<PAGE>
Registration No. 33-14207
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 7
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
SERIES 264
B.
Names of Depositors:
SMITH BARNEY INCORPORATED
KIDDER, PEABODY & CO. INCORPORATED
<TABLE>
<S> <C>
C. Complete addresses of depositors' principal executive
offices:
SMITH BARNEY KIDDER, PEABODY & CO.
INCORPORATED
INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York 10005
D. Names and complete addresses of agents for service:
STEPHEN J. TREADWAY GILBERT R. OTT, JR.
Smith Barney Kidder, Peabody & Co.
Incorporated Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York 10005
</TABLE>
It is proposed that this filing will become effective August 19,
1994
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
CALIFORNIA TRUST 78
NEW YORK TRUST 81
CONNECTICUT TRUST 77
PENNSYLVANIA TRUST 77
MINNESOTA TRUST 76
[S][C][C]
In the opinion of counsel, under existing law interest to the Trusts
and, with certain exceptions, to Unit holders is exempt from all
Federal income tax. In addition, in the opinion of counsel, the
interest income of each State Trust is exempt, to the extent
indicated, from state and local taxes when held by residents of the
state where the issuers of bonds in such State Trust are located.
Capital gains, if any, are subject to tax. Investors should retain
this Prospectus for future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE
TRUSTS HAS BEEN COMPLETED. THE UNITS OFFERED
HEREBY ARE ISSUED AND OUTSTANDING UNITS WHICH
HAVE BEEN ACQUIRED BY THE SPONSORS EITHER BY
PURCHASE FROM THE TRUSTEE OF UNITS TENDERED
FOR REDEMPTION OR IN THE SECONDARY MARKET.
SEE PART B, "RIGHTS OF UNIT HOLDERS-REDEMPTION
OF UNITS -PURCHASE BY THE SPONSORS OF UNITS
TENDERED FOR REDEMPTION" AND "MARKET FOR
UNITS". THE PRICE AT WHICH THE UNITS OFFERED
HEREBY WERE ACQUIRED WAS NOT LESS THAN THE
REDEMPTION PRICE DETERMINED AS PROVIDED
HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS-
REDEMPTION OF UNITS-COMPUTATION OF REDEMPTION
PRICE PER UNIT".
THE TAX EXEMPT SECURITIES TRUST, SERIES 264 consists
of four underlying separate unit investment trusts (the "Trusts" or
"State Trusts") designated as the California Trust 78, Connecticut
Trust 77, Minnesota Trust 76, and Pennsylvania Trust 77, each
formed for the purpose of obtaining for its Unit holders tax-exempt
interest income through investment in a fixed portfolio consisting
primarily of long term municipal bonds rated at the time of deposit A
or better by Standard & Poor's Corporation or Moody's Investors
Service, with certain ratings being provisional or conditional. (See
"Portfolio of Securities".) Each State Trust is comprised of a fixed
portfolio of interest bearing obligations issued primarily by or on
behalf of the State for which such Trust is named and counties,
municipalities, authorities and political subdivisions thereof. The
interest on all bonds in each State Trust is, in the opinion of
recognized bond counsel to the issuers of the obligations, exempt
from all Federal income tax (except in certain instances depending
upon the Unit holders) under existing law and from state income taxes
in the State for which such Trust is named.
THE PUBLIC OFFERING PRICE of the Units of each State Trust
is equal to the aggregate bid price of the underlying Securities in the
State Trust's portfolio divided by the number of Units outstanding in
such State Trust, plus a sales charge equal to 3.25%, 3.25%, 5%,
and 3.25% of the Public Offering Price (3.359%, 3.359%, 5.263%,
and 3.359% of the aggregate bid price of the Securities per Unit). A
proportional share of accrued and undistributed interest on the
Securities at the date of delivery of the Units to the purchaser is also
added to the Public Offering Price.
THE SPONSORS, although not obligated to do so, intend to
maintain a market for the Units of the Trusts at prices based upon the
aggregate bid price of the underlying Securities, as more fully
described in Part B, "Market for Units". If such a market is not
maintained, a Unit holder may be able to dispose of his Units only
through redemption at prices based upon the aggregate bid price of
the underlying Securities.
MONTHLY DISTRIBUTIONS of principal and interest received by
the Trusts will be made on or shortly after the fifteenth day of each
month to holders of record on the first day of that month. For further
information regarding the distributions by the Trust, see the
"Summary of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus Part A dated August 19, 1994
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
SUMMARY OF ESSENTIAL INFORMATION AS OF MAY 24,
1994+
Sponsors: SMITH BARNEY INC. and
KIDDER, PEABODY & CO. INCORPORATED
Trustee: UNITED STATES TRUST COMPANY OF NEW YORK
Evaluator: KENNY S&P EVALUATION SERVICES
CaliforniaConnecticutMinnesotaPennsylvania
Trust 78Trust 77Trust 76Trust 77
<S> <C> <C> <C>
Principal Amount of Securities in Trust
$2,285,000 $2,165,000
$1,460,000 $2,690,000
Number of Units
2,465 2,730 1,893 3,000
Fractional Undivided Interest in Trust per Unit
1/2,465 1/2,730 1/1,893 1/3,000
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less than
$1,500,000 $1,500,000 $1,250,000 $1,500,000
Trust must be terminated if Principal Amount is less than
$750,000 $750,000 $625,000 $750,000
Principal Amount of Securities in Trust per Unit
$926.97 $ 793.04 $ 771.26 $ 896.66
Public Offering Price per Unit#*
$1,024.55 $ 877.67 $ 830.82 $ 981.64
Sales Charge (3.25%, 3.25%, 5% and 3.25%, respectively,
of Public Offering Price)#
33.30 28.52
41.54 31.90
Approximate Redemption and Sponsors' Repurchase Price
per Unit (per Unit Bid Price of Securities)#**
$991.25 $ 849.15 $ 789.28 $ 949.74
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Interest Income per Unit
$73.39 $58.53 $ 57.39 $ 68.98
Less Estimated Annual Expenses per Unit
1.52 1.55
1.71 1.70
Estimated Net Annual Income per Unit
$71.87 $56.98 $ 55.68 $ 67.28
Monthly Interest Distribution per Unit
$5.98 $ 4.74 $ 4.64 $ 5.60
Daily Rate (360-day basis) of Income Accrual per Unit
$.1996 $.1582 $ .1546 $ .1868
Estimated Current Return Based on Public Offering Price#
7.01% 6.49% 6.70% 6.85%
Estimated Long-Term Return#
4.79% 5.02% 6.91% 6.01%
<FN>
# Subject to changes in the prices of the underlying securities. The
aggregate bid price of the securities is determined on each business
day as of the Evaluation Time.
* Plus $19.31, $18.47, $16.61 and $20.13 per Unit, representing
accrued interest and the net of cash on hand, accrued expenses and
amounts distributable to Unit holders, attributable to the Units of
California Trust, Connecticut Trust, Minnesota Trust and
Pennsylvania Trust, respectively, through the expected date of
settlement (five business days after May 24, 1994).
The sales charge of the Connecticut Trust has been reduced effective
as of the date of this prospectus and the sales charge of the
California Trust and Pennsylvania Trust was previously reduced
because prerefundings of Portfolio securities have shortened the
average life of the Trust.
** Plus $17.91, $17.36, $15.52 and $18.81 per Unit, representing
accrued interest and the net of cash on hand, accrued expenses and
amounts distributable to Unit holders, attributable to the Units of
California Trust, Connecticut Trust, Minnesota Trust and
Pennsylvania Trust, respectively, as of May 24, 1994, on a pro rata
basis. (See "Redemption of Units-Computation of Redemption Price
per Unit".)
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
Record Dates: The 1st day of each month
Distribution Dates: The 15th day of each month
Evaluation Time: Close of trading on the New
York Stock Exchange
(currently 4:00 P.M. New York Time)
Date of Deposit and
Trust Agreement: July 1, 1987
Mandatory Termination Date:January 1, 2037
Trustee's Annual Fee:
$1.05 per $1,000 principal amount of
bonds ($9,030 per year on the basis
of bonds in the principal amount
of $8,600,000) plus expenses.
Evaluator's Fee:
$.30 per bond per evaluation
As of May 24, 1994, 6 (56%) of the Bonds in the California Trust
were rated by Standard & Poor's Corporation (47% being rated AAA
and 9% being rated A) and 5 (44%) were rated by Moody's Investors
Service (11% being rated Aaa, 12% being rated Aa and 21% being
rated A); 6 (98%) of the Bonds in the Connecticut Trust were rated
by Standard & Poor's (48% being rated AAA, 23% being rated AA
and 27% being rated A) and 1 (2%) was rated Aaa by Moody's; 5
(100%) of the Bonds in the Minnesota Trust were rated by Standard
& Poor's (25% being rated AAA, 67% being rated AA and 8% being
rated CCC); 9 (81%) of the Bonds in the Pennsylvania Trust were
rated by Standard & Poor's (26% being rated AAA, 37% being rated
A and 18% being rated BBB) and 1 (19%) was Aaa rated by
Moody's. Ratings assigned by rating services are subject to change
from time to time.
Additional Considerations - Investment in any Trust should be
made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates. Approximately 6%, 25%
and 70% of the Bonds in the California Trust, Connecticut Trust and
Pennsylvania Trust, respectively, consist of hospital revenue bonds
(including obligations of health care facilities). Approximately 15%
and 67% of the Bonds in the California Trust and Minnesota Trust,
respectively, consist of obligations of municipal housing authorities.
Approximately 15% and 67% of the Bonds in the California Trust
and Minnesota Trust, respectively, consist of bonds which are subject
to the Mortgage Subsidy Bond Tax Act of 1980. Approximately 44%,
65% and 25% of the Bonds in the California Trust, Connecticut Trust
and Minnesota Trust, respectively, consist of bonds in the power
facilities category. Approximately 22% of the Bonds in the California
Trust consist of bonds issued for the financing of nuclear power
plants. Obligations of issuers located in the Commonwealth of
Puerto Rico represent approximately and 10% of the Bonds in the
Connecticut Trust. (See Part B "Tax Exempt Securities Trust-
Portfolio" for a brief summary of additional considerations relating to
certain of these issues.)
+ The percentages referred to in this summary are each computed
on the basis of the aggregate bid price of the Bonds as of May 24,
1994.
<PAGE>
<TABLE>TAX EXEMPT SECURITIES TRUST, SERIES 264
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
Income Principal
Units Net
Asset Distributions
Distributions
Period Ended Outstanding Value
Per Unit Per Unit Per
Unit
<S> <C> <C> <C>
<C> <C>
April 30, 1992 California 2,536 $
1,050.59 $ 74.58 $ 3.94
Connecticut 2,930
1,044.95 73.32 -
Minnesota 2,250
983.01 72.82 18.76
Pennsylvania 3,000
1,057.11 75.98 3.34
April 30, 1993 California 2,536 $
1,067.28 $ 73.77 $ 11.83
Connecticut 2,930
996.52 71.48 85.29
Minnesota 2,108
864.43 67.88 134.40
Pennsylvania 3,000
1,107.15 75.84 -
April 30, 1994 California 2,536 $
1,011.57 $ 72.69 $ 15.77
Connecticut 2,730
868.35 60.57 104.09
Minnesota 1,968
805.53 59.07 55.34
Pennsylvania 3,000
970.66 68.94 98.33
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
BALANCE SHEETS
April 30, 1994
ASSETS
CaliforniaConnecticutMinnesotaPennsylvania
Trust 78Trust 77Trust 76Trust 77
<S> <C> <C> <C> <C>
Investments in tax exempt bonds, at market value
(Cost $2,333,855, $2,068,864, $1,417,732 and $2,570,140,
respectively) (Note 3 to Portfolio of Securities)
$2,517,065
$2,320,493 $1,552,808 $2,852,248
Accrued interest
58,164 54,939
38,279 56,593
Cash
- -
- 3,682
Total Assets
$2,575,229 $2,375,432
$1,591,087 $2,912,523
LIABILITIES AND NET ASSETS
Overdraft payable
$9,361 $ 4,401
$ 5,467 $-
Accrued expenses
513 421
327 540
Total Liabilities
9,874 4,822
5,794 540
Net Assets (Units of fractional undivided
interest outstanding - 2,536, 2,730, 1,968,
and 3,000, respectively):
Original cost to investors (Note 1)
3,106,810 3,068,621
2,468,914 3,037,741
Less initial underwriting commission (sales charge)
(Note 1)
146,020 144,225 116,039 142,774
2,960,790 2,924,396
2,352,875 2,894,967
Cost of bonds sold or redeemed since date of
deposit (July 1, 1987)
(626,935)(855,532)
(935,143) (324,827)
Net unrealized market appreciation
183,210 251,629
135,076 282,108
2,517,065 2,320,493 1,552,808 2,852,248
Undistributed net investment income
48,274 50,091 32,466 59,725
Undistributed proceeds from bonds sold or redeemed
16 26
19 10
Net Assets
2,565,355 2,370,610
1,585,293 2,911,983
Total Liabilities and Net Assets
$2,575,229 $2,375,432
$1,591,087 $2,912,523
Net asset value per unit
$ 1,011.57 $868.35
$ 805.53 $ 970.66
The accompanying Notes to Financial Statements are an integral
part of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
CALIFORNIA TRUST 78
STATEMENTS OF OPERATIONS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
<S> <C> <C>
<C>
Investment Income-interest (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 187,788$
190,617. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 192,324
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,1883,293 3,095
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953
901 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 851
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,141
4,194 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,946
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,647
186,423. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,378
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5). . . . . . . . . . . . . . . . .(300
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(225) (75
)
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,292
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,210 36,835
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,592
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,985 36,760
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $83,055$259,408
$ 225,138
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $183,647$186,423
$ 188,378
Net realized loss on securities transactions (Note 5). . . . . . . . . . . . . . . . .(300
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(225) (75
)
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,292
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,210 36,835
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . 83,055
259,408. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,138
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .(184,342
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(187,081) (189,135
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . . . . . . . . . (39,993
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,001) (9,992
)
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (224,335
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (217,082)
(199,127)
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . . . . . . . . .(141,280
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42,326 26,011
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,706,635
2,664,309. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,638,298
End of year (including undistributed net
investment income of $48,274, $48,969
and $49,627, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,565,355$
2,706,635. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,664,309
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
CONNECTICUT TRUST 77
STATEMENTS OF OPERATIONS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Investment Income-interest (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 172,802$
213,480. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,845
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,3163,901 3,699
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 637
791 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,953
4,692 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,474
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,849
208,788. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,371
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,870(3,675
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,427
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,317 34,204
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,557
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,642 34,204
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $106,292$317,430
$ 248,575
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $168,849$208,788
$ 214,371
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,870(3,675
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,427
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,317 34,204
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . 106,292
317,430. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,575
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .(170,724
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(209,436) (214,828
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . . . . . . . . . (292,868
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (249,900) -
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (463,592
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (459,336)
(214,828)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . . . . . . . . .(3,796
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .- -
Value of Units at date of redemption . . . . . . . . . . . . . . . . . . . . . . . . . (188,118
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (191,914
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . . . . . . . . .(549,214
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(141,906) 33,747
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,919,824
3,061,730. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,027,983
End of year (including undistributed net
investment income of $50,091, $55,762
and $56,410, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,370,610$
2,919,824. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,061,730
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
MINNESOTA TRUST 76
STATEMENTS OF OPERATIONS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Investment Income-interest (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 124,271$
146,429. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,905
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,7263,067 3,153
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448
436 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,174
3,503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,634
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,097
142,926. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,271
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27,593(21,946
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(6,931)
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,434
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,080 (27,948
)
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,841
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,134 (34,879
)
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $116,256$175,060
$ 133,392
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,097$142,926
$ 168,271
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27,593(21,946
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(6,931)
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,434
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,080 (27,948
)
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . 116,256
175,060. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,392
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .(121,875
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(149,087) (168,711
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . . . . . . . . . (110,488
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (285,107) (43,034
)
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (232,363
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (434,194)
(211,745)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption . . . . . . . . . . . . . . . . . . . . . . . .(2,000
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(2,195) (1,462
)
Value of Units at date of redemption . . . . . . . . . . . . . . . . . . . . . . . . . (118,823
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,228) (81,487
)
Total Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (120,823
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130,423) (82,949
)
Decrease in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(236,930
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(389,557) (161,302
)
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,822,223
2,211,780. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,373,082
End of year (including undistributed net
investment income of $32,466, $35,244
and $43,600, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,585,293$
1,822,223. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,211,780
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
PENNSYLVANIA TRUST 77
STATEMENTS OF OPERATIONS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Investment Income-interest (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,100$
232,040. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 232,574
Less expenses:
Trustee's fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,8344,207 3,905
Evaluator's fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 857
887 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 851
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,691
5,094 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,756
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,409
226,946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,818
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(15,638
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .- 1,076
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,429
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,694 67,257
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113,067
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,694 68,333
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $92,342$377,640
$ 296,151
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended April 30, 1994, 1993 and 1992
1994
1993
1992
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $205,409$226,946
$ 227,818
Net realized gain (loss) on securities transactions
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(15,638
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,076
Net increase (decrease) in unrealized market
appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,429
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,694 67,257
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . 92,342
377,640. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,151
Distributions to Unit Holders:
Net investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .(206,820
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(227,520) (227,940
)
Proceeds from securities sold or redeemed. . . . . . . . . . . . . . . . . . . . . . . (294,990
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (10,020
)
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (501,810
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (227,520)
(237,960)
Increase (decrease) in net assets. . . . . . . . . . . . . . . . . . . . . . . . . . .(409,468
) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,120 58,191
Net Assets:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,321,451
3,171,331. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,113,140
End of year (including undistributed net
investment income of $59,725, $61,136
and $61,710, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,911,983$
3,321,451. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,171,331
The accompanying Notes to Financial Statements are an integral part
of these statements.
</TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
<PAGE>
April 30, 1994
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (July 1, 1987),
exclusive of accrued interest, computed on the basis of the aggregate
offering price of the securities. The initial underwriting commission
(sales charge) was 4.70% of the aggregate public offering price
(4.932% of the aggregate offering price of the securities).
(2) Interest income represents interest earned on the Trust's portfolio
and has been recorded on the accrual basis.
(3) 200 Units and 365 Units in the Connecticut Trust and Minnesota
Trust, respectively, were redeemed by the Trustee during the three
years ended April 30, 1994 (200 Units and 140 Units in the
Connecticut Trust and Minnesota Trust, respectively, being
redeemed in 1994. 142 Units and 83 Units in the Minnesota Trust
being redeemed in 1993 and 1992, respectively).
(4) Interest received by the Trust is distributed to Unit holders on the
fifteenth day of each month, after deducting applicable expenses.
(5) The gain (loss) from the sale or redemption of securities is
computed on the basis of the average cost of the issue sold or
redeemed.
(6) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of
each Trust and is responsible for establishing and maintaining a
system of internal control directly related to, and designed to
provide reasonable assurance as to the integrity and reliability of,
financial reporting of each Trust. The Trustee is also responsible
for all estimates of expenses and accruals reflected in each Trust's
financial statements. The Evaluator determines the price for each
underlying Bond included in each Trust's Portfolio of Securities on
the basis set forth in Part B, "Public Offering - Offering Price".
Under the Securities Act of 1933, as amended (the "Act"), the
Sponsors are deemed to be issuers of each Trust's Units. As such,
the Sponsors have the responsibility of issuers under the Act with
respect to financial statements of each Trust included in the
Registration Statement.
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsors and Trustee of
Tax Exempt Securities Trust, Series 264:
We have audited the accompanying balance sheets of Tax Exempt
Securities Trust, Series 264 (comprising, respectively, California Trust 78,
Connecticut Trust 77, Minnesota Trust 76 and Pennsylvania Trust 77),
including the portfolios of securities, as of April 30, 1994, and the related
statements of operations and changes in net assets for each of the years
in the three-year period ended April 30, 1994. These financial
statements are the responsibility of the Trustee (see Note 6). Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of April 30, 1994 by correspondence
with the Trustee. An audit also includes assessing the accounting
principles used and significant estimates made by the Trustee, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of each of the
respective Trusts constituting Tax Exempt Securities Trust, Series 264 as
of April 30, 1994, and the results of their operations and changes in their
net assets for each of the years in the three-year period ended April 30,
1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
August 3, 1994
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
CALIFORNIA TRUST 78 - PORTFOLIO OF SECURITIES - April
30, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
<S> <C> <C>
<C> <C>
California Health Facilities Finance
Authority, Insured Hospital Revenue
Bonds, Centinela Hospital Medical AAA 9/1/95 @
102 $ 140,000$152,260
Center, 9.375% due 9/1/2015 (p)
California Housing Finance Agency,
Home Mortgage Revenue Bonds, Aa* 8/1/96 @
102 300,000301,923
6.90% due 8/1/2016 S.F. 2/1/03
@ 100
California Pollution Control
Financing Authority, Pollution
Control Refunding Revenue Bonds,
Pacific Gas & Electric Company, A1* 6/1/96 @
102 300,000317,634
7.50% due 5/1/2016
Los Angeles County, California,
Transportation Commission
Sales Tax Revenue Bonds, Aaa* 7/1/96 @
102 250,000271,417
7.60% due 7/1/2012 (p)
Los Angeles, California, Community
Redevelopment Agency, Center
Business District, Tax Allocation A- 7/1/95 @
102 270,000289,815
Bonds, 8.85% due 7/1/2010 (p)
Northern California Power Agency,
Geothermal Project Number 3 Revenue A* 7/1/96 @
101 1/2 70,00073,018
Bonds, 7.00% due 7/1/2007 S.F. 7/1/04
@ 100
Northern California Public Power
Agency, Hydroelectric Project
Refunding Revenue Bonds, AAA 7/1/98 @
100 115,000128,660
8.00% due 7/1/2024 (p)
The Redevelopment Agency of the
City of Oakland, California, Central
District Redevelopment Project, Tax
Allocation Refunding Bonds, AAA 2/1/96 @
102 240,000256,966
7.50% due 2/1/2014 (p)
San Francisco Port Commission A1* 7/1/94 @
103 105,000109,115
Revenue Bonds, 9.50% due 7/1/2009
Southern California Public Power
Authority, Power Project Revenue AAA 7/1/96 @
103 500,000552,770
Bonds, 8.125% due 7/1/2015 (p)
Thousand Oaks, California,
Redevelopment Agency, Single Family
Residential Mortgage Revenue AAA 1/1/97 @
102 60,000 63,487
Refunding Bonds, 7.90% due 1/1/2016 S.F. 1/1/04
@ 100
$2,350,000$2,517,065
The accompanying Notes are an integral part of this Portfolio.
A-11
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
CONNECTICUT TRUST 77 - PORTFOLIO OF SECURITIES -
April 30, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Connecticut Health and Educational
Facilities Authority, Danbury
Hospital Revenue Bonds, Aaa* --
$ 50,000 $
54,041
7.875% due 7/1/2009
Connecticut Health and Educational
Facilities Authority Revenue
Bonds, Hebrew Home and Hospital AA 8/1/97 @
102 500,000526,565
Issue, 7.00% due 8/1/2030 S.F.
Currently @ 100
Connecticut Municipal Electric
Energy Cooperative, Power Supply
System Revenue Bonds, AAA 1/1/96 @
102 500,000528,990
7.00% due 1/1/2016 S.F. 1/1/09
@ 100
Connecticut Resources Recovery
Authority, Bridge Resco Co.,
LP Project Bonds, A 1/1/97 @
103 395,000423,136
7.625% due 1/1/2009 S.F. 1/1/05
@ 100
Connecticut Resources Recovery
Authority, Mid-Connecticut System AAA 11/15/96
@ 103 500,000551,220
Bonds, 7.875% due 11/15/2012 S.F.
11/15/01 @ 100
Commonwealth of Puerto Rico,
General Obligation Public
Improvement Revenue Bonds, A 7/1/97 @
102 185,000198,529
7.125% due 7/1/2002 S.F. 7/1/98
@ 100
Puerto Rico Electric Power
Authority, Power Revenue Bonds, AAA 7/1/95 @
103 35,000 38,012
9.125% due 7/1/2015 (p)
$2,165,000$2,320,493
The accompanying Notes are an integral part of this Portfolio.
A-12
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
MINNESOTA TRUST 76 - PORTFOLIO OF SECURITIES - April
30, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Minnesota State Housing Finance
Agency, Family Mortgage Revenue
Bonds, 7.00% due 7/1/2016 AA+ 7/1/96 @
102 $ 180,000$183,877
7.25% due 7/1/2016 AA+ 7/1/96 @
102 275,000282,901
S.F. 7/1/07
@ 100
Minneapolis Community Development
Agency and St. Paul Housing &
Redevelopment Authority, Home
Ownership Mortgage Revenue Bonds, AA 7/1/96 @
102 500,000523,485
7.875% due 7/1/2017 S.F.
Currently @ 100
Port Authority of The City of Saint
Paul, Minnesota, Industrial
Development Revenue Bonds, CCC 6/1/94 @
102 150,000121,757
7.625% due 12/1/2011 (Note 4) S.F.
12/1/02 @ 100
Southern Minnesota Municipal Power
Agency, Power Supply System Revenue AAA 1/1/96 @
102 415,000 440,788
Bonds, 7.125% due 1/1/2015 (p)
$1,520,000$1,552,808
The accompanying Notes are an integral part of this Portfolio.
A-13
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
PENNSYLVANIA TRUST 77 - PORTFOLIO OF SECURITIES -
April 30, 1994
Ratings
Redemption Principal
Market
Security Description (1)
Provisions (2) Amount
Value (3)
Pennsylvania State Higher Educational
Facilities Authority, Temple University A 10/1/96 @
102 $ 250,000$268,127
Revenue Bonds, 7.40% due 10/1/2010 S.F.
10/1/07 @ 100
Temple University of the Commonwealth
System of Higher Education, Pennsylvania, Aaa* 8/1/98 @
100 500,000544,785
Hospital Revenue Bonds, 7.25% due 8/1/2016 (p)
Beaver County, Pennsylvania, Industrial
Development Authority, Pollution Control
Revenue Bonds, J. Ray McDermott BBB- 5/29/94 @
100 1/2 275,000267,487
& Co., Inc. 6.80% due 2/1/2009 S.F. 2/1/06
@ 100
Delaware County, Pennsylvania, Higher
Education Authority Revenue Bonds, Widener A+ 6/15/94
@ 103 200,000207,860
University, 8.375% due 6/15/2007 S.F.
6/15/03 @ 100
Lehigh County General Purpose Authority,
Pennsylvania, Hospital Revenue Refunding
Bonds, Horizon Health System, Inc., A+ 7/1/97 @
101 300,000333,228
8.25% due 7/1/2013 (p)
Lycoming County, Pennsylvania, Hospital
Authority Lease Revenue Bonds, AAA 11/1/96 @
102 350,000373,674
Williamsport Hospital, 7.00% due 11/1/2015 S.F.
11/1/05 @ 100
Philadelphia, Pennsylvania, Hospital and
Higher Education Facilities Authority,
Hospital Revenue Bonds, Albert Einstein AAA 4/1/95 @
102 250,000267,735
Medical Center, 9.875% due 4/1/2000 (p)
Philadelphia, Pennsylvania, Hospital
& Higher Education Facilities Authority,
Hospital Revenue Bonds, Roxborough
Memorial Hospital Issue, A- 2/1/97 @
100 215,000227,995
7.10% due 2/1/2027 (p)
Sewickley Valley, Pennsylvania, Hospital
Authority Refunding Revenue Bonds,
Harmarville Rehabilitation Center, BBB+ 7/1/94 @
100 250,000250,000
7.375% due 7/1/2008 S.F. 7/1/02
@ 100
Westmoreland County, Pennsylvania,
Municipal Authority, Special Obligation AAA --
100,000 111,357
Bonds, 9.125% due 7/1/2010
$2,690,000$2,852,248
The accompanying Notes are an integral part of this Portfolio.
A-14
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 264
PORTFOLIO OF SECURITIES - April 30, 1994
(Continued)
At April 30, 1994 the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
California Connecticut
Minnesota Pennsylvania
Trust 78 Trust 77
Trust 76 Trust 77
<S> <C> <C>
<C> <C>
Gross unrealized market appreciation $ 200,244 $ 252,018
$ 155,772 $ 295,262
Gross unrealized market depreciation (17,034) (389)
(
2
0
,
6
9
6
)
(
1
3
,
1
5
4
)
Net unrealized market appreciation $ 183,210 $ 251,629
$ 135,076 $ 282,108
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but
not below par. "S.F." indicates a sinking fund has been or will
be established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may
or may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolios, including bonds not listed as being subject to
redemption provisions, may be redeemed in whole or in part
other than by operation of the stated redemption or sinking
fund provisions under certain unusual or extraordinary
circumstances specified in the instruments setting forth the
terms and provisions of such bonds. For example, see
discussion of obligations of municipal housing authorities under
"Tax Exempt Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of April 30, 1994 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(4) The Financial Statement as of December 31, 1992 of the Port
Authority of the City of Saint Paul contains the following note:
Based upon studies prepared by the Authority and
independent financial advisers, the Authority has been able to
determine with reasonable certainty, that barring a successful
restructuring, a default in the payment of 876 bonds is likely
to occur in the future.
During October 1992, the Authority appointed a trustee for
the 876 bond program. To avoid a default in the payment of
876 bonds, the trustee submitted to the court a petition, based
upon information available at that time, that proposed to
restructure all outstanding 876 bonds maturing after
December 31, 1999. The petition gave these bondholders the
option of modifying future principal and/or interest payments.
On November 30, 1992, the trustee, at the direction of the
majority of the adversely affected bondholders, withdrew the
petition. The Authority is continuing to develop a
restructuring proposal that will be acceptable to a majority of
the affected bondholders.
No assurances can be given that the Authority will be
successful in implementing the plans to avoid default in the
payment of 876 bonds in the future.
These bonds are part of the 876 bond program.
(p) It is anticipated that these bonds will be redeemed prior to
their scheduled maturity, pursuant to a pre-refunding, as
reflected under the column "Redemption Provisions".
A-15
<PAGE>
[TEXT]
Note: Part B of this Prospectus may not be distributed
unless accompanied by Part A
TAX EXEMPT SECURITIES TRUST
Each State Trust is one of a series of similar but separate unit
investment trusts created under the laws of the State of New York by a
Trust Indenture and Agreement and related Reference Trust Agreement
(collectively, the "Trust Agreement"), dated the Date of Deposit, among
the sponsors, United States Trust Company of New York, as trustee (the
"Trustee"), and Kenny Information Systems, Inc., as evaluator (the
"Evaluator"). As of the date of this
Prospectus, the sponsors include Smith Barney Shearson Inc. and Kidder,
Peabody & Co. Incorporated (the "Sponsors" or "Co-Sponsors"). Each
trust contains Bonds of a State for which such Trust is named herein (a
"State Trust"). On the Date of Deposit the Sponsors deposited with the
Trustee interest-bearing obligations (the "Bonds"), including contracts for
the purchase of certain such obligations and, in the case of some State
Trusts, Units of previously issued series of a State Trusts (including
Tax Exempt Securities Trust and/or Multistate Series) or the State
Trusts and all other Trusts(hereinafter to as the " Umbrella Series"), (the
"Deposited Units") (such Bonds
and Deposited Units being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsors registered
certificates of beneficial interest (the "Certificates") representing the units
(the "Units") comprising the entire ownership of each State Trust. The
initial public offering of Units in each State Trust has been completed.
The Units offered hereby are issued and outstanding
Units which have been acquired by the Sponsors either by purchase from
<PAGE>
the Trustee of Units tendered for redemption or in the secondary market.
References to multiple Trusts in Part B herein should be read as
references to a single Trust if Part A indicates the creation of only one
Trust. See "Rights of Unit Holders -- Redemption of Units -- Purchase
by the Sponsors of Units Tendered for Redemption" and "Public
Offering -- Market for Units."
Objectives
The objectives of each State Trust are tax-exempt income and
conservation of capital through an investment in a diversified portfolio
of municipal bonds. There is, of course, no guarantee that a Multistate
Trust's or Umbrella Series' objectives will be achieved since the payment
of interest and the preservation of principal are dependent upon the
continued ability of the issuers of the Bonds to meet such obligations.
Portfolio
The following factors, among others, were considered in
selecting the Bonds for each State Trust: (1) all the Bonds deposited in
a State Trust are obligations of the State for which such State Trust is
named or of the counties or municipalities of such State, territories or
possessions of the United States, and authorities or political subdivisions
thereof, so that the interest on them will,
in the opinion of recognized bond counsel to the issuing governmental
authorities given on the date of the original delivery of the Bonds, be
exempt from Federal income tax under existing law and from state
income taxes in the state for which
such Trust is named in each case to the extent indicated in "Tax Exempt
Securities Trust - Tax Status", (2) the Bonds are diversified as to purpose
of issue, and (3) in the opinion of the Sponsors, the Bonds are fairly
valued relative to other bonds of comparable quality and maturity. The
rating of each issue is also set forth in Part A, "Portfolio of Securities."
For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's and Moody's, see "Ratings." It should
be emphasized, however, that the ratings of
Standard & Poor's and Moody's represent their opinions as to the quality
of the Bonds which they undertake to rate, and that these ratings are
general and are not absolute standards of quality.
The Bonds in the Portfolio of a State Trust were chosen in part
on the basis of their respective maturity dates. The Bonds in each State
Trust will have a dollar-weighted average portfolio maturity as
designated in Part A. For the actual maturity date of each of the Bonds
contained in a State Trust, which date may be earlier or later than the
dollar-weighted average portfolio maturity
of the State Trust. A sale or other disposition of a Bond by the Trust
prior to the maturity of such Bond may be at a price which results in a
loss to the State Trust. The inability of an issuer to pay the principal
<PAGE>
amount due upon the maturity of a Bond would result in a loss to the
State Trust.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust are subject
to redemption prior to their stated maturity date pursuant to sinking fund
or call provisions. (See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to
the particular State Trust described therein.) In general, a call or
redemption provision is more likely to be exercised when the offering
price valuation of a bond is higher than its call or redemption price, as
it might be in periods of declining interest rates, than when such price
valuation is less than the bond's call or redemption price. To the extent
that a Bond was deposited in a State Trust at a price higher than the price
at which it is redeemable, redemption will result in a loss of capital when
compared with the original public offering price of the Units.
Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price
of the Units. Monthly distributions will generally be reduced by the
<PAGE>
<PAGE>
amount of the income which would otherwise have been paid with
respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units
may be affected by such redemptions. Each Portfolio of Securities in Part
A contains a listing of the sinking fund and call provisions, if any, with
respect to each of the Bonds in a State Trust. Because certain of the
Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in
accordance with their terms and the proceeds from such events will be
distributed to Unit holders and will not be reinvested, no assurance can
be given that a State Trust
will retain for any length of time its present size and composition.
Neither the Sponsors nor the Trustee shall be liable in any way for any
default, failure or defect in any Bond.
The Portfolio of the State Trust may consist of some Bonds
whose current market values were below face value on the Date of
Deposit. A primary reason for the market value of such Bonds being less
than face value at maturity is that the interest coupons of such Bonds are
at lower rates than the current market interest rate for comparably rated
Bonds, even though at the time of the issuance of such Bonds the interest
coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds
selling at market discounts tend to increase in market value as they
approach maturity when the principal amount is payable. A market
discount tax-exempt Bond held to maturity will have a larger portion of
its total return in the form of taxable ordinary income and less in the
form of tax-exempt income than a comparable
Bond bearing interest at current market rates. Under the provisions of the
Internal Revenue Code in effect on the date of this Prospectus any
ordinary income attributable to market discount will be taxable but will
not be realized until maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit",
the State Trust may contain or be concentrated in one or more of the
classifications of Bonds referred to below. A State Trust is considered to
be "concentrated" in a particular category when the Bonds in that
category constitute 25% or more of the aggregate value of the Portfolio.
(See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to the particular State Trust described
therein.) An investment in Units of the State Trust should be made with
an understanding of the risks that these investments may entail, certain
of which are described below.
General Obligation Bonds. Certain of the Bonds in the
Portfolio may be general obligations of a governmental entity that are
secured by the taxing power of the entity. General obligation bonds are
backed by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. However, the taxing power of any
<PAGE>
governmental entity may be limited by provisions of state constitutions
or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both
their revenues and expenditures, as well as other factors, many state and
local governments are confronting deficits and potential deficits which
are the most severe in recent years. Many issuers are facing highly
difficult choices about significant tax increases and/or spending
reductions in order to restore budgetary balance. Failure to implement
these actions on a timely basis could force the issuers to depend upon
market access to finance deficits or cash flow needs.
In addition, certain of the Bonds in the State Trust may be
obligations of issuers (including California issuers) who rely in whole or
in part on ad valorem real property taxes as a source of revenue. Certain
proposals, in the form of state legislative proposals or voter initiatives,
to limit ad valorem real property taxes have been introduced in various
states, and an amendment to the constitution of the State of California,
providing for strict limitations on ad valorem real property taxes, has had
a significant impact on the taxing powers of local governments and on
the financial conditions of school districts and local governments in
California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on
their abilities to make future payments on their outstanding debt
obligations.
Industrial Development Revenue Bonds ("IDRs"). IDRs,
including pollution control revenue bonds, are tax-exempt securities
issued by states, municipalities, public authorities or similar entities
("issuers") to finance the cost of acquiring, constructing or improving
various projects, including pollution control facilities and certain
industrial development facilities. These projects are usually operated by
corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers
are only obligated to pay amounts due on the IDRs to the extent that
funds are available from the unexpended proceeds of the IDRs or receipts
or revenues of the issuer under arrangements between the issuer and the
corporate operator of a project. These arrangements may be in the form
of a lease, installment sale agreement, conditional sale agreement or loan
agreement, but in each case the payments to the issuer are designed to
be sufficient to meet the payments of amounts due on the IDRs.
<PAGE>
IDRs are generally issued under bond resolutions, agreements
or trust indentures pursuant to which the revenues and receipts payable
under the issuer's arrangements with the corporate operator of a
particular project have been assigned and pledged to the holders of the
IDRs or a trustee for the benefit of the holders of the IDRs. In certain
cases, a mortgage on the underlying project has been assigned to the
holders of the IDRs or a trustee as additional security for the IDRs. In
addition, IDRs are frequently directly guaranteed by the corporate
operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely
dependent upon the creditworthiness of the corporate operator of the
project or corporate guarantor. Corporate operators or guarantors that are
industrial companies may be affected by many factors which may have
an adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory
and environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition (including that
of low-cost foreign companies), unfunded pension fund liabilities or
off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of the
IDRs in the Portfolio may be additionally insured or secured by letters
of credit issued by banks or otherwise guaranteed or secured to cover
amounts due on the IDRs in the event of default in payment by an issuer.
Hospital and Health Care Facility Bonds. The ability of
hospitals and other health care facilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the level of payments received from private third-party
payors and government programs and the cost of providing health care
services.
A significant portion of the revenues of hospitals and other
health care facilities is derived from private third-party payors and
government programs, including the Medicare and Medicaid programs.
Both private third-party payors and government programs have
undertaken cost containment measures designed
to limit payments made to health care facilities. Furthermore,
government programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government
funding restrictions, all of which may
materially decrease the rate of program payments for health care
facilities. There can be no assurance that payments under governmental
programs will remain at levels comparable to present levels or will, in
the future, be sufficient to cover the costs allocable to patients
participating in such programs. In addition, there can be no assurance
that a particular hospital or other health
care facility will continue to meet the requirements for participation in
such programs.
<PAGE>
The costs of providing health care services are subject to
increase as a result of, among other factors, changes in medical
technology and increased labor costs. In addition, health care facility
construction and operation is subject to federal, state and local regulation
relating to the adequacy of medical care, equipment, personnel,
operating policies and procedures, rate-setting, and compliance with
building codes and environmental laws. Facilities are subject to periodic
inspection by governmental and other authorities to assure continued
compliance with the various standards necessary
for licensing and accreditation. These regulatory requirements are subject
to change and, to comply, it may be necessary for a hospital or other
health care facility to incur substantial capital expenditures or increased
operating expenses to effect changes in its facilities, equipment,
personnel and services.
Hospitals and other health care facilities are subject to claims
and legal actions by patients and others in the ordinary course of
business. Although these claims are generally covered by insurance,
there can be no assurance that a claim will not exceed the insurance
coverage of a health care facility or
that insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility. The
Clinton Administration may impose regulations which could limit price
increases for hospitals or the level of reimbursements for third-party
payors or other measures to reduce health care costs and make health
care available to more individuals, which would reduce profits for
hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a
hospital cannot adjust to the new system by reducing expenses or raising
rates, financial difficulties may arise. Also, Blue Cross has denied
reimbursement for some hospitals for services other than emergency
room services. The lost volume would reduce revenues unless
replacement patients were found.
Certain hospital bonds may provide for redemption at par at
any time upon the sale by the issuer of the hospital facilities to a
non-affiliated entity, if the hospital becomes subject to ad valorem
taxation, or in various other circumstances. For example, certain
hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to
perform procedures against specified religious principles or to disclose
information that is considered confidential or privileged. Certain
FHA-insured bonds may provide that all or a portion of these bonds,
otherwise callable at a premium, can be called at par in certain
circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables
may be uncertain and, if the bond obligation is secured by the hospital
facilities, legal restrictions on the ability to foreclose upon the facilities
<PAGE>
and the limited alternative uses to which a hospital can be put may
severely reduce its collateral value.
