<PAGE>
Registration No. 33-21414
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 7
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
INSURED SERIES 16
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 August 18,
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>
INSURED SERIES 16
[S] [C]
In the opinion of counsel, under existing law interest income to the Trust
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
the California Trust is exempt, to the extent indicated, from State and
local taxes when held by residents of the state where the issuers of bonds
in such Trust are located but the interest income of the National Trust
may be subject to State and local taxes. Capital gains, if any, are subject
to tax. Investors should read and retain this Prospectus for future
reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS HAS
BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE ISSUED
AND OUTSTANDING UNITS WHICH HAVE BEEN ACQUIRED BY
THE SPONSOR 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 SPONSOR 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".
INSURED SERIES 16 is a unit investment trust designated as the
National Trust formed for the purpose of obtaining for its Unit holders
tax-exempt interest income and conservation of capital through investment
in a fixed portfolio of long term municipal bonds. As a result of the
insurance on the bonds the Units were rated AAA by Standard & Poor's
Corporation as of the Date of Deposit (See "Portfolio of Securities".)
The bonds are issued on behalf of states, counties, territories, possession
and municipalities of the United States and authorities or political
subdivisions thereof. The interest on such bonds is exempt from all
Federal income tax (except in certain instances depending upon the Unit
holder) under existing law in the opinion of recognized bond counsel to
the issuing governmental authorities.
THE OBJECTIVES of the Trust are tax-exempt income and
conservation of capital through an investment in a diversified portfolio
consisting primarily of insured municipal bonds. There is, of course, no
guarantee that the Trust's objectives will be achieved since the payment
of interest and preservation of principal are dependent upon the continued
ability of the issuers and the obligors of the bonds, and the insurers
thereof, to meet such obligations. The insurance does not protect Unit
holders from the risk that the value of the Units may decline.
INSURANCE, guaranteeing the scheduled payment of all principal and
interest throughout the life of certain of the Bonds in the Trust has been
obtained at either cost of the issuer at the time of issuance, at the cost of
a holder prior to the purchase of the Bond by the Trust, or at the cost of
the Sponsor at the Date of Deposit. Insurance guaranteeing the scheduled
payments of principal and interest on the remainder of the Bonds in the
portfolio of the Trust ("Portfolio Insurance") has been obtained by the
Trust from Financial Guaranty Insurance Company ("Financial
Guaranty") and applies only while such Bonds are retained in the Trust.
Pursuant to an irrevocable commitment obtained from Financial Guaranty,
in the event of the sale of a Bond covered by Portfolio Insurance, the
Trustee has the right to obtain permanent insurance ("Permanent
Insurance") for such Bonds upon payment of a single predetermined
premium from the proceeds of the sale of such Bond. The monthly cost
of the Portfolio Insurance on the Bonds while held in the Trust is
accounted for as an expense of the Trust. Any amount paid for
Permanent Insurance on a Bond sold by the Trust will be accounted for
as an offset to the amount received on the sale. All insurance relates only
to the Bonds in the Trust and not to the Units offered hereby or to the
market value thereof. On the Date of Deposit, the Units were rated
"AAA" by Standard & Poor's Corporation. The Sponsor has been
advised that the basis for the "AAA" rating on the Units of the Trust was
the "AAA" claims-paying ability rating of the Insurers of the Bonds in
such Trusts. The Sponsor has not sought to confirm the rating on the
Units subsequent to the Date of Deposit. (See Part B--"Insurance".)
THE PUBLIC OFFERING PRICE of the Units is equal to the aggregate
bid price of the underlying securities in the Trust's portfolio divided by
the number of Units outstanding, 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). 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 SPONSOR, although not obligated to do so, intends to maintain a
market for the Units 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. The market value of the
underlying securities includes the value attributable to the insurance on
the securities. (See Part B--"Insurance".)
MONTHLY DISTRIBUTIONS of principal and interest received by the
Trust will be made on or shortly after the fifteenth day of each month to
holders of record on the first day of that month. For further information
regarding the distributions by the Trust, see the "Summary of Essential
Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Part A dated August 18, 1995
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 16
SUMMARY OF ESSENTIAL INFORMATION AS OF MAY 23,
1995+
Sponsor:SMITH BARNEY INC.
Trustee:UNITED STATES TRUST COMPANY OF NEW YORK
Evaluator:KENNY S&P EVALUATION SERVICES
<S><C>
Principal Amount of Securities in Trust$8,490,000
Number of Units 10,077
Fractional Undivided Interest in Trust per Unit 1/10,077
Principal Amount of Securities in Trust per Unit$842.51
Public Offering Price per Unit #*$906.69
Sales Charge (3.25% of Public Offering Price)#$ 29.46
Approximate Redemption and Sponsor's Repurchase Price
per Unit
(per Unit Bid Price of Securities)#**$877.23
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit$65.30
Less Estimated Annual Expenses per Unit$1.35
Less Annual Insurance Premium per Unit$ .49
Estimated Net Annual Income per Unit$63.46
Monthly Income Distribution per Unit$5.28
Daily Rate (360-day basis) of Income Accrual per
Unit$.1762
Estimated Current Return Based on Public Offering Price#
6.99%
Estimated Long-Term Return# 5.23%
<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 $18.08 per Unit representing accrued interest and the net of
cash on hand, accrued expenses and amounts distributable to Unit
holders through the expected date of settlement (five business days
after May 23, 1995). (See "Public Offering--Offering Price".)
The sales charge has been reduced effective as of the date of this
prospectus because prerefundings of Portfolio securities have
shortened the average life of the Trust.
**Plus $16.67 per Unit representing accrued interest and the net of
cash on hand, accrued expenses and amounts distributable to Unit
holders of record as of May 23, 1995 on a pro rata basis. (See
"Redemption of Units--Computation of Redemption Price per Unit".)
</TABLE>
Record Dates: The first day of each month
Distribution Dates: The fifteenth 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: May 12, 1988
Mandatory Termination Date: January 1, 2038
Minimum Value of Trust: Trust may be terminated if the value of
the Trust is less than $5,750,000 and must be terminated if the value
of the Trust is less than $2,875,000
Trustee's Annual Fee: $1.03 per $1,000 principal amount of bonds
($8,745 per year on the basis of bonds in the principal amount of
$8,490,000) plus expenses.
Evaluator's Fee: $.30 per bond per evaluation
Percentage of the portfolio consisting of General Obligation
Bonds: 6%
Number of General Obligation Bonds: 1 Number of
issues: 22 Number of States: 11
As of May 23, 1995, 18 (84%) of the Bonds were rated by Standard
& Poor's Corporation (80% being rated AAA, 3% being rated AA
and 1% being rated A) and 4 (16%) of the Bonds were rated by
Moody's Investors Service (8% being rated Aaa and 8% being rated
Aa). Ratings assigned by the bond rating services are subject to
change from time to time.
<PAGE>
Additional Considerations - Investment in the Trust should be made with
an understanding that the value of the underlying Portfolio may decline
with increases in interest rates. Approximately 15% of the Bonds in the
Trust consist of hospital revenue bonds (including obligations of health
care facilities). Approximately 11% of the Bonds in the Trust consist of
obligations of municipal housing authorities. Approximately 5% of the
Bonds in the Trust consist of bonds which are subject to the Mortgage
Subsidy Bond Tax Act of 1980. Approximately 50% of the Bonds in the
Trust consist of bonds in the power facilities category. Approximately
39% of the Bonds in the Trust are bonds issued for the financing of
nuclear power plants. (See Part B, "Tax Exempt Securities Trust-
Portfolio" for a brief summary of additional considerations relating to
certain of these issues.)
