18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June 1994, the State was reported to
rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment, Employment indicators have fluctuated somewhat in the
annual periods since June of 1990 but have demonstrated an upward trend since
1991. The following table reflects the fluctuation in certain key employment
categories.
<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY ADJUSTED) JUNE 1990 JUNE 1991 JUNE 1992 JUNE 1993 JUNE 1994
<S> <C> <C> <C> <C> <C>
CIVILIAN LABOR FORCE 3,312,000 3,228,000 3,495,000 3,504,000 3,560,000
NONAGRICULTURAL EMPLOYMENT 3,129,000 3,059,000 3,135,000 3,203,400 3,359,700
GOODS PRODUCING OCCUPATIONS (MIN- 1,023,100 973,600 980,800 993,600 1,021,500
ING, CONSTRUCTION AND MANUFACTURING)
SERVICE OCCUPATIONS 2,106,300 2,085,400 2,154,200 2,209,800 2,337,200
WHOLESALE/RETAIL OCCUPATIONS 732,500 704,100 715,100 723,200 749,000
GOVERNMENT EMPLOYEES 496,400 496,700 513,400 515,400 554,600
MISCELLANEOUS SERVICES 587,300 596,300 638,300 676,900 731,900
AGRICULTURAL EMPLOYMENT 58,900 88,700 102,800 88,400 53,000
</TABLE>
The seasonally adjusted unemployment rate in January 1995 was estimated to be
3.8% of the labor force (down from 4.0% in January 1994), as compared with 5.7%
nationwide (down from 6.7% in January 1994).
As of 1993, the State was tenth in the nation in gross agricultural income of
which nearly the entire amount (approximately $5.3 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1993, the
State ranked first in the nation in the production of flue-cured tobacco,
turkeys and sweet potatoes; second in the value of poultry and eggs, hog
production, trout and the production of cucumbers for pickles; fourth in
commercial broilers, blueberries and peanuts; sixth in burley tobacco and net
farm income.
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The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production is the leading source of agricultural income in the State,
accounting for 20% of gross agricultural income. Tobacco farming in North
Carolina has been and is expected to continue to be affected by major Federal
legislation and regulatory measures regarding tobacco production and marketing
and by international competition. Measures adverse to tobacco farming could
have negative effects on farm income and the North Carolina economy generally.
The poultry industry provides nearly 34% of gross agricultural income. The pork
industry has been expanding and accounted for 17% of gross agricultural income
in 1993.
The number of farms has been decreasing; in 1994 there were approximately
58,000 farms in the State (down from approximately 72,000 in 1987, a decrease of
about 19% in seven years). However, a strong agribusiness sector also supports
farmers with inputs (fertilizer, insecticide, pesticide and farm machinery) and
processing of commodities produced by farmers (vegetable canning and cigarette
manufacturing).
The State Department of Commerce, Travel and Tourism Division reports that in
1993 more than $803 billion was spent on tourism in the State. The Department
estimates that two-thirds of total expenditures came from out-of-state
travelers, and that approximately 250,000 people were employed in tourism-
related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's
also reaffirmed its stable outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects the State's
strong economic characteristics, sound financial performance, and low debt
levels.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and statements by, or news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any matters contained in this
Prospectus other than the tax opinions set forth below under North Carolina
Taxes.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of ratings
agencies and news reports of statements by State officials and employees and by
rating agencies. The Sponsor and its counsel have not independently verified
any of the information contained in the official statements and other sources
and counsel have not expressed any opinion regarding the completeness or
materiality of any contained in this Prospectus other than the tax opinions set
forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel to
the fund for North Carolina tax matters rendered an opinion under then existing
North Carolina income tax law applicable to taxpayers whose income is subject to
North Carolina income taxation substantially to the effect that:
Upon the establishing of the North Carolina Trust and the Units thereunder:
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(1) The North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law with the result that income of the
North Carolina Trust will be deemed to be income of the Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina income tax when
received by the North Carolina Trust will retain its tax-exempt status
when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North Carolina Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when a Unitholder redeems or sells his Units (or any of
them), and taxable gains for Federal income tax purposes may result in
gain taxable as ordinary income for North Carolina income tax purposes.
However, when a Bond had been issued under an act of the North Carolina
General Assembly that provides that all income from such Bond, including
any profit made from the sale thereof, shall be free from all taxation by
the State of North Carolina, any such profit received by the North
Carolina Trust will retain its tax-exempt status in the hands of the
Unitholders.
(4) Unitholders must authorize their proportionate share of any premium on a
Bond. Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against
gross income for the year.
(5) The Units are exempt from the North Carolina tax on intangible personal
property so long as the corpus of the North Carolina Trust remains
composed entirely of Bonds or, pending distribution, amounts received on
the sale, redemption or maturity of the Bonds and the Trustee
periodically supplies to the North Carolina Department of Revenue at such
times required by the Department of Revenue a complete description of the
North Carolina Trust and also the name, description and value of the
obligations held in the corpus of the North Carolina Trust.
OHIO TRUSTS. As described above, the Ohio Trust will invest substantially all
of its net assets in securities issued by or on behalf of (or in certificates of
participation in lease purchase obligations of) the State of Ohio, political
subdivisions of the State or agencies or instrumentalities of the State or its
political subdivisions ("Ohio Obligations"). The Ohio Trust is therefore
susceptible to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the complex factors that may have an
effect. This information does not apply to "conduit" obligations on which the
public issuer itself has no financial responsibility. This information is
derived from official statements published in connection with their issuance of
securities of certain Ohio issuers and from other publicly available
information, and is believed to be accurate. No independent verification has
been made of any of the following information.
Generally, creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the State itself, and the State has no responsibility
to make payments on those local obligations. There may be specific factors that
at particular times apply in connection with investment in particular Ohio
Obligations or in those obligations of particular Ohio issuers. It is possible
that the investment may be in particular Ohio Obligations, or in those of
particular issuers as to which those factors apply. However, the information
below is intended only as a general summary and is not intended as a discussion
of any specific factors that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by the bond insurance purchased by the issuers, the Ohio or other
parties. Ohio Obligations may not be subject to the factors referred to in this
section of the Prospectus.
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Ohio is the seventh most populous state; The 1990 Census count of 10,847,000
indicates a 0.5% population increase from 1980. The Census estimate for 1993 is
11,091,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture also is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 15% of total employment is in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the
last four years the State rates were below the national rates (6.5% versus 6.8%
in 1993). The unemployment rate and its effects vary among geographic areas of
the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio portfolio or the ability of particular obligors to
make timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund ("GRF"), for which
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has well-
established procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF", a cash and
budgetary management fund). In the next two fiscal years, necessary corrective
steps were taken to respond to lower receipts and higher expenditures in certain
categories than earlier estimated. Those steps included selected reductions in
appropriations spending and the transfer of $64 million from the BSF to the GRF.
Reported June 30, 1991 ending fund balances were 35.3 million (GRF) and $300
million (BSF).
To allow time to resolve certain budget differences for the latest complete
biennium, an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire 1992-93
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium passed on July 11, 1991,
$200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of FY 1992, both in light
of the continuing uncertain nationwide economic situation, there was projected
and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales, use and
personal income taxes. Higher expenditure levels came in certain areas,
particularly human services including Medicaid. The Governor ordered most State
agencies to reduce GRF spending in the last six months of the FY 1992 by a total
of approximately $184 million. As authorized by the General Assembly the $100.4
million BSF balance, and additional amounts from certain other funds were
transferred late in the FY to the GRF, and adjustments made in the timing of
certain tax payments. Other administrative revenue and spending actions
resolved the remaining imbalance.
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A significant GRF shortfall (approximately $520 million) was then projected
for the next year, FY 1993. It was addressed by appropriate legislative and
administrative actions. The Governor ordered, effective July 1, 1992, $300
million in selected GRF spending reductions. Subsequent executive and
legislative action in December 1992 -- a combination of tax revisions and
additional spending reductions -- resulted in a balance of GRF resources and
expenditures in the 1992-93 biennium. The June 30, 1993 ending GRF fund balance
was approximately $111 million, of which, as a first step to BSF replenishment,
$21 million was deposited in the BSF. (Based on June 30, 1994 balances, an
additional $260 million has been deposited in the BSF, which has a current
balance of $281 million.)
No spending reductions were applied to appropriations needed for debt service
on or lease rentals relating to any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for State debt services and lease rental payments then projected
for the biennium.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State Constitution provisions.
The State may incur debt, limited in amount to $750,000, to cover casual
deficits or failures in revenues or to meet expenses not otherwise provided for.
The Constitution expressly precludes the State from assuming the debts of any
local government or corporation. (An exception is made in both cases for any
debt incurred to repel invasion, suppress insurrection or defend the State in
war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt and the pledge to taxes or excises to
its payment. At January 25, 1995, $794.4 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 ($38.9 million outstanding); (b) $360 million of obligations
authorized for local infrastructure improvements, no more than $120 million may
be issued in any calendar year ($728 million outstanding or awaiting delivery);
and (c) up to $200 million in general obligation bonds for parks, recreation and
natural resources which may be outstanding at any one time (no more than $50
million to be issued in any one year).
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.5 billion of
which were outstanding or awaiting delivery at January 25, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchases of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded especially from
program revenues.)
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State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitution provisions.
In general, payment obligations under lease-purchase agreements of Ohio public
agencies (in which certificates of participation may be issued) are limited in
duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
in the range of 46% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 107 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial court recently
concluded that aspects of the system (including basic operating assistance) are
unconstitutional and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State has appealed. A small number of
the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion of
State subsidy distributions to repayment if needed. Borrowings under this
program totalled $68.6 million for 44 districts (including $46.6 million for one
district) in FY 1992, $94.5 million for 27 districts (including $75 million for
one) in FY 1993, and $15.6 million for 28 districts in FY 1994.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cities and villages; for 18 of
them the fiscal situation was resolved and the procedures terminated.
At present the State itself does not levy any ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited to 1%
of true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
Commencing in 1985 Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to income
taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Counsel to each Ohio
Trust for Ohio tax matters rendered an opinion under then existing Ohio income
tax law applicable to taxpayers whose income is subject to Ohio income taxation
substantially to the effect that:
(1) The Ohio Trust is not taxable as a corporation or otherwise for purposes
of the Ohio personal income tax, the school district income taxes in
Ohio, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
(2) Distributions with respect to Units of the Ohio Trust ("Distributions")
will be treated as the income of the Unitholders for purposes of the Ohio
personal income tax, and school district and municipal income taxes in
Ohio, and the Ohio corporation franchise tax in proportion to the
respective interest therein of each Unitholder.
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(3) Distributions properly attributable to interest on obligations issued by
or on behalf of the State of Ohio, political subdivisions thereof, or
agencies or instrumentalities thereof ("Ohio Obligations"), or by the
governments of Puerto Rico, the Virgin Islands or Guam ("Territorial
Obligations") held by the Trust are exempt from the Ohio personal income
tax, school district and municipal income taxes, and are excluded from
the net income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
(4) Distributions properly attributable to proceeds of insurance paid to the
Ohio Trust that represent maturing or matured interest on defaulted
obligations held by the Ohio Trust and that are excluded from gross
income for federal income tax purposes will be exempt from Ohio personal
income tax, and school district municipal income taxes in Ohio and the
net income base of the Ohio corporation franchise tax.
