<PAGE>
Registration No. 33-16308
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 8
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
SERIES 267
B.
Name of Depositor:
SMITH BARNEY INC.
<TABLE>
<S> <C>
C. Complete address of depositor's principal executive
office:
SMITH BARNEY
INC.
388 Greenwich Street
New York, New York 10013
D. Name and complete address of agent for service:
LAURIE A. HESSLEIN
Smith Barney
Inc.
388 Greenwich Street
New York, New York 10013
</TABLE>
It is proposed that this filing will become effective November 22,
1995
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>
Ohio Trust 73
Pennsylvania Trust 78
[S][C]
In the opinion of counsel, under existing law interest income to the
Trusts and, with certain exceptions, to Unit holders is exempt from all
Federal income tax. In addition, in the opinion of counsel, the interest
income of each State Trust is similarly exempt from state income taxes
in the state for which such Trust is named. Capital gains, if any, are
subject to tax. Investors should retain both parts of this Prospectus for
future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS
HAS BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE
ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSORS EITHER BY PURCHASE FROM
THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR
IN THE SECONDARY MARKET. SEE PART B, "RIGHTS OF
UNIT HOLDERS--REDEMPTION OF UNITS--PURCHASE BY
THE SPONSORS OF UNITS TENDERED FOR REDEMPTION"
AND "MARKET FOR UNITS". THE PRICE AT WHICH THE
UNITS OFFERED HEREBY WERE ACQUIRED WAS NOT LESS
THAN THE REDEMPTION PRICE DETERMINED AS PROVIDED
HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS--
REDEMPTION OF UNITS--COMPUTATION OF REDEMPTION
PRICE PER UNIT".
THE TAX EXEMPT SECURITIES TRUST SERIES 267 consists of
two underlying separate unit investment trusts (the "Trusts" or "State
Trusts") designated as the Ohio Trust 73 and Pennsylvania Trust 78,
each formed for the purpose of obtaining for its Unit holders tax-
exempt interest income through investment in a fixed portfolio
consisting primarily of long term municipal bonds rated at the time of
deposit A or better by Standard & Poor's Corporation or Moody's
Investors Service, with certain ratings being provisional or conditional.
(See "Portfolio of Securities".) Each State Trust is comprised of a
fixed portfolio of interest bearing obligations issued primarily by or on
behalf of the State for which such Trust is named and counties,
municipalities, authorities and political subdivisions thereof. The
interest on all bonds in each State Trust is, in the opinion of
recognized bond counsel to the issuers of the obligations, exempt from
all Federal income tax (except in certain instances depending upon the
Unit holders) under existing law and from state income taxes in the
State for which such Trust is named. See "Taxes" regarding proposals
with respect to the Federal income tax treatment of interest on
municipal bonds.
THE PUBLIC OFFERING PRICE of the Units of each State Trust
is equal to the aggregate bid price of the underlying Securities in the
State Trust's portfolio divided by the number of Units outstanding in
such State Trust, plus a sales charge equal to 3.25% of the Public
Offering Price (3.359% of the aggregate bid price of the Securities per
Unit) for the Ohio Trust and Pennsylvania Trust, respectively. A
proportional share of accrued and undistributed interest on the
Securities at the date of delivery of the Units to the purchaser is also
added to the Public Offering Price.
THE SPONSORS, although not obligated to do so, intend to maintain
a market for the Units of the Trusts at prices based upon the aggregate
bid price of the underlying Securities, as more fully described in Part
B, "Market for Units". If such a market is not maintained, a Unit
holder may be able to dispose of his Units only through redemption at
prices based upon the aggregate bid price of the underlying Securities.
MONTHLY DISTRIBUTIONS of principal and interest received by
the Trusts will be made on or shortly after the fifteenth day of each
month to holders of record on the first day of that month. For further
information regarding the distributions by the Trust, see the "Summary
of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus Part A dated November 22, 1995
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
SUMMARY OF ESSENTIAL INFORMATION AS OF
SEPTEMBER 12, 1995+
Sponsor: SMITH BARNEY INC.
Trustee: THE CHASE MANHATTAN BANK, N.A.
Evaluator: KENNY S&P EVALUATION SERVICES
OhioPennsylvania
Trust 73Trust 78
<S><C><C>
Principal Amount of Securities in Trust$2,295,000$2,190,000
Number of Units 2,2372,763
Fractional Undivided Interest in Trust per Unit 1/2,2371/2,763
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less
than$1,500,000$1,500,000
Trust must be terminated if Principal Amount is less
than$750,000$750,000
Principal Amount of Securities in Trust per Unit$1,025.92$792.61
Public Offering Price per Unit#*$1,097.69$865.05
Sales Charge (3.25% of Public Offering Price)# 35.67 28.11
Approximate Redemption and Sponsor's Repurchase Price
per Unit (per Unit Bid Price of Securities)#**$1,062.02$836.94
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit$76.80$59.73
Less Estimated Annual Expenses per Unit 2.03 1.92
Estimated Net Annual Income per Unit$74.77$57.81
Monthly Income Distribution per Unit$6.23$4.81
Daily Rate (360-day basis) of Income Accrual per Unit$.2076$.1605
Estimated Current Return Based on Public Offering Price#
6.81%6.68%
Estimated Long-Term Return# 4.90%4.05%
<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 $17.69 and $15.02 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 Ohio Trust and
Pennsylvania Trust, respectively, through the expected date of
settlement (three business days after September 12, 1995).
The sales charge was previously reduced because prerefundings of
Portfolio securities have shortened the average life of the Trust.
**Plus $16.65 and $14.22 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 Ohio Trust and
Pennsylvania Trust, respectively, as of September 12, 1995 on a pro
rata basis. (See "Redemption of Units--Computation of Redemption
Price per Unit".)
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
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:September 1, 1987
Mandatory Termination Date:January 1, 2037
Trustee's Annual Fee: $1.26 per $1,000 principal amount
of bonds ($5,651 per year on the
basis of bonds in the principal
amount of $4,485,000) plus
expenses.
Evaluator's Fee:$.30 per bond per evaluation
As of September 12, 1995, 3 (26%) of the Bonds in the Ohio
Trust were rated by Standard & Poor's Corporation (12% being rated
AAA and 14% being rated BBB) and 4 (74%) were rated by Moody's
Investors Service (8% being rated Aaa and 66% being rated A); 6
(73%) of the Bonds in the Pennsylvania Trust were rated by Standard
& Poor's (18% being rated AAA, 19% being rated AA and 36% being
rated A), 3 (25%) were rated by Moody's (18% being rated A and 7%
being rated Ba) and 1 (2%) was not rated by either service.
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 80% and
56% of the Bonds in the Ohio Trust and Pennsylvania Trust,
respectively, consist of hospital revenue bonds (including obligations
of health care facilities). Approximately 8% of the Bonds in the Ohio
Trust consist of obligations of municipal housing authorities.
Approximately 8% of the Bonds in the Ohio Trust consist of bonds
which are subject to the Mortgage Subsidy Bond Tax Act of 1980.
(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 September 12,
1995.<PAGE>
<PAGE>
<TABLE>TAX EXEMPT SECURITIES TRUST, SERIES 267
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
IncomePrincipal
UnitsNet AssetDistributionsDistributions
Period EndedOutstandingValue Per UnitPer UnitPer Unit
<C><S><C><C><C><C>
July 31, 1993 Ohio 2,359$1,139.66$75.48$-
Pennsylvania 2,8541,075.5776.68-
July 31, 1994 Ohio 2,285$1,107.99$75.14$-
Pennsylvania 2,794960.9870.3596.28
July 31, 1995 Ohio 2,237$1,077.11$74.84$1.59
Pennsylvania2,763881.4967.0168.08
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
BALANCE SHEETS
July 31, 1995
ASSETS
OhioPennsylvania
Trust 73Trust 78
<S><C><C>
Investments in tax exempt bonds, at market value
(Cost $2,136,150 and $2,059,379, respectively)
(Note 3 to Portfolio of Securities)$2,360,694$2,306,365
Accrued interest 33,34742,191
Cash 15,985 87,387
Total Assets$2,410,026$2,435,943
LIABILITIES AND NET ASSETS
Accrued expenses$ 519$ 364
Net Assets (Units of fractional undivided interest
outstanding - 2,237 and 2,763, respectively):
Original cost to investors (Note 1)$3,055,3563,085,273
Less initial underwriting commission (sales charge) (Note 1)
143,602 145,008
2,911,7542,940,265
Cost of bonds sold or redeemed since date of deposit
(September 1, 1987) (775,604)(880,886)
Net unrealized market appreciation 224,544 246,986
2,360,6942,306,365
Undistributed net investment income 48,80350,379
Undistributed proceeds from bonds sold or redeemed 10
78,835
Net Assets 2,409,507 2,435,579
Total Liabilities and Net Assets$2,410,026$2,435,943
Net asset value per unit$1,077.11$881.49
The accompanying Notes to Financial Statements are an integral
part of these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
OHIO TRUST 73
STATEMENTS OF OPERATIONS
For the years ended July 31, 1995, 1994 and 1993
1995 1994 1993
<S><C><C><C>
Investment Income-interest (Note 2)$ 173,844$ 177,624$
183,197
Less expenses:
Trustee's fees and expenses 4,0003,8063,914
Evaluator's fees 591 598 387
Total expenses 4,591 4,404 4,301
Net investment income 169,253 173,220 178,896
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) (2,938)1,255-
Net increase (decrease) in unrealized market
appreciation (65,262) (73,116) 63,154
Net gain (loss) on investments (68,200) (71,861) 63,154
Net increase in net assets resulting from
operations$101,053$101,359$242,050
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1995, 1994 and 1993
1995 1994 1993
Operations:
Net investment income$169,253$173,220$178,896
Net realized gain (loss) on securities transactions
(Note 5) (2,938)1,255-
Net increase (decrease) in unrealized market
appreciation (65,262) (73,116) 63,154
Net increase in net assets resulting from operations 101,053
101,359 242,050
Distributions to Unit Holders:
Net investment income (Note 4)(169,217) (173,091) (178,057)
Proceeds from securities sold or redeemed (3,557) -
-
Total Distributions (172,774) (173,091) (178,057)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (824)(1,174)-
Value of Units at date of redemption (49,708) (83,806) -
Total Redemptions (50,532) (84,980) -
Increase (decrease) in net assets (122,253)(156,712)63,993
Net Assets:
Beginning of year 2,531,760 2,688,472 2,624,479
End of year (including undistributed net
investment income of $48,803, $49,591
and $50,636, respectively)$2,409,507$2,531,760$2,688,472
The accompanying Notes to Financial Statements are an integral part of
these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
PENNSYLVANIA TRUST 78
STATEMENTS OF OPERATIONS
For the years ended July 31, 1995, 1994 and 1993
1995 1994 1993
Investment Income-interest (Note 2)$ 189,700$ 197,575$
227,917
Less expenses:
Trustee's fees and expenses4,6404,2404,817
Evaluator's fees 1,008 1,040 1,154
Total expenses 5,648 5,280 5,971
Net investment income 184,052 192,295 221,946
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5)(27,702)(36,069)2,536
Net increase (decrease) in unrealized market
appreciation (1,883) (8,787) 43,462
Net gain (loss) on investments (29,585) (44,856) 45,998
Net increase in net assets resulting from
operations$154,467$147,439$267,944
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended July 31, 1995, 1994 and 1993
1995 1994 1993
Operations:
Net investment income$184,052$192,295$221,946
Net realized gain (loss) on securities transactions
(Note 5) (27,702)(36,069)2,536
Net increase (decrease) in unrealized market
appreciation (1,883) (8,787) 43,462
Net increase in net assets resulting from operations 154,467
147,439 267,944
Distributions to Unit Holders:
Net investment income (Note 4) (186,421)(197,706)(222,280)
Proceeds from securities sold or redeemed (189,127) (269,006)
-
Total Distributions (375,548) (466,712) (222,280)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (477)(1,136)(1,505)
Value of Units at date of redemption (27,858) (64,294)
(84,066)
Total Redemptions (28,335) (65,430) (85,571)
Decrease in net assets (249,416)(384,703)(39,907)
Net Assets:
Beginning of year 2,684,995 3,069,698 3,109,605
End of year (including undistributed net
investment income of $50,379, $53,225
and $59,772, respectively)$2,435,579$2,684,995$3,069,698
The accompanying Notes to Financial Statements are an integral part of
these statements.<PAGE>
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
July 31, 1995
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial public
offering price as of the date of deposit (September 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) 122 Units and 172 Units in the Ohio Trust and Pennsylvania Trust,
respectively, were redeemed by the Trustee during the three years
ended July 31, 1995 (48 Units and 31 Units in the Ohio Trust and
Pennsylvania Trust, respectively, being redeemed in 1995. 74 Units
and 60 Units in the Ohio Trust and Pennsylvania Trust, respectively,
being redeemed in 1994. 81 Units in the Pennsylvania Trust being
redeemed in 1993).
(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 Sponsor is deemed to be issuer of each
Trust's Units. As such, the Sponsor has the responsibility of issuer
under the Act with respect to financial statements of each Trust
included in the Registration Statement.
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust, Series 267:
We have audited the accompanying balance sheets of Tax Exempt Securities
Trust, Series 267 (comprising, respectively, Ohio Trust 73 and Pennsylvania
Trust 78), including the portfolios of securities, as of July 31, 1995, and the
related statements of operations and changes in net assets for each of the
years in the three-year period ended July 31, 1995. These financial
statements are the responsibility of the Trustee (see Note 6). Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned as of July 31,
1995 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 267 as of July 31, 1995,
and the results of their operations and changes in their net assets for each of
the years in the three-year period ended July 31, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
October 26, 1995
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
OHIO TRUST 73 - PORTFOLIO OF SECURITIES - July 31, 1995
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
<S><C><C><C><C>
Ohio Building Authority, State
Correctional Facilities Bonds, AAA10/1/95 @ 103$35,000$36,360
9.10% due 10/1/2004 (p)
City of Cleveland, Ohio, Waterworks
Improvement First Mortgage RevenueAaa*1/1/97 @ 102170,000182,240
Bonds, 7.875% due 1/1/2016 (p)
County of Cuyahoga, Ohio, Hospital
Refunding Revenue Bonds, The
Mt. Sinai Medical Center, A*11/15/97 @ 102500,000535,490
8.125% due 11/15/2014S.F. 11/15/07 @ 100
Hamilton, Ohio, Sewer System
Revenue Bonds, Metropolitan
Sewer District of GreaterAAA6/1/96 @ 102240,000251,868
Cincinnati, 7.50% due 12/1/2010 (p)
Mahoning County, Ohio, Hospital
Facilities Refunding Revenue
Bonds, St. Elizabeth HospitalA+6/1/96 @ 100500,000502,730
Medical Center, 6.75% due 12/1/2016S.F. 12/1/10 @ 100
County of Miami, Ohio, Hospital
Facilities Revenue Refunding
Bonds, Upper Valley MedicalA-5/1/97 @ 102500,000534,280
Center, Inc., 8.375% due 5/1/2013
County of Montgomery, Ohio, Hospital
Facilities Revenue Refunding Bonds,
Dayton Osteopathic Hospital BBB6/1/97 @ 102 350,000 317,726
Project, 6.00% due 12/1/2012S.F. 6/1/09 @ 100
$2,295,000$2,360,694
The accompanying Notes are an integral part of this Portfolio.
A-9<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
PENNSYLVANIA TRUST 78 - PORTFOLIO OF SECURITIES -
July 31, 1995
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
Allegheny County, Pennsylvania, Hospital
Development Authority, Hospital Revenue
Bonds, Mercy Hospital of Pittsburgh, A+4/1/96 @
102$440,000$455,686
7.375% due 4/1/2015
Allegheny County Hospital Development
Authority, Pennsylvania, Hospital Revenue
Refunding Bonds, South Hills Health A*3/1/97 @ 102200,000203,778
System Project, 7.00% due 3/1/2007S.F. 3/1/00 @ 100
Chester County, Pennsylvania, Hospital
Authority, Hospital Revenue Bonds, A-7/1/97 @ 102200,000203,194
Brandywine Hospital, 7.00% due 7/1/2010
Lehigh County, Pennsylvania, General
Purpose Authority, Hospital Revenue
Refunding Bonds, Horizon Health NR7/1/97 @ 10150,00054,151
System, Inc., 8.25% due 7/1/2013 (p)
The Philadelphia Municipal Authority,
Philadelphia, Pennsylvania, RefundingAAA(c)7/15/97 @
102250,000272,767
Revenue Bonds, 7.875% due 7/15/2017 (p)
Philadelphia, Pennsylvania, Hospital &
Higher Education Facility Authority,
Hospital Revenue Bonds, Roxborough
Memorial Hospital Issue, A-2/1/97 @ 100370,000385,440
7.10% due 2/1/2027 (p)
Philadelphia, Pennsylvania, Authority
For Industrial Development, Industrial
Development Revenue Refunding Bonds, Ba3*5/1/97 @
103155,000154,974
U.S. Gypsum Company, 7.25% due 5/1/2014
University of Pittsburgh, Pennsylvania,
Higher Education University Project AAA6/1/97 @ 102125,000136,935
Bonds, 8.375% due 6/1/2005 (p)
York County, Pennsylvania, Solid Waste
and Refuse Authority, Resource Recovery
Project Bonds, 8.20% due 12/1/2014AA-12/1/97 @ 103210,000230,706
S.F. 12/1/08 @ 100
8.20% due 12/1/2014AA-12/1/97 @ 103 190,000 208,734
S.F. 12/1/08 @ 100
$2,190,000$2,306,365
The accompanying Notes are an integral part of this Portfolio.
A-10<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 267
PORTFOLIO OF SECURITIES - July 31, 1995
(Continued)
At July 31, 1995, the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
OhioPennsylvania
Trust 73Trust 78
<S><C><C>
Gross unrealized market appreciation$227,034$246,986
Gross unrealized market depreciation (2,490) -
Net unrealized market appreciation$224,544$246,986
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set forth
in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue of
bonds initially or currently is redeemable and the redemption price
for that year; unless otherwise indicated, each issue continues to be
redeemable at declining prices thereafter, but not below par. "S.F."
indicates a sinking fund has been or will be established with respect
to an issue of bonds. The prices at which bonds may be redeemed
or called prior to maturity may or may not include a premium and,
in certain cases, may be less than the cost of the bonds to the Trust.
Certain bonds in the portfolios, including bonds not listed as being
subject to redemption provisions, may be redeemed in whole or in
part other than by operation of the stated redemption or sinking fund
provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of
such bonds. For example, see discussion of obligations of municipal
housing authorities under "Tax Exempt Securities Trust--Portfolio"
in Part B.
(3) The market value of securities as of July 31, 1995 was determined
by the Evaluator on the basis of bid prices for the securities at such
date.
(p) It is anticipated that these bonds will be redeemed prior to
their scheduled maturity, pursuant to a pre-refunding, as
reflected under the column "Redemption Provisions".
(c) Continuance of the rating is contingent upon Standard &
Poor's Corporation's receipt of an executed copy of the escrow
agreement or closing documentation confirming investments
and cash flows.
A-11
<PAGE>
PROSPECTUS-PART B
Note: Part B of this Prospectus may not be distributed
unless accompanied by Part A
TAX EXEMPT SECURITIES TRUST
For over 20 years, Tax Exempt Securities Trust has
specialized in quality municipal bond investments designed to meet a
variety of investment objectives and tax situations. Tax Exempt
Securities Trust is a convenient and cost effective alternative to
individual bond purchases. Each State Trust or Umbrella Series 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 J.J.