+The percentages referred to in this summary are each computed on the
basis of the aggregate bid price of the Bonds as of May 23, 1995.
<TABLE>
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
IncomePrincipal
UnitsNet AssetDistributionsDistributions
Period EndedOutstandingValue Per UnitPer UnitPer Unit
<S><C><C><C><C>
April 30, 199311,311$1,056.50$75.95$33.76
April 30, 199410,799936.9971.7877.04
April 30, 199510,140889.8967.6923.22
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust, Insured Series 16:
We have audited the accompanying balance sheet of Tax Exempt
Securities Trust, Insured Series 16, including the portfolio of securities,
as of April 30, 1995, and the related statements of operations and
changes in net assets for each of the years in the three-year period ended
April 30, 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 April 30, 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 Tax Exempt Securities
Trust, Insured Series 16 as of April 30, 1995, and the results of its
operations and changes in its net assets for each of the years in the three-
year period ended April 30, 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
July 28, 1995<PAGE>
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 16
BALANCE SHEET
April 30, 1995
ASSETS
<S><C>
Investments in tax exempt bonds, at market value
(Cost $8,096,026) (Note 3 to Portfolio of Securities)$8,832,627
Accrued interest 226,813
Total Assets$9,059,440
LIABILITIES AND NET ASSETS
Overdraft payable$34,844
Accrued expenses 1,017
Total Liabilities 35,861
Net Assets (10,140 units of fractional undivided
interest outstanding):
Original cost to investors (Note 1)$11,895,894
Less initial underwriting commission (sales charge)
(Note 1) 559,000
11,336,894
Cost of securities sold or redeemed since date
of deposit (May 12, 1988) (3,240,868)
Net unrealized market appreciation 736,601
8,832,627
Undistributed net investment income 182,639
Undistributed proceeds from securities sold or
redeemed 8,313
Net Assets 9,023,579
Total Liabilities and Net Assets$9,059,440
Net asset value per unit$889.89
STATEMENTS OF OPERATIONS
For the years ended April 30, 1995, 1994 and 1993
1995 1994 1993
<S><C><C><C>
Investment Income-interest (Note 2)$ 695,484$ 800,391$
879,784
Less expenses:
Trustee's fees and expenses12,31912,83813,861
Evaluator's fees2,0102,1402,297
Insurance expense 4,950 5,857 5,857
Total expenses 19,279 20,835 22,015
Net investment income 676,205 779,556 857,769
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note
5)(59,067)(127,749)(21,812)
Net increase (decrease) in unrealized market
appreciation (157,536) (324,923) 373,342
Net gain (loss) on investments (216,603) (452,672) 351,530
Net increase in net assets resulting from
operations$459,602$326,884$1,209,299
The accompanying Notes to Financial Statements are an integral part of
these statements.
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 16
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended April 30, 1995, 1994 and 1993
1995 1994 1993
Operations:
Net investment income$676,205$779,556$857,769
Net realized loss on securities transactions (Note 5)
(59,067)(127,749)(21,812)
Net increase (decrease) in unrealized market
appreciation (157,536) (324,923) 373,342
Net increase in net assets resulting from operations 459,602
326,884 1,209,299
Distributions to Unit Holders:
Net investment income (Note 4) (718,370)(786,804)(860,513)
Proceeds from securities sold or redeemed (247,714) (833,877)
(381,860)
Total Distributions (966,084) (1,620,681) (1,242,373)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (10,103)(9,657)(1,756)
Value of Units at date of redemption (578,418) (528,145)
(96,824)
Total Distributions (588,521) (537,802) (98,580)
Decrease in net assets (1,095,003)(1,831,599)(131,654)
Net Assets:
Beginning of year 10,118,582 11,950,181 12,081,835
End of year (including undistributed net
investment income of $182,639, $234,906
and $251,811, respectively)$9,023,579$10,118,582$11,950,181
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (May 12, 1988)
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) 1,263 Units were redeemed by the Trustee during the three years
ended April 30, 1995 (659 Units, 512 Units and 92 Units being
redeemed in 1995, 1994 and 1993, respectively).
(4) Interest received by the Trust is distributed to Unit holders on the
fifteenth day of each month, after deducting applicable expenses.
(5) The 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.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 16
PORTFOLIO OF SECURITIES - April 30, 1995
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
<S><C><C><C><C>
Municipal Electric Authority of Georgia,
General Power Revenue Bonds, AAA1/1/96 @ 102$500,000$520,270
7.875% due 1/1/2018 (p)
(BIG Ins.) (Note 4)
Chicago, Illinois, General Obligation AAA7/1/96 @ 101500,000515,595
Bonds, 7.00% due 1/1/2013 S.F. 1/1/11 @ 100
(MBIA Ins.) (Note 4)
Chicago, Illinois, Public Building
Commission, Revenue Bonds,AAA --100,000109,591
8.75% due 1/1/2007 S.F. 1/1/03 @ 100
(BIG Ins.) (Note 4)
Des Plaines, Illinois, Hospital Facility
Revenue Refunding Bonds, Holy Family AAA1/1/96 @
102500,000524,775
Hospital, 9.25% due 1/1/2014 S.F. 1/1/01 @ 100
(AMBAC Ins.) (Note 4)
Lafayette Public Power Authority,
Louisiana, Electric Revenue Refunding AAA11/1/96 @
103715,000753,160
Bonds, 7.25% due 11/1/2012 S.F. 11/1/08 @ 100
(BIG Ins.) (Note 4)
Michigan State Housing Development
Authority, Multi-Family Insured AAA7/1/95 @ 103500,000518,870
Housing, 8.875% due 7/1/2017S.F. 1/1/04 @ 100
(Financial Guaranty Ins.) (Note 4)
Health and Educational Facilities
Authority of The State of Missouri,
Health Facilities Revenue Refunding
Bonds, Lester E. Cox Medical Center AAA6/1/97 @
102200,000206,502
Project, 6.90% due 6/1/2015 S.F. 6/1/07 @ 100
(MBIA Ins.) (Note 4)
North Carolina Eastern Municipal
Power Agency, Power System Revenue
Bonds, 7.00% due 1/1/2024A*1/1/98 @ 102470,000474,014
6.00% due 1/1/2026A*1/1/98 @ 100190,000171,393
S.F. 1/1/25 @ 100
6.00% due 1/1/2026 (p)Aaa*1/1/22 @ 100310,000312,440
4.50% due 1/1/2024 (p)Aaa*1/1/22 @ 100500,000390,295
Ohio Air Quality Development Authority,
State of Ohio, Pollution Control Revenue
Bonds, The Dayton Power and Light
Company Project, 9.50% due 12/1/2015 AAA12/1/95 @ 102
1/2750,000790,027
(MBIA Ins.) (Note 4)
Texas Municipal Power Agency, Revenue A+9/1/97 @
102110,000117,987
Refunding Bonds, 7.25% due 9/1/2011 (p)
A-6
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 16
PORTFOLIO OF SECURITIES - April 30, 1995
(Continued)
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
City of Austin, Texas, Combined
Utility Systems Revenue Refunding AAA5/15/96 @
102$250,000$262,453
Bonds, 7.75% due 11/15/2012 (p)
(BIG Ins.) (Note 4)
Fort Bend County, Texas, Levee
Improvement District No. 2 Revenue AAA2/15/96 @
100260,000268,817
Refunding Bonds, 9.10% due 2/15/2008
(MBIA Ins.) (Note 4) (p)
Harris County, Texas, Toll Road
Unlimited Tax and Subordinate Lien
Revenue Refunding Bonds, AAA8/1/98 @ 102500,000557,300
8.125% due 8/1/2015 (p)
Lower Colorado River Authority,
Texas, Priority Revenue Bonds, AAA1/2/96 @ 100380,000384,628
6.50% due 1/1/2016 (p)
Intermountain Power Agency, Utah,
Power Supply Revenue Refunding Bonds,
8.375% due 7/1/2012 (p)AAA7/1/97 @ 102315,000343,501
(AMBAC Ins.) (Note 4)
8.375% due 7/1/2012 AAA7/1/97 @ 102285,000310,294
(AMBAC Ins.) (Note 4)S.F. 7/1/08 @ 100
8.625% due 7/1/2021AA7/1/97 @ 102250,000271,617
S.F. 1/1/13 @ 100
Wisconsin Health and Educational
Facilities Authority Revenue Bonds,
Meriter Hospital, Inc., AAA12/1/97 @ 102500,000552,395
8.375% due 12/1/2009 (p)
(Financial Guaranty Ins.) (Note 4)
District of Columbia Housing Finance
Agency, Residential Mortgage Revenue AAA9/1/96 @ 103 455,000
476,703
Senior Revenue Bonds, 7.75% due 9/1/2016
(Financial Guaranty Ins.) (Note 4)$8,540,000$8,832,627
At April 30, 1995, the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
<S><C>
Gross unrealized market appreciation$847,769
Gross unrealized market depreciation (111,168)
Net unrealized market appreciation $736,601
</TABLE>
The accompanying Notes are an integral part of this Portfolio.