(5) Distributions of profit made on the sale, exchange or other disposition
by the Ohio Trust of Ohio Obligations including Distributions of "capital
gain dividends" as defined in Section 852 (b) (3) (C) of the Code,
properly attributable to the sale, exchange or other disposition of Ohio
Obligations are exempt from Ohio personal income tax, and school district
and municipal income taxes in Ohio, and are excluded from the net income
base of the Ohio corporation franchise tax.
SOUTH CAROLINA TRUSTS. Although all or most of the Bonds in the South
Carolina Quality Trust are revenue obligations of local governments or
authorities rather than general obligations of the State of South Carolina
itself, there can be no assurance that any financial difficulties the State may
experience will not adversely affect the market value or marketability of the
Bonds or the ability of the respective obligors to pay interest on or principal
of the Bonds. The information regarding the financial condition of the State is
included for the purpose of providing information about general economic
conditions that may affect issuers of the Bonds in South Carolina.
From the early 1920s to the present nine, the State's economy has been
dominated by the textile industry with over one out of every three manufacturing
workers directly or indirectly related to the textile industry. While the
textile industry is still the major industrial employer in the State, since 1950
the State's economy has undergone a gradual transition. The economic base of
the State has diversified as the trade and service sectors developed and with
the added development of the durable goods manufacturing industries, South
Carolina's economy now resembles more closely that of the United States.
In South Carolina in 1992, personal income grew at an average annual rate of
5.9%. During the same period the nation's income grew 6.1% and the Southeast
grew 6.5%. Over the last five (5) years (1987-1992) personal income in South
Carolina rose at a compounded annual rate of 7.0%, outpacing the nation and the
Southeast with income growth rates of 6.2% and 6.8%, respectively, in the same
period. During the first nine months in 1993, personal income in South Carolina
rose 5.7% while the rate of increase in the U.S. for the same period was 5.2%.
Monthly unemployment rates in the State have equalled or been below
comparable national rates for the nation during 1993. The rate for December,
1993, was 7% compared to 6.4% national rate.
The State Constitution requires the General Assembly to provide a balanced
budget and requires that if there be a deficit, such deficit shall be provided
for in the succeeding fiscal year. The State Constitution also provides that
the State Budget and Control Board may, if a deficit appears likely, effect such
reductions in appropriations as may be necessary to prevent a deficit. At the
November 6, 1984 general election there was approved a constitutional amendment
providing that annual increases in State appropriations may not exceed the
average growth rate of the economy of the State and that the annual increase in
the number of State
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employees may not exceed the average growth of population of the State. The
State Constitution also establishes a Reserve Fund to be maintained in an amount
equal to 4% of General Fund revenue for the latest fiscal year. Despite the
efforts of the State Budget and Control Board, deficits were experienced in each
of the fiscal years ended June 30, 1981, June 30, 1982, June 30, 1985 and June
30, 1986. All deficits have been funded out of the Reserve Fund. For the
fiscal years ending June 30, 1983 and 1984, the State had cash surpluses. As of
June 30, 1985 the General Fund reserve was $89,100,000.
In 1993 the General Assembly provided that beginning with appropriations for
fiscal year 1994-1995, appropriations in the annual general appropriations act
may not exceed the base revenue estimate. The base revenue estimate is defined
as the lesser of (i) the total of recurring general fund revenues collected in
the latest completed fiscal year before the General Assembly first considers the
annual general appropriations bill plus an increase of seventy-five percent of
the difference between the general fund revenue estimate of the Board of
Economic Advisors for the upcoming fiscal year and actual revenue collections
from the latest completed fiscal year; or (ii) the Board of Economic Advisors
general fund estimate for the upcoming fiscal year.
At its July 1985 meeting the State Budget and Control Board, acting upon
advice that a shortfall in General Fund revenues for the fiscal year ending June
30, 1985 might develop, froze all supplemental appropriations pending the final
accounting of the General Fund for fiscal year 1985. On August 8, 1985, the
Office of the Comptroller General advised the State Budget and Control Board
that General Fund expenditures for the fiscal year ended June 30, 1985 did
exceed General Fund revenues by $11,936,636. Obedient to the constitutional
mandate that a casual deficit shall be provided for in the succeeding fiscal
year, the State Budget and Control Board delayed certain hiring and capital
improvements scheduled to be made in fiscal year 1986 in an amount sufficient to
meet the fiscal year 1985 budget shortfall. In January of the fiscal year ended
June 30, 1986 the State Budget and Control Board was advised of a possible
shortfall of $46,346,968. The Board immediately reduced State agency
appropriations by the amount of the anticipated shortfall. Notwithstanding this
action, at the end of fiscal year 1986, it became apparent that a shortfall
would result. In August of 1986, the State Budget and Control Board voted to
fund the deficit by transferring $37,353,272 from the Reserve Fund to the
General Fund, bringing the balance in the Reserve Fund to $51.8 million.
At the November 5, 1986 meeting of the Budget and Control Board, the Board of
Economic Advisors advised that it had reduced its revenue estimate for the
current fiscal year by $87,434,452. As required by the provisions of the
Capital Expenditure Fund, the Board applied $27,714,661 budgeted for this fund
to the anticipated shortfall. This action left a remaining shortfall of
$59,719,791 which the Budget and Control Board funded by imposing a 2.6% cut in
expenditures. In a February 1987 meeting of the Board, a further cut in
expenditures of 0.8% was ordered.
After net downward revisions of $122 million in estimated revenues during the
year, the actual revenue collections exceeded the final estimate by $37 million,
resulting in a surplus for the fiscal year ending June 30, 1987, of $20.5
million. The General Reserve Fund received $6.6 million during the year in
accordance with the Appropriation Act, and $17 million of the year-end surplus
was transferred to the General Reserve Fund, bringing the balance in the General
Reserve Fund to $75.4 million at June 30, 1987.
On August 5, 1988, it was announced that for the fiscal year ending June 30,
1988, the Budgetary General Fund had a surplus of $107.5 million. The surplus
resulted from a $117.3 million excess of revenues over expenditures. The State
will use $52.6 million of the surplus to fund supplemental appropriations, $28.3
million to fund the Capital Reserve, and $20.5 million for an early buy-out of a
school bus lease agreement The General Assembly will decide how the State will
spend the remaining $6.1 million.
The General Reserve Fund received $25.1 million during the 1987-88 fiscal year
in accordance with the Appropriation Act During the year, the General Assembly
reduced the required funding of the General Reserve Fund from 4% to 3 % of the
latest completed fiscal year's actual revenue. The General Assembly
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used $14.4 million of the resulting excess to fund the 1987-1988 Supplemental
Appropriation Act, leaving $86.1 million in the General Reserve Fund at June 30,
1988. The full-funding amount at that date, however, was only $80.8 million.
In accordance with the 1988-1989 Appropriation Act, the excess of $5.3 million
will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was approved a constitutional
amendment reducing from 4% to 3% the amount of General Fund revenue which must
be kept in the General Reserve Fund, and removing the provisions requiring a
special vote to adjust this percentage. The amendment also created a Capital
Reserve Fund equal to 2% of General Fund revenue. Before March 1 of each year,
the Capital Reserve Fund must be used to offset mid-year budget reductions
before mandating cuts in operating appropriations, and after March 1, the
Capital Reserve Fund may be appropriated by a special vote in separate
legislation by the General Assembly to finance in cash previously authorized
capital improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the Capital
Reserve Fund not appropriated or any appropriation for a particular project or
item which has been reduced due to application of the monies to year-end deficit
must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Reserve Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year 1989-1990, the
State Budget and Control Board committed $42.4 million of the $58.7 million
Capital Reserve Fund in April, 1990. Lack of sufficient funding at year end
resulted in an additional use of $4.5 million from the Capital Reserve Fund.
After the above reductions, the State had a fiscal year 1989-1990 surplus of
$13,159,892 which was used to fund supplemental appropriations of $1,325,000 and
the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in the
General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control Board has approved
mid-year budget changes in November of 1990 and again in February of 1991, to
offset lower revenue estimates. Those changes included committing the Capital
Reserve Fund appropriation ($62,742,901) and reducing agency appropriations in
an additional amount necessary to offset (together with automatic expenditure
reductions that are tied to revenue levels) what would otherwise be a projected
deficit of approximately $132.6 million. On May 14 and May 21, 1991, the Budget
and Control Board, responding to April revenue figures and unofficial estimates
indicating an additional shortfall of $30 to $50 million, ordered an immediate
freeze on all personnel activities, from hiring to promotions; a freeze on
purchasing, with limited exceptions; and an indefinite halt to new contracts and
contract renewals. The Board also asked the General Assembly for the power to
furlough government workers periodically during the next fiscal year.
In the past the State's budgetary accounting principles allowed revenue to be
recorded only when the State received the related cash. On July 30, 1991, the
Budget and Control Board approved a change in this principle for sales tax
revenue beginning with the fiscal year ended June 30, 1991. The Board's
resolution requires that sales taxes collected by merchants in June and received
by the State in July be reported as revenue in June rather than in July. This
change resulted in a $5.2 million decrease in reported 1990-91 sales tax revenue
and a one-time $83.1 million addition to fund balance. The one-time adjustment
increases the fund balance to the level it would be if the new principle had
been in effect in years before 1990-91. Following such action, the year-end
balance in the General Reserve Fund was $33.4 million.
At its July 30, 1991, meeting the Budget and Control Board also took action
with respect to the current fiscal year. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected a
revenue shortfall of $148 million for the fiscal year 1991-92 budget of $3.581
billion. In response, the Budget and Control Board eliminated the two percent
(2%) Capital Reserve Fund appropriation
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of $65.9 million and reduced other expenditures across the board by three
percent (3%). On February 10, 1992, the Board of Economic Advisers advised the
Budget and Control Board that it had revised its estimate of revenues for the
current fiscal year downward by an additional $55 million. At its February 11,
1992 meeting, the Budget and Control Board responded by imposing an addition one
percent (1%) across-the-board reduction of expenditures (except with respect to
approximately $10 million for certain agencies). At its February 13, 1992
meeting, the Budget and Control Board restored a portion of the one percent (1%)
reduction to four (4) education-related agencies totalling approximately $5.7
million. These expenditure reduction measures, when coupled with revenue
increases projected by the Budget and Control Board, resulted in an estimated
balance of approximately $1.4 million in the General Fund for the fiscal year
1991-92. Despite such actions, expenditures exceeded revenues by $38.2 million
and, as required by the South Carolina Constitution, such amount was withdrawn
from the General Rescue Fund to cover the shortfall.
Responding to these recurrent operating deficits, Standard & Poor's Corp. has
placed the State's AAA-rated general obligation debt on its CreditWatch, and on
January 29, 1993, this rating was reduced to AA+.
On August 22, 1992, the Budget and Control Board adopted a plan to reduce
appropriations under the 1992 Appropriations Act because of revenue shortfall
projections of approximately $200 million for the 1992-93 fiscal year. These
reductions were based on the rate of growth in each agency's budget over the
past year. On September 15, 1992, the Supreme Court of South Carolina enjoined
the Budget and Control Board from implementing its proposed plan for budget
reductions on the grounds that the Board had authority to make budget reductions
only across-the-board based on total appropriations. In response to this
decision, the Board instituted a 4% across the board reduction. On November 10,
1992, the Budget and Control Board permanently reduced the $88.1 million in
appropriations which were set aside on September 15, 1992. This action, along
with improved actual revenue collections, created a budgetary surplus of
approximately $101 million.