Kenny Co., Inc., as evaluator (the "Evaluator"). As of the date of this
Prospectus, the sponsor is Smith Barney Inc. (the "Sponsor" ). Each
trust contains Bonds of a State for which such Trust is named herein (a
"State Trust"). On the Date of Deposit the Sponsor deposited with the
Trustee interest-bearing obligations (the "Bonds"), including contracts
for the purchase of certain such obligations for the State Trusts and all
other Trusts (hereinafter referred to as the "Umbrella Series")(such
Bonds and Deposited Units being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsor
registered certificates of beneficial interest (the "Certificates")
representing the units (the "Units") comprising the entire ownership of
each State Trust or Umbrella Series. The initial public offering of
Units in each State Trust and Umbrella Series has been completed.
The Units offered hereby are issued and outstanding Units which have
been acquired by the Sponsor either by purchase from 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
Sponsor of Units Tendered for Redemption" and "Public Offering --
Market for Units."
Objectives
A tax-exempt unit investment trust provides many of the
same benefits as individual bond purchases, while the Unit holder
avoids the complexity of analyzing selecting and monitoring a
multibond portfolio. The objectives of each State Trust and Umbrella
Series are tax-exempt income and conservation of capital through an
investment in a diversified portfolio of municipal bonds. There is, of
course, no guarantee that a Multistate Trust's or 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 and Umbrella Series: (1) all
the Bonds deposited in a State Trust or an Umbrella Series 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 - Taxes", (2) the Bonds are diversified as to purpose
of issue, (3) in the opinion of the Sponsor, the Bonds are fairly valued
relative to other bonds of comparable quality and maturity and (4) the
Bonds were chosen in part on the basis of their respective maturity
dates and offer a degree of call protection. The rating of each issue is
also set forth in Part A, "Portfolio of Securities." For a description of
the meaning of the applicable rating symbols as published by Standard
& Poor's and Moody's, see "Ratings." It should be emphasized,
however, that the ratings of Standard & Poor's and Moody's represent
their opinions as to the quality of the Bonds which they undertake to
rate, and that these ratings are general and are not absolute standards
of quality.
References to State Trusts, in the following discussion,
also relate to other Trusts comprising Umbrella Series.
The Bonds in the Portfolio of a State Trust were chosen
in part on the basis of their respective maturity dates. The actual
maturity date of each of the Bonds contained in a State Trust is
indicated in Part A. A 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 or Umbrella Series. The inability of an issuer
to pay the principal amount due upon the maturity of a Bond would
result in a loss to the State Trust or Umbrella Series.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust and
Umbrella Series 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 and Umbrella Series 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 and Umbrella Series at a price higher than the price at which it
is redeemable, redemption will result in a loss of capital when
compared with the original public offering price of the Units.
Conversely, to the extent that a Bond was acquired at a price lower
than the redemption price, redemption will result in an increase in
capital when compared with the original public offering price of the
Units. Monthly distributions will generally be reduced by the amount
of the income which would otherwise have been paid with respect to
redeemed bonds. The Estimated Current Return and Estimated
Long-Term Return of the Units may be affected by such redemptions.
Each Portfolio of Securities in Part A contains a listing of the sinking
fund and call provisions, if any, with respect to each of the Bonds in
a State Trust and Umbrella Series. 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 and Umbrella Series will
retain for any length of time its present size and composition. Neither
the Sponsor nor the Trustee shall be liable in any way for any default,
failure or defect in any Bond.
The Portfolio of the State Trust and Umbrella Series 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 and Umbrella Series may contain or be
concentrated in one or more of the classifications of Bonds referred to
below. A State Trust and Umbrella Series 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 and Umbrella Series described
therein.) An investment in Units of the State Trust and Umbrella Series
should be made with an understanding of the risks that these
investments may entail, certain of which are described below.
General Obligation Bonds. Certain of the Bonds in the
Portfolio may be general obligations of a governmental entity that are
secured by the taxing power of the entity. General obligation bonds are
backed by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. However, the taxing power
of any governmental entity may be limited by provisions of state
constitutions or laws and an entity's credit will depend on many factors,
including an erosion of the tax base due to population declines, natural
disasters, declines in the state's industrial base or inability to attract
new industries, economic limits on the ability to tax without eroding
the tax base and the extent to which the entity relies on Federal or state
aid, access to capital markets or other factors beyond the entity's
control.
As a result of the recent recession's adverse impact upon
both their revenues and expenditures, as well as other factors, many
state and local governments are confronting deficits and potential
deficits which are the most severe in recent years. Many issuers are
facing highly difficult choices about significant tax increases and/or
spending reductions in order to restore budgetary balance. Failure to
implement these actions on a timely basis could force the issuers to
depend upon market access to finance deficits or cash flow needs.
In addition, certain of the Bonds in the State Trust and
Umbrella Series 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.
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.
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 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 and Umbrella Series 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 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 of 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 to the date of issuance, thereby reducing the
value of the bonds, subjecting the Holders to unanticipated tax liabilities
and possibly requiring the Trustee to sell the bonds at reduced values.
Furthermore, any failure to meet these ongoing requirements might not
constitute an event of default under the applicable mortgage or permit
the holder to accelerate payment of the bond or require the issuer to
redeem the bond. In any event, where the mortgage is insured by the
Federal Housing Administration, its consent may be required before
insurance proceeds would become payable to redeem the mortgage
bonds.
Power Facility Bonds. The ability of utilities to meet their
obligations with respect to revenue bonds issued on their behalf is
dependent on various factors, including the rates they may charge their
customers, the demand for a utility's services and the cost of providing
those services. Utilities, in particular investor-owned utilities, are
subject to extensive regulations relating to the rates which they may
charge customers. Utilities can experience regulatory, political and
consumer resistance to rate increases. Utilities engaged in long-term
capital projects are especially sensitive to regulatory lags in granting
rate increases. Any difficulty in obtaining timely and adequate rate
increases could adversely affect a utility's results of operations.
The demand for a utility's services is influenced by,
among 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 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 Sponsor cannot
predict at this time the ultimate effect of such factors on the ability of
any issuers to meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became
law in October, 1992, makes it mandatory for a utility to permit
non-utility generators of electricity access to its transmission system for
wholesale customers, thereby increasing competition for electric
utilities. NEPA also mandated demand-side management policies to be
considered by utilities. NEPA prohibits the Federal Energy Regulatory
Commission from mandating electric utilities to engage in retail
wheeling, which is competition among suppliers of electric generation
to provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate
retail wheeling under certain conditions.
There is concern by the public, the scientific community,
and the U.S. Congress regarding environmental damage resulting from
the use of fossil fuels. Congressional support for the increased
regulation of air, water, and soil contaminants is building and there are
a number of pending or recently enacted legislative proposals which
may affect the electric utility industry. In particular, on November 15,
1990, legislation was signed into law that substantially revises the Clean
Air Act (the "1990 Amendments"). The 1990 Amendments seek to
improve the ambient air quality throughout the United States by the
year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility
power plants, particularly those fueled by coal. Under the 1990
Amendments the U.S. Environmental Protection Agency ("EPA") must
develop limits for nitrogen oxide emissions by 1993. The sulphur
dioxide reduction will be achieved in two phases. Phase I addresses
specific generating units named in the 1990 Amendments. In Phase II
the total U.S. emissions will be capped at 8.9 million tons by the year
2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated levels. An
allowance is defined as the authorization to emit one ton of sulphur
dioxide.
The 1990 Amendments also provide for possible further
regulation of toxic air emissions from electric generating units pending
the results of several federal government studies to be conducted over
the next three to four years with respect to anticipated hazards to
public health, available corrective technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power
plants are exposed to risks inherent in the nuclear industry. These risks
include exposure to new requirements resulting from extensive federal
and state regulatory oversight, public controversy, decommissioning
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.
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.
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 and Umbrella Series 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 waste
disposal facilities are generally payable from tipping fees and from
revenues that may be earned by the facility on the sale of electrical
energy generated in the combustion of waste products. The ability of
solid waste disposal facilities to meet their obligations depends upon the
continued use of the facility, the successful and efficient operation of
the facility and, in the case of waste-to-energy facilities, the continued
ability of the facility to generate electricity on a commercial basis. All
of these factors may be affected by a failure of municipalities to fully
utilize the facilities, an insufficient supply of waste for disposal due to
economic or population decline, rising construction and maintenance
costs, any delays in construction of facilities, lower-cost alternative
modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of financing, there
may be technological risks involved in the satisfactory construction or
operation of the projects exceeding those associated with most
municipal enterprise projects. Increasing environmental regulation on
the federal, state and local level has a significant impact on waste
disposal facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs on the
facilities. These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining construction and
operating permits, the cost of conforming to prescribed and changing
equipment standards and required methods of operation and, for
incinerators or waste-to-energy facilities, the cost of disposing of the
waste residue that remains after the disposal process in an
environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and
officials to their location and operation, to the possible adverse effects
upon the public health and the environment that may be caused by
wastes disposed of at the facilities and to 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 and Umbrella
Series may also include "moral obligation" bonds. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral commitment but not a legal obligation of the
state or municipality in question. Even though the state may be called
on to restore any deficits in capital reserve funds of the agencies or
authorities which issued the bonds, any restoration generally requires
appropriation by the state legislature and accordingly does not constitute
a legally enforceable obligation or debt of the state. The agencies or
authorities generally have no taxing power.
Refunded Bonds. Refunded Bonds are typically secured by
direct obligations of the U.S. Government, or in some cases obligations
guaranteed by the U.S. Government, placed in an escrow account
maintained by an independent trustee until maturity or a predetermined
redemption date. These obligations are generally noncallable prior to
maturity or the predetermined redemption date. In a few isolated
instances to date, however, bonds which were thought to be escrowed
to maturity have been called for redemption prior to maturity.
Airport, Port and Highway Revenue Bonds. Certain
facility revenue bonds are payable from and secured by the revenues
from the ownership and operation of particular facilities, such as
airports (including airport terminals and maintenance facilities),
bridges, marine terminals, turnpikes and port authorities. For example,
the major portion of gross airport operating income is generally derived
from fees received from signatory airlines pursuant to use agreements
which consist of annual payments for airport use, occupancy of certain
terminal space, facilities, service fees, concessions and leases. Airport
operating income may therefore be affected by the ability of the airlines
to meet their obligations under the use agreements. The air transport
industry is experiencing significant variations in earnings and traffic,
due to increased competition, excess capacity, increased aviation fuel
costs, deregulation, traffic constraints, the recent 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 Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for
payment on the financial condition of the airlines and their usage of the
particular airport facility. Furthermore,proposed Legislation would
provide the U.S. Secretary of Transportation with the temporary
authority to freeze airport fees upon the occurrence of disputes between
a particular airport facility and the airlines utilizing that 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 be adversely affected by a reduction in revenues realized
from the underlying special tax due to a general decline in the local
economy or population or due to a decline in the consumption, use or
cost of the goods and services that are subject to taxation. Also, should
spending on the particular goods or services that are subject to the
special tax decline, the municipality may be under no obligation to
increase the rate of the special tax to ensure that sufficient revenues are
raised from the shrinking taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically
secured by incremental tax revenues collected on property within the
areas where redevelopment projects, financed by bond proceeds are
located ("project areas"). Such payments are expected to be made from
projected increases in tax revenues derived from higher assessed values
of property resulting from development in the particular project area
and not from an increase in tax rates. Special risk considerations
include: reduction of, or a less than anticipated increase in, taxable
values of property in the project area, caused either by economic
factors beyond the Issuer's control (such as a relocation out of the
project area by one or more major property owners) or by destruction
of property due to natural or other disasters; successful appeals by
property owners of assessed valuations; substantial delinquencies in the
payment of property taxes; or imposition of any constitutional or
legislative property tax rate decrease.
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
and Umbrella Series may contain Bonds of issuers in the convention
facilities category. Bonds in the convention facilities category include
special limited obligation securities issued to finance convention and
sports facilities payable from rental payments and annual governmental
appropriations. The governmental agency is not obligated to make
payments in any year in which the monies have not been appropriated
to make such payments. In addition, these facilities are limited use
facilities that may not be used for purposes other than as convention
centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of issuers
which will be affected by general economic conditions in Puerto Rico.
Puerto Rico's unemployment rate remains significantly higher than the
U.S. unemployment rate. Furthermore, the economy is largely
dependent for its development upon U.S. policies and programs that are
being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of
Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal Revenue Code (the "Code")
provides for a credit against Federal income taxes for U.S. companies
operating on the island if certain requirements are met. The Omnibus
Budget Reconciliation Act of 1993 imposes limits on such credit,
effective for tax years beginning after 1993. In addition, from time to
time proposals are introduced in Congress which, if enacted into law,
would eliminate some or all of the benefits of Section 936. Although
no assessment can be made at this time of the precise effect of such
limitation, it is expected that the limitation of Section 936 credits would
have a negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally depended
heavily on Federal programs, and current Federal budgetary policies
suggest that an expansion of aid to Puerto Rico is unlikely. An adverse
effect on the Puerto Rican economy could result from other U.S.
policies, including a reduction of tax benefits for distilled products,
further reduction in transfer payment programs such as food stamps,
curtailment of military spending and policies which could lead to a
stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican
electorate chose to continue Puerto Rico's Commonwealth status.
Previously proposed legislation, which was not enacted, would have
preserved the federal tax exempt status of the outstanding debts of
Puerto Rico and its public corporations regardless of the outcome of the
referendum, to the extent that similar obligations issued by states are
so treated and subject to the provisions of the Code currently in effect.
There can be no assurance that any pending or future legislation finally
enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both
direct and indirect consequences on such matters as the basic
characteristics of future Puerto Rico debt obligations, the markets for
these obligations, and the types, levels and quality of revenue sources
pledged for the payment of existing and future debt obligations. Such
possible consequences include, without limitation, legislative proposals
seeking restoration of the status of Section 936 benefits otherwise
subject to the limitations discussed above. However, no assessment can
be made at this time of the economic and other effects of a change in
federal laws affecting Puerto Rico as a result of the November 1993
plebiscite.
Insurance. Certain Bonds (the "Insured Bonds") may be
insured or guaranteed by AMBAC Indemnity Corporation ("AMBAC"),
Asset Guaranty Reinsurance Company ("Asset Guaranty"), Capital
Guaranty Insurance Company ("CGIC"), Capital Markets Assurance
Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie Lee"),
Financial Guaranty Insurance Company "Financial Guaranty"),
Financial Security Assurance Inc. ("FSA"), or Municipal Bond
Investors Assurance Corporation ("MBIA") (collectively, the
"Insurance Companies"). The claims-paying ability of each of these
companies, unless otherwise indicated, is rated AAA by Standard &
Poor's or another acceptable national rating service. The ratings are
subject to change at any time at the discretion of the rating agencies.
In determining whether to insure bonds, the Insurance Companies
severally apply their own standards. The cost of this insurance is borne
either by the issuers or previous owners of the bonds or by the
Sponsor. The insurance policies are non-cancellable and will continue
in force so long as the Insured Bonds are outstanding and the insurers
remain in business. The insurance policies guarantee the timely
payment of principal and interest on but do not guarantee the market
value of the Insured Bonds or the value of the Units. The insurance
policies generally do not provide for accelerated payments of principal
or, except in the case of any portfolio insurance policies, cover
redemptions resulting from events of taxability. If the issuer of any
Insured Bond should fail to make an interest or principal payment, the
insurance policies generally provide that the Trustee or its agent shall
give notice of nonpayment to the Insurance Company or its agent and
provide evidence of the Trustee's right to receive payment. The
Insurance Company is then required to disburse the amount of the
failed payment to the Trustee or its agent and is thereafter subrogated
to the Trustee's right to receive payment from the issuer.
The following are brief descriptions of certain of the
insurance companies that may insure or guarantee certain Bonds. The
financial information presented for each company has been determined
on a statutory basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of the State of
Wisconsin, and licensed to do business in various states, with admitted
assets of approximately $2,145,000,000 and policyholders' surplus of
approximately $782,000,000 as of December 31, 1994. AMBAC is a
wholly-owned subsidiary of AMBAC Inc., a financial holding company
which is publicly owned following a complete divestiture by Citibank
during the first quarter of 1992.
Asset Guaranty is a New York State insurance company
licensed to write financial guarantee, credit, residual value and surety
insurance. Asset Guaranty commenced operations in mid-1988 by
providing reinsurance to several major monoline insurers. Asset
Guaranty also issued limited amounts of primary financial guaranty
insurance, but not in direct competition with the primary mono-line
companies for which it acts as a reinsurer. The parent holding company
of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with Enhance
Financial Services (EFS) in June, 1990 to form Enhance Financial
Services Group Inc. (EFSG). The two main, 100%-owned subsidiaries
of EFSG, Asset Guaranty and Enhance Reinsurance Company (ERC),
share common management and physical resources. After an initial
public offering completed in February 1992 and the sale by Merrill
Lynch & Co. of its stake, EFSG is 49.8%-owned by the public, 29.9%
by US West Financial Services, 14.1% by Manufacturers Life
Insurance Co. and 6.2% by senior management. Both ERC and Asset
Guaranty are rated "AAA" for claims paying ability by Duff & Phelps.
ERC is rated triple-A for claims-paying ability by both S&P and
Moody's. Asset Guaranty received a "AA" claims-paying-ability rating
from S&P during August 1993, but remains unrated by Moody's. As
of December 31, 1994 Asset Guaranty had admitted assets of
approximately $159,000,000 and policyholders' surplus of
approximately $140,000,000.
CAPMAC commenced operations in December 1987, as
the second mono-line financial guaranty insurance company (after FSA)
organized solely to insure non-municipal obligations. CAPMAC, a New
York corporation, is a wholly-owned subsidiary of CAPMAC
Holdings, Inc. (CHI), which was sold in 1992 by Citibank (New York
State) to a group of 12 investors led by the following: Dillon Read's
Saratoga Partners Il; L.P. (Saratoga), an acquisition fund; Caprock
Management, Inc., representing Rockefeller family interests;
Citigrowth Fund, a Citicorp venture capital group; and CAPMAC
senior management and staff. These groups control approximately 70%
of the stock of CHI. CAPMAC had traditionally specialized in
guaranteeing consumer loan and trade receivable asset-backed
securities. Under the new ownership group CAPMAC intends to
become involved in the municipal bond insurance business, as well as
their traditional non-municipal business. As of December 31, 1994
CAPMAC's admitted assets were approximately $199,000,000 and its
policyholders' surplus was approximately $140,000,000.
CGIC, a monoline bond insurer headquartered in San
Francisco, California, was established in November 1986 to assume the
financial guaranty business of United States Fidelity and Guaranty
Company ("USF&G'). It is a wholly-owned subsidiary of Capital
Guaranty Corporation ("CGC") whose stock is owned by: Constellation
Investments, Inc., an affiliate of Baltimore Gas & Electric,
Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance
Corporation, an affiliate of Siemens AG, and USF&G, the 8th largest
property/casualty company in the U.S. as measured by net premiums
written, and CGC management. As of December 31, 1994, CGIC had
total admitted assets of approximately $304,000,000 and total statutory
policyholders' surplus of approximately $168,000,000 .
Connie Lee is a wholly owned subsidiary of College
Construction Loan Insurance Association ("CCLIA"), a
government-sponsored enterprise established by Congress to provide
American academic institutions with greater access to low-cost capital
through enhancement. Connie Lee, the operating insurance company,
was incorporated in 1987 and began business as a reinsurer of
tax-exempt bonds of colleges, universities, and teaching hospitals with
a concentration on the hospital sector. During the fourth quarter of
1991 Connie Lee began underwriting primary bond insurance which
will focus largely on the college and university sector. CCLIA's
founding shareholders are the U.S. Department of Education, which
owns 36% of CCLIA, and the Student Loan Marketing Association
("Sallie Mae"), which owns 14%. The other principal owners are:
Pennsylvania Public School Employees' Retirement System,
Metropolitan Life Insurance Company, Kemper Financial Services,
Johnson family funds and trusts, Northwestern University, Rockefeller
& Co., Inc. administered trusts and funds, and Stanford University.