A-7<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, INSURED SERIES 16
NOTES TO PORTFOLIO OF SECURITIES - April 30, 1995
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set forth
in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue of
bonds initially or currently is redeemable and the redemption price
for that year; unless otherwise indicated, each issue continues to be
redeemable at declining prices thereafter, but not below par.
"S.F." indicates a sinking fund has been or will be established with
respect to an issue of bonds. The prices at which bonds may be
redeemed or called prior to maturity may or may not include a
premium and, in certain cases, may be less than the cost of the
bonds to the Trust. Certain bonds in the portfolio, including bonds
listed as not being subject to redemption provisions, may be
redeemed in whole or in part other than by operation of the stated
redemption or sinking fund provisions under certain unusual or
extraordinary circumstances specified in the instruments setting
forth the terms and provisions of such bonds. For example, see
discussion of obligations of municipal housing authorities under
"Tax Exempt Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of April 30, 1995 was determined
by the Evaluator on the basis of bid prices for the securities at such
date.
(4) Insurance to maturity has been obtained previously from the listed
Insurance Company for these Bonds. The AAA ratings on these
Bonds are based in part on the creditworthiness and claims-paying
ability of the Insurance Company insuring such Bond to maturity.
No premium is payable therefore by the Trust.
All other bonds in the portfolio are insured by the Portfolio
Insurance Policy obtained by the Trust. (See Part B, "Insurance on
the Bonds in the Portfolio of a Trust".)
(p) It is anticipated that these bonds will be redeemed prior to
their scheduled maturity, pursuant to a pre-refunding, as
reflected under the column "Redemption Provisions".
A-8
<PAGE>
PROSPECTUS-PART B
Note that Part B of the Prospectus may not be distributed
unless accompanied by Part A.
TAX EXEMPT SECURITIES TRUST--INSURED SERIES
The Trusts
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 Trust is one of a
series of similar but separate unit investment trusts created under the
laws of the State of New York by a Trust Indenture and Agreement and
related Reference Trust Agreement, dated the Date of Deposit
(collectively, the "Trust Agreement"), among Smith Barney Inc. (the
"Sponsor"), United States Trust Company of New York, as Trustee,
and J.J. Kenny Co., Inc., as Evaluator. Each trust containing Bonds
of a State for which such Trust is named (a "State Trust") and each
National Trust and Selected Term Trust is referred to herein as the
"Trust" or "Trusts," unless the context requires otherwise. On the
Date of Deposit the Sponsor deposited with the Trustee interest-bearing
obligations (the "Bonds"), including contracts and funds (represented
by a certified check or checks and/or an irrevocable letter or letters of
credit, issued by a major commercial bank) for the purchase of certain
such obligations (such Bonds being referred to herein 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 Trust. The initial public offering of Units in each Trust 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.
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 multi-
bond portfolio. The objectives of a Trust in the Insured Series are tax-
exempt income and conservation of capital through an investment in a
diversified portfolio of insured municipal bonds. There is, of course,
no guarantee that a Trust's 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 or the
creditworthiness of the insurers to meet such obligations. The
insurance does not protect Unit holders from the risk that the value of
the Units may decline before the ratings of the Bonds subsequent to the
Date of Deposit, set forth in Part A - "Portfolio of Securities" may
have declined due to, among other factors (including a decline in the
creditworthiness of an insurer in the case of an insured trust which may
also result in a decline in the AAA ratings of the Units of an insured
trust), a decline in the creditworthiness of the issuer of said Bonds.
Portfolio
The following factors, among others, were considered
in selecting Bonds for each Trust: (1) all the Bonds of the National
Trust and the Selected Term Trust are obligations of the states,
counties, territories, or municipalities 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, be exempt from Federal income tax under
existing law to the extent described in "Taxes", (2) all the Bonds
deposited in a State Trust are obligations of the State for which such
Trust is named or of the counties, territories or municipalities of such
State, and authorities or political subdivisions thereof, or of the
Territory of Guam or the Commonwealth of Puerto Rico, so that the
interest on them will, in the opinion of recognized bond counsel to the
issuing governmental authorities, be exempt from Federal income tax
under existing law to the extent described in "Taxes" and from state
income taxes in the state for which such State Trust is named to the
extent described in Part C - "Tax Exempt Securities Trust - Taxes," (3)
the Bonds are diversified as to purpose of issue and location of issuer,
except in the case of a State Trust where the Bonds are diversified only
as to purpose of issue, (4) the Bonds were chosen in part on the basis
of their respective maturity dates and offer a degree of call protection,
(5) in the opinion of the Sponsor, the Bonds are fairly valued relative
to other bonds of comparable quality and maturity, and (6) whether
insurance guaranteeing the timely payment, when due, of all principal
and interest on the Bonds was available.
The Bonds in the Portfolio of a Trust were chosen in
part on the basis of their respective maturity dates. The Selected Term
Trust will contain Bonds which will have a dollar-weighted average
portfolio maturity of more than three years but not more than ten years
from the Date of Deposit. The National Trust or a State Trust not
specified as to term will have a dollar-weighted average portfolio
maturity of more than ten years from the Date of Deposit. For the
actual maturity dates of each of the Bonds contained in each Trust, see
Part A, "Portfolio or Securities". 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 Trust. The inability of an issuer to pay the
principal amount due upon the maturity of a Bond would result in a
loss to the Trust.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust are
subject to redemption prior to their stated maturity date pursuant to
sinking fund or call provisions. (See Part A-"Portfolio Summary as of
Date of Deposit" for information relating to the particular State Trust
described therein.) In general, a call or redemption provision is more
likely to be exercised when the offering price valuation of a bond is
higher than its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less than the
bond's call or redemption price. To the extent that a Bond was
deposited in a State Trust at a price higher than the price at which it is
redeemable, redemption will result in a loss of capital when compared
with the original public offering price of the Units. Conversely, to the
extent that a Bond was acquired at a price lower than the redemption
price, redemption will result in an increase in capital when compared
with the original public offering price of the Units. Monthly
distributions will generally be reduced by the amount of the income
which would otherwise have been paid with respect to redeemed bonds.