The Internal Revenue Service is currently engaged in a
program of intensive audits of certain large tax-exempt hospital and
health care facility organizations. Although these audits have not yet
been completed, it has been reported that the tax-exempt status of some
of these organizations may be revoked. At this time, it is uncertain
whether any of the hospital and health care facility bonds held by the
State Trust will be affected by such audit
proceedings.
Single Family and Multi-Family Housing Bonds. Multi-family
housing revenue bonds and single family mortgage revenue bonds are
state and local housing issues that have been issued to provide financing
for various housing projects. Multi-family housing revenue bonds are
payable primarily from the revenues derived from mortgage loans to
housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the
purpose of acquiring from originating financial institutions notes secured
by mortgages on residences.
Housing obligations are not general obligations of the issuer
although certain obligations may be supported to some degree by
Federal, state or local housing subsidy programs. Budgetary constraints
experienced by these programs as well as the failure by a state or local
housing issuer to satisfy the qualifications required for coverage under
these programs or any legal or administrative determinations that the
coverage of these programs is not available to a housing issuer, probably
will result in a decrease or elimination of subsidies available for payment
of amounts due on the issuer's obligations. The ability of housing issuers
to make debt service payments on their obligations will also be affected
by various economic and non-economic developments including, among
other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single family
issues and the ability of mortgage insurers to pay claims, employment
and income conditions prevailing in local markets, increases in
construction costs, taxes, utility costs and other operating expenses, the
managerial ability of project managers, changes in laws and
governmental regulations and economic trends
generally in the localities in which the projects are situated. Occupancy
of multi-family housing projects may also be adversely affected by high
rent levels and income limitations imposed under Federal, state or local
programs.
All single family mortgage revenue bonds and certain
multi-family housing revenue bonds are prepayable over the life of the
underlying mortgage or mortgage pool, and therefore the average life of
<PAGE>
housing obligations cannot be determined. However, the average life of
these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part
from prepayments on underlying mortgage loans; mortgage loans are
frequently partially or completely prepaid prior to their final stated
maturities as a result of events such as declining interest rates, sale of the
mortgaged premises, default, condemnation or casualty loss. Multi-family
issues are characterized by mandatory redemption at par upon the
occurrence of monetary defaults or breaches or covenants by the project
operator. Additionally, housing obligations are generally subject to
mandatory partial redemption at par to the extent that proceeds from the
sale of the obligations are not
allocated within a stated period (which may be within a year of the date
of issue). To the extent that these obligations were valued at a premium
when a Holder purchased Units, any prepayment at par would result in
a loss of capital to the Holder and, in any event, reduce the amount of
income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends
on qualification under Section 143 of the Internal Revenue Code of 1986,
as amended (the "Code"), in the case of single family mortgage revenue
bonds or Section 142(a)(7) of the Code or other provisions of Federal
law in the case of certain multi-family housing revenue bonds (including
Section 8 assisted bonds). These sections of the Code or other provisions
of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of
the residences financed with the proceeds of the single family mortgage
revenue bonds and the income levels of tenants of the rental projects
financed with the proceeds of the multi-family housing revenue bonds.
While the issuers of the bonds and other parties, including the originators
and servicers of the single-family mortgages and the owners of the rental
projects financed with the
multi-family housing revenue bonds, generally covenant to meet these
ongoing requirements and generally agree to institute procedures
designed to ensure that these requirements are met, there can be no
assurance that these ongoing requirements will be consistently met. The
failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly
retroactively from the date of issuance, thereby reducing the value of the
bonds, subjecting the Holders to unanticipated tax liabilities and possibly
requiring the Trustee to sell the bonds at reduced values. Furthermore,
any failure to meet these ongoing requirements might not constitute an
event of default under the applicable mortgage or permit the holder to
accelerate payment of the bond or require the issuer to redeem the bond.
In any event, where the mortgage is insured by the Federal Housing
Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage
bonds.
<PAGE>
Power Facility Bonds. The ability of utilities to meet their
obligations with respect to revenue bonds issued on their behalf is
dependent on various factors, including the rates they may charge their
customers, the demand for a utility's services and the cost of providing
those services. Utilities, in particular investor-owned utilities, are subject
to extensive regulations relating to the rates which they may charge
customers. Utilities can experience regulatory, political and consumer
resistance to rate increases. Utilities engaged in long-term capital projects
are especially sensitive to regulatory lags in granting rate increases. Any
difficulty in obtaining timely and adequate rate increases could adversely
affect a utility's results of operations.
The demand for a utility's services is influenced by, amoung
other factors, competition, weather conditions and economic conditions.
Electric utilities, for example, have experienced increased competition as
a result of the availability of other energy sources, the effects of
conservation on the use of electricity, self-generation by industrial
customers and the generation of electricity by co-generators and other
independent power producers. Also, increased competition will result if
federal regulators determine that utilities must open their transmission
lines to competitors. Utilities which distribute natural gas also are subject
to competition from alternative fuels, including fuel oil, propane and
coal.
The utility industry is an increasing cost business making the
cost of generating electricity more expensive and heightening its
sensitivity to regulation. A utility's costs are influenced by the utility's
cost of capital, the availability and cost of fuel and other factors. In
addition, natural gas pipeline and distribution companies have incurred
increased costs as a result of long-term natural gas purchase contracts
containing "take or pay" provisions which require that they pay for
natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on
these increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future
they will also incur increasing capital and operating expenses to comply
with environmental legislation such as the Clean Air Act of 1990, and
other energy, licensing and other laws and regulations relating to, among
other things, air emissions, the quality of drinking water, waste water
discharge, solid and hazardous substance handling and disposal, and
siting and licensing of facilities. Environmental legislation and
regulations are changing rapidly and are the subject of current public
policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic
fields associated with electric transmission and distribution lines as well
as emissions of carbon dioxide and other so-called greenhouse gases
<PAGE>
associated with the burning of fossil fuels. Compliance with these
requirements may limit a utility's operations or require substantial
investments in new equipment and, as a result, may adversely affect a
utility's results of operations.
The electric utility industry in general is subject to various
external factors including (a) the effects of inflation upon the costs of
operation and construction, (b) substantially increased capital outlays and
longer construction periods for larger and more complex new
generating units, (c) uncertainties in predicting future load requirements,
(d) increased financing requirements coupled with limited availability of
capital, (e) exposure to cancellation and penalty charges on new
generating units under construction, (f) problems of cost and availability
of fuel, (g) compliance with rapidly changing and complex
environmental, safety and licensing
requirements, (h) litigation and proposed legislation designed to delay or
prevent construction of generating and other facilities, (i) the uncertain
effects of conservation on the use of electric energy, (j) uncertainties
associated with the development of a national energy policy, (k)
regulatory, political and consumer resistance to rate increases and (l)
increased competition as a result of the availability of other energy
sources. These factors may delay the construction and increase the cost
of new facilities, limit the use of, or necessitate costly modifications to,
existing facilities, impair the access of electric utilities to credit markets,
or substantially increase the cost of credit for electric generating
facilities. The Sponsors cannot predict at this time the ultimate effect of
such factors on the ability of any issuers to meet their obligations with
respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law
in October, 1992, makes it mandatory for a utility to permit non-utility
generators of electricity access to its transmission system for wholesale
customers, thereby increasing competition for electric utilities. NEPA
also mandated demand-side management policies to be considered by
utilities. NEPA prohibits the Federal Energy Regulatory Commission
from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric
generation to provide electricity to retail customers (particularly
industrial retail customers) of a utility. However, under NEPA, a state
can mandate retail wheeling under certain conditions.
There is concern by the public, the scientific community, and
the U.S. Congress regarding environmental damage resulting from the
use of fossil fuels. Congressional support for the increased regulation of
air, water, and soil contaminants is building and there are a number of
pending or recently enacted legislative proposals which may affect the
electric utility industry. In particular, on November 15, 1990, legislation
was signed into law that substantially revises the Clean Air Act (the
"1990 Amendments"). The 1990 Amendments seek to improve the
<PAGE>
ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the
reduction of sulphur dioxide and nitrogen oxide emissions caused by
electric utility power plants, particularly those fueled by coal. Under the
1990 Amendments the U.S. Environmental Protection Agency ("EPA")
must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in
two phases. Phase I addresses specific generating units named in the
1990 Amendments. In Phase II the total U.S. emissions will be capped
at 8.9 million tons by the year 2000. The 1990 Amendments contain
provisions for allocating allowances to power plants based on historical
or calculated levels. An allowance is defined as the authorization to emit
one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further
regulation of toxic air emissions from electric generating units pending
the results of several federal government studies to be conducted over the
next three to four years with respect to anticipated hazards to public
health, available corrective technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants
are exposed to risks inherent in the nuclear industry. These risks include
exposure to new requirements resulting from extensive federal and state
regulatory oversight, public controversy, decomissioning costs, and spent
fuel and radioactive waste disposal issues. While nuclear power
construction risks are no longer of paramount concern, the emerging
issue is radioactive waste disposal. In addition, nuclear plants typically
require substantial capital additions and modifications throughout their
operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade
various plant systems. The high degree of regulatory monitoring and
controls imposed on
nuclear plants could cause a plant to be out of service or on limited
service for long periods. When a nuclear facility owned by an
investor-owned utility or a state or local municipality is out of service or
operating on a limited service basis, the utility operator or its owners
may be liable for the recovery of replacement power costs. Risks of
substantial liability also arise from the operation of nuclear facilities and
from the use, handling, and possible radioactive emissions associated
with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in
connection with the ownership and operation of a nuclear plant and
severe financial consequences could result from a significant accident or
occurrence. The Nuclear Regulatory Commission has promulgated
regulations mandating the establishment of funded reserves to assure
financial capability for the eventual decommissioning of licensed nuclear
facilities. These funds are to be accrued from revenues in amounts
currently estimated to be sufficient to pay
for decommissioning costs.
<PAGE>
The ability of state and local joint action power agencies to
make payments on bonds they have issued is dependent in large part on
payments made to them pursuant to power supply or similar agreements.
Courts in Washington, Oregon and Idaho have held that certain
agreements between the Washington Public
Power Supply System ("WPPSS") and the WPPSS participants are
unenforceable because the participants did not have the authority to enter
into the agreements. While these decisions are not specifically applicable
to agreements entered into by public entities in other states, they may
cause a reexamination of the legal
structure and economic viability of certain projects financed by joint
power agencies, which might exacerbate some of the problems referred
to above and possibly lead to legal proceedings questioning the
enforceability of agreements upon which payment of these bonds may
depend.
Water and Sewer Revenue Bonds. Water and sewer bonds are
generally payable from user fees. The ability of state and local water and
sewer authorities to meet their obligations may be affected by failure of
municipalities to utilize fully the facilities constructed by
these authorities, economic or population decline and resulting decline in
revenue from user charges, rising construction and maintenance costs and
delays in construction of facilities, impact of environmental requirements,
failure or inability to raise user charges in response to increased costs,
the difficulty of obtaining or discovering new supplies of fresh water, the
effect of conservation programs and the impact of "no growth" zoning
ordinances. In some cases this ability may be affected by the continued
availability of Federal and state financial assistance and of municipal
bond insurance for future bond issues.
University and College Bonds. The ability of universities and
colleges to meet their obligations is dependent upon various factors,
including the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and restrictions on the
use of endowments and other funds, the quality and maintenance costs
of campus facilities, and, in the case of public institutions, the financial
condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such
factors as tuition costs, demographic trends, geographic location,
geographic diversity and quality of the student body, quality of the
faculty and the diversity of program offerings.
Legislative or regulatory action in the future at the Federal,
state or local level may directly or indirectly affect eligibility standards
or reduce or eliminate the availability of funds for certain types of
student loans or grant programs, including student aid, research grants
and work-study programs, and may affect indirect assistance for
education.
<PAGE>
Lease Rental Bonds. Lease rental bonds are issued for the
most part by governmental authorities that have no taxing power or other
means of directly raising revenues. Rather, the authorities are financing
vehicles created solely for the construction of buildings (administrative
offices, convention centers and prisons, for example) or the purchase of
equipment (police cars and computer systems, for example) that will be
used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness
of the lessee government to meet its lease rental payments which include
debt service on the bonds. Willingness to pay may be subject to changes
in the views of citizens and government officials as to the essential nature
of the finance project. Lease rental bonds are subject, in almost all cases,
to the annual appropriation risk, i.e., the lessee government is not legally
obligated to budget and appropriate for the rental payments beyond the
current fiscal year. These bonds are also subject to the risk of abatement
in many states-rental bonds cease in the event that damage, destruction
or condemnation of the project prevents its use by the lessee. (In these
cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the
lessee government, in the event it defaults on its rental payments, from
the purchase or use of similar equipment for a certain period of time.
This safeguard is designed to insure that the lessee government will
appropriate the necessary funds even though it is not legally obligated to
do so, but its legality remains untested in most, if not all, states.
Capital Improvement Facility Bonds. The Portfolio of a State
Trust may contain Bonds which are in the capital improvement facilities
category. Capital improvement bonds are bonds issued to provide funds
to assist political subdivisions or agencies of a state through acquisition
of the underlying debt of a state or local political subdivision or agency
which bonds are secured by the proceeds of the sale of the bonds,
proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or
failure of payment of proceeds on and default of the underlying debt.
Solid Waste Disposal Bonds. Bonds issued for solid water
disposal facilities are generally payable from tipping fees and from
revenues that may be earned by the facility on the sale of electrical
energy generated in the combustion of waste products. The ability of
solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful
and efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
<PAGE>
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction
and maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental
regulations. Because of the relatively short history of this type of
financing, there may be technological risks involved in the satisfactory
construction or operation of the projects exceeding those associated with
most municipal enterprise projects. Increasing environmental regulation
on the federal, state and local level has a significant impact on waste
disposal facilities. While regulation requires more waste producers to use
waste disposal facilities, it also imposes
significant costs on the facilities. These costs include compliance with
frequently changing and complex regulatory requirements, the cost of
obtaining construction and operating permits, the cost of conforming to
prescribed and changing equipment standards and required methods of
operation and, for incinerators or waste-to-energy facilities, the cost of
disposing of the waste residue that remains after the disposal process in
an environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and
officials to their location and operation, to the possible adverse effects
upon the public health and the environment that may be caused by wastes
disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit
from laws which require waste to be disposed of in a certain manner but
any relaxation of these laws could cause a decline in demand for the
facilities' services. Finally, waste-to-energy facilities are concerned with
many of the same issues facing utilities insofar as they derive revenues
from the sale of energy to local power utilities (see Power Facility Bonds
above).
Moral Obligation Bonds. The State Trust may also include
"moral obligation" bonds. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of the bonds becomes a
moral commitment but not a legal obligation
of the state or municipality in question. Even though the state may be
called on to restore any deficits in capital reserve funds of the agencies
or authorities which issued the bonds, any restoration generally requires
appropriation by the state legislature and accordingly does not constitute
a legally enforceable obligation or debt of the state. The agencies or
authorities generally have no taxing power.
Refunded Bonds. Refunded Bonds are typically secured by
direct obligations of the U.S. Government, or in some cases obligations
guaranteed by the U.S. Government, placed in an escrow account
maintained by an independent trustee until maturity or a predetermined
redemption date. These obligations are generally noncallable prior to
maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought
to be escrowed to maturity have been called for redemption prior to
<PAGE>
maturity.
Airport, Port and Highway Revenue Bonds. Certain facility
revenue bonds are payable from and secured by the revenues from the
ownership and operation of particular facilities, such as airports
(including airport terminals and maintenance facilities), bridges, marine
terminals, turnpikes and port authorities. For example, the major portion
of gross airport operating income is generally derived from fees received
from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy
of certain terminal space, facilities, service fees, concessions and leases.
Airport operating income may therefore be affected by the ability of the
airlines to meet their obligations under the use agreements. The air
transport industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased aviation
fuel, deregulation, traffic constraints, the current recession and other
factors. As a result, several airlines are experiencing severe financial
difficulties. Several airlines including America West Airlines have sought
protection from their creditors under Chapter 11 of the Bankruptcy Code.
In addition, other airlines such as Midway Airlines, Inc., Eastern
Airlines, Inc. and Pan American Corporation have been liquidated.
However, within the past few months Northwest
Airlines, Continental Airlines and Trans World Airlines have emerged
from bankruptcy. The Sponsors cannot predict what effect these industry
conditions may have on airport revenues which are dependent for
payment on the financial condition of the airlines and their usage of the
particular airport facility.
Similarly, payment on bonds related to other facilities is
dependent on revenues from the projects, such as use fees from ports,
tolls on turnpikes and bridges and rents from buildings. Therefore,
payment may be adversely affected by reduction in revenues due to such
factors and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable from and
secured by the revenues derived by a municipality from a particular tax
such as a tax on the rental of a hotel room, on the purchase of food and
beverages, on the rental of automobiles or on the consumption of liquor.
Special tax bonds are not secured by the general tax revenues of the
municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special
tax bonds may not be adversely affected by a reduction in revenues
realized from the underlying special tax due to a general decline in the
local economy or population or due to a decline in the consumption, use
or cost of the goods and services that are subject to taxation. Also,
should spending on the particular
goods or services that are subject to the special tax decline, the
<PAGE>
municipality may be under no obligation to increase the rate of the
special tax to ensure that sufficient revenues are raised from the
shrinking taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically
secured by incremental tax revenues collected on property within the
areas where redevelopment projects, financed by bond proceeds are
located ("project areas"). Such payments are expected to be made from
projected increases in tax revenues derived from higher assessed values
of property resulting from development in the particular project area and
not from an increase in tax rates. Special risk considerations include:
reduction of, or a less than anticipated increase in, taxable values of
property in the project area, caused
either by economic factors beyond the Issuer's control (such as a
relocation out of the project area by one or more major property owners)
or by destruction of property due to natural or other disasters; successful
appeals by property owners of assessed valuations; substantial
delinquencies in the payment of property taxes; or imposition of any
constitutional or legislative property tax
rate decrease.
Transit Authority Bonds. Mass transit is generally not
self-supporting from fare revenues. Therefore, additional financial
resources must be made available to ensure operation of mass transit
systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or
a pledge of a special tax such as a sales tax or a property tax. If fare
revenues or the additional financial resources do not increase
appropriately to pay for rising operating expenses, the ability of the
issuer to adequately service the debt may be adversely affected.
Convention Facility Bonds. The Portfolio of a State Trust may
contain Bonds of issuers in the convention facilities category. Bonds in
the convention facilities category include special limited obligation
securities issued to finance convention and sports facilities payable from
rental payments and annual governmental appropriations. The
governmental agency is not obligated to
make payments in any year in which the monies have not been
appropriated to make such payments. In addition,
these facilities are limited use facilities that may not be used for purposes
other than as convention centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of issuers which
will be affected by general economic conditions in Puerto Rico. Puerto
Rico's unemployment rate remains significantly higher than the U.S.
unemployment rate. Furthermore, the economy is largely dependent for
its development upon U.S.policies and programs that are being reviewed
and may be eliminated.
<PAGE>
The Puerto Rican economy is affected by a number of
Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal
Revenue Code (the "Code") provides for a credit against Federal income
taxes for U.S. companies operating on the island if certain requirements
are met. The Omnibus Budget Reconciliation Act of 1993 imposes limits
on such credit, effective for tax years beginning after 1993. In addition,
from time to time proposals are introduced in Congress which, if enacted
into law, would eliminate some or all of the benefits of Section 936.
Although no assessment can be made at this time
of the precise effect of such limitation, it is expected that the limitation
of Section 936 credits would have a negative impact on Puerto Rico's
economy.
Aid for Puerto Rico's economy has traditionally depended
heavily on Federal programs, and current Federal budgetary policies
suggest that an expansion of aid to Puerto Rico is unlikely. An adverse
effect on the Puerto Rican economy could result from other U.S.
policies, including a reduction of tax benefits
for distilled products, further reduction in transfer payment programs
such as food stamps, curtailment of military spending and policies which
could lead to a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican
electorate chose to continue Puerto Rico's Commonwealth status.
Previously proposed legislation, which was not enacted, would have
preserved the federal tax exempt status of
the outstanding debts of Puerto Rico and its public corporations
regardless of the outcome of the referendum, to the extent that similar
obligations issued by states are so treated and subject to the provisions
of the Code currently in effect. There can be no assurance that any
pending or future legislation finally enacted will include the same or
similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both
direct and indirect consequences on such matters as the basic
characteristics of future Puerto Rico debt obligations, the markets for
these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing
and future debt obligations. Such possible consequences include, without
limitation, legislative proposals seeking restoration of the status of
Section 936 benefits otherwise subject to the limitations discussed above.
However, no assessment can be made at this time of the economic and
other effects of a change in federal laws affecting Puerto Rico as a result
of the November 1993 plebiscite.
Litigation and Legislation. To the best knowledge of the
Sponsors, there is no litigation pending as of the Initial Date in respect
of any Bonds which might reasonably be expected to have a material
adverse effect upon the State Trust.
<PAGE>
At any time after the Initial Date of Deposit, litigation may be initiated
on a variety of grounds, or legislation may be enacted, with respect to
Bonds in the Trust. Litigation, for example, challenging the issuance of
pollution control revenue bonds under environmental protection statutes
may affect the validity of Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely
predicted, opinions of bond counsel are delivered on the date of issuance
of each Bond to the effect that the Bond has been validly issued and that
the interest thereon is exempt from Federal income tax. In addition,
other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due
on the Bonds.
Under the Federal Bankruptcy Act, a political subdivision or
public agency or instrumentality of any state, including municipalities,
may proceed to restructure or otherwise alter the terms of its obligations,
including those of the type comprising the State Trust's Portfolio. The
Sponsors are unable to predict
what effect, if any, this legislation might have on the State Trust.
From time to time Congress considers proposals to tax the
interest on state and local obligations, such as the Bonds. The Supreme
Court clarified in South Carolina v. Baker (decided April 20, 1988) that
the U.S. Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
Tax Exemption. In the opinion of bond counsel rendered on
the date of issuance of each Bond, the interest on each Bond is
excludable from gross income under existing law for regular Federal
income tax purposes (except in certain circumstances depending on the
Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of
the Bonds may become subject to regular Federal income tax, perhaps
retroactively to their date of issuance, as a result of changes in Federal
law or as a result of the failure of issuers (or other users of the proceeds
of the Bonds) to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on June
14, 1993 that it will be expanding its examination program with respect
to tax-exempt bonds.The expanded examination program will consist of,
among other measures, increased enforcement against abusive
transactions, broader audit coverage (including the
expected issuance of audit guidelines) and expanded compliance achieved
by means of expected revisions to the tax-exempt bond information
return forms. At this time, it is uncertain whether the tax exempt status
of any of the Bonds would be affected by such proceedings, or whether
<PAGE>
such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on the
Bond should ultimately be determined to be taxable, the Bond would
become due and payable by its issuer, and, in addition, may provide that
any related letter of credit or other security could be called upon if the
issuer failed to satisfy all or part of its obligation. In other cases,
however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter
of credit or other security upon a determination of taxability. In those
cases in which a Bond does not provide for acceleration or redemption
or in which both the issuer and the bank or other entity issuing the letter
of credit or other security are unable to meet their obligations to pay the
amounts due on the Bond as a result of a determination of taxability, the
Trustee would be obligated to sell the Bond and, since it would be sold
as a taxable security, it is expected that it would have to be sold at a
substantial discount from current market price. In addition, as mentioned
above, under certain circumstances Holders could be required to pay
income tax on interest received prior to the date on which the interest is
determined to be taxable.
Moreover, the California Trust, the Connecticut Trust, the
Florida Trust, the Maryland Trust, the Massachusetts Trust, the
Minnesota Trust, the Missouri Trust, the New Jersey Trust, the New
York Trust, the North Carolina Trust, the Ohio Trust, the Pennsylvania
Trust and the Texas Trust are subject to certain additional state risk
factors:
California Trust
California's economy is the largest among the 50 states. The
State's January 1, 1992 population of 31 million represented
approximately 12.0% of the total United States population. Total
employment was about 14 million, the majority of which was in the
service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced
the worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, have all been severely affected. Job losses have
been the worst of any post-war recession. Employment levels are
expected to stabilize by late 1993. However,
pre-recession job levels are not expected to be reached for several more
years. Unemployment reached 10% in November 1992 and is expected
to remain above 9% through 1993 and 1994. According to the
Department of Finance, recovery from the recession in California is not
expected in meaningful terms until late 1993 or 19994, notwithstanding
signs of recovery elsewhere in the nation.
<PAGE>
After three years of recession, California's economy seems to
be stabilizing, however, economic signals remain mixed. On the plus
side, nonfarm employment in April was essentially unchanged from the
December level. The unemployment rate seems to be moving down,
although the large April drop, from 9.4% to 8.6%, probably exaggerates
the improvement. Personal income growth is improving gradually, from
gains of 2% or less in 1991 to slightly over 3% at the beginning of 1993,
and taxable sales are stabilizing after a lengthy decline.
There are still ample signs of weakness. Manufacturing
employment continues to decline, with deep losses in aerospace,
reflecting defense cuts and weak commercial markets. Despite strong
output and sales gains, electronics firms continue to cut payrolls. All
manufacturing industries,
with the exception of apparel and textiles, are posting employment
losses. Housing, usually an engine of recovery, remains in a slump.
Permit volume has averaged a 95,000 unit annual rate in recent months,
actually somewhat below
1992's 98,000 total. Nonresidential construction continues to hit new
recession lows, reflecting oversupplied commercial office, retail and
hotel markets. Employment continues to decline in normally stable
industries such as banking,
the utilities and most segments of wholesale and retail trade. Food,
department and apparel stores are shedding jobs and government
employment is down 30,000 jobs over the past year.
The department of Finance, in its May 1993 Revision of the
Governor's 1993-94 Budget, states that it expects this essentially flat
pattern of economic activity to persist throughout 1993, with employment
by year end only marginally higher than in April. Gains in service
industries, mainly health care,
temporary agencies (in business services), motion picture production and
amusements are expected to continue. There should be modest increases
in wholesale and retail trade. The finance and transportation and utilities
groups will be stable to down slightly. Assuming a modest pickup in
homebuilding, construction employment will also be flat this year.
Against these, manufacturing and government will continue to lose jobs.
The largest losses in
percentage terms will be in aerospace manufacturing and the Federal
Department of Defense, reflecting cuts in the military budget. Budget
constraints will also affect State and local government.
The recession has seriously affected State tax revenues, which
basically mirror economic conditions. It has also caused increased
expenditures for health and welfare programs. The State is also facing
a structural imbalance in its budget with the largest programs supported
by the General Fund--K-14 education (kindergarten through community
college), health, welfare and
<PAGE>
corrections--growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. As a result, the
State entered a period of chronic budget imbalance, with expenditures
exceeding revenues for
four of the last five fiscal years. Revenues declined in 1990-91 over
1989-90, the first time since the 1930s. By June 30, 1993, the State's
General Fund had an accumulated deficit, on a budget basis, of
approximately $2.75 billion.
Further consequence of the larger budget imbalances over the last three
fiscal years has been that the State depleted its available cash resources
and has had to use a series of external borrowings to meet its cash needs.
The 1992-93 Governor's Budget proposed expenditures of
$56.3 billion in General and Special Funds for the 1992-93 fiscal year,
a 1.6% increase over corresponding figures for the 1991-92 fiscal year.
General Fund expenditures were projected at $43.8 billion, an increase
of 0.2% over the 1992-93 Revised Governor's Budget. The Budget
estimated $45.7 billion of revenues
and transfers for the General Fund (a 4.7% increase over 1991-92) and
$12.4 billion for Special Funds (a 9.6% increase over 1991-92). To
balance the proposed budget, program reductions totaling $4.365 billion
and revenue and
transfer increases of $872 million were proposed for the 1991-92 and
1992-93 fiscal years. By the time of the Governor's May Revision issued
on May 20, 1992, the Administration estimated that the 1992-93 Budget
needed to address a gap of about $7.9 billion, much of which was needed
to repay the accumulated budget deficits of the previous two years.
The severity of the budget actions needed led to a long delay
in adopting the budget. With the failure to adopt a budget by July 1,
1992, which would have allowed the State to carry out its normal annual
cash flow borrowing, the Controller was forced to issue registered
warrants to pay a variety of obligations representing prior year's or
continuing appropriations, and
mandates from court orders. Available funds were used to make
constitutionally-mandated payments, such as debt service on bonds and
revenue anticipations warrants. After that date, all remaining outstanding
registered warrants (about $2.9 billion) were called for redemption from
proceeds of the issuance of 1992 Interim Notes after the budget was
adopted.
The 1992-93 Budget Act provided for expenditures of $57.4
billion, consisting of General Fund expenditures of $40.8 billion and
Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimates
there will be a balance in the Special Fund for Economic Uncertainties
of $28 million on June 30, 1993.
<PAGE>
<PAGE>
The $7.9 billion budget gap was closed through a combination
of increased revenues and transfers and expenditure cuts such as:
1. General fund savings in health and welfare programs
totaling $1.6 billion.
2. General fund reductions of $1.9 billion for K-12
schools and community colleges.
3. General fund savings of $1.3 billion by revising the
State aid program to local governments originally enacted after
Proposition 13.
4. Program cuts for higher education totaling $415
million.
5. A total of $1.6 billion of transfers and accelerated
collections of State revenues.
6. Approximately $1.0 billion from various additional
program reductions.
Shortly after the 1992-93 Budget Act was enacted, it became
evident the economic conditions in the State were not beginning to
improve in the second half of 1992, as assumed by the Department of
Finance's May 1992 economic estimates. This was exacerbated by
enactment of an initiative measure in November 1992 repealing a sales
tax for certain candy, snack foods and
bottled water, reducing revenues by about $300 million for a full fiscal
year ($200 million in 1992-93). The Governor's Budget proposal for
1993-94, released on January 8, 1993 (the "January Governor's
Budget"), confirmed the
earlier forecasts about the State's economy and the 1992-93 Budget Act.
The January Governor's Budget projected that the economy would not
start meaningful recovery from the recession until late 1993 or 1994.
With the economy continuing in recession throughout the 1992-93 fiscal
year, revenues were projected about $2.5 billion lower than anticipated
when the 1992-93 Budget Act was signed, leading to a projected $2.1
billion budget deficit at June
30, 1993 (compared to the Budget Act projection of a $28 million
balance). That deficit amount was projected if, by March 1993, the
Legislature adopted
several actions proposed by the Governor to save about $475 million in
the 1992-93 fiscal year. The Legislature did not adopt any of the
Governor's proposals.
<PAGE>
<PAGE>
On May 20. 1993, the Department of Finance released its May
Revision to the January Governor's Budget (the "May Revision"),
updating revenue and expenditure projections and proposals for the
1992-93 and 1993-94 fiscal years. The May Revision projected that the
General Fund will end the fiscal year on June 30, 1993 with an
accumulated budget deficit of about $2.8
billion, and a negative fund balance of about $2.2 billion ( the difference
being certain reserves for encumbrances and school funding costs). The
Governor projected revenues for 1992-93 of $41.0 billion, $1.0 billion
less than in the 1991-92 fiscal year. On the expenditure side, the
continued recession increased
health and welfare costs above the original Budget Act projections.
Also, property tax receipts at the local level were less than projected, so
that the State will not get the full $1.3 billion benefit from the property
tax shift enacted in the 1992-93 Budget Act. Overall, the May Revision
projected total General Fund
expenditures of $1.1 billion for the 1992-93 fiscal year, about $300
million higher than the Budget Act and $2.2 billion less than fiscal year
1991-92.
The January Governor's Budget had projected that, because of
severely reduced revenues, the State would face a cash flow shortfall in
May 1993, necessitating additional external borrowing. The State met
this cash flow need by issuing $3.0 billion of revenue anticipation notes
on April 26, 1993, which matured on June 24, 1993. The State also
issued the 1993 Revenue Participation Warrants in the principal amount
of $2.0 billion to meet cash flow
requirements for the end of the 1992-93 fiscal year and the start of the
1993-94 fiscal year.
The 1993-94 fiscal year represents the third consecutive year
the Governor and the Legislature were faced with a very difficult budget
environment, requiring revenue actions and expenditure cuts totalling
multiple billions of dollars to produce a balanced budget.
The Governor's budget introduced on January 8, 1993
proposed General Fund Expenditures of $37.33 billion, with projected
revenues of $39.87 billion. It also proposed Special Fund expenditures
of $12.35 billion and Special
Fund Revenues of $12.10 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts
from local government, reliance on increased federal aid and reductions
in State spending.
The May Revision of the Governor's Budget, released on May
20, 1993, indicated that the revenue projections of the January Budget
Proposal were tracking well, with full year 1992-93 about $80 million
higher than the January projection. Personal Income tax revenue was
higher than projected, sales tax was close to target, and bank and
<PAGE>
corporation taxes were lagging behind projections. The May Revision
projected the State would have about
$2.7 billion accumulated deficit by June 30, 1993. The Governor
proposed to repay this deficit over an 18-month period. He also agreed
to retain the 0.5% sales tax scheduled to expire June 30 for a six-month
period, dedicated to local
public safety purposes, with a November election to determine a
permanent extension. Unlike previous years, the Governor's Budget and
May Revision did not calculate a "gap" to be closed, but rather set forth
revenue and expenditure forecasts and proposals designed to produce a
balanced budget.
The 1993-94 Budget Act, signed by the Governor on June 30,
1993, is predicated on revenue and transfer estimates of $40.6 billion,
about $700 million higher than the January Governor's Budget, but still
about $400 million below 1992-93 (and the second consecutive year of
actual decline). The principal reasons for this decline are the continued
weak economy and the expiration (or repeal) of three fiscal steps taken
in 1991-a half cent temporary
sales tax (which generates about $1.5 billion annually), a deferral of
operating loss carry forwards ($440 million), and repeal by initiative of
a sales tax on candy and snack foods ($300 million). The Governor also
proposes a number of fiscal steps (tax credits and the like) to stimulate
job growth, which could result in short-term revenue costs. The 1993-94
Budget Act assumes Special Fund revenues of $11.8 billion, an increase
of 5.0% over 1992-93.
The 1993-94 Budget Act includes General Fund expenditures
of $38.5 billion (a 6.5% reduction from projected 1992-93 expenditures
of $41.2 billion), in order to keep a balanced budget within the available
revenues. The Budget also includes Special Fund expenditures of $12.1
billion, a 4.2% increase. The Budget Act reflects the following major
adjustments:
1. Changes in local government financing to
shift about $2.6 billion in property taxes
from cities, counties, special districts and
redevelopment agencies to school and
community districts.
2. The Budget keeps K-12 Proposition 98
funding on a cash basis at the same per-
pupil level as 1992-93 by providing schools
a loan payable from future years' Proposition
98 funds.
3. Receipt in 1993-94 of about $550 million
in aid from the federal government to offset
health and welfare costs associated with
<PAGE>
foreign immigrants living in the State, which
would reduce a like amount of General Fund
expenditures.
4. Reductions of $0.3 billion in health and
welfare programs.
5. Reductions of $400 million in support for
higher education.
6. A 2 year suspension of the renters' tax
credit ($390 million expenditure reduction in
1993-94).
7. Various miscellaneous cuts (totalling
approximately $150 million ) in Sate
government services in many agencies, up to
15%.
8. Miscellaneous one-time items, including
deferral of payment to the Public Employees
Retirement Fund and a change in accounting
for debt service from accrual to cash basis,
saving $107 million.
A key feature of the 1993-94 Budget Act is a plan to retire the
projected $2.8 billion accumulated deficit over an 18 month period by
the use of external borrowing. The Budget Act estimates that about $1.6
billion of the deficit elimination loan would be repaid by December 23,
1993 from the proceeds of the $2.0 billion Revenue Anticipation
Warrants issued on June 23, 1993.
The 1993-94 Budget Act continues to predict that population
growth in the 1990's will keep upward pressure on major State
programs, such as K-14 education, health, welfare and corrections,
outstripping projected revenue growth
in an economy only very slowly emerging from a deep recession. The
Governor's health, welfare and local government reductions continue his
efforts to keep expenditures in line with resources in the long term. The
Budget Act also proposes significant restructuring of State government,
with elimination and consolidation of several agencies and numerous
smaller boards, and change to
a "performance budgeting" concept which would be more efficient and
cost-effective (with a pilot project to be implemented in 1994-95). The
Governor also proposes initiatives in the fields of information technology
to increase governmental productivity.
On June 2, 1993, the Commission on State Finance ("COSF")
issued its Quarterly General Fund Forecast, which assessed the
<PAGE>
Governor's May Revision. The COSF report projected stagnant
economic conditions through
1994, and agreed generally with the Governor's economic projections,
although the COSF showed slightly lower growth than the Governor in
some California economic factors. The COSF projects lower revenues
and higher expenditures in 1993-94 than the May Revision, and notes
that the May Revision continues
the uses of off-bookloans to schools and has no built-in protection against
downside risk.
The COSF projects about $700 million lower revenues in
1993-94 than the May Revision, principally because COSF believes most
of the increase in personal income taxes seen late in 1992-93 came from
a one-time income shift, rather than reflecting a permanent base of
greater tax revenues. COSF
also knows other major taxes (and local property taxes) a little weaker
than the May Revision, with a resulting increase in expenditures to make
up the property tax shortfall for school financing. Altogether, COSF
projects in its "primary
forecast" that the fund balance at June 30,1994 would be over $800
million more negative than the May Revision forecast, and the negative
difference would grow to $1.9 billion by June 30, 1995.
The COSF report includes two alternative forecasts based on
either continued recession, or stronger recovery. The pessimistic
forecast is $3.8 billion worse at June 30, 1995 than the Primary
Forecast, and the optimistic forecast is about $3.8 billion better. The
COSF also expressed concern that the
proposed $2.6 billion shift of property taxes could materially impact
local government's fiscal stability.
THE FOREGOING DISCUSSION OF THE 1993-94 FISCAL
YEAR BUDGET IS BASED IN LARGE PART ON STATEMENTS
MADE IN A RECENT "PRELIMINARY OFFICIAL STATEMENT"
DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT
DOCUMENT, THE STATE INDICATED THAT ITS DISCUSSION OF
THE 1993-94 FISCAL YEAR BUDGET WAS BASED ON
ESTIMATES AND PROJECTIONS OF REVENUES AND
EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST
NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE
NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS
ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS
FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN
THE STATE AND THE NATION, AND THAT THERE CAN BE NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
<PAGE>
<PAGE>
The State is subject to an annual appropriations limit imposed
by Article XIIIB of the State Constitution (the "Appropriations Limit"),
and is prohibited from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. Article XIIIB, originally adopted in
1979, was modified substantially by Propositions 98 and 111 in 1988 and
1990, respectively. "Appropriations subject to limitation" are
authorizations to spend "proceeds of
taxes", which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the
extent that such
proceeds exceed the reasonable cost of providing the regulation, product
or service. The Appropriations Limit is based on the limit for the prior
year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of
taxes received over such two-
year period above the combined Appropriation Limits for those two years
is divided equally between transfers to K-14 districts and refunds to
taxpayers.
Exempted from the Appropriations Limit are debt service costs
of certain bonds, court or federally mandated costs, and, pursuant to
Proposition 111, qualified capital outlay projects and appropriations or
revenues derived from any increase in gasoline taxes and motor vehicle
weight fees above January 1, 1990 levels. Some recent initiatives were
structured to create new tax
revenues dedicated to specific uses and expressly exempted from the
Article XIIIB limits. The Appropriations Limit may also be exceeded
in cases of emergency arising from civil disturbance or natural disaster
declared by the Governor and approved by two-thirds of the Legislature.
If not so declared and
approved, the Appropriations Limit for the next three years must be
reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8,
1988, also establishes a minimum level of state funding for school and
community college districts and requires that excess revenues up to a
certain limit be transferred to schools and community college districts
instead of returned to the taxpayers. Determination of the minimum
level of funding is based on several
tests set forth in Proposition 98. During fiscal year 1991-92 revenues
were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the
1991-92 and 1992-93 fiscal
years without exceeding it, the Legislature enacted legislation to reduce
1991-92 appropriations. The amount budgeted to schools but which
exceeded the reduced appropriation was treated as a non-Proposition 98
short-term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion
of the amount budgeted to K-14 schools was designated to "repay" the
<PAGE>
prior year loan, thereby reducing cash outlays in 1992-93 by that
amount.
Because of the complexities of Article XIIIB, the ambiguities
and possible inconsistencies in its terms, the applicability of its
exceptions and exemptions and the impossibility of predicting future
appropriations, the Sponsor cannot predict the impact of this or related
legislation on the Bonds in the California Trust Portfolio. Other
Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If
any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate
revenues as mandated
by such initiatives. Propositions such as Proposition 98 and others that
may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources available
for other State programs, especially to the extent the Article XIIIB
spending limit would restrain the
State's ability to fund such other programs by raising taxes.
As of June 30, 1993, the State had over $17.64 billion
aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately
$7.24 billion remained unissued as of June 30, 1993. The State also
builds and acquires capital facilities
through the use of lease purchase borrowing. As of June 30, 1992, the
State had approximately $2.88 billion of outstanding Lease-Purchase
Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $21.87 billion aggregate principal amount
of revenue bonds and notes outstanding as of March 31, 1993. Revenue
bonds represent both obligations payable from State revenue-producing
enterprises and projects, which are not payable from the General Fund,
and conduit obligations payable only from revenues paid by private users
of facilities financed by such
revenue bonds. Such enterprises and projects include transportation
projects, various public works and exposition projects, education
facilities (including the
California State University and University of California systems),
housing health facilities and pollution control facilities.