Prospective investors should study with care the portfolio of Bonds in the
South Carolina Trust and should consult with their investment advisers as to the
merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special Counsel for
each South Carolina Trust for South Carolina tax matters rendered an opinion
under then existing South Carolina income tax law applicable to taxpayers whose
income is subject to South Carolina income taxation substantially to the effect
that:
By the provision of paragraph (j) of Section 3 of Article 10 of the South
Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation.
Pursuant to the provisions of Section 12-1-60 the interest of all bonds, notes
or certificates of indebtedness issued by or on behalf of the State of South
Carolina and any authority, agency, department or institution of the State and
all counties, school districts, municipalities, divisions and subdivisions of
the State and all agencies thereof are exempt from income taxes and that the
exemption so granted extends to all recipients of interest paid thereon through
the Trust. (This opinion does not extend to so-called 63-20 obligations.) The
income of the Trust would be treated as income to each Unitholder of the Trust
in the proportion that the number of Units of the Trust held by the Unitholder
bears to the total number of Units of the Trust outstanding. For this reason,
interest derived by the Trust that would not be includable in income for South
Carolina income tax purposes when paid directly to a South Carolina Unitholder
will be exempt from South Carolina income taxation when received by the Trust
and attributed to such South Carolina Unitholder.
Each Unitholder will recognize gain or loss for South Carolina state income
tax purposes if the Trustee disposes of a Bond (whether by sale, payment on
maturity, retirement or otherwise) or if the Unitholder
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redeems or sells his Unit. The Trust would be regarded, under South Carolina
law, as a common trust fund and therefore not subject to taxation under any
income tax law of South Carolina.
The above described opinion of Special Counsel has been concurred in by an
informal ruling of the South Carolina Tax Commission pursuant to Section 12-3-
170 of the South Carolina Code.
VIRGINIA TRUSTS. The Commonwealth's financial condition is supported by a
broad-based economy, including manufacturing, tourism, agriculture, ports,
mining and fisheries. Manufacturing continues to be a major source of
employment, ranking behind only services, wholesale and retail trade, and
government (Federal, state and local). The federal government is a major
employer in Virginia, due to the heavy concentration of federal employees in the
metropolitan Washington, D.C. segment of Northern Virginia and the military
employment in the Hampton Roads area, which houses the nation's largest
concentration of military installations. However, the expected retrenchment of
the military sector as a consequence of the end of the Cold War remains a cloud
on the economic horizon.
In recent years per capita personal income in Virginia has consistently been
above the national average. However, while total personal income has continued
to rise during the current recession, it has not always kept pace with both
inflation and the population, either nationally or in Virginia. Real personal
income in Virginia fell for seven consecutive quarters, ending with the last
quarter of 1991, with a slow recovery being evidenced in 1992. The annualized
rate of growth in real personal income in Virginia for the second quarter of
1992 was 0.5 percent compared to a national rate of 0.3 percent. Virginia's
real per capita income has exceeded that for both the nation and the southeast
region since the early 1980s, although the differentials have decreased since
1989. Virginia's nonagricultural employment figures mirror the national economy
although the recent recession has hit Virginia harder than the nation as a whole
with employment declining at an average annual rate of 1.6 percent since 1990 in
Virginia, compared to 0.7 percent nationally, With respect ot unemployment,
Virginia's unemployment rate has consistently been below that of the nation.
For the decade of 1980 to 1990, the differential has been two percentage points,
although it decreased to below one percentage point in 1991 and the first six
months of 1992.
Employment trends in Virginia have varied from sector to sector and from
region to region. For example, manufacturing and trade sectors in 1980 each
employed more workers than the service sector. Now the service sector is the
largest employer in Virginia and mining and manufacturing are now at lower
levels than in 1980. Highest rates of employment are concentrated in southwest
Virginia where mining jobs have been lost and the lowest unemployment rates are
seen in Northern Virginia where much federally related employment is
concentrated. Not surprisingly, there is great overlap between areas of lowest
unemployment and those highest per capita income. Economic recovery from the
recent recession is expected to be long and slow in Virginia, although in the
long term, a growing and more diversified export sector holds promise that
should mitigate current concerns.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1992, fiscal year, the General Fund
had an ending fund balance computed on a budgetary cash basis of $195.2 million,
of which $15 million was in required reserve; $142.3 million thereof was
designated for expenditure during the next fiscal year, leaving an undesignated,
unreserved fund balance of $52.8 million, the first such undesignated fund
balance since 1988. Computed on a modified accrual basis in accordance with
generally accepted accounting principles, the General Fund balance at the end of
the fiscal year ended June 30, 1992, was minus $121.8 million, compared with a
General Fund balance at the end of the fiscal year ended June 30, 1991, of minus
$265.1 million. Contributing to the reduction were $256.4 million in deferred
credits, representing estimated tax refunds associated with income taxes
withheld for the period January through June, 1992, and an accrual for estimated
Medicaid claims of $155.8 million.
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<PAGE>
As of June 30, 1992, Outstanding general obligation debt backed by the full
faith and credit of the Commonwealth was $582.7 million at June 30, 1992. Of
that amount, $544.4 million was also secured by revenue producing capital
projects. Debt service on the balance equaled 0.2% of total General Fund
expenditures in fiscal year 1992.
The Virginia Constitution contains limits on the amount of general obligation
bonds which the Commonwealth can issue. These limits are substantially in
excess of current levels of outstanding bonds, and at June 30, 1992 would permit
an additional total of approximately $5.00 billion of bonds secured by revenue-
producing projects and approximately $5.50 billion of unsecured general
obligation bonds, with not more than approximately $1.39 billion of the latter
to be issued in any four-year period. Bonds which are not secured by revenue-
producing projects must be approved in a state-wide election.
In November of 1992 the Constitution of Virginia was amended to establish a
permanent Revenue Stabilization Fund. This Fund will go into effect in the
1994-96 biennium. In anticipation of the first required deposit ($40.5 million)
to the fund, the Governor included, and the General Assembly approved, a $30.0
million down payment.
The current biennium started on July 1, 1992 and will end on June 30, 1994.
The amended biennial budget appropriated a total of $29,090.6 million: $6,416.0
million in general funds and $7,907.1 million in nongeneral funds in fiscal
1993, and $6,852.1 million in general funds and $7,915.3 million in nongeneral
funds in fiscal 1994.
The amended Appropriations Act assumed that general fund revenues would
increase by 7.1 percent in fiscal 1993 and 6.0 percent in fiscal 1994.
Currently, year-to-date general fund growth for the 11 months of fiscal 1993 is
9.7 percent. When general fund revenues are adjusted for one-time corporate
payments, the year-to-date growth declined to 7.9 percent.
The Commonwealth of Virginia has consistently maintained ratings of AAA by
Standard & Poor's and Aaa by Moody's on its general obligation indebtedness,
reflecting in part its sound fiscal management, diversified economic base and
low debt ratios. There can be no assurance that these conditions will continue.
Nor are these same conditions necessarily applicable to securities which are not
general obligations of the Commonwealth. Securities issued by specific
municipalities, governmental authorities or similar issuers may be subject to
economic risks or uncertainties peculiar to the issuers of such securities or
the sources from which they are to be paid.
At the time of the closing for each Virginia Trust, Special Counsel to each
Virginia Trust for Virginia tax matters rendered an opinion under then existing
Virginia income tax law applicable to taxpayers whose income is subject to
Virginia income taxation substantially to the effect that:
(1) The Virginia Trust is not an association taxable as a corporation for
purposes of the Virginia Income Tax and each Unitholder of the Trust will
be treated as the owner of a pro rata portion of the assets held by the
Trust and the income of such portion of the Virginia Trust will be
treated as income of the Unitholder for purposes of the Virginia Income
Tax.
(2) Income on the Bonds which is exempt from Virginia Income Tax when
received by the Virginia Trust and which would be exempt from Virginia
Income Tax if received directly by a Unitholder, will retain its status
as exempt from such tax when received by the Trust and distributed to
such Unitholder.
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<PAGE>
(3) Each Unitholder will recognize gain or loss for purposes of the
Virginia Income Tax if the Trustee disposes of a bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax
purposes, except as described in this paragraph. Virginia has by law
provided that all income from certain tax-exempt obligations issued under
the laws of Virginia, including any profits made from the sale of such
Bonds, shall be exempt from all taxation by Virginia. Although we express
no opinion, the Virginia Department of Taxation has indicated that the
gain on the sale of such tax-exempt obligations, recognized for federal
income tax purposes, would not be subject to Virginia income taxation.
Accordingly, any such gain relating to the disposition of any Bond that
would not be subject to Virginia Income Tax if the Bond was held directly
by a Unitholder will retain its tax-exempt status for purposes of the
Virginia Income Tax when the Bond is disposed of by the Virginia Trust or
when the Unitholder is deemed to have disposed of his pro rata portion of
such Bond upon the disposition of his Unit provided that such gain can be
determined with reasonable certainty and substantiated.
(4) The Virginia Income Tax does not permit a deduction of interest paid on
indebtedness incurred or continued to purchase or carry Units in the
Virginia Trust to the extent that interest income related to the
ownership of Units is exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax, the
income derived by such a Unitholder from his pro rata portion of the Bonds held
by the Virginia Trust may affect the determination of such Unitholders' Bank
Franchise Tax. Prospective investors subject to the Virginia Bank Franchise Tax
should consult their tax advisors.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are offered at the Public
Offering Price thereof. The Public Offering Price per Unit is equal to the
aggregate bid side evaluation of the Municipal Bonds in the State Trust's
portfolio (as determined pursuant to the terms of a contract with the Evaluator,
by Muller Data Corporation, a non-affiliated firm regularly engaged in the
business of evaluating, quoting or appraising comparable securities), plus or
minus cash, if any, in the Principal Account, held or owned by the State Trust,
divided by the number of outstanding Units of the State Trust plus accrued
interest to the date of settlement (which in the case of Kemper Defined Funds,
consists of Purchased Interest and Daily Accrued Interest), plus the sales
charge applicable to a Unit of such State Trust. Investors who purchase Units
through brokers or dealers pursuant to a current management agreement which by
contract or operation of law does not allow such broker or dealer to earn an
additional commission (other than any fee of commission paid for maintenance of
such investor's account under the management agreement) on such transactions may
purchase such Units at the current Public Offering Price net of the applicable
broker or dealer concession. See "Public Distribution of Units" below.
The sales charge is based upon the dollar weighted average maturity of the
State Trust and is determined in accordance with the table set forth below. For
purposes of this computation, Municipal Bonds will be deemed to mature on their
expressed maturity dates unless: (a) the Municipal Bonds have been called for
redemption or funds or securities have been placed in escrow to redeem them on
an earlier call date, in which case such call date will be deemed to be the date
upon which they mature; or (b) such Municipal Bonds are subject to a "mandatory
tender", in which case such mandatory tender will be deemed to be the date upon
which they mature. The effect of this method of sales charge computation will
be that different sales charge rates will be applied to the State Trust based
upon the dollar weighted average maturity of such State Trust's portfolio, in
accordance with the following schedule:
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<PAGE>
<TABLE>
DOLLAR PERCENT OF PERCENT OF NET
WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
- ----------------- --------------- --------------
<S> <C> <C>
0 to .99 years.............. 0.00% 0.000%
1 to 3.99 years............. 2.00 2.041
4 to 7.99 years............. 3.50 3.627
8 to 14.99 years............ 4.50 4.712
15 or more years............ 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
-----------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999............................. 3.50% 4.50% 5.50%
$100,000 to $499,999...................... 3.25 4.25 5.00
$500,000 to $999,999...................... 3.00 4.00 4.50
$1,000,000 or more........................ 2.75 3.75 4.00
</TABLE>
- --------------------------
* If the dollar weighted average maturity of a State Trust is from 1 to 3.99
years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1 to $249,999 and $250,000 or more, respectively.