Connie Lee is domiciled in the state of Wisconsin and has licenses to
do business in 47 states and the District of Columbia. As of December
31, 1994, its total admitted assets were approximately $194,000,000
and policyholders' surplus was approximately $106,000,000.
Financial Guaranty, a New York stock insurance company,
is a wholly-owned subsidiary of FGIC Corporation which is
wholly-owned by General Electric Capital Corporation. The investors
in the FGIC Corporation are not obligated to pay the debts of or the
claims against Financial Guaranty. Financial Guaranty commenced its
business of providing insurance and financial guarantees for a variety
of investment instruments in January 1984 and is currently authorized
to provide insurance in 49 states and the District of Columbia. It files
reports with state regulatory agencies and is subject to audit and review
by those authorities. As of December 31, 1994, its total admitted assets
were approximately $2,131,000,000 and its policyholders' surplus was
approximately $894,000,000.
FSA is a monoline property and casualty insurance
company incorporated in New York in 1984. It is a wholly-owned
subsidiary of Financial Security Assurance Holdings Ltd., a New York
Stock Exchange listed company which is in turn approximately 60.5%
owned by U.S. West Capital Corportion (U.S. West) 7.6% by Fund
American Enterprises Holdings Inc. and 7.4% by the Tokio Marine and
Fire Insurance Co. Ltd. FSA is licensed directly or indirectly through
its subsidiaries to engage in the special guaranty insurance business in
all 50 states, the District of Columbia, Puerto Rico and the United
Kingdom.
U.S. West is a subsidiary of U.S. West, Inc., which
operates businesses involved in communications, data solutions,
marketing services and capital assets, including the provision of
telephone services in 14 states in the western and midwestern United
States.
Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written by FSA or either of its subsidiaries
proportional to their respective capital surplus and reserves, subject to
applicalbe statutory risk limitations. In addition, FSA reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsureres under various quota-share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by
FSA as a risk management device and to comply with certain statutory
and rating agency requirements; it does not alter or limit FSA's
obligations under any financial guaranty insurance policy. As of
December 31, 1994 total total admitted assets were $804,000,000 and
policyholders' surplus was approxiamtely $344,000,000.
MBIA is the principal operating subsidiary of MBIA Inc.
The principal shareholders of MBIA Inc. were originally Aetna
Casualty and Surety Company, The Fund American Companies, Inc.,
subsidiaries of CIGNA Corporation and Credit Local de France,
CAECL, S.A. These principal shareholders now own approximately
13% of the outstanding common stock of MBIA Inc., following a series
of four public equity offerings over a five-year period. As of December
31, 1994, MBIA had admitted assets of approximately $3.4 billion and
policyholders' surplus of approximately $1,100,000,000.
Insurance companies are subject to regulation and
supervision in the jurisdictions in which they do business under statutes
which delegate regulatory, supervisory and administrative powers to
state insurance commissioners. This regulation, supervision and
administration relate, among other things, to: the standards of solvency
which must be met and maintained; the licensing of insurers and their
agents; the nature of and limitations on investments; deposits of
securities for the benefit of policyholders;
approval of policy forms and premium rates; periodic examinations of
the affairs of insurance companies; annual and other reports required
to be filed on the financial condition of insurers or for other purposes;
and requirements regarding reserves for unearned premiums, losses and
other matters. Regulatory agencies require that premium rates not be
excessive, inadequate or unfairly discriminatory. Insurance regulation
in many states also includes "assigned risk" plans, reinsurance
facilities, and joint underwriting associations, under which all insurers
writing particular lines of insurance within the jurisdiction must accept,
for one or more of those lines, risks unable to secure coverage in
voluntary markets. A significant portion of the assets of insurance
companies is required by law to be held in reserve against potential
claims on policies and is not available to general creditors.
Although the Federal government does not regulate the
business of insurance, Federal initiatives can significantly impact the
insurance business. Current and proposed Federal measures which may
significantly affect the insurance business include pension regulation
(ERISA), controls on medical care costs, minimum standards for
no-fault automobile insurance, national health insurance, personal
privacy protection, tax law changes affecting life insurance companies
or the relative desirability of various personal investment vehicles and
repeal of the current antitrust exemption for the insurance business. (If
this exemption is eliminated, it will substantially affect the way
premium rates are set by all property-liability insurers.) In addition, the
Federal government operates in some cases as a co-insurer with the
private sector insurance companies.
Insurance companies are also affected by a variety of state
and Federal regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and
provided. These include judicial redefinitions of risk exposure in areas
such as products liability and state and Federal extension and protection
of employee benefits, including pension, workers' compensation, and
disability benefits. These developments may result in short-term
adverse effects on the profitability of various lines of insurance.
Longer-term adverse effects can often be minimized through prompt
repricing of coverages and revision of policy terms. In some instances,
these developments may create new opportunities for business growth.
All insurance companies write policies-and set premiums based on
actuarial assumptions about mortality, injury, the occurrence of
accidents and other insured events. These assumptions, while well
supported by past experience, necessarily do not take account of future
events. The occurrence in the future of unforeseen circumstances could
affect the financial condition of one or more insurance companies. The
insurance business is highly competitive and with the deregulation of
financial service businesses, it should become more competitive. In
addition, insurance companies may expand into non-traditional lines of
business which may involve different types of risks.
The above financial information relating to the Insurance
Companies has been obtained from publicly available information. No
representation is made as to the accuracy or adequacy of the
information or as to the absence of material adverse changes since the
information was made available to the public.
Litigation and Legislation. To the best knowledge of the
Sponsor, 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 and Umbrella Series. 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.
<PAGE>
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
and Umbrella Series's Portfolio. The Sponsor are unable to predict
what effect, if any, this legislation might have on the State Trust and
Umbrella Series.
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 such
effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on
the Bond should ultimately be determined to be taxable, the Bond
would become due and payable by its issuer, and, in addition, may
provide that any related letter of credit or other security could be called
upon if the issuer failed to satisfy all or part of its obligation. In other
cases, however, a Bond may not provide for the acceleration or
redemption of the Bond or a call upon the related letter of credit or
other security upon a determination of taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in
which both the issuer and the bank or other entity issuing the letter of
credit or other security are unable to meet their obligations to pay the
amounts due on the Bond as a result of a determination of taxability,
the Trustee would be obligated to sell the Bond and, since it would be
sold as a taxable security, it is expected that it would have to be sold
at a substantial discount from current market price. In addition, as
mentioned above, under certain circumstances Holders could be
required to pay income tax on interest received prior to the date on
which the interest is determined to be taxable.
Potential purchasers of the Units of a State Trust or
Umbrella Series should consider the fact that the Trust's Portfolio
consists primarily of Bonds issued by the state for which such State
Trust is named or its municipalities or authorities and realize the
substantial risks associated with an investment in such Bonds.
Moreover, the California Trust, the Connecticut Trust, the Florida
Trust, the Maryland Trust, the Massachusetts Trust, the Minnesota
Trust, the Missouri Trust, the New Jersey Trust, the New York Trust,
the North Carolina Trust, the Ohio Trust, the Pennsylvania Trust and
the Texas Trust are subject to certain additional state risk factors. The
Sponsor believe the discussions of risk factors summarized below
describe some of the more significant aspects of the State Trusts. The
sources of such information are the official statements of issuers as well
as other publicly available documents. While the Sponsor have not
independently verified this information, they have no reason to believe
that such information is not correct in all material respects. Investments
in a State Trust or an Umbrella Series containing State Trusts should
be made with an understanding that the value of the underlying
Portfolio may decline with increases in interest rates.
California Trust
California's economy is the largest among the 50 states.
The State's January 1, 1992 population of 31 million represented
approximately 12.0% of the total United States population. Total
employment was about 14 million, the majority of which was in the
service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has
faced the worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, have all been severely affected. Job losses
have been the worst of any post-war recession and have continued
through the end of 1993. Employment levels are expected to stabilize
before net employment starts to increase and pre-recession job levels
are not expected to be reached for several more years. Unemployment
is expected to remain above 9% through 1994.
The recession has seriously affected State tax revenues,
which basically mirror economic conditions. It has also caused
increased expenditures for health and welfare programs. The State is
also facing a structural imbalance in its budget with the largest
programs supported by the General Fund--K-14 education (kindergarten
through community college), health, welfare and corrections--growing
at rates significantly higher than the growth rates for the principal
revenue sources of the General Fund. As a result, the State entered a
period of chronic budget imbalance, with expenditures exceeding
revenues for four of the last five fiscal years. Revenues declined in
1990-91 over 1989-90, the first time since the 1930s. By June 30,
1993, the State's General Fund had an accumulated deficit, on a budget
basis, of approximately $2.8 billion. (Special Funds account for
revenues obtained from specific revenue sources, and which are legally
restricted to expenditures for specific purposes.) The 1993-94 Budget
Act incorporated a Deficit Reduction Plan to repay this deficit over two
years. The original budget for 1993-94 reflected revenues which
exceeded expenditures by a approximately $2.8 billion. As a result of
continuing recession, the excess of revenues over expenditures for the
fiscal year is now expected to be only about $500 million. Thus, the
accumulated budget deficit at June 30, 1994 is now estimated by the
Department of Finance to be approximately $2 billion, and the deficit
will not be retired by June 30, 1995 as planned. The accumulated
budget deficits over the past several years, together with expenditures
for school funding which have not been reflected in the budget, and the
reduction of available internal borrowable funds, have combined to
significantly depleted the State's cash resources to pay as ongoing
expenses. In order to meet its cash needs, the State has had to rely for
several years on a series of external borrowings, including borrowings
past the end of a fiscal year.
The State's tax revenue clearly reflects sharp declines in
employment, income and retail sales on a scale not seen in over 50
years. The May 1994 revision to the 1994-95 Governor's Budget (the
"May Revision"), released May 20, 1994, assumes that the State will
start recovery from recessionary conditions in 1994, with a modest
upturn beginning in 1994 and continuing into 1995, a year later than
predicted in the May 1993 Department of Finance economic projection.
Pre-recession job levels are not expected to be reached until 1997.
However, there is growing evidence that California is
showing signs of an economic turnaround, and the May Revision is
revised upward from the Governor's January Budget forecast. Since the
Governor's January Budget forecast, 1993 non-farm employment has
been revised upward by 31,000 jobs. Employment in the early months
of 1994 has shown encouraging signs of growth, several months sooner
than was contemplated in the January Budget forecast. Between
December 1993 and April 1994, payrolls are up by 50,000 jobs.
On January 17, 1994 the Northridge earthquake,
measuring an estimated 6.8 on the Richter Scale, struck Los Angeles.
Significant property damage to private and public facilities occurred in
a four-county area including northern Los Angeles County, Ventura
County, and parts of Orange and San Bernadino Counties, which were
declared as State and federal disaster areas by January 18. Current
estimates of total property damage (private and public) are in the range
of $20 billion or more, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of
structures in the areas, including large manufacturing and commercial
buildings and all modern high-rise offices, survived the earthquake with
minimal or no damage, validating the cumulative effect of strict
building codes and thorough preparation for such emergency by the
State and local agencies.
Damage to State-owned facilities included transportation
corridors and facilities such as Interstate Highways 5 and 10 and State
Highways 14, 118 and 210. Most of the major highways (Interstates 5
and 10) have now been reopened. The campus at California State
University Northridge (very near the epicenter) suffered an estimated
$350 million damage, resulting in the temporary closure of the campus.
lt reopened using borrowed facilities elsewhere and many temporary
structures. There was also some damage to the University of California
at Los Angeles and to the Van Nuys State Office Building (now open
after a temporary closure). Overall, except for the temporary road and
bridge closures, and CSU-Northridge, the earthquake did not and is not
expected to significantly affect State government operations.
The State in conjunction with the federal government is
committed to providing assistance to local governments, individuals and
businesses suffering damage as a result of the earthquake, as well as to
provide for the repair and replacement of State owned facilities. The
federal government has provided substantial earthquake assistance. The
President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners
and small businesses, and costs for repair of damaged public facilities.
lt is now estimated that the overall effect of the earthquake on the
regional and State economy will not be serious. The earthquake may
have dampened economic activity briefly during late January and
February, but the rebuilding efforts are now adding a small measure of
stimulus.
Sectors which are now contributing to California's
recovery include construction and related manufacturing, wholesale and
retail trade, transportation and several service industries such as
amusements and recreation, business services and management
consulting. Electronics is showing modest growth and the rate of
decline in aerospace manufacturing is slowly diminishing. These trends
are expected to continue, and by next year, most of the restructuring
in the finance and utilities industries should be nearly completed. As a
result of these factors, average 1994 non-farm employment is now
forecast to maintain 1993 levels compared to a projected 0.6% decline
in the Governor's January Budget forecast. 1995 employment is
expected to be up 1.6% compared to 0.7% in the January Budget
forecast.
The Northridge earthquake resulted in a downward
revision of this year's personal income growth from 4% in the
Governor's January Budget forecast to 3.6%. However, this decline is
more than explained by the $5.5 billion charge against rental and
proprietor's income---equal to 0.8% of total income reflecting
uninsured damage from the quake. Next year, without the quake's
effects, income is projected to grow 6.1% compared to 5% projected
in the January Budget forecast. Without the quake's effects, income
was little changed in the May Revision compared to the January Budget
forecast.
The housing forecast remains essentially unchanged from
the January Budget forecast. Although existing sales have strengthened
and subdivision surveys indicated increased new home sales, building
permits are up only slightly from recession lows. Gains are expected
in the months ahead, but higher mortgage interest rates will dampen the
upturn. Essentially, the Northridge earthquake adds a few thousand
housing units to the forecast, but this effect is offset by higher interest
rates.
Interest rates represent one of several downside risks to the
forecast. The rise in interest rates has occurred more rapidly than
contemplated in the Governor's January Budget forecast. In addition to
affecting housing, higher rates may also dampen consumer spending,
given the high percentage of California homeowners with
adjustable-rate mortgages. The May Revision forecast includes a further
rise in the Federal Funds rate to nearly 5% by the beginning of 1995.
Should rates rise more steeply, housing and consumer spending would
be adversely affected.
The unemployment upturn is still tenuous. The
Employment Development Department revised down February's
employment gain and March was revised to a small decline.
Unemployment rates in California have been volatile since January,
ranging from 10.1% to a low of 8.6%, with July's figure at 9%. The
small sample size coupled with changes made to the survey instrument
in January contributed to this volatility.
1993-94 Budget
The Governor's Budget, introduced on January 8, 1993,
proposed General Fund expenditures of $37.3 billion, with projected
revenues of $39.9 billion. To balance the budget in the face of
declining revenues, the Governor proposed a series of revenue shifts
from local government, reliance on increased federal aid, and
reductions in State spending.
The May Revision of the Governor's budget, released on
May 20,1993, projected the State would have an accumulated deficit of
about $2.75 billion by June 30,1993, essentially unchanged from the
prior year. The Governor proposed to eliminate this deficit over an
18-month period. Unlike previous years, the Govenor's Budget and
May Revision did not calculate a "gap" to be closed, but rather set
forth revenue and expenditure forecasts and proposals designed to
produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on
June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending. With enactment of the Budget
Act, the State carried out its regular cash flow borrowing program for
the fiscal year with the issuance of $ billion of revenue anticipation
notes maturing June 28, 1994.
The 1993-94 Budget Act was predicated on revenue and
transfer estimates of $40.6 billion, $400 million below 1992-93 (and
the second consecutive year of actual decline). The principal reasons
for declining revenue were the continued weak economy and the
expiration (or repeal) of three fiscal steps taken in 1991 a half cent
temporary sales tax, a deferral -of operating loss carryforwards, and
repeal by initiative of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund
revenues of $11.9 billion, an increase of 2.9% over 1992-93. The
1993-94 Budget Act included General Fund expenditures of $38.5
billion (a 6.3% reduction from projected 1992-93 expenditures of $41.1
billion), in order to keep a balanced budget within the available
revenues. The Budget also included Special Fund expenditures of $12.1
billion, a 4.2% increase. The Budget Act reflected the following major
adjustments:
1. Changes in local government financing to shift
about $2.6 billion in property taxes from cities, counties, special
districts and redevelopment agencies to school and community college
districts. The property tax losses for cities and counties were offset in
part by additional sales tax revenues and relief from some state
mandated programs. Litigation by local governments challenging this
shift has so far been unsuccessful. In November 1993 the voters
approved the permanent extension of the 0.5% sales tax for local public
safety purposes.
2. The Budget projected K-12 Proposition 98
funding on a cash basis at the same per-pupil level as 1992-93
by-providing schools a $609 million loan payable from future years'
Proposition 98 funds.
3. The Budget assumed receipt of $692 million in
aid to the State from the federal government to offset health and
welfare costs associated with foreign immigrants living in the State.
About $411 million of this amount was one-time funding. Congress
ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare
programs.
5. A 2-year suspension of the renters' tax credit
($390 million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of
payment to the Public Employees Retirement Fund ($339 million) and
a change in accounting for debt service from accrual to cash basis,
saving $107 million.
Administration reports during the course of the 1993-94
fiscal year have indicated that, although economic recovery appears to
have started in the second half of the fiscal year, recessionary
conditions continued longer than had been anticipated when the 1993-94
Budget Act was adopted. Overall, revenues for the 1993-94 fiscal year
were about $800 million lower than original projections, and
expenditures were about $780 million higher, primarily because of
higher health and welfare caseloads, lower property taxes, which
require greater State support for K-14 education to make up the
shortfall, and lower than anticipated federal government payments for
immigration-related costs. The most recent reports, however, in May
and June 1994, indicated that revenues in the second half of the
1993-94 fiscal year have been very close to the projections made in the
Governor's Budget of January 10, 1994, which is consistent with a
slow turnaround in the economy.
During the 1993-94 fiscal year, the State implemented the
Deficit Reduction Plan, which was a part of the 1993-94 Budget Act,
by issuing $1.2 billion of revenue anticipation warrants in February
1994, maturing December 21, 1994. This borrowing reduced the cash
deficit at the end of the 1993-94 fiscal year. Nevertheless, because of
the $1.5 billion variance from the original Budget Act assumption, the
General Fund ended the fiscal year at June 30, 1994 carrying forward
an accumulated deficit of approximately $2 billion. Because of the
revenue shortfall and the State's reduced internal borrowing cash
resources, in addition to the $1-2 billion of revenue anticipation
warrants issued as part of the Deficit Reduction Plan, the State issued
an additional $2 billion of revenue anticipation warrants, maturing July
26,1994. which were needed to fund the State's obligations and
expenses through the end of the 1993-94 fiscal year.
1994-95 Budget
The 1994-95 fiscal year represents the fourth consecutive
year the Governor and Legislature were faced with a very difficult
budget environment to produce a balanced budget. Many program cuts
and budgetary adjustments have already been made in the last three
years. The Governor's May Revision to his Budget proposal recognized
that the accumulated deficit could not be repaid in one year, and
proposed a two-year solution. The May Revision sets forth revenue and
expenditure forecasts and revenue and expenditure proposals which
result in operating surpluses for the budget for both 1994-95 and
1995-96, and lead to the elimination of the accumulated deficit,
estimated at about $2 billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July
8, 1994, projects revenues and transfers of $41.9 billion, about $2.1
billion higher than revenues in 1993-94. This reflects the
Administration's forecast of an improved economy. Also included in
this figure is the projected receipt of about $360 million from the
Federal Government to reimburse the State for the cost of incarcerating
undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal fiscal year
1995 Budget is completed, which is expected to be by October 1994.
The Legislature took no action on a proposal in the Governor s January
Budget to undertake expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of the
State current sales tax. The Budget Act projects Special Fund revenues
of $12.1 billion, a decrease of 2.4% from 1993-94 estimated levels.