The Estimated Current Return and Estimated Long-Term Return of the
Units may be affected by such redemptions. Each Portfolio of
Securities in Part A contains a listing of the sinking fund and call
provisions, if any, with respect to each of the Bonds in a State Trust.
Because certain of the Bonds may from time to time under certain
circumstances be sold or redeemed or will mature in accordance with
their terms and the proceeds from such events will be distributed to
Unit holders and will not be reinvested, no assurance can be given that
a State Trust will retain for any length of time its present size and
composition. Neither the 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 may consist of some
Bonds whose current market values were below face value on the Date
of Deposit. A primary reason for the market value of such Bonds being
less than face value at maturity is that the interest coupons of such
Bonds are at lower rates than the current market interest rate for
comparably rated Bonds, even though at the time of the issuance of
such Bonds the interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds
selling at market discounts tend to increase in market value as they
approach maturity when the principal amount is payable. A market
discount tax-exempt Bond held to maturity will have a larger portion of
its total return in the form of taxable ordinary income and less in the
form of tax-exempt income than a comparable Bond bearing interest at
current market rates. Under the provisions of the Internal Revenue
Code in effect on the date of this Prospectus any ordinary income
attributable to market discount will be taxable but will not be realized
until maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of
Deposit", the State Trust may contain or be concentrated in one or
more of the classifications of Bonds referred to below. A State Trust
is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate value
of the Portfolio. (See Part A-"Portfolio Summary as of Date of
Deposit" for information relating to the particular State Trust described
therein.) An investment in Units of the State Trust should be made with
an understanding of the risks that these investments may entail, certain
of which are described below.
<PAGE>
General Obligation Bonds. Certain of the Bonds in the
Portfolio may be general obligations of a governmental entity that are
secured by the taxing power of the entity. General obligation bonds are
backed by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. However, the taxing power
of any governmental entity may be limited by provisions of state
constitutions or laws and an entity's credit will depend on many factors,
including an erosion of the tax base due to population declines, natural
disasters, declines in the state's industrial base or inability to attract
new industries, economic limits on the ability to tax without eroding
the tax base and the extent to which the entity relies on Federal or state
aid, access to capital markets or other factors beyond the entity's
control.
As a result of the recent recession's adverse impact
upon both their revenues and expenditures, as well as other factors,
many state and local governments are confronting deficits and potential
deficits which are the most severe in recent years. Many issuers are
facing highly difficult choices about significant tax increases and/or
spending reductions in order to restore budgetary balance. Failure to
implement these actions on a timely basis could force the issuers to
depend upon market access to finance deficits or cash flow needs.
In addition, certain of the Bonds in the State Trust may
be obligations of issuers (including California issuers) who rely in
whole or in part on ad valorem real property taxes as a source of
revenue. Certain proposals, in the form of state legislative proposals or
voter initiatives, to limit ad valorem real property taxes have been
introduced in various states, and an amendment to the constitution of
the State of California, 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 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,
amoung other factors, competition, weather conditions and economic
conditions. Electric utilities, for example, have experienced increased
competition as a result of the availability of other energy sources, the
effects of conservation on the use of electricity, self-generation by
industrial customers and the generation of electricity by co-generators
and other independent power producers. Also, increased competition
will result if federal regulators determine that utilities must open their
transmission lines to competitors. Utilities which distribute natural gas
also are subject to competition from alternative fuels, including fuel oil,
propane and coal.
The utility industry is an increasing cost business
making the cost of generating electricity more expensive and
heightening its sensitivity to regulation. A utility's costs are influenced
by the utility's cost of capital, the availability and cost of fuel and other
factors. In addition, natural gas pipeline and distribution companies
have incurred increased costs as a result of long-term natural gas
purchase contracts containing "take or pay" provisions which require
that they pay for natural gas even if natural gas is not taken by them.
There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future
they will also incur increasing capital and operating expenses to comply
with environmental legislation such as the Clean Air Act of 1990, and
other energy, licensing and other laws and regulations relating to,
among other things, air emissions, the quality of drinking water, waste
water discharge, solid and hazardous substance handling and disposal,
and siting and licensing of facilities. Environmental legislation and
regulations are changing rapidly and are the subject of current public
policy debate and legislative proposals. It is increasingly likely that
some or many utilities will be subject to more stringent environmental
standards in the future that could result in significant capital
expenditures. Future legislation and regulation could include, among
other things, regulation of so-called electromagnetic fields associated
with electric transmission and distribution lines as well as emissions of
carbon dioxide and other so-called greenhouse gases 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, decomissioning
costs, and spent fuel and radioactive waste disposal issues. While
nuclear power construction risks are no longer of paramount concern,
the emerging issue is radioactive waste disposal. In addition, nuclear
plants typically require substantial capital additions and modifications
throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade
various plant systems. The high degree of regulatory monitoring and
controls imposed on nuclear plants could cause a plant to be out of
service or on limited service for long periods. When a nuclear facility
owned by an investor-owned utility or a state or local municipality is
out of service or operating on a limited service basis, the utility
operator or its owners may be liable for the recovery of replacement
power costs. Risks of substantial liability also arise from the operation
of nuclear facilities and from the use, handling, and possible radioactive
emissions associated with nuclear fuel. Insurance may not cover all
types or amounts of loss which may be experienced in connection with
the ownership and operation of a nuclear plant and severe financial
consequences could result from a significant accident or occurrence.
The Nuclear Regulatory Commission has promulgated regulations
mandating the establishment of funded reserves to assure financial
capability for the eventual decommissioning of licensed nuclear
facilities. These funds are to be accrued from revenues in amounts
currently estimated to be sufficient to pay for decommissioning costs.
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 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 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.
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 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.
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. At any time after the
Initial Date of Deposit, litigation may be initiated on a variety of
grounds, or legislation may be enacted, with respect to Bonds in the
Trust. Litigation, for example, challenging the issuance of pollution
control revenue bonds under environmental protection statutes may
affect the validity of Bonds or the tax-free nature of their interest.
While the outcome of litigation of this nature can never be entirely
predicted, opinions of bond counsel are delivered on the date of
issuance of each Bond to the effect that the Bond has been validly
issued and that the interest thereon is exempt from Federal income tax.
In addition, other factors may arise from time to time which potentially
may impair the ability of issuers to make payments due on the Bonds.
Under the Federal Bankruptcy Act, a political
subdivision or public agency or instrumentality of any state, including
municipalities, may proceed to restructure or otherwise alter the terms
of its obligations, including those of the type comprising the State
Trust's Portfolio. The Sponsor is unable to predict what effect, if any,
this legislation might have on the State Trust.
From time to time Congress considers proposals to tax
the interest on state and local obligations, such as the Bonds. The
Supreme Court clarified in South Carolina v. Baker (decided April 20,
1988) that the U.S. Constitution does not prohibit Congress from
passing a nondiscriminatory tax on interest on state and local
obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult
their own tax advisers.
Tax Exemption. In the opinion of bond counsel
rendered on the date of issuance of each Bond, the interest on each
Bond is excludable from gross income under existing law for regular
Federal income tax purposes (except in certain circumstances depending
on the Holder) but may be subject to state and local taxes. As discussed
under Taxes below, interest on some or all of the Bonds may become
subject to regular Federal income tax, perhaps retroactively to their
date of issuance, as a result of changes in Federal law or as a result of
the failure of issuers (or other users of the proceeds of the Bonds) to
comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on
June 14, 1993 that it will be expanding its examination program with
respect to tax-exempt bonds. The expanded examination program will
consist of, among other measures, increased enforcement against
abusive transactions, broader audit coverage (including the expected
issuance of audit guidelines) and expanded compliance achieved by
means of expected revisions to the tax-exempt bond information return
forms. At this time, it is uncertain whether the tax exempt status of any
of the Bonds would be affected by such proceedings, or whether 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.