The reduced sales charges as shown on the preceding charts will apply to all
purchases of Units on any one day by the same purchaser from the same firm and
for this purpose, purchases of Units of a Series of the Trust will be aggregated
with concurrent purchases of Units of any other unit investment trust that may
be offered by the Sponsor. Additionally, Units purchased in the name of a
spouse or child (under 21) of such purchaser will be deemed to be additional
purchases by such purchaser. The reduced sales charges will also be applicable
to a trust or other fiduciary purchasing for a single trust estate or single
fiduciary account.
The Sponsor intends to permit officers, directors and employees of the Sponsor
and Evaluator and in the sole direction of the Sponsor, registered
representatives of selling firms to purchase Units of the Trust without a sales
charge, although a transaction processing fee may be imposed on such trades.
The Public Offering Price per Unit of a State Trust on the date shown on the
cover page of Part Two of the Prospectus or on any subsequent date will vary
from the amounts stated under "Essential Information" in Part Two in accordance
with fluctuations in the prices of the underlying Municipal Bonds and the amount
of accrued interest on the Units. The aggregate bid side evaluation of the
Municipal Bonds shall be determined (a) on the basis of current bid prices of
the Municipal Bonds, (b) if bid prices are not available for any particular
Municipal Bond, on the basis of current bid prices for comparable bonds, (c) by
determining the value of the Municipal Bonds on the bid side of the market by
appraisal, or (d) by any combination of the above.
The foregoing evaluations and computations shall be made as of the Evaluation
Time stated under "Essential Information" in Part Two, on each business day
effective for all sales made during the preceding 24-hour period, and for
purposes of resales and repurchases of Units.
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<PAGE>
The interest on the Municipal Bonds in each State Trust, less the related
estimated fees and expenses, is estimated to accrue in the annual amounts per
Unit set forth under "Essential Information" in Part Two. The amount of net
interest income which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of a State Trust change or
as the number of outstanding Units of such State Trust changes.
Payment for Units must be made on or before the fifth business day following
the order for purchase (the "settlement date"). A purchaser becomes the owner
of Units on the settlement date. Cash, if any, made available to the Sponsor
prior to the date of settlement for the purchase of Units may be used in the
Sponsor's business and may be deemed to be a benefit to the Sponsor, subject to
the limitations of the Securities Exchange Act of 1934. If a Unitholder desires
to have certificates representing Units purchased, such certificates will be
delivered as soon as possible following a written request therefor, or shortly
thereafter. For information with respect to redemption of Units purchased, but
as to which certificates requested have not been received, see "Redemption"
below.
The following section entitled "Accrued Interest" applies only to series of
Kemper Tax-Exempt Income Trust, Multi-State Series and Ohio Tax-Exempt Bond
Trust, Series 1-10.
ACCRUED INTEREST. Accrued interest consists of two elements. The first
element arises as a result of accrued interest which is the accumulation of
unpaid interest on a bond from the last day on which interest thereon was paid.
Interest on Bonds in the State Trusts is actually paid either monthly or semi-
annually to the State Trust. However, interest on the Bonds in the State Trusts
is accounted for daily on an accrual basis. Because of this, a State Trust
always has an amount of interest earned but not yet collected by the Trustee
because of coupons that are not yet due. For this reason, the Public Offering
Price of Units will have added to it the proportionate share of accrued and
undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as of the First Settlement
Date (which is five business days following the Date of Deposit) and the same
was distributed to the Sponsor. Such advance was repaid to the Trustee through
the first receipts of interest received on the Municipal Bonds. Consequently,
the amount of accrued interest added to the Public Offering Price of Units
included only accrued interest arising after the First Settlement Date of a
State Trust, less any distributions from the Interest Account subsequent to this
First Settlement Date. Since the First Settlement Date was the date of
settlement for anyone who ordered Units on the Date of Deposit, no accrued
interest was added to the Public Offering Price of Units ordered on the Date of
Deposit.
The second element of accrued interest arises because of the structure of the
Interest Account. The Trustee has no cash for distribution to Unitholders until
it receives interest payments on the Bonds in a State Trust. The Trustee is
obligated to provide its own funds, at times, in order to advanced interest
distributions. The Trustee will recover these advancements when such interest
is received. Interest Account balances are established so that it will not be
necessary on a regular basis for the Trustee to advance its own funds in
connection with such interest distributions. The Interest Account balances are
also structured so that there will generally be positive cash balances and since
the funds held by the Trustee will be used by it to earn interest thereon, it
benefits thereby (see "Expenses of the Trust").
Accrued interest is computed as of the initial Record Date of the State
Trusts. On the date of the first distribution of interest to Unitholders after
the First Settlement Date the interest collected by the Trustee will be
sufficient to repay its advances, to allow for accrued interest under the
monthly, quarterly and semi-annual plans of distribution and to generate enough
cash to commerce distributions to Unitholders. If a Unitholder sells or redeems
all or a portion of his Units or if the Bonds in a State Trust are sold or
otherwise removed or if a State Trust is liquidated, he will receive at that
time his proportionate share of the accrued interest
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<PAGE>
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption in such State Trust.
The following section entitled "Purchased and Daily Accrued Interest" applies
only to series of Kemper Defined Funds (Tax-Exempt Portfolio).
PURCHASED AND DAILY ACCRUED INTEREST. Accrued interest consists of two
elements. The first element arises as a result of accrued interest which is the
accumulation of unpaid interest on a bond from the later of the last day on
which interest thereon was paid or the date of original issuance of the bond.
Interest on the coupon Bonds in the State Trust is paid semi-annually to the
Trust. In the case of series of Kemper Defined Funds, a portion of the
aggregate amount of such accrued interest on the Bonds in the Trust to the First
Settlement Date of the Trust is referred to herein as "Purchased Interest."
Included in the Public Offering Price of the Trust Units in any series of Kemper
Defined Funds is the Purchased Interest. In an effort to reduce the amount of
Purchased Interest which would otherwise have to be paid by Unitholders, the
Trustee may advance a portion of the accrued interest to the Sponsor as the
Unitholder of record as the First Settlement Date. The second element of
accrued interest arises because the estimated net interest on the Units in the
State Trust is accounted for daily on an accrual basis (herein referred to as
"Daily Accrued Interest in connection with Kemper Defined Funds"). Because of
this, the Units always have an amount of interest earned but not yet paid or
reserved for payment. For this reason, the Public Offering Price of Units in
any series of Kemper Defined Funds will include the proportionate share of Daily
Accrued Interest to the date of settlement.
If a Unitholder in any series of Kemper Defined Funds sells or redeems all or
a portion of his Units or if the Bonds are sold or otherwise removed or if the
State Trust is liquidated, he will receive at that time his proportionate share
of the Purchased Interest and Daily Accrued Interest computed to the settlement
date in the case of sale or liquidation and to the date of tender in the case of
redemption in the State Trust.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified Units of each State
Trust for sale in the State for which such State Trust is named. Units will be
sold through dealers who are members of the National Association of Securities
Dealers, Inc. and through others. Sales may be made to or through dealers at
prices which represent discounts from the Public Offering Price as set forth in
the table below. Certain commercial banks are making Units of the Trust
available to their customers on an agency basis. A portion of the sales charge
paid by their customers is retained by or remitted to the banks, in the amounts
in the table below. Under the Glass-Steagall Act, banks are prohibited from
underwriting Trust Units; however, the Glass-Steagall Act does permit certain
agency transactions and the banking regulators have indicated that these
particular agency transactions are permitted under such Act. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE
YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
-----------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
-------------------- -----------------------------------
<S> <C> <C> <C>
$1 to $99,999.......................... 2.00% 3.00% 4.00%
$100,000 to $499,999................... 1.75 2.75 3.50
$500,000 to $999,999................... 1.50 2.50 3.00
$1,000,000 or more..................... 1.25 2.25 2.50
</TABLE>
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<PAGE>
In addition to such discounts, the Sponsor may, from time to time, pay or
allow an additional discount, in the form of cash or other compensation, to
dealers employing registered representatives who sell, during a specified time
period, a minimum dollar amount of Units of the Trust and other unit investment
trusts underwritten by the Sponsor. The Sponsor reserves the right to change
the levels of discounts at any time. The difference between the discount
allowed to firms and the sales charge will be retained by the Sponsor. The
Sponsor reserves the right to reject, in whole or in part, any order for the
purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion of the sales charge on
each Unit sold from its inventory, representing the difference between the
Public Offering Price of the Units, calculated as stated under "Public Offering
Price," and the discounts allowed to firms selling such Units. The Sponsor may
realize additional profit or loss as a result of the possible change in the
daily evaluation of the Municipal Bonds in the State Trusts from its inventory.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to subject to change at any
time, maintain a market for Units of the State Trust offered hereby and to offer
to purchase said Units at prices, as determined by the Evaluator, based on the
aggregate bid prices of the underlying Municipal Bonds in such State Trusts,
together with accrued interest to the expected date of settlement (which, in the
case of Kemper Defined Funds, consists of Purchased Interest and Daily Accrued
Interest). Accordingly, Unitholders who wish to dispose of their Units should
inquire of their broker or bank as to the current market prices in order to
determine whether there is in existence any price in excess of the Redemption
Price and, if so, the amount thereof.
The offering price of any Units resold by the Sponsor will be in accord with
that described in the currently effective Prospectus describing such Units. Any
profits or loss resulting from the resale of such Units will belong to the
Sponsor. The Sponsor may suspend of discontinue purchases of Units of any Trust
Fund if the supply of Units exceeds demand, or for other business reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market described
above may cause their Units to be redeemed by the Trustee by making a written
request to the Trustee, Investors Fiduciary Trust Company, P.O. Box 419430,
Kansas City, Missouri 64173-0216 and, in the case of Units evidenced by a
certificate, by tendering such certificate to the Trustee, properly endorsed or
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Trustee. Unitholders must sign such written request, and
such certificate or transfer instrument, exactly as their names appear on the
records of the Trustee and on any certificate representing the Units to be
redeemed. If the amount of the redemption is $25,000 or less and the proceeds
are payable to the Unitholder of record at the address of record, no signature
guarantee is necessary for redemptions by individual account owners (including
joint owners). Additional documentation may be requested, and a signature
guarantee is always required, from corporations, executors, administrators,
trustees, guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guarantee program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee. A certificate should only be sent by
registered or certified mail for the protection of the Unitholder. Since tender
of the certificate is required for redemption when one has been issued, Units
represented by a certificate cannot be redeemed until the certificate
representing such Units has been received by the purchasers.