The 1994-95 Budget Act projects General Fund
expenditures of $40.9 billion, an increase of $1.6 billion over 1993-94.
The Budget Act also projects Special Fund expenditures of $13.7
billion, a 5.4% increase over 1993-94 estimated expenditures. The
principal features of the Budget Act were the following:
1. Receipt of additional federal aid in 1994-95 of
about $400 million for costs of refugee assistance and medical care for
undocumented aliens, thereby offsetting a similar General Fund cost.
The State will not know how much of these funds it will receive until
the Federal fiscal year 1994 Budget is passed.
2. Reductions of approximately $l.l billion in health
and welfare programs.
3. A General Fund increase of approximately $38
million in support for the University of California and $65 million for
the California State University. It is anticipated that student fees for the
U.C. and the C.S.U will increase up to 10%.
4. Proposition 98 funding for K-14 schools is
increased by $526 million from the 1993-94 levels, representing an
increase for enrollment growth and inflation. Consistent with previous
budget agreements, Proposition 98 funding provides approximately
$4,217 per student for K-12 schools, equal to the level in the past three
years.
5. Legislation enacted with the Budget Act clarifies
laws passed in 1992 and 1993 requiring counties and other local
agencies to transfer funds to local school districts, thereby reducing
State aid. Some counties had implemented programs providing less
moneys to schools if there were redevelopment agencies projects. The
legislation bans this method of transfers.
6. The Budget Act provides funding for anticipated
growth in the State's prison inmate population, including provisions for
implementing recent legislation (the so-called "Three Strikes" law)
which requires mandatory life sentences for certain third-time felony
offenders.
7. Additional miscellaneous cuts ($500 million) and
fund transfers ($255 million) totalling in the aggregate approximately
$755 million.
The 1994-95 Budget Act contains no tax increases. Under
legislation enacted for the 1993-94 Budget, the renters' tax credit was
suspended for 1993 and 1994. A ballot proposition to permanently
restore the renters' credit after this year failed at the June 1994
election. The Legislature enacted a further one-year suspension of the
renters' tax credit, saving about $390 million in the 1995-96 fiscal
year. The 1994-95 Budget assumes that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and
warrants. Issuance of the warrants allows the State to defer repayment
of approximately $1 billion of its accumulated budget deficit into the
1995-96 fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94
AND 1994-1995 FISCAL YEAR BUDGETS IS BASED IN LARGE
PART ON STATEMENTS MADE IN A RECENT
"PRELIMINARY OFFICIAL STATEMENT" DISTRIBUTED BY
THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE
STATE INDICATED THAT ITS DISCUSSION OF THE 1994-95
FISCAL YEAR BUDGET WAS BASED ON ESTIMATES AND
PROJECTIONS OF REVENUES AND EXPENDITURES FOR
THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT. THE STATE
NOTED FURTHER THAT THE ESTIMATES AND
PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS
WHICH MAY BE AFFECTED BY NUMEROUS FACTORS,
INCLUDING FUTURE ECONOMIC CONDITIONS IN THE
STATE AND THE NATION, AND THAT THERE CAN BE NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
The State is subject to an annual appropriations limit
imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"), and is prohibited from spending
"appropriations subject to limitation" in excess of the Appropriations
Limit. Article XIIIB, originally adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990,
respectively. "Appropriations subject to limitation" are authorizations
to spend "proceeds of taxes", which consist of tax revenues and certain
other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed the reasonable cost
of providing the regulation, product or service. The Appropriations
Limit is based on the limit for the prior year, adjusted annually for
certain changes, and is tested over consecutive two-year periods. Any
excess of the aggregate proceeds of taxes received over such two-year
period above the combined Appropriation Limits for those two years is
divided equally between transfers to K-14 districts and refunds to
taxpayers.
Exempted from the Appropriations Limit are debt service
costs of certain bonds, court or federally mandated costs, and, pursuant
to Proposition 111, qualified capital outlay projects and appropriations
or revenues derived from any increase in gasoline taxes and motor
vehicle weight fees above January 1, 1990 levels. Some recent
initiatives were structured to create new tax revenues dedicated to
specific uses and expressly exempted from the Article XIIIB limits.
The Appropriations Limit may also be exceeded in cases of emergency
arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so
declared and approved, the Appropriations Limit for the next three
years must be reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November
8, 1988, also establishes a minimum level of state funding for school
and community college districts and requires that excess revenues up
to a certain limit be transferred to schools and community college
districts instead of returned to the taxpayers. Determination of the
minimum level of funding is based on several tests set forth in
Proposition 98. During fiscal year 1991-92 revenues were smaller than
expected, thus reducing the payment owed to schools in 1991-92 under
alternate "test" provisions. In response to the changing revenue
situation, and to fully fund the Proposition 98 guarantee in the 1991-92
and 1992-93 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to
schools but which exceeded the reduced appropriation was treated as a
non-Proposition 98 short-term loan in 1991-92. As part of the 1992-93
Budget, $1.1 billion of the amount budgeted to K-14 schools was
designated to "repay" the prior year loan, thereby reducing cash outlays
in 1992-93 by that amount. To maintain per-average daily attendance
("ADA") funding, the 1992-93 Budget included loans of $732 million
to K-12 schools and $241 million to community colleges, to be repaid
from future Proposition 98 entitlements. The 1993-94 Budget also
provided new loans of $609 million to K-12 schools and $178 million
to community colleges to maintain ADA funding. These loans have
been combined with the 1992-93 fiscal year loans into one loan of
$1.760 billion, to be repaid from future years' Proposition 98
entitlements, and conditioned upon maintaining current funding levels
per pupil at K-12 schools. A Sacramento County Superior Court in
California Teachers' Association, et al. v. Gould, et al., has ruled that
the 1992-93 loans to K-12 schools and community colleges violate
Proposition 98. The impact of the court's ruling on the State budget
and funding for schools is unclear and will remain unclear until the
Court's written ruling, which is currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4 billion of
Proposition 98 funds for K-14 schools, exceeding the minimum
Proposition 98 guaranty by $8 million to maintain K-12 funds per
pupil at $4,217. Based upon State revenues, growth rates and inflation
factors, the 1994-95 Budget Act appropriations an additional $286
million within Proposition 908 for the 1993-94 fiscal year to reflect a
need in appropriations for school district and county officers of
education, as well as an anticipated deficiency in special education
funding.
Because of the complexities of Article XIIIB, the
ambiguities and possible inconsistencies in its terms, the applicability
of its exceptions and exemptions and the impossibility of predicting
future appropriations, the Sponsor cannot predict the impact of this or
related legislation on the Bonds in the California Trust Portfolio. Other
Constitutional amendments affecting state and local taxes and
appropriations have been proposed from time to time. If any such
initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate
revenues as mandated by such initiatives. Propositions such as
Proposition 98 and others that may be adopted in the future, may place
increasing pressure on the State's budget over future years, potentially
reducing resources available for other State programs, especially to the
extent the Article XIIIB spending limit would restrain the State's ability
to fund such other programs by raising taxes.
As of July 1, 1994, the State had over $18.34 billion
aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of
approximately $5.16 billion remained unissued as of July 1, 1994. The
State also builds and acquires capital facilities through the use of lease
purchase borrowing. As of June 30, 1994, the State had approximately
$5.09 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies
and authorities had approximately $21.87 billion aggregate principal
amount of revenue bonds and notes outstanding as of March 31, 1993.
Revenue bonds represent both obligations payable from State revenue-
producing enterprises and projects, which are not payable from the
General Fund, and conduit obligations payable only from revenues paid
by private users of facilities financed by such revenue bonds. Such
enterprises and projects include transportation projects, various public
works and exposition projects, education facilities (including the
California State University and University of California systems),
housing health facilities and pollution control facilities.
The State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. In addition, the
State is involved in certain other legal proceedings that, if decided
against the State, might require the State to make significant future
expenditures or impair future revenue sources. Examples of such cases
include challenges to the State's method of taxation of certain
businesses, challenges to certain vehicle license fees, and challenges to
the State's use of Public Employee Retirement System funds to offset
future State and local pension contributions. Other cases which could
significantly impact revenue or expenditures involve reimbursement to
school districts for voluntary school desegregation and state mandated
costs, challenges to Medi-Cal eligibility, recovery for flood damages,
and liability for toxic waste cleanup. Because of the prospective nature
of these proceedings, it is not presently possible to predict the outcome
of such litigation or estimate the potential impact on the ability of the
State to pay debt service on its obligations.
On June 20, 1994, the United States Supreme Court, in
two companion cases, upheld the validity of California's prior method
of taxing multinational corporations under a "unitary" method of
accounting for their worldwide earnings, thus avoiding tax refunds of
approximately $1.55 billion by the State, and enabling the State to
collect $620 million in previous assessments. Barclays Bank PLC v.
Franchise Tax Board concerning foreign corporations, and Colgate-
Palmmolive v. Franchise Tax Board concerned domestic corporations.
Ratings
On July 15, 1994, Standard Poor's Corporation ("Standard
& Poor's"), Moody's Investors Service, Inc. ("Moody's"),and Fitch
Investors Service, Inc. ("Fitch") all downgraded their ratings of
California's general obligation bonds. These bonds are usually sold in
20- to 30-year increments and used to finance the construction of
schools, prisons, water systems and other projects. The ratings were
reduced by Standard & Poor's from "A+" to "A", by Moody's from
"Aa" to "A1", and by Fitch from "AA" to "A". Since 1991, when
it had a "AAA" rating, the State's rating has been downgraded three
times by all three ratings agencies. All three agencies cite the 1994-95
Budget Act's dependence on a "questionable" federal bailout to pay
for the cost of illegal immigrants, the Propositions 98 guaranty of a
minimum portion of State revenues for kindergarten through community
college, and the persistent deficit requiring more borrowing as reasons
for the reduced rating. Another concern was the State's reliance on a
standby mechanism which could trigger across-the-board reductions in
all State programs, and which could disrupt State operations,
particularly in fiscal year 1995-96. However, a Standard & Poor's
spokesman stated that, although the lowered ratings means California
is aa riskier borrower, Standard & Poor's anticipates that the State will
pay off its debts and not default. There can be no assurance that such
ratings will continue for any given period of time or that they will not
in the future be further revised.
As a result of Orange County's Chapter 9 bankruptcy
filing on December 6, 1994, Moody's has suspended the County's bond
ratings, and Standard & Poor's has cut its rating of all Orange County
debt from "AA-" to "CCC", a level below investment grade and an
indication of high risk and uncertainty. Fitch does not rate Orange
County bonds. It is anticipated that as Orange County's credit and bond
ratings fall, it will have difficulty in getting loans or selling its bonds
to raise money. Additionally, the County's bankruptcy filing could
affect about 180 municipalities, school districts and other municipal
entities which entrusted billions of dollars to Orange County to invest.
Standard & Poor's has informed such entities that they have been
placed on negative credit watch, the usual step prior to a downgrade of
credit rating.
The Sponsor believes the information summarized above
describes some of the more significant aspects relating to the California
Trust. The sources of such information are Preliminary Official
Statements and Official Statements relating to the State's general
obligation bonds and the State's revenue anticipation notes, or
obligations of other issuers located in the State of California, or other
publicly available documents. Although the Sponsor has not
independently verified this information, it has no reason to believe that
such information is not correct in all material respects.
Connecticut Trust
The Sponsor believes 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 Sponsor have
not independently verified this information, they no reason to believe
that such information is not correct in all material respects.
Potential purchasers of the Units of the Connecticut Trust
should consider the fact that the Trust's Portfolio consists primarily of
Bonds issued by the State of Connecticut (the "State") or its
municipalities or authorities, and realize the substantial risks associated
with an investment in such Bonds.
Connecticut's manufacturing industry has historically been
of prime economic importance to Connecticut. The manufacturing
industry is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) dominant followed by fabricated
metal products, non-electrical machinery and electrical machinery.
From 1970 to 1993, however, there was a rise in employment in
service-related industries. During this period, manufacturing
employment declined 33.5%, while employment in non-agricultural
establishments (including government) increased 63.3%, particularly in
the service, trade and finance categories. In 1993, manufacturing
accounted for only 19.2% 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 6.6% in 1993. While these rates were lower
than those recorded for the U.S. as a whole for the same periods, as
of May, 1993, the estimated rate of unemployment in Connecticut in
connection on a seasonally adjusted basis was 7.4%, compared to only
6.9 % for the United States as a whole, and pockets of significant
unemployment and poverty exist in some of Connecticut's cities and
towns. Moreover, Connecticut is now in a recession the depth and
duration of which is uncertain.
The State derives over seventy percent of its revenues
from taxes imposed by the State. The two major taxes have been the
sales and use taxes and the corporation business tax, each of which is
sensitive to changes in the level of economic activity in the State, but
the Connecticut income tax on individuals, trusts and estates enacted in
1991 is expected to supersede each of them in importance.
The State's General Fund budget for fiscal year 1986-87
(ending June 30) anticipated appropriations and revenues of
approximately $4,300,000,000. The General Fund ended fiscal year
1986-87 with a surplus of $365,200,000. The General Fund budget for
fiscal year 1987-88 anticipated appropriations and revenues of
approximately $4,915,800,000. However, the General Fund ended
fiscal year 1987-88 with a deficit of approximately $115.6 million.
The General Fund budget for fiscal year 1988-89 anticipated that
General Fund expenditures of $5,551,000,000 and certain educational
expenses of $206,700,000 not previously paid through the General
Fund would be financed in part from surpluses of prior years and in
part from higher tax revenues projected to result from tax laws in effect
for fiscal year 1987-88 and stricter enforcement thereof; a substantial
deficit was projected during the third quarter of fiscal year 1988-89,
but, largely because of tax law changes that took effect before the end
of the fiscal year, the deficit was kept to $28,000,000. 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 borrowing were outstanding as of July 1, 1993. To fund the
cumulative General Fund deficit for fiscal years 1989-90 and 1990-91,
the legislation enacted August 22, 1991, authorized the State Treasurer
to issue Economic Recovery Notes up to the aggregate amount of such
deficit, which must be payable no later than June 30, 1996; at least
$50,000,000 of such Notes, but no more than a cap amount, is to be
retired each fiscal year commencing with fiscal year 1991-92, and any
unappropriated surplus up to $205,000,000 in the General Fund at the
end of each of the three fiscal years commencing with fiscal year 1991-
92 must be applied to retire such Notes as may remain outstanding at
those times. On September 25, 1991 and October 24, 1991, the State
issued $640,710,000 and $325,002,000, respectively, of such Economic
Recovery Notes, of which $555,610,000 were outstanding as of
November 1, 1994.
To meet the need for reconstructing, repairing,
rehabilitating, and improving the State transportation system (except
Bridle 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 November 1, 1994, the General Assembly has
authorized STO bonds for the program in the aggregate amount of
$3,794,938,104, of which $3,144,650,752 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) litigation on behalf of
black and hispanic school children in the City of Hartford seeking
"integrated education" within the greater Hartford metropolitan area;
(ii) litigation involving claims by Indian tribes to less than 1/10 of 1%
of the State's land area; (iii) litigation challenging the State's method
of financing elementary and secondary public schools on the ground
that it denies equal access to education; (iv) 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; (v) litigation involving claims for refunds of taxes by
several cable television companies; (vi) 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;
(vii) 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; (viii) a class action by the
Connecticut Criminal Defense Lawyers Association claiming a
campaign of illegal surveillance activity and seeking damages and
injunctive relief; (ix) 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; (x) 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 (xi)
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; (xii) an action challenging the
validity of the State's imposition of gross earnings taxes on hospital
revenues to finance certain uncompensated care costs; and (xiii) an
action by inmates of the Department of Correction seeking damages and
injunctive reliefwith respect to alleged violations of statutory and
constitutional rights as a result of the monitoring and recording of their
telephones from the State's correctional institutions. Inaddition, a
number of corporate taxpayers have filed refund requests for
corporation business tax asserting that interest on federal obligations
may not be included in the measure of that tax, alleging that to do so
violates federal law because interest on certain State of Connecticut
obligations is not included in the measure of the tax.
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 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
In 1980, Florida was the seventh most populous state in
the U.S. The State has grown dramatically since then an as of April 1,
1993, ranks fourth with an estimated population of 13.5 million.
Florida's attraction, as both a growth and retirement state, has kept net
migration fairly steady with an average of 292,988 new residents a year
from 1983 through 1993. The U.S. average population increase since
1982 is about 1% annually, while Florida's average annual rate of
increase is about 2.5%. Florida continues to be the fastest growing of
the ten laargest states. This strong population growth is one reason the
State's economy is performing better than the nation as a whole. In
addition to attracting senior citizens to Florida as a place for retirement,
the State is also recognized as attracting a significant number of
working age individuals. Since 1983, the prime working age population
(18-44) has grown at an average annual rate of 2.6%. The share of
Florida's total working age population (18-59) to total State population
is approximately 54%. This share is not expected to change appreciably
into the twenty-first century.
The State's personal income has been growing strongly the
last several years and has generally out performed both the U.S. as a
whole and the southeast in paarticular, according to the U.S.
Department of Commerce and the Florida Consensus Economic
Estimating Conference. This is due to the fact that Florida's population
has been growing at a very strong pace and, since the early 70's the
State's economy has diversified so as to provide greater insulation from
national economic downturns. As a result, Florida's real per capita
personal income has tracked closely with the national average and has
tracked above the southeast. From 1984 through 1993, the State's real
per capita income rose an aaverage 5.4% a year, while the national real
per capita income increased at an average 5.5%.
Because Florida has a proportionately greater retirement
age population, 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 1993 was 62% of total personal income, while a similar figure for
the nation for 1990 was 72%. Transfer payments are typically less
sensitive to the business cycle than employment income and, therefore,
act as stabilizing forces in weak economic periods.
The State's per capita personal income in 1993 of $20,857
was slightly above the national average of $20,817 and significantly
ahead of that for the southeast United States, which was $18,753. Real
personal incme in the State is estimated to increase 4.5% in 1994-95
and 4.2% in 1995-96. By the end of 1995-96, real personal income per
capita in the State is projected to average 4.5% higher than its 1993-94
level.
Since 1980, the State's job creation rate is well over twice
the rate for the nation as a whole, and its growth rate in new non-
agricultural jobs is the fastest of the 11 most populous states and second
only to California in the absolute number of new jobs created.
Contributing to the State's rapid rate of growth in employment and
income is international trade. In addition, since 1980, the State's
unemployment rate has generally tracked below that of the Nation's
unemployment rate. However, as the State's economic growth has
slowed from its previous highs, the State's unemployment rate has
tracked above the national average. The average rate in Florida since
1980 has been 6.5% while the national average is 7.1%. According
to the U.S. Department of Commerce, the Florida Department of Labor
and Employment Security, and the Florida Consensus Economic
Estimating Conference (together the "Organization") the State's
unemployment rate was 8.2% during 1992. As of January 1994, the
Organization estimates that the unemployment rate will be 6.7% for
1993-94 and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector
has exceeded that of the U.S. From the beginning of 1980 through
1993, the state added over 50,100 new manufacturing jobs, an 11.7%
increase. During the same period, national manufacturing employment
declined ten out of the fourteen years, for a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to
increase 2.7% in 1993-94 and rise 3.8% in 1994-95. Trade and
services, the two largest, account for more than half of the total
non-farm employment. Employment in the service sectors should
experience an increase of 5.4% in 1994-95, while growing 4.7% in
1995-96. Trade is expected to expand 3.1% in 1995 and 3.2% in 1996.