<PAGE>
Potential purchasers of the Units of a State Trust
should consider the fact that the Trust's Portfolio consists primarily of
Bonds issued by the state for which such State Trust is named or its
municipalities or authorities and realize the substantial risks associated
with an investment in such Bonds. Moreover, each State Trust is
subject to certain additional state risk factors. The Sponsor believes 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 has not independently
verified this information, it has no reason to believe that such
information is not correct in all material respects. Investments in a
State Trust or 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.
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 is 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.
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.
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 has scheduled the case for
trial (potentially liability estimated at between $9 million and $55
million); 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.
The Units
On the date of this Prospectus, each Unit in a Trust
represented a fractional undivided interest in the principal and net
income of the Trust as set forth in the "Summary of Essential
Information" in Part A. If any Units are redeemed by the Trustee, the
principal amount of the Bonds in the affected Trust will be reduced by
an amount allocable to redeemed Units and the fractional undivided
interest in the affected Trust represented by each unredeemed Unit will
be increased. Units will remain outstanding until redeemed upon tender
to the Trustee by any Unit holder, which may include the 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 the Trust are offered on a dollar price basis, the rate of
return on an investment in Units of the Trust is stated in terms of
"Estimated Current Return", computed by dividing the Net Annual
Income per Unit by the Public Offering Price per Unit. Any change
in either the Net Annual Income per Unit or the Public Offering Price
per Unit will result in a change in the Estimated Current Return. The
Net Annual Income per Unit of a Trust is determined by dividing the
total annual interest income of such Trust, less estimated annual fees
and expenses of the Trustee, the Sponsor and the Evaluator, by the
number of Units of such Trust outstanding. The Net Annual Income
per Unit of a Trust will change as the income or expenses of such Trust
changes and as Bonds are redeemed, paid, sold or exchanged. For a
statement of the Net Annual Income per Unit and the Estimated Current
Return Based on Public Offering Price, see Part A, "Summary of
Essential Information".
The Estimated Long-Term Return for a Trust is a
measure of the return to the investor over the estimated life of a Trust.
The Estimated Long-Term Return represents an average of the yields
to maturity (or call) of the Bonds in a Trust's portfolio calculated in
accordance with accepted bond practice and adjusted to reflect expenses
and sales charges. In calculating Estimated Long-Term Return, the
average yield for a Trust's portfolio is derived by weighing each
Bond's yield by the market value of the Bond and by the amount of
time remaining to the date to which the Bond is priced. Once the
average portfolio yield is computed, this figure is then reduced to
reflect estimated expenses and the effect of the maximum sales charge
paid by investors. The Estimated Long-Term Return calculation does
not take into account the difference in the timing of payments to
Unitholders who choose the quarterly or semi-annual plan of
distribution which will reduce the economic return compared to those
who choose the monthly plan of distribution.
A Trust may experience expenses and portfolio charges
different from those assumed in the calculation of Estimated Long-
Term Return. There thus can be no assurance that the Estimated
Current Returns or Estimated Long-Term Returns quoted for a Trust
will be realized in the future. Since both Estimated Current Return and
Estimated Long-Term Return quoted on a given business day are based
on the market value of the underlying Bonds on that day, subsequent
calculations of these performance measures will reflect the then-current
market value of the underlying Bonds and may be higher or lower.
Taxes
The following discussion addresses only the tax
consequences of Units held as capital assets and does not address the
tax consequences of Units held by dealers, financial institutions or
insurance companies.
In the opinion of Davis Polk & Wardwell, special
counsel for the 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 under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to determine the face amount of a Holder's pro
rata portion of each Bond on the Date of Deposit, see "Aggregate
Principal" under "Portfolio of Securities". The total cost to a Holder of
his Units, including sales charges, is allocated to his pro rata portion
of each Bond, in proportion to the fair market values thereof on the
date the Holder purchases his Units, in order to determine his tax basis
for his pro rata portion of each Bond. In order for a Holder who
purchases his Units on the Date of Deposit to determine the fair market
value of his pro rata portion of each Bond on such date, see "Cost of
Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond
is received by the State Trust. In the opinion of bond counsel (delivered
on the date of issuance of each Bond), such interest will be excludable
from gross income for regular Federal income tax purposes (except in
certain limited circumstances referred to below). Amounts received by
the State Trust pursuant to a bank letter of credit, guarantee or
insurance policy with respect to payments of principal, premium or
interest on a Bond in the State Trust will be treated for Federal income
tax purposes in the same manner as if such amounts were paid by the
issuer of the Bond.
The Trusts 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 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 because the fees and expenses
are incurred in connection with the production of tax-exempt income.
Further, if borrowed funds are used by a Holder to purchase or carry
Units of the State Trust, interest on such indebtedness will not be
deductible for Federal income tax purposes. In addition, under rules
used by the Internal Revenue Service, the purchase of Units may be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in
Congress and state legislatures which, if enacted into law, could have
an adverse impact on the tax-exempt status of the Bonds. It is
impossible to predict whether any legislation in respect of the tax status
of interest on such obligations may be proposed and eventually enacted
at the Federal or state level.
The foregoing discussion relates only to Federal and
certain aspects of New York State and City income taxes. Depending
on their state of residence, Holders may be subject to state and local
taxation and should consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after
August 7, 1986 will be a preference item for purposes of the alternative
minimum tax ("AMT"). The Sponsor believes 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 on the Bonds, the
gross proceeds received by the Trust from the disposition of any Bond
(resulting from redemption or payment at maturity of any Bond or the
sale by the State Trust of any Bond), and the fees and expenses paid by
the State Trust. The Trustee will also furnish annual information
returns to each Holder and to the Internal Revenue Service. Holders are
required to report to the Internal Revenue Service the amount of
tax-exempt interest received during the year.
The description of Federal tax consequences applies
separately for each State Trust. Below, arranged alphabetically by state,
is a description of certain state and local tax consequences for residents
of the state and locality for which such State Trust is named.
California Trust
Messrs. Morgan, Lewis & Bockius acted as special
California counsel to Insured Trust 9 and all prior Insured Trusts.
Messrs. Adams, Duque and Hazeltine, special California counsel to
Insured Trust 21 and New York 14. At the time of the Closing for
each Insured Trust, the respective counsel to the Trusts rendered an
opinion under the existing law substantially to the effect that:
The Insured 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 Insured
California Trust will be treated as the income, deductions and credits
against tax of the holders of Units in the Insured California Trust under
the income tax laws of the State of California;
Interest on the bonds held by the Insured California Trust, and any
interest income received by the Insured California Trust from its
investments in units of previously formed California trusts included
within a Multistate 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 Insured California Trust will have a
taxable event when the Insured 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 Insured California Trust is
allocated among each of the bond issues held in the Insured California
Trust (in accordance with the proportion of the Insured 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 a taxable
gain when the Insured 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 Insured California
Trust disposes of any of its ownership interests in a Previously Formed
Trust;
Each holder of a Unit in the Insured California Trust is deemed to
be the owner of a pro rata portion of the Insured California Trust under
the personal property tax laws of the State of California; and
The pro rata ownership of the bonds held by the Insured California
Trust, as well as the interest income therefrom, are exempt from
California personal property taxes.