Redemption shall be made by the Trustee on the seventh calendar day following
the day on which a tender for redemption is received, or if the seventh calendar
day is not a business day, on the first business day prior
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<PAGE>
thereto (the "Redemption Date"), by payment of cash equivalent to the Redemption
Price for such State Trust, determined as set forth below under "Computation of
Redemption Price," as of the Evaluation Time stated under "Essential
Information" in Part Two, next following such tender, multiplied by the number
of Units being redeemed. The price received upon redemption might be more or
less than the amount paid by the Unitholder depending on the value of the
Municipal Bonds in the State Trust's portfolio at the time of redemption. Any
Units redeemed shall be cancelled and any undivided fractional interest in the
State Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the Trustee is
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's tax
identification number in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may be recovered by
the Unitholder only when filing a tax return. Under normal circumstances the
Trustee obtains the Unitholder's tax identification number from the selling
broker. However, any time a Unitholder elects to tender Units for redemption,
such Unitholder should make sure that the Trustee has been provided a certified
tax identification number in order to avoid this possible "back-up withholding."
In the event the Trustee has not been previously provided such number, one must
be provided at the time redemption is requested.
Any amounts paid on redemption representing interest shall be withdrawn from
the Interest Account for such State Trust to the extent that funds are available
for such purpose. All other amounts paid on redemption shall be withdrawn from
the Principal Account for such State Trust. The Trustee is empowered to sell
Municipal Bonds for such State Trust in order to make funds available for the
redemption of Units of such State Trust. Such sale may be required when
Municipal Bonds would not otherwise be sold and might result in lower prices
then might otherwise be realized. To the extent Municipal Bonds are sold, the
size and diversity of such State Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the Sponsor does
not elect to purchase any Units tendered for redemption, in lieu of redeeming
such Units, to sell such Units in over-the-counter market for the account of
tendering Unitholders at prices which will return to such Unitholders amounts in
cash, net after brokerage commissions, transfer taxes and other charges, equal
to or in excess of the Redemption Price for such Units. In the event of any
such sale, the Trustee shall pay the net proceeds thereof to the Unitholders on
the day they would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange is closed, other than customary
weekend and holiday closings, or during which (as determined by the Securities
and Exchange Commission) trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists as a result of which
disposal by the Trustee of Municipal Bonds is not reasonably practicable or it
is not reasonably practicable fairly to determine the value of the underlying
Municipal Bonds in accordance with the Agreement; or (3) for such other period
as the Securities and Exchange Commission may by order permit. The Trustee is
not liable to any person or in any way for any loss or damage which may result
from any such suspension or postponement.
COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of each State
Trust is computed by the Evaluator as of the Evaluation Time stated under
"Essential Information" in Part Two next occurring after the tendering of a Unit
for redemption and on any other business day desired by it, by
A. adding (1) the principal cash on hand held or owed by the State Trust
other than cash deposited in the Trust Fund to purchase Municipal Bonds
not applied to the purchase of such Bonds; (2) the aggregate value of the
Municipal Bonds held in the State Trust, as determined by the Evaluator on
the basis of bid prices therefor; and (3) interest accrued and unpaid on
the Municipal Bonds in the State Trust as of the date of computation; and
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<PAGE>
B. deducting therefrom (1) amounts representing any applicable taxes or
governmental charges payable out of the State Trust and for which no
deductions have been previously made for the purpose of additions to the
Reserve Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of the State Trust including, but
not limited to, unpaid fees and expenses of the Trustee (including legal
and auditing fees and any insurance costs), the Evaluator, the Sponsor and
bond counsel, if any; (3) cash held for distribution to Unitholders of
record as of the business day prior to the evaluation being made; and (4)
other liabilities incurred by the State Trust; and
C. finally, dividing the results of such computation by the number of Units
of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State Trust will not be
evidenced by a certificate unless a Unitholder or the Unitholder's registered
broker/dealer or the clearing agent for such broker/dealer makes a written
request to the Trustee. Certificates, if issued, will be so noted on the
confirmation statement sent to the Underwriter and broker. Non-receipt of such
certificate(s) must be reported to the Trustee within one year; otherwise, a 2%
surety bond fee will be required for replacement.
Units are transferable by making a written request to the Trustee and, in the
case of Units evidenced by a certificate, by presenting and surrendering such
certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer which should be sent registered or
certified mail for the protection of Unitholders. Unitholders must sign such
written request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate representing
the Units to be transferred. Such signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other signature guaranty program in addition to, or in substitution for,
STAMP, as may be accepted by the Trustee.
Units may be purchased and certificates, if requested, will be issued in
denominations of one Unit or any multiple thereof subject to any minimum
investment requirement established by the Sponsor from time to time. Any
certificate issued will be numbered serially for identification, issued in fully
registered form and will be transferable only on the books of the trustee. The
Trustee may require a Unitholder to pay a fee for each certificate re-issued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. The Trustee at the present
time does not intend to charge for the normal transfer or interchange of
certificates. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity (generally
amounting to 3% of the market value of the Units), affidavit of loss, evidence
of ownership and payment of expenses incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest Distributions: Interest received by
each State Trust, including any portion of the proceeds from a disposition of
Municipal Bonds which represents accrued interest, is credited by the Trustee to
the Interest Account for such State Trust. All other receipts are credited by
the Trustee to a separate Principal Account for the State Trust. The Trustee
normally has no cash for distribution to Unitholders until it received interest
payments on the Bonds in the State Trust. Since municipal interest usually is
paid semi-annually, during the initial months of the Trust, the Interest Account
of each State Trust, consisting of accrued but uncollected interest and
collected interest (cash), will be predominantly the uncollected accrued
interest that is not available for distribution.
Thereafter, assuming the State Trust retains its original size and
composition, after deduction of the fees and expenses of the Trustee, the
Sponsor and Evaluator and reimbursements (without interest) to the Trustee
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for any amount advanced to a State Trust, the Trustee will normally distribute
on each Interest Distribution Date (the fifteenth of the month) of shortly
thereafter to Unitholders of record of such State Trust on the preceding Record
Date. Unitholders of the State Trusts will receive an amount substantially
equal to one-twelfth, one-fourth or one-half (depending on the distribution
option selected) of such holders' pro rata share of the estimated net annual
interest income to the Interest Account of such State Trust. However, interest
earned at any point in time will be greater than the amount actually received by
the Trustee and distributed to the Unitholders. Therefore, there will always
remain an item of accrued interest that is added to the daily value of the
Units. If Unitholders of a State Trust sell or redeem all or a portion of their
Units, they will be paid their proportionate share of the accrued interest of
such State Trust to, but not including, the fifth business day after the date of
a sale or to the date of tender in the case of a redemption.
In order to equalize distributions and keep the undistributed interest income
of the Trusts at a low level, all Unitholders of record in such State Trust on
the first Record Date received and interest distribution on the first Interest
Distribution Date. Because the period of time between the first Interest
Distribution Date and the regular distribution dates may not have been a full
period, the first regular distributions amy have been partial distributions.
Persons who purchase Units between a Record Date and a Distribution Date will
receive their first distribution on the second Distribution Date following their
purchase of Units. Since interest on Municipal Bonds in the State Trusts is
payable at varying intervals, usually in semi-annual installments, and
distributions of income are made to Unitholders at different intervals from
receipt of interest, the interest accruing to a State Trust may not be equal to
the amount of money received and available for distribution from the Interest
Account. Therefore, on each Distribution Date the amount of interest actually
deposited in the Interest Account of a State Trust and available for
distribution may be slightly more or less than the interest distribution made.
In order to eliminate fluctuations in interest distributions resulting from
variances, the Trustee is authorized by the Trust Agreements to advance such
amounts as may be necessary to provide interest distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest, for any such
advances from funds available in the Interest Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 1-10 who desire to receive
distributions on a quarterly or semi-annual basis may elect to do so, however,
only monthly distributions are available for series of Kemper Defined Funds.
Record Dates for monthly distributions will be the first day of each month;
Record Dates for quarterly distributions will be the first day of January,
April, July and October; and Record Dates for semi-annual distributions will be
the first day of January and July. The distribution option selected by a
Unitholder of any series of Kemper Tax-Exempt Income Trust, Multi-State Series
or Ohio Tax-Exempt Bond Trust, Series 1-10 will remain in effect until changed
by written notice to the Trustee.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 1-10 purchasing Units of the State
Trusts in the secondary market will initially receive distributions in
accordance with the election of the prior owner. Unitholders of such Trusts
desiring to change their distribution option may do so by sending written notice
to the Trustee, together with their certificate (if one was issued).
Certificates should only be sent by registered or certified mail to minimize the
possibility of loss. If written notice and any certificate are received by the
Trustee not later than January 1 or July 1 of a year, the change will become
effective for distributions commencing with February 15 or August 15,
respectively, of that year. If notice is not received by the Trustee, the
Unitholder will be deemed to have elected to continue with the same option.
Principal Distributions. The Trustee will distribute on each semi-annual
Distribution Date (or, in the case of Kemper Defined Funds, on each Distribution
Date) or shortly thereafter, to each Unitholder of record of
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the State Trust of the preceding Record Date, an amount substantially equal to
such holder's pro rata share of the cash balance, if any, in the Principal
Account of such State Trust computed as of the close of business on the
preceding Record Date. However, no distribution will be required if the balance
in the Principal Account is less than $1.00 per Unit (or $.001 per Unit for
certain Series). Additionally, in the case of any series of Kemper Tax-Exempt
Income Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10, if
such balance is between $5.00 and $10.00 per Unit, distributions will be made on
each quarterly Distribution Date; and if such balance exceeds $10.00 per Unit,
such amounts will be distributed on the next monthly Distribution Date.
STATEMENTS TO UNITHOLDERS. With each distribution, the Trustee will furnish
each Unitholder a statement of the amount of interest and the amount of other
receipts, if any, which are being distributed, expressed in each case as a
dollar amount per Unit.
The accounts of each State Trust are required to be audited annually, at the
State Trust's expense, by independent auditors designated by the Sponsor, unless
the Trustee determines that such an audit would not be in the best interest of
the Unitholders of such State Trust. The accountants' report will be furnished
by the Trustee to any Unitholder of such State Trust upon written request.
Within a reasonable period of time after the end of each calendar year, the
Trustee shall furnish to each person who at any time during the calendar year
was a Unitholder of a State Trust a statement covering the calendar year,
setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds and the
percentage of such amount by states and territories in which the issuers
of such Bonds are located;
2. The amount paid from the Interest Account of such State Trust
representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such State Trust for
applicable taxes, if any, fees and expenses (including auditing fees) of
the Trustee, the Evaluator, the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such State
Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and deductions, expressed
both as a total dollar amount and a dollar amount per Unit outstanding on
the last business day of such calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of any of the
Municipal Bonds in such State Trust and the net proceeds received
therefrom excluding any portion credited to the Interest Account;
2. The amount paid from the Principal Account of such Series representing
the principal of any Units redeemed;
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3. The deductions from the Principal Account of such Series for payment of
applicable taxes, if any, fees and expenses (including auditing expenses)
of the Trustee, the Evaluator, the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such Series
described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount per
Unit outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust as of the last
business day of such calendar year;
2. The number of Units of such State Trust outstanding on the last business
day of such calendar year;
3. The Redemption Price of such State Trust based on the last Trust Fund
Evaluation made during such calendar year; and
4. The amount actually distributed during such calendar year from the
Interest and Principal Accounts of such State Trust separately stated,
expressed both as total dollar amounts and as dollar amounts per Unit of
such State Trust outstanding on the Record Date for each such
distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to the
Trustee for redemption. No Unitholder of a State Trust shall have the right to
control the operation and management of the Trust or such State Trust in any
manner, except to vote with respect to amendment of the Agreement or termination
of the Trust or such State Trust. The death or incapacity of any Unitholder
will not operate to terminate the Trust or any State Trust nor entitle legal
representatives or heirs to claim an accounting or to bring any action or
proceeding in any court for partition or winding up of the Trust or any State
Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the purchase,
sale or substitution of Municipal Bonds, except in the special circumstances
noted below. Thus, with the exception of the redemption or maturity of
Municipal Bonds in accordance with their terms, and/or the sale of Municipal
Bonds to meet redemption requests, the assets of the State Trusts will remain
unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the value of
which has been affected by certain adverse events including default in the
payment of principal or interest, institution of certain legal proceedings,
default under other documents which may adversely affect debt service, default
in the payment of interest on other obligations of the same issuer, decline in
projected income pledged for debt service on revenue bonds, or decline in their
price or the occurrence of other market factors, including advance refunding, so
that in the opinion of the Sponsor the retention of such Municipal Bonds in a
State Trust would be detrimental to the interest of its Unitholders. The
proceeds from any such sales, exclusive of any portion which represents accrued
interest, will be credited to the Principal Account of such Trust Fund for
distribution to its Unitholders.