The State is a party to numerous legal proceedings, many of
which normally occur in governmental operations. In addition, the State
is involved in certain other legal proceedings that, if decided against the
State, might require the State to make significant future expenditures or
impair future revenue sources. Examples of such cases include
challenges to the State's method of
taxation of certain businesses, challenges to certain vehicle license fees,
<PAGE>
and challenges to the State's use of Public Employee Retirement System
funds to offset future State and local pension contributions. Other cases
which could significantly impact revenue or expenditures involve
reimbursement to school
districts for voluntary school desegregation and state mandated costs,
challenges to Medi-Cal eligibility, recovery for flood damages, and
liability for toxic waste cleanup. Because of the prospective nature of
these proceedings, it is not
presently possible to predict the outcome of such litigation or estimate
the potential impact on the ability of the State to pay debt service on its
obligations.
On November 1, 1993 the United States Supreme Court
agreed to review the California court decisions in Barclays Bank
International, Ltd. v. Franchise Tax Board and Colgate-Palmolive
Company, Inc. v. Franchise Tax
Board which upheld California's worlwide combined reporting
("WWCR") method of taxing corporations engaged in a unitary business
operation against challenges under the foreign commerce and due process
clauses. In1983, in Container Corporation v. Franchise Tax Board, the
Supreme Court held that the
WWCR method did not violate the foreign commerce clause in the case
of a domestic-based unitary business group with foreign-domiciled
subsidiaries, but specifically left open the of whether a different result
would obtain for a foreign-based multi-national unitary business.
Barclays concerns a foreign-based multinational and Colgate-Palmolive
concerns a domestic-based multinational in
light of federal foreign policy developments since 1983. In a brief filed
at the Supreme Court's request, the Clinton Administration had argued
that the Court should not hear the Barclay's case, even though there are
"serious questions" about the California Supreme Court's analysis and
holdings, because the recent changes in the law noted below means the
issue in Barclays "lacks substantial recurring importance". The Clinton
Administration had previously decided not
to become involved in the Barclays petition. the United States
Government under the Bush Administration, along with various foreign
Governmnets, had appeared as amicus on behalf of Barclays before the
California Courts. The Clinton Administration has filed an amicus on
behalf of Barclays before the California Courts. The Clinton
Administration has filed an amicus brief on the merits
supporting the California Franchise Tax Board, arguing that the Court
should judge WWCR by lookingat federal policies in effect at the time
the taxes were collected and stating that the federal government had not
indicated to the States
during the 1970s and 1980s that it objected to WWCR. The fiscal impact
on the State of Caliornia has not been reported as follows: the State
would have a refund $1.730 billion to taxpayers ($530 million due to
Barclays; $41.2 billion due to Colgate), and cancel anohter$2.35 billion
of pending assessments ($350
<PAGE>
million due to Barclays; $1.9 billion due to Colgate), if the Supreme
Court ultimately strikes down the WWCR method and rules its decision
has retrospective effect.
As a result of the deterioration in the State's budget and cash
situation in fiscal year 1991-92, and the delay in adopting the 1992-93
budget which resulted in issuance of registered warrants (I.O.U.s), rating
agencies reduced the State's credit rating. Between November 1991 and
September 30, 1992, the rating on the State's general obligation bonds
was reduced by Standard & Poor's Corporation from "AAA" to "A+",
by Moody's Investors Service,
Inc. from "Aaa" to "Aa", and by Fitch Investors Service, Inc. from
"AAA" to "AA". There can be no assurance that such ratings will
continue for any given period of time or that they will not in the future
be further revised or withdrawn.
The January 1994 Los Angeles earthquake may negatively
impact the ability of certain issuers to make scheduled interest and
principal payments, for example, if the specific project for which bonds
were issued is damaged or if revenues backing certain bonds decline. In
addition, the impact on tourism and
business spending resulting from earthquake damaage and any delay in
its repair could negatively impact the ability of certain issuers to make
timely debt payments. Further, as with October 1989 Loma Prieta
earthquake that struck San Francisco, lawsuits may be filed against state
agencies. Both Moody's Investors Service and Standard & Poor's
Corporation have said that it is too soon to offer official assessments of
the damage and its effect on bondholders. However, Moody's has also
stated that because the pledge to make debt service
payments for general obligation bonds and essential purpose revenue
bonds is absolute and unconditional, it does not expect any rating
adjustment over the short-term for such bonds. The Sponsors are unable
to predict the effects of this
earthquake or any other future natural disaster on the bonds in the
Portfolio of the California Trust.
Connecticut Trust
The Sponsors believe the information summarized below
describes some of the more significant aspects of the Connecticut
Trust.
The sources of such information are the official statements of issuers
as
well as other publicly available documents. While the Sponsors have
not
independently verified this information, they no reason to believe that
such information is not correct in all material respects.
Potential purchasers of the Units of the Connecticut Trust should
consider the fact that the Trust's Portfolio consists primarily of
Bonds
issued by the State of Connecticut (the "State") or its municipalities
or
<PAGE>
authorities, and realize the substantial risks associated with an
investment
in such Bonds.
Connecticut's manufacturing industry has historically been of
prime economic importance to Connecticut. The manufacturing
industry
is diversified, with transportation equipment (primarily aircraft
engines,
helicopters and submarines) dominant followed by fabricated metal
products, non-electrical machinery and electrical machinery. From
1970
to 1992, however, there was a rise in employment in service-related
industries. During this period, manufacturing employment declined
30.8%, while employment in non-agricultural establishments
(including
government) increased 60.8%, particularly in the service, trade and
finance categories. In 1992, manufacturing accounted for only
20.1%
of total non-agricultural employment in Connecticut. Defense-related
business plays an important role in the Connecticut economy. On a
per
capita basis, defense awards to Connecticut have traditionally been
among the highest in the nation. Reductions in defense spending
have
had a substantial adverse impact on Connecticut's economy.
Moreover,
the State's largest defense contractors have announced substantial
labor
force reductions scheduled to occur over the next four years.
The annual average unemployment rate (seasonally adjusted) in
Connecticut decreased from 6.9% in 1982 to a low of 3.0% in 1988
but
rose to 7.2% in 1992. While these rates were lower than those
recorded
for the U.S. as a whole for the same periods, as of May, 1993, the
estimated rate of unemployment in Connecticut in connection on a
seasonally adjusted basis was 7.4%, compared to only 6.9 % for the
United States as a whole, and pockets of significant unemployment
and
poverty exist in some of Connecticut's cities and towns. Moreover,
Connecticut is now in a recession the depth and duration of which is
uncertain.
The State derives over seventy percent of its revenues from taxes
imposed by the State. The two major taxes have been the sales and
use
taxes and the corporation business tax, each of which is sensitive to
changes in the level of economic activity in the State, but the
Connecticut
income tax on individuals, trusts and estates enacted in 1991 is
expected
to supersede each of them in importance.
The State's General Fund budget for fiscal year 1986-87 (ending
June 30) anticipated appropriations and revenues of approximately
$4,300,000,000. The General Fund ended fiscal year 1986-87 with
a
surplus of $365,200,000. The General Fund budget for fiscal year
1987-
88 anticipated appropriations and revenues of approximately
$4,915,800,000. However, the General Fund ended fiscal year
1987-88
with a deficit of approximately $115.6 million. The General Fund
budget for fiscal year 1988-89 anticipated that General Fund
expenditures
of $5,551,000,000 and certain educational expenses of $206,700,000
not
previously paid through the General Fund would be financed in part
from
<PAGE>
surpluses of prior years and in part from higher tax revenues
projected
to result from tax laws in effect for fiscal year 1987-88 and stricter
enforcement thereof; a substantial deficit was projected during the
third
quarter of fiscal year 1988-89, but, largely because of tax law
changes
that took effect before the end of the fiscal year, the deficit was kept
to
$28,000,000. The General Fund budget for fiscal year 1989-90
anticipated appropriations of approximately $6,224,500,000 and, by
virtue of tax increases enacted to take effect generally at the
beginning
of the fiscal year, revenues slightly exceeded such amount.
However,
largely because of tax revenue shortfalls, the General Fund ended
fiscal
year 1989-90 with a deficit for the year of $259,000,000, wiping out
reserves for such events built up in prior years. The General Fund
ended fiscal year 1990-91 with a deficit of $809,000,000, primarily
because of significant declines in tax revenues and unanticipated
expenditures reflective of economic adversity.
A General Fund budget was not enacted for fiscal year 1991-92
until August 22, 1991. This budget anticipated General Fund
expenditures of $ 7,007,861,328 and revenues of $ 7,426,390,000.
Anticipated decreases in revenues resulting from a 25% reduction in
the
sales tax rate effective October 1, 1991, the repeal of the taxes on
the
capital gains and interest and dividend income of resident individuals
for
years starting after 1991, and the phase-out of the corporation
business
tax surcharge over two years commencing with years starting after
1991
were expected to be more than offset by a new general income tax
imposed at effective rates not to exceed 4.5% on the Connecticut
taxable
income of resident and non-resident individuals, trusts and estates.
The
Comptroller's annual report for fiscal year 1991-92 reflected a
General
Fund operating surplus of $110,000,000. A General Fund budget
for
fiscal year 1992-93 anticipated General Fund expenditures of
$7,372,062,859 and revenues of $7,372,210,000 and the General
Fund
ended fiscal year 1992-93 with an operating surplus of
$113,500,000.
Balanced General Fund budgets for the biennium ending June 30,
1995,
have been adopted appropriating expenditures of $7,828,900,000 for
fiscal year 1993-94 and $8,266,000,000 for fiscal year 1994-95.
The primary method for financing capital projects by the State
is through the sale of the general obligation bonds of the State.
These
bonds are backed by the full faith and credit of the State. As of
October
1, 1993, there was a total legislatively authorized bond indebtedness
of
$9,140,275,363, of which $7,384,654,455 had been approved for
issuance by the State Bond Commission and $6,355,937,037 had
been
issued.
To fund operating cash requirements, prior to fiscal year
1991-92
the State borrowed up to $750,000,000 pursuant to authorization to
issue
commercial paper, and on July 29, 1991, it issued $200,000,000
General
Obligation Temporary Notes, none of which temporary borrowings
were
outstanding as of July 1, 1993. To fund the cumulative General Fund
<PAGE>
deficit for fiscal years 1989-90 and 1990-91, the legislation enacted
August 22, 1991, authorized the State Treasurer to issue Economic
Recovery Notes up to the aggregate amount of such deficit, which
must
be payable no later than June 30, 1996; at least $50,000,000 of such
Notes, but no more than a cap amount, is to be retired each fiscal
year
commencing with fiscal year 1991-92, and any unappropriated
surplus
up to $205,000,000 in the General Fund at the end of each of the
three
fiscal years commencing with fiscal year 1991-92 must be applied to
retire such Notes as may remain outstanding at those times. On
September 25, 1991 and October 24, 1991, the State issued
$640,710,000 and $325,002,000, respectively, of such Economic
Recovery Notes, of which $705,610,000 were outstanding as of
October
1, 1993, and are shown in the outstanding state general obligation
bond
indebtedness shown above.
To meet the need for reconstructing, repairing, rehabilitating,
and improving the State transportation system (except Bradley
International Airport), the State adopted legislation which provides
for,
among other things, the issuance of special tax obligation ("STO")
bonds
the proceeds of which will be used to pay for improvements to the
State's transportation system. The STO bonds are special tax
obligations
of the State payable solely from specified motor fuel taxes, motor
vehicle
receipts and licenses, permit and fee revenues pledged therefor and
deposited in the special transportation fund. The twelve-year cost of
the
infrastructure program which began in 1984, to be met from federal,
state and local funds, is currently estimated at $9.5 billion. To
finance
a portion of the State's share of such cost, the State expects to issue
$3.7
billion of STO bonds over the twelve-year period.
As of March 2, 1994, the General Assembly has authorized STO
bonds for the program in the aggregate amount of $3,604,363,104,
of
which $2,944,650,752 had been issued. It is anticipated that
additional
STO bonds will be authorized by the General Assembly annually in
an
amount necessary to finance and to complete the infrastructure
program.
Such additional bonds may have equal rank with the outstanding
bonds
provided certain pledged coverage requirements of the STO indenture
controlling the issuance of such bonds are met. The State expects to
continue to offer bonds for this program.
The State, its officers and employees are defendants in numerous
lawsuits. According to the Attorney General's Office, an adverse
decision in any of the cases which are summarized herein could
materially affect the State's financial position: (i) an action in which
eight
retarded persons claim denial of equal protection rights on behalf of
all
retarded persons between ages 19 and 61 who require daily care but
are
ineligible for admission to a group home; (ii) litigation on behalf of
black
and hispanic school children in the City of Hartford seeking
"integrated
education" within the greater Hartford metropolitan area; (iii)
litigation
involving claims by Indian tribes to less than 1/10 of 1% of the
State's
<PAGE>
land area; (iv) litigation challenging the State's method of financing
elementary and secondary public schools on the ground that it denies
equal access to education; (v) an action in which two retarded
persons
seek placement outside a State hospital, new programs and damages
on
behalf of themselves and all mentally retarded patients at the
hospital;
(vi) litigation involving claims for refunds of taxes by several cable
television companies; (vii) an action on behalf of all persons with
retardation or traumatic brain injury, claiming that their
constitutional
rights are violated by placement in State hospitals alleged not to
provide
adequate treatment and training, and seeking placement in
community
residential settings with appropriate support services; (viii) an action
by
the Connecticut Hospital Association and 33 hospitals seeking to
require
the State to reimburse hospitals for in-patient medical services on a
basis
more favorable to them; (ix) a class action by the Connecticut
Criminal
Defense Lawyers Association claiming a campaign of illegal
surveillance
activity and seeking damages and injunctive relief; (x) two actions
for
monetary damages brought by a former patient at a state mental
hospital
stemming from an attempted suicide that left her brain-damaged; (xi)
an
action challenging the validity of the State's imposition of surcharges
on
hospital charges to finance certain uncompensated care costs incurred
by
hospitals and (xii) an action to enforce the spending cap provision
of the
State's constitution by seeking to require that the General Assembly
define certain terms used therein and to enjoin certain increases in
"general budget expenditures" until this is done.
As a result of the State's budget problems, the ratings of its
general obligation bonds were reduced by Standard & Poor's from
AA+
to AA on March 29, 1990, and by Moody's from Aa1 to Aa on
April 9,
1990. Moreover, because of these problems, on February 5, 1991,
Standard & Poor's placed the State's general obligation bonds and
certain
other obligations that depend in part on the creditworthiness of the
State
on CreditWatch with negative implications. On March 7, 1991,
Moody's downgraded its ratings of the revenue bonds of four
Connecticut hospitals because of the effects of the State's restrictive
controlled reimbursement environment under which they have been
operating. On September 13, 1991 the ratings of the State's general
obligation bonds and certain other obligations were lowered by
Standard
& Poor's from AA to AA- and removed from CreditWatch.
General obligation bonds issued by Connecticut municipalities
are
payable primarily only from ad valorem taxes on property subject to
taxation by the municipality. Certain Connecticut municipalities
have
experienced severe fiscal difficulties and have reported operating and
accumulated deficits in recent years. The most notable of these is
the
City of Bridgeport, which filed a bankruptcy petition on June 7,
1991;
the State opposed the petition. The United States Bankruptcy Court
for
the District of Connecticut has held that Bridgeport had authority to
file
such a petition but that its petition should be dismissed on the
grounds
that Bridgeport was not insolvent when the petition was filed.
Regional
<PAGE>
economic difficulties, reductions in revenues, and increased expenses
could lead to further fiscal problems for the State and its political
subdivisions, authorities, and agencies. This could result in declines
in
the value of their outstanding obligations, increases in their future
borrowing costs, and impairment of their ability to pay debt service
on
their obligations.
Florida Trust
The State's economy in the past has been highly dependent on
the
construction industry and construction-related manufacturing. This
dependency has declined in recent years and continues to do so as a
result of continued diversification of the State's economy. For
example,
in 1980 total contract construction employment as a share of total
non-
farm employment was just over seven percent, and in 1990 the share
had
edged downward to six percent. This trend is expected to continue
as
the State's economy continues to diversify. Florida nevertheless has
a
dynamic construction industry, with single and multi-family housing
starts accounting for 9.48% of total U.S. housing starts in 1991
while the
State's population is 5.3% of the U.S. total population.
A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although Florida
currently
is the fourth most populous state, its population growth is now
projected
to decline as the number of people moving into the State is expected
to
hover near the mid-200,000 range annually well into the 1990s.
This
population trend should provide plenty of fuel for business and home
builders to keep construction activity lively in Florida for some time
to
come. However, some factors that have adversely affected the
construction industry's performance include:
(i) Federal tax reform legislation that has eliminated tax
deductions for owners of three or more residential real
estate properties and the lengthening of depreciation
schedules on investment and commercial properties;
(ii) Costs of financing that have been relatively high in
recent years; and
(iii) Economic growth and existing supplies of commercial
buildings and homes also contribute to the level of
construction activities in the State.
Since 1980, the State's job creation rate is well over twice the
rate for the nation as a whole, and its growth rate in new
non-agricultural
jobs is the fastest of the 11 most populous states and second only to
California in the absolute number of new jobs created. Contributing
to
the State's rapid rate of growth in employment and income is
<PAGE>
international trade. In addition, since 1980, the State's
unemployment
rate has generally tracked below that of the Nation's unemployment
rate.
However, in the last two years, the State's jobless rate moved ahead
of
the national average of approximately 7.2%. According to Florida's
Office of Planning & Budgeting Revenue and Economic Analysis
Unit
("Office of Planning & Budget"), the State's unemployment rate was
5.9% during 1990. The State's unemployment rate had increased to
7.3% for 1991. The State forecasts that the unemployment rate will
be
8.2% in 1992. Unemployment is projected to be 7.3% of the labor
force
in 1992-93 and 6.8% in 1993-94. The State's non-farm job growth
rate
is expected to mirror the path of employment growth of the nation
(decline 1.3% in 1992-93 and rise 4.3% in 1993-94). The State's
two
largest and fastest growing private employment categories are the
service
and trade sectors. Employment in these sectors is expected to
decline
3.6% for trade and growth and 1.5% for services in 1991-92 and are
expected to grow 0.7% and 3.7% in 1992-93, respectively.
Together,
they account for more than half of the total non-farm employment
growth
over the next two years. The service sector has overtaken the trade
sector and is now the State's largest employment category.
The number of tourists coming to the State has stabilized. The
State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its
seasonality.
Approximately 40.9 million people visited the State in 1992. During
1992-93, tourist arrivals are expected to be approximately 42
million.
The State's per capita personal income in 1992 of $19,397 was
slightly below the national average of $19,841 and significantly
ahead of
that for the southeast United States, which was $17,661. Growth in
real
personal income in the State follows a course similar to that of the
nation. Real personal income is estimated to increase 0.7% in
1992-93
and increasing 5.1% in 1993-94. The decrease in the 1992-93 level
is
due to property loses resulting from Hurricane Andrew.
Compared to other states, Florida has a proportionately greater
retirement age population, which comprises 18.3% of the State's
population, and is forecast to grow at over 1.96% through the 1990s.
Thus, property income (dividends, interest, and rent) and transfer
payments (Social Security and pension benefits, among other sources
of
income) are relatively more important sources of income. For
example,
Florida's total wages and salaries and other labor income in 1990 and
1991 was 54.9% and 54.8%, respectively of total income, while a
similar figure for the nation for 1990 and 1991 was 64.8% and
64.4%,
respectively. Transfer payments are typically less sensitive to the
business cycle than employment income and, therefore, act as
stabilizing
forces in weak economic periods; however, these payments, which
have
increased approximately 8.6% annually from 1985-90, may also be
subject to greater risks from inflation.
<PAGE>
In fiscal year 1990-91, approximately 64% of the State's total
direct revenue to its four operating funds were derived from state
taxes,
with federal grants and other special revenue accounting for the
balance.
State sales and use tax, corporate income tax, and beverage tax
amounted
to 66%, 7%, and 5%, respectively, of total receipts by the General
Revenue Fund during fiscal 1990-91. In that same year,
expenditures for
education, health and welfare, and public safety amounted to 55%,
27%,
and 8%, respectively, of total expenditures from the General
Revenue
Fund. At the end of fiscal year 1991, approximately $4.45 billion
in
principal amount of debt secured by the full faith and credit of the
State
was outstanding. Since July 1, 1991 through August 1992, the State
has
issued $965 million in principal amount of full faith and credit
bonds.
Fiscal year 1991-92 General Revenue plus Working Capital
funds
available total $11,253.1 million. Compared to 1991-92 General
Revenue effective appropriations of $11,066.1 million.
Estimated fiscal year 1992-93 General Revenue plus Working
Capital funds available total $12,255.9 million, a 9.1% increase
over
1991-92. The amount reflects a transfer of $228.8 million, out of an
estimated $233.5 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief trust fund. The $12,004.1 million
Estimated Revenues (excluding the Hurricane Andrew impacts)
represent
an increase of 10.1% over the previous year's Estimated Revenues.
With effective General Revenue plus Working Capital Fund
appropriations at $11,804.5 million, unencumbered reserves at the
end
of the fiscal year are estimated at $441.4 million.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be kept
in
balance from currently available revenues each fiscal year. If the
Governor or Comptroller believes a deficit will occur in any State
fund,
by statute, he must certify his opinion to the Administrative
Commission,
which then is authorized to reduce all State agency budgets and
releases
by a sufficient amount to prevent a deficit in any fund. In response
to
the deficits projected for fiscal 1990-91, the State established
mandatory
budget holdbacks of $479.9 million and $270 million. To effectuate
the
holdbacks, and thus prevent a deficit, the State has undertaken
significant
budget reducing and revenue increasing measures, including, but not
limited to, layoffs of State employees and curtailments of State
services.
While there can be no assurance that such
measures will eliminate the State budget deficit, as of early January
1991, the 1990-91 revenue shortfall was reported to be forecast at
approximately $270 million, and the State has indicated since such
forecast that, based on projected revenues and further budget
reductions,
there will be no shortfall.
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than 10%
of
<PAGE>
the State's sales and use tax is designated for local governments and
is
distributed to the respective counties in which collected for such use
by
such counties and municipalities. In addition to this distribution,
local
governments may (by referendum) assess a 0.5% or a 1.0%
discretionary
sales surtax within their county. Proceeds from this local option
sales
tax are earmarked for funding local infrastructure programs and
acquiring land for public recreation or conservation or protection of
natural resources as provided under Florida law. Certain charter
counties have other taxing powers in addition. For the fiscal year
ended
June 30, 1992, estimated sales and use tax receipts (exclusive of the
tax
on gasoline and special fuels) totalled $8,375.5 million, an increase
of
2.7% over fiscal year 1990-91.
The State imposes an alcoholic beverage wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's major
tax
sources, with revenues totalling $435.2 million in fiscal year ending
June
30, 1992. Alcoholic beverage tax receipts declined over the previous
year. The revenues collected from this tax are deposited into the
State's
General Revenue Fund.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated
trust
funds for specific purposes and are not included in the State's
General
Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For
the
fiscal year ended June 30, 1992, receipts from this source were
$801.3
million, a increase of 14.2% from fiscal year 1990-91.
The State also imposes a stamp tax on deeds and other
documents
relating to realty, corporate shares, bonds, certificates of
indebtedness,
promissory notes, wage assignments, and retail charge accounts.
The
documentary stamp tax collections totaled $472.4 million during
fiscal
year 1991-92, a 0.5% increase from the previous fiscal year. For
the
fiscal year 1991-92, 76.21% of the documentary stamp tax revenues
were deposited to the General Revenue Fund. Beginning in fiscal
year
1992-93, 71.29% of these taxes are to be deposited to the General
Revenue Fund.
On January 12, 1988, the State began its own lottery. State law
requires that lottery revenues be distributed 50% to the public in
prizes,
37.5% for use in enhancing education, and the balance, 12.5%, to
retailers as commissions for their services and for administration of
the
lottery. Additionally, the 1990 State Legislature decreased the
allocation
for administrative costs to 12.0% for fiscal year 1990-91. Lottery
ticket
sales totalled $2.19 billion in fiscal 1991-92, providing education
with
$835.4 million.
<PAGE>
Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any
of
such matters, individually or in the aggregate, will not have a
material
adverse effect on the State's financial position.
In the wake of the U.S. Supreme Court decision holding that a
Hawaii law unfairly discriminated against out-of-state liquor
producers,
suits have been filed in the State's courts contesting a similar State
law
(in effect prior to 1985), that seek $384 million in tax refunds. A
trial
court, in a ruling that was subsequently upheld by the State's
Supreme
Court, found the State law in question to be unconstitutional but
made its
ruling operate prospectively, thereby denying any tax refunds. The
issue
of whether the unconstitutionality of the tax should be applied
retroactively was recently decided by the United States Supreme
Court.
The Supreme Court found in favor of the taxpayers. On remand
from
the U.S. Supreme Court, the Florida Supreme Court, on January 15,
1991, mandated further proceedings to fashion a "clear and certain
remedy" consistent with constitutional restrictions and the opinion of
the
U.S. Supreme Court. The Florida Department of Revenue has
proposed
to the Florida Supreme Court that the Department be allowed to
collect
back tax from those who received a tax preference under the prior
law.
If the Department's proposal is rejected and tax refunds are ordered
to
all potential claimants, a liability of approximately $298 million
could
result. The case is now before the Florida Circuit Court, 2nd
Judicial
District. That court will hear affected parties response to the
Department's proposed collection of the tax at the higher rate
charged to
out-of-staters.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged the
constitutionality of this tax preference and sought a refund of taxes
paid.
Recently, the State Supreme Court ruled in favor of the State.
Similar
issues have been raised in other cases where insurers have challenged
taxes imposed on premiums received for certain motor vehicle
service
agreements. These four cases and pending refund claims total about
$200 million.
On August 24, 1992, the State was hit with a major hurricane,
Hurricane Andrew. Published speculation estimates total damage to
the
southern portion of the State to be $20-30 billion. The actual
economic
impact to the State is unknown at this time, but, in published reports,
the
director of economic and demographic research for the Joint
Legislative
Management Committee of the State's Legislature estimates that the
State's revenues from sales tax collection will exceed the estimates
prior
to Andrew. It is estimated that about $15.0 billion of these losses
are
insured. In addition, a major funding package totalling $10.6 billion
from the federal government will provide additional funding to help
offset these losses. However, the Revenue Estimating Conference has
<PAGE>
estimated additional non-recurring General Revenues totalling $645.8
million during fiscal years 1992-93, 1993-94 and 1994-95 as a result
of
increased economic activity. In a December 1992 special session,
the
Legislature enacted a law that sets aside an estimated $630.4 million
of
the $645.8 million hurricane revenue windfall to be used by State
and
local government agencies to defray a wide array of expenditures
related
to Hurricane Andrew.
Florida maintains a bond rating of Aa and AA from Moody's
Investors Service and Standard & Poor's Corporation, respectively,
on
the majority of its general obligation bonds, although the rating of a
particular series of revenue bonds relates primarily to the project,
facility, or other revenue source from which such series derives
funds for
repayment. While these ratings and some of the information
presented
above may indicate that Florida is in satisfactory economic health,
there
can be no assurance that there will not be a decline in economic
conditions or that particular Bonds in the portfolio of the Florida
Trust
will not be adversely affected by any such changes.
The sources for the information above include official statements and
financial statements of the State of Florida. While the sponsor has
not
independently verified this information, the Sponsor has no reason
to
believe that the information is not correct in all material respects.
Maryland Trust
State Debt. The Public indebtedness of the State of Maryland
and its
instrumentalities is divided into three general types. The State issues
general
obligation bonds for capital improvements and for various State
projects, to the
payment of which the State ad valorem property tax is exclusively
pledged. In
addition, the Maryland Department of Transportation issues for
transportation
purposes its limited, special obligation bonds payable primarily from
specific,
fixed-rate excise taxes and other revenues related mainly to highway
use.
Certain authorities issue obligations payable solely from specific
non-tax,
enterprise fund revenues and for which the State has no liability and
has given
no moral obligation assurance.
General obligation bonds of the State are authorized and issued
primarily to provide funds for State-owned capital improvements,
including
institutions of higher learning, and the construction of locally owned
public
schools. Bonds have also been issued for local government
improvements,
including grants and loans for water quality improvement projects
and
correctional facilities, to provide funds for repayable loans or
outright grants to
private, non-profit cultural or educational institutions, and to fund
certain loan
and grant programs.
The Maryland Constitution prohibits the contracting of State debt
unless
it is authorized by a law levying an annual tax or taxes sufficient to
pay the debt
service within 15 years and prohibiting the repeal of the tax or taxes
or their use
<PAGE>
for another purpose until the debt is paid. As a uniform practice,
each separate
enabling act which authorizes the issuance of general obligation
bonds for a
given object or purpose has specifically levied and directed the
collection of an
ad valorem property tax on all taxable property in the State. The
Board of
Public Works is directed by law to fix by May 1 of each year the
precise rate
of such tax necessary to produce revenue sufficient for debt service
requirements
of the next fiscal year, which begins July 1. However, the taxes
levied need not
be collected if or to the extent that funds sufficient for debt service
requirements
in the next fiscal year have been appropriated in the annual State
budget.
Accordingly, the Board, in annually fixing the rate of property tax
after the end
of the regular legislative session in April, takes account of
appropriations of
general funds for debt service.
In the opinion of counsel, the courts of Maryland have
jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief
to (i)
require the Governor to include in the annual budget a sufficient
appropriation
to pay all general obligation bond debt service for the ensuing fiscal
year; (ii)
prohibit the General Assembly from taking action to reduce any such
appropriation below the level required for that debt service; (iii)
require the
Board of Public Works to fix and collect a tax on all property in the
State
subject to assessment for State tax purposes at a rate and in an
amount sufficient
to make such payments to the extent that adequate funds are not
provided in the
annual budget; and (iv) provide such other relief as might be
necessary to
enforce the collection of such taxes and payment of the proceeds of
the tax
collection to the holders of general obligation bonds, pari passu,
subject to the
inherent constitutional limitations referred to below.
It is also the opinion of counsel that, while the mandatory
injunctive
remedies would be available and while the general obligation bonds
of the State
are entitled to constitutional protection against the impairment of the
obligation
of contracts, such constitutional protection and the enforcement of
such remedies
would not be absolute. Enforcement of a claim for payment of the
principal of
or interest on the bonds could be subject to the provisions of any
statutes that
may be constitutionally enacted by the United States Congress or the
Maryland
General Assembly extending the time for payment or imposing other
constraints
upon enforcement.
There is no general debt limit imposed by the Maryland
Constitution or
public general laws, but a special committee created by statute
annually submits
to the Governor an estimate of the maximum amount of new general
obligation
debt that prudently may be authorized. Although the committee's
responsibilities are advisory only, the Governor is required to give
due
consideration to the committee's findings in preparing a preliminary
allocation
of new general debt authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations issued
by the
Maryland Department of Transportation, the principal of which must
be paid
within 15 years from the date of issue, for highway, port, transit,
rail or
aviation facilities or any combination of such facilities. Debt service
on
Consolidated Transportation Bonds is payable from those portions of
the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling
tax, all
mandatory motor vehicle registration fees, motor carrier fees, and
the corporate
income tax as are credited to the Maryland Department of
Transportation, plus
<PAGE>
all departmental operating revenues and receipts. Holders of such
bonds are not
entitled to look to other sources for payment.
The Maryland Department of Transportation also issues its bonds
to
provide financing of local road construction and various other county
transportation projects and facilities. Debt service on these bonds is
payable
from the subdivisions' share of highway user revenues held to their
credit in a
special State fund.
The Maryland Transportation Authority operates certain
highway,
bridge and tunnel toll facilities in the State. The tolls and other
revenues
received from these facilities are pledged as security for revenue
bonds of the
Authority issued under and secured by a trust agreement between the
Authority
and a corporate trustee.
Certain other instrumentalities of the State government are
authorized
to borrow money under legislation which expressly provides that the
loan
obligations shall not be deemed to constitute a debt or a pledge of the
faith and
credit of the State. The Community Development Administration of
the
Department of Housing and Community Development, the Board of
Trustees of
St. Mary's College of Maryland, the Maryland Environmental
Service, the
Board of Regents of the University of Maryland System, the Board
of Regents
of Morgan State University, and the Maryland Food Center
Authority have
issued and have outstanding bonds of this type. The principal of and
interest on
bonds issued by these bodies are payable solely from various
sources, principally
fees generated from use of the facilities or enterprises financed by
the bonds.
Under a Comprehensive Plan of Financing, as amended, of the
Maryland Stadium Authority, the Authority is authorized to finance
the
acquisition and construction of sports facilities at a site within the
City of
Baltimore. Under the Plan of Financing, the Authority proposes to
engage in
a series of borrowings, together with certain equity contributions, to
finance
acquisitions of the site, construction of a baseball stadium and
ancillary facilities,
and if a lease agreement is executed between the Authority and a
professional
football franchise, a football stadium.
The Authority's financings as well as any future financings for
a
football stadium are leased-backed revenue obligations, payment of
which is
secured by among other things, an assignment of revenues to be
received under
a lease of the sports facilities from the Authority to the State of
Maryland; rental
payments due from the State under that lease will be subject to
annual
appropriation by the Maryland General Assembly. The State
anticipates that
revenues to fund the lease payments will be generated from a variety
of sources,
including in each year sports lottery revenues, the net operating
revenues of the
Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered by the
Water
Quality Financing Administration in the Department of the
Environment. The
Fund may be used to provide loans, subsidies and other forms of
financial
assistance to local government units for wastewater treatment projects
as
contemplated by the 1987 amendments to the Federal Water
Pollution Control
Act. The Administration is authorized to issue bonds secured by
revenues of the
Fund, including loan repayments, federal capitalization grants, and
matching
<PAGE>
State grants.
The University of Maryland System, Morgan State University,
and St.
Mary's College of Maryland are authorized to issue revenue bonds
for the
purpose of financing academic and auxiliary facilities. Auxiliary
facilities are
any facilities that furnish a service to students, faculty, or staff, and
that
generate income. Auxiliary facilities include housing, eating,
recreational,
campus, infirmary, parking, athletic, student union or activity,
research
laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order
assigning
to the Department of Budget and Fiscal Planning responsibility to
review certain
proposed issuances of revenue and enterprise debt other than private
activity
bonds. The Executive Order also provides that the Governor may
establish a
ceiling of such debt to be issued during the fiscal year, which ceiling
may be
amended by the Governor.
Although the State has authority to make short-term borrowings
in
anticipation of taxes and other receipts up to a maximum of $100
million, in the
past it has not issued short-term tax anticipation and bond
anticipation notes or
made any other similar short-term borrowings. However, the State
has recently
issued certain obligations in the nature of bond anticipation notes for
the purpose
of assisting several savings and loan associations in qualifying for
Federal
insurance and in connection with the assumption by a bank of the
deposit
liabilities of an insolvent savings and loan association.
The State has financed the construction and acquisition of various
facilities through unconditional purchase, sale-leaseback, and similar
transactions. By statute, all of the lease payments under these
arrangements are
subject to an annual appropriation by the Maryland General
Assembly. In the
event that appropriations are not made, the State may not be held
contractually
liable for the payments.
Savings and Loan matters. During the first half of calendar year
1985, several State-chartered savings and loans associations, the
savings
accounts of which were privately insured, experienced unusually
heavy
withdrawals of funds by depositors. The resulting decline in the
associations'
liquid assets led to the appointment of receivers for the assets of six
associations
and the creation of an agency of the State to succeed, by statutory
merger, the
private insurer. The savings accounts of all savings and loan
associations op-
erating in the State of Maryland must be insured by either the State
agency or
the Federal Savings and Loan Insurance Corporation. The State
agency assumed
the insurance liabilities of the private insurance agency with respect
to deposits
made prior to May 18, 1985, and insures amounts deposited after
that date up
to the amount insured by the Federal Savings and Loan Insurance
Corporation.
The legislation establishing the insurance agency provides that "It is
the policy
of this State that funds will be appropriated to the (insurance agency)
to the
extent necessary to protect holders of savings accounts in member
associations".
As of December 31, 1989, depositors of all insured accounts at
associations in
receivership have been paid in full. Because the amount of the losses
incurred
by the State Insurance Agency are estimated and because numerous
lawsuits
involving the Agency are pending, the ultimate outcome of the
savings and loan
<PAGE>
situation is uncertain.
Local Subdivision Debt. The counties and incorporated
municipalities
in Maryland issue general obligation debt for general governmental
purposes.
The general obligation debt of the counties and incorporated
municipalities is
generally supported by ad valorem taxes on real estate, tangible
personal
property and intangible personal property subject to taxation. The
issuer
typically pledges its full faith and credit and unlimited taxing power
to the
prompt payment of the maturing principal and interest on the general
obligation
debt and to the levy and collection of the ad valorem taxes as and
when such
taxes become necessary in order to provide sufficient funds to meet
the debt
service requirements. The amount of debt which may be authorized
may in
some cases be limited by the requirement that it not exceed a stated
percentage
of the assessable base upon which such taxes are levied.
In the opinion of counsel, the issuer may be sued in the event
that it
fails to perform its obligations under the general obligation debt to
the holders
of the debt, and any judgments resulting from such suits would be
enforceable
against the issuer. Nevertheless, a holder of the debt who has
obtained any such
judgment may be required to seek additional relief to compel the
issuer to levy
and collect such taxes as may be necessary to provide the funds
from which a
judgment may be paid. Although there is no Maryland law on this
point, it is
the opinion of counsel that the appropriate courts of Maryland have
jurisdiction
to entertain proceedings and power to grant additional relief, such as
mandatory
injunction, if necessary, to enforce the levy and collection of such
taxes and
payment of the proceeds of the collection of the taxes to the holders
of general
obligation debt, pari passu, subject to the same constitutional
limitations on
enforcement, as described above, as apply to the enforcement of
judgments
against the State.
Local subdivisions, including counties and municipal
corporations, are
also authorized by law to issue special and limited obligation debt for
certain
purposes other than general governmental purposes. The source of
payment of
that debt is limited to certain revenues of the issuer derived from
commercial
activities operated by the issuer, payments made with respect to
certain facilities
or loans, and any funds pledged for the benefit of the holders of the
debt. That
special and limited obligation debt does not constitute a debt of the
State, the
issuer or any other political subdivision of either within the meaning
of any
constitutional or statutory limitation. Neither the State nor the issuer
or any
other political subdivision of either is obligated to pay the debt or
interest on the
debt except from the revenues of the issuer specifically pledged to
the payment
of the debt. Neither the faith and credit nor the taxing power of the
State, the
issuer or any other political subdivision of either is pledged to the
payment of
the debt. The issuance of the debt is not directly or indirectly or
contingently
an obligation, moral or other, of the State, the issuer or any other
political
subdivision of either to levy any tax for its payment.
Washington Suburban Sanitary District Debt. The Washington
Suburban Sanitary District operates as a public corporation of the
State to
provide, as authorized, water, sewerage and drainage systems,
including water
supply, sewage disposal, and storm water drainage facilities for
Montgomery
County, Maryland and Prince George's County, Maryland. For the
purpose of
<PAGE>
paying the principal of and interest on bonds of the District,
Maryland law
provides for the levy, annually, against all the assessable property
within the
District by the County Council of Montgomery County and the
County Council
of Prince Georges County of ad valorem taxes sufficient to pay such
principal
and interest when due and payable.
Storm water drainage bonds for specific projects are payable
from ad
valorem tax upon all of the property assessed for county tax purposes
within the
portion of the District situated in the county in which the storm water
project
was, or is to be, constructed. Storm water drainage bonds of the
District are
also guaranteed by such county, which guaranty operates as a pledge
of the full
faith and credit of the county to the payment of the bonds and
obligates the
county council to the extent that the tax revenues referred to above
and any
other money available or to become available are inadequate to
provide the
funds necessary to pay the principal of and the interest on the bonds,
to levy
upon all property subject to taxation within the county ad valorem
taxes in rate
and in amount sufficient to make up any such deficiency.
Substantially all of the debt service on the bonds, except storm
water
drainage bonds, is being paid from revenues derived by the District
from water
consumption charges, from foot benefit charges, and sewage usage
charges.
Notwithstanding the payment of principal of and interest on those
bonds from
those charges, the underlying security of all bonds of the District is
the levy of
ad valorem taxes on the assessable property as stated above.
Special Authority Debt. The State and local governments have
created
several special authorities with the power to issue debt on behalf or
the State of
local government for specific purposes, such as providing facilities
for non-profit
health care and higher educational institutions, facilities for the
disposal of solid
waste, funds to finance single family and low-to-moderate income
housing, and
similar purposes. The Maryland Health and Higher Educational
Facilities
Authority, the Northeast Maryland Waste Disposal Authority, the
Housing
Opportunities Commission of Montgomery County, and the Housing
Authority
of Prince Georges County are some of the special authorities which
have issued
and have outstanding debt of this type.
The debts of the authorities issuing debt on behalf of the State
and the
local governments are limited obligations of the authorities payable
solely from
and secured by a pledge of the revenues derived from the facilities
or loans
financed with the proceeds of the debt and from any other funds and
receipts
pledged under an indenture with a corporate trustee. The debt does
not
constitute a debt, liability or pledge of the faith and credit of the
State or of any
political subdivision or of the authorities. Neither the State nor any
political
subdivision thereof nor the authorities shall be obligated to pay the
debt or the
interest on the debt except from such revenues, funds and receipts.