The service sector is now the State's largest employment category.
Construction
The State's economy has in the past been highly dependent
on the construction industry and construction related manufacturing.
This dependency has declined in recent years and continues to do so as
a result of continued diversification of the State's economy. The State
is still somewhat at the mercy of the construction and construction
related manufacturing industries. For example, in 1980, total contract
construction employment as a share of total non-farm employment was
just over 7%, and in 1993, the share had edged downward to 5%. This
trend is expected to continue as the State's economy continues to
diversify. Florida, nevertheless, has a dynamic construction industry,
with single and multi-family housing starts accounting for 8.5% of total
U.S. housing starts in 1993 while the State's population is 5.3% of the
U.S. total population. Florida's housing starts since 1980 have
represented an average of 11.0% of the U.S.'s total annual starts, and
since 1980, total housing starts have averaged 156,450 a year.
A driving force behind the State's construction industry has
been the State's rapid rate of population growth. Although the State
currently is the fourth most populous state, its annual population growth
is now projected to decline as the number of people moving into the
State is expected to hover near the mid 250,000 range annually
throughout the 1990s. This population trend should provide fuel for
business and home builders to keep construction activity lively in
Florida for some time to come. However, other factors do influence the
level of construction in the State. For example, federal tax reform in
1986 and other changes to the federal income tax code have eliminated
tax deductions for owners of more than two residential real estate
properties and have lengthened depreciation schedules on investment
and commercial properties. Economic growth and existing supplies of
homes also contribute to the level of construction in the State. Also,
while interest rates remain low currently, an increase in interest rates
could significantly adversely impact the financing of new construction
with the State, thereby adversely impacting unemployment and other
economic factors within the State. In addition, available commercial
office space has tended to remain high over the past few years. So long
as this glut of commercial rental space continues, construction of this
be of space will likely continue to remain slow.
Single and multi-family housing starts in 1994-95 are
projected to reach a combined level of 118,000, increasing to 124,100
next year. Lingering recessionary effects on consumers and tight credit
are some of the reasons for relatively slow core construction activity,
as well as lingering effects from the 1986 tax reform legislation
discussed above. However, construction is one of the sectors most
severely affected by Andrew. Total construction expenditures are
forecasted to increase 6.6% this year and increase 7.5% next year.
The State has continuously been dependent on the highly
cyclical construction and construction related manufacturing industries.
While that dependency has decreased, the State is still somewhat at the
mercy of the construction related manufacturing industries. The
construction industry is driven to a great extent by the State's rapid
growth in population. There can be no assurance that population
growth will continue throughout the 1990's in which case there could
be an adverse impact on the State's economy through the loss of
construction and construction related manfacturing jobs. Also, while
interest rates remain low currently, an increase in interest rates could
significantly adversely impact the financing of new construction within
the State, thereby adversely impacting unemployment and other
economic factors within the State. In addition, available commercial
office space has tended to remain high over the past few years. So long
as this glut of commercial rental space continues, construction of this
type of space will likely continue to remain slow.
Tourism
Tourism is one of State's most important industries.
Approximately 41.1 million tourists visited the State in 1993, as
reported by the Florida Department of Commerce. In terms of business
activities and state tax revenues, tourists in Florida in 1993 represented
an estimated 4.5 million additional residents. Visitors to the State tend
to arrive equally by air and car. The State's tourist industry over the
years has become more sophisticated, attracting visitors year-round
and, to a degree, reducing its seasonality. The dollar's depreciation has
enhanced the State's tourism industry. Tourist arrivals are expected to
increase by almost 5.0% percent this year and 3.4% next year. Tourist
arrivals to Florida by air and car are expected to diverge from each
other, air decreasing 9.2% and 2.95 next year and auto increasing
0.7% this year and 4.0% next year. By the end of the State's current
fiscal year, 42.1 million domestic and international tourists are expected
to have visited the State. In 1995-96, tourist arrivals should
approximate 43.6 million.
Revenues and Expenses
Estimated fiscal year 1994-95 General Revenue plus
Working Capital funds available to the State total $14,624.4 million, a
5.7% increase over 1993-94. This reflects a transfer of $159 million in
non-recurring revenue due to Andrew, to a hurricane relief trust fund.
Of the total General Revenue plus Working Capital funds available to
the State, $13,858.4 million of that is Estimated Revenues (excluding
the Andrew impact) which represents an increase of 7.9% over the
previous year's Estimated Revenues. With effective General Revenues
plus Working Capital Fund appropriations at $14.311.1 million,
unencumbered reserves at the end of 1994-95 are estimated at $313.3
million. Estimated, fiscal year 1995-96 General Revenue plus Working
Capital and Budget Stabilization funds available total $15,145.9 million.
a 3.6% increase over 1994-95. The $14,647.2 million in Estimated
Revenues represents an increase of 5.7% over the previous year's
Estimated Revenues.
In fiscal year 1993-94, approximately 66% of the State's
total direct revenue to its three operating funds were derived from
State taxes,with Federal grants and other special revenue accounting
for the balance. State sales and use tax, corporate income tax,
intangible personal property tax, and beverage tax amounted to 66%,
8%, 4% and 4%, respectively, of total General Revenue Funds
available during fiscal 1993-94. In that same year, expenditures for
education, health and welfare, and public safety amounted to
approximately 49%, 32%, and 12%, respectively, of total expenditures
from the General Revenue Fund.
The State's sales and use tax (6%) currently accounts for
the State's single largest source of tax receipts. Slightly less than 10%
of the State's sales and use tax is designated for local governments
and is distributed to the respective counties in which collected for use
by the counties, and the municipalities therein. In addition to this
distribution, local governments may (by referendum) assess a 0.5%
or a 1.0% discretionary sales surtax within their county. Proceeds
from this local option sales tax are earmarked for funding local
infrastructure programs and acquiring land for public recreation or
conservation or protection of natural resources as provided under
applicable Florida law. Certain charter counties have other taxing
powers. In addition, and non-consolidated counties with a population
in excess of 800,000 may levy a local option sales tax to fund indigent
health care. It alone cannot exceed 0.5% and when combined with the
infrastructure surtax cannot exceed 1.0%. For the fiscal year ended
June 30, 1994, sales and use tax receipts (exclusive of the tax on
gasoline and special fuels) totalled $10,012.5 million, an increase of
6.9% over fiscal year 1992-1993.
The second largest source of State tax receipts is the tax
on motor fuels. However, these revenues are almost entirely dedicated
trust funds for specific purposes and are not included in the State's
General Revenue Fund.
The State imposes an alcoholic beverage, wholesale tax
(excise tax) on beer, wine, and liquor. This tax is one of the State's
major tax sources, with revenues totalling $439.8 million in fiscal year
ending June 30, 1994. Alcoholic beverage tax receipts decreased 1.0%
from the previous year's total. The revenues collected from this tax
are deposited into the State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of
the corporate income tax are credited to the General Revenue Fund.
For the fiscal year ended June 30, 1994, receipts from this source were
$1,047.4 million, and increase of 23.7% from fiscal year 1992-93.
The State imposes a documentary stamp tax on deeds and
other documents relating to realty, corporate shares, bonds, certificates
of indebtedness, promissory notes, wage assignments, and retail charge
accounts. The documentary stamp tax collections totalled $775.0
million during fiscal year 1993-94, a 21.3% increase from the
previous fiscal year. Beginning in fiscal year 1992-93, 71.29% of
these taxes are to be deposited to the General Revenue Fund.
The State imposes an intangible personal property tax on
stocks, bonds, including bonds secured by liens in Florida real
property, notes, governmental leaseholds, and certain other
intangibles, not secured by alien on Florida real property. The annual
rate of tax is 2 mils. Second, the State imposes a non-recurring 2 mil
tax on mortgages and other obligations secured by liens on Florida real
property. In fiscal year 1993-94, total intangible personal property tax
collections were $836.0 million, a 6.7% increase over the prior year.
Of the tax proceeds, 66.5% are distributed to the General Revenue
Fund.
The State's severance tax taxes, oil, gas and sulphur
production, as well as the severance of phosphate rock and other solid
minerals. Total collections from severance taxes total $54.8 million
during fiscal year 1993-94, down 15.0% from the previous year.
Currently, 60% of this amount is transferred to the General Revenue
Fund.
The State began its own lottery in 1988. State law
requires that lottery revenues be distributed 50% to the public in prizes,
38.0% for use in enhancing education, and the balance, 12.0% for
costs of administering the lottery. Fiscal year 1993-94 lottery ticket
sales totalled $2.15 billion, providing education with approximately
$816.2 million.
Debt-Balanced Budget Requirement
At the end of fiscal 1993, approximately $5.61 billion in
principal amount of debt secured by the full faith and credit of the State
was outstanding. In addition, since July 1, 1993, the State issued
about $1.13 billion in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State
budget, as a whole, and each separate fund within the State budget, be
kept in balance form currently available revenues each fiscal year. If
the Governor or Comptroller believes a deficit will occur in any State
fund, by statute, he must certify his opinion to the Administrative
Commission, which then is authorized to reduce all State agency
budgets and releases by a sufficient amount to prevent a deficit in any
fund. Additionally, the State Constitution prohibits issuance of State
obligations to fund State operations.
Litigation
Currently under litigation are several issues relating to
State actions or State taxes that put at risk substantial amounts of
General Revenue Fund monies. Accordingly, there is no assurance
that any of such matters, individually or in the aggregate, will not have
a immaterial adverse affect on the State's financial position.
Florida law provides preferential tax treatment to insurers
who maintain a home office in the State. Certain insurers challenged
the constitutionality of this tax preference and sought a refund of taxes
paid. Recently, the Florida Supreme Court ruled in favor of the State.
This case and others, along with pending refund claims, total about
$150 million.
The State imposes a $295 fee on the issuance of
certificates of title for a motor vehicles previously titled outside the
State. The State has been sued by plaintiffs alleging that this fee
violates the Commerce Clause of the U.S. Constitution. The Circuit
Court in which the case was filed has granted summary judgment for
the plaintiffs and has enjoined further collection of the impact fee and
has ordered refunds to all those who have paid the fee since the
collection of the fee went into effect. The State has appealed the lower
Court's decision and an automatic stay has been granted to the State
allowing it to continue to collect the fee. The potential refund exposure
to the State if it should lose the case may be in excess off $100
million.
The State maintains a rating of Aa and AA from Moody's
Investors Service and Standard & Poors Corporation, respectively, on
the majority of its general obligation bonds, although the rating of a
particular series of revenue bonds relates primarily to the project,
facility,or other revenues source from which such series derives funds
for repayment. While these ratings and some of the information
presented above indicate that the State is in satisfactory economic
health, there can be no assurance that there will not be a decline in
economic conditions or that particular conditions or that particular
Bonds purchased by the Trust will not be adversely affected by any
such changes.
The sources for the information presented above include
official statements and financial statements of the State of Florida.
While the Sponsor has not independently verified this information, the
Sponsor has no reason to believe that the information is not correct in
all material respects.
Maryland Trust
Risk Factors. 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 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 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 borrowing, together with
certain equity contributions, to finance acquisitions of the site,
construction of a baseball stadium and ancillary facilities, and if a lease
agreement is executed between the Authority and a professional football
franchise, a football stadium.
The Authority's financings as well as any future financings
for a football stadium are leased-backed revenue obligations, payment
of which is secured by among other things, an assignment of revenues
to be received under a lease of the sports facilities from the Authority
to the State of Maryland; rental payments due from the State under that
lease will be subject to annual appropriation by the Maryland General
Assembly. The State anticipates that revenues to fund the lease
payments will be generated from a variety of sources, including in each
year sports lottery revenues, the net operating revenues of the Authority
and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered
by the Water Quality Financing Administration in the Department of
the Environment. The Fund may be used to provide loans, subsidies
and other forms of financial assistance to local government units for
wastewater treatment projects as contemplated by the 1987 amendments
to the Federal Water Pollution Control Act. The Administration is
authorized to issue bonds secured by revenues of the Fund, including
loan repayments, federal capitalization grants, and matching State
grants.
The University of Maryland System, Morgan State
University, and St. Mary's College of Maryland are authorized to issue
revenue bonds for the purpose of financing academic and auxiliary
facilities. 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
borrowing 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
borrowing. 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.
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 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.
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.
Massachusetts Trust
Risk Factors.The Commonwealth of Massachusetts and
certain of its cities and towns have at certain times in the recent past
undergone serious financial difficulties which have adversely affected
and, to some degree, continue to adversely affect their credit standing.
These financial difficulties could adversely affect the market values and
marketability of, or result in default in payment on, outstanding bonds
issued by the Commonwealth or its public authorities or municipalities,
including the Bonds deposited in the Trust. The following description
highlights some of the more significant financial problems of the
Commonwealth and the steps taken to strengthen its financial condition.
The effect of the factors discussed below upon the ability
of Massachusetts issuers to pay interest and principal on their
obligations remains unclear and in any event may depend on whether
the obligation is a general or revenue obligation bond (revenue
obligation bonds being payable from specific sources and therefore
generally less affected by such factors) and on what type of security is
provided for the bond. In order to constrain future debt service costs,
the Executive Office for Administration and Finance established in
November, 1988 an annual fiscal year limit on capital spending of $925
million, effective fiscal 1990. In January, 1990, legislation was
enacted to impose a limit on debt service in Commonwealth budgets
beginning in fiscal 1991. The law provides that no more than 10% of
the total appropriations in any fiscal year may be expended for payment
of interest and principal on general obligation debt of the
Commonwealth (excluding the Fiscal Recovery Bonds discussed
below). It should also be noted that Chapter 62F of the Massachusetts
General Laws establishes a state tax revenue growth limit and does not
exclude principal and interest due on Massachusetts debt obligations
from the scope of the limit. It is possible that other measures affecting
the taxing or spending authority of Massachusetts or its political
subdivisions may be approved or enacted in the future.
The Commonwealth has waived its sovereign immunity
and consented to be sued under contractual obligations including bonds
and notes issued by it. 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 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.
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
borrowing 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 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 borrowing, 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 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.
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 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.
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 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 Sponsor 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
Diversity and a significant natural rexource base are two
important characteristics of the Minnesota economy. Generally, the
structure of the State's economy parallels the structure of the United
States economy as a whole. There are, however, employment
concentrations in durable goods and non-durable goods manufacturing,
particularly industrial machinery instruments and miscellaneous food,
paper and related industries and printing and publishing. During the
period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to
declining agricultural employment. The rate of employment growth in
Minnesota exceeded the rate of national growth, however, in the period
of 1990 to 1994. Since 1980, Minnesota per capita income generally
has remained above the national average, although personal income in
Minnesota grew more slowly than the natioanl average during the
period of 1992 and 1993. Minnesota personal income growth in 1993
was slowed by a decline in farm income as a result of cool, wet
weather. During 1993 and 1994, the State's monthly unemployment
rate was generally less than the national unemployment rate. The
Minnesota Department of Finance February 1995 Forecast projected
that the State's economy will not grow as fast during the biennium
ending June 30, 1997 as the national aggregates, due to continued
tightness in local labor markets. Although the State's national economic
forecasting consultant forecast a slowdown but no recession during
1995, it recognized the substantial possibility of a recession.
The State of Minnesota (the "State") relies heavily on a
progressive individual income tax and a retail sales tax for revenue,
which results in a fiscal system that is sensitive to economic conditions.
In the early 1980s, the State of Minnesota experienced financial
difficulties due to a downturn in the State's economy resulting from the
national recession. As a consequence, the State's revenues were
significantly lower than anticipated in the July 1, 1979 to June 30, 1981
biennium and the July 1, 1981 to June 30, 1983 biennium. In response
to revenue shortfalls, the legislature broadened and increased the State
sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payments of State
aid, including appropriations for and aids to local governmental units.
The State's fiscal problems affected other governmental units within the
State, such as local government, school districts and state agencies,
which, in varying degrees, also faced cash flow difficulties. In certain
cases, revenues of local governmental units and agencies were reduced
by the recession. Because of the State's fiscal problems, Standard &
Poor's Corporation reduced its rating of the State's outstanding general
obligation bonds from AAA to AA+ in August 1981 and to AA in
March 1982. Moody's Investors Service, Inc. 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 reducing the State's budget reserve (cash flow account),
imposing a sales tax on purchases by local governmental units and
making other budgetary adjustments. A budget analysis released by the
Department of Finance on May 27, 1994 projected a General Fund
balance of $130 million 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 $16.9 billion.
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 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.
Nebraska Trust
Nebraska's Economy. Approximately 1.5 million people
live in Nebraska. About four-fifths of Nebraskans live in Nebraskans
live in the eastern third of the state. The economy of western Nebraska
continues to revolve around crop and livestock production, although
food processing and other types of manufacturing are becoming more
prevalent. Eastern Nebraska, which includes the cities of Omaha with
about 335,00 people and Lincoln with about 190,000 residents, has a
more diversified economy. The economy of eastern Nebraska includes
foodprocessing, general manufacturing, insurance, financial services,
telemarketing, education, government and a large military base outside
of Omaha. The economy of the state as a whole is vulnerable to
downturns in crop and livestock prices, reductions in government farm
subsidies, changes in interest rates and decisions at the federal level,
including decisions regarding Offutt Air Force Base. Any one of these
factors, or other developments could adversely affect any, or all issues
of Nebraska tax-exempt securities.
According to the Federal Reserve Bank of Kansas City,
economic growth in Nebraska was flat in 1992. Nonagricultural
employment dipped slightly after a gain in 1991. the civilian
unemployment rate climbed to 3.2% in the third quarter from 2.9% at
the end of 1991. Still Nebraska's unemployment rate remained below
the national average of 7.6%. Real nonfarm income grew twice as fast
as in 1991, but not as fast as in surrounding states. Nebraska's
manufacturing sector remained stable in 1992. Manufacturing
employment, dominated by nondurables such as food processing, fell
slightly. Nondurable industries added jobs, offsetting continuing job
losses in durable goods industries. Nebraska construction sector was
strong in 1992, with the value of construction contracts awarded in the
first three quarters up considerably from the year before. Permits for
single-family homes increased, as did contract awards for nonresidential
buildings and public structures, such as roads and bridges.
Nevertheless, the increase in construction activity did not translate into
new jobs. In fact, construction employment fell 1.4% after rising
slightly in 1991. Nebraska's non-goods-producing sectors slipped as in
1991. Employment in retail and wholesale trade fell 4.6%. While
service employment held up better, there has been essentially no job
growth in this sector in the past two years.
Nebraska's utilities engaged in the production of electric
power are either publicly-owned or consumer-owned cooperatives and
are subject to limited regulation.
Nebraska Developments Relating to Property Taxation.
The validity of Nebraska's system of assessing and taxing real and
personal property for support of local political subdivisions has been
the subject of numerous court challenges and a recent constitutional
amendment. In a series of decisions beginning in 1989, the Nebraska
Supreme Court (the"Court") held that Nebraska's personal property tax
scheme which exempted from taxation approximately of 75% of
Nebraska's commercial and industrial personal property, but taxed
railcars, gas pipelines and other property, violated the Uniformity
Clause of the Nebraska Constitution. These decisions arguably required
either that all tangible personal and real property be taxed or that all
such property be removed from the tax rolls.