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The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of the Municipal Bonds to issue new obligations in exchange or
substitution for any of such Municipal Bonds pursuant to a refunding financing
plan, except that the Sponsor may instruct the Trustee to accept or reject such
an offer or to take any other action with respect thereto as the Sponsor may
deem proper if (a) the issuer is in default with respect to such Municipal
Bonds; or (b) in the written opinion of the Sponsor, there is a reasonable basis
to believe that the issuer will default with respect to such Municipal Bonds in
the foreseeable future. Any obligations received in exchange or substitution
will be held by the Trustee subject to the terms and conditions of the Agreement
to the same extent as the Municipal Bonds originally deposited thereunder.
Within five days after such deposit, notice of such exchange and deposit shall
be given by the Trustee to each unitholder of such State Trust registered on the
books of the Trustee, including an identification of the Municipal Bonds
eliminated and the Municipal Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the Sponsor, from a State
Trust for the purpose of redeeming Units of such State Trust tendered for
redemption and the payment of expenses.
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a trust
company specializing in investment related services, organized and existing
under the laws of Missouri, having its trust office at 127 West 10th Street,
Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the Federal
Deposit Insurance Corporation. Investors Fiduciary Trust Company is owned by
State Street Boston Corporation.
The Trustee, whose duties are ministerial in nature, has not participated in
selecting the portfolio of any Trust Fund. For information relating to the
responsibilities of the Trustee under the Agreement, reference is made to the
material set forth under "Unitholders."
In accordance with the Agreements, the Trustee shall keep proper books of
record and account of all transactions at its office. Such records shall
include the name and address of, and the number of Units held by, every
Unitholder of each State Trust. Such books and records shall be open to
inspection by any Unitholder of such State Trust at all reasonable times during
the usual business hours. The Trustee shall make such annual or other reports
as may from time to time be required under any applicable state or Federal
statute, rule or regulation. The Trustee shall keep a certified copy or
duplicate original of the Agreements on file in its office available for
inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in each
State Trust. Pursuant to the Agreements, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds comprising
the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign and be
discharged of the trust created by the Agreement by executing an instrument in
writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of resignation
to all Unitholders then of record, not less than sixty days before the date
specified in such notice when such resignation is to take effect. The Sponsor
upon receiving notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon such resignation, no successor trustee has been
appointed and has accepted the appointment within thirty days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The Sponsor may at any time
remove the Trustee with or without cause and appoint a successor trustee as
provided in the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by
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a successor trustee, all the rights, powers, duties and obligations of the
original Trustee shall vest in the successor.
The Trustee shall be a corporation organized under the laws of the United
States or any state thereof, which is authorized under such laws to exercise
trust powers. The Trustee shall have at all times an aggregate capital, surplus
and undivided profits of not less than $5,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., the Sponsor, also serves as Evaluator. The Evaluator may resign or be
removed by the Trustee, which is to use its best efforts to appoint a
satisfactory successor. Such resignation or removal shall become effective upon
acceptance of appointment by the successor evaluator. If, upon resignation of
the Evaluator no successor has accepted appointment within thirty days after
notice of resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor. Notice of such resignation or
removal and appointment shall be mailed by the Trustee to each Unitholder. At
the present time, pursuant to a contract with the Evaluator, Muller Data
Corporation a non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities, provides portfolio
evaluations of the Municipal Bonds in the State Trusts which are then reviewed
by the Evaluator. In the event the Sponsor is unable to obtain current
evaluations from Muller Data Corporation, it may make its own evaluations or it
may utilize the services of any other non-affiliated evaluator or evaluators it
deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended by the Trustee and
the Sponsor without the consent of any of the Unitholders: (1) to cure any
ambiguity or to correct or supplement any provision which may be defective or
inconsistent; (2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental agency; or (3)
to make such provisions as shall not adversely affect the interest of the
Unitholders. The Agreement with respect to any State Trust may also be amended
in any respect by the Sponsor and the Trustee, or any of the provisions thereof
may be waived, with the written consent of the holders of Units representing
66-2/3% of the Units then outstanding of such State Trust, provided that no such
amendment or waiver will reduce the interest in the State Trust of any
Unitholder thereof without the consent of such Unitholder or reduce the
percentage of Units required to consent to any such amendment or waiver without
the consent of all Unitholders of such State Trust. In no event shall the
Agreement be amended to increase the number of Units of a State Trust issuable
thereunder or to permit, except in accordance with the provisions of the
Agreement, the acquisition of any Municipal Bonds in addition to or in
substitution for those in a State Trust. The Trustee shall promptly notify
Unitholders of the substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon the
maturity, redemption or other disposition, as the case may be, of the last of
the Municipal Bonds held in such State Trust. If the value of a State Trust
shall be less than the applicable minimum value stated under "Essential
Information" in Part Two the Trustee may, in its discretion, and shall, when so
directed by the Sponsor, terminate the State Trust. A State Trust may be
terminated at any time by the holders of Units representing 66-2/3% of the Units
thereof then outstanding. Notwithstanding the foregoing, in no event shall any
State Trust continue beyond the mandatory termination date shown in Part Two
under "Essential Information." In the event of termination of a State Trust,
written notice thereof will be sent by the Trustee to all Unitholders of such
State Trust. Within a reasonable period after termination, the Trustee will
sell any Municipal Bonds remaining in the State Trust and, after paying all
expenses and charges incurred by the State Trust, will distribute to Unitholders
thereof (upon surrender for cancellation of certificates for Units, if issued)
their pro rata share of the balances remaining in the Interest and Principal
Accounts of such State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for the
performance of its obligations arising from its responsibilities under the
Agreement, but will be under no liability to the Unitholders for taking any
action or refraining from any action in good faith pursuant to the Agreement or
for errors in judgment,
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except in cases of its own gross negligence, bad faith or willful misconduct.
The Sponsor shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the sale of any Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be under no
liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal Bonds,
or certificates except by reason of its own gross negligence, bad faith or
willful misconduct, nor shall the Trustee be liable or responsible in any way
for depreciation or loss incurred by reason of the sale by the Trustee of any
Municipal Bonds. In the event that the Sponsor shall fail to act, the Trustee
may act and shall not be liable for any such action taken by it in good faith.
The Trustee shall not be personally liable for any taxes or other governmental
charges imposed upon or in respect of the Municipal Bonds or upon the interest
thereon. In addition, the Agreement contains other customary provisions
limiting the liability of the Trustee. The Trustee, whose duties are
ministerial, did not participate in the selection of Municipal Bonds for the
State Trusts.
The Evaluator: The Trustee and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. The Agreement provides that the determinations made by the Evaluator
shall be made in good faith upon the basis of the best information available to
it; provided, however, that the Evaluator shall be under no liability to the
Trustee or Unitholders for errors in judgment, but shall be liable only for its
gross negligence, lack of good faith or willful misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence and except
as otherwise stated under "Essential Information" in Part Two of the Prospectus,
the Sponsor will not charge any State Trust an advisory fee and will receive no
fee from the Trust for services performed as Sponsor. The Sponsor will charge
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series and
all series of Kemper Defined Funds an annual surveillance fee for services
performed for such Trust Funds in an amount not to exceed the amount shown under
"Essential Information" in Part Two, but in no event will such compensation when
combined with all compensation received from other unit investment trusts for
which the Sponsor acts as Sponsor and provides portfolio surveillance, exceed
the aggregate cost to the Sponsor for providing such services. Such fee shall
be based on the total number of Units of such State Trust outstanding as of the
January Record Date for any annual period. The Sponsor and other Underwriters
paid all the expenses of creating and establishing the Trust, including the cost
of the initial preparation, printing and execution of the Prospectus, Agreements
and the certificates, legal and accounting expenses, advertising and selling
expenses, payment of closing fees, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis of the
annual rate set forth under "Essential Information" in Part Two per $1,000
principal amount of Municipal Bonds in each State Trust, based on the largest
aggregate principal amount of Municipal Bonds in the State Trust at any time
during the monthly, quarterly or semi-annual period, as appropriate. The
Trustee also receives indirect benefits to the extent that it holds funds on
deposit in the various non-interest bearing accounts created pursuant to the
Agreement; however, the Trustee is also authorized by the Agreement to make from
time to time certain non-interest bearing advances to the State Trusts. See
"Unitholders - Distributions to Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator receives
a fee, payable monthly calculated on an annual rate as set forth under
"Essential Information" in Part Two, based upon the largest aggregate principal
amount of Municipal Bonds in such State Trust at any time during such monthly
period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State Trusts
are payable monthly on or before each Distribution Date by deductions from the
Interest Accounts thereof to the extent funds are available
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and then from the Principal Accounts. Such fees may be increased without
approval of the Unitholders by amounts not exceeding a proportionate increase in
the Consumer Price Index entitled "All Services Less Rent of Shelter," published
by the United States Department of Labor, or any equivalent index substituted
therefor.
The following additional charges are or may be incurred by a State Trust: (a)
fees for the Trustee's extraordinary services; (b) expenses of the Trustee
(including legal and auditing expenses, but not including any fees and expenses
charged by any agent for custody and safeguarding of Municipal Bonds) and of
bond counsel, if any; (c) various governmental charges; (d) expenses and costs
of any action taken by the Trustee to protect the Trust or such State Trust, or
the rights and interests of the Unitholders; (e) indemnification of the Trustee
for any loss, liability or expense incurred by it in the administration of the
Trust or such State Trust without gross negligence, bad faith or willful
misconduct on its part; (f) indemnification of the Sponsor for any loss,
liability or expense incurred in acting as Sponsor of the State Trust without
gross negligence, bad faith or willful misconduct; and (g) expenditures incurred
in contacting Unitholders upon termination of the State Trust. The fees and
expenses set forth herein are payable out of the appropriate State Trust and,
when owed to the Trustee, are secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted from the Interest Account
thereof, or, to the extent funds are not available in such Account, from the
Principal Account. The Trustee may withdraw from the Principal Account or the
Interest Account of any State Trust such amounts, if any, as it deems necessary
to establish a reserve for any taxes or other governmental charges or other
extraordinary expenses payable out of the State Trust. Amounts so withdrawn
shall be credited to a separate account maintained for the State Trust known as
the Reserve Account and shall not be considered a part of the State Trust when
determining the value of the Units until such time as the Trustee shall return
all or any part of such amounts to the appropriate account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 W. Wacker
Drive, 29th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service of
Kemper Securities, Inc., which is a wholly-owned subsidiary of Kemper Financial
Companies, Inc., a financial services holding company which, in turn, is a
wholly-owned subsidiary of Kemper Corporation. The Sponsor acts as principal
underwriter of a number of other Kemper unit investment trusts and will act as
underwriter of any other unit investment trust products developed by the Sponsor
in the future. As of December 31, 1994, the total stockholder's equity of
Kemper Securities, Inc. was approximately $252,676,937 (unaudited).