Neither the
faith and credit nor the taxing power of the State or of any political
subdivision
of the State or the authorities is pledged to the payment of the
principal of or the
interest on such debt. The issuance of the debt is not directly or
indirectly an
obligation, moral or other, of the State or of any political subdivision
of the
State or of the authority to levy or to pledge any form of taxation
whatsoever,
or to make any appropriation, for their payment. The authorities
have no taxing
power.
<PAGE>
Hospital Bonds. The rates charged by non-governmental
Maryland
hospitals are subject to review and approval by the Maryland Health
Services
Cost Review Commission. Maryland hospitals subject to regulation
by the
Commission are not permitted to charge for services at rates other
than those
established by the Commission. In addition, the Commission is
required to
permit any nonprofit institution subject to its jurisdiction to charge
reasonable
rates which will permit the institution to provide, on a solvent basis,
effective
and efficient service in the public interest.
Under an agreement between Medicare and the Commission,
Medicare
agrees to pay Maryland hospitals on the basis of
Commission-approved rates,
less a 6% differential. Under this so-called "Medicare Waiver",
Maryland
hospitals are exempt from the Medicare Prospective Payment System
which pays
hospitals fixed amounts for specific services based upon patient
diagnosis. No
assurance can be given that Maryland will continue to meet any
current or future
tests for the continuation of the Medicare Waiver.
In setting hospital rates, the Commission takes into account each
hospital's budgeted volume of services and cash financial
requirements for the
succeeding year. It then establishes the rates of the hospital for the
succeeding
year based upon the projected volume and those financial
requirements of the
institution which the Commission has deemed to be reasonable.
Financial
requirements allowable for inclusion in rates generally include
budgeted
operating costs, a "capital facilities allowance", other financial
considerations
(such as charity care and bad debts) and discounts allowed certain
payers for
prompt payment. Variations from projected volumes of services are
reflected
in the rates for the succeeding year. The Commission, on a selective
basis by
the application of established review criteria, grants Maryland
hospitals increases
in rates to compensate for inflation experienced by hospitals and for
other
factors beyond the hospitals' control.
Regulations of the Commission provide that overcharges will in
certain
circumstances be deducted from prospective rates. Similarly,
undercharges will
in certain circumstances not be recoverable through prospective
rates.
The Commission has entered into agreements with certain
hospitals to
adjust rates in accordance with a prospectively approved, guaranteed
inpatient
revenue per admission program. Those agreements are in addition
to the rate
adjustment methodology discussed above. Under the program, a
hospital's
revenue per admission is compared to the revenue per admission, as
adjusted,
for a base year. Variations from the adjusted base year revenues per
admission
are added or deducted, as the case may be, from the hospital's gross
revenue
and rates for the following year.
There can be no assurance that the Commission will continue to
utilize
its present rate-setting methodology or approve rates which will be
sufficient to
ensure payment on an individual hospital's obligations. Future
actions by the
Commissions or the loss of the Medicare Waiver may adversely
affect the
operations of individual hospitals.
Changes in economic conditions in or governmental policies of
the state
of Maryland could have a significant impact on the performance of
the Maryland
<PAGE>
Trust. For example, services (including mining), wholesale and
retail trade,
government, and manufacturing (primarily printing and publishing,
food and
kindred products, instruments and related products, electronic
equipment,
industrial machinery and transportation equipment), are the leading
areas of
employment in the State of Maryland. In contrast to the nation as a
whole,
more people in Maryland are employed in government than in
manufacturing.
The relatively high concentration of governmental employment in
Maryland
makes the state potentially vulnerable spending. Recent Maryland
executive
branch projections show a budgetary deficit for the fiscal year ending
June 30,
1991. The Governor of Maryland has recently acted to curtail
spending in
response to the projected deficit for that fiscal year.
In recent years, finance, insurance, and real estate were large
contributors to the gross state product. The continued strength in
those sectors
is subject to question given recent disclosures indicating financial
weakness in
major banking and insurance companies having their corporate
headquarters in
Maryland and the general regional decline in real estate activity and
values.
The State is the subject of numerous legal proceedings relating
to
normally recurring governmental operations in which the State is a
defendant
and where monetary damages sought are substantial. These
proceedings could
adversely affect the financial condition of the State for the present or
any future
fiscal year.
Massachusetts Trust
Risk Factors, The Commonwealth of Massachusetts and certain
of its
cities and towns have at certain times in the recent past undergone
serious
financial difficulties which have adversely affected and, to some
degree,
continue to adversely affect their credit standing. These financial
difficulties
could adversely affect the market values and marketability of, or
result in default
in payment on, outstanding bonds issued by the Commonwealth or
its public
authorities or municipalities, including the Bonds deposited in the
Trust. The
following description highlights some of the more significant
financial problems
of the Commonwealth and the steps taken to strengthen its financial
condition.
The effect of the factors discussed below upon the ability of
Massachusetts issuers to pay interest and principal on their
obligations remains
unclear and in any event may depend on whether the obligation is a
general or
revenue obligation bond (revenue obligation bonds being payable
from specific
sources and therefore generally less affected by such factors) and on
what type
of security is provided for the bond. In order to constrain future
debt service
costs, the Executive Office for Administration and Finance
established in
November, 1988 an annual fiscal year limit on capital spending of
$925 million,
effective fiscal 1990. In January, 1990, legislation was enacted to
impose a
limit on debt service in Commonwealth budgets beginning in fiscal
1991. The
law provides that no more than 10% of the total appropriations in
any fiscal year
may be expended for payment of interest and principal on general
obligation
debt of the Commonwealth (excluding the Fiscal Recovery Bonds
discussed
below). It should also be noted that Chapter 62F of the
Massachusetts General
<PAGE>
Laws establishes a state tax revenue growth limit and does not
exclude principal
and interest due on Massachusetts debt obligations from the scope of
the limit.
It is possible that other measures affecting the taxing or spending
authority of
Massachusetts or its political subdivisions may be approved or
enacted in the
future.
The Commonwealth has waived its sovereign immunity and
consented
to be sued under contractual obligations including bonds and notes
issued by it.
However, the property of the Commonwealth is not subject to
attachment or
levy to pay a judgment, and the satisfaction of any judgment
generally requires
legislative appropriation. Enforcement of a claim for payment of
principal of
or interest on bonds and notes of the Commonwealth may also be
subject to
provisions of federal or Commonwealth statutes, if any, hereafter
enacted
extending the time for payment or imposing other constraints upon
enforcement,
insofar as the same may be constitutionally applied. The United
States
Bankruptcy Code is not applicable to states.
Cities and Towns. During recent years limitations were placed
on the
taxing authority of certain Massachusetts governmental entities that
may impair
the ability of the issuers of some of the Bonds in the Massachusetts
Trust to
maintain debt service on their obligations. Proposition 2.5, passed
by the voters
in 1980, led to large reductions in property taxes, the major source
of income
for cities and towns. As a result, between fiscal 1981 and fiscal
1989, the
aggregate property tax levy declined in real terms by 15.6%.
Since Proposition 2.5 did not provide for any new state or local
taxes
to replace the lost revenues, in lieu of substantial cuts in local
services, the
Commonwealth began to increase local aid expenditures. In 1981
constant
dollars, total direct local aid expenditures increased by 58.5%
between fiscal
years 1981 and 1989, or 5.9% per year. During the same period,
the total of
all other local revenue sources declined by 5.87% or 0.75% per
year. Despite
the substantial increases in local aid from fiscal 1981 to fiscal 1989,
local
spending increased at an average rate of 1% per year in real terms.
Direct local
aid for fiscal 1987, 1988, and 1989 was $2.601 billion, $2.769
billion, and
$2.961 billion, respectively. Direct local aid declined in the three
subsequent
years to $2.937 billion in fiscal 1990, $2.608 billion in 1991 and
$2.328 billion
in 1992 and increased to $2.547 billion in 1993. It is estimated that
fiscal 1994
expenditures for direct local aid will be $2.737 billion, which is an
increase of
approximately 7.5% above the fiscal 1993 level. The additional
amount of
indirect local aid provided over and above the direct local aid is
estimated to
have been $1.313 billion in fiscal 1991, $1.265 billion in fiscal 1992
and $1.717
billion in fiscal 1993 and is estimated to be approximately $1.717
billion in
fiscal 1994.
Many communities have responded to the limitations imposed by
Proposition 2.5 through statutorily permitted overrides and
exclusions. Override
activity peaked in fiscal 1991, when 182 communities attempted
votes on one
of the three types of referenda questions (override of levy limit,
exclusion of
debt service, or exclusion of capital expenditures) and 100 passed at
least one
question, adding $58.5 million of their levy limits. In fiscal 1992,
67 of 143
communities had successful votes totalling $31.0 million. In fiscal
1993, 83
communities attempted a vote; two-thirds of them (56) passed
questions
<PAGE>
aggregating $16.4 million.
A statewide voter initiative petition which would effectively
mandate
that, commencing with fiscal 1992, no less than 40% of receipts
from personal
income taxes, sales and use taxes, corporate excise taxes and lottery
fund
proceeds be distributed to certain cities and towns in local aid was
approved in
the general election held November 6, 1990. Pursuant to this
petition, the local
aid distribution to each city or town was to equal no less than 100%
of the total
local aid received for fiscal 1989. Distributions in excess of fiscal
1989 levels
were to be based on new formulas that would replace the current
local aide
distribution formulas. If implemented in accordance with its terms
(including
appropriation of the necessary funds), the petition as approved would
shift
several hundred million dollars to direct local aid. However, local
aid payments
explicitly remain subject to annual appropriation, and fiscal 1992 and
fiscal 1993
appropriations for local aid did not meet, and fiscal 1994
appropriations for local
aid do not meet, the levels set forth in the initiative law.
Pension Liabilities. The Commonwealth had funded its two
pension
systems on essentially a pay-as-you-go basis. The funding schedule
is based on
actuarial valuations of the two pension systems as of January 1.
1990, at which
time the unfunded accrued liability for such systems operated by the
Commonwealth (and including provision for Boston teachers) totalled
$8.865
billion. The unfunded liability for the Commonwealth related to cost
of living
increases for local retirement systems was estimated to be an
additional $2.004
billion as of January 1, 1990. An actuarial valuation as of January
1, 1992
shows that, as of such date, the total unfunded actuarial liability for
such
systems, including cost-of-living allowances, was approximately
$8.485 billion
representing a reduction of approximately $2.383 billion from
January 1, 1990.
The amount in the Commonwealth's pension reserve, established
to
address the unfunded liabilities of the two state systems, has
increased
significantly in recent years due to substantial appropriations and
changes in law
relating to investment of retirement system assets. Total
appropriations and
transfers to the reserve in fiscal years 1985, 1986, 1987 and 1988
amounted to
approximately $680 million. Comprehensive pension legislation
approved in
January 1988 committed the Commonwealth, beginning in fiscal
1989, to normal
cost funding of its pension obligations and to a 40-year amortization
schedule for
its unfunded pension liabilities. Total pension costs increased from
$659.7
million in fiscal 1989 to $868.2 million in fiscal 1993. Pension
funding is
estimated to be $951.0 million in fiscal year 1994. As of June 30,
1993, the
Commonwealth's pension reserves had grown to approximately
$3.877 billion.
State Budget and Revenues. The Commonwealth's Constitution
requires, in effect, that its budget be balanced each year. The
Commonwealth's
fiscal year ends June 30. The General Fund is the Commonwealth's
primary
operating fund; it also functions as a residuary fund to receive
otherwise
unallocated revenues and to provide monies for transfers to other
funds as
required. The condition of the General Fund is generally regarded
as the
principal indication of whether the Commonwealth's operating
revenues and
expenses are in balance; the other principal operating funds (the
Local Aid Fund
and the Highway Fund) are customarily funded to at least a zero
balance.
<PAGE>
Limitations on Commonwealth tax revenues have been
established by
enacted legislation and by public approval of an initiative petition
which has
become law. The two measures are inconsistent in several respects,
including
the methods of calculating the limits and the exclusions from the
limits. The
initiative petition does not exclude debt service on the
Commonwealth's notes
and bonds from the limits. State tax revenues in fiscal 1988 through
fiscal 1993
were lower than the limits. The Executive Office for Administration
and
Finance currently estimates that state tax revenues will not reach the
limit
imposed by either the initiative petition or the legislative enactment
in fiscal
1994.
Budgeted expenditures for fiscal 1989 totalled approximately
$12.643
billion. Budgeted revenues totalled approximately $11.970 billion,
approximately $672.5 million less than total expenditures. Under the
budgetary
basis of accounting, after taking account of certain fund balances,
fiscal 1989
ended with a deficit of $319.3 million. Under the GAAP basis of
accounting,
excluding fiduciary accounts and enterprise funds, the
Commonwealth ended
fiscal 1989 with a deficit of $946.2 million. This deficit reflected an
operating
gain in the capital projects funds due to the additional borrowings to
reduce
prior year deficits. If the capital project funds are excluded, the
Comptroller
calculated a GAAP deficit of $1.002 billion in fiscal 1989.
Fiscal 1989 tax revenues were adversely affected by the
economic
slowdown that began in mid-1988. In June, 1988, the fiscal 1989
tax revenue
estimate was for 10.9% growth over fiscal 1988. Fiscal 1989 ended
with actual
tax revenue growth of 6.5%.
The fiscal 1989 budgetary deficit caused a cash deficit in the
Commonwealth operating accounts on June 30, 1989 in the amount
of
approximately $450 million. The State Treasurer was forced to defer
until early
July certain fiscal 1989 expenditures including the payment of
approximately
$305 million in local aid due June 30, and with legislative
authorization, issued
temporary notes in July in the amount of $1.1 billion to pay fiscal
1989 and
fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of approximately
$13.260
billion. Budgeted revenues and other services for fiscal 1990 were
approximately $12.008 billion. Tax revenues for fiscal 1990 were
approximately $8.517 billion, a decrease of approximately $314
million or 3.6%
from fiscal 1989. The Commonwealth suffered an operating loss of
approximately $1.25 billion and ended fiscal 1990 with a budgetary
deficit of
$1.104 billion. The Commonwealth had a cash surplus of $99.2
million on June
30, 1990 as a result of deferring until fiscal 1991 the payment of
approximately
$1.26 billion of local aid due June 30, 1990.
On July 28, 1990, the legislature enacted Chapter 151 which
provides,
among other matters, for the Commonwealth Fiscal Recovery Loan
Act of 1990
and grants authorization for the Commonwealth to issue bonds in an
aggregate
amount up to $1.42 billion for purposes of funding the
Commonwealth's fiscal
1990 deficit and certain prior year Medicaid reimbursement
payments. Chapter
151 also provides for the establishment of the Commonwealth Fiscal
Recovery
Fund, deposits for which are derived from a portion of the
Commonwealth's
personal income tax receipts, are dedicated for this purpose and are
to be
<PAGE>
deposited in trust and pledged to pay the debt service on these bonds.
Under
Chapter 151, the Commonwealth issued $1.363 billion of Dedicated
Income Tax
Bonds to cover the anticipated fiscal 1990 deficit.
Total expenditures for fiscal 1991 are estimated to have been
$13.659
billion. Total revenues for fiscal 1991 are estimated to have been
$13.634
billion, resulting in an estimated $21.2 million operating loss.
Application of
the adjusted fiscal 1990 fund balances of $258.3 million resulted in
a final fiscal
1991 budgetary surplus of $237.1 million. State finance law
required that
approximately $59.2 million of the fiscal year surplus be placed in
the
Stabilization Fund described above. Amounts credited to the
Stabilization Fund
are not generally available to defray current year expenses without
subsequent
specific legislative authorization.
After payment in full of the local aid distribution of $1.018
billion due
on June 28, 1991, retirement of all of the Commonwealth's
outstanding
commercial paper and repayment of certain other short-term
borrowings, as of
the period of fiscal 1991, the Commonwealth had a cash balance of
$182.3
million. The fiscal 1991 year-end cash position compared favorably
to the
Commonwealth's cash position at the end of the prior fiscal year,
June 30,
1990, when the Commonwealth's cash shortfall would have exceeded
$1.1
billion had payment of local aid not been postponed.
Upon taking office in January 1991, the new Governor undertook
a
comprehensive review of the Commonwealth's budget. Based on
projected
spending of $14.105 billion, it was then estimated that $850 million
in budget
balancing measures would be needed prior to the close of fiscal
1991. At that
time, estimated tax revenues were revised to $8.845 billion, $903
million less
than was estimated at the time the fiscal 1991 budget was adopted.
The
Governor proposed a series of legislative and administrative actions,
designed
to eliminate the projected deficit. The legislature adopted a number
of the
Governor's recommendations and the Governor took certain other
administrative
actions, not requiring legislative approval, including $65 million in
savings from
the adoption of a state employee furlough program. It is estimated
that spending
reductions achieved through savings incentives and withholding of
allotments
totalled $484.3 million in the aggregate for fiscal 1991.
In addition to recommending spending reductions to close the
projected
budget deficit, the administration, in May 1991, filed an amendment
to its
Medicaid state plan that enabled it to claim 50% Federal
reimbursement on
uncompensated care payments provided to certain hospitals in the
Commonwealth.
In fiscal 1992, Medicaid accounted for more than half of the
Commonwealth's appropriations for health care. It is the largest
item in the
Commonwealth's budget. It has also been one of the fastest growing
budget
items. During fiscal years 1989, 1990 and 1991, Medicaid
expenditures were
$1.83 billion, $2.12 billion and $2.77 billion, respectively. A
substantial
amount of expenditures in recent years was provided through
supplemental
appropriations, repeating the experience that Medicaid expenditures
have
exceeded initial appropriation amounts. These annual amounts,
however, do not
take account of the practice of retroactive settlement of many
provider payments
after audit review and certification by the Rate Setting Commission.
In fiscal
<PAGE>
1990, payments of approximately $488 million were made to
hospitals and
nursing homes for rate settlements dating back as far as 1980,
through the
Medical Assistance Liability Fund established to fund certain
Medicaid liabilities
incurred, but not certified for payment, in prior years. This amount
is not
factored into the annual totals for Medicaid expenditures listed
above. Including
retroactive provider settlements, Medicaid expenditures for fiscal
1992 were
$2.818 billion and for fiscal 1993 were $3.151 billion. The
Executive Office
for Administration and Finance estimates that fiscal 1994 Medicaid
expenditures
will be approximately $3.252 billion, an increase of 3.9% over fiscal
1993
expenditures. For fiscal 1994, no supplemental Medicaid
appropriations are
currently expected to be necessary. The Governor had proposed a
managed care
program to be implemented commencing in January, 1992 in order
to address
the considerable annual cost increases in the Medicaid program.
Medicaid is
presently 50% funded by federal reimbursements.
In fiscal 1992, total revenues and other sources of the budgeted
operating funds totalled $13.728 billion, an increase over fiscal 1991
revenues
of .7%. (Actual fiscal 1992 tax revenues exceeded original estimates
and
totalled $9.484 billion, an increase over fiscal 1991 collections of
5.4%). Fiscal
1992 expenditures and other uses of budgeted operating funds
totalled
approximately $13.420 billion, a decrease from fiscal 1991
expenditures by
1.7%. Fiscal year 1992 revenues and expenditures resulted in an
operating gain
of $312.3 million. Through the use of the prior year ending fund
balances of
$312.3 million, fiscal 1992 budgetary fund balances totalled $549.4
million.
Total fiscal 1992 spending authority continued into fiscal 1993 is
$231.0 million.
After payment in full of the quarterly local aid distribution of
$514
million due on June 30, 1992, retirement of the Commonwealth's
outstanding
commercial paper (except for approximately $50 million of bond
anticipation
notes) and certain other short-term borrowings, as of June 30, 1992,
the
Commonwealth showed a year-end cash position of approximately
$731 million
for fiscal year 1992. The ending balance compares favorably with
the cash
balance of $182.3 million at the end of fiscal 1991. As of June
1993, the
Commonwealth showed a year-end cash position of $622.2 million
for fiscal
year 1993. As of January 19, 1994, the Commonwealth estimates
a 1994 year-
end cash position of approximately $725.4 million.
The budgeted operating funds of the Commonwealth ended fiscal
1993
with a surplus of revenues and other sources over expenditures and
other uses
of $13.1 million and aggregate ending fund balances in the budgeted
operating
funds of the Commonwealth of approximately $562.5 million.
Budgeted
revenues and other sources for fiscal 1993 totalled approximately
$14.710
billion, including tax revenues of $9.930 billion. Total revenues and
other
sources increased by approximately 6.9% from fiscal 1992 to fiscal
1993, while
tax revenues increased by 4.7% for the same period. In July 1992,
tax revenues
had been estimated to be approximately $9.685 billion for fiscal
1993. This
amount was subsequently revised during fiscal 1993 to $9.940
billion.
Commonwealth budgeted expenditures and other used in fiscal
1993
totalled approximately $14.696 billion, which is $1.280 billion or
approximately
9.6% higher than fiscal 1992 expenditures and other uses. Fiscal
1993 budgeted
expenditures were $23 million lower than the initial July 1992
estimates of fiscal
1993 budget expenditures.
<PAGE>
On July 19, 1993, the Governor signed into law the budget for
fiscal
1994, totalling $15.463 billion. This represented a $694 million
increase over
the then estimated budgeted expenditures of $14.976 billion for fiscal
1993. On
January 14, 1994, the Governor signed into law supplemental
appropriations
totalling approximately $157.9 million. Including an additional $8.1
million in
fiscal 1994 supplemental appropriation recommendations that the
Governor plans
to file, and an approximate $100 million contingency reserve in fiscal
1994 for
possible additional spending, fiscal 1994 budgeted expenditures are
currently
estimated to be approximately $15.716 billion. Budgeted revenues
and other
sources to be collected in fiscal 1994 are estimated to be
approximately $15.535
billion, which includes tax revenues of approximately $10.694 billion
(as
compared to $9.930 billion in fiscal 1993). This budget includes
$175 million
as part of an education reform bill passed by the legislature. The
fiscal 1994
budget is based on numerous spending and revenue estimates, the
achievement
of which cannot be assured. As of January 10, 1994, the Legislature
had
overridden $21.0 million of the Governor's vetoes relating to the
fiscal 1994
budget. Commonwealth expenditures and other uses in fiscal 1994
are currently
estimated to be approximately $15.500 billion, which is $788 million
or
approximately 5.36% higher than those of fiscal 1993. Based on
currently
estimated revenues and expenditures, the Executive Office for
Administration
and Finance projects a fiscal 1994 ending balance of approximately
$382.0
million, of which approximately $315.5 million will be in the
Stabilization Fund.
On July 19, 1993, a 60-day hiring freeze on all executive branch
agencies was instituted to help ensure that agency expenditures
remain within
their fiscal 1994 budget authorizations. On August 16, 1993, the
Commonwealth announced that approximately 1,280 state employees
would be
laid off in the near future, in addition to approximately 350
employees already
laid off in fiscal 1994.
On January 21, 1994, the Governor presented his Budget
Submission
for fiscal year 1995 providing for expenditures of $16.14 billion, a
$424 million,
or 2.7%, increase over current fiscal year 1994 projections. These
proposed
expenditures for fiscal year 1995 include direct local aid of $2.997
billion. This
budget is based on total anticipated revenues of $16.144 billion,
which
represents a $609 million, or 3.9%, increase over fiscal year 1994
estimates.
The Governor's budget recommendation is based on a tax revenue
estimate of
$11.226 billion, an increase of approximately 5.0%, as compared to
currently
estimated fiscal 1994 tax revenues of $10.694 billion.
The liabilities of the Commonwealth with respect to outstanding
bonds
and notes payable as of January 1, 1994 totalled $12.555 billion.
These
liabilities consisted of $8.430 billion of general obligation debt,
$1.036 billion
of dedicated income tax debt (the Fiscal Recovery Bonds), $104
million of
special obligation debt, $2.742 billion of supported debt, and $243
million of
guaranteed debt.
Capital spending by the Commonwealth was approximately $595
million
in fiscal 1987, $632 million in fiscal 1988 and $971 million in fiscal
1989. In
November 1988, the Executive Office for Administration and
Finance
established an administrative limit on state financed capital spending
in the
Capital Projects Funds of $925.0 million per fiscal year. Capital
expenditures
decreased to $936 million, $847 million, $694.1 million and $575.9
million in
<PAGE>
fiscal 1990, 1991, 1992 and 1993, respectively. Capital expenditures
are
projected to increase to $886.0 million in fiscal 1994. The growth
in capital
spending accounts for a significant rise in debt service during the
period.
Payments for the debt service on Commonwealth general obligation
bonds and
notes have risen at an average annual rate of 20.4% from $649.8
million in
fiscal 1989 to $942.3 million in fiscal 1991. Debt Service payments
in fiscal
1992 were $898.3 million, representing a 4.7% decrease from fiscal
1991. This
decrease resulted from a $261 million one-time reduction achieved
through the
issuance of refunding bonds in September and October of 1991.
Debt service
expenditures were $1.139 billion for fiscal 1993 and are projected to
be $1.220
billion for fiscal 1994. These amounts represent debt service
payments on direct
Commonwealth debt and do not include debt service on notes issued
to finance
the fiscal 1989 deficit and certain Medicaid-related liabilities, which
were paid
in full from non-budgeted funds. Also excluded are debt service
contract
assistance to certain state agencies and the municipal school building
assistance
program projected to total of $359.7 million in the aggregate in
fiscal 1994.
In addition to debt service on bonds issued for capital purposes, the
Commonwealth is obligated to pay the principal of and interest on
the Fiscal
Recovery Bonds described above. The estimated debt service on
such bonds
currently outstanding (a portion of which were issued as variable rate
bonds)
ranges from approximately $279 million (interest only) in fiscal 1994
through
fiscal 1997 and approximately $130 million in fiscal 1998, at which
time the
entire amount of the Fiscal Recovery Bonds will be retired.
In January 1990 legislation was enacted to impose a limit on debt
service in Commonwealth budgets beginning in fiscal 1991. The law
provides
that no more than 10% of the total appropriations in any fiscal year
may be
expended for payment of interest and principal on general obligation
debt
(excluding the Fiscal Recovery Bonds) of the Commonwealth. This
law may be
amended or appealed by the legislature or may be superseded in the
General
Appropriation Act for any year. From fiscal year 1987 through
fiscal year 1994
estimated this percentage has been substantially below the limited
established by
this law.
Legislation enacted in December 1989 imposes a limit on the
amount
of outstanding direct bonds of the Commonwealth. The limit for
fiscal 1994 is
$7.872 billion. The law provides that the limit for each subsequent
fiscal year
shall be 105% of the previous fiscal year's limit. The Fiscal
Recovery Bonds
will not be included in computing the amount of bonds subject to this
limit.
In August 1991, the Governor announced a five-year capital
spending
plan. The plan, which represents the Commonwealth's first
centralized multi-
year capital plan, sets forth, by agency, specific projects to receive
capital
spending allocations over the next five fiscal years and annual
capital spending
limits. Capital spending by the Commonwealth, which exceeded
$900 million
annually in fiscal 1989, 1990 and 1991, declined to $694.1 million
in fiscal 1992
and $575.9 in fiscal 1993. For fiscal 1994 through 1998, the plan
forecasts
annual capital spending for the Commonwealth of between $813
million and
$886 million per year, exclusive of spending by the Massachusetts
Bay Transit
Authority. Total expenditures are forecast at $4.25 billion, an
amount less than
the total amount of agency capital spending requests for the same
period.
Planned spending is also significantly below legislatively authorized
spending
levels.
<PAGE>
Unemployment. From 1980 to 1989, the Massachusetts
unemployment
rate was significantly lower than the national average. The
Massachusetts
unemployment rate averaged 9.0%, 8.5% and 6.9% in calendar
1991, 1992 and
1993, respectively. The Massachusetts unemployment rate in
December, 1993
was 6.3% as compared to 6.6% for November, 1993 and 8.6% for
December
of 1992, although the rate has been volatile throughout this period.
The
Massachusetts unemployment rate in January and February, 1994
was 7.2% and
6.4%, respectively; these rates are not comparable to prior rates due
to a new
rate computation which became effective in 1994.
The balance in the Massachusetts Unemployment Compensation
Trust
Fund had been exhausted as of September 1991 due to the continued
high levels
of unemployment. As of December 31, 1992, the Massachusetts
Unemployment
Compensation Trust Fund balance was in deficit by $377 million.
As of
November 30, 1993, the Fund was in deficit by $163 million. The
deficit is
now expected to be approximately $120 million by the end of
calendar 1993.
Benefit payments in excess of contributions are being financed by use
of
repayable advances from the federal unemployment loan account.
Legislation
enacted in May 1992 increased employer contributions in order to
reduce
advances from the federal loan account. The additional increases in
contributions provided by the new legislation should result in a
positive balance
in the Unemployment Compensation Trust Fund by the end of
December 1994
and rebuild reserves in the system to over $1 billion by the end of
1996.
Litigation. The Attorney General of the Commonwealth is not
aware
of any cases involving the Commonwealth which in his opinion
would affect
materially its financial condition. However, certain cases exist
containing
substantial claims, among which are the following:
The United States has brought an action on behalf of the U.S.
Environmental Protection Agency alleging violations of the Clean
Water Act and
seeking to enforce the clean-up of Boston Harbor. The
Massachusetts Water
Resources Authority (the "MWRA") has assumed primary
responsibility for
developing and implementing a court approved plan and time table
for the
construction of the treatment facilities necessary to achieve
compliance with the
federal requirements. The MWRA currently projects that total cost
of
construction of the waste water facilities required under the court's
order as
approximately $3.5 billion in current dollars. Under the Clean
Water Act, the
Commonwealth may be liable for any costs of complying with any
judgment in
this case to the extent that the MWRA or a municipality is prevented
by state
law from raising revenues necessary to comply with such a
judgment.
In a recent suit filed against the Department of Public Welfare,
plaintiffs allege that the Department has unlawfully denied personal
care
attendant services to severely disabled Medicaid recipients. The
Court has
denied plaintiffs' motion for a preliminary injunction and has not yet
acted on
plaintiffs' motion for reconsideration of that decision. If plaintiffs
prevail on
their claims, the suit could cost the Commonwealth as much as $200
million.
In a suit filed against the Commissioner of Revenue, plaintiffs
challenge
the inclusion of income from tax exempt obligations in the measure
of the bank
excise tax. The Appellate Tax Board issued a finding of fact and
report in favor
<PAGE>
of the Commissioner of Revenue on September 30, 1993. An appeal
has been
filed. Approximately $400 million is at issue.
There are also several tax matters in litigation which may result
in an
aggregate liability in excess of $195 million.
Ratings. Beginning on May 17, 1989, Standard & Poor's
downgraded
its ratings on Massachusetts general obligation bonds and certain
agency issues
from AA+ to AA. The ratings were downgraded three additional
times to a
low of BBB on December 31, 1989. On July 14, 1989, Standard &
Poor's also
downgraded its rating on temporary general obligation notes and
various agency
notes from SP-1 + to SP-1 and on general obligation short-term
notes and on
short-term agency debt from SP-1 to SP-2. Bonds rated BBB may
have
speculative characteristics. The rating remained at BBB until
September 9, 1992
when Standard & Poor's raised its rating to A. At this same time,
such bonds
were removed from CreditWatch. On October 14, 1993, Standard
& Poor's
raised its rating from A to A+.
On June 21, 1989, Moody's Investors Service downgraded its
rating on
Massachusetts general obligation bonds Aa to A. The ratings were
further
reduced on two occasions to a low on March 19, 1990 of Baa where
it
remained until September 10, 1992 when Moody's increased its
rating to A.
Fitch Investors Service, Inc. lowered its rating on the
Commonwealth's
bonds from AA to A on September 29, 1989. As of December 5,
1991, its
qualification of the bonds changed from Uncertain Trends to
Stabilizing Credit
Trend. On October 13, 1993, Fitch Investors raised its rating from
A to A+.
Ratings may be changed at any time and no assurance can be
given that
they will be not be revised or withdrawn by the rating agencies, if
in their
respective judgments, circumstances should warrant such action.
Any downward
revision or withdrawal of a rating could have an adverse effect on
market prices
of the bonds.
The Sponsors are unable to predict what effect, if any, such
factors
may have on the Bonds in the Massachusetts Trust. Nevertheless,
investors
should be aware that if there should be a financial crisis relating to
Massachusetts, its public bodies or municipalities (including the city
of
Boston), the market value and marketability of all outstanding bonds
issued
by the Commonwealth and its public authorities or municipalities,
including
the Bonds in the Massachusetts Trust, could be adversely affected.
Minnesota Trust
The State of Minnesota (the "State") relies heavily on a
progressive
individual income tax and a retail sales tax for revenue, which results
in a
fiscal system that is sensitive to economic conditions. In the early
1980s, the
State of Minnesota experienced financial difficulties due to a
downturn in the
State's economy resulting from the national recession. As a
consequence, the
State's revenues were significantly lower than anticipated in the July
1, 1979
<PAGE>
to June 30, 1981 biennium and the July 1, 1981 to June 30, 1983
biennium.
In response to revenue shortfalls, the legislature broadened and
increased the
State sales tax, increased income taxes (by increasing rates and
eliminating
deductions) and reduced appropriations and deferred payments of
State aid,
including appropriations for and aids to local governmental units.
The State's
fiscal problems affected other governmental units within the State,
such as
local government, school districts and state agencies, which, in
varying
degrees, also faced cash flow difficulties. In certain cases, revenues
of local
governmental units and agencies were reduced by the recession.
Because of
the State's fiscal problems, Standard & Poor's Corporation reduced
its rating
of the State's outstanding general obligation bonds from AAA to
AA+ in
August 1981 and to AA in March 1982. Moody's Investors Service,
Inc.
lowered its rating on the State's outstanding general obligation bonds
from
Aaa to Aa in April 1982.
The State's economy recovered in the July 1, 1983 to June 30,
1985
biennium, and substantial reductions in the individual income tax
were
enacted in 1984 and 1985. Standard & Poor's raised its rating on
the State's
outstanding general obligation bonds to AA+ in January 1985. In
1986,
1987, 1991, 1992 and 1993 legislation was required to eliminate
projected
budget deficits by raising additional revenue and reducing
expenditures,
including aid to political subdivisions and higher education and
making other
budgetary adjustments. A budget forecast released by the
Department of
Finance on March 1, 1994 projected a balanced General Fund for the
end of
the current biennium at June 30, 1995, plus an increase in the State's
cash
flow account from $360 million to $500 million. Total projected
expenditures
and transfers for the biennium are $17.0 billion. The forecast also
projects,
however, a shortage of $29.5 million in the Local Government Trust
Fund at
June 30, 1995, against total projected expenditures from the Fund of
$1.8
billion for the biennium.
The Minnesota Supreme Court held on April 1, 1994 that
numerous
banks are entitled to refunds of Minnesota bank excise taxes paid for
tax
years 1979 through 1983, on the grounds that interest on federal
obligations
was unlawfully included in the computation of the tax for such years.
The
trial court has been directed to calculate the amounts to be refunded.
The
taxes and interest are estimated to be in excess of $188 million. The
State
will be permitted to pay the refunds over a four-year period. the
State of
Minnesota also is a party to a variety of other civil actions which
could
adversely affect the State's General Fund.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota.
Even
with respect to Bonds that are revenue obligations of the issuer and
not
general obligations of the State, there can be no assurance that the
fiscal
problems referred to above will not adversely affect the market value
or
marketability of the Bonds or the ability of the respective obligors to
pay
interest on and principal of the Bonds.
Missouri Trust
The following discussion regarding constitutional limitations and
the
economy of the State of Missouri is included for the purpose of
providing
general information that may or may not affect issuers of the Bonds
in
Missouri.
In November 1981, the voters of Missouri adopted a tax
limitation
<PAGE>
amendment to the constitution of the State of Missouri (the
"Amendment").
The Amendment prohibits increases in local taxes, licenses, or fees
by
political subdivisions without approval of the voters of such political
subdivision. The Amendment also limits the growth in revenues and
expenditures of the State to the rate of growth in the total personal
income of
the citizens of Missouri. The limitation may be exceeded if the
General
Assembly declares an emergency by a two-thirds vote. The
Amendment did
not limit revenue growth at the state level in fiscal 1982 through
1991 with
exception of fiscal 1984. Management Report No. 85-20, which was
issued
on March 5, 1985 by State Auditor Margaret Kelly, indicates that
state
revenues exceeded the allowable increase by $30.52 million in fiscal
1984.
The economy of Missouri is diverse and includes manufacturing,
retail and wholesale trade, services, agriculture, tourism, and
mining.
According to the Business and Public Administration Research
Center of the
College of Business and Public Administration, University of
Missouri at
Columbia, real per capita personal income in Missouri, adjusted for
inflation,
is projected to increase 5.9% during 1993. As a result of the State's
weak
economic outlook, Missouri General Fund Revenues are currently
projected
to increase by only 3.1% for the 1992-1993 fiscal year. According
to the
Missouri Department of Labor and Industrial Relations, the
unemployment
rate in Missouri for December 1992 was 5.3 percent, compared to
6.0
percent in December 1991, and 4.8 percent in November 1992.
There can
be no assurance that the general economic conditions or the financial
circumstances of Missouri or its political subdivisions will not
adversely
affect the market value of the Bonds or the ability of the obligor to
pay debt
service on such Bonds.
Currently, Moody's Investors Service rates Missouri general
obligation bonds "Aaa" and Standard & Poor's Corporation rates
Missouri
general obligation bonds "AAA". Although these ratings indicate
that the
State of Missouri is in relatively good economic health, there can be,
of
course, no assurance that this will continue or that particular bond
issues may
not be adversely affected by changes in the State or local economic
or
political conditions.
The foregoing information constitutes only a brief summary of
some
of the general factors which may impact certain issuers of Bonds and
does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of obligations held by the Missouri
Trust are
subject. Additionally, many factors including national economic,
social and
environmental policies and conditions, which are not within the
control of the
issuers of the Bonds, could affect or could have an adverse impact
on the
financial condition of the State and various agencies and political
subdivisions
located in the State. It is not possible to predict whether or to what
extent
such factors or other factors may affect the issuers of the Bonds, the
market
value or marketability of the Bonds or the ability of the respective
issuers of
the Bonds acquired by the Missouri Trust to pay interest on or
principal of
the Bonds.
New Jersey Trust
Risk Factors Prospective investors should consider the recent
financial difficulties and pressures which the State of New Jersey (the
"State") and certain of its public authorities have undergone.
The State's 1994 fiscal year budget became law on June 30,
1993.
<PAGE>
The economic recovery is likely to be slow and uneven in both
New
Jersey and the nation. Some sectors, like commercial and industrial
construction, will undoubtedly lag because of continued excess
capacity.
Also, employers in rebounding sectors can be expected to remain
cautious
about hiring until they become convinced that improved business will
be
sustained. Other firms will continue to merge or downsize to
increase
profitability. As a result, job gains will probably come grudgingly
and
unemployment will recede at a corresponding slow pace.
Pursuant to the State Constitution, no money may be drawn from
the
State Treasury except for appropriations made by law. In addition,
all
monies for the support of State purposes must be provided for in one
general
appropriation law covering one and the same fiscal year.
In addition to the Constitutional provisions, the New Jersey
statutes
contain provisions concerning the budget and appropriation system.
Under
these provisions, each unit of the State requests an appropriation
from the
Director of Division of Budget and Accounting, who reviews the
budget
requests and forwards them with his recommendation to the
Governor. The
Governor then transmits his recommended expenditures and sources
of
anticipated revenue to the legislature, which reviews the Governor's
Budget
Message and submits an appropriations bill to the Governor for his
signing by
July 1 of each year. At the time of signing the bill, the Governor
may revise
appropriations or anticipated revenues. That action can be reversed
by a two-
thirds vote of each House. No supplemental appropriation may be
enacted
after adoption of the act, except where there are sufficient revenues
on hand
or anticipated, as certified by the Governor, to meet the
appropriation.
Finally, the Governor may, during the course of the year, prevent
the
expenditure of various appropriations when revenues are below those
anticipated or when he determines that such expenditure is not in the
best
interest of the State.
State Aid to Local Governments is the largest portion of fiscal
year
1994 appropriations. In fiscal year 1994, $6,562.0 million of the
State's
appropriations consisted of funds which are distributed to
municipalities,
counties and school districts. The largest State Aid appropriation, in
the
amount of $4,824.1 million, was provided for local elementary and
secondary
education programs. Of this amount, $2,538.2 million is provided
as
foundation aid to school districts by formula based upon the number
of
students and the ability of a school district to raise taxes from its
own base.
In addition, the State provided $582.5 million for special education
programs
for children with disabilities. A $293 million program was also
funded for
pupils at risk of educational failure, including basic skills
improvement. The
State appropriated $767.2 million on behalf of school districts as the
employer share of the teachers' pension and benefits programs,
$263.8
million to pay for the cost of pupil transportation and $57.4 million
for
transition aid, which guaranteed school districts a 6.5% increase over
the aid
received in fiscal year 1991 and is being phased out over four years.