On May 12, 1992, the people of Nebraska voted to amend
the Uniformity Clause of the Nebraska Constitution. The amendment
granted the Nebraska Legislature (the "Legislature") greater authority
to administer the property tax in a nonuniform manner and allow real
and personal property to be treated as separate classes of tangible
property for taxation purposes. Pursuant to the amendment, the
Legislature enacted legislation, which incorporated into the statutes the
provisions of the amendment and placed certain personal property,
including business and agricultural equipment and breeding livestock,
on the personal property tax rolls. These actions should have placed the
state's system of property taxation on a firm constitutional footing.
The most serious threat to Nebraska's political subdivisions
as a result of the Court's Uniformity Clause decisions has been the
prospect that subdivisions would be required to refund large amounts
of property taxes received between the years 1989 and 1992. However,
in 1993 the Court held that taxpayers were not entitled to refunds of
100% of taxes paid under the pre-1993 tax structure. Rather, the Court
affirmed an award to a taxpayer of approximately 18% of the
taxpayer's 1990 personal property taxes, which reduced the taxpayer's
effective tax rate for 1990 on the taxpayer's tangible personal property
to the level which the taxpayer would have paid if all improperly
exempted property had been taxed. This 1993 decision, which the
United States Supreme Court refused to review, is expected to
significantly reduce the amount of taxes which subdivisions must
refund.
Recently, in a decision unrelated to its Uniformity Clause
decisions, the Court held that Nebraska's system of funding public
education, which relies heavily on ad valorem taxes and results in wide
disparities in funding between rich and poor school districts, does not
violate the right to "free instruction" enshrined in the Nebraska
Constitution. In this case, the Court rejected the plaintiff's argument
that Nebraska should follow decisions by the Courts of Texas,
Kentucky, New Jersey and other states which had held that similar
systems of funding education violated their respective state
constitutions.
Statutory Property Tax Receipts Limitations. Legislation
adopted in 1991 imposes a 0% limit on the annual increase of
anticipated property tax receipts budgeted by local political subdivisions
with several exceptions, including (1) property taxes collected for the
retirement of bonded indebtedness and (2) tax receipts collected with
respect to property annexed by the political subdivision or to revenue
received as a result of growth (including revenues due to the taxation
of previously exempt personal property). In addition, (i) upon an
affirmative vote of the majority of the governing body of a political
subdivision, the anticipated property tax receipts may be increased by
the percentage change in the CPI- All Urban Consumers for the
previous calendar year up to a maximum of 5% over the anticipated
property tax receipts for the prior fiscal year; (ii) if the increase based
on the CPI is less than 5%, upon an affirmative vote of 75% of the
governing body, the anticipated tax receipts may be increased up to a
maximum of 5% over the previous fiscal year; and (iii) upon an
affirmative majority vote of those voting in a special election called by
the governing body, the limitation may be exceeded by the amount
approved. This limitation provision terminates for fiscal years
beginning on or after July 1, 1995.
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 1995 fiscal year budget became law on June
30, 1994.
Reflecting the downturn, the rate of unemployment in the
State rose from a low of 3.6% during the first quarter of 1989 to a
recessionary peak of 9.3% during 1992. Since then, the unemployment
rate fell to 6.7% during the fourth quarter of 1993. The jobless rate
averaged 7.1% during the first nine months of 1994, but this estimate
is not comparable to those prior to January because of major changes
in the federal survey from which these statistics are obtained.
In the first nine months of 1994, relative to the same
period a year ago, job growth took place in services (3.5%) and
construction (5.7%), more moderate growth took place in trade (1.9%),
transportation and utilities (1.2%) and finance/insurance/real estate
(1.4%), while manufacturing and government declined by 1.5% and
0.1%, respectively. The net result was a 1.6% increase in average
employment during the first nine months of 1994 compared to the first
nine months of 1993.
The economic recovery is likely to be slow and uneven in
both New Jersey and the nation. Some sectors, like commercial and
industrial construction, will undoubtedly lag because of continued
excess capacity. Also, employers in rebounding sectors can be
expected to remain cautious about hiring until they become convinced
that improved business will be sustained. Other firms will continue to
merge or downsize to increase profitability. As a result, job gains will
probably come grudgingly and unemployment will recede at a
corresponding slow pace.
Pursuant to the State Constitution, no money may be
drawn from the State Treasury except for appropriations made by law.
In addition, all monies for the support of State purposes must be
provided for in one general appropriation law covering one and the
same fiscal year.
In addition to the Constitutional provisions, the New Jersey
statutes contain provisions concerning the budget and appropriation
system. Under these provisions, each unit of the State requests an
appropriation from the Director of Division of Budget and Accounting,
who reviews the budget requests and forwards them with his
recommendation to the Governor. The Governor then transmits his
recommended expenditures and sources of anticipated revenue to the
legislature, which reviews the Governor's Budget Message and submits
an appropriations bill to the Governor for his signing by July 1 of each
year. At the time of signing the bill, the Governor may revise
appropriations or anticipated revenues. That action can be reversed by
a two-thirds vote of each House. No supplemental appropriation may
be enacted after adoption of the act, except where there are sufficient
revenues on hand or anticipated, as certified by the Governor, to meet
the appropriation. 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.
One of the major reasons for cautious optimism is found
in the construction industry. Total construction contracts awarded in
New Jersey have turned around, rising by 8.6% in 1993 compared with
1992. By far, the largest boost came from residential construction
awards which increased by 37.7% in 1993 compared with 1992. In
addition, non residential building construction awards have turned
around, posting a 6.9% gain.
Nonbuilding construction awards increased approximately
4% in the first eight months of 1994 compared with the same period in
1993.
Finally, even in the labor market there are signs of
recovery. Thanks to a reduced layoff rate and the reappearance of job
opportunities in some parts of the economy, unemployment in the State
has been receding since July 1992, when it peaked at 9.6% according
to U.S. Bureau of Labor Statistics estimates based on the federal
government's monthly household survey. The same survey showed
joblessness dropped to an average of 6.7% in the fourth quaarter of
1993. The unemployment rate registered an average of 7.8% in the first
quarter of 1994, but this rate cannot be compared with prior data due
to the changes in the U.S. Department of Labor procedures fir
determining the unemployment rate that went into effect in January
1994.
State Aid to Local Governments is the largest portion of
fiscal year 1995 appropriations. In fiscal year 1995, $5,782.2 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 $3,900.1 million, was provided for
local elementary and secondary education programs. Of this amount,
$2,431.6 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 $474.8 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 six
years.
Appropriations to the Department of Community Affairs
total $635.1 million in State Aid monies for fiscal year 1995. The
principal programs funded were the Supplemental Municipal Property
Tax Act ($314.1 million); the Municipal Revitalization Program
($165.0 million); municipal aid to urban communities to maintain and
upgrade municipal services ($40.7 million); and the Safe and Clean
Neighborhoods Program ($58.9 million). Appropriations to the State
Department of the Treasury total $321.3 million in State Aid monies
for fiscal year 1995. The principal programs funded by these
appropriations were payments under the Business Personal Property
Tax Replacement Programs ($158.7 million); the cost of senior
citizens, disabled and veterans property tax deductions and exemptions
($41.7 million); aid to densely populated municipalities ($25.0 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 1995
include: welfare programs ($499.1 million); aid to county colleges
($123.6 million); and aid to county mental hospitals ($79.4 million).
The second largest portion of appropriations in fiscal 1995
is applied to Direct State Services: the operation of State government's
17 departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In fiscal 1995, appropriations for Direct
State Services aggregate $5,203.1 million. Some of the major
appropriations for Direct State Services during fiscal 1995 are detailed
below.
$595.3 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.
$27.7 million is appropriated for administration of the
Medicaid and pharmaceutical assistance to the aged and disabled
programs; $14.9 million for administration of the various income
maintenance programs, including Aid to Families with Dependent
Children(AFDC); $69.3 million for the Division of Youth and Family
Services, which protects the children of the State from abuse and
neglect and $15.0 million for juvenile community programs which
serves juveniles who have violated the laws of the State and have been
committed to the Juvenile Services Division.
The Department of Health was appropriated $32.3 million
for the prevention and treatment of diseases, alcohol and drug abuse
programs, regulation of health care facilities, and the uncompensated
care program.
$689.3 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.
$92.3 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.
$176.6 million was appropriated to the Department of
Environmental Protection for the protection of air, land, water, forest,
wildlife and shellfish resources and for the provision of outdoor
recreational facilities.
The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These
bonds are backed by the full faith and credit of the State. State tax
revenues and certain other fees are pledged to meet the principal and
interest payments required to pay the debt fully. No general obligation
debt can be issued by the State without prior voter approval, except that
no voter approval is required for any law authorizing the creation of a
debt for the purpose of refinancing all or a portion of outstanding debt
of the State, so long as such law requires that the refinancing provide
a debt service savings.
All appropriations for capital projects and all proposals for
State bond authorizations are subject to the review and recommendation
of the New Jersey Commission on Capital Budgeting and Planning.
This permanent commission was established in November, 1975, and
is charged with the preparation of the State Capital Improvement Plan,
which contains proposals for State spending for capital projects.
The aggregate outstanding general obligation bonded
indebtedness of the State as of June 30, 1993 was $3.549.7 billion.
The debt service obligation for outstanding indebtedness is $119.9
million for fiscal year 1994.
Aside from its general obligation bonds, the State's "moral
obligation" backs certain obligations issued by the New Jersey Housing
and Mortgage Finance Agency, the South Jersey Port Corporation (the
"Corporation") and the Higher Education Assistance Authority. As of
June 30, 1992, there was outstanding in excess of $1 billion of moral
obligation bonded indebtedness issued by such entities, for which the
maximum annual debt service was over $101 million as of such date.
The State provides the Corporation with funds to cover debt service and
property tax requirements when earned revenues are anticipated to be
insufficient to cover these obligations. For the calendar years 1986
through 1992, the State has appropriated $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-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 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.
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 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 $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 authority 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 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.
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.
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.
1995-1998 Financial Plan. On July 8, 1994, the City
submitted to the Control Board the Financial Plan for the 1995-1998
fiscal years (the "1995-1998 Financial Plan or "Financial Plan"), which
relates to the City, the Board of Education ("BOE") and the City
Universiuty of New York ("CUNY"). The Financial Plan is based on
the City's expense and capital budgets for the City's 1995 fiscal year,
which were adopted on June 23, 1994.
The 1995-1998 Financial Plan projects revenues and
expenditures for the 1995 fiscal year balanced in accordance with
GAAP. The projections for the 1995 fiscal year reflect proposed
actions to close a previously projected gap of approximately $2.3
billion for the 1995 fiscal year, which include City actions aggregating
$1.9 billion, a $288 million increase in State actions over the 1994 and
1995 fiscal years, and a $200 million increase in Federal assistance.
The City actions include proposed agency actions aggregating $1.1
billion, including productivity savings; tax and fee enforcement
initiatives; service reductions; and savings from the restucturing of City
services. City actions also include savings of $45 million resulting from
proposed tort reform, the projected transfer to the 1995 fiscal year of
$171 million of the projected 1994 fiscal year surplus, savings of $200
million for employee health care costs, $51 million in reduced pension
costs, savings of $225 million from refinancing City bonds and $65
million from the proposed sale of certain City assets. The proposed
savings for employee health care ocsts are subject to collective
bargaining negotiation with the City's unions; the proposed savings
from tort reform will require the approval of the State Legislature; and
the $200 million increase in Federal assistance is subject to approval by
Congress and the President.
The Financial Plan also set forth projections for the 1996
through 1998 fiscal years and outlines a proposed gap-closing program
to close projected gaps of $1.5 billion, $2.0 billion and a $2.4 billion
for the 1996 through 1998 fiscal years, respectively, after successful
implementation of the $2.3 billion gap-closing program for the 1995
fiscal year.
The projections for the 1996 through 1998 fiscal years
assume the extension by the State Legislature of the 14% personal
income tax surcharge beyond calendar year 1995 and extension of the
12.5% personal income tax surcharge beyond calendar year 1996,
resulting in combined revenues of $159 million, $633 million and $920
million in the 1996, 1997 and 1998 fiscal years, respectively. However,
as part of the tax reduction program refected in the Financial Plan, the
City is proposing the elimination of the 12.5% personal income tax
surcharge when it expires at a cost of $184 million in fiscal year 1997
and$455 million in fiscal year 1998. The proposed gap-closing actions
include City actions aggregating $1.2 billion, $1.5 billion and $1.7
billion in the 1996 through 1998 fiscal years, respectively; $275
million, $375 million and $525 million in proposed additional State
actions in the 1996 through 1998 fiscal years, repectively, primarily
from the proposed State assumption of certain Medicaid costs; and$100
million and $200 million in proposed additional Federal assistance in
the 1997 and 1998 fiscal years, respectively. The proposed additional
City actions, a substantial number of which are unspecified, include
additional spending reductions, the reduction of City personnel through
attrition, government efficiency initiatives, procurement initiatives,
labor productivity initiatives, and the proposed privatization of City
sewage treatment plants. Certain of these initiatives may be subject to
negotiation with the City's municipal unions. Various actions proposed
in the Financial Plan for the 1996-1998 fiscal years, including the
proposed state actions, are subject to approval by Congress and the
President. The State Legislature has in previous legislative sessions
failed to approve certain of the City's proposals for the State
assumption of certain Medicaid costs and mandate relief, thereby
increasing the uncertainty as to the receipt of the State assistance
included in the Financial Plan. In addition, the Financial Plan assumes
the continuation of the current assumption with respect to wages for
City employees and the assumed 9% earnings on pension fund assets
for the 1994 fiscal year are expected to be substantially below the 9%
assumed rate, which will increase the City's future pension
contributions. In addition, a review of the pension fund earnings
assumptions is currently being conducted which could firther increase
the City's future pension contributions. In addition, a review of the
pension fund earnings assumptions is currently being conducted which
could further increse the City's future pension contributions by a
substantial amount.
The City expects that tax revenue for the 1994 fiscal year
will be approximaately $65 million less than forecast in the 1994
Modification, primarily due to shortfalls in the personal income tax and
sales tax,and that expenditures will be approximately $25 million
greater than forecast. Accordingly, the $171 million of the projected
surplus for the 1994 fiscal year, which is currently projected in the
1994 Modification and the Financial Plan to be transferred to the 1995
fiscal year will decrease to 81 million. As a result, the City will reduce
expenditures for the 1995 fiscal year to offset this decrease, which is
expected to be reflected in the first quarter modification to the Financial
Plan. In addition, the Financial Plan assumes that a special session of
the State Legislature, which may take place in the near future, will
enact, and the Governor will sign, State legislation relating to the
proposed tort reform, which would save the City $45 million in
payments for tort liability in fiscal year 1995, and certain anticipated
improvements in fine and fee collections forecast to earn $25 million
in City revenue in fiscal year 1995, and that the State Legislature will
not enact proposed legislation mandataing additional pension benefits
for City retirees costing the City approximately $200 million annually.
To address these and other possible contingencies, on July 11, 1994,
the Mayor stated that he will reserve $100 million from authorized
spending by City agencies in fiscal year 1995 in addition to the
existing general reserrves of $150 million. In addition, the City has
identified a $360 million contingency program for the 1995 fiscal year,
primarily consisting of layoffs and service reductions.
Actions to Close the Gaps. The 1995-1998 Financial Plan
reflects a program of proposed actions by the City, State and Federal
governments to close the gaps between projected revenues and
expenditures of $1.5 billion, $2.0 billion and $2.4 billion for the 1996,
1997 and 1998 fiscal years, respectively.
City gap-closing actions total $1.2 billion in the 1996 fiscal
year, $1.5 billion in the 1997 fiscal year and $1.7 billion in the 1998
fiscal year. These actions, a substantial number of which are
unspecified, include additional spending reductions, aggregate $501
million, $598 million and $532 million in the 1996 through 1998 fiscal
years, respectively; government efficiency initiatives aggregating $50
million, $100 million and $150 million in the 1996 through 1998 fiscal
years, respectively; labor productivity initiatives, aggregating $250
million in each of the 1996 through 1998 fiscal years; and a proposed
privatiztion of City seewage treatment plants which would result in
revenues of $200 million in each of the 1996 through 1998 fiscal years.
Certain of these initiatives may besubject to negotiation with the City's
municipal unions.
State actions proposed in the gap-closing program total
$275 million, $375 million and $525 million in each of the 1996, 1997
and 1998 fiscal years, respectively. These actions include savings
primarily from the proposed State assumption of certain Medicaid
costs.
The Federal actions proposed in the gap-closing program
are $100 million and $200 million in increased Federal assistance in
fiscal years 1997 and 1998, respectively.
Various actions proposed in the Financial Plan, including
the proposed increse 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. State
and Federal actions are uncertain and no assurance can be given that
such actions will in fact be taken or that the savings that the City
projects will ersult from these actions will be realized. The State
Legislature failed to approve a substantial portion of the proposed State
assumption of Medicaid costs in the last session. The Financial Plan
assumes that these proposals will be approved by the State Legislature
during the 1995 fiscal year and that the Federal government will
increase its share of funding for the Medicaid program. If these
measures cannot be implemented, the City will be required to take
other actions to decrease expenditures or increase revenues to maintain
a balanced financial plan.
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.
Assumptions. The 1995-1998 Financial Plan is based on
numerous assumptions, including the continuing improvement in the
City's and the region's economy and a modest employment recvery
during calendar year 1994 and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The 1995-1998
Financial Plan is subject to various other uncertainties and
contingencies relating to, among other factors, the extent, if any, to
which wage increses for City employees exceed the annual increases
assumed for the 1995 through 1998 fiscal years; continuation of the 9%
interest earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability
of the State, in the context, of the State's current financial condition,
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 Mdeicaid costs and State mandate relief; the ability
of HHC, BOE and other such agencies to maintain balanced budgets;
the willingness of the Federal government to provide Federal aid;
approval of the proposed continuation of the personal income tax
surcharge; adoption of the City's budgets by the City Council in
substantially the forms submitted by the MAyor; the ability of the City
to implement proposed reductions in City personnel and other cost
reduction initiatives, which may require in certain cases the cooperation
of the City's municipal unions, and teh success with which the City
controls expenditures; savings for health care costs for City employees
in the amounts projected in the Financial Plan; additional expenditures
that may be incurred due to the requirements of certain legislation
requiring minimum levels of funding for education; the impact on real
estate tax revenues of the current weakness in the real estate market;
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 od 1990; and additional expenditures
that may be incurred as a result of deterioration in the condition of the
City's ifrastructure.
The projections and assumptions contained in the 1995-
1998 Financial Plan are subject to revision which may involve
substantial change, and no assurance can be given that these estimates
and projections, which include actions which the City expects will be
taken but which are not within the City's control, will be realized.
Certain Reports. From time to time, the Control Board
staff, the City Comptroller and others issue reports and make public
statements regarding the City's financial condition, commenting on,
among other matters, the City's financial plans, projected revenues and
expenditures and actions by the City to eliminate projected operating
deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports
have analyzed the City's Future economic and social conditions and
have questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and
to provide necessary services.
On March 1, 1994, the City Comptroller issued a report
on the state of the City's economy. The report concluded that, while
the City's long recession is over, moderate growth is the best the City
can expect, with the local economy being held back by continuing
weakness in important international economies.