If at any time the Sponsor shall fail to perform any of its duties under the
Agreement or shall become incapable of acting or shall be adjudged a bankrupt or
insolvent or its affairs are taken over by public authorities, then the Trustee
may (a) appoint a successor sponsor at rates of compensation deemed by the
Trustee to be reasonable and not exceeding such reasonable amounts as may be
prescribed by the Securities and Exchange Commission, or (b) terminate the
Agreement and liquidate the Trust or any State Trust as provided therein or (c)
continue to act as Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor relates to the
Sponsor only and not to this Trust or any State Trust. Such information is
included in this Prospectus only for the purpose of informing investors as to
the financial responsibility of the Sponsor and its ability to carry out its
contractual obligations with respect to the State Trusts. More comprehensive
financial information can be obtained upon request from the Sponsor.
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LEGAL OPINIONS
The legality of the Units offered hereby and certain matters relating to
federal tax law were originally passed upon by Chapman and Cutler, 111 West
Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of investments, appearing
in Part Two of this Prospectus and Registration Statement, with information
pertaining to the specific State Trust to which such statement relates, has been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
appearing in Part Two and is included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS/3/
Standard & Poor's Ratings Group. - A brief description of the applicable
Standard & Poor's Ratings Group ("Standard & Poor's") rating symbols and their
meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current assessment
of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default - capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
II. Nature of and provisions of the obligations;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement, under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
- ------------------------
/3/As published by the rating companies.
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A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service, Inc. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Their safety is so
absolute that with the occasional exception of oversupply in a few specific
instances, characteristically, their market value is affected solely by money
market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities. Their market value is virtually immune to all but money market
influences, with the occasional exception of oversupply in a few specific
instances.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. The market
value of A-rated bonds may be influenced to some degree by economic performance
during a sustained period of depressed business conditions, but, during periods
of normalcy, A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few specific
instances.
A1 - Bonds which are rated A1 offer the maximum in security within their
quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the market place.
Baa - Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and, in fact, have speculative
95
<PAGE>
characteristics as well. The market value of Baa-rated bonds is more sensitive
to changes in economic circumstances and, aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa and A obligations during periods of economic normalcy,
except in instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the security
depends upon the completion of some act or the fulfillment of some condition.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which begin
when facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in certain areas of its bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
96
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Part Two
Dated August 28, 1995
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY
IS A CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed unless
Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Essential Information
As of July 17, 1995
Sponsor: Kemper Financial Services, Inc.
Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
General Information
<S>
<C>
Principal Amount of Municipal Bonds
$1,765,000
Number of Units
1,772
Fractional Undivided Interest in the Trust per Unit
1/1,772
Principal Amount of Municipal Bonds per Unit
$996.05
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio
$1,786,823
Aggregate Bid Price of Municipal Bonds per Unit
$1,008.37
Cash per Unit (1)
$(1.69)
Sales Charge 4.712% (4.5% of Public Offering Price)
$47.43
Public Offering Price per Unit (exclusive of accrued
interest) (2)
$1,054.11
Redemption Price per Unit (exclusive of accrued interest)
$1,006.68
Excess of Public Offering Price per Unit Over Redemption
Price per Unit
$47.43
Minimum Value of the Trust under which Trust Agreement
may be terminated
$400,000
</TABLE>
Date of Trust
May 12, 1987
Mandatory Termination Date
December 31, 2037
Annual Evaluation Fee: $.30 per $1,000 principal amount of
Municipal Bonds.
Evaluations for purpose of sale, purchase or redemption of Units
are made as
of the close of business of the Sponsor next following receipt of
an order for
a sale or purchase of Units or receipt by Investors Fiduciary
Trust Company of
Units tendered for redemption.
[FN]
1. This amount, if any, represents principal cash or overdraft
which is an
asset or liability of the Trust and is included in the Public
Offering Price.
2. Units are offered at the Public Offering Price plus accrued
interest to
the date of settlement (three business days after purchase). On
July 17,
1995, there was added to the Public Offering Price of $1,054.11,
accrued
interest to the settlement date of July 20, 1995 of $13.78,
$13.91 and $14.01
for a total price of $1,067.89, $1,068.02 and $1,068.12 for the
monthly,
quarterly and semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Essential Information (continued)
As of July 17, 1995
Sponsor: Kemper Financial Services, Inc.
Evaluator: Kemper Unit Investment Trusts
Trustee: Investors Fiduciary Trust
Company
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly
Semiannual
<S> <C> <C>
<C>
-------- --------
--------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $73.0813 $73.0813
$73.0813
Less: Estimated Annual Expense 2.5152 2.1173
1.8647
-------- --------
--------
Estimated Net Annual Interest Income $70.5661 $70.9640
$71.2166
======== ========
========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $70.5661 $70.9640
$71.2166
Divided by 12, 4 and 2, respectively $5.8805 $17.7410
$35.6083
Estimated Daily Rate of Net Interest
Accrual per Unit $.1960 $.1971
$.1978
Estimated Current Return Based on Public
Offering Price (3) 6.69% 6.73%
6.76%
Estimated Long-Term Return (3) 6.17% 6.21%
6.23%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's Fee):
$2.5152,
$2.1173 and $1.8647 ($.9533, $.8736 and $.9970 of which represent
expenses)
per Unit under the monthly, quarterly and semiannual distribution
options,
respectively.
Record and Computation Dates: First day of the month, as
follows: monthly -
each month; quarterly - January, April, July and October;
semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows:
monthly - each
month; quarterly - January, April, July and October; semiannual -
January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return
will vary.
For detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Income Trust
Multi-State Series 33 Colorado Trust
We have audited the accompanying statement of assets and
liabilities of Kemper
Tax-Exempt Income Trust Multi-State Series 33 Colorado Trust,
including the
schedule of investments, as of April 30, 1995, and the related
statements of
operations and changes in net assets for each of the three years
in the period
then ended. These financial statements are the responsibility of
the Trust's
sponsor. Our responsibility is to express an opinion on these
financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial
statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence
supporting the amounts and disclosures in the financial
statements. Our
procedures included confirmation of investments owned as of April
30, 1995, by
correspondence with the custodial bank. An audit also includes
assessing the
accounting principles used and significant estimates made by the
sponsor, as
well as evaluating the overall financial statement presentation.
We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in
all material respects, the financial position of Kemper
Tax-Exempt Income
Trust Multi-State Series 33 Colorado Trust at April 30, 1995, and
the results
of its operations and the changes in its net assets for each of
the three
years in the period then ended in conformity with generally
accepted
accounting principles.
Ernst & Young LLP
Kansas City, Missouri
August 14, 1995
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Statement of Assets and Liabilities
April 30, 1995
<TABLE>
<CAPTION>
<S> <C>
<C>
Assets
Municipal Bonds, at value (cost $1,690,859)
$1,816,501
Interest receivable
37,965
----------
1,854,466
Liabilities and net assets
Accrued liabilities
1,015
Cash overdraft
5,350
----------
6,365
Net assets, applicable to 1,822 Units outstanding:
Cost of Trust assets, exclusive of interest $1,690,859
Unrealized appreciation 125,642
Distributable funds 31,600
----------
----------
Net assets
$1,848,101
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended
April 30
1995 1994
1993
<S> <C> <C>
<C>
--------- --------
--------
Investment income - interest $134,358 $143,734
$145,475
Expenses:
Trustee's fees and related expenses 3,309 3,406
3,448
Evaluator's fees 552 591
600
--------- --------
--------
Total expenses 3,861 3,997
4,048
--------- --------
--------
Net investment income 130,497 139,737
141,427
Realized and unrealized gain (loss)
on investments:
Realized gain 14,171 13,509
-
Unrealized appreciation
(depreciation) during the year (108,154) (30,578)
103,224
--------- --------
--------
Net gain (loss) on investments (93,983) (17,069)
103,224
--------- --------
--------
Net increase in net assets resulting
from operations $36,514 $122,668
$244,651
========= ========
========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended
April 30
1995 1994
1993
<S> <C> <C>
<C>
---------- ----------
- ----------
Operations:
Net investment income $130,497 $139,737
$141,427
Realized gain on investments 14,171 13,509
-
Unrealized appreciation (depreciation)
on investments during the year (108,154) (30,578)
103,224
---------- ----------
- ----------
Net increase in net assets resulting
from operations 36,514 122,668
244,651
Distributions to Unitholders:
Net investment income (134,039) (140,849)
(141,677)
Capital transactions:
Redemption of Units (137,535) (50,042)
-
---------- ----------
- ----------
Total increase (decrease) in net assets (235,060) (68,223)
102,974
Net assets:
At the beginning of the year 2,083,161 2,151,384
2,048,410
---------- ----------
- ----------
At the end of the year (including
distributable funds applicable to
Trust Units of $31,600, $39,258
and $39,287 at April 30, 1995,
1994 and 1993, respectively) $1,848,101 $2,083,161
$2,151,384
========== ==========
==========
Trust Units outstanding at the end
of the year 1,822 1,954
2,000
========== ==========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt
Income Trust
Multi-State
Series 33
Colorado
Trust
Schedule of
Investments
April 30,
1995
<CAPTION>
Coupon
Maturity Redemption Principal
Name of Issuer and Title of Bond(5)(6) Rate
Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C>
<C> <C> <C> <C>
-------
- ---------- -------------- --------- ---------- ----------
+Colorado Health Facilities Authority Refunding 7.40%
2/01/2016 2000 @ 100 Aaa* $300,000 $316,812
Revenue Bonds (Porter Memorial Hospital Project),
1986 Series A.
Colorado Health Facilities Authority Revenue 7.00
10/01/2015 2003 @ 100 S.F. BBB+ 165,000 162,898
Refunding Bonds (Swedish Medical Center Project),
1997 @ 102
1987 Series A.
+Colorado Springs, Colorado, Utility System Revenue 7.30
11/15/2020 1995 @ 100 AAA 300,000 304,683
Bonds, 1986 Series A.
City and County of Denver, Colorado, Airport System 8.375
8/01/2011 1995 @ 100.5 Baa1* 300,000 291,282
Revenue Bonds, 1985 Series.
+Metropolitan Denver, Colorado, Sewer Disposal 6.75
4/01/2012 1996 @ 101 AA 80,000 79,812
District #1 Sewer Improvement Reserve Bonds, 1986
Series B.
#Metropolitan Denver, Colorado, Sewer Disposal 6.75
4/01/2012 2010 @ 100 S.F. AA 220,000 213,836
District #1 Sewer Improvement Reserve Bonds, 1986
1996 @ 101
Series B.