Appropriations to the Department of Community Affairs total
$650.4
million in State Aid monies for fiscal year 1994. The principal
programs
funded were the Supplemental Municipal Property Tax Act ($365.7
million);
the Municipal Revitalization Program ($165.0 million); municipal aid
to
urban communities to maintain and upgrade municipal services
($40.4
million); and the Safe and Clean Neighborhoods Program ($58.9
million).
Appropriations to the State Department of the Treasury total $312.5
million
in State Aid monies for fiscal year 1994. The principal programs
funded by
these appropriations were payments under the Business Personal
Property Tax
Replacement Programs ($158.7 million); the cost of senior citizens,
disabled
<PAGE>
and veterans property tax deductions and exemptions ($41.7 million);
aid to
densely populated municipalities ($33.0 million); Municipal Purposes
Tax
Assistance ($30.0 million); and payments to municipalities for
services to
state owned property ($34.9 million).
Other appropriations of State aid in fiscal year 1994 include:
welfare programs ($477.4 million); aid to county colleges ($114.6
million);
and aid to county mental hospitals ($88.0 million).
The second largest portion of appropriations in fiscal 1994 is
applied
to Direct State Services: the operation of State government's 19
departments,
the Executive Office, several commissions, the State Legislature and
the
Judiciary. In fiscal 1994, appropriations for Direct State Services
aggregate
$4,574.6 million. Some of the major appropriations for Direct State
Services
during fiscal 1994 are detailed below.
$602.3 million was appropriated for programs administered by
the
Department of Human Services. The Department of Labor is
appropriated
$51.4 million for the administration of programs for workers'
compensation,
unemployment and disability insurance, manpower development, and
health
safety inspection.
The Department of Health was appropriated $37.6 million for the
prevention and treatment of diseases, alcohol and drug abuse
programs,
regulation of health care facilities, and the uncompensated care
program.
$673.0 million was appropriated to the Department of Higher
Education for the support of eight State colleges, Rutgers University,
the
New Jersey Institute of Technology, and the University of Medicine
and
Dentistry of New Jersey.
$932.6 million was appropriated to the Department of Law and
Public Safety and the Department of Corrections.
$99.8 million was appropriated to the Department of
Transportation
for the various programs it administers, such as the maintenance and
improvement of the State highway systems and subsidies for railroads
and bus
companies.
$156.4 million was appropriated to the Department of
Environmental
Protection for the protection of air, land, water, forest, wildlife and
shellfish
resources and for the provision of outdoor recreational facilities.
The primary method for State financing of capital projects is
through
the sale of the general obligation bonds of the State. These bonds
are backed
by the full faith and credit of the State. State tax revenues and
certain other
fees are pledged to meet the principal and interest payments required
to pay
the debt fully. No general obligation debt can be issued by the State
without
prior voter approval, except that no voter approval is required for
any law
authorizing the creation of a debt for the purpose of refinancing all
or a
portion of outstanding debt of the State, so long as such law requires
that the
refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for State
bond authorizations are subject to the review and recommendation of
the New
Jersey Commission on Capital Budgeting and Planning. This
permanent
commission was established in November, 1975, and is charged with
the
preparation of the State Capital Improvement Plan, which contains
proposals
for State spending for capital projects.
<PAGE>
The aggregate outstanding general obligation bonded
indebtedness of
the State as of June 30, 1993 was $3.549.7 billion. The debt service
obligation for outstanding indebtedness is $119.9 million for fiscal
year 1994.
Aside from its general obligation bonds, the State's "moral
obligation" backs certain obligations issued by the New Jersey
Housing and
Mortgage Finance Agency, the South Jersey Port Corporation (the
"Corporation") and the Higher Education Assistance Authority. As
of June
30, 1992, there was outstanding in excess of $1 billion of moral
obligation
bonded indebtedness issued by such entities, for which the maximum
annual
debt service was over $101 million as of such date. The State
provides the
Corporation with funds to cover debt service and property tax
requirements
when earned revenues are anticipated to be insufficient to cover these
obligations. For the calendar years 1986 through 1992, the State has
appropriated $12,237,565.00 to cover property tax shortfalls of the
Corporation.
At any given time, there are various numbers of claims and cases
pending against the State, State Agencies and employees, seeking
recovery of
monetary damages that are primarily paid out of the fund created
pursuant to
the Tort Claims Act, N.J.S.A. 59:1-1 et seq. In addition, at any
given time
there are various contract claims against the State and State agencies
seeking
recovery of monetary damages. The State is unable to estimate its
exposure
for these claims and cases. An independent study estimated an
aggregate
potential exposure of $50 million for claims pending, as of January
1, 1982.
It is estimated that were a similar study made of claims currently
pending,
the amount of such estimated exposure would be somewhat higher.
New
Jersey is involved in a number of lawsuits in which adverse decisions
could
materially affect revenues or expenditures. Such cases include
challenges to
its system of educational funding, the methods by which the State
Department
of Human Services shares with county governments the maintenance
recoveries and costs for residents in State psychiatric hospitals and
residential
facilities for the developmentally disabled.
Other lawsuits that could materially affect revenue or
expenditures
include a suit by a number of taxpayers seeking refunds of taxes paid
to the
Spill Compensation Fund pursuant to N.J.S.A. 58:10-23.11; a suit
alleging
that unreasonably low Medicaid payment rates have been
implemented for
long-term care facilities in New Jersey; a suit alleging unfair taxation
on
interstate commerce; a suit by Essex County seeking to invalidate the
State's
method of funding the medical system and a suit seeking return of
moneys
paid by various counties for maintenance of Medicaid or Medicare
eligible
residents of institutions and facilities for the developmentally
disabled, and a
suit challenging the imposition of premium tax surcharges on
insurers doing
business in New Jersey, and assessments upon property and casualty
liability
insurers pursuant to the Fair Automobile Insurance Reform Act.
Legislation approved June 30, 1992, effective immediately,
called
for revaluation of several public employee pension funds, authorized
an
adjustment to the assumed rate of return on investment and refunds
$773
million in public employer contributions to the State from various
pension
funds, to be reflected as a revenue source for Fiscal Year 1992 and
$226
million in Fiscal Year 1993 and each fiscal year thereafter. Several
labor
unions filed suit seeking a judgment directing the State Treasurer to
refund all
monies transferred from the pension funds and paid into the General
Fund.
An adverse determination would have a significant impact on Fiscal
Years
1992 and 1993 revenue estimates.
Bond Ratings: Citing a developing pattern of reliance on non-
<PAGE>
recurring measures to achieve budgetary balance, four years of
financial
operations marked by revenue shortfalls and operating deficits, and
the
likelihood that financial pressures will persist, on August 24, 1992
Moody's
lowered from Aaa to Aa1 the rating assigned to New Jersey general
obligation bonds. Currently, Standard & Poor's rates New Jersey
general
obligation bonds AA+. On July 6, 1992, Standard & Poor's
affirmed its
AA+ ratings on New Jersey's general obligation and various lease
and
appropriation backed debt, but its ratings outlook was revised to
negative for
the longer term horizon (beyond four months) for resolution of two
items: (i)
the Federal Health Care Facilities Administration ruling concerning
retroactive Medicaid hospital reimbursements and (ii) the State's
uncompensated health care funding system, which is under review in
the U.S.
Supreme Court.
New York Trust
New York State
The State's current fiscal year commenced on April 1, 1994, and
ends in March 31, 1995, and is referred to herein as the State's
1994-95
fiscal year. The State's budget for the 1994-95 fiscal year was
enacted by
the Legislature on June 7, 1994, more than two months after the start
of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State
operations and other purposes, including all necessary appropriations
for debt
service. The State Financial Plan for the 1994-95 fiscal year was
formulated
on June 16, 1994 and is based on the State's budget as enacted by
the
Legislature and signed into law by the Governor.
The economic and financial condition of the State may be
affected by
various financial, social, economic and political factors. Those
factors can be
very complex, may vary from fiscal year to fiscal year, and are
frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal
government, that
are not under the control of the State.
The State Financial Plan is based upon forecasts of national and
State
economic activity. Economic forecasts have frequently failed to
predict
accurately the timing and magnitude of changes in the national and
the State
economies. Many uncertainties exist in forecasts of both the national
and
State economies, including consumer attitudes toward spending,
Federal
financial and monetary policies, the availability of credit, and the
condition of
the world economy, which could have an adverse effect on the State.
There
can be no assurance that the State economy will not experience
results in the
current fiscal year that are worse than predicted, with corresponding
material
and adverse effects on the State's projections of receipts and
disbursements.
The State Division of the Budget ("DOB") believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are
reasonable.
Actual results, however, could differ materially and adversely from
the
projections set forth below, and those projections may be changed
materially
and adversely from time to time.
As noted above, the financial condition of the State is affected by
several factors, including the strength of the State and regional
economy and
actions of the Federal government, as well as State actions affecting
the level
<PAGE>
of receipts and disbursements. Owing to these and other factors, the
State
may, in future years, face substantial potential budget gaps resulting
from a
significant disparity between tax revenues projected from a lower
recurring
receipts base and the future costs of maintaining State programs at
current
levels. Any such recurring imbalance would be exacerbated if the
State were
to use a significant amount of nonrecurring resources to balance the
budget in
a particular fiscal year. To address a potential imbalance for a given
fiscal
year, the State would be required to take actions to increase receipts
and/or
reduce disbursements as it enacts the budget for that year, and under
the State
Constitution the Governor is required to propose a balanced budget
each
year. To correct recurring budgetary imbalances, the State would
need to
take significant actions to align recurring receipts and disbursements
in future
fiscal years. There can be no assurance, however, that the State's
actions
will be sufficient to preserve budgetary balance in a given fiscal year
or to
align recurring receipts and disbursements in future fiscal years.
The 1994-95 State Financial Plan contains actions that provide
nonrecurring resources or savings, as well as actions that impose
nonrecurring losses of receipts or costs. It is believed that the net
positive
effect of nonrecurring actions represents considerably less than
one-half of
one percent of the State's General Fund, an amount significantly
lower than
the amount included in the State Financial Plans in recent years; it
is believed
that those actions do not materially affect the financial condition of
the State.
In addition to those nonrecurring actions, the 1994-95 State Financial
Plan
reflects the use of $1.026 billion in the positive cash margin carried
over
from the prior fiscal year, resources that are not expected to be
available in
the State's 1995-96 fiscal year.
The General Fund is the general operating fund of the State and
is
used to account for all financial transactions, except those required
to be
accounted for in another fund. It is the State's largest fund and
receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1994-95 fiscal year, the General Fund is
expected to
account for approximately 52 percent of total governmental-fund
receipts and
51 percent of total governmental-fund disbursements. General Fund
moneys
are also transferred to other funds, primarily to support certain
capital
projects and debt service payments in other fund types.
New York State's financial operations have improved during
recent
fiscal years. During the period 1989-90 through 1991-92, the State
incurred
General Fund operating deficits that were closed with receipts from
the
issuance of tax and revenue anticipation notes ("TRANs"). First, the
national
recession, and then the lingering economic slowdown in the New
York and
regional economy, resulted in repeated shortfalls in receipts and three
budget
deficits. For its 1992-93 and 1993-94 fiscal years, the State recorded
balanced budgets on a cash basis, with substantial fund balances in
each year
as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140
billion in the tax refund reserve account, $265 million in its
Contingency
Reserve Fund ("CRF") and $134 million in its Tax Stabilization
Reserve
Fund. These fund balances were primarily the result of an
improving
national economy, State employment growth, tax collections that
exceeded
earlier projections and disbursements that were below expectations.
Deposits
to the personal income tax refund reserve have the effect of reducing
reported
personal income tax receipts in the fiscal year when made and
withdrawals
from such reserve increase receipts in the fiscal year when made.
The
balance in the tax refund service account will be used to pay
taxpayer
refunds, rather than drawing from 1994-95 receipts.
<PAGE>
Of the $1.140 billion deposited in the tax refund reserve account,
$1.026 billion was available for budgetary planning purposes in the
1994-95
fiscal year. The remaining $114 million will be redeposited in the
tax refund
reserve account at the end of the State's 1994-95 fiscal year to
continue the
process of restructuring the State's cash flow as part of the Local
Government Assistance Corporation ("LGAC") program. The
balance in the
CRF will be used to meet the cost of litigation facing the State. The
Tax
Stabilization Reserve Fund may be used only in the event of an
unanticipated
General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund service
account, General Fund receipts in 1993-94 exceeded those originally
projected when the State Financial Plan for that year was formulated
on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the
personal
income tax, the bank tax, the corporation franchise tax and the estate
tax
accounted for most of this variance, and more than offset
weaker-than-
projected collections from the sales and use tax and miscellaneous
receipts.
Collections from individual taxes were affected by various factors
including
changes in Federal business laws, sustained profitability of banks,
strong
performance of securities firms, and higher-than-expected
consumption of
tobacco products following price cuts.
Disbursements and transfers from the General Fund were $303
million below the level projected in April 1993, an amount that
would have
been $423 million had the State not accelerated the payment of
Medicaid
billings, which in the April 1993 State Financial Plan were planned
to be
deferred into the 1994-95 fiscal year. Compared to the estimates
included in
the State Financial Plan formulated in April 1993, lower
disbursements
resulted from lower spending for Medicaid, capital projects, and debt
service
(due to refundings) and $114 million used to restructure the State's
cash flow
as part of the LGAC program. Disbursements were
higher-than-expected for
general support for public schools, the State share of income
maintenance,
overtime for prison guards, and highway snow and ice removal.
In certain prior fiscal years, the State has failed to enact a budget
prior to the beginning of the State's fiscal year. A delay in the
adoption of
the State's budget beyond the statutory April 1 deadline and the
resultant
delay in the State's Spring borrowing has in certain prior years
delayed the
projected receipt by the City of State aid, and there can be no
assurance that
State budgets in the future fiscal years will be adopted by the April
1
statutory deadline.
The State has noted that its forecasts of tax receipts have been
subject to variance in recent fiscal years. As a result of these
uncertainties
and other factors, actual results could differ materially and adversely
from
the State's current projections and the State's projections could be
materially
and adversely changed from time to time. There can be no assurance
that the
State will not face substantial potential budget gaps in future years
resulting
from a significant disparity between tax revenues projected from a
lower
recurring receipts base and the spending required to maintain State
programs
at current levels. To address any potential budgetary imbalance, the
State
may need to take significant actions to align recurring receipts and
disbursements in future fiscal years.
Ratings on general obligation bonds of the State of New York
were
lowered by Standard & Poor's Corporation and Moody's Investors
Service
during 1990 from AA- to A and Aa to A, respectively. On January
6, 1992,
Moody's Investors Service lowered its rating on certain
appropriations-backed
debt of New York State to Baa1 from A. The agency cited the
failure of
<PAGE>
Governor Mario M. Cuomo and New York State lawmakers to close
New
York's current year budget gap. Moody's Investors Services also
placed the
general obligation, State guaranteed and New York local Municipal
Assistance Corporation Bonds under review for possible downgrade
in
coming months. In addition, on January 13, 1992, Standard &
Poor's
Corporation lowered its rating on general obligation debt and
guaranteed debt
to A- from A. Standard & Poor's Corporation also downgraded its
rating on
variously rated debt, State moral obligations, contractual obligations,
lease
purchase obligations and other State guarantees. Additional
reductions in
ratings could result in a loss to Unit holders.
As of March 31, 1994, the State had approximately $5.370
billion in
general obligation bonds, excluding refunding bonds and $294
million in bond
anticipation notes outstanding. On May 24, 1993, the State issued
$850
million in tax and revenue anticipation notes, all of which matured
on
December 31, 1993. Principal and interest due on general obligation
bonds
and interest due on bond anticipation notes and on tax and revenue
anticipation notes were $782.5 million for the 1993-94 fiscal year,
and are
estimated to be $786.3 million for the 1994-95 fiscal year. These
figures do
not include interest on refunding bonds issued in July 1992, to the
extent that
such interest is to be paid from escrowed funds.
State Authorities
The fiscal stability of the State is related to the fiscal stability of
its
authorities, which generally have responsibility for financing,
constructing,
and operating revenue-producing benefit facilities. Certain
authorities of the
State, including the State Housing Finance Agency ("HFA"), the
Urban
Development Corporation ("UDC") and the Metropolitan
Transportation
Authority ("MTA") have faced and continue to experience substantial
financial difficulties which could adversely affect the ability of such
authorities to make payments of interest on, and principal amounts
of, their
respective bonds. Should any of its authorities default on their
respective
obligations, the State's access to public credit markets could be
impaired.
The difficulties have in certain instances caused the State (under its
so-called
"moral obligation") to appropriate funds on behalf of the authorities.
Moreover, it is expected that the problems faced by these authorities
will
continue and will require increasing amounts of State assistance in
future
years. Failure of the State to appropriate necessary amounts or to
take other
action to permit those authorities having financial difficulties to meet
their
obligations (including HFA, UDC and MTA) could result in a
default by one
or more of the authorities. Such default, if it were to occur, would
be likely
to have a significant adverse effect on investor confidence in, and
therefore
the market price of, obligations of the defaulting authority. In
addition, any
default in payment of any general obligation of any authority whose
bonds
contain a moral obligation provision could constitute a failure of
certain
conditions that must be satisfied in connection with Federal
guarantees of
City and MAC obligations and could thus jeopardize the City's
long-term
financing plans.
The fiscal stability of the State is related to the fiscal stability of
its
authorities, which generally have responsibility for financing,
constructing
and operating revenue-producing public benefit facilities. The
authorities are
not subject to the constitutional restrictions on the incurrence of debt
which
apply to the State itself and may issue bonds and notes within the
amounts of,
and as otherwise restricted by, their legislative authorization. As of
September 30, 1992, there were 18 authorities that had outstanding
debt of
<PAGE>
$100 million or more. The aggregate outstanding debt, including
bonds, of
these 18 authorities was 63.5 billion as of September 30, 1993. As
of March
31, 1994, aggregate public auhtority debt outstanding as State
supported debt
was $21.1 billion as State-related debt was $29.4 billion.
The authorities are generally supported by revenues generated by
the
projects financed or operated, such as fares, user fees on bridges,
highway
tolls and rentals for dormitory rooms and housing. In recent years,
however,
the State has provided financial assistance through appropriations, in
some
cases of a recurring nature, to certain of the 18 authorities for
operating and
other expenses and, in fulfillment of its commitments on moral
obligation
indebtedness or otherwise for debt service. This assistance is
expected to
continue to be required in future years.
The MTA oversees the operation of New York City's subway
and
bus lines by its affiliates, the New York City Transit Authority and
the
Manhattan and Bronx Surface Transit operating (collectively, the
"Transit
Authority" or the "TA"). Through MTA's subsidiaries, the Long
Island
Railroad Company, the Metro-North Commuter Railroad Company
and the
Metropolitan Suburban Bus Authority, the MTA operates certain
commuter
rail and bus lines in the New York metropolitan area. In addition,
the Staten
Island Rapid Transit Operating Authority, an MTA subsidiary,
operates a
rapid transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA
operates
certain intrastate toll bridges and tunnels. Because fare revenues are
not
sufficient to finance the mass transit portion of these operations, the
MTA
has depended and will continue to depend for operating support upon
a
system of Federal, State, local government and TBTA support,
including
loans, grants and operating subsidies. Over the past several years,
the State
has enacted several taxes, including a surcharge on the profits of
banks,
insurance corporations and general business corporations doing
business in
the 12-county region served by the MTA (the"Metropolitan
Transportation
Region") and a special one-quarter of 1% regional sales and use tax,
that
provide additional revenues for mass transit purposes including
assistance to
the MTA, the surcharge, which expires in November 1995, yielded
$507
million in calendar year 1992, of which the MTA was entitled to
receive
approximately 90 percent, or approximately $456 million. For the
1994-95
State fiscal year, total State assistance to the MTA is estimated at
approximately $1.3 billion.
In 1993, State legislation authorized the refunding of a five-year
$9.56 billion MTA capital plan for the five-year period, 1992
through 1996
(the "1992-96 Capital Program"). The MTA has received approval
of the
1992-96 Capital Program based on this legislation from the 1992-96
Capital
Program Review Board, as State law requires. This is the third
five-year
plan since the Legislature authorized procedures for the adoption,
approval
and amendment of a five-year plan in 1981 for a capital program
designed to
upgrade the performance of the MTA's transportation systems and
to
supplement, replace and rehabilitate facilities and equipment. The
MTA, the
TBTA and the TA are collectively authorized to issue an aggregate
of $3.1
billion of bonds (net of certain statutory exclusions) to finance a
portion of
the 1992-96 Capital Program. The 1992-96 Capital Program is
expected to
be financed in significant part through the dedication of State
petroleum
business taxes.
There can be no assurance that all the necessary governmental
actions for the Capital Program will be taken, that funding sources
currently
identified will not be decreased or eliminated, or that the 1992-96
Capital
Program, or parts thereof, will not be delayed or reduced.
Furthermore, the
<PAGE>
power of the MTA to issue certain bonds expected to be supported
by the
appropriation of State petroleum business taxes is currently the
subject of a
court challenge. If the Capital Program is delayed or reduced,
ridership and
fare revenues may decline, which could, among other things, impair
the
MTA's ability to meet its operating expenses without additional State
assistance.
The State's experience has been that if an Authority suffers
serious
financial difficulties, both the ability of the State and the Authorities
to obtain
financing in the public credit markets and the market price of the
State's
outstanding bonds and notes may be adversely affected. The
Housing
Finance Agency ("HFA") and the Urban Development Corporation
("UDC")
have in the past required substantial amounts of assistance from the
State to
meet debt service costs or to pay operating expenses. Further
assistance,
possibly in increasing amounts, may be required for these, or other,
Authorities in the future. In addition, certain statutory arrangements
provide
for State local assistance payments otherwise payable to localities
whose local
assistance payments otherwise payable to localities to be made under
certain
circumstances to certain Authorities. The State has no obligation to
provide
additional assistance to localities whose local assistance payments
have been
paid to Authorities under these arrangements. However, in the event
that
such local assistance payments are so diverted, the affected localities
could
seek additional State funds.
<PAGE>
<PAGE>
New York City and Other Localities
The City, with a population of approximately 7.3 million, is an
international center of business and culture. Its non-manufacturing
economy
is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and
construction
industries accounting for a significant portion of the City's total
employment
earnings. Additionally, the City is the nation's leading tourist
destination.
The City's manufacturing activity is conducted primarily in apparel
and
publishing.
The national economic recession which began in July 1990 has
adversely impacted the City harder than almost any other political
jurisdiction
in the nation. As a result, the City, with approximately 3 percent of
national
employment, has lost approximately 20 percent of all U.S. jobs
during the
recent economic downturn and, consequently, has suffered erosion
of its local
tax base. In total, the City private sector employment has
plummeted by
approximately 360,000 jobs since 1987. But, after nearly five years
of
decline, the City appears to be on the verge of a broad-based
recovery which
will lift many sectors of the local economy. Most of the nascent
local
recovery can be attributed to the continued improvement in the U.S.
economy, but a great deal of the strength expected in the City
economy will
be due to local factors, such as the heavy concentration of the
securities and
banking industries in the City. The current forecast calls for modest
employment growth of about 20,000 a year (0.6 percent) on average
through
1998 with some slowing but still positive growth in employment in
1995-96
as U.S. growth slows (local job gains slow from 25,000 to around
10,000 per
year).
During the most recent economic downturn, the City has faced
recurring extraordinary budget gaps that have been addressed by
undertaking
one-time, one-shot budgetary initiatives to close then projected gaps
in order
to achieve a balanced budget as required by the laws of the State.
For
example, in order to achieve a balanced budget for the 1992 fiscal
year, the
City increased taxes and reduced services during the 1991 fiscal year
to close
a then projected gap of $3.3 billion in the 1992 fiscal year which
resulted
from, among other things, lower than expected tax revenue of
approximately
$1.4 billion, reduced State aid for the City of approximately $564
million and
greater than projected increases in legally mandated expenditures of
approximately $400 million, including public assistance and
Medicare
expenditures. The gap-closing measures for fiscal year 1992
included receipt
of $605 million from tax increases, approximately $1.5 billion of
proposed
service reductions and proposed productivity savings of $545 million.
Notwithstanding its recurring projected budget gaps, for fiscal
years
1981 through 1993 the City achieved balanced operating results (the
City's
General Fund revenues and transfers reduced by expenditures and
transfers),
as reported in accordance with Generally Accepted Accounting
Principles
("GAAP"), and the City's 1994 fiscal year results are projected to be
balanced in accordance with GAAP.
The City's ability to maintain balanced budgets in the future is
subject to numerous contingencies; therefore, even though the City
has
managed to close substantial budget gaps in recent years in order to
maintain
balanced operating results, there can be no assurance that the City
will
continue to maintain a balanced budget as required by State law
without
additional tax or other revenue increases or reduction in City
services, which
could adversely affect the City's economic base.
<PAGE>
Pursuant to the laws of the State, the City prepares an annual
four-
year financial plan, which is reviewed and revised on a quarterly
basis and
which includes the City's capital, revenue and expense projections.
The City
is required to submit its financial plans to review bodies, including
the New
York State Financial Control Board ("Control Board"). If the City
were to
experience certain adverse financial circumstances, including the
occurrence
or the substantial likelihood and imminence of the occurrence of an
annual
operating deficit of more than $100 million or the loss of access to
the public
credit markets to satisfy the City's capital and seasonal financing
requirements, the Control Board would be required by State law to
exercise
powers, among others, of prior approval of City financial plans,
proposed
borrowings and certain contracts.
On November 23, 1993, the City submitted to the Control Board
the
Financial Plan for the 1994 through 1997 fiscal years, which is a
modification to a financial plan submitted to the Control Board on
August 30,
1993 and which relates to the City, the Board of Education ("BOE")
and the
City University of New York ("CUNY"). The 1994-1997 Financial
Plan
projects revenues and expenditures for the 1994 fiscal year balanced
in
accordance with GAAP. The 1994-1997 Financial Plan sets forth
actions to
close a previously projected gap of approximately $2.0 billion in the
1994
fiscal year. The gap-closing actions for the 1994 fiscal year included
agency
actions aggregating $666 million, including productivity savings and
savings
from restructuring the delivery of City services; service reduction
aggregating
$274 million; the sale of delinquent real property tax receivables for
$215
million; discretionary transfers from the 1993 fiscal year of $110
million;
reduced debt service costs aggregating $187 million; resulting from
refinancings and other actions; $150 million in proposed increased
Federal
assistance; a continuation of the personal income tax surcharge,
resulting in
revenues of $143 million; $80 million in proposed increased State
aid, which
is subject to approval by the Governor; and revenue actions
aggregating $173
million.
The Financial Plan also sets forth projections for the 1995
through
1997 fiscal years and outlines a proposed gap-closing program to
close
projected budget gaps of $1.7 billion, $2.5 billion and $2.7 billion
for the
1995 through 1997 fiscal years, respectively. City gap-closing
actions total
$640 million in the 1995 fiscal year, $814 million in the 1996 fiscal
year and
$870 million in the 1997 fiscal year. These actions include increased
revenues and reduced expenditures from agency actions aggregating
$165
million, $439 million and $470 million in the 1995 through 1997
fiscal years,
respectively, including productivity savings and savings from
restructuring the
delivery of City services and service reductions; possible BOE
expenditure
reductions aggregating $125 million in each of the 1995 through
1997 fiscal
years; and reduced other than personal service costs aggregating $50
million
in each of the 1995 through 1997 fiscal years.
State actions proposed in the gap-program total $306 million,
$616
million in each of the 1995, 1996 and 1997 fiscal years, respectively.
These
actions include savings from various proposed mandate relief
measures and
the proposed reallocation of State education aid among various
localities
totaling $175 million, $325 million and $475 million in each of the
1995,
1996 and 1997 fiscal years, respectively. These actions also include
$131
million in 1995 and $291 million in each of 1996 and 1997 in
anticipated
State actions which could include savings from the proposed State
assumption
<PAGE>
of certain Medicaid costs or various proposed mandate relief
measures.
The Federal actions proposed in the gap-closing program are
$100
million and $200 million in increased Federal assistance in fiscal
years 1996
and 1997, respectively.
Other Actions proposed in the gap-closing program represent
Federal, State or City actions to be specified in the future.
Various actions proposed in the Financial Plan, including the
proposed continuation of the personal income tax surcharge beyond
December
31, 1995 and the proposed increase in State aid, are subject to
approval by
the Governor and the State Legislature, and the proposed increase in
Federal
aid is subject to approval by Congress and the President. The State
Legislature has in previous legislative sessions failed to approve
proposals for
the State assumption of certain Medicaid costs, mandate relief and
reallocations of State education aid, thereby increasing the
uncertainty as to
the receipt of the State assistance included in the Financial Plan. If
these
actions cannot be implemented, the City will be required to take
other actions
to decrease expenditures or increase revenues to maintain a balanced
financial
plan. The State Legislature has approved the continuation of the
personal
income tax surcharge through December 31, 1995, and the Governor
is
expected to approve this continuation. The Financial Plan has been
the
subject of extensive public comment and criticism particularly
regarding the
sale of delinquent property tax receivables, the sale of the New York
City
Off-Track Betting Corporation ("OTB"), the amount of State and
Federal aid
included in the Financial Plan and the inclusions of non-recurring
actions.
Notwithstanding the proposed city, federal and state actions in
the
gap-closing programs, the City Comptroller has warned in past
published
reports that State and local tax increases in an economic downturn or
period
of slow economic growth can have adverse effects on the local
economy and
can slow down an economic recovery. The City Comptroller has
also
previously expressed concerns about the effect on the City's economy
and
budgets of rapidly increasing water and sewer rates, decreasing rental
payments in future years from the Port Authority under leases for
LaGuardia
and Kennedy airports, the dependence on increased aid from the
State and
Federal Governments for gap-closing programs, the escalation cost
of
judgments and claims, federal deficit reduction measures and the
increasing
percentages of future years' revenues projected to be consumed by
debt
service, even after reductions in the capital program.
Although the City has maintained balanced budgets in each of its
last
thirteen years, and is projected to achieve balanced operating results
for the
1993 fiscal year, there can be no assurance that the gap-closing
actions
proposed in the Financial Plan can be successfully implemented or
that the
City will maintain a balanced budget in future years without
additional State
aid, revenue increases or expenditure reductions. Additional tax
increases
and reductions in essential City services could adversely affect the
City's
economic base.
In November 1993, Rudolph W. Giuliani was elected mayor of
the
City, replacing the previous administration on January 1, 1994.
Mayor
Giuliani's Modification No. 94-2 to the Financial Plan for the City
and
Covered Organizations for fiscal years 1994-1998 (the
"Modification"),
<PAGE>
issued February 10, 1994, reports that for 1995 fiscal year, the
budget gap is
estimated at $2.26 billion, or nearly a 12 percent shortfall of existing
tax
revenues over baseline expenditures. Absent gap closing initiatives,
the
Modification reports that the projected budget gap will grow to
nearly $3.4
billion by 1998 fiscal year. According to the Modification, the 1995
fiscal
year budget gap is the largest that the City has faced since 1981,
when the
City converted to GAAP. The Modification attributes the projected
budget
gaps to the lingering national recession, to a sharp growth in
expenditures
during the boom years of the 1980s and the failure of the City to
reduce the
City's municipal workforce. The Modification reports that at the
same time
that City employment has declined as a percentage of U.S.
employment, local
government employment in the City, which exceeds the state
government
employment of the five largest states, is on the verge of an historic
high.
According to the Modification, at the end of December 1993, the
City's full-
time municipal workforce stood at more than 362,000 employees,
and absent
reductions, will reach an all-time high at the end of fiscal year 1994.
The Modification states that in order to strengthen the City's
long-
term fiscal position the City's gap-closing initiatives must be
accomplished
without resorting to one-shot gap-closing measures, such as tax
increases;
instead, it must balance its budgets by reducing City spending,
reducing the
size of the City's municipal workforce and reducing certain City
taxes to
encourage economic growth. Under the Modification, fiscal year
1995
spending declines by $516 million over the current fiscal year, the
lowest
projected spending rate since 1975. The Modification plans to
reduce the
City's municipal workforce by 15,000 positions, as compared to the
current
headcount, by the end of fiscal year 1995. The workforce reduction
will be
achieved through an aggressive severance package, and, if necessary,
layoffs.
It is anticipated that these workforce reduction initiatives will save
$117
million, $144 million, $311 million, $415 million and $539 million
in fiscal
years 1994 through 1998, respectively, after taking into account an
estimated
$200 million in costs related to instituting the propose severance
programs
which are anticipated to be financed with surplus Municipal
Assistance
Corporation funds (see below for discussion of the Municipal
Assistance
Corporation). The Modification also contemplates the loss of $35
million,
$186 million, $534 million and $783 million in tax revenues in 1995
through
1998, respectively, as a result of the reduction in certain City taxes,
such as
the reduction of the hotel tax from 6 percent to 5 percent,
commercial rent
tax reductions and the elimination of the 12.5 percent personal
income tax
surcharge.
The 1994-97 Financial Plan is based on numerous assumptions,
including the recovery of the City's and the region's economy early
in the
calendar year 1993. The 1994-97 Financial Plan is subject to various
other
uncertainties and contingencies relating to, among other factors, the
extent, if
any, to which wage increases for City employees exceed the annual
increases
assumed for the 1994 through 1997 fiscal years; continuation of the
9%
interest earnings assumptions for pension fund assets affecting the
City's
required pension fund contributions; the willingness and the ability
of the
State to provide the aid contemplated by the Financial Plan and to
take
various other actions to assist the City, including the proposed State
takeover
of certain Medicaid costs and State mandate relief, the ability of
HHC, BOE
and other agencies to maintain budget balance; the willingness of the
Federal
government to provide Federal aid; approval of the proposed
continuation of
<PAGE>
the personal income tax surcharge and the State budgets; adoption of
the
City's budgets by the City Council; the ability of the City to
implement
contemplated productivity and service and personnel reduction
programs and
the success with which the City controls expenditures; additional
expenditures that may be incurred due to the requirements of certain
legislation requiring minimum levels of funding for education; the
City's
ability to market its securities successfully in the public credit
markets; the
level of funding required to comply with the Americans with
Disabilities Act
of 1990; and additional expenditures that may be incurred as a result
of
deterioration in the condition of the City's infrastructure. Certain of
these
assumptions have been questioned by the City Comptroller and other
public
officials.
Estimates of the City's revenues and expenditures are based on
numerous assumptions and the subject to various uncertainties. If
expected
Federal or State aid is not forthcoming, if unforeseen developments
in the
economy significantly reduce revenues derived from economically
sensitive
taxes or necessitate increased expenditures for public assistance, if
the City
provided for in the City's Financial Plan of if other uncertainties
materialize
that reduce expected revenues or increase projected expenditures
then, to
avoid operating deficits, the City may be required to implement
additional
actions, including increases in taxes and reductions in essential City
services.
The City might also seek additional assistance from the State.
The City depends on the State for State aid both to enable the
City to
balance its budget and to meet its cash requirements. For its 1993
fiscal
year, the State, before taking any remedial action, reported a
potential budget
deficit of $4.8 billion (before providing for repayment of the deficit
notes as
described below). If the State experiences revenue shortfalls or
spending
increases beyond its projections during its 1993 fiscal year or
subsequent
years, such developments could result in reductions in projected State
aid to
the City. In addition, there can be no assurance that State budgets
in future
fiscal years will be adopted by the April 1 statutory deadline and that
there
will not be adverse effects on the City's cash flow and additional
City
expenditures as a result of such delays.
Implementation of the Financial Plan is also dependent upon the
City's ability to market its securities successfully in the public credit
markets.
The City's financing program for fiscal years 1994-97 contemplates
issuance
of $10.8 billion of general obligation bonds primarily to reconstruct
and
rehabilitate the City's infrastructure and physical assets and to make
capital
investments. A significant portion of such bond financing is used to
reimburse the City's general fund for capital expenditures already
incurred.
In addition, the City issues revenue and tax anticipation notes to
finance its
seasonal working capital requirements. The success of projected
public sales
of City bonds and notes will be subject to prevailing market
conditions at the
time of the sale, and no assurance can be given that such sales will
be
completed. If the City were unable to sell its general obligation
bonds and
notes, it would be prevented from meeting its planned operating and
capital
expenditures.
Substantially all of the City's full-time employees are members
of
labor unions. The Financial Emergency Act requires that all
collective
bargaining agreements entered into by the City and the Covered
Organizations be consistent with the City's current financial plan,
except
<PAGE>
under certain circumstances, such as awards arrived at through
impasse
procedures.
On January 11, 1993, the City announced a settlement with a
coalition of municipal unions, including Local 237 of the
International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District
Council 37")
and other unions covering approximately 44% of the City's
workforce. The
settlement, which has been ratified by the unions, includes a total net
expenditure increase of 8.25% over a 39-month period, ending
March 31,
1995 for most of these employees. On April 9, 1993 the City
announced an
agreement with the Uniformed Fire Officers Association
(the"UFOA") which
is consistent with the coalition agreement. The agreement has been
ratified.
The Financial Plan reflects the costs associated with these settlements
and
provides for similar increases for all other City-funded employees.
The Financial Plan provides no additional wage increases for
City
employees after their contracts expire in the 1995 fiscal year. Each
1% wage
increase for all employees commencing in the 1995 fiscal year would
cost the
City an additional $56 million for the 1995 fiscal year and $152
million for
the 1996 fiscal year and each year thereafter above the amounts
provided for
in the Financial Plan.
The terms of eventual wage settlements could be determined
through
the impasse procedure in the New York City Collective Bargaining
Law,
which can impose a binding settlement.
A substantial portion of the capital improvement in the City are
financed by indebtedness issued by the Municipal Assistance
Corporation of
the City of New York ("MAC"). MAC was organized in 1975 to
provide
financing assistance for the City and also to exercise certain review
functions
with respect to the City's finances. MAC bonds are payable out of
certain
State sales and compensating use taxes imposed within the City, State
stock
transfer taxes and per capita State aid to the City. Any balance from
these
sources after meeting MAC debt service and reserve fund
requirements and
paying MAC's operating expenses is remitted to the City or, in the
case of
stock transfer taxes, rebated to the taxpayers. The State is not,
however,
obligated to continue the imposition of such taxes or to continue
appropriation
of the revenues therefrom to MAC, nor is the State obligated to
continue to
appropriate the State per capita aid to the City which would be
required to
pay the debt service on certain MAC obligations. MAC has not
taxing power
and MAC bonds do not create an enforceable obligation of either the
State or
the City. As of March 31, 1993, MAC had outstanding an aggregate
of
approximately $5.463 billion of its bonds.
On February 11, 1991, Moody's Investors Service lowered its
rating on the City's general obligation bonds from A to Baa1. On
July 2,
1993, Standard & Poor's reconfirmed its A- rating of City bonds,
continued
its negative rating outlook assessment and stated that maintenance of
such
ratings depended upon the City's making further progress towards
reducing
budget gaps in the outlying years.
Litigation
The State is the subject of numerous legal proceedings relating
to
<PAGE>
State finances, State programs and miscellaneous tort, real property
and
contract claims in which the State is a defendant and where monetary
damages sought are substantial. These proceedings could adversely
affect the
financial condition of the State in the 1994-95 fiscal years or
thereafter.
Among the more significant of these litigations, which are at
various
procedural stages, are those that challenge: (i) the validity of
agreements and
treaties by which various Indian tribes transferred title to the State of
certain
land in central New York; (ii) certain aspects of the State's Medicaid
rates
and regulations, including reimbursements to providers of mandatory
and
optional Medicaid services; (iii) contamination in the Love Canal
area of
Niagara Falls; (iv) an action against State and New York City
officials
alleging that the present level of shelter allowance for public
assistance
recipients is inadequate under statutory standards to maintain proper
housing;
(v) challenges to the practice of reimbursing certain Office of Mental
Health
patient care expenses from the client's Social Security benefits; (vi)
a
challenge to the methods by which the State reimburses localities for
the
administrative costs of food stamp programs; (vii) a challenge to the
State's
possession of certain funds taken pursuant to the State's Abandoned
Property
Law; (viii) alleged responsibility of State officials to assist in
remedying
racial segregation in the City of Yonkers; (ix) an action in which the
State is
a third party defendant, for injunctive or other appropriate relief
concerning
liability for the maintenance of stone groins constructed along certain
areas of
Long Island's shoreline; (x) actions challenging the constitutionality
of
legislation enacted during the 1990 legislative session which changed
the
actuarial funding methods for determining contributions to State
employee
retirement systems; (xi) challenges to the constitutionality of financial
programs of the Thruway Authority authorized by Chapters 166 and
410 of
the Laws of 1991, and to the sufficiency of the fiscal year 1991-92
judiciary
budget; (xii) challenges to the delay by the State Department of
Social
Services in making two one-week Medicaid payments to the service
providers; (xiii) challenges to provisions of Section 2808-C of the
Public
Health Law, which imposes a 13% surcharge on inpatient hospital
bills paid
by commercial insurers and employee welfare benefit plans and to
portions of
Chapter 55 of the laws of 1992 requiring hospitals to impose and
remit to the
State an 11% surcharge on hospital bills paid by commercial
insurers; (xiv)
challenges promulgated by the State Department of Social Services
of a home
assessment resource review instrument used to determine eligibility
for and
nature of home care services for Medicaid recipients; and (xv)
challenges to
programs implemented under Section 62 of Chapter 41 of the Laws
of 1992
to reduce Medicaid benefits to certain home-relief Medicaid
recipients.