On July 11, 1994, the City Comptroller issued a report on
the City's adopted budget for the 1995 fiscal year. The City
Comptroller stated that if none of the uncertain proposals are
implemented, the total risk could be as much as $763 million to $1.02
billion. risks which were identified as substantial risks include a
possible $208 million to $268 million increase in overtime costs;
approval by the State Legislature of a tort reform program to limit
damage claims against the City, which would result in savings of $45
million; the $65 million proceeds from a proposed asset sale;
additional expenditures at Health and Hospitals Corporation totaling $60
million; and $60 million of increased pension contributions resulting
from lower than assumed pension fund earnings. Additional possible
risks include obtaining the agreement of municipal unions to the
proposed reduction in City expenditures for health care costs by $200
million; uncertainties concerning the assumed improvement in the
collection of taxes, fines and fees totaling $75 million; and uncertainty
concerning the receipt of the $200 million of increased Federal aid
projected for the 1995 fiscal year. The City Comptroller noted that
there are a number of additional issues, including possible larger than
projected expenditures for foster care and public assistance and the
receipt of $100 million from assumed FICA refunds. The City
Comptroller has also stated in a report issued on June 8, 1994 that
certain of the reductions in personnel and services proposed in the
City's financial plan submitted to the Control Board on May 10, 1994
(the "May Financial Plan") will have long-term and, in some cases,
severe consequences for City residents.
In addition, on July 11, 1994, the private members of the
Control Board, Robert R. Kiley, Heather L. Ruth and Stanley S.
Shuman, issued a statement which concluded that the 1995 fiscal year
is not reasonalbly balanced and that further budget cuts are unavoidable
in the next six months. In addition, the private members stated that the
Financial Plan does not set forth a path to structural balance. The
private members stated that, in order ot achieve this goal, City
managers must be given fiscal targets they can be expected to meet;
solid new proposals must be developed that back up the savings the
City has committed to achieve to balance future budgets; and the
deferral of expenses to future years, through actions such as the sale of
property tax receivables, stretching out pension contributions and
delaying debt service payments through refundings, must stop. On July
11, 1994, the Control Board staff stated that the City faces risks of
greater than $1 billion and $2 billion for the 1995 and 1996 fiscal
years, respectively, and risks of approximately $3 billion for each of
the 1997 and 1998 fiscal years.
Substantially all of the City's full-time employees are
members of labor unions. The Financial Emergency Act requires that
all collective bargaining agreements entered into by the City and the
Covered Organizations be consistent with the City's current financial
plan, except under certain circumstances, such as awards arrived at
through impasse procedures.
On January 11, 1993, the City announced a settlement with
a coalition of municipal unions, including Local 237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District
Council 37") and other unions covering approximately 44% of the
City's workforce. The settlement, which has been ratified by the
unions, includes a total net expenditure increase of 8.25% over a 39-
month period, ending March 31, 1995 for most of these employees. On
April 9, 1993 the City announced an agreement with the Uniformed
Fire Officers Association (the"UFOA") which is consistent with the
coalition agreement. The agreement has been ratified. The Financial
Plan reflects the costs associated with these settlements and provides for
similar increases for all other City-funded employees.
The Financial Plan provides no additional wage increases
for City employees after their contracts expire in the 1995 and 1996
fiscal years. Each 1% wage increase for all employees commencing in
the 1995 and 1996 fiscal years would cost the City an additional $130
million for the 1995 fiscal year and $140 million for the 1996 fiscal
year and $150 million 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.
New York City Indebtedness. Outstanding indebtedness
having an initial maturity greater than one year from the date of
issuance of the City as of March 31, 1994 was $21,290,000 compared
to $19,624,000 as of March 31, 1993.
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, 1994, MAC had outstanding an aggregate of approximately $4.071
billion of its bonds compared to $4.470 billion as of March 31, 1993.
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. In
January 1995, Standard & Poor's reconfirmed its negative outlook and
placed it on CreditWatch because of the City's accounting methods.
Litigation
The State is the subject of numerous legal proceedings
relating to State finances, State programs and miscellaneous tort, real
property and contract claims in which the State is a defendant and
where monetary damages sought are substantial. These proceedings
could adversely affect the financial condition of the State in the 1994-95
fiscal years or thereafter.
In addition to the proceedings noted below, the State is
party to other claims and litigation which its legal counsel has advised
are not probable of adverse court decisions. Although the amounts of
potential losses, if any are not presently determinable, it is the State's
opinion that its ultimate liability in htese cases is not expected to have
a material adverse effect on the State's financial position in the 1994-95
fiscal year 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 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 Sponsor 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 Sponsor 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 3,452,700
jobs as of June 1995. The largest nonagricultural segment of jobs was
the approximately 784,900 persons employed in trade, with textiles as
the largest manufacturing segment employing approximately 201,000
people. The United States Department of Labor estimates that as of
May, 1995, 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 June 1995,
to be 4.7% of the labor force, as compared with an unemployment rate
of 5.8% nationwide. Gross agricultural income (excluding farm forest
products) in 1993 was $5.457 billion. This places North Carolina ninth
in the nation in gross agricultural income. Tobacco production is the
leading source of agricultural crop income in the State, accounting for
approximately 18.9% of gross agricultural income in 1993.
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 1994 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 $10.613 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, 1994, approximately $936
million aggregate principal amount of the State's general obligation
bonds and $55 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 8 agencies or public authorities of the State had
approximately $9.705 billion principal amount of revenue bonds
outstanding as of June 30, 1994. 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
$5.118 billion principal amount of general obligation bonds and $2.337
billion of revenue bonds (excluding industrial revenue bonds of county
authorities) outstanding as of June 30, 1994. The State has no financial
responsibility with respect to this debt.
Ohio Trust
The Ohio Trust will invest substantially all of its net assets
in Ohio Obligations. The Ohio Trust is therefore susceptible to
political, economic and regulatory factors that may affect issuers of
Ohio Obligations. The following information constitutes only a brief
summary of some of the complex factors that may affect the financial
situation of issuers in Ohio, and is not applicable to "conduit"
obligations on which the public issue itself has no financial
responsibility.
The creditworthiness of obligations issued by local Ohio
issuers may be unrelated to the creditworthiness of obligations issued
by the State, and generally there is no responsibility on the part of the
State to make payments on those local obligations. There may be
specific factors that are applicable in connection with investment in
particular Ohio Obligations or in the obligations of particular Ohio
issuers, and it is possible the investment will be in Ohio Obligations or
in obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only
as a general summary and not a discussion of any such specific factors
that may affect any particular issuer or issue of Ohio Obligations.
Ohio is the seventh most populous state, with a 1990
Census Count of 10,847,000 indicating a 0.5% population increase
from 1980.
The economy of Ohio, while diversifying more into the
service and other non-manufacturing areas, continues to rely in part on
durable goods manufacturing, which is largely concentrated in motor
vehicles and equipment, steel, rubber products and household
appliances. As a result, general economic activity in Ohio, as in many
other industrially-developed states, tends to be more cyclical than in
some other states and in the nation as a whole. Agriculture also is an
important segment of the economy in the State, and the State has
instituted several programs to provide financial assistance to farmers.
The State's economy, has had varying effects on different geographic
areas of the State and the political subdivisions located within those
geographic areas.
In prior years, the State's overall unemployment rate is
commonly somewhat higher than the national average. In January 1993
and February 1993, the unemployment rate was 8.2 and 7.8,
respectively, compared to the national rates 7.9 and 7.7 respectively.
However, for both 1991 and 1992 the State rate was below the national
rate; the State rates were 6.4% and 7.2%, and the national rates 6.7%
and 7.4% respectively. The unemployment rate, and its effects, vary
among particular geographic areas of the State.
There can be no assurance that future state-wide or
regional economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market
value of Ohio Obligations held in the portfolio of the Ohio Trust or the
ability of the particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending
a fiscal year or biennium in a deficit position. Most operations are
financed through the General Reserve Fund (GRF), with personal
income and sales-use taxes being the major GRF sources.
Growth and depletion of GRF ending fund balances show
a consistent pattern related to national economic conditions, with the
June 30 (end of fiscal year) balance reduced during less favorable
national economic periods and increased during more favorable
economic times.
Key end of biennium fund balances at June 30, 1991 were
$135,365,000 (unaudited) (GRF) and approximately $300,000,000
(Budget Stabilization Fund (BSF), a cash and budgetary management
fund). Necessary corrective steps were taken in fiscal year 1991 to
respond to lower than estimated receipts and higher expenditures in
certain categories. Those steps included the transfer of $64,000,000
from the BSF to the GRF. The State reported biennium ending fund
balances of $135.3 million (GRF) and $300 million (BSF).
The State has established procedures for, and has timely
taken, necessary actions to ensure a resource/expenditures balance
during less favorable economic periods. These include general and
selected reductions in appropriations spending; none have been applied
to appropriations needed for debt service or lease rentals on any State
obligations.
To allow time to complete the resolution of certain Senate
and House differences in the budget and appropriations for the current
biennium (beginning July 1, 1991), an interim appropriations act was
enacted, effective July 1; it included debt service and lease rental
appropriations for the 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 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.
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.
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 General
Fund of the Commonwealth (the principal operating fund of the
Commonwealth) experienced deficits in fiscal 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 and at June 30,
1993 of $698.9. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to a
surplus of $64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been dependent
upon heavy industry, but has diversified recently into various services,
particularly into medical and health services, education and financial
services. Agricultural industries continue to be an important part of the
economy, including not only the production of diversified food and
livestock products, but substantial economic activity in agribusiness and
food-related industries. Service industries currently employ the greatest
share of non-agricultural workers, followed by the categories of trade
and manufacturing. Future economic difficulties in any of these
industries could have an adverse impact on the finances of the
Commonwealth or its municipalities, and could adversely affect the
market value of the Bonds in the Pennsylvania Trust or the ability of
the respective obligors to make payments of interest and principal due
on such Bonds.
Certain litigation is pending against the Commonwealth
that could adversely affect the ability of the Commonwealth to pay debt
service on its obligations, including suits relating to the following
matters: (i) the ACLU has filed suit in federal court demanding
additional funding for child welfare services; the Commonwealth settled
a similar suit in the Commonwealth Court of Pennsylvania and is
seeking the dismissal of the federal suit, inter alia, because of that
settlement. The district court has denied class certification to the
ACLU, and the parties have stipulated to a judgment against the
plaintiffs to allow plaintiffs to appeal teh denial of a class certification
to the Third Circuit; (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; in July 1994, the Commonwealth
Court en banc upheld the constitutionality of the 1989 bank shares tax
law but struck down a companion law to provide credits againsst the
bank shares tax for new banks; cross appeals from that decision to the
Pennsylvania Supreme Court have been filed; (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) the ACLU has brought a class action
on behalf of inmates challenging the conditions of confinement in
thirteen of the Commonwealth's correctional institutions; a proposed
settlement agreement has been submitted to the court and members of
the class, but the court has not yet set a date for hearing on the terms
of the agreement (no available estimate of potential cost of complying
with the injunction sought but capital and personnel costs might cost
millions of dollars) and (vi) 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; the
district court denied class certification and the parties have submitted
a tentative settlement agreement to the court for approval; and (vii)
litigation has been filed in federal court by the Pennsylvania Medical
Society seeking payment of the full co-pay and deductible in excess of
the maximum fees set under the Commonwealth's medical assistance
program for outpatient services provided to medical assistance patients
who were also eligible for Medicare; the Commonwealth received a
favorable decision in the federal district court, but the Pennsylvania
Medical Society won a reversal in the federal circuit court (potential
liability estimated at $50 million per year).
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 1992.
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. The Authority
approved the latest update of the five-year financial plan on May 2,
1994. The City has reported a surplus of approximately $15 million for
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 of the City and to fund additional capital projects.
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
Sponsor 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 on each
region.
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 12% 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.
Service-producing sectors (which include transportation and public
utilities; finance and insurance;trade;services and government) are the
major sources of job growth in Texas. Texas' location and
transportation and accessibility have made it a distribution center for
the southwestern United States as well as an international center for
finance and distribution. The high-technology sector, growth of exports
and manufacturing job growth are expected to be significant to Texas'
future growth.
Economic growth and activity in Texas are likely to be
inhibited by many factors including over-capacity in commercial and
residential real estate markets, asset sales by the Resolution Trust
Corporation, conservative lending practices owing to stricter risk-based
capital guidelines imposed on financial institutions, the national
recession, and the unstable international economic and political
environment. Continued low levels of economic growth and activity in
Texas' major industries, budgeting difficulties, constitutional limitations
on taxes, and other matters could adversely affect the Texas Securities
and hence the value of the Units in the Texas Trust. The Sponsor
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.
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 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 Sponsor believes the information summarized above
describes some of the more significant aspects relating to the State
Trust and Umbrella Series. 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 Sponsor has 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
and Umbrella Series represented a fractional undivided interest in the
principal and net income of such State Trust and Umbrella Series 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 and Umbrella
Series will be reduced by an amount allocable to redeemed Units and
the fractional undivided interest in the affected State Trust and
Umbrella Series 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 Sponsor, 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 and Umbrella Series are offered on a
dollar price basis, the rate of return on an investment in Units of a
State Trust and Umbrella Series 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 and Umbrella Series is determined by
dividing the total annual interest income to such State Trust and
Umbrella Series, less estimated annual fees and expenses of the
Trustee, the Sponsor, and the Evaluator, by the number of Units of
such State Trust and Umbrella Series outstanding. The Net Annual
Income per Unit of a State Trust and Umbrella Series will change as
the income or expenses of such State Trust and Umbrella Series
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 and
Umbrella Series is a measure of the return to the investor over the
estimated life of a State Trust and Umbrella Series. The Estimated
Long-Term Return represents an average of the yields to maturity (or
call) of the Bonds in a State Trust and Umbrella Series'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 and Umbrella Series'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 and Umbrella Series may experience
expenses and portfolio charges different from those assumed in the
calculation of Estimated Long-Term Return. There thus can be no
assurance that the Estimated Current Returns or Estimated Long-Term
Returns quoted for a State Trust and Umbrella Series 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 Sponsor, 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 and Umbrella Series 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 and Umbrella Series. 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 and Umbrella Series
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 and Umbrella Series 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 and Umbrella Series may contain Bonds
which were originally issued at a discount ("original issue discount").
The following principles will apply to each Holder's pro rata portion
of any Bond originally issued at a discount. In general, original issue
discount is defined as the difference between the price at which a debt
obligation was issued and its stated redemption price at maturity.
Original issue discount on a tax-exempt obligation issued after
September 3, 1982, is deemed to accrue as tax-exempt interest over the
life of 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 amortization 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
and Umbrella Series 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 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 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 and Umbrella Series 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 and Umbrella Series,
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.
<PAGE>
* * * * *
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 Sponsor 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.
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 Sponsor 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 to 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 and Umbrella Series
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 and Umbrella Series
of any Bond), and the fees and expenses paid by the State Trust and
Umbrella Series. The Trustee will also furnish annual information
returns to each Holder and to the Internal Revenue Service. Holders are
required to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year.
The description of Federal tax consequences applies
separately for each State Trust and Umbrella Series. 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.
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 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.
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.
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
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. Cahill Gordon & Reindel regarding
Federal income tax matters, under then existing Massachusetts law
substantially to the effect that:
Tax-exempt interest for Federal income tax purposes
received by or through the Massachusetts Trust, or by or through a
Previous Trust in which the Massachusetts Trust owns an interest, on
obligations issued by Massachusetts, its counties, municipalities,
authorities, political subdivisions or instrumentalities, by the
government of Puerto Rico or by its authority or by the government of
Guam or by its authority, will not result in a Massachusetts income tax
liability for the Massachusetts Trust or for Unit holders who are subject
to Massachusetts income taxation under Massachusetts General Laws,
Chapter 62.
Capital gain and capital loss realized by the Massachusetts
Trust and included in the Federal gross income of Unit holders who are
subject to Massachusetts income taxation under General Laws, Chapter
62 will be included as capital gains and losses in the Unit holder's
Massachusetts gross income, except where capital gain is specifically
exempted from income taxation under the Massachusetts statute
authorizing issuance of the obligations held by the Massachusetts Trust
or held by the Previous Trusts in which the Massachusetts Trust owns
an interest, and will not result in a Massachusetts income tax liability
for the Massachusetts Trust.
Gains and losses realized on sale or redemption of Units
by Unit holders who are subject to Massachusetts income taxation
under Massachusetts General Laws, Chapter 62 will be includible in
their Massachusetts gross income.
Minnesota Trust
On the Date of Deposit for each Minnesota Trust, Messrs.
Dorsey & Whitney, a partnership including professional corporations,
special Minnesota counsel on Minnesota tax matters, rendered an
opinion under then existing law substantially to the effect that:
The Minnesota Trust is not an association taxable as a
corporation for purposes of Minnesota income taxation. Minnesota
taxable net income is, with certain modifications, determined with
reference to federal taxable income. Each Unit holder of the Minnesota
Trust will be treated as the owner of a pro rata portion of the
Minnesota Trust (including the ownership interest of the Minnesota
Trust in property comprising previously issued Series) for purposes of
Minnesota income taxation, and the income of the Minnesota Trust will
be treated as the income of the Unit holders under Minnesota law.
Interest on Bonds that would be excluded from Minnesota taxable net
income when paid directly to an individual, estate or trust will be
excluded from Minnesota taxable net income of Unit holders that are
individuals, estates or trusts when received by the Minnesota Trust (or
by a previously issued Series in which the Minnesota Trust has an
ownership interest) and when distributed to such Unit holders. Interest
on Bonds that would be included in Minnesota "alternative minimum
taxable income" when paid directly to a noncorporate taxpayer will be
included in Minnesota "alternative minimum taxable income" of Unit
holders that are individuals, estates or trusts for purposes of the
Minnesota alternative minimum tax.
Any such Unit holder that is subject to Minnesota income
taxation will realize taxable gain or loss when the Minnesota Trust (or
a previously issued Series in which the Minnesota Trust has an
ownership interest) disposes of a Bond or an ownership interest in a
previously issued Series (whether by sale, exchange, redemption or
payment at maturity) or when the Unit holder redeems or sells Units at
a price that differs from original cost, as adjusted for amortization of
bond premium and other basis adjustments. The total tax cost of each
Unit to a Unit holder is allocated proportionately (by value) among
each of the Bonds held in the Minnesota Trust. Tax cost reduction
requirements relating to amortization of bond premium may, under
some circumstances, result in the realization of taxable gain by Unit
holders when their Units (or underlying Bonds) are sold or redeemed
for an amount equal to or less than their original cost. Minnesota has
repealed the favorable treatment of capital gains, but preserved
limitations on the deductibility of capital losses.
Interest income attributable to Bonds that are "industrial
development bonds" or "private activity bonds," as such terms are
defined in the Internal Revenue Code, will be taxable under Minnesota
law to a Unit holder that is a "substantial user" of the facilities financed
by the proceeds of such Bonds (or a "related person" to such a
"substantial user") to the same extent as if such Bonds were held
directly by such Unit holder.
Minnesota law does not permit a deduction for interest on
indebtedness incurred or continued by individuals, estates and trusts to
purchase or carry Units. Minnesota law also restricts the deductibility
of other expenses allocable to Units.
With limited exceptions, interest on Bonds in the
Minnesota Trust will be included in taxable income for purposes of the
Minnesota franchise tax on corporations and financial institutions. No
opinion is expressed as to other Minnesota tax effects on Unit holders
that are corporations or financial institutions.
Missouri Trust
Messrs. Bryan, Cave, McPheeters & McRoberts acted as
special Missouri counsel to Missouri Trust 75 and all prior Missouri
Trusts. Messrs. Blackwell Sanders Matheny Weary & Lombardi acted
as special Missouri counsel to Missouri Trust 76 and all subsequent
Missouri Trusts. On the Date of Deposit for each Missouri Trust, the
respective counsel to the Trusts rendered an opinion under then existing
law substantially to the effect that:
For Missouri income tax purposes under Chapters 143 of
the Missouri Revised Statutes, the Missouri Trust will be treated as
having the same organizational characteristics as it is accorded for
Federal Income Tax purposes. In reliance upon the opinion of Cahill
Gordon & Reindel as described above, we are therefore of the opinion
that the Missouri Trust is not an association taxable as a corporation
under Missouri law, that each Unit holder will 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.