Municipal Subdistrict of Northern Colorado, Water 7.75
12/01/2012 1996 @ 102 A+ 200,000 203,160
Conservancy District, Water Revenue Bonds,
1986 Series D.
Platte River Power Authority, Colorado, Power 6.875
6/01/2016 1997 @ 102 Aa* 200,000 198,258
Revenue Bonds, 1987 Series AA. 5.75
6/01/2018 1997 @ 100 Aa* 50,000 45,760
---------- ----------
$1,815,000 $1,816,501
========== ==========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless
marked with the
symbol "*", in which case the rating is by Moody's Investors
Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each
issue of Bonds is
initially redeemable and the redemption price for that year or,
if currently
redeemable, the redemption price currently in effect; unless
otherwise
indicated, each issue continues to be redeemable at declining
prices
thereafter, but not below par value. In addition, certain Bonds
in the
Portfolio may be redeemed in whole or in part other than by
operation of the
stated redemption or sinking fund provisions under certain
unusual or
extraordinary circumstances specified in the instruments setting
forth the
terms and provisions of such Bonds. "S.F." indicates a sinking
fund is
established with respect to an issue of Bonds. Redemption
pursuant to call
provisions generally will, and redemption pursuant to sinking
fund provisions
may, occur at times when the redeemed Bonds have a valuation
which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a
price higher
than the price at which they are redeemed, this will represent a
loss of
capital when compared with the original Public Offering Price of
the Units.
To the extent that the Bonds were acquired at a price lower than
the
redemption price, this may represent an increase in capital when
compared with
the original Public Offering Price of the Units. Distributions
of net income
will generally be reduced by the amount of the income which would
otherwise
have been paid with respect to redeemed Bonds and, unless
utilized to pay for
Units tendered for redemption, there will be distributed to
Unitholders the
principal amount and any premium received on such redemption. In
this event
the estimated current return and estimated long-term return may
be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a
description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Notes to Schedule of Investments
(continued)
4. At April 30, 1995, the Portfolio of the Trust consists of 9
obligations
issued by 7 entities located in Colorado. All of the issues are
payable from
the income of a specific project or authority and are not
supported by an
issuer's power to levy taxes. The sources of payment for the
bonds are
divided as follows: Electric Systems, 2; Hospitals and Health
Care,
2; Airport, 1; Utilities, 1; Water, 1; Sewer, 2. Approximately
26% of the
aggregate principal amount of Bonds in the Trust are obligations
of issuers
whose revenues are derived primarily from hospitals and health
care
facilities. All of the Bonds in the Trust are subject to call by
the issuers
within five years after April 30, 1995.
5. Those securities preceded by (+) are secured by, and payable
from,
escrowed U.S. Government securities.
6. The security preceded by (#) is of the same issue as another
Bond in the
Trust.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Notes to Financial Statements
1. Significant Accounting Policies
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by
Kemper Unit
Investment Trusts (A Service of Kemper Securities, Inc.), the
"Evaluator" of
the Trust. The aggregate bid prices of the Bonds are determined
by the
Evaluator based on (a) current bid prices of the Bonds, (b)
current bid prices
for comparable bonds, (c) appraisal, or (d) any combination of
the above.
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the
Bonds on
May 12, 1987 (Date of Deposit). The premium or discount
(including any
original issue discount) existing at May 12, 1987, is not being
amortized.
Realized gain (loss) from Bond transactions is reported on an
identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at April
30, 1995:
<TABLE>
<CAPTION>
<S>
<C>
Gross unrealized depreciation
$(14,919)
Gross unrealized appreciation
140,561
- ---------
Net unrealized appreciation
$125,642
=========
</TABLE>
3. Transactions with Affiliates
From the inception of the Trust through January 31, 1995, the
Trustee,
Investors Fiduciary Trust Company (IFTC), was 50% owned by Kemper
Financial
Services, Inc., the Trust's sponsor and an affiliate of Kemper
Unit Investment
Trusts. On that date, State Street Boston Corporation acquired
IFTC. Prior
to January 1, 1995, the Trustee's fee (not including the
reimbursement of out-
of-pocket expenses), calculated monthly, was at the annual rate
of $1.25,
$1.00 and $.70 under the monthly, quarterly and semiannual
distribution
options, respectively, per $1,000 principal amount of Bonds in
the Trust,
based on the largest aggregate principal amount of Bonds in the
Trust at any
time during such monthly, quarterly or semiannual periods.
Effective January
1, 1995, such fees were revised to $1.5249, $1.2143 and $.8472
under the
monthly, quarterly and semiannual distribution options,
respectively. The
Evaluator received a fee, payable monthly, at an annual rate of
$.30 per
$1,000 principal amount of Bonds, based on the largest aggregate
principal
amount of Bonds in the Trust at any time during such monthly
period.
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Notes to Financial Statements (continued)
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for
federal income
tax purposes. Each Unitholder is considered to be the owner of a
pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1
of the
Internal Revenue Code of 1986, as amended. Accordingly, no
provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on
the aggregate
offering price of the Bonds on the date of an investor's
purchase, plus a
sales charge of 4.7% of the Public Offering Price (equivalent to
4.932% of the
net amount invested). The Public Offering Price for secondary
market
transactions is based on the aggregate bid price of the Bonds
plus or minus a
pro rata share of cash or overdraft in the Principal Account, if
any, on the
date of an investor's purchase, plus a sales charge of 4.5% of
the Public
Offering Price (equivalent to 4.712% of the net amount invested).
Distributions
Distributions of net investment income to Unitholders are
declared and paid in
accordance with the option (monthly, quarterly or semiannual)
selected by the
investor. Such income distributions, on a record date basis, are
as follows:
<TABLE>
<CAPTION>
Year ended Year ended
Year ended
Distribution April 30, 1995 April 30, 1994
April 30, 1993
Plan Per Unit Total Per Unit Total Per
Unit Total
<S> <C> <C> <C> <C> <C>
<C>
-------- -------- -------- --------
- -------- --------
Monthly $71.50 $71,465 $70.85 $79,359
$70.54 $79,307
Quarterly 71.85 39,015 71.18 38,828
70.87 39,564
Semiannual 72.06 21,978 71.29 21,816
71.05 22,806
-------- --------
--------
$132,458 $140,003
$141,677
======== ========
========
</TABLE>
<PAGE>
Kemper Tax-Exempt Income Trust
Multi-State Series 33
Colorado Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
In addition, the Trust redeemed Units with proceeds from the sale
of Bonds as
follows:
<TABLE>
<CAPTION>
Year
ended April 30
1995
1994
<S> <C>
<C>
--------
-------
Principal portion $137,535
$50,042
Net interest accrued 1,581
846
--------
-------
$139,116
$50,888
========
=======
Units 132
46
========
=======
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt
Income Trust
Multi-State
Series 33
Colorado
Trust
Notes to Financial
Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each
year -
<CAPTION>
Monthly
Quarterly Semiannual
Year ended April 30
Year ended April 30 Year ended April 30
1995 1994 1993
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
Investment income - interest $72.78 $72.89 $72.74
$72.78 $72.89 $72.74 $72.78 $72.89 $72.74
Expenses 2.29 2.20 2.20
1.94 1.87 1.87 1.74 1.70 1.69
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
Net investment income 70.49 70.69 70.54
70.84 71.02 70.87 71.04 71.19 71.05
Distributions to Unitholders:
Net investment income (71.50) (70.85) (70.54)
(71.85) (71.18) (70.87) (72.06) (71.29) (71.05)
Net gain (loss) on investments (50.93) (9.53) 51.61
(50.93) (9.53) 51.61 (50.93) (9.53) 51.61
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
Change in net asset value (51.94) (9.69) 51.61
(51.94) (9.69) 51.61 (51.95) (9.63) 51.61
Net asset value:
Beginning of the year 1,063.19 1,072.88 1,021.27
1,063.34 1,073.03 1,021.42 1,081.28 1,090.91 1,039.30
--------- --------- ---------
- --------- --------- --------- --------- --------- ---------
End of the year, including
distributable funds $1,011.25 $1,063.19 $1,072.88
$1,011.40 $1,063.34 $1,073.03 $1,029.33 $1,081.28 $1,090.91
========= ========= =========
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"Independent
Auditors" and to the use of our report dated August 14, 1995, in
this Post-
Effective Amendment to the Registration Statement (Form S-6) and
related
Prospectus of Kemper Tax-Exempt Income Trust Multi-State Series
33 Colorado
Trust dated August 28, 1995.
Ernst & Young LLP
Kansas City, Missouri
August 28, 1995
<PAGE>
Contents of Post-Effective AmendmentTo Registration Statement
This Post-Effective amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933,
The Registrant, Kemper Tax-Exempt Income Trust Multi-State,
Series 33, certifies that it meets all of the requirements for
effectiveness of this registration statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of Chicago, and State of Illinois, on the 27th day of August,
1995.
Kemper Tax-Exempt Income Trust
Multi-State, Series 33
Registrant
By: Kemper Unit Investment Trusts
(a service of Kemper
Securities, Inc.)
Depositor
By: Michael J. Thoms
Vice President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to the Registration Statement has been signed
below on August 27, 1995 by the following persons, who constitute
a majority of the Board of Directors of Kemper Securities, Inc.
Signature Title
James R. Boris Chairman and Chief Executive Officer
James R. Boris
Stephen G. McConahey President and Chief Operating Officer
Stephen G. McConahey
Frank V. Geremia Senior Executive Vice President
Frank V. Geremia
David M. Greene Senior Executive Vice President
David M. Greene
Arthur J. McGivern Senior Executive Vice President and
Director
Arthur J. McGivern
Ramon Pecuch Senior Executive Vice President and
Director
Ramon Pecuch
Thomas R. Reedy Senior Executive Vice President and
Director
Thomas R. Reedy
Janet L. Reali Executive Vice President and Director
Janet L. Reali
Daniel D. Williams Executive Vice President and Treasurer
Daniel D. Williams
David B. Mathis Director
David B. Mathis
Stephen B. Timbers Director
Stephen B. Timbers
Donald F. Eller Director
Donald F. Eller
Michael J. Thoms
Michael J. Thoms signs this document pursuant to a Power of
Attorney filed with the Securities and Exchange Commission with
Amendment No. 1 to the Registration Statement on Form S-6 for
Kemper Defined Funds Series 28 (Registration No. 33-56779).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted
from
Post-effective Amendment Number 9 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amendment to
Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 33
<NAME> KEMPER TAX EXEMPT MULTI-STATE COLORADO SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 1,690,859
<INVESTMENTS-AT-VALUE> 1,816,501
<RECEIVABLES> 37,965
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,854,466
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,365
<TOTAL-LIABILITIES> 6,365
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,690,859
<SHARES-COMMON-STOCK> 1,822
<SHARES-COMMON-PRIOR> 1,954
<ACCUMULATED-NII-CURRENT> 31,600
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 125,642
<NET-ASSETS> 1,848,101
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 134,358
<OTHER-INCOME> 0
<EXPENSES-NET> 3,861
<NET-INVESTMENT-INCOME> 130,497
<REALIZED-GAINS-CURRENT> 14,171
<APPREC-INCREASE-CURRENT> (108,154)
<NET-CHANGE-FROM-OPS> 36,514
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (134,039)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 132
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (235,060)
<ACCUMULATED-NII-PRIOR> 39,258
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