Economy
A national recession commenced in mid-1990. The State has
suffered a more severe economic downturn. The national recession
has been
exacerbated in the State by a significant retrenchment in the financial
services
industry, cutbacks in defense spending, and an overbuilt real estate
market.
Over the long term, serious potential economic problems may
continue to aggravate State and local financial conditions. For
decades, the
State economy has grown more slowly than the nation as a whole,
resulting
in the gradual erosion of the State's relative economic affluence and
tax base,
and the relocation of certain manufacturing operations and executive
offices
<PAGE>
outside the State. The causes of this relative decline are varied and
complex,
in many cases involving national and international developments
beyond the
State's control. Part of the reason for the long-term relative decline
in the
State economy has been attributed to the combined state and local tax
burden,
which is among the highest in the nation. The existence of this tax
burden
limits the State's ability to impose higher taxes in the event of future
financial
difficulties.
If during the existence of the New York Trust, the City of New
York, the State, or any of its agencies or municipalities, because of
its or
their own financial difficulties, become unable to meet regular
commitments or if there should be a default, moratorium or other
interruption of payments of interest or principal on any obligation
issued
by New York City, the State, or a municipality or other authority in
the
State, the market value and marketability of Bonds in the New York
Trust, the asset value of Units of the New York Trust, and the
interest
income to the New York Trust, could be adversely affected.
North Carolina Trust
The Sponsors believe the information summarized below
describes
some of the more significant developments relating to Securities of
(i)
municipalities or other political subdivisions or instrumentalities of
the State
of North Carolina (the "State") which rely, in whole or in part, on
ad
valorem real property taxes and other general funds of such
municipalities or
political subdivisions or (ii) the State of North Carolina, which are
general
obligations of the State payable from appropriations from the State's
General
Fund. The sources of such information include official reports from
the
Department of the Treasurer, as well as other publicly available
documents.
The Sponsors have not independently verified any of the information
contained in such official reports, but are not aware of any facts
which would
render such information inaccurate.
State Economic Profile. North Carolina is basically a rural state,
having only five municipalities with populations in excess of
100,000. The
economic profile of North Carolina consists of a combination of
industry,
agriculture, and tourism. Nonagricultural wage and salary
employment
accounted for approximately 3,258,300 jobs as of January 1994.
The largest
nonagricultural segment of jobs was the approximately 729,200
persons
employed in trade, with textiles as the largest manufacturing segment
employing approximately 203,600 people. The United States
Department of
Labor estimates that as of August, 1993, North Carolina ranked tenth
among
the states in nonagricultural employment, eighth in manufacturing
employment, and eleventh in trade. During the period 1980 through
1992,
per capita income in North Carolina grew from $7,999 to $17,667,
an
increase of approximately 121%. The North Carolina Employment
Security
Commission estimated the unadjusted unemployment rate in February
1994,
to be 5.5% of the labor force, as compared with an unemployment
rate of
7.1% nationwide. Gross agricultural income (excluding farm forest
products)
in 1992 was $5.182 billion. This places North Carolina tenth in the
nation in
gross agricultural income. Tobacco production is the leading source
of
agricultural crop income in the State, accounting for approximately
20.3% of
gross agricultural income in 1992.
<PAGE>
State Financial Condition. The State's two principal operating
accounts are the General Fund and the Highway Fund. The principal
sources
of General Fund tax revenues are the income tax and the sales and
use tax.
The State Constitution limits the income tax to a rate of 10% of total
net
income; the State actually imposed a maximum rate of 7.75% during
the
1992 calendar year.
The State had (audited) General Fund balances at the June 30th
year-
end of approximately $254 million, $124 million, $112 million
(deficit
balance), $235 million and $681 million for, respectively, the 1989,
1990,
1991, 1992 and 1993 fiscal years. For the year ended June 30,
1993, the
State had total budgeted appropriations from the General Fund of
approximately $10.163 billion.
The State Highway Fund had an ending credit balance of
approximately $308 million as of June 30, 1993, with total
expenditures of
approximately $1.410 billion.
State Debt. As of June 30, 1993, approximately $494 million
aggregate principal amount of the State's general obligation bonds
and $87
million of its highway fund general obligation bonds were
outstanding. The
highway fund bonds are payable from the Highway Fund.
In addition, 16 constituent institutions of the University of North
Carolina and 9 agencies or public authorities of the State had
approximately
$9.539 billion principal amount of revenue bonds outstanding as of
June 30,
1993. There are no bonds of the State outstanding, and no State
statutes
which would authorize the issuance of any bonds, which contemplate
the
appropriation by the General Assembly of such amount as would be
necessary
to make up any deficiency in a debt service reserve fund.
Local governmental units in the State had approximately $4.543
billion principal amount of general obligation bonds and $2.054
billion of
revenue bonds (excluding industrial revenue bonds of county
authorities)
outstanding as of June 30, 1993. The State has no financial
responsibility
with respect to this debt.
Ohio Trust
The Ohio Trust will invest substantially all of its net assets in
Ohio
Obligations. The Ohio Trust is therefore susceptible to political,
economic
and regulatory factors that may affect issuers of Ohio Obligations.
The
following information constitutes only a brief summary of some of
the
complex factors that may affect the financial situation of issuers in
Ohio, and
is not applicable to "conduit" obligations on which the public issue
itself has
no financial responsibility.
The creditworthiness of obligations issued by local Ohio issuers
may
be unrelated to the creditworthiness of obligations issued by the
State, and
generally there is no responsibility on the part of the State to make
payments
on those local obligations. There may be specific factors that are
applicable
in connection with investment in particular Ohio Obligations or in the
obligations of particular Ohio issuers, and it is possible the
investment will be
in Ohio Obligations or in obligations of particular issuers as to which
such
<PAGE>
specific factors are applicable. However, the information set forth
below is
intended only as a general summary and not a discussion of any such
specific
factors that may affect any particular issuer or issue of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census
Count
of 10,847,000 indicating a 0.5% population increase from 1980.
The economy of Ohio, while diversifying more into the service
and
other non-manufacturing areas, continues to rely in part on durable
goods
manufacturing, which is largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a
result,
general economic activity in Ohio, as in many other
industrially-developed
states, tends to be more cyclical than in some other states and in the
nation as
a whole. Agriculture also is an important segment of the economy
in the
State, and the State has instituted several programs to provide
financial
assistance to farmers. The State's economy, has had varying effects
on
different geographic areas of the State and the political subdivisions
located
within those geographic areas.
In prior years, the State's overall unemployment rate is
commonly
somewhat higher than the national average. In January 1993 and
February
1993, the unemployment rate was 8.2 and 7.8, respectively,
compared to the
national rates 7.9 and 7.7 respectively. However, for both 1991 and
1992
the State rate was below the national rate; the State rates were 6.4%
and
7.2%, and the national rates 6.7% and 7.4% respectively. The
unemployment rate, and its effects, vary among particular geographic
areas
of the State.
There can be no assurance that future state-wide or regional
economic difficulties, and the resulting impact on State or local
government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the portfolio of the Ohio Trust or the ability of
the
particular obligors to make timely payments of debt service on (or
lease
payments relating to) those obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from
ending a fiscal
year or biennium in a deficit position. Most operations are financed
through
the General Reserve Fund (GRF), with personal income and
sales-use taxes
being the major GRF sources.
Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with the
June 30
(end of fiscal year) balance reduced during less favorable national
economic
periods and increased during more favorable economic times.
Key end of biennium fund balances at June 30, 1991 were
$135,365,000 (unaudited) (GRF) and approximately $300,000,000
(Budget
Stabilization Fund (BSF), a cash and budgetary management fund).
Necessary corrective steps were taken in fiscal year 1991 to respond
to lower
than estimated receipts and higher expenditures in certain categories.
Those
steps included the transfer of $64,000,000 from the BSF to the GRF.
The
State reported biennium ending fund balances of $135.3 million
(GRF) and
$300 million (BSF).
<PAGE>
The State has established procedures for, and has timely taken,
necessary actions to ensure a resource/expenditures balance during
less
favorable economic periods. These include general and selected
reductions in
appropriations spending; none have been applied to appropriations
needed for
debt service or lease rentals on any State obligations.
To allow time to complete the resolution of certain Senate and
House
differences in the budget and appropriations for the current biennium
(beginning July 1, 1991), an interim appropriations act was enacted,
effective
July 1; it included debt service and lease rental appropriations for the
entire
1992-93 biennium, while continuing most other appropriations for 31
days at
97% of fiscal year 1991 monthly levels. The general appropriations
act for
the entire biennium was passed on July 11, 1991 and signed by the
Governor.
It authorized the transfer, which has been made, of $200 million
from the
BSF to the GRF and provided for transfers in fiscal year 1993 back
to the
BSF if revenues are sufficient for the purpose (which the State Office
of
Budget and Management, OBM, at present thinks unlikely).
Based on updated fiscal year financial results and economic
forecast
for the State, in light of the continuing uncertain nationwide
economic
situation, OBM projected, and was timely addressed, a fiscal year
1992
imbalance in GRF resources and expenditures. GRF receipts were
significantly below original forecasts, a shortfall resulting primarily
from
lower collections of certain taxes, particularly sales and use taxes.
Higher
than earlier projected expenditure levels totalling approximately
$143,000,000
resulted from higher spending in certain areas, particularly human
services,
including Medicaid. As an initial action, the Governor ordered most
State
agencies to reduce GRF appropriations spending in the final six
months of
fiscal year 1992 by a total of approximately $184 million (debt
service and
lease rental obligations were not affected). The General Assembly
authorized,and OBM made in June 1992, the transfer to the GRF of
the
$100.4 million BSF balance and additional amounts from certain
other funds.
Other administrative revenue and spending actions resolved the
remaining
GRF imbalance, resulting in positive GRF fiscal year 1992 ending
fund and
cash balances.
A significant GRF shortfall, approximately $520 million, was
then
projected for fiscal year 1993. It had been addressed by appropriate
legislative and administrative actions. As a first step the Governor
ordered,
effectively July 1, 1992, $300 million in selected GRF spending
reductions.
Executive and legislative action in December 1992 (a combination of
tax
revisions and additional appropriations spending reductions) is
projected by
OBM to balance GRF resources and expenditures in this biennium
and
provide a better base for the appropriations for the next biennium.
Those
actions included tax revisions estimated to produce an additional
$194,500,000 this fiscal year, and additional appropriations spending
reductions totalling approximately $50,000,000 are provided for in
that
legislation and subsequent action by the Governor.
Litigation filed on February 1, 1993 seeks to have a new tax on
soft
drinks, included in those tax revisions, declared invalid and its
collection
enjoined. The trial court's preliminary injunction has been stayed by
the
Ohio Supreme Court on procedural grounds, and that tax is for now
being
collected. OBM had estimated approximately $18,500,000 being
collected
from that tax this fiscal year, representing less than 10% of the
projected
<PAGE>
additional tax revenues. Several bases for invalidity were asserted,
including
a claim that the bill in which this and other elements of the tax
package ( as
well as certain capital appropriations and financing authorizations )
were
included did not comply with a constitutional "one-subject"
procedural
requirement.
Supplementing the general authorization for the Governor's
spending
reduction orders described above and exercised several times in this
biennium, the biennial appropriations act authorizes the OBM
Director to
implement up to 1% fiscal year reduction in GRF amounts
appropriated if on
March 1 of either fiscal year of the biennium receipts for that fiscal
year are
for any reason more than $150,000,000 under estimates and the then
estimated GRF ending fund balance is less than $50,000,000.
Expressly,
excerpted from this cutback authorization are debt service and lease
rental
appropriations. In light of the other corrective actions described
above, this
supplemental spending reduction authorization was not implemented
in fiscal
year 1992 and is not expected to be implemented in fiscal year 1993.
The general appropriations process for the next biennium (beginning
July 1,
1993) has commenced with the Governor's presentation of a
proposed GRF
budget to the General Assembly. That budget document and the
related
appropriations bill as introduced and passed by the House include all
necessary GRF appropriations for biennial State debt service and
lease rental
payments.
The incurrence or assumption of debt by the State without a
popular
vote is, with limited exceptions, prohibited by current provisions of
the State
Constitution. The State may incur debt to cover casual deficits or
failures in
revenues or to meet expenses not otherwise provided for, but limited
in
amount to $750,000. The State is expressly precluded from
assuming the
debts of any local government or corporation. (An exception in both
cases is
made for any debt incurred to repel invasion, suppress insurrection,
or defend
the State in war.)
By thirteen constitutional amendments (the last adopted in 1993),
Ohio voters have authorized the incurrence of State debt to which
taxes or
excesses were pledged for payment. At January 31, 1994, $712.6
million
(excluding certain highway bonds payable primarily from highway
use
charges) of this debt was outstanding or awaiting delivery. The only
such
State debt then still authorized to be incurred are portions of the
highway
bonds and the following: (a) up to $100 million of obligations for
coal
research and development may be outstanding at any one time ($43.1
million
outstanding); (b) $1.2 billion of obligations authorized for local
infrastructure
improvements, no more than $120 million may be issued in any
calendar year
($645.2 million outstanding or awaiting delivery, $480 million
remaining to
be issued); and (c) up to $200 million in general obligation bonds for
parks
and recreation purposes may be outstanding at any one time ( no
more than
$50 million to be issued in any one year, and none have yet been
issued).
The Constitution also authorized the issuance, for certain
purposes,
of State obligations, the owners of which are not given the right to
have
excises or taxes levied to pay debt service. Those special obligations
include
bonds and notes issued by, among others, the Ohio Public Facilities
Commission and the Ohio Building Authority. A total of $4.28
billion of
those obligations were outstanding at January 31, 1994.
<PAGE>
A 1990 constitutional amendment authorized greater State and
political subdivision participation in the provision of individual and
family
housing, including borrowing for this purpose. The General
Assembly may
authorize the issuance of State obligations secured by a pledge of all
or such
portion as it authorizes of State revenues or receipts, although the
obligations
may not be supported by the State's full faith and credit.
State and local agencies issue revenue obligations that are
payable
from revenues of revenue-producing facilities or categories of
facilities,
which obligations are not "debt" within constitutional provisions or
payable
from taxes. In general, lease payment obligations under
lease-purchase
agreements of Ohio issuers (in connection with which certificates of
participation may be issued) are limited in duration to the issuer's
fiscal
period, and are renewable only upon appropriations being made
available for
the subsequent fiscal periods.
Local school districts in Ohio receive a major portion (on a
statewide
basis, historically approximately 46%) of their operating moneys
from State
subsidies ( known as the Foundation Program ), but are dependent
on local
ad valorem property taxes and in, 88 districts, income taxes for
significant
portions of their budgets. Litigation has recently been filed, similar
to that in
other states, questioning the constitutionality of Ohio's system of
school
funding. A small number of the State's 612 local school districts
have in any
year required special assistance to avoid year-end deficits. A current
program ( Emergency School Advancement Fund ) provides for
school
district cash-need borrowing directly from commercial lenders, with
State
diversion of subsidy distributions to repayment if needed; 26 districts
borrowed a total of $41.8 million in fiscal year 1991 under this
program, in
fiscal year 1992, borrowings totalled $68.6 million (including over
$46.6
million by one district);in fiscal year 1993, 43 districts borrowed
approximately $94.5 million (including $75 million for one district)
and in
fiscal year 1994 loan approvals totalled at January 31, 1994, $9.90
million
for 16 districts.
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations, and, with
other
local governments, receive local government support and property
tax relief
monies distributed by the State. Procedures have been established
for those
few municipalities that have on occasion faced significant financial
problems,
which include establishment of a joint State/local commission to
monitor the
municipality's fiscal affairs, with a financial plan developed to
eliminate
deficits and cure any defaults. Since inception in 1979, these
procedures
have been applied to 23 cities and villages, in 18 of which the fiscal
situation
has been resolved and the procedures terminated.
At present the State itself does not levy any ad valorem taxes on
real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has
since 1934
limited the amount of the aggregate levy of ad valorem property
taxes,
without a vote of the electors or municipal charter provision, to 1%
of true
value in money, and statutes limit the amount of the aggregate levy
without a
vote or charter provision to 10 mills per $1 of assessed valuation
(commonly
referred to as the "ten-mill limitation"). Voted general obligations
of
subdivisions are payable from property taxes unlimited as to amount
or rate.
<PAGE>
Although revenue obligations of the State or its political
subdivisions
may be payable from a specific project or source, including lease
rentals,
there can be no assurance that future economic difficulties and the
resulting
impact on State and local government finances will not adversely
affect the
market value of Ohio obligations held in the portfolio of the Trust or
the
ability of the respective obligors to make timely payments of
principal and
interest on such obligations.
The outstanding Bonds issued by the Sinking Fund are rated Aa
by
Moody's Investors Service ("Moody's") and AAA by Standard &
Poor's
Corporation ("S&P"). In January 1982, S&P adjusted its rating on
certain of
the State's general obligation bonds from AA+ to AA. Previously,
in
November 1979, the ratings on general obligation debt of the State
were
changed by Moody's and S&P from Aaa and AAA to Aa and AA+,
respectively. S&P did not at either time change its AAA ratings on
the
Bonds. The outstanding State Bonds issued by the Ohio Public
Facilities
Commission and the Ohio Building Authority are rated A+ by S&P
and A by
Moody's.
Pennsylvania Trust
Potential purchasers of Units of the Trust should consider the
fact
that the Trust's portfolio consists primarily of securities issued by the
Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities
and authorities and should realize the substantial risks associated with
an
investment in such securities. Although the Commonwealth had a
positive
budgetary balance at the end of each fiscal year from fiscal 1984 to
fiscal
1989, the positive balance in the General Fund of the Commonwealth
(the
principal operating fund of the Commonwealth) declined to a zero
balance at
the close of fiscal 1989, and a negative balance was experienced in
1990 and
1991, tax increases and spending decreases helped return the General
Fund
balance to a surplus at June 30, 1992 of $87.5 million. The deficit
in the
Commonwealth's unreserved/undesignated funds was also reduced,
from
$1.1462 million at June 30, 1991 to $138.6 million at June 30, 1992.
Pennsylvania's economy historically has been dependent upon
heavy
industry, but has diversified recently into various services,
particularly into
medical and health services, education and financial services.
Agricultural
industries continue to be an important part of the economy, including
not only
the production of diversified food and livestock products, but
substantial
economic activity in agribusiness and food-related industries.
Service
industries currently employ the greatest share of non-agricultural
workers,
followed by the categories of trade and manufacturing. Future
economic
difficulties in any of these industries could have an adverse impact
on the
finances of the Commonwealth or its municipalities, and could
adversely
affect the market value of the Bonds in the Pennsylvania Trust or the
ability
of the respective obligors to make payments of interest and principal
due on
such Bonds.
Certain litigation is pending against the Commonwealth that
could
adversely affect the ability of the Commonwealth to pay debt service
on its
obligations, including suits relating to the following matters: (i) the
ACLU
has filed suit in federal court demanding additional funding for child
welfare
services; the Commonwealth settled a similar suit in the
Commonwealth
<PAGE>
Court of Pennsylvania and is seeking the dismissal of the federal
suit, inter
alia, because of that settlement; in April 1993, the federal court
granted in
part and denied in part the Commonwealth's motion for summary
judgment
(no available estimates of potential liability); (ii) in 1987, the
Supreme Court
of Pennsylvania held that the statutory scheme for county funding of
the
judicial system to be in conflict with the Constitution of the
Commonwealth
but stayed judgment pending enactment by the legislature of funding
consistent with the opinion and the legislature has yet to consider
legislation
implementing the judgment; (iii) several banks have filed suit against
the
Commonwealth contesting the constitutionality of a law enacted in
1989
imposing a bank shares tax (potential liability estimated at $1.023
billion
through June 1993 plus interest); (iv) litigation has been filed in both
state
and federal court by an association of rural and small schools and
several
individual school districts and parents challenging the
constitutionality of the
Commonwealth's system for funding local school districts--the
federal case
has been stayed pending resolution of the state case and the state case
is in
the pre-trial state (no available estimate of potential liability); (v)
litigation
has been filed in state court by a variety of plaintiffs challenging the
validity
of a number of provisions in the 1991 tax legislation, including the
tax on
leased vehicles the sales tax on periodicals, and the repeal of the
deduction
for net operating loss carryforwards (no available estimate of
potential
liability for refund of taxes collected or amount of tax revenue at
risk); (vi)
the ACLU has brought a class action on behalf of inmates
challenging the
conditions of confinement in thirteen of the Commonwealth's
correctional
institutions (no available estimate of potential cost of complying with
the
injunction sought but capital and personnel costs might cost millions
of
dollars) and (vii) a consortium of public interest law firms has filed
a class
action suit alleging that the Commonwealth has not complied with a
federal
mandate to provide screening, diagnostic and treatment services for
all
Medicaid-eligible children under 21 (potentially liability estimated at
$98
million).
The Commonwealth's general obligation bonds have been rated
AA-
by Standard & Poor's and A1 by Moody's for more than the last five
years.
The City of Philadelphia (the "City") has been experiencing
severe
financial difficulties which has impaired its access to public credit
markets
and a long-term solution to the City's financial crisis is still being
sought.
The City experienced a series of General Fund deficits for fiscal
years 1988
through 1991.
Additional deficits are expected for the 1992 and 1993 fiscal
years.
The City has no legal authority to issue deficit reduction bonds on its
own
behalf, but state legislation has been enacted to create an
Intergovernmental
Cooperation Authority to provide fiscal oversight for Pennsylvania
cities
(primarily Philadelphia) suffering recurring financial difficulties.
The
Authority is broadly empowered to assist cities in avoiding defaults
and
eliminating deficits by encouraging the adoption of sound budgetary
practices
and issuing bonds. In order for the Authority to issue bonds on
behalf of the
City, the City and the Authority entered into an intergovernmental
cooperative agreement providing the Authority with certain oversight
powers
with respect to the fiscal affairs of the City, and the Authority
approved a
five-year financial plan prepared by the City. On June 16, 1992, the
Authority issued a $474,555,000 bond issue on behalf of the City.
A five
year plan that projects a balanced General Fund budget in Fiscal
Year 1994
<PAGE>
without a grant from the Authority was approved by the Authority
on April
6, 1992. Full implementation of the five year plan was delayed due
to labor
negotiations that were not completed until October 1992, three
months after
the expiration of the old labor contracts. In March 1993,
Philadelphia filed
an amended five year plan with the Authority, which projects a $6.6
million
deficit in the General Fund for the fiscal year ending June 30, 1993.
The
City Council and the Authority have approved a fiscal 1994 budget
that
projects no deficit for the fiscal year ending June 30, 1994. In July
1993, the
Authority issued $643,430,000 of bonds to refund certain general
obligation
bonds of the City and to fund additional capital projects. In
September 1993,
the Authority issued $178,675,000 of bonds to advance refund
certain of the
bonds issued in June 1992.
Texas Trust
Potential purchasers of the Units of the Texas Trust should
consider
the fact that the Texas Trust's Portfolio consists of securities issued
by the
State of Texas, or its municipalities or authorities (the "Texas
Securities")
and realize the substantial risks associated with an investment in such
Texas
Securities. The following information is a brief summary and does
not
purport to be a complete description of conditions, developments and
risk
factors that may adversely affect the Texas Securities and hence the
value of
the Units. The information is drawn principally from publicly
available
documents. While the Sponsors have not independently verified such
information, they have no reason to believe that such information is
inaccurate.
Economic Factors. Geographic, cultural, climatic and geological
differences within the State of Texas have produced six generally
distinct
geographic regions in which economic developments, such as
changes in oil
prices, the value of the Mexican peso, and defense spending can be
expected
to have varying effects.
Texas experienced a severe economic recession in the 1980's
commencing with a decline of the energy industry which in turn led
to a
depression of the real estate industry, financial institution failures and
declines in most sectors of the Texas economy. As the Texas
economy began
to level off in the late 1980's, its dependence on certain industry
segments
began to shift. The energy industry currently comprises
approximately 15%
of the State's total economic output compared to a peak of 27% in
1981,
while the service industry currently comprises approximately 15% of
the
State's total economic output compared to a peak of 27% in 1981,
while the
service industry (including health and business services) comprises
approximately 17% of the State's local economic output compared
to 11.9%
in 1982.
Economic growth and activity in Texas are likely to be inhibited
by
many factors including over-capacity in commercial and residential
real estate
markets, asset sales by the Resolution Trust Corporation,
conservative
lending practices owing to stricter risk-based capital guidelines
imposed on
financial institutions, the national recession, and the unstable
international
economic and political environment. Continued low levels of
economic
growth and activity in Texas' major industries, budgeting difficulties,
constitutional limitations on taxes, and other matters could adversely
affect
the Texas Securities and hence the value of the Units in the Texas
Trust.
<PAGE>
The Sponsors cannot predict the course of economic trends in Texas.
State Finances. The State operates on a fiscal year beginning
September 1, and ending August 31. The State's accounting period
is a
biennium covering two fiscal years. The State is required by law to
maintain
its accounting and reporting functions on a cash basis.
The economic troubles of the 1980's caused numerous budgeting
difficulties for the State and its political subdivisions due principally
to a
shrinking and changing tax base. Historically, the primary sources
of the
State's revenue have been sales taxes, mineral severance taxes and
federal
grants. Due to the State's economic recession and the consequent
enactment
of new tax measures, including those increasing the rates of existing
taxes
and expanding the tax base for certain taxes, there has been a
reordering in
the relative importance of the State's taxes in terms of their
contribution to
the State's total revenue. Key revenue sources in the State of Texas
for the
fiscal year ended August 31, 1992 included sales taxes (28.8% of
total
revenue), federal grants (28.4% of total revenue), licenses and fees
(6.3% of
total revenue), interest and investment income (6.3% of total
revenue) and
motor fuels taxes. The State imposes a corporate franchise tax based
on a
corporation's taxable capital apportionable to Texas. While the State
currently has no income tax, an income tax has been and continues
to be
considered and may be enacted.
For the biennium ended August 31, 1989, the State of Texas had
a
budget surplus of approximately $297 million (attributable, in large
part, to
increased sales tax revenue), compared to a budget deficit of
approximately
$745 million for the biennium ended August 31, 1987 (attributable
primarily
to the decline of the energy industry which was principally a result
of lower
oil and gas prices). The above biennium end balances include
approximately
$300 million in oil overcharge funds which amounts are restricted to
energy
conservation projects. The 72nd Legislature meeting in special
session, in
the summer of 1991, approved for the Governor's signature an
approximately
$9.4 billion budget increase for the fiscal 1992-93 biennium to be
financed in
part by approximately $3.4 billion in new revenue measures.
The $3.4 billion in new revenues to finance the new budget came
from several new sources. A tax and fee bill raised a total of $2.1
billion in
new revenues for the state. A fiscal management bill added another
$779
million. Legislative approval of a lottery is expected to add another
$462
million. Finally, another $50 million was added through a change
in the
Permanent School Fund investment strategy, which will make
additional
short-term earnings available to help fund public schools during the
biennium.
The most important component of the tax bill was a major
overhaul
of the State's franchise tax, which includes a new measure of
business
activity referred to as "earned surplus." A part of the change was
a lowering
of the tax rate on capital from $5.25 to $2.50 per $1,000. An
additional
surtax on "earned surplus," which includes federal net corporate
income and
officers' and directors' compensation of 4.5%, was added.
Essentially,
corporations pay a tax on capital or a tax on "earned surplus,"
whichever is
higher. The revised franchise tax is expected to raise an additional
$789.3
million over currently projected franchise tax collections during the
1992-93
biennium.
<PAGE>
The Texas Constitution prohibits the State from levying ad
valorem
taxes on property for general revenue purposes and limits the rate of
such
taxes for other purposes to $.35 per $100 of valuation. The
Constitution also
permits counties to levy, in addition to all other ad valorem taxes
permitted
by the Constitution, ad valorem taxes on property within the county
for flood
control and road purposes in an amount not to exceed $.30 per $100
of
valuation. The Constitution prohibits counties, cities and towns from
levying
a tax rate exceeding $.80 per $100 of valuation for general fund and
other
specified purposes.
With certain specific exceptions, the Texas Constitution generally
prohibits the creation of debt by or on behalf of the State unless the
voters of
the State, by constitutional amendment, authorize the issuance of debt
(including general obligation indebtedness backed by the State's
taxing power
and full faith and credit). In excess of $7.3 billion of general
obligation
bonds have been authorized in Texas and almost $2.81 billion of
such bonds
are currently outstanding. Of these, over 37% were issued by the
Veterans'
Land Board.
Though the full faith and credit of the State are pledged for the
payment of all general obligations issued by the State, much of that
indebtedness is designed to be eventually self-supporting from fees,
payments, and other sources of revenues; in some instances, the
receipt of
such revenues by certain issuing agencies has been in sufficient
amounts to
pay the principal of and interest on the issuer's outstanding bonds
without
requiring the use of appropriated funds.
From the time Standard & Poor's Corporation began rating
Texas
general obligation bonds in 1956 until early 1986, the firm gave such
bonds
its highest rating, "AAA." In April 1986, in response to the State
economic
problems, Standard & Poor's downgraded its rating of Texas general
obligation bonds to "AA+." Such rating was further downgraded
in July
1987 to "AA." Moody's Investors Service, Inc. has rated Texas
bonds since
prior to the Great Depression. Moody's upgraded its rating of Texas
general
obligation bonds in 1962 from "Aa" to "Aaa", its highest rating,
following
the imposition of a statewide sales tax by the Legislature. Moody's
downgraded such rating to "Aa" in March 1987. No prediction can
be made
concerning future changes in ratings by national rating agencies of
Texas
general obligation bonds or concerning the effect of such ratings
changes on
the market for such issues.
The same economic and other factors affecting the State of Texas
and its agencies also have affected cities, counties, school districts
and other
issuers of bonds located throughout the State. Declining revenues
caused by
the downturn in the Texas economy in the mid-1980s forced these
various
other issuers to raise taxes and cut services to achieve the balanced
budget
mandated by their respective charters or applicable State law
requirements.
Standard & Poor's Corporation and Moody's Investors Service, Inc.
assign
separate ratings to each issue of bonds sold by these other issuers.
Such
ratings may be significantly lower than the ratings assigned by such
rating
agencies to Texas general obligation bonds.
Litigation. In October 1989, the Texas Supreme Court in
Edgewood v. Kirby unanimously held that the State public school
finance
<PAGE>
system violated provisions of the Texas Constitution. The Supreme
Court
reinstated an injunction issued by the District Court (enjoining the
State from
funding the public school finance system) but postponed its effect.
New
legislation intended to resolve the problem was passed, however, the
District
Court subsequently held the new finance system unconstitutional.
The Texas
Supreme Court was asked to review the matter, and in January 1991,
held
that the new finance system violated the Texas Constitution. The
Texas
Supreme Court stayed the effect of the injunction until April 1, 1991.
On April 15, 1991, the Governor signed into law Senate Bill
351,
the School Finance Reform Bill. This bill sets a minimum local
property tax
rate which guarantees the local school districts a basic state allotment
of a
specified amount per pupil. The funding mechanism is based on tax
base
consolidation and creates 188 new taxing units, drawn largely along
county
lines. Within each taxing unit, school districts will share the revenue
raised
by the minimum local property tax. Local school districts are
allowed to
"enrich" programs and provide for facilities construction by levying
an
additional tax. In January 1992, the Texas Supreme Court declared
the
School Finance Reform Bill unconstitutional because the community
education districts are in essence a state property tax. The legislature
was
given until September 1, 1993 to pass a new school finance reform
bill. The
Supreme Court said that, in the meantime, the county education
districts
could continue to levy and collect property taxes. Several taxpayers
have
filed suit challenging the right of such districts to collect a tax that
has been
declared unconstitutional by the Supreme Court. In connection with
formulating a new school finance bill the legislature is expected to
consider
several proposals, some of which could fundamentally change the
State's tax
structure including a state income tax.
It is not possible to predict whether the new public school
finance
system will be held constitutional and, if it is, how the State will
appropriate
the additional funding, and what the impact of such appropriation
will be
upon the State. If the new public school system is held
unconstitutional, it is
not possible to predict the legislative solution to the problems or to
assess the
impact of such solution upon the financial condition of the State.
The Sponsors believe the information summarized above
describes
some of the more significant aspects relating to the State Trusts. The
sources
of such information are the official statements of issuers located in
each of
the respective States as well as other publicly available documents.
While the
Sponsors have not independently verified this information, they have
no
reason to believe that such information is not correct in all material
respects.
The Units
On the date of this Prospectus, each Unit in a State Trust
represented a fractional undivided interest in the principal and net
income
of such State Trust as is set forth in the "Summary of Essential
Information" of
Part A. If any Units are redeemed after the date of this Prospectus
by
the Trustee, the principal amount of the Bonds in the affected State
Trust
will be reduced by an amount allocable to redeemed Units and the
fractional undivided
<PAGE>
interest in the affected State Trust represented by each unredeemed
Unit
will be increased. Units will remain outstanding until redeemed
upon
tender to the Trustee by any Unit holder, which may include the
Sponsors, or until the termination of the Trust Agreement. (See
"Amendment and Termination of the
Trust Agreement--Termination".) References in this Prospectus to
"Units" are to Units which represented the fractional undivided
interest
indicated in the "Summary of Essential Information" of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are
customarily offered to investors on a "yield price" basis (as
contrasted
to a "dollar price"
basis) at the lesser of the yield as computed to maturity of the bonds
or
to an earlier redemption date and which takes into account not only
the
interest payable on the bonds but also the amortization or accretion
to a
specified date
of any premium over or discount from the par (maturity) value in the
bond's purchase price. Since Units of each State Trust are offered
on a
dollar price basis, the rate of return on an investment in Units of a
State
Trust is stated in terms of "Estimated Current Return", computed by
dividing the Net Annual Income per Unit by the Public Offering
Price
per Unit. Any change in either
the Net Annual Income per Unit or the Public Offering Price per
Unit
will result in a change in the Estimated Current Return. The Net
Annual
Income per Unit of a State Trust is determined by dividing the total
annual interest income to such State Trust, less estimated annual fees
and
expenses of the Trustee, the
Sponsor, and the Evaluator, by the number of Units of such State
Trust
outstanding. The Net Annual Income per Unit of a State Trust will
change as the income or expenses of such State Trust changes and as
Bonds are redeemed,
paid, sold or exchanged. For a statement of the Net Annual Income
per
Unit and the Estimated Current Return based on the Public Offering
Price, see Part A under "Summary of Essential Information".
The Estimated Long-Term Return for a State Trust is a
measure of the return to the investor over the estimated life of a
State
Trust. The Estimated Long-Term Return represents an average of
the
yields to maturity (or call) of the Bonds in a State Trust's portfolio
calculated in accordance with accepted
bond practice and adjusted to reflect expenses and sales charges. In
calculating Estimated Long-Term Return, the average yield for a
State
Trust's portfolio is
derived by weighing each Bond's yield by the market value of the
Bond
and by the amount of time remaining to the date to which the Bond
is
priced. Once the average portfolio yield is computed, this figure is
then
reduced to reflect estimated expenses and the effect of the maximum
sales charge paid by investors.
A State Trust may experience expenses and portfolio
charges
different from those assumed in the calculation of Estimated
Long-Term
Return. There thus can be no assurance that the Estimated Current
<PAGE>
Returns or Estimated Long-Term Returns quoted for a State Trust
will
be realized in the future. Since both Estimated Current Return and
Estimated Long-Term Return quoted on a given business day are
based
on the market value of the underlying Bonds
on that day, subsequent calculations of these performance measures
will
reflect the then-current market value of the underlying Bonds and
may
be higher or lower.
Taxes
The following discussion addresses only the tax consequences of
Units
held as capital assets and does not address the tax consequences of
Units
held by dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the
Sponsors, under existing law:
The Trust is not an association taxable as a corporation for Federal
income tax purposes, and income received by the Trust will be
treated
as the income of the Unit holders ("Holders") in the manner set forth
below.
Each Holder will be considered the owner of a pro rata portion of
each
Bond in the State Trust under the grantor trust rules of Sections
671-679
of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to determine the face amount of a Holder's pro rata portion of
each
Bond on the Date of Deposit, see "Aggregate Principal" under
"Portfolio
of Securities". The total cost to a Holder of his Units, including sales
charges, is allocated to his pro rata
portion of each Bond, in proportion to the fair market values thereof
on
the date the Holder purchases his Units, in order to determine his tax
basis for his pro rata portion of each Bond. In order for a Holder
who
purchases his Units on the Date of Deposit to determine the fair
market
value of his pro rata portion of each Bond on such date, see "Cost
of
Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received the interest on his
pro
rata portion of each Bond when interest on the Bond is received by
the
State Trust. In the opinion of bond counsel (delivered on the date of
issuance of each Bond), such interest will be excludable from gross
income for regular Federal income tax
purposes (except in certain limited circumstances referred to below).
Amounts received by the State Trust pursuant to a bank letter of
credit,
guarantee or insurance policy with respect to payments of principal,
premium or interest on a Bond in the State Trust will be treated for
Federal income tax purposes in the same
manner as if such amounts were paid by the issuer of the Bond.
The State Trust may contain Bonds which were originally issued at
a
discount ("original issue discount"). The following principles will
apply
to each Holder's pro rata portion of any Bond originally issued at a
discount. In general, original issue discount is defined as the
difference
between the price at which a debt obligation was issued and its stated
redemption price at maturity. Original issue discount on a tax-exempt
<PAGE>
obligation issued after September 3, 1982, is deemed to accrue as
tax-exempt interest over the life of
the obligation under a formula based on the compounding of interest.
Original issue discount on a tax-exempt obligation issued before July
2,
1982 is deemed to accrue as tax-exempt interest ratably over the life
of
the obligation. Original issue discount on any tax-exempt obligation
issued during the period beginning July 2, 1982 and ending
September
3, 1982 is also deemed to accrue as tax-exempt interest over the life
of
the obligation, although it is not clear
whether such accrual is ratable or is determined under a formula
based
on the compounding of interest. If a Holder's tax basis for his pro
rata
portion of a Bond issued with original issue discount is greater than
its
"adjusted issue price" but less than its stated redemption price at
maturity
(as may be adjusted for certain payments), the Holder will be
considered
to have purchased his pro rata portion of the Bond at an "acquisition
premium." A Holder's adjusted tax basis for his pro rata portion of
a
Bond issued with original issue discount will include original issue
discount accrued during the period
such Holder held his Units. Such increases to the Holder's tax basis
in
his pro rata portion of the Bond resulting from the accrual of original
issue discount, however, will be reduced by the amount of any such
acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond exceeds
the redemption price at maturity thereof (subject to certain
adjustments),
the Holder will be considered to have purchased his pro rata portion
of
the Bond with "amortizable bond premium". The Holder is required
to
amortize such bond
premium over the term of the Bond. Such amortization is only a
reduction of basis for his pro rata portion of the Bond and does not
result
in any deduction against the Holder's income. Therefore, under some
circumstances, a Holder may
recognize taxable gain when his pro rata portion of a Bond is
disposed
of for an amount equal to or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his
pro
rata portion of a Bond is disposed of by the State Trust for an
amount
greater or less than his adjusted tax basis. Any such taxable gain or
loss
will be capital gain or loss, except that any gain from the disposition
of
a Holder's pro rata portion of a Bond acquired by the Holder at a
"market discount" (i.e., where
the Holder's original tax basis for his pro rata portion of the Bond
(plus
any original issue discount which will accrue thereon until its
maturity)
is less than its stated redemption price at maturity) would be treated
as
ordinary income to the extent the gain does not exceed the accrued
market discount. Capital gains are generally taxed at the same rate
as
ordinary income. However, the excess of net long-term capital gains
over
net short-term capital losses may be taxed at a lower rate than
ordinary
income for certain noncorporate
taxpayers. A capital gain or loss is long-term if the asset is held for
more
than one year and short-term if held for one year or less. The
deduction
of capital losses is subject to limitations. A Holder will also be
<PAGE>
<PAGE>
considered to have disposed of all or part of his pro rata portion of
each
Bond when he sells or redeems all or some of his Units.
Under the income tax laws of the State and City of New York, the
State Trust is not an association taxable as a corporation and income
received by the State Trust will
be treated as the income of the Holders in the same manner as for
Federal income tax purposes, but will not necessarily be tax-exempt.
Under Section 265 of the Code, a Holder (except a corporate
Holder)
is not entitled to a deduction for his pro rata share of fees and
expenses
of the State Trust because the fees and expenses are incurred in
connection with the production of tax-exempt income. Further, if
borrowed funds are used by a Holder to purchase or carry Units of
the
State Trust, interest on such indebtedness
will not be deductible for Federal income tax purposes. In addition,
under rules used by the Internal Revenue Service, the purchase of
Units
may be considered to have been made with borrowed funds even
though
the borrowed funds are not directly traceable to the purchase of
Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact
on
the tax-exempt status of the Bonds. It is impossible to predict
whether
any legislation in respect of the tax status of interest on such
obligations
may be proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal and certain aspects
of
New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and
should
consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986
will
be a preference item for purposes of the alternative minimum tax
("AMT"). The Sponsors believe that interest (including any original
issue
discount) on the Bonds should not be subject to the AMT for
individuals
or corporations under this rule. A corporate Holder should be aware,
however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise
to
an alternative minimum tax liability (or increase an existing liability)
because the interest income will be included in the corporation's
"adjusted current earnings" for purposes of the adjustment to
alternative
minimum taxable income required by Section 56(g) of the Code and
will
be taken into account for
purposes of the environmental tax on corporations under Section 59A
of
the Code, which is based on an alternative minimum taxable income.