Nebraska Taxes
In the opinion of Kutak,Rock, Omaha, Nebraska, special
counsel on Nebraska's tax matters, with respect to the Nebraska Trust,
under existing law appicable to individuals, corporations, estates and
trusts who are Nebraska residents:
1. Under Nebraska income tax law, each Unitholder of the
Nebraska Trust will be treated as the owner of a pro rata portion of the
Nebraska Trust and income of the Nebraska Trust will be treated as
income of the respective Unitholders. Unterest on Securities in the
Nebraska Trust that is exempt from personal and corporate income tax
under the income tax law of the State of Nebraska when received by
such Nebraska Trust will retain its tax-exempt status when distributed
to the Unitholders.
2. Each Unitholder of the Nebraska Trust will have a
taxable event when the Nebraska Trust disposes of a security (whether
by sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells its certificates. For purposes of determining
gain or loss, the total tax cost of each Unit to a Unitholder is allocated
among the underlying Securities(inaccordance with the proportion of the
Nebraska Trust's assets comprised by such Security), in order to
determine the Unitholder's per Unit tax cost for each Security.
3. Title 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 subdivision of any state. Accordingly, the interest on anysuch
obligations held by the Nebraska Trust would be exempt from the
Nebraska corporate and individual income taxes appicable to resident
corporations, resident trusts, residents estates and resident individuals.
4. Upon the death of a Unitholder, the value of the Unit
will be included in the estate of such deceased Unitholder and will be
subject ot Nebraska inheritance tax.
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 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
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 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 subdivision 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 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 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 investments 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).
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 Trust and Umbrella Series, the
Sponsor has 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 Sponsor except as otherwise provided in the Trust
Agreement.
Trustee's, Sponsor's 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 of providing Portfolio supervisory services for such
Trust, but at no time will the total amount the Sponsor receives 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 Sponsor 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 and Umbrella Series. 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 Sponsor. 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 Sponsor based upon the face amount of Deposited Units
in a Trust, for the Trustee's services in maintaining such Deposited
Units. The approval of Unit holders shall not be required for charging
of such additional fee.
Other Charges--The following additional charges are or
may be incurred by a State Trust and Umbrella Series: 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 and Umbrella Series; 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 and Umbrella Series
under Federal or state securities laws subsequent to initial registration
so long as the Sponsor 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 and Umbrella Series (no such taxes or charges are
being levied or made or, to the knowledge of the Sponsor,
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 and Umbrella Series. 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 Trust and Umbrella Seriess 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 and Umbrella Series at the date
of delivery of the Units of such State Trust and Umbrella Series to the
purchaser is also added to the Public Offering Price.
Units of a State Trust and Umbrella Series are available
to employees of certain of the Sponsor, 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 and Umbrella
Series per Unit plus a sales charge of 1.25% of the Public Offering
Price. Sales through such plans to employees of the Sponsor require
less selling effort and selling expenses than sales to the general public.
Method of Evaluation
The aggregate bid price of the Bonds (which is used to
calculate the price at which the Sponsor 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 Sponsor 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 Sponsor 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 Sponsor reserve the right to reject, in whole or in part, any order
for the purchase of Units. A purchaser does not become a Unit holder
(Certificate holder) or become entitled to exercise the rights of a Unit
holder (including the right to redeem his Units) until he has paid for his
Units. Generally, such payment must be made within five business
days after an order for the purchase of Units has been placed. The
price paid by a Unit holder is the Public Offering Price in effect at the
time his order is received, plus accrued interest (see "Public Offering--
Method of Evaluation"). This price may be different from the Public
Offering Price in effect on any other day, including the day on which
the Unit holder pays for the Units.
Market for Units
Although not obligated to do so, the Sponsor presently
intend to maintain a market for the Units of the respective State Trust
and Umbrella Seriess 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 Sponsor except as otherwise provided in the Trust Agreement.
The Sponsor 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 Sponsor
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 Trust and
Umbrella Seriess, a Unit holder of such State Trust and Umbrella
Series 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 Sponsor reserve the right to modify,
suspend or terminate this plan at any time without further notice to Unit
holders. Therefore, there is no assurance that a market for units will
in fact exist on any given date on which a Unit holder wishes to sell his
Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected
in whole units only. Any excess proceeds from Unit holders' Units
being surrendered will be returned and Unit holders will not be
permitted to advance any new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for
units of an Exchange Trust will generally constitute a "taxable event"
under the Code, i.e., a Holder will recognize a gain or loss at the time
of exchange. However, an exchange of Units of this Trust for units of
any other similar series of the Tax Exempt Securities Trust which are
grantor trusts for U.S. federal income tax purposes will not constitute
a taxable event to the extent that the underlying securities in each trust
do not differ materially either in kind or in extent. Unit holders are
urged to consult their own tax advisors as to the tax consequences to
them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the
Exchange Option at the bid prices of the underlying securities in the
particular portfolio involved per unit plus a fixed charge of $25 per
unit. As an example, assume that a Unit holder, who has three units
of a trust with a current price of $1,020 per unit based on the bid
prices of the underlying securities, desires to exchange his Units for
units of a series of an Exchange Trust with a current price of $880 per
unit based on the bid prices of the underlying securities. In this
example, the proceeds from the Unit holder's units will aggregate
$3,060. Since only whole units of an Exchange Trust may be
purchased under the Exchange Option, the Unit holder would be able
to 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 Sponsor
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
Sponsor for more complete information, including charges and
expenses. The appropriate prospectus will be sent to the Unit holder.
The Unit holder should read the prospectus for a reinvestment program
carefully before deciding to participate. Participation in the
reinvestment program will apply to all Units of a State Trust and
Umbrella Series 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.
Sponsor's Profits
For their services the Sponsor receives 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 Trust and
Umbrella Seriess (see "Public Offering--Market for Units"), the
Sponsor also realizes 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 Trust and
Umbrella Seriess is evidenced by registered certificates executed by the
Trustee and the Sponsor. 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 and
Umbrella Series will be distributed on each Monthly Distribution Date
on a pro rata basis to Unit holders in such State Trust and Umbrella
Series of record as of the preceding Record Date. All distributions will
be net of applicable expenses and funds required for the redemption of
Units and, if applicable, reimbursements to the Trustee for interest
payments advanced to Unit holders on previous Monthly Distribution
Dates. (See Part A, "Summary of Essential Information" and "Tax
Exempt Securities Trust--Expenses and Charges" and "Rights of Unit
Holders--Redemption of Units" in this Section.)
The Trustee will credit to the Interest Account of each
respective State Trust and Umbrella Series all interest received by such
State Trust and Umbrella Series, including that part of the proceeds of
any disposition of Bonds of such State Trust and Umbrella Series which
represents accrued interest. Other receipts will be credited to the
Principal Account of the affected State Trust and Umbrella Series. 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 and
Umbrella Series will change as the income and expenses of the
respective State Trust and Umbrella Seriess change and as Bonds are
exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of each
State Trust and Umbrella Series is paid on a semi-annual basis.
Because Bond interest is not received by the State Trust and Umbrella
Seriess at a constant rate throughout the year, any Monthly Interest
Distribution may be more or less than the amount credit to the Interest
Account as of the Record Date. In order to eliminate fluctuations in
Monthly Interest Distributions resulting from such variances, the
Trustee is required by the Trust Agreement to advance such amounts
as may be necessary to provide Monthly Interest Distributions of
approximately equal amounts. The Trustee will be reimbursed, without
interest, for any such advances from funds available from the Interest
Account on the next ensuing Record Date or Record Dates, as the case
may be. If all or a portion of the Bonds for which advances have been
made subsequently fail to pay interest when due, the Trustee may
recoup advances made by it in anticipation of receipt of interest
payments on such Bonds by reducing the amount distributed per Unit
in one or more Monthly Interest Distributions. If units are redeemed
subsequent to such advances by the Trustee, but prior to receipt by the
Trustee of actual notice of such failure to pay interest, the amount of
which was so advanced by the Trustee, each remaining Unit holder will
be subject to a greater pro rate reduction in his Monthly Interest
Distribution than would have occurred absent such redemptions. Funds
which are available for future distributions, payments of expenses and
redemptions are in accounts which are non-interest bearing to Unit
holders and are available for use by United States Trust Company of
New York, pursuant to normal banking procedures. The Trustee is
entitled to the benefit of holding any reasonable cash balances in the
Interest and Principal Accounts. The Trustee anticipates that the
average cash balance in the Interest Account will be approximately 2%
in excess of the amounts anticipated to be required for Monthly
Distributions to Unit holders. In addition, because of the varying
interest payment dates of the Bonds comprising each State Trust and
Umbrella Series portfolio, accrued interest at any point in time will be
greater than the amount of interest actually received by a particular
State Trust and Umbrella Series 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. It should be noted
that any Series formed ater Series 384 (including Series 384) that
accrued interest carryover no longer is implemented. (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 Umbrella Series and,
to the extent funds are not sufficient therein, from the Principal
Account of such State Trust and Umbrella Series, amounts necessary
to pay the expenses of such State Trust and Umbrella Series. (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 and Umbrella Series. Amounts so
withdrawn shall not be considered a part of a State Trust and Umbrella
Series's assets until such time as the Trustee shall return all or any part
of such amounts to the appropriate account. In addition, the Trustee
may withdraw from the Interest Account and the Principal Account
such amounts as may be necessary to cover redemption of Units by the
Trustee. (See "Rights of Unit Holders--Redemption of Units".) The
Trustee is also entitled to withdraw from the Interest Account, and, to
the extent funds are not sufficient therein, from the Principal Account,
on one or more Record Dates as may be appropriate, amounts sufficient
to recoup advances which the Trustee has made in anticipation of the
receipt by a Trust of interest in respect of Bonds which subsequently
fail to pay interest when due.
Reports and Records
The Trustee shall furnish Unit holders in connection with
each distribution a statement of the amount of interest, if any, and the
amount of other receipts, if any, which are being distributed, expressed
in each case as a dollar amount per Unit. In the event that the issuer
of any of the Bonds fails to make payment when due of any interest or
principal and such failure results in a change in the amount that would
otherwise be distributed as a monthly distribution, the Trustee will,
with the first such distribution following such failure, set forth in an
accompanying statement, the issuer and the Bonds, the amount of the
reduction in the distribution per Unit resulting from such failure, the
percentage of the aggregate principal amount of Bonds which such
Bond represents and, to the extent then determined, information
regarding any disposition or legal action with respect to such Bond.
Within a reasonable time after the end of each calendar year, the
Trustee will furnish to each person who at any time during the calendar
year was a Unit holder of record, a statement (1) as to the Interest
Account: interest received (including amounts representing interest
received upon any disposition of Bonds), deductions for payment of
applicable taxes and for fees and expenses of a State Trust and
Umbrella Series, 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 and Umbrella Series, 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 and
Umbrella Series will be audited not less frequently than annually by
independent auditors designated by the Sponsor, and the report of such
auditors shall be furnished by the Trustee to Unit holders upon request.
The Trustee shall keep available for inspection by Unit
holders at all reasonable times during usual business hours, books of
record and account of its transactions as Trustee including records of
the names and addresses of Unit holders, certificates issued or held, a
current list of Bonds in the Portfolio of a State Trust and Umbrella
Series 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 Sponsor 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 may 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 Sponsor 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
Sponsor of Units Tendered for Redemption."
Accrued interest paid on redemption shall be withdrawn
from the Interest Account, or, if the balance therein is insufficient,
from the Principal Account. All other amounts paid on redemption
shall be withdrawn from the Principal Account. The Trustee is
empowered to sell Bonds in order to make funds available for
redemption. Such sales, if required, could result in a sale of Bonds by
the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of a State Trust and Umbrella Series 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 and Umbrella Series is
determined by the Trustee on the basis of the bid prices of the Bonds
in such State Trust and Umbrella Series as of the Evaluation Time on
the date any such determination is made. The Redemption Price per
Unit of a State Trust and Umbrella Series is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in
such State Trust and Umbrella Series 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
Umbrella Series, 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 and Umbrella
Series, (b) the accrued expenses of such State Trust and Umbrella
Series, and (c) cash held for distribution to Unit holders of such State
Trust and Umbrella Series of record as of a date prior to the
evaluation. The Evaluator may determine the value of the Bonds in the
Trust (i) on hte basis of current bid prices for the Bonds, (ii) if bid
prices are not available for any Bonds, on the basis of current bid
prices for comparable securities, (iii) by appraisal, or (iv) by any
combination of the above.
The difference betweeen the bid and offering prices of the
Bonds may beexpected to average approximately 1.5% of the principal
amount. In the case of actively traded securities, the difference may be
as little as 0.5 of 1.0%, and in the case of inactively traded securities
such difference usually will not exceed 3.0%. The price at which Units
may be redeemed could be less than the price paid by the Unit holder.
On the Date of Deposit for each Trust the aggregate current offering
price of such Bonds per Unit exceeded the bid price of such Bonds per
Unit by the amounts set forth under PArt A, "Summary of Eseential
Information".
Purchase by the Sponsor of Units Tendered for
Redemption--The Trust Agreement requires that the Trustee notify the
Sponsor of any tender of Units for redemption. So long as the Sponsor
are maintaining a bid in the secondary market, the Sponsor, 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 Sponsor may be tendered to the
Trustee for redemption as any other Units, provided that the Sponsor
shall not receive for Units purchased as set forth above a higher price
than they paid, plus accrued interest.
The offering price of any Units resold by the Sponsor 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 Sponsor
which likewise will bear any loss resulting from a lower offering or
redemption price subsequent to their acquisition of such Units. (See
"Public Offering--Sponsor's Profits".)
SPONSOR
Smith Barney Inc. 388 Greenwich Street, New York, New
York 10013 ("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 Travelers Group Inc.
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.
The Sponsor has acted previously as managing underwriter 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 Sponsor also executes orders for the purchase and sale
of securities of investment companies and sell securities to such
companies in its capacities as broker or dealer in securities.
Limitations on Liability
The Sponsor is liable for the performance of its 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 its obligations and duties. (See
"Tax Exempt Securities Trust--Portfolio" and "Sponsor--
Responsibility".)
Responsibility
Although the Trusts are not actively managed as mutual
funds are, the portfolios are reviewed periodically on a regular cycle.
The Sponsor is 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 Sponsor, may be
detrimental to the interests of the Unit holders.
The Sponsor intends to provide portfolio services for each
State Trust and Umbrella Series in order to determine whether the
Trustee should be directed to dispose of any such Bonds.
It is the responsibility of the Sponsor 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 Sponsor
may instruct the Trustee to accept such an offer or to take any other
action with respect thereto as the Sponsor may deem proper if the
issuer is in default with respect to such Bonds or in the judgment of the
Sponsor 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
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.
Resignation
If Sponsor resigns or otherwise fails or becomes unable
to perform its 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 Trust and Umbrella Seriess, the Trustee
may use the services of The Depository Trust Company. These
services may include safekeeping of the Bonds and coupon-clipping,
computer book-entry transfer and institutional delivery services. The
Depository Trust Company is a limited purpose trust company
organized under the Banking Law of the State of New York, a member
of the Federal Reserve System and a clearing agency registered under
the Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way
for depreciation or loss incurred by reason of the disposition of any
moneys, securities or certificates or in respect of any evaluation or for
any action taken in good faith reliance on prima facie properly executed
documents except in cases of willful misfeasance, bad faith, gross
negligence or reckless disregard for its obligations and duties. In
addition, the Trustee shall not be personally liable for any taxes or
other governmental charges imposed upon or in respect of any State
Trust and Umbrella Series 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",
"Sponsor--Resignation" and "Other Charges".
Resignation
By executing an instrument in writing and filing the same
with the Sponsor, the Trustee and any successor may resign. In such
an event the Sponsor is 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 Sponsor
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.
EVALUATOR
The Evaluator is Kenny Information Systems, Inc., a
division of J.J. Kenny Co., Inc. with main offices located at 65
Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsor 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 Sponsor 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 and Umbrella Series 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 and Umbrella Series is
tendered for redemption and on any other day such evaluation is
desired by the Trustee or is requested by the Sponsor. 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 Sponsor and the Trustee, and in such event, the Sponsor
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.
AMENDMENT AND TERMINATION OF THE TRUST
AGREEMENT
Amendment
The Sponsor 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 Trust and Umbrella Seriess, 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 and Umbrella Series, the
Trustee may in its discretion and will, when directed by the Sponsor,
terminate such State Trust and Umbrella Series. Each State Trust and
Umbrella Series 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 and Umbrella
Series 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 Umbrella
Series, and, after paying all expenses and charges incurred by such
State Trust and Umbrella Series, 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 and Umbrella Series.
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 Sponsor. Messrs. Carter, Ledyard & Milburn, 2 Wall Street, New
York, New York 1005, act as counsel for the Trustee.
AUDITORS
The Statements of Financial Condition and Portfolios of
Securities of each State Trust and/or Umbrella Series included in this
Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
BOND RATINGS
All ratings except those identified otherwise are by
Standard & Poor's.
Standard & Poor's
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.
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, 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.
Ba--Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in
this class.
B--Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C--Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B groups
which Moody's believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1, and B1, respectively.
In addition, Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category. Although industrial
Revenue Bonds and Environmental Control Revenue Bonds are tax-
exempt issues, they are included in the corporate bond rating system.
Conditional ratings, indicated by "Con" are given to bonds for
which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects unseasoned in
operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. A parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
<PAGE>
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.
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).
<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
266
Financial and Statistical Information. . . . . . . . . . . . . . . . . . . A- 4
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 5
Report of Independent Public Auditors. . . . . . . . . . . . . . . . . . . A- 9
Portfolios of Securities . . . . . . . . . . . . . . . . . . . . . . . . . A-10
5,000 Units
Tax Exempt Securities Trust. . . . . . . . . . . . . . . . . . . . . . . . 1
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PROSPECTUS
Additional Considerations Regarding the Trusts . . . . . . . . . . . . . .2
Dated
November 22, 1995
State Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Estimated Current Return and Estimated Long-Term Return 69
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Expenses and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Method of Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Sponsors
Distribution of Units. . . . . . . . . . . . . . . . . . . . . . . . . . 85
Market for Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SMITH BARNEY INC.
Exchange Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Reinvestment Programs. . . . . . . . . . . . . . . . . . . . . . . . . . 86
388 Greenwich Sreet
Sponsor's Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
New York, New York 10013
Rights of Unit Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 87
(800) 298-UNIT
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Distribution of Interest and Principal . . . . . . . . . . . . . . . . . 87
Reports and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Redemption of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Sponsor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . 91
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . 92
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Evaluator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . 93
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Amendment and Termination of the Trust Agreement . . . . . . . . . . . . . 93
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Bond Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Standard & Poor's Corporation. . . . . . . . . . . . . . . . . . . . . . 94
Moody's Investors Service, Inc . . . . . . . . . . . . . . . . . . . . . .95
Fitch Investors Service, Inc . . . . . . . . . . . . . . . . . . . . . . .96
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
388 Greenwich Street
New York, NY 10013
RE:Tax Exempt Securities Trust
Series 267
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-16308 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated October 26, 1995 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
October 31, 1995
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Series 267,
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 31st day of October, 1995.
Signatures appear on pages II-3.
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.
<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
William J. Mills, II
Michael B. Panitch
Jack L. Rivkin
Paul Underwood
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