Massachusetts Trust
At the time of the closing for each Massachusetts
Trust, Messrs. Palmer & Dodge, special Massachusetts counsel on
Massachusetts tax matters, rendered an opinion under then existing
Massachusetts law substantially to the effect that:
Tax-exempt interest for federal income tax purposes
(including insurance payments to the extent they are treated as 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 Trusts 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 Unitholders 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
Unitholders 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 upon sale or redemption of
Units by Unitholders who are subject to Massachusetts income taxation
under Massachusetts General Law, Chapter 62 will be includible in
their Massachusetts gross income.
Pennsylvania Trust
At the time of the closing for each Pennsylvania Trust,
Messrs. Drinker Biddle & Reath, special Pennsylvania counsel on
Pennsylvania tax matters, rendered an opinion under then existing
Pennsylvania 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, any political subdivision of 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 and 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 Acts, but because
such bonds are expressly relieved from state taxation by United States
statutes, the Commonwealth of Pennsylvania and its political
subdivisions are precluded from imposing any direct tax on Possession
Bonds, and, therefore, such bonds are not subject to Personal Property
Tax.
Pennsylvania Trust Units may be subject to tax in the
estate of a resident decedent under the Pennsylvania inheritance and
estate tax.
Income received by a Unit holder attributable to
interest realized by the Pennsylvania Trust from Pennsylvania Bonds,
Possession Bonds and Prior Trust Units or attributable to insurance
proceeds on account of such interest, is not taxable to individuals,
estates or trusts under the Personal Income Tax imposed by Article III
of the Tax Reform Code of 1971. Neither is such income taxable to
corporations under the Corporate Net Income Tax imposed by Article
IV of the Tax Reform Code of 1971 (in the case of insurance proceeds
to the extent that they are exempt for Federal Income Tax purposes);
nor to individuals under the Pennsylvania School District Net Income
Tax ("School District Tax") imposed on Philadelphia resident
individuals under 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.
Such gain is also not taxable under the Corporate Net Income Tax or
under the School District Tax, except that gain on the sale or other
disposition of Possession Bonds and that portion of Prior Trust Units
attributable to such bonds held for six months or less may be taxable
under the School District Tax.
To the extent that gain on the disposition of a Unit
represents gain realized on Pennsylvania or Possession Bonds held by
the Pennsylvania Trust or held by Prior Trust Units, such gain may be
subject to the Personal Income Tax and Corporate Net Income Tax.
Such gain may also be subject to the School District Tax, except the
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 any privilege,
excise, franchise or other tax imposed on business entities not discussed
herein (including the Corporate Capital Stock/Foreign Franchise Tax).
Insurance on the Bonds in the Portfolio of a Trust
Insurance guaranteeing the scheduled payment to
maturity of all principal and interest ("Insurance to Maturity") has been
obtained for some or all of the Bonds in each Trust at the cost of the
issuer of the Bond, a previous holder or the Sponsor as of the first
business day after the Date of Deposit. Insurance to Maturity was
obtained from the Municipal Bond Insurance Association ("MBIA"), as
of the Date of Deposit, for all the Bonds in the Portfolios of Insured
Series 1-4, Insurance to Maturity was obtained for all the Bonds in the
Portfolios of Insured Series 5-9 from one or more of the following
insurers; MBIA, AMBAC Indemnity Corporation ("AMBAC"),
Municipal Bond Investors Assurance Corporation ("MBIAC"), Capital
Guaranty Insurance Company ("CGIC"), Financial Guaranty Insurance
Company ("Financial Guaranty"), Asset Guaranty Reinsurance
Company ("Asset Guaranty"), Capital Markets Insurance Company
("CAPMAC"), Connie Lee Insurance Company ("Connie Lee") or
FInancial Security Assurance Inc. ("FSA"). (collectively, the
"Insurance Companies".) For Insured Series 5 and subsequent Insured
Series, the description of the Bonds under "Portfolio of Securities" in
Part A indicates which Insurance Company has issued Insurance to
Maturity with respect to each Bond.
The insurance policies are non-cancellable and will
continue in force so long as Bonds are outstanding and the insurers
remain in business. The respective insurance policies guarantee the
scheduled payment of principal and interest on but do not guarantee the
market value of the Bonds covered by each policy or the value of the
Units. In the event the issuer of an insured Bond defaults in payment
of interest or principal the insurance company insuring the Bond will
be required to pay to the trustee any interest or principal payments due.
Payment under each of the insurance policies is to be made in respect
of principal of and interest on Bonds covered thereby which becomes
due for payment but is unpaid. Each such policy provides for payment
of the defaulted principal or interest due to a trustee or paying agent.
In turn, such trustee or paying agent will make payment to the
bondholder (in this case, the Trustee) upon presentation of satisfactory
evidence of such bondholder's rights to receive such payment.
As a result of the insurance on the Bonds of each
Trust, the Units thereof received a rating of AAA by Standard &
Poor's Corporation as of the Date of Deposit for each such Trust.
There can be no assurance that Units of a Trust will retain this AAA
rating. Insurance is not a substitute for the basic credit of an issuer,
but supplements the issuer's existing credit and provides additional
security therefor. No representation is made as to the Insurance
Companies' abilities to meet their commitments.
A description of each of the insurers follows:
AMBAC Indemnity Corporation
AMBAC is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of the State of
Wisconsin, and licensed to do business in various states, with admitted
assets of approximately $1,450,000,000 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.
CGIC
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 .
Financial Guaranty
Financial Guaranty is a wholly-owned subsidiary of
FGIC Corporation (the "Corporation"), a Delaware holding company.
Financial Guaranty, domiciled in the State of New York and located at
175 Water Street, New York, New York, 10038, commenced its
business of providing insurance and financial guaranties for a variety
of investment instruments in January, 1984. The Corporation is a
wholly-owned subsidiary of General Electric Capital Corporation. The
Corporation and General Electric Capital Corporation are not
obligated to pay the debts of Financial Guaranty or the claims against
Financial Guaranty. Neither the National Insured Trust nor the Units
nor the portfolio is insured directly or indirectly by the Corporation.
Financial Guaranty, in addition to providing insurance
for the payment of interest and principal of municipal bonds and notes
held in unit investment trust portfolios, provides insurance for all or
a portion of new issues of municipal bonds and notes and for municipal
bonds and notes held by mutual funds. Financial Guaranty expects to
provide other forms of financial guaranties in the future. It is also
authorized to write fire, property damage liability, workman's
compensation and employers' liability and fidelity and surety insurance.
As of December 31, 1994, its total admitted assets were approximately
$2,131,000,000 and its policyholders' surplus was approximately
$894,000,000. Although the Sponsor has not undertaken an independent
investigation of Financial Guaranty, the Sponsor is not aware that the
information herein is inaccurate or incomplete. Standard & Poor's
Corporation and Moody's Investors Service have rated the claims-
paying ability of Financial Guaranty "AAA" and "Aaa", respectively.
Financial Guaranty is currently licensed to provide
insurance in all 50 states and the District of Columbia, files reports
with state insurance regulatory agencies and is subject to audit and
review by such authorities. Financial Guaranty is also subject to
regulation by the State of New York Insurance Department. Such
regulation, however, is no guarantee that Financial Guaranty will be
able to perform on its contracts of insurance in the event a claim should
be made thereunder.
The information relating to Financial Guaranty
contained above has been furnished by Financial Guaranty. The
financial information contained herein with respect to Financial
Guaranty is unaudited but appears in reports filed with state insurance
regulatory authorities and is subject to audit and review by such
authorities. No representation is made herein as to the accuracy or
adequacy of such information or as to the absence of material adverse
changes in such information subsequent to the dates thereof.