<PAGE>
<PAGE>
In addition, interest on the Bonds must be taken into consideration
in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal
income
tax. Holders are urged to consult their own tax advisers concerning
an
investment in Units.
At the time of issuance of each Bond, an opinion relating to the
validity
of the Bond and to the exemption of interest thereon from regular
Federal income taxes was or will be rendered by bond counsel.
Neither
the Sponsors nor Davis Polk & Wardwell nor any of the special
counsel
for state tax matters have made
or will make any review of the proceedings relating to the issuance
of the
Bonds or the basis for these opinions. The tax exemption is
dependent
upon the issuer's (and other users') compliance with certain ongoing
requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no
assurance
that the issuer (and other users) will
comply with these requirements, in which event the interest on the
Bond
could be determined to be taxable retroactively from the date of
issuance.
In the case of certain of the Bonds, the opinions of bond counsel
indicate that interest on such Bonds received by a "substantial user"
of
the facilities being financed with the proceeds of such Bonds, or
persons
related thereto, for periods while such Bonds are held
by such a user or related person, will not be exempt from regular
Federal income taxes, although interest on such Bonds received by
others
would be exempt from regular Federal income taxes. "Substantial
user"
is defined under U.S. Treasury Regulations to include only a person
whose gross revenue derived with respect to the facilities financed by
the
issuance of bonds is more than
5% of the total revenue derived by all users of such facilities, or
who
occupies more than 5% of the usable area of such facilities or for
whom
such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" are defined to include
certain related natural persons, affiliated corporations, partners and
partnerships. Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to
each
Holder an annual statement containing information relating to the
interest
received by the State Trust on the Bonds, the gross proceeds received
by
the Trust from the disposition of any Bond (resulting from
redemption
or payment at maturity of any Bond or the sale by the State Trust of
any
Bond), and the fees and expenses
paid by the State Trust. The Trustee will also furnish annual
information
returns to each Holder and to the Internal Revenue Service. Holders
are
required to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year.
<PAGE>
The description of Federal tax consequences applies
separately
for each State Trust. Below, arranged alphabetically by state, is a
description of certain state and local tax consequences for residents
of the
state and locality for which such State Trust is named.
California Trust
Messrs. Morgan, Lewis and Bockius acted as special
California counsel to California Trust 98 and all prior California
Trusts.
Messrs. Adams, Duque and Hazeltine acted as special California
counsel
to California Trust 99 and all subsequent California Trusts. On the
Date
of Deposit for each California Trust, the respective counsel to the
Trusts
rendered an opinion under then existing law substantially to the effect
that:
The California Trust is not an association taxable as a
corporation under the income tax laws of the State of California;
The income, deductions and credits against tax of the
California Trust will be treated as the income, deductions and credits
against tax of the holders of Units in the California Trust under the
income tax laws of the State of California;
Interest on the bonds held by the California Trust, and any
interest income received by the California Trust from its investments
in
units of previously formed California trusts included within a
Multistate
Series or Umbrella Series of Tax Exempt Securities Trust (the
"Previously Formed Trusts"), to the extent that such interest is
exempt
from taxation under California law will not lose its character as
tax-exempt income merely because that income is passed through to
the
holders of Units; however, a corporation subject to the California
franchise tax is required to include that interest income
in its gross income for purposes of determining its franchise tax
liability;
Each holder of a Unit in the California Trust will have a
taxable event when the California Trust disposes of a bond (whether
by
sale, exchange, redemption, or payment at maturity) or when the
Unit
holder redeems or sells his Units. The total tax cost of each Unit to
a
holder of a Unit in the California
Trust is allocated among each of the bond issues held in the
California
Trust (in accordance with the proportion of the California Trust
comprised by each bond issue) in order to determine the holder's per
Unit tax cost for each bond issue,
and the tax cost reduction requirements relating to amortization of
bond
premium will apply separately to the per Unit tax cost of each bond
issue. Therefore, under some circumstances, a holder of a Unit may
realize taxable gain when the California Trust which issued such Unit
disposes of a bond or the holder's Units are sold or redeemed for an
amount equal to or less than his original cost of the bond or Unit.
<PAGE>
Similarly, each Unit holder will have a
taxable event (i) when a Previously Formed Trust disposes of a
bond,
and (ii) when the California Trust disposes of any of its ownership
interests in a Previously Formed Trust;
Each holder of a Unit in the California Trust is deemed to
be
the owner of a pro rata portion of the California Trust under the
personal
property tax laws of the State of California; and
The pro rata ownership of the bonds held by the California
Trust, as well as the interest income therefrom, are exempt from
California personal property taxes.
Connecticut Trust
On the Date of Deposit for each Connecticut Trust,
Messrs.
Day, Berry and Howard, special Connecticut counsel on Connecticut
tax
matters, rendered an opinion which was based explicitly on the
opinion
of Messrs. Cahill Gordon & Reindel regarding Federal income tax
matters, under then existing Connecticut law substantially to the
effect
that:
The Connecticut Trust is not subject to the Connecticut
corporation business tax or any other tax on or measured by net
income
imposed by the State of Connecticut;
Interest income of the Connecticut Trust from obligations
issued by or on behalf of the State of Connecticut, any political
subdivision thereof, or any agency, instrumentality, authority, or
district
of either (a "Connecticut Issuer"),
or from obligations of United States territories or possessions and
their
public authorities the interest on which Federal law would prohibit
Connecticut from taxing if received directly by a Unit holder from
the
issuer thereof, is not taxable under the Connecticut income tax on the
Connecticut taxable income of individuals, trusts and estates (the
"Connecticut Income Tax"), when received
by the Connecticut Trust or when distributed by it to such a Unit
holder;
Gains and losses recognized by a Unit holder for Federal
income tax purposes upon the sale, redemption, or other disposition
of
Units of the Connecticut Trust held by a Unit holder are taken into
account as gains or losses, respectively, for purposes of the
Connecticut
Income Tax, except that,
in the case of a unit holder holding a Unit of the Connecticut Trust
as a
capital asset, such gains and losses recognized upon the sale or
exchange
of a Connecticut Bond held by the Connecticut Trust are excluded
from
gains and losses taken into account for purposes of such tax and no
opinion is expressed as to the treatment for purposes of such tax of
gains
<PAGE>
and losses recognized upon the maturity or redemption of a
Connecticut
Bond held by the Connecticut Trust or, to the extent attributable to
Connecticut Bonds, of gains and losses
recognized upon the redemption, sale, or other disposition by a Unit
holder of a Unit of the Connecticut Trust held by him;
The portion of any interest or capital gain of the
Connecticut
Trust that is allocable to a Unit holder that is subject to the
Connecticut
corporation business tax is includible in the gross income of such
Unit
holder for purposes of such tax; and
An interest in a Unit of the Connecticut Trust that is
owned by
or attributable to a Connecticut resident at the time of his death is
includible in his gross estate for purposes of the Connecticut
succession
tax and the Connecticut estate tax.
The Connecticut Income Tax was enacted in August 1991.
Generally, under this tax as enacted, a Unit holder recognizes gain
or
loss upon the maturity, redemption, sale, or other disposition by the
Connecticut Trust of an obligation held by it, or upon the
redemption,
sale, or other disposition of a Unit of the Connecticut Trust held by
the
Unit holder, to the same extent that gain or loss is recognized by the
Unit holder thereupon for Federal income tax
purposes. However, on June 19, 1992, Connecticut legislation was
adopted that provides that gains and losses from the sale or exchange
of
Connecticut Bonds held as capital assets will not be taken into
account
for purposes of the Connecticut Income Tax for taxable years starting
on
or after January 1, 1992. It is not clear whether this provision would
apply to gain or loss recognized by
a Unit holder upon the maturity or redemption of a Connecticut Bond
held by the Connecticut Trust or, to the extent attributable to
Connecticut
Bonds held by the Connecticut Trust, to gain or loss recognized by
a
Unit holder upon the redemption, sale, or other disposition of a Unit
of
the Connecticut Trust held by
the Unit holder. Unit holders are urged to consult their own tax
advisers
in this regard.
By legislation adopted May 19, 1993, as amended by
legislation adopted June 25, 1993, Connecticut enacted the net
Connecticut minimum tax,
retroactive to taxable years beginning on or after January 1, 1993,
which
is applicable to individuals, trusts, and estates that are subject to the
Federal alternative minimum tax. Income of the Connecticut Trust
that
is subject to the Federal alternative minimum tax in the case of such
Unit
holders may also be subject to the net Connecticut minimum tax.
<PAGE>
<PAGE>
Florida Trust
On the Date of Deposit for each Florida Trust, Messrs.
Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A., special
Florida
counsel on Florida tax matters, rendered an opinion, under then
existing
law substantially to the effect that:
The Florida Trust will not be subject to the Florida income
tax
imposed by Chapter 220 so long as the Florida Trust transacts no
business in Florida or has no income subject to federal income
taxation.
In addition, political subdivisions of Florida do not impose any
income
taxes.
Non-Corporate Unit holders will not be subject to any
Florida
income taxation on income realized by the Florida Trust. Corporate
Unit
holders with commercial domiciles in Florida will be subject to
Florida
income taxation on income realized by the Trust. Other corporate
Unit
holders will be subject to Florida income taxation on income realized
by
the Florida Trust only
to the extent that the income realized is other than "non-business
income"
as defined by Chapter 220.
Florida Trust Units will be subject to Florida estate tax if
owned by Florida residents and may be subject to Florida estate tax
if
owned by other decedents at death. However, the Florida estate tax
is
limited to the amount of
the credit allowable under the applicable Federal Revenue Act
(currently
Section 2011 [and in some cases Section 2102] of the Internal
Revenue
Code of 1986, as amended) for death taxes actually paid to the
several
states.
Neither the Bonds nor the Units will be subject to the
Florida
ad valorem property tax or the Florida sales or use tax.
The Florida Trust will not be subject to Florida intangible
personal property tax. In addition, Units of the Florida Trust will
not be
subject to Florida intangible personal property tax.
The issuance and sale of the Units by the Florida Trust
will
not subject either the Florida Trust or the Unit holders to the Florida
documentary stamp tax.
The transfer of Units by a Unit holder will not be subject
to
the Florida documentary stamp tax.
In the event Bonds issued by the government of Puerto
Rico,
the government of Guam, or the government of the United States
Virgin
Islands are included in the Florida Trust, the opinions expressed
above
will be unchanged.
<PAGE>
<PAGE>
For the purposes of the foregoing opinion, the following
terms
have the following meanings:
(a) "Non-Corporate Unit holder" -- a Unit holder of the
Florida Trust who is an individual not subject to the Florida state
income
tax on corporations under Chapter 220, Florida Statutes (1989 and
Supp.
1990) as amended by Chapter 91-112, Laws of Florida ("Chapter
220").
(b) "Corporate Unit holder" -- a Unit holder of the
Florida
Trust that is a corporation subject to the Florida state income tax on
corporations under Chapter 220.
Maryland Trust
Messrs. Venable, Baetjer and Howard acted as special
Maryland counsel to Maryland Trust 75 and all prior Maryland
Trusts.
Messrs. Weinberg & Green acted as special Maryland counsel to
Maryland Trust 76 and all subsequent Maryland Trusts. On the Date
of
Deposit for each Maryland Trust,
the respective counsel to the Trusts rendered an opinion for
Maryland
State and local income tax purposes and under then existing law,
substantially to the effect that:
The Maryland Trust will not be treated as an association
taxable as a corporation, and the income of the Maryland Trust will
be
treated as the income of the Holders. The Maryland Trust is not a
"financial institution" subject to the Maryland Franchise Tax
measured
by net earnings. The Maryland Trust is not subject to Maryland
property taxes imposed on the intangible personal property of certain
corporations.
Except as described below in the case of interest paid on
private activity bonds constituting a tax preference for federal income
tax
purposes, a Holder will not be required to include such Holder's
pro-rata
share of the earnings of, or distributions from, the Maryland Trust
in
such Holder's Maryland taxable income to the extent that such
earnings
or distributions represent interest excludable from gross income for
federal income tax purposes received by the Maryland Trust on
obligations of the State of Maryland, the
Government of Puerto Rico, or the Government of Guam and their
respective political subdivisions and authorities. Interest on Debt
Obligations is subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
In the case of taxpayers who are individuals, Maryland
presently imposes an income tax on items of tax preference with
reference to such items as defined in the Internal Revenue Code, as
amended, for purposes of calculating the federal alternative minimum
<PAGE>
<PAGE>
tax. Interest paid on certain private activity bonds is a preference
item
for purposes of calculating the federal alternative minimum tax.
Accordingly, if the Maryland Trust holds such bonds,
50% of the interest on such bonds in excess of a threshold amount
is
taxable by Maryland.
A Holder will recognize taxable gain or loss, except in the
case of an individual Holder who is not a Maryland resident, when
the
Holder disposes of all or part of such Holder's pro-rata portion of
the
Debt Obligations in the
Maryland Trust. A Holder will be considered to have disposed of
all or
part of such Holder's pro-rata portion of each Debt Obligation when
the
Holder sells or redeems all or some of such Holder's Units. A
Holder
will also be considered to have disposed of all or part of such
Holder's
pro-rata portion of a Debt Obligation when all or part of the Debt
Obligation is disposed of by the Maryland Trust or is redeemed or
paid
at maturity. Gain included in the gross
income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the
extent
that the gain is derived from the disposition of Debt Obligations
issued
by the State of Maryland and its
political subdivisions. Profits realized on the sale or exchange of
Debt
Obligations are subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to Maryland
inheritance and estate tax only if held by Maryland residents.
Neither the Debt Obligations nor the Units will be subject
to
Maryland personal property tax.
The sales of Units in Maryland or the holding of Units in
Maryland will not be subject to Maryland Sales or Use Tax.
Massachusetts Trust
On the Date of Deposit for each Massachusetts Trust,
Messrs.
Palmer and Dodge, special Massachusetts counsel on Massachusetts
tax
matters, rendered an opinion, which is based explicitly on the
opinion of
Messrs. Davis Polk & Wardwell regarding Federal income tax
matters,
under then existing Massachusetts law substantially to the effect that:
Tax-exempt interest for Federal income tax purposes
received
by or through the Massachusetts Trust, or by or through a Previous
Trust
in which the Massachusetts Trust owns an interest, on obligations
issued
by Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, by the government of Puerto Rico
or
by its authority or by the government of Guam or by its authority,
will
<PAGE>
not result in a Massachusetts income tax liability for the
Massachusetts
Trust or for Unit holders who are subject to Massachusetts income
taxation under Massachusetts General Laws, Chapter 62.
Capital gain and capital loss realized by the Massachusetts
Trust and included in the Federal gross income of Unit holders who
are
subject to Massachusetts income taxation under General Laws,
Chapter
62 will be included as capital gains and losses in the Unit holder's
Massachusetts gross income,
except where capital gain is specifically exempted from income
taxation
under the Massachusetts statute authorizing issuance of the
obligations
held by the Massachusetts Trust or held by the Previous Trusts in
which
the Massachusetts Trust owns an interest, and will not result in a
Massachusetts income tax liability for the Massachusetts Trust.
Gains and losses realized on sale or redemption of Units
by
Unit holders who are subject to Massachusetts income taxation under
Massachusetts General Laws, Chapter 62 will be includible in their
Massachusetts gross income.
Minnesota Trust
On the Date of Deposit for each Minnesota Trust, Messrs.
Dorsey & Whitney, a partnership including professional
corporations,
special Minnesota counsel on Minnesota tax matters, rendered an
opinion
under then existing law substantially to the effect that:
The Minnesota Trust is not an association taxable as a
corporation for purposes of Minnesota income taxation. Minnesota
taxable net income is, with certain modifications, determined with
reference to federal taxable income. Each Unit holder of the
Minnesota
Trust will be treated as the owner of a pro rata portion of the
Minnesota
Trust (including the ownership interest of the
Minnesota Trust in property comprising previously issued Series) for
purposes of Minnesota income taxation, and the income of the
Minnesota
Trust will be
treated as the income of the Unit holders under Minnesota law.
Interest
on Bonds that would be excluded from Minnesota taxable net income
when paid directly to an individual, estate or trust will be excluded
from
Minnesota taxable net income of Unit holders that are individuals,
estates
or trusts when received by the Minnesota Trust (or by a previously
issued Series in which the Minnesota
Trust has an ownership interest) and when distributed to such Unit
holders. Interest on Bonds that would be included in Minnesota
"alternative minimum taxable income" when paid directly to a
noncorporate taxpayer will be included in Minnesota "alternative
minimum taxable income" of Unit holders that are
individuals, estates or trusts for purposes of the Minnesota alternative
<PAGE>
<PAGE>
minimum tax.
Any such Unit holder that is subject to Minnesota income
taxation will realize taxable gain or loss when the Minnesota Trust
(or
a previously issued Series in which the Minnesota Trust has an
ownership interest) disposes
of a Bond or an ownership interest in a previously issued Series
(whether
by sale, exchange, redemption or payment at maturity) or when the
Unit
holder redeems or sells Units at a price that differs from original
cost,
as adjusted for amortization of bond premium and other basis
adjustments. The total tax cost
of each Unit to a Unit holder is allocated proportionately (by value)
among each of the Bonds held in the Minnesota Trust. Tax cost
reduction requirements relating to amortization of bond premium
may,
under some circumstances, result
in the realization of taxable gain by Unit holders when their Units
(or
underlying Bonds) are sold or redeemed for an amount equal to or
less
than their original cost. Minnesota has repealed the favorable
treatment
of capital gains, but preserved limitations on the deductibility of
capital
losses.
Interest income attributable to Bonds that are "industrial
development bonds" or "private activity bonds," as such terms are
defined in the Internal Revenue Code, will be taxable under
Minnesota
law to a Unit holder that is a "substantial user" of the facilities
financed
by the proceeds of such Bonds (or a "related person" to such a
"substantial user") to the same extent as
if such Bonds were held directly by such Unit holder.
Minnesota law does not permit a deduction for interest on
indebtedness incurred or continued by individuals, estates and trusts
to
purchase or carry Units. Minnesota law also restricts the
deductibility
of other expenses allocable to Units.
With limited exceptions, interest on Bonds in the
Minnesota
Trust will be included in taxable income for purposes of the
Minnesota
franchise tax on corporations and financial institutions. No opinion
is
expressed as to other Minnesota tax effects on Unit holders that are
corporations or financial institutions.
Missouri Trust
Messrs. Bryan, Cave, McPheeters & McRoberts acted as
special Missouri counsel to Missouri Trust 75 and all prior Missouri
Trusts. Messrs. Blackwell Sanders Matheny Weary & Lombardi
acted
as special Missouri counsel to Missouri Trust 76 and all subsequent
Missouri Trusts. On the Date of Deposit for each Missouri Trust,
the
respective counsel to the Trusts rendered an opinion under then
existing
<PAGE>
<PAGE>
law substantially to the effect that:
For Missouri income tax purposes under Chapters 143 of
the
Missouri Revised Statutes, the Missouri Trust will be treated as
having
the same organizational characteristics as it is accorded for Federal
Income Tax purposes. In reliance upon the opinion of Cahill Gordon
&
Reindel as described above, we
are therefore of the opinion that the Missouri Trust is not an
association
taxable as a corporation under Missouri law, that each Unit holder
will
be treated as the owner of a proportionate, undivided interest in the
Missouri Trust, and the income of the Missouri Trust will be treated
as
the income of such Unit holders.
Under Missouri law, interest income received by the
Missouri
Trust from (i) obligations of the State of Missouri, its political
subdivisions and authorities, or (ii) bonds issued by the Government
of
Puerto Rico, or by its authority, and which is excluded from Federal
gross income by Federal law or
on which Missouri is prohibited by Federal law from imposing an
income tax, will be excluded from the Missouri taxable income of
the
Unit holders to the extent that the interest is exempt from income tax
under Missouri law when received by the Missouri Trust.
Gains and losses from the Missouri Trust treated for
Federal
Income Tax purposes as the gains and losses of the Unit holders, to
the
extent included in Federal gross income, will be included in the
Missouri
taxable income of Unit holders who are individuals, except to the
extent
that (i) such Unit holders are non-residents of Missouri and (ii) such
gains and losses of such non-resident Unit holders are derived from
sources wholly without Missouri.
Such gains or losses, to the extent included in determining the
Federal
taxable income of a corporate Unit holder after Missouri
adjustments, are
allocated or apportioned to Missouri in order to determine Missouri
taxable income.
New Jersey Trust
On the Date of Deposit for each New Jersey Trust,
Messrs.
Shanley & Fisher, P.C., special New Jersey counsel on New Jersey
tax
matters, rendered an opinion under then existing law substantially to
the
effect that:
The proposed activities of the New Jersey Trust will not
cause
it to be subject to the New Jersey Corporation Business Tax Act.
The income of the New Jersey Trust will be treated as the
income of individuals, estates and trusts who are the Holders of
Units of
the New Jersey Trust for purposes of the New Jersey Gross Income
Tax
Act, and interest which
<PAGE>
<PAGE>
is exempt from tax under the New Jersey Gross Income Tax Act
when
received by the New Jersey Trust will retain its status as tax-exempt
in
the hands of such Unit Holders. Gains arising from the sale or
redemption by a Holder of his
Units or from the sale, exchange, redemption or payment at maturity
of
a Bond by the New Jersey Trust are exempt from taxation under the
New
Jersey Gross Income Tax Act (P.L. 1976 C. 47), as enacted and
construed on the date hereof, to the extent such gains are attributable
to
Bonds, the interest on which is exempt from tax under the New
Jersey
Gross Income Tax Act. Any loss realized on such disposition may
not
be utilized to offset gains realized by such
Unit Holder on the disposition of assets the gain on which is subject
to
the New Jersey Gross Income Tax Act.
Units of the New Jersey Trust may be subject, in the
estates
of New Jersey residents, to taxation under the Transfer Inheritance
Tax
Law of the State of New Jersey.
North Carolina Trust
In the opinion of Messrs. Petree Stockton, special North
Carolina counsel on North Carolina tax matters, with respect to the
North Carolina Trust, under then existing law applicable to persons
who
are North Carolina residents:
The State of North Carolina imposes a tax upon the
taxable income of individuals, corporations, estates, and trusts.
Nonresident individuals are generally taxed only on income from
North Carolina sources. Corporations doing business within and
without North Carolina are entitled to allocate and apportion their
income if they have income from business activity which is taxable
in another state. The mere ownership of Units will not subject a
nonresident Unit holder to the tax jurisdiction of North Carolina.
Counsel has been advised that for Federal income tax
purposes the North Carolina Trust will be a grantor trust and not an
association taxable as a corporation. Upon this assumption,
counsel is of the opinion that the North Carolina Trust will be
treated as a grantor trust for North Carolina income tax purposes
and not as an association taxable as a corporation. Each participant
in the North Carolina Trust must report his share of the taxable
income of the North Carolina Trust.
The calculation of North Carolina taxable income of
an
individual, corporation, estate or trust begins with Federal
taxable income. Certain modifications are specified, but no such
modification requires the addition of interest on the obligations of
the State of North Carolina, its political subdivisions, or nonprofit
<PAGE>
<PAGE>
educational institutions organized or chartered under the laws of
North Carolina.
As a general rule, gain (or loss) from the sale of
obligations held by the North Carolina Trust (whether as a result of
the
sale of such obligations by the North Carolina Trust or as a result of
the
sale of a unit by a Unit holder) is includible (or deductible) in the
calculation of the Unit holder's North Carolina taxable income.
Under the language of certain enabling legislation such as the North
Carolina Hospital Authorities Act, the North Carolina Health Care
Facilities Finance Act, the North Carolina Housing Finance Agency
Act, the act establishing the North Carolina State Ports Authority,
the North Carolina Joint Municipal Electric Power and Energy Act,
the act authorizing the organization of business development
corporations, the North Carolina Higher Education Facilities
Finance Act, the North Carolina Agricultural Finance Act, and the
act establishing the North Carolina Solid Waste Management Loan
Program, profits made on the sale of obligations issued by
authorities created thereunder are made expressly exempt from
North Carolina income taxation. The exemption of such profits
from North Carolina income taxation does not require a
disallowance of any loss incurred on the sale of such obligations in
the calculation of North Carolina income taxes.
For Federal income tax purposes, interest on North
Carolina obligations that would otherwise be exempt from taxation
may
in certain circumstances be taxable to the recipient. North Carolina
law provides that the interest on North Carolina obligations shall
maintain its exemption from North Carolina income taxation
notwithstanding that such interest may be subject to federal income
taxation.
North Carolina imposes a tax on persons for the
privilege
of ownership of items of intangible personal property. The tax is
generally imposed at the rate of $.25 per $100 of the value of each
item of intangible personal property at December 31 of each year.
Bonds and other evidences of indebtedness of the State of North
Carolina, political subdivisions of the State, agencies of such
governmental units, or nonprofit educational institutions organized
or chartered under the laws of North Carolina are exempt from the
intangible personal property tax.
This exemption does not extend to units of ownership
of
an investment trust that owns obligations which would be exempt
from
the intangible personal property tax if owned directly by the Unit
holders of the investment trust. However, the North Carolina
Department of Revenue by regulation has announced that the
taxable value of units of ownership in an investment trust may be
reduced by a percentage equal to the ratio of direct obligations of
<PAGE>
<PAGE>
the United States Government and direct obligations of the State of
North Carolina and its political subdivisions held in the trust on
December 31. Thus, if the assets then held by the North Carolina
Trust consist entirely of direct obligations of the United States
Government and direct obligations of the State of North Carolina
and its political subdivisions, the entire value of the North Carolina
Trust Units will not be subject to the intangible personal property
tax under this regulation.
North Carolina imposes a tax on transfers which occur
by
reason of death or by gift. Transfers of obligations of
North
Carolina, its political subdivisions, agencies of such
governmental units, or nonprofit educational institutions organized
or
chartered under the laws of North Carolina are not exempt from the
North Carolina inheritance and gift taxes.
48 U.S.C. Section 745 provides that bonds issued by
the
Government of Puerto Rico, or by its authority, shall be exempt
from
taxation by any State or by any county, municipality, or other
municipal
sudivision of any State. Accordingly, interest on any such
obligations held by the North Carolina Trust would be exempt from
the North Carolina corporate and individual income taxes. The
North Carolina Department of Revenue takes the position that gains
from the sale or other disposition of such obligations are subject to
the North Carolina corporate and individual income taxes. Such
obligations would be treated as obligations of the United States for
purposes of the intangible personal property tax and the application
of such tax to units of ownership in an investment trust.
Ohio Trust
On the Date of Deposit for each Ohio Trust, Squire,
Sanders
& Dempsey, special Ohio counsel on Ohio tax matters, rendered an
opinion under then existing law substantially to the effect that:
The Ohio Trust is not taxable as a corporation or
otherwise for
purposes of the Ohio personal income tax, Ohio school district
income
taxes, the Ohio corporation franchise tax, or the Ohio dealers in
intangibles tax.
Income of the Ohio Trust will be treated as the income of
the
Unit holders for purposes of the Ohio personal income tax, Ohio
school
district income taxes, Ohio municipal income taxes and the Ohio
corporation franchise tax in proportion to the respective interest
therein
of each Unit holder.
Interest on Ohio Obligations held by the Ohio Trust is
exempt
from the Ohio personal income tax and Ohio school district income
taxes, and is excluded from the net income base of the Ohio
corporation
<PAGE>
<PAGE>
franchise tax when distributed or deemed distributed to Unit holders.
Gains and losses realized on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the
Ohio
personal income tax and Ohio
school district income taxes, and are excluded from the net income
base
of the Ohio corporation franchise tax when distributed or deemed
distributed to Unit holders.
Except as stated in the next sentence, Ohio municipalities
may
not impose income taxes on interest on or profit made on the sale of
intangible property, including Ohio Obligations. The municipalities
of
Indian Hill, Wickliffe and Wyoming are authorized by state law to,
and
do, impose a tax on certain intangible income; however, it is not
clear
that such municipalities may tax interest on or profit made on the
sale,
exchange or other disposition of Ohio
Obligations. In addition, specific Ohio statutes authorizing the
issuance
of certain Ohio Obligations generally provide that the interest on
and, in
some cases, gain or profit from the sale or other disposition of such
Ohio
Obligations are exempt from all taxation in the State. Interest on and
gain or profit from the sale or other disposition of obligations issued
pursuant to such statutes are exempt from all Ohio municipal income
taxes.
Pennsylvania Trust
On the Date of Deposit for each Pennsylvania Trust,
Messrs.
Drinker Biddle & Reath, special Pennsylvania counsel on
Pennsylvania
tax matters, rendered an opinion under then existing law substantially
to
the effect that:
Units evidencing fractional undivided interests in the
Pennsylvania Trust are not subject to any of the personal property
taxes
presently in effect in Pennsylvania to the extent that the Trust is
comprised of bonds issued by the Commonwealth of Pennsylvania,
any
public authority, commission, board or
other agency created by the Commonwealth of Pennsylvania or any
public authority created by any such political subdivision
("Pennsylvania
Bonds"). The taxes referred to include the County Personal Property
Tax imposed on residents of Pennsylvania by the Act of June 17,
1913,
P.L. 507, as amended, and the
additional personal property taxes imposed on Pittsburgh residents by
the
School District of Pittsburgh under the Act of June 20, 1947, P.L.
733,
as amended, and by the City of Pittsburgh under Ordinance No. 599
of
December 28, 1967. The portion, if any, representing Pennsylvania
Bonds held by Units in a Prior Trust are also not subject to such
taxes.
The portion, if any, of such Units representing bonds or other
obligations
<PAGE>
<PAGE>
issued by the Government of Guam or by its authority, bonds issued
by
the Government of Puerto Rico or by its
authority, and bonds issued by the Government of the Virgin Islands
or
by a municipality thereof (collectively, "Possession Bonds") is not
expressly exempt from taxation under the foregoing Pennsylvania
Acts.
However, such bonds are expressly relieved from state taxation by
United States statutes. Therefore,
Units in the Pennsylvania Trust are not subject to Personal Property
Tax
to the extent that the Trust is comprised of Possession Bonds.
Pennsylvania Trust Units may be subject to tax in the estate of a
resident
decedent under the Pennsylvania inheritance and estate taxes.
Income received by a Unit holder attributable to interest
realized by the Pennsylvania Trust from Pennsylvania Bonds,
Possession
Bonds, and Prior Trust Units is not taxable to individuals, estates or
trusts under the Personal Income Tax imposed by Article III of the
Tax
Reform Code of 1971; to corporations under the Corporate Net
Income
tax imposed by Article IV of the Tax Reform Code of 1971; nor to
individuals under the Philadelphia School
District Net Income Tax ("School District Tax") imposed on
Philadelphia
resident individuals under the authority of the Act of August 9, 1963,
P.L. 640.
Income received by a Unit holder attributable to gain on
the
sale or other disposition by the Pennsylvania Trust of Pennsylvania
Bonds, Possession Bonds and Prior Trust Units is not taxable to
individuals, estates or trusts under
the Personal Income Tax. Nor is such gain taxable under the
Corporate
Net Income Tax or under the School District Tax, except that gain
on the
sale or other disposition of Possession Bonds and that portion of
Prior
Trust Units attributable to such bonds held for six months or less
may be
taxable under the School District tax.
To the extent that gain on the disposition of a Unit
represents
gain realized on Pennsylvania or Possession Bonds held by the
Pennsylvania Trust or held by Prior Trust Units, such gain may be
subject to the Personal Income Tax
and Corporate Net Income Tax. Such gain may also be subject to
the
School District Tax, except that gain realized with respect to a Unit
held
for more than six months is not subject to the school District Tax.
No opinion is expressed regarding the extent, if any, to
which
Units, or interest and gain thereon, is subject to, or included in the
measure of, the special taxes imposed by the Commonwealth of
Pennsylvania on banks and other financial institutions or with respect
to
any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including
the
Corporate Capital Stock/Foreign Franchise Tax).
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Texas Trust
The opinion of Akin, Gump, Strauss, Hauer & Feld,
special
Texas counsel on Texas tax matters with respect to the Texas Trust,
given on the Date of Deposit under then existing Texas law which is
subject to change includes the following:
(1) Neither the State nor any political subdivision of the
State
currently imposes an income tax on individuals. Therefore, no
portion
of any distribution received by an individual Unitholder of the Trust
in
respect of his Units, including a distribution of the proceeds of
insurance
in respect of such Units, is subject to income taxation by the State or
any
political subdivision of the State;
(2) Except in the case of certain transportation businesses,
savings and loan associations and insurance companies, no Unit of
the
Trust is taxable under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed upon
certain
transfers of property of a deceased resident individual Unitholder,
may
be measured in part upon the value of Units of the Trust included in
the
estate of such Unitholder; and
(4) With respect to any Unitholder which is subject to the
State corporate franchise tax, Units in the Trust held by such
Unitholder,
and distributions received thereon, will be taken into account in
computing the "taxable capital" of the Unitholder allocated to the
State,
one of the bases by which such franchise tax is currently measured
(the
other being a corporation's
"net capital earned surplus," which is, generally, its net corporate
income
plus officers and directors income).
Expenses and Charges
Initial Expenses
At no cost to the State Trusts, the Sponsors have borne all
the
expenses of creating and establishing each Multistate Trust or
Umbrella
Series, including the cost of the initial preparation and execution of
the
Trust Agreement, initial preparation and printing of the certificates
for
Units, the fees of the Evaluator during the initial public offering,
legal
expenses, advertising and selling expenses and other out-of-pocket
expenses. The costs of maintaining
the secondary market, such as printing, legal and accounting, will be
borne by the Sponsors except as otherwise provided in the Trust
Agreement.
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<PAGE>
Trustee's, Sponsors' and Evaluator's Fees--The Trustee
will
receive for its ordinary recurring services to each Multistate Trust or
Umbrella Series an annual fee in the amount set forth in the
"Summary
of Essential Information" of Part A. For a discussion of the services
performed by the Trustee pursuant to its obligations under the Trust
Agreement, see "Rights of Unit Holders". The Trustee will receive
the
benefit of any reasonable cash balances in the Interest and Principal
accounts.
The Portfolio supervision fee (the "Supervision Fee"),
which
is earned for Portfolio supervisory services is based upon the greatest
face amount of Bonds in the Trust at any time during the calendar
year
with respect to which the fee is being computed. The Supervision
Fee
has been incurred by Portfolios
which have come into existence after August 14, 1991, beginning
with
Series 345, initially, and each Series, in existence, thereafter.
The Supervision Fee, which is not to exceed the amount
set
forth in Part A--"Summary of Essential Information", may exceed
the
actual costs ofproviding Portfolio supervisory services for such
Trust, but
at no time will the total amount the Sponsors receive for Portfolio
supervisory services rendered to
all series of Tax Exempt Securities Trust in any calendar year exceed
the
aggregate cost to them of supplying such services in such year. In
addition, the Sponsors may also be reimbursed for bookkeeping and
other administrative services provided to the Trust in amounts not
exceeding their costs of providing these services.
The Evaluator determines the aggregate bid price of the
underlying securities on a daily basis at a fee in the amount set forth
under Part A, "Summary of Essential Information," for each
evaluation
of the Bonds in a State Trust. For a discussion of the services
performed
by the Evaluator pursuant to its obligations under the Trust
Agreement,
see "Evaluator--Responsibility" and "Public Offering--Offering
Price".
Any of such fees may be increased without approval of the
Unit holders by amounts not exceeding proportionate increases in
consumer prices for services as measured by the United States
Department of Labor's Consumer Price Index entitled "All Services
Less
Rent" or, if such Index is no longer
published, in a similar index to be determined by the Trustee and the
Sponsors. In addition, at the time of any such increase, the Trustee
shall
also be entitled to charge thereafter an additional fee at a rate or
amount
to be determined by the Trustee and the Sponsors based upon the
face
amount of Deposited Units in a Trust, for the Trustee's services in
maintaining such Deposited Units. The
approval of Unit holders shall not be required for charging of such
additional fee.
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<PAGE>
Other Charges--The following additional charges are or
may
be incurred by a State Trust: all expenses of the Trustee (including
fees
and expenses of counsel and auditors) incurred in connection with its
activities under the Trust Agreement, including reports and
communications to Unit holders;
expenses and costs of any action undertaken by the Trustee to protect
the
Multistate Trust or Umbrella Series and the rights and interests of
the
Unit holders; fees of the Trustee for any extraordinary services
performed under the Trust Agreement; indemnification of the Trustee
for
any loss or liability accruing to it without gross negligence, bad faith
or
willful misconduct on its part, arising out of or in connection with
its
acceptance or administration of a
State Trust; in the case of certain trusts, to the extent lawful,
expenses
(including legal, accounting and printing expenses) of maintaining
registration or qualification of the Units and/or a State Trust under
Federal or state securities
laws subsequent to initial registration so long as the Sponsors are
maintaining a market for the Units; and all taxes and other
governmental
charges imposed upon the Bonds or any part of a State Trust (no
such
taxes or charges are being levied or made or, to the knowledge of
the
Sponsors, contemplated). The above
expenses, including the Trustee's fee, when paid by or owing to the
Trustee, are secured by a lien on such State Trust. In addition, the
Trustee is empowered to sell Bonds in order to make funds available
to
pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the respective
State
Trusts is determined by adding to the Evaluator's determination of
the
aggregate bid price of the Bonds per Unit a sales charge equal to the
percentage of the Public Offering Price indicated for the Trust in
Part A,
"Summary of Essential Information". The aggregate bid price of the
underlying Bonds may be expected
to be less than the aggregate offering price of the Bonds. (See
"Method
of Evaluation".) A proportionate share of accrued and undistributed
interest on the Bonds in a State Trust at the date of delivery of the
Units
of such State Trust to the purchaser is also added to the Public
Offering
Price.
Units of a State Trust are available to employees of certain
of
the Sponsors, pursuant to employee benefit plans, at a Public
Offering
Price equal to the Evaluator's determination of the aggregate bid
price
of Bonds of a State Trust per Unit plus a sales charge of 1.25% of
the
Public Offering Price. Sales
through such plans to employees of the Sponsors require less selling
effort and selling expenses than sales to the general public.
<PAGE>
<PAGE>
Method of Evaluation
The aggregate bid price of the Bonds (which is used to
calculate the price at which the Sponsors repurchase and sell Units
in the
secondary market and the Redemption Price at which Units may be
redeemed) will be determined by the Evaluator (1) on the basis of the
current bid prices for the Bonds, (2)
if bid prices are not available for any Bonds, on the basis of current
bid
prices of comparable securities, (3) by appraisal, or (4) by any
combination of the above. Such determinations will be made each
business day as of the Evaluation
Time set forth in the "Summary of Essential Information" of Part A,
effective for all sales made subsequent to the last preceding
determination. The term "business day," as used herein, shall
exclude
Saturdays, Sundays and any day
on which the New York Stock Exchange is closed. The difference
between the bid and offering prices of the Bonds may be expected
to
average approximately 1.5 % of principal amount. In the case of
actively traded securities, the difference may be as little as 0.5 of
1%,
and in the case of inactively traded
securities, such difference will usually not exceed 3%. The price at
which Units may be repurchased by the Sponsors in the secondary
market could be less than the price paid by the Unit holder. For
information relating to the calculation of
the Redemption Price per Unit, which is also based on the aggregate
bid
price of the underlying Bonds and which may be expected to be less
than
the Public Offering Price per unit, see "Rights of Unit
Holders--Redemption of Units".
Distribution of Units
Units acquired in the secondary market (see "Public
Offering--
Market for Units") may be offered by this Prospectus at the Public
Offering Price determined in the manner provided above (see "Public
Offering--Offering Price"). The Sponsors will allow a discount on
Units
sold to members of the National Association of Securities Dealers,
Inc.
Such discount is subject to change from time to time.
Sales will be made only with respect to whole Units, and
the
Sponsors reserve the right to reject, in whole or in part, any order
for
the purchase of Units. A purchaser does not become a Unit holder
(Certificate holder) or become entitled to exercise the rights of a Unit
holder (including the right to redeem his Units) until he has paid for
his
Units. Generally, such payment must be made within five business
days
after an order for the purchase of Units has been placed. The price
paid
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<PAGE>
by a Unit holder is the Public Offering Price in effect at the time his
order is received, plus accrued interest (see "Public
Offering--Method of
Evaluation"). This price may be different from the
Public Offering Price in effect on any other day, including the day
on
which the Unit holder pays for the Units.
Market for Units
Although not obligated to do so, the Sponsors presently
intend
to maintain a market for the Units of the respective State Trusts and
to
continuously offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds which may be less than
the
price paid by the Unit holder. For information relating to the
method
and frequency of the Evaluator's
determination of the aggregate bid price of the underlying Bonds, see
"Public Offering--Method of Evaluation". The costs of maintaining
the
secondary market, such as printing, legal and accounting, will be
borne
by the Sponsors except as otherwise provided in the Trust
Agreement.
The Sponsors may cease to maintain such a market at any time and
from
time to time without notice if
the supply of Units of any of the respective State Trusts of the
Multistate
Trust or Umbrella Series exceeds demand, or for any other reason.
In
this event the Sponsors may nonetheless purchase Units, as a service
to
Unit holders, at prices based on the current Redemption Price of
those
Units. In the event that a
market is not maintained for the Units of any of the State Trusts, a
Unit
holder of such State Trust desiring to dispose of his Units may be
able
to do so only by tendering such Units to the Trustee for redemption
at
the Redemption Price, which is also based upon the aggregate bid
price
of the underlying Bonds. (See "Rights of Unit Holders--Redemption
of
Units".)