MBIA
The insurance companies comprising MBIA and their
respective percentage liabilities are as follows: The Aetna Casualty and
Surety Company, thirty-three percent (33%); The Fund American
Companies, Inc., thirty percent (30%); The Travelers Indemnity
Company, fifteen percent (15%); Cigna Property and Casualty
Company, twelve percent (12%); and The Continental Insurance
Company, ten percent (10%). Each insurance company comprising
MBIA is licensed to do business in various states. Such state
regulation, however, is no guarantee that any of the insurance
companies comprising MBIA will be able to perform on its contract of
insurance in the event a claim should be made thereunder. All policies
are individual obligations of the participating insurance companies and
their obligations thereunder cannot be increased beyond their percentage
commitment; therefore, each company will not be obligated to pay any
unpaid obligation of any other member of MBIA. However, each
insurance company is a multiline insurer involved in several lines of
insurance other than municipal bond insurance, and the assets of each
insurance company also secure all of its other insurance policy and
surety bond obligations. The MBIA companies listed above or their
parent organizations have been in the insurance business from seventy
to well over a hundred years. Standard & Poor's Corporation rates all
new issues insured by MBIA, "AAA" and Moody's Investors Service
rates all bond issues insured by MBIA, "Aaa".
MBIAC
MBIAC is the principal operating subsidiary of MBIA,
Inc. The principal shareholders of MBIA, Inc. are The Aetna Casualty
and Surety Company, The Fund American Companies, Inc.,
subsidiaries of CIGNA Corporation and Credit Local de France,
CAECL S.A., and they own approximately 35% of the outstanding
common stock of MBIA Inc. Neither MBIA, Inc. nor its shareholders
are obligated to pay the debts of or claims against MBIAC. MBIAC,
is a limited liability corporation rather than a several liability
association. MBIAC is domiciled in the State of New York and
licensed to do business in all 50 states, the District of Columbia and the
Commonwealth of Puerto Rico. As of December 31, 1994, MBIAC
had admitted assets of approximately $3.4 billion and policyholders'
surplus of approximately $1,100,000,000. Standard & Poor's
Corporation rates all new issues insured by MBIAC and Moody's
Investors Service rates all bond issues insured by MBIAC, "AAA" and
"Aaa", respectively.
Asset Guaranty
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
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.
Connie Lee
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.
FSA
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 admitted assets of FSA and its wholly-owned
subsidiaries was $804,000,000 and total policyholder' surplus was
$344,000,000.
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 financial information relating to AMBAC, CGIC,
MBIA, MBIAC, Asset Guaranty, CAPMAC, Connie Lee and FSA has
been obtained from publicly available sources. No representation is
made herein as to the accuracy or adequacy of such information or as
to the absence of material adverse changes in such information
subsequent to the dates thereof, but the Sponsor is not aware that the
information herein is inaccurate or incomplete.
Insurance Premiums
The cost of the insurance (the "Insurance Premiums")
for Insurance to Maturity has been paid by the issuers at the time of
issuance, by a previous holder of a Bond or by the Sponsor on the first
business day after the Date of Deposit. The Insurance Premiums paid
by the Sponsor were paid from the acquisition profit of the Sponsor
(see "Public Offering--Sponsor's and Underwriters' Profits"), and, if
such profit was not sufficient to cover the cost of said Insurance
Premiums, from the sales charge imposed on the purchasers of Units
or from other general funds of the Sponsor.
Expenses and Charges
At no cost to the Trusts, the Sponsor has borne all the
expenses of creating and establishing the Trusts, including the cost of
the initial preparation and execution of the Trust Agreements, initial
preparation and printing of the certificates for Units, the fees of the
Evaluator, legal expenses, advertising and selling expenses and other
out-of-pocket expenses. The cost of maintaining the secondary market,
such as printing, legal and accounting, will be borne by the Sponsor
except as otherwise provided in the Trust Agreements.
Trustee's, Sponsor's and Evaluator's Fees -- The
Trustee will receive for its ordinary recurring services to the Trusts an
annual fee in the amount set forth in Part A -- "Summary of Essential
Information". For a discussion of the services performed by the
Trustee pursuant to its obligation under the Trust Agreements, 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 in the Trusts 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 Trust. For a discussion of the
services performed by the Evaluator pursuant to its obligations under
the Trust Agreements, 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 in 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 Trust: all expenses (including counsel fees and
expenses of counsel and auditors) of the Trustee incurred in connection
with its activities under the Trust Agreements, including reports and
communications to Unit holders; the expenses and costs of any action
undertaken by the Trustee to protect the Trusts and the rights and
interests of the Unit holders; fees of the Trustee for any extraordinary
services performed under the Trust Agreements, indemnification of a
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 Trust; in the case
of certain Trusts, to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or
qualification of the Units and/or the Trust 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 Securities or any part of the
Trusts (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 the Trust. In addition, the Trustee is empowered
to sell Bonds in order to make funds available to pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the Trusts is
determined by adding to the Evaluator's determination of the aggregate
bid price of the Bonds per Unit a sales charge equal to the percentage
of the Public Offering Price indicated for the Trust in Part A,
"Summary of Essential Information". The aggregate bid price of the
underlying Bonds may be expected to be less than the aggregate
offering price of the Bonds. (See "Method of Evaluation".) A
proportionate share of accrued and undistributed interest on the Bonds
in a Trust at the date of delivery of the Units of such Trust to the
purchaser is also added to the Public Offering Price.
Pursuant to employee benefit plans, Units of the Trusts
are available to employees of the Sponsor, at a Public Offering Price
equal to the Evaluator's determination of the aggregate bid price of
Bonds of a Trust per Unit plus a sales charge of 1.25% of the Public
Offering Price and after the Initial Public Offering period, at a Public
Offering Price equal to the Evaluator's determination of the aggregate
bid price of the Bonds of a Trust per Unit plus a sales charge of 1.25%
of the Public Offering Price. Sales through such plans to employees of
the Sponsor result in 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" in 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 other 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 upon 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".
In determining the bid prices of Bonds covered by
Insurance of Maturity, the evaluator took into account the insurance
issued in respect of those Bonds and the AAA rating assigned to certain
of those Bonds as a result of the insurance. In making its evaluation,
the Evaluator first determined the quality of the insurance issued by the
Insurance Companies and then compared the Bonds to other securities
which had comparable insurance and which were of comparable
quality. In addition, the Evaluator, in accordance with its practice,
obtained from dealers and brokers two sets of bid prices for the Bonds:
one based on actual bid prices for such Bonds (without insurance) and
the other based on said dealer's or broker's estimation of such bid
prices as if such Bonds were insured.
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 reserves 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 made payment for the Units.
Market for Units
Although not obligated to do so, the Sponsor presently
intends to maintain a market for the Units of the respective Trusts and
to continuously offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds which may be less than the
price paid by the Unit holder. For information relating to the method
and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds. (See "Public Offering-Method of
Evaluation".) The costs of maintaining the secondary market, such as
printing, legal and accounting, will be borne by the Sponsor except as
otherwise provided in the Trust Agreements. 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 Trusts 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 Trusts, a Unit
holder of such a Trust desiring to dispose of his Units may be able to
do so only by tendering such Units to the Trustee for redemption at the
Redemption Price, which is also based upon the aggregate bid price of
the underlying Bonds. (See "Rights of Unit Holders--Redemption of
Units".)
Exchange Option
Unit holders may elect to exchange any or all of their
Units in this series of a Trust 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 reserves 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 Unit holder will recognize 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 Trust owned by the
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 Trusts
(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 Trusts is
evidenced by registered certificates executed by the Trustee and the
Sponsor. Certificates are transferable by presentation and surrender to
the Trustee of the certificate 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 Trust will be
distributed on each monthly Distribution Date on a pro rata basis to
Unit holders in such Trust of record as of the preceding Record Date.