Exchange Option
Unit holders may elect to exchange any or all of their
Units
of this series for units of one or more of any series of Tax Exempt
Securities Trust (the "Exchange Trust") available for sale in the state
in
which the Unit holder resides at a Public Offering Price for the units
of
the Exchange Trust to be acquired
based on a fixed sales charge of $25 per unit. The Sponsors reserve
the
right to modify, suspend or terminate this plan at any time without
further notice to Unit holders. Therefore, there is no assurance that
a
market for units will in
fact exist on any given date on which a Unit holder wishes to sell his
Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected
in
whole units only. Any excess proceeds from Unit holders' Units
being
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<PAGE>
surrendered will be returned and Unit holders will not be permitted
to
advance any new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for
units of an Exchange Trust will generally constitute a "taxable event"
under the Code, i.e., a Holder will recognize a gain or loss at the
time
of exchange. However, an exchange of Units of this Trust for units
of
any other similar series of the
Tax Exempt Securities Trust which are grantor trusts for U.S.
federal
income tax purposes will not constitute a taxable event to the extent
that
the underlying securities in each trust do not differ materially either
in
kind or in extent. Unit holders are urged to consult their own tax
advisors as to the tax consequences to them of exchanging Units in
particular cases.
Units of the Exchange Trust will be sold under the
Exchange
Option at the bid prices of the underlying securities in the particular
portfolio involved per unit plus a fixed charge of $25 per unit. As
an
example, assume that a Unit holder, who has three units of a trust
with
a current price of $1,020 per unit based on the bid prices of the
underlying securities, desires to exchange
his Units for units of a series of an Exchange Trust with a current
price
of $880 per unit based on the bid prices of the underlying securities.
In
this example, the proceeds from the Unit holder's units will
aggregate
$3,060. Since only whole units of an Exchange Trust may be
purchased
under the Exchange Option, the Unit holder would be able to acquire
three units in the Exchange Trust for
a total cost of $2,715 ($2,640 for the units and $75 for the sales
charge).
The remaining $345 would be returned to the Unit holder in cash.
Reinvestment Programs
Distributions of interest and principal, if any, are made to
Unit
holders monthly. The Unit holder will have the option of either
receiving his monthly income check from the Trustee or participating
in
one of the reinvestment programs offered by certain of the Sponsors
provided such unit holder meets the minimum qualifications of the
reinvestment program and such
program lawfully qualifies for sale in the jurisdiction in which the
Unit
holder resides. Upon enrollment in a reinvestment program, the
Trustee
will direct monthly interest distributions and principal distributions,
if
any, to the reinvestment program selected by the Unit holder. Since
each Sponsor has
arranged for different reinvestment alternatives, Unit holders should
contact the Sponsors for more complete information, including
charges
and expenses. The appropriate prospectus will be sent to the Unit
holder. The Unit holder should
read the prospectus for a reinvestment program carefully before
deciding
<PAGE>
<PAGE>
to participate. Participation in the reinvestment program will apply
to all
Units of a State Trust owned by a Unit holder and may be terminated
at
any time by the Unit holder, or the program may be modified or
terminated by the Trustee or the program's Sponsor.
Sponsors' Profits
For their services the Sponsors receive a gross commission
equal to a percentage of the Public Offering Price of the Units. In
maintaining a market for the Units of the respective State Trusts (see
"Public Offering--Market for Units"), the Sponsors also realize
profits
or sustain losses in the amount of any difference between the price
at
which they buy such Units and the price at which they resell or
redeem
such Units (see "Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective State Trusts is
evidenced
by registered certificates executed by the Trustee and the Sponsors.
A
Certificate is transferable by presentation and surrender of the
Certificate
to the Trustee properly endorsed or accompanied by a written
instrument
or instruments of transfer. Certificates may be issued in
denominations
of one Unit or any multiple thereof. A Unit holder may be required
to
pay $2.00 per certificate reissued or transferred, and to pay any
governmental charge that may be
imposed in connection with each such transfer or interchange. For
new
certificates issued to replace destroyed, stolen or lost certificates, the
Unit holder must furnish indemnity satisfactory to the Trustee and
must
pay such expenses as the Trustee may incur. Mutilated certificates
must
be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each State Trust will be
distributed on each Monthly Distribution Date on a pro rata basis to
Unit
holders in such State Trust of record as of the preceding Record
Date.
All distributions will be net of applicable expenses and funds
required for
the redemption of Units and, if applicable, reimbursements to the
Trustee
for interest payments advanced to Unit holders on previous Monthly
Distribution Dates. (See Part A, "Summary of Essential
Information"
and "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights
of Unit Holders--Redemption of Units" in
this Section.)
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<PAGE>
The Trustee will credit to the Interest Account of each
respective State Trust all interest received by such State Trust,
including
that part of the proceeds of any disposition of Bonds of such State
Trust
which represents accrued interest. Other receipts will be credited to
the
Principal Account of the affected State Trust. The pro rata share of
the
Interest Account and the pro rata
share of cash in the Principal Account represented by each Unit of
a
Trust will be computed by the Trustee each month as of the Record
Date. (See Part A, "Summary of Essential Information".) Proceeds
received from the disposition
of any of the Bonds subsequent to a Record Date and prior to the
next
succeeding Distribution Date will be held in the Principal Account
and
will not be distributed until the following Distribution Date. The
distribution to Unit holders as of each Record Date will be made on
the
following Distribution Date or shortly thereafter, and shall consist of
an
amount substantially equal to one-twelfth of such holders' pro rata
share
of the estimated annual income to the Interest Account after
deducting
estimated expenses (the "Monthly Interest
Distribution") plus such holders' pro rata share of the cash balance
in the
Principal Account computed as of the close of business on the
preceding
Record Date. Persons who purchase Units between a Record Date
and
a Distribution Date will receive their first distribution on the second
Distribution Date following their purchase of Units. No distribution
need be made from the Principal Account if the balance therein is
less
than an amount sufficient to distribute $1.00 per Unit. The Monthly
Interest Distribution per Unit as of the
date shown in the "Summary of Essential Information" in Part A for
the
particular State Trust will change as the income and expenses of the
respective State Trusts change and as Bonds are exchanged,
redeemed,
paid or sold.
Normally, interest on the Bonds in the Portfolio of each
State
Trust is paid on a semi-annual basis. Because Bond interest is not
received by the State Trusts at a constant rate throughout the year,
any
Monthly Interest
Distribution may be more or less than the amount credit to the
Interest
Account as of the Record Date. In order to eliminate fluctuations in
Monthly Interest Distributions resulting from such variances, the
Trustee
is required by the Trust Agreement to advance such amounts as may
be
necessary to provide Monthly Interest Distributions of approximately
equal amounts. The Trustee will be
reimbursed, without interest, for any such advances from funds
available
from the Interest Account on the next ensuing Record Date or
Record
Dates, as the case may be. If all or a portion of the Bonds for which
advances have been made subsequently fail to pay interest when due,
the
Trustee may recoup advances made by it in anticipation of receipt of
interest payments on such Bonds by reducing the amount distributed
per
Unit in one or more Monthly Interest Distributions. If units are
redeemed subsequent to such advances by the
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<PAGE>
Trustee, but prior to receipt by the Trustee of actual notice of such
failure to pay interest, the amount of which was so advanced by the
Trustee, each remaining Unit holder will be subject to a greater pro
rate
reduction in his Monthly Interest Distribution than would have
occurred
absent such redemptions. Funds which are available for future
distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit
holders and are available for use by United States Trust Company of
New York, pursuant to normal banking procedures. The Trustee is
entitled to the benefit of holding any reasonable cash balances in the
Interest and Principal Accounts.
The Trustee anticipates that the average cash balance in the Interest
Account will be approximately 2% in excess of the amounts
anticipated
to be required for Monthly Distributions to Unit holders. In
addition,
because of the varying interest payment dates of the Bonds
comprising
each State Trust portfolio,
accrued interest at any point in time will be greater than the amount
of
interest actually received by a particular State Trust and distributed
to
Unit holders. The excess accrued but undistributed interest amount
is
known as the accrued interest carryover. If a Unit holder sells or
redeems all or a portion of his Units, a
portion of his sale proceeds will be allocable to his proportionate
share
of the accrued interest carryover. Similarly, if a Unit holder
redeems all
or a portion of his Units, the Redemption Price per Unit which he is
entitled to receive from the Trustee will include his accrued interest
carryover on the Bonds. (See
"Rights of Unit Holders--Redemption of Units--Computation of
Redemption Price Per Unit.")
As of the first day of each month the Trustee will deduct
from
the Interest Account of each State Trust and, to the extent funds are
not
sufficient therein, from the Principal Account of such State Trust,
amounts necessary to pay the expenses of such State Trust. (See
"Tax
Exempt Securities Trust--Expenses and Charges".) The Trustee also
may
withdraw from said accounts such amounts, if any, as it deems
necessary
to establish a reserve for any governmental charges payable out of
a State
Trust. Amounts so withdrawn shall
not be considered a part of a State Trust's assets until such time as
the
Trustee shall return all or any part of such amounts to the
appropriate
account. In addition, the Trustee may withdraw from the Interest
Account and the Principal Account such amounts as may be
necessary to
cover redemption of Units by the Trustee. (See "Rights of Unit
Holders--Redemption of Units".) The Trustee
is also entitled to withdraw from the Interest Account, and, to the
extent
funds are not sufficient therein, from the Principal Account, on one
or
more Record Dates as may be appropriate, amounts sufficient to
recoup
advances which the Trustee has made in anticipation of the receipt
by a
Trust of interest in respect of Bonds which subsequently fail to pay
interest when due.
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<PAGE>
Reports and Records
The Trustee shall furnish Unit holders in connection with
each
distribution a statement of the amount of interest, if any, and the
amount
of other receipts, if any, which are being distributed, expressed in
each
case as a dollar amount per Unit. In the event that the issuer of any
of
the Bonds fails to make payment when due of any interest or
principal
and such failure results in
a change in the amount that would otherwise be distributed as a
monthly
distribution, the Trustee will, with the first such distribution
following
such failure, set forth in an accompanying statement, the issuer and
the
Bonds, the amount of the reduction in the distribution per Unit
resulting
from such failure, the percentage of the aggregate principal amount
of
Bonds which such Bond represents and, to the extent then
determined,
information regarding any disposition or legal action with respect to
such
Bond. Within a reasonable time after the end of each calendar year,
the
Trustee will furnish to each person who
at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including
amounts representing interest received upon any disposition of
Bonds),
deductions for payment of applicable taxes and for fees and expenses
of
a State Trust, redemptions of Units
and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount
representing the pro rata
share of each Unit outstanding on the last business day of such
calendar
year; (2) as to the Principal Account: the dates of disposition of any
Bonds and the
net proceeds received therefrom (excluding any portion representing
interest), deductions for payments of applicable taxes and for fees
and
expenses of a State Trust, redemptions of Units, and the balance
remaining after such distributions
and deductions, expressed both as a total dollar amount and as a
dollar
amount representing the pro rata share of each Unit outstanding on
the
last business day of such calendar year; (3) a list of the Bonds held
and
the number of Units
outstanding on the last business day of such calendar year; (4) the
Redemption Price per Unit based upon the last computation thereof
made
during such calendar year; and (5) amounts actually distributed
during
such calendar year from the Interest Account and from the Principal
Account, separately stated,
expressed both as total dollar amounts and as dollar amounts
representing
the pro rata share of each Unit outstanding. The accounts of such
State
Trust will be audited not less frequently than annually by
independent
auditors designated by the Sponsors, and the report of such auditors
shall
be furnished by the Trustee to Unit holders upon request.
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<PAGE>
The Trustee shall keep available for inspection by Unit
holders
at all reasonable times during usual business hours, books of record
and
account of its transactions as Trustee including records of the names
and
addresses of Unit holders, certificates issued or held, a current list
of
Bonds in the Portfolio of a State Trust and a copy of the Trust
Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption at its
unit
investment trust office at 770 Broadway, New York, New York
10003,
upon payment of any relevant tax. At the present time there are no
specific taxes related to the redemption of the Units. No redemption
fee
will be charged by the Sponsors or the Trustee. Units redeemed by
the
Trustee will be canceled.
Certificates for Units to be redeemed must be properly
endorsed or accompanied by a written instrument of transfer. Unit
holders must sign exactly as their name appears on the face of the
certificate with the signature guaranteed
by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain
instances the Trustee any require additional documents such as, but
not
limited to, trust instruments, certificates of death, appointments as
executor or administrator or certificates of
corporate authority.
Within seven calendar days following such tender, the
Unit
holder will be entitled to receive in cash an amount for each Unit
tendered equal to the Redemption Price per Unit computed as of the
Evaluation Time set forth in the "Summary of Essential Information"
in
Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit".)
The "date of tender" is deemed to be the date on which Units are
received by the Trustee, except that as regards Units received after
the
close of trading on the New York Stock Exchange, the date of tender
is
the next day on which such Exchange is
open for trading, and such Units will be deemed to have been
tendered
to the Trustee on such day for redemption at the Redemption Price
computed on that day. For information relating to the purchase by
the
Sponsors of Units tendered to the Trustee for redemption at prices
which
may be, in certain circumstances
in excess of the Redemption Price, see "Redemption of
Units--Purchase
by the Sponsors of Units Tendered for Redemption."
Accrued interest paid on redemption shall be withdrawn
from
the Interest Account, or, if the balance therein is insufficient, from
the
Principal Account. All other amounts paid on redemption shall be
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<PAGE>
withdrawn from the Principal Account. The Trustee is empowered
to
sell Bonds in order to make funds available for redemption. Such
sales,
if required, could result in a sale of Bonds by the Trustee at a loss.
To
the extent Bonds are sold, the size and diversity of a State Trust will
be
reduced.
The Trustee reserves the right to suspend the right of
redemption and to postpone the date of payment of the Redemption
Price
per Unit for any period during which the New York Stock Exchange
is
closed, other than weekend and holiday closings, or trading on that
Exchange is restricted or during which (as determined by the
Securities
and Exchange Commission) an emergency exists as a result of which
disposal or evaluation of the underlying
Bonds is not reasonably practicable, or for such other periods as the
Securities and Exchange Commission has by order permitted.
Computation of Redemption Price per Unit--The
Redemption
Price per Unit of a State Trust is determined by the Trustee on the
basis
of the bid prices of the Bonds in such State Trust as of the
Evaluation
Time on the date any such determination is made. The Redemption
Price per Unit of a State Trust is each Unit's pro rata share,
determined
by the Trustee, of: (1) the
aggregate value of the Bonds in such State Trust on the bid side of
the
market (determined by the Evaluator as set forth under "Public
Offering--Method of
Evaluation"), (2) cash on hand in such State Trust, and accrued and
unpaid interest on the Bonds as of the date of computation, less (a)
amounts representing taxes or governmental charges payable out of
such
State Trust, (b) the accrued expenses of such State Trust, and (c)
cash
held for distribution to
Unit holders of such State Trust of record as of a date prior to the
evaluation.
Purchase by the Sponsors of Units Tendered for
Redemption--
The Trust Agreement requires that the Trustee notify the Sponsors
of any
tender of Units for redemption. So long as the Sponsors are
maintaining
a bid in the secondary market, the Sponsors, prior to the close of
business on the second
succeeding business day, will purchase any Units tendered to the
Trustee
for redemption at the price so bid by making payment therefor to the
Unit holder in an amount not less than the Redemption Price not
later
than the day on which
the Units would otherwise have been redeemed by the Trustee. (See
"Public Offering--Market for Units".) Units held by the Sponsors
may
be tendered to the Trustee for redemption as any other Units,
provided
that the Sponsors shall
not receive for Units purchased as set forth above a higher price than
they paid, plus accrued interest.
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<PAGE>
The offering price of any Units resold by the Sponsors
will be
the Public Offering Price determined in the manner provided in this
Prospectus. (See "Public Offering--Offering Price".) Any profit
resulting
from the resale of such Units will belong to the Sponsors which
likewise
will bear any loss resulting from a lower offering or redemption
price
subsequent to their acquisition of such Units. (See "Public
Offering--Sponsors' Profits".)
SPONSORS
Smith Barney Inc. 1345 Avenue of the Americas,
New York, New York 10105 ("Smith Barney"), was incorporated in
Delaware in 1960 and traces its history through predecessor
partnerships
to 1873. Smith Barney, an investment banking and securities
broker-dealer firm, is a member
of the New York Stock Exchange, Inc. and other major securities
and
commodities exchanges, the National Association of Securities
Dealers,
Inc. and the Securities Industry Association. Smith Barney is an
indirect
wholly-owned subsidiary of The Travelers Inc. (formerly, Primerica
Corporation).
Kidder, Peabody & Co. Incorporated, 10 Hanover Square,
New York, New York 10005 ("Kidder, Peabody"), was incorporated
in
Delaware in 1956 and traces its history through predecessor
partnerships
to 1865. Kidder, Peabody, an investment banking and securities
broker-dealer firm, is a member
of the New York Stock Exchange, Inc. and other major securities
and
option exchanges, the National Association of Securities Dealers,
Inc.
and the Securities Industry Association.
On May 26, 1989 the Commission granted Kidder,
Peabody
a permanent exemption from certain provisions of the Investment
Company Act of 1940 which otherwise would have rendered Kidder,
Peabody ineligible to serve as sponsor, depositor or underwriter of
the
Trust, as a result of an
injunction entered against Kidder, Peabody. The injunction arose out
of
certain alleged activities of Kidder, Peabody not involving the Trust
or
any other investment company and which are described below. In
order
to obtain the permanent exemption, Kidder, Peabody retained a
consultant (at its own expense) to review the policies and procedures
utilized by it to prevent violations
of the federal securities laws in connection with its investment
company
business, and to recommend, where appropriate, changes in policies,
procedures and staffing necessary to assure ongoing compliance.
The
Commission considered the application of Kidder, Peabody for a
permanent exemption after the Commission had received a copy of
the
consultant's report and recommendations and reports from Kidder,
Peabody setting forth the actions it
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<PAGE>
had taken or proposed to take in respect of the implementation of the
consultant's recommendations.
On June 4, 1987 the Commission filed a complaint (the
"Complaint") in the United States District Court for the Southern
District
of New York, in a civil action entitled Securities and Exchange
Commission v. Kidder, Peabody & Co. Incorporated, 87 Civ. 3869
(RO)
(the "SEC Action"). On the same day, Kidder, Peabody entered
into,
and the parties filed in the SEC Action, a related Consent and
Undertakings, in which Kidder,
Peabody neither admitted nor denied any of the allegations in the
Complaint except as to jurisdiction, and pursuant to which Consent
and
Undertakings the District Court entered a Final Judgment of
Permanent
Injunction and other relief as to Kidder, Peabody (the "Final
Judgment").
The exemption from the Act was requested by Kidder, Peabody as
a
result of the Final Judgment.
The Complaint in the injunctive action brought by the
Commission alleges that Kidder, Peabody violated sections 10(b) and
14(e) of the Securities Exchange Act of 1934 (the "Exchange Act")
and
rules promulgated thereunder by engaging, for its own account, in
purchases or sales of the securities of six
named companies while in the possession of material, non-public
information concerning tender offers or other extraordinary corporate
transactions concerning such companies. The Complaint asserts that
such
information was obtained by
a former executive of Kidder, Peabody as part of a scheme for the
exchange of non-public information with a partner at another
investment
banking firm. These allegations are directed to events in 1984 and
1985;
the executive ceased employment with Kidder, Peabody in February,
1986. Other allegations of the Complaint allege violations by
Kidder,
Peabody of sections 7(c) and 17(a)(1) of
the Exchange Act and various rules promulgated thereunder and
aiding
and abetting in violations by another entity of sections 15(c)(3) and
17(a)(1) of the Exchange Act and various rules promulgated
thereunder.
These provisions relate to the maintenance and preservation of
accurate
books and records, adherence to margin requirements prescribed by
the
Federal Reserve Board and
compliance with net capital requirements applicable to
broker-dealers.
The violations alleged in the Complaint with respect to all of these
provisions stem from several transactions in 1984 and 1985 involving
another broker-dealer. According to the Complaint, oral
understandings
between Kidder, Peabody and
the other broker-dealer enabled the other broker-dealer to avoid
adherence to the net capital requirements and constituted an
impermissible extension of credit to such entity by Kidder, Peabody.
Among other provisions, the Final Judgment enjoins
Kidder,
Peabody from engaging in certain transactions, acts, practices or
courses
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<PAGE>
of business which constitute or would constitute violations of
Sections
7(c), 10(b),14(e) and 17(a)(1), or constitute or would constitute
aiding
and abetting violations of Sections 15(c)(3) and 17(a)(1), of the
Exchange Act and various rules promulgated thereunder. The Final
Judgment also requires that Kidder,
Peabody pay a penalty of approximately $11.6 million to the U.S.
Treasury under the Insider Trading Sanctions Act of 1984, and
establish
a fund of approximately $13.7 million which would be available to
compensate anyone with valid claims of injury from the conduct
alleged.
Also, on June 4, 1987, the Commission instituted
administrative proceedings against Kidder, Peabody pursuant to
Section
15(b)(4) of the Exchange Act, entitled In the Matter of Kidder,
Peabody
& Co. Incorporated, Administrative Proceeding File No. 3-6855 (the
"SEC Order").On the same day, Kidder, Peabody filed an Offer of
Settlement (the "Offer")
with respect to the SEC Order, which was accepted by the
Commission
and incorporated into the SEC Order. The Final Judgment was the
basis
for the SEC Order. In the SEC Order, the Commission censured
Kidder, Peabody and ordered that Kidder, Peabody comply with its
undertakings (consisting of certain
remedial measures to be taken by Kidder, Peabody designed to
prevent
future occurrence of the conduct alleged in the Complaint and to
ensure
Kidder, Peabody's compliance on an ongoing basis with the federal
securities laws and the rules and regulations of self-regulatory
organizations) set forth in the Order.
None of the allegations in the Complaint relate to any of
Kidder, Peabody's activities in connection with any unit investment
trust,
or any other investment company.
Smith Barney sponsors numerous open-end investment
companies and closed-end investment companies. Smith Barney also
sponsors all Series of Corporate Securities Trust, Government
Securities
Trust and Harris, Upham Tax-Exempt Fund and acts as co-sponsor
of
certain trusts of The Equity Income
Fund, Concept Series. Kidder, Peabody sponsors Target Corporate
High
Yield Series Unit Trust and family of open-end investment
companies;
Kidder, Peabody Government Money Fund, Inc., Kidder, Peabody
Premium Account Fund, Kidder, Peabody Tax Exempt Money Fund,
Inc., Kidder, Peabody Cash
Reserve Fund, Inc., Kidder, Peabody Exchange Money Fund,
Kidder,
Peabody Equity Income Fund, Inc., Kidder, Peabody Government
Income Fund, Inc., Liquid Institutional Reserves, Kidder, Peabody
Global Equity Fund, Kidder,
Peabody Intermediate Term Fixed Income Fund Kidder, Peabody
Asset
Allocation Fund and Kidder, Peabody California Tax Exempt Money
Fund, Inc. Kidder, Peabody Asset Management Inc., a subsidiary of
Kidder, Peabody, is the investment adviser and administrator of each
of
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<PAGE>
the open-end investment companies. The Sponsors have acted
previously
as managing underwriters of other investment companies. In
addition to
participating as a
member of various underwriting and selling groups or as agent of
other
investment companies, the Sponsors also execute orders for the
purchase
and sale of securities of investment companies and sell securities to
such
companies in their capacities as brokers or dealers in securities.
Limitations on Liability
The Sponsors are jointly and severally liable for the
performance of their obligations arising from their responsibilities
under
the Trust Agreement, but will be under no liability to Unit holders
for
taking any action or refraining from any action in good faith or for
errors in judgment or responsible in any way for depreciation or loss
incurred by reason of the sale of any Bonds, except in cases of
willful
misfeasance, bad faith, gross negligence
or reckless disregard of their obligations and duties. (See "Tax
Exempt
Securities Trust--Portfolio" and "Sponsors--Responsibility".)
Responsibility
The Sponsors are empowered to direct the Trustee to
dispose
of Bonds or deposited Units of other trusts when certain events occur
that adversely affect the value of the Bonds, including default in
payment
of interest or principal, default in payment of interest or principal on
other obligations of the
same issuer, institution of legal proceedings, default under other
documents adversely affecting debt service, decline in price or the
occurrence of other market or credit factors, or decline in projected
income pledged for debt service
on revenue bonds and advanced refunding that, in the opinion of the
Sponsors, may be detrimental to the interests of the Unit holders.
The Sponsors intend to provide portfolio services for each
State Trust in order to determine whether the Trustee should be
directed
to dispose of any such Bonds.
It is the responsibility of the Sponsors to instruct the
Trustee
to reject any offer made by an issuer of any of the Bonds to issue
new
obligations in exchange and substitution for any Bonds pursuant to
a
refunding or refinancing plan, except that the Sponsors may instruct
the
Trustee to accept such an offer or to take any other action with
respect
thereto as the Sponsors may deem proper if the issuer is in default
with
respect to such Bonds or in the
judgment of the Sponsors the issuer will probably default in respect
to
such Bonds in the foreseeable future. Any obligations so received
in
exchange or substitution will be held by the Trustee subject to the
terms
and conditions of the Trust Agreement to the same extent as Bonds
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<PAGE>
originally deposited thereunder. Within five days after the deposit of
obligations in exchange or substitution for
underlying Bonds, the Trustee is required to give notice thereof to
each
Unit holder, identifying the Bonds eliminated and the Bonds
substituted
therefor. Except as stated in this paragraph, the acquisition by a
Multistate Trust or Umbrella Series of any securities other than the
Bonds initially deposited in that particular State Trust is prohibited.
Smith Barney Inc. has been appointed by Kidder,
Peabody & Co. Incorporated as agent for purposes of taking any
action
required or permitted to be taken by the Sponsors under the Trust
Agreement. If the Sponsors are unable to agree with respect to
action
to be taken jointly by them
under the Trust Agreement and they cannot agree as to which
Sponsor
shall act as sole Sponsor, then Smith Barney Inc. shall act as
sole Sponsor. If one of the Sponsors fails to perform its duties under
the
Trust Agreement or becomes incapable of acting or becomes
bankrupt or
its affairs are taken over by public authorities, that Sponsor is
automatically discharged under the Trust
Agreement and the remaining Sponsor acts as Sponsor.
Resignation
Any Sponsor may resign provided that at the time of such
resignation each remaining Sponsor maintains a net worth of
$1,000,000
and is agreeable to such resignation. Concurrently with or
subsequent
to such resignation a new Sponsor may be appointed by the
remaining
Sponsors and the Trustee to assume the duties of the resigning
Sponsor.
If all Sponsors resign or otherwise fail or become unable to perform
their
duties under the Trust Agreement, and no express provision is made
for
action by the Trustee in such event, the Trustee may appoint a
successor
sponsor or terminate the Trust Agreement and liquidate the affected
State
Trusts.
TRUSTEE
The Trustee is United States Trust Company of New
York,
with its principal place of business at 114 West 47th Street, New
York,
New York 10036. United States Trust Company of New York has,
since its establishment in 1853, engaged primarily in the management
of
trust and agency accounts for individuals and corporations. The
Trustee
is a member of the New York Clearing House Association and is
subject
to supervision and examination by the
Superintendent of Banks of the State of New York, the Federal
Deposit
Insurance Corporation and the Board of Governors of the Federal
Reserve System. In connection with the storage and handling of
certain
Bonds deposited in any of the State Trusts, the Trustee may use the
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<PAGE>
services of The Depository Trust Company. These services may
include
safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery
services. The Depository Trust Company is a limited purpose trust
company organized under the Banking Law of the State of New
York,
a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way
for
depreciation or loss incurred by reason of the disposition of any
moneys,
securities or certificates or in respect of any evaluation or for any
action
taken in good faith reliance on prima facie properly executed
documents
except in cases of willful misfeasance, bad faith, gross negligence or
reckless disregard for its obligations and duties. In addition, the
Trustee
shall not be personally
liable for any taxes or other governmental charges imposed upon or
in
respect of any State Trust which the Trustee may be required to pay
under current or future law of the United States or any other taxing
authority having jurisdiction.
(See "Tax Exempt Securities Trust--Portfolio".) For information
relating
to the responsibilities and indemnification of the Trustee under the
Trust
Agreement, reference is made to the material set forth under "Rights
of
Unit Holders", "Sponsors--Resignation" and "Other Charges".
Resignation
By executing an instrument in writing and filing the same
with
the Sponsors, the Trustee and any successor may resign. In such an
event the Sponsors are obligated to appoint a successor trustee as
soon
as possible. If the Trustee becomes incapable of acting or becomes
bankrupt or its affairs are taken
over by public authorities, the Sponsors may remove the Trustee and
appoint a successor as provided in the Trust Agreement. Such
resignation or removal
shall become effective upon the acceptance of appointment by the
successor trustee. If no successor has accepted the appointment
within
thirty days after notice of resignation, the retiring trustee may apply
to
a court of competent jurisdiction for the appointment of a successor.
The resignation or removal of
a trustee becomes effective only when the successor trustee accepts
its
appointment as such or when a court of competent jurisdiction
appoints
a successor trustee.
<PAGE>
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a
division
of Kenny Information Systems, Inc., with main offices located at 65
Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsors and Unit holders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility
for
the accuracy thereof. Determinations by the Evaluator under the
Trust
Agreement shall be made in good faith upon the basis of the best
information available to it;
provided, however, that the Evaluator shall be under no liability to
the
Trustee, the Sponsors or Unit holders for errors in judgment. But
this
provision shall not protect the Evaluator in cases of willful
misfeasance,
bad faith, gross negligence or reckless disregard of its obligations
and
duties.
Responsibility
The Trust Agreement requires the Evaluator to evaluate
the
Bonds of a State Trust on the basis of their bid prices on the last
business
day of June and December in each year, on the day on which any
Unit
of such State Trust is tendered for redemption and on any other day
such
evaluation is desired by
the Trustee or is requested by the Sponsors. For information
relating to
the responsibility of the Evaluator to evaluate the Bonds on the basis
of
their bid prices see "Public Offering--Offering Price."
Resignation
The Evaluator may resign or may be removed by the joint
action of the Sponsors and the Trustee, and in such event, the
Sponsors
and the Trustee are to use their best efforts to appoint a satisfactory
successor. Such resignation or removal shall become effective upon
the
acceptance of appointment by a
successor evaluator. If upon resignation of the Evaluator no
successor
has accepted appointment within thirty days after notice of
resignation,
the Evaluator may apply to a court of competent jurisdiction for the
appointment of a successor.
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<PAGE>
AMENDMENT AND TERMINATION OF THE TRUST
AGREEMENT
Amendment
The Sponsors and the Trustee have the power to amend
the
Trust Agreement without the consent of any of the Unit holders
when
such an amendment is (1) to cure any ambiguity or to correct or
supplement any provision of the Trust Agreement which may be
defective or inconsistent with
any other provision contained therein, or (2) to make such other
provisions as shall not adversely affect the interests of the Unit
holders;
provided, that the Trust Agreement is not amended to increase the
number of Units issuable
thereunder or to permit the deposit or acquisition of securities either
in
addition to or in substitution for any of the Bonds initially deposited
in
the respective State Trusts, except for the substitution of certain
refunding securities for such
Bonds or to permit the Trustee to engage in business or investment
activities not specifically authorized in the Trust Agreement as
originally
adopted. In the event of any amendment, the Trustee is obligated to
notify promptly all Unit holders of the substance of such amendment.
Termination
The Trust Agreement provides that if the principal amount
of
Bonds is less than 50% of the principal amount of the Bonds
originally
deposited in such State Trust, the Trustee may in its discretion and
will,
when directed by the Sponsors, terminate such State Trust. Each
State
Trust may be terminated
at any time by 100% of the Unit holders. See Part A for additional
optional and mandatory termination provisions. However, in no
event
may any State Trust continue beyond the Mandatory Termination
Date
set forth under Part A "Summary of Essential Information." In the
event of termination, written
notice thereof will be sent by the Trustee to all Unit holders. Within
a
reasonable period after termination, the Trustee will sell any Bonds
remaining in the affected State Trust, and, after paying all expenses
and
charges incurred by such State Trust, will distribute to each Unit
holder,
upon surrender for cancellation of his certificate for Units, his pro
rata
share of the balances remaining in the Interest Account and Principal
Account of such State Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Units offered
hereby have been passed upon by Messrs. Davis Polk & Wardwell,
450
Lexington Avenue, New York, New York 10017, as special counsel
for
the Sponsors. Messrs. Carter, Ledyard & Milburn, 2 Wall Street,
New
York, New York 10005, act as counsel for the Trustee.
<PAGE>
<PAGE>
AUDITORS
The Statements of Financial Condition and Portfolios of
Securities of each State Trust included in this Prospectus have been
audited by KPMG Peat Marwick, independent auditors, as indicated
in
their report with respect thereto,
and are included herein in reliance upon the authority of said firm as
experts in giving said report.
BOND RATINGS
All ratings except those identified otherwise are by
Standard
& Poor's Corporation.
Standard & Poor's Corporation
A Standard & Poor's corporate or municipal bond rating
is a
current assessment of the creditworthiness of an obligor with respect
to
a specific debt obligation. This assessment of creditworthiness may
take
into consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or
sell
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's
from
other sources it considers reliable. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability
of,
such information.
The ratings are based, in varying degrees, on the
following
considerations:
I. Likelihood of default--capacity and willingness of
the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy,
reorganization or
other arrangement under the laws of bankruptcy
and
other laws affecting creditors' rights.
<PAGE>
<PAGE>
A summary of the meaning of the applicable ratings
symbols
as published by Standard & Poor's follows:
AAA--This is the highest rating assigned by Standard &
Poor's
to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
AA--Bonds rated AA have a very strong capacity to pay
interest and repay principal, and in the majority of instances they
differ
from AAA issues only in small degrees.
A--Bonds rated A have a strong capacity to pay interest
and
repay principal, although they are somewhat more susceptible to the
adverse affects of changes in circumstances and economic conditions
than
bonds in higher-rated categories.
BBB--Bonds rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions
or
changing circumstances are more likely to lead to weakened capacity
to
pay interest and repay principal for bonds in this category than for
bonds
in the higher-rated categories.
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC, and
C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms
of the obligation. BB indicates the lowest degree of speculation and
C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed
indications
of credit quality, the ratings from "AA" to "CCC" may be modified
by
the addition of a plus or minus sign to show relative standing within
the
major rating categories.
Provisional Ratings: The letter "p" following a rating
indicates the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the issuance
of the
bonds being rated and indicates
that payment of debt service requirements is largely or entirely
dependent
upon the successful and timely completion of the project. This
rating,
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<PAGE>
however, while addressing credit quality subsequent to completion,
makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should
exercise his
own judgment with respect to such likelihood and risk.
Conditional rating(s), indicated by "con" are given to
bonds
for which the continuance of the security rating is contingent upon
Standard & Poor's receipt of an executed copy of escrow agreement
or
closing documentation confirming investments and cash flows and/or
the
security rating is conditional upon the issuance of insurance by the
respective insurance company.
Moody's Investors Service
A brief description of the applicable Moody's Investors Service's
rating symbols and their meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the
best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge". Interest payments are protected
by
a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes
as can be visualized are most unlikely to impair the fundamentally
strong
position of such issues.
Aa--Bonds which are rated Aa are judged to be of high
quality
by all standards. Together with the Aaa group they comprise what
are
generally known as high grade bonds. Aa bonds are rated lower
than the
best bonds because margins of protection may not be as large as in
Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements
may be present which suggest a susceptibility to impairment
sometime
in the future.
Baa--Bonds which are rated Baa are considered as medium
grade obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds
lack outstanding investment characteristics
and in fact have speculative characteristics as well.
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<PAGE>
Ba--Bonds which are rated Ba are judged to have
speculative
elements; their future cannot be considered as well assured. Often
the
protection of interest and principal payments may be very moderate
and
thereby not well safeguarded during both good and bad times over
the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics
of
the desirable investment. Assurance of interest and principal
payments
or of maintenance of other terms of the contract over any long period
of
time may be small.
Caa--Bonds which are rated Caa are of poor standing.
Such
issues may be in default or there may be present elements of danger
with
respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which
are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of
bonds
and issues so rated can be regarded as having extremely poor
prospects
of ever attaining any real investment standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B
groups
which Moody's believes possess the strongest investment attributes
are
designated by the symbols Aa1, A1, Baa1, Ba1, and B1,
respectively.
In addition, Moody's applies numerical modifiers, 1, 2, and 3 in
each
generic rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category. Although industrial Revenue Bonds and Environmental
Control Revenue Bonds are tax-exempt issues, they are included in
the
corporate bond rating system.
Conditional ratings, indicated by "Con" are given to bonds for
which
the security depends upon the completion of some act or the
fulfillment
of some condition. These are bonds secured by (a) earnings of
projects
under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or
(d)
payments to which some other limiting condition attaches. A
parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis
of
condition.
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<PAGE>
Fitch Investors Service, Inc.
A brief description of the applicable Fitch Investors
Service,
Inc. rating symbols and their meanings is as follows:
AAA--Bonds which are considered to be investment grade
and
of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA--Bonds which are considered to be investment grade
and
of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong although not quite as strong as bonds
rated
AAA.
A--Bonds which are considered to be investment grade and
of
high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
bonds
with higher ratings.
BBB-Bonds which are considered to be investment grade
and
of satisfactory credit quality. The obligor's ability to pay interest
and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that these bonds
will fall below investment grade is higher than for bonds with higher
ratings.
Plus (+) Minus (-)--Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit within the
rating
category. Plus and minus signs, however, are not used in the 'AAA',
'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on the
successful
completion of a project of the occurrence of a specific event.
NOTE: NR indicates, among other things, that no rating has
been
requested, that there is insufficient information on which to base a
rating,
or that Standard & Poor's Corporation, Moody's Investors Service
and
Fitch Investors Service, Inc. do not rate a particular type of
obligation
as a matter of policy. Subsequent to the Date of Deposit, the credit
characteristics of the Issuers of Securities may have changed.
Currently,
certain of the Securities in the Portfolio of a Trust may be unrated
and
have credit characteristics comparable
to securities rated below the minimum requirements of such Trust for
acquisition of a Security. See Part A--"Portfolio of Securities"
herein to
ascertain the ratings on the Securities, if any, on the date of the
Portfolios of Securities.
<PAGE>
<PAGE>
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating
Co.
rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are
negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk
is
modest but may vary slightly from time to time because of economic
conditions.
A-Protection factors are average but adequate. However,
risk
factors are more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk
during
economic cycles.
NR- Not rated (credit characteristics comparable to A or
better
on the Date of Deposit).
[/TEXT]
<PAGE>
<TABLE>
Prospectus
This Prospectus contains information concerning the Trust and
the Sponsors, but does not contain all the information set forth
in the registration statements and exhibits relating thereto, which
the Trust has filed with the Securities and Exchange Commission,
Washington, D.C. under the Securities Act of 1933 and the
Investment Company Act of 1940, and to which reference is
hereby made.
<S>
<C>
Index:
Page
Summary of Essential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-
2 Series
264
Financial and Statistical Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 4
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 5
Report of Independent Public Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
Portfolios of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-11
10,088 Units
Tax Exempt Securities Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PROSPECTUS
Additional Considerations Regarding the Trusts . . . . . . . . . . . . . . . . . . . . . . . . . .2
Dated
August 19, 1994
State Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Estimated Current Return and Estimated Long-Term Return 54
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Expenses and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Method of Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Sponsors
Distribution of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Market for Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SMITH BARNEY INC.
Exchange Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Reinvestment Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
1345 Avenue of the Americas
Sponsors' Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
New York, New York 10105
Rights of Unit Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
(800) 298-UNIT
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Distribution of Interest and Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Reports and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Redemption of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 &
Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
KIDDER, PEABODY & CO.
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Incorporated
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Evaluator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
10
Hanover Square
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
New York, New York 10005
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
(212) 747-5951
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Amendment and Termination of the Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 77
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Bond Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Standard & Poor's Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Moody's Investors Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Fitch Investors Service, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
</TABLE>
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Series 264
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-14207 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated August 3, 1994 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
August 5, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Series 264,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 5th day of August, 1994.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Inc. have signed this Post-Effective Amendment
pursuant to Powers of Attorney authorizing the person signing
this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
A majority of the members of the Board of Directors of
Kidder, Peabody & Co. Incorporated have signed this Post-
Effective Amendment pursuant to Powers of Attorney authorizing
the person signing this Post-Effective Amendment to do so on
behalf of such members. These Powers of Attorney were filed with
the Securities and Exchange Commission under the Securities Act
of 1933 as an exhibit to the Registration Statement of Tax Exempt
Securities Trust, Series 303, Post-Effective Amendment No. 1,
Registration No. 33-28378.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
John F. Lyness
Jack L. Rivkin
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
<PAGE>
TAX EXEMPT SECURITIES TRUST
By Kidder, Peabody & Co. Incorporated
By
(Gilbert R. Ott, Jr.)
By the following persons*, who constitute a majority
of the directors of Kidder, Peabody & Co. Incorporated:
Edward A. Cerullo
Michael A. M. Keehner
John M. Liftin
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
By
(Gilbert R. Ott, Jr.
Attorney-in-Fact)
___
* Pursuant to Powers of Attorney previously filed.
II-4