All distributions will be net of applicable expenses and funds required
for the redemption of Units and, if applicable, reimbursements to the
Trustee for interest payments advanced to Unit holders on previous
Monthly Distribution Dates. (See Part A, "Summary of Essential
Information" and "Tax Exempt Securities Trust--Expenses and
Charges" and "Rights of Unit Holders--Redemption of Units" in this
section.)
The Trustee will credit to the Interest Account of each
respective Trust all interest received by such Trust, including that part
of the proceeds of any disposition of Bonds of such Trust which
represents accrued interest and including all moneys paid pursuant to
any insurance contract representing interest on any Bond in the Trusts.
Other receipts will be credited to the Principal Account of the affected
Trust. The pro rata share of the Interest Account and the pro rata
share of cash in the Principal Account represented by each Unit of a
Trust will be computed by the Trustee each month as of the Record
Date. (See Part A, "Summary of Essential Information".) Proceeds
received from the disposition of any of the Bonds subsequent to a
Record Date and prior to the next succeeding Distribution Date will be
held in the Principal Account and will not be distributed until the
following Distribution Date. The distribution to the 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 holder's pro rata share of the estimated annual
income to the Interest Account after deducting estimated expenses (the
"Monthly Interest Distribution") plus such holder's 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 of this
Prospectus is shown in the "Summary of Essential Information" in Part
A for the particular Trust and will change as the income and expenses
of the respective Trusts change and as Bonds are exchanged, redeemed,
paid or sold.
Normally, interest on the Bonds in the Portfolio of
each Trust is paid on a semi-annual basis. Because Bond interest is not
received by the Trusts at a constant rate throughout the year, any
Monthly Interest Distribution may be more or less than the amount
credited 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 and if one or more of the insurers of such Bonds fails to meet its
obligation under its policy of insurance, 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 the failure of the issuer to pay the interest due on the
underlying Bond and the concurrent failure of the respective insurance
company to meet its obligation under its insurance policy, each
remaining Unit holder will be subject to a greater pro rata 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 Trust Portfolio, accrued interest at any point in time will be
greater than the amount of interest actually received by a particular
Trust and distributed to Unit holders. Therefore, there will always
remain an item of accrued interest that is added to the value of the
Units. This excess accrued but undistributed interest amount is known
as the accrued interest carryover. If a Unit holder sells all or redeems
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 sells or redeems all or a portion of his Units, the
Redemption Price per Unit which he is entitled to receive from the
Trustee will include accrued interest carryover on the Bonds. (See
"Rights of Unit Holders --Redemption of Units--Computation of
Redemption Price per Unit".)
As of the first day of each month the Trustee will
deduct from the Interest Account of each Trust and, to the extent funds
are not sufficient therein, from the Principal Account of such Trust,
amounts necessary to pay the expenses of such Trust. (See "Tax
Exempt Securities Trust--Expenses and Charges".) The Trustee also
may withdraw from said account such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable
out of the Trust. Amounts so withdrawn shall not be considered a part
of the Trust's assets until such time as the Trustee shall return all or
any part of such amounts to the appropriate account. In addition, the
Trustee may withdraw from the Interest Account and the Principal
Account such amounts as may be necessary to cover redemption of
Units by the Trustee. (See "Rights of Unit Holders--Redemption of
Units".) The Trustee is also entitled to withdraw from the Interest
Account, and, to the extent funds are not sufficient therein, from the
Principal Account, on one or more Record Dates as may be
appropriate, amounts sufficient to recoup advances which it 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 the Trust,
redemption 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 the Trust,
redemptions of Units, and the balance remaining after such distributions
and deductions, expressed both as a total dollar amount and as a dollar
amount representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (3) a list of 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 Trusts 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 of such Trusts upon request.
The Trustee shall keep available for inspection by Unit
holders at all reasonable times during the 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 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 cancelled.
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"
of 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 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, in certain circumstances, be 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 each Trust will be reduced.
The Trustee reserves the right to suspend the right of
redemption and to postpone the date of payment of the Redemption
Price per Unit for any period during which the New York Stock
Exchange is closed, other than weekend and holiday closings, or
trading on that Exchange is restricted or during which (as determined
by the Securities and Exchange Commission) an emergency exists as
a result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
Computation of Redemption Price per Unit - The
Redemption Price per Unit of a Trust is determined by the Trustee on
the basis of the bid prices of the Bonds in such Trust as of the
Evaluation Time on the date any such determination is made. The
Redemption Price per Unit of a Trust is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in
such Trust on the bid side of the market (determined by the Evaluator
as set forth under "Public Offering Prices--Method of Evaluation"), (2)
cash on hand in such Trust, and accrued and unpaid interest on the
Bonds as of the date of computation, less (a) amounts representing
taxes or governmental charges payable out of such Trust, (b) the
accrued expenses of such Trust, and (c) cash held for distribution to
Unit holders of such Trust of record as of a date prior to the
evaluation.
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
is 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 therefore 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 it 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.
(formerly, Primerica Corporation).
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 of 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, if the Sponsor determine that any
insurance that may be applicable to the Bonds cannot be relied upon to
maintain the interests of the Trusts to at least as great an extent as such
disposition, 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 Trust 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 the Trust of any
securities other than the Bonds initially deposited in each respective
Trust is prohibited.
Resignation
If the 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 Trusts.
TRUSTEE
The Trustee is the 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 the
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 the Trust, 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 a Trust
which the Trustee may be required to pay under current or future law
of the United States or any other taxing authority having jurisdiction.
(See "Tax Exempt Securities Trust -- Portfolio".) For information
relating to the responsibilities and indemnification of the Trustee under
the Trust Agreement, reference is made to the material set forth under
"Rights of Unit Holders", "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 Trust on the basis of their bid prices on the last business
day of June and December in each year, on the day on which any Unit
of such Trust 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 Trustees 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
Trusts, except for the substitution of certain refunding securities for
such Bonds or to permit the Trustee to engage in business or in
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 Trust, the Trustee may in its discretion and
will, when directed by the Sponsor, terminate such Trust. Each Trust
may be terminated at any time by 100% of the Unit holders. See Part
A for additional mandatory and optional termination provisions.
However, in no event may any trust continue beyond the Mandatory
Termination Date set forth in Part A of this Prospectus under
"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 Trust, and, after paying all expenses
and charges incurred by such Trust, will distribute to each Unit holder,
upon surrender for cancellation of his certificate for Units, his pro rata
share of the balances remaining in the Interest Account and Principal
Account of such Trust.
LEGAL OPINIONS
Certain legal matters in connection with the Units
offered hereby have been passed upon by Messrs. Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017, as
special counsel for the Sponsor. Messrs. Carter, Ledyard & Milburn,
2 Wall Street, New York, New York 10005, act as counsel for the
Trustee.
AUDITORS
The Statements of Financial Condition and Portfolio of
Securities of each Trust included in this Prospectus have been audited
by KPMG Peat Marwick LLP, independent auditors, as indicated in
their report with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
RATINGS
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. Standard & Poor's does not
perform any audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of,
such information.
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 rating
symbols as published by Standard & Poor's follows:
AAA--Debt rated AAA has the highest rating assigned
by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA--Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the higher rated issues
only in small degree.
A--Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than debt 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 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.
D--Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears.
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 that the rating is provisional. A provisional rating assumes
the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion
of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of, default upon failure of such completion.
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 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 summary of the meaning 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 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 a
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 s
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 the
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.
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 and Moody's
Investors Service 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 Portfolio of Securities.
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.
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).
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.
<TABLE>
<S> <C>
Index:
Page
Summary of Essential Information. . . . . . . . . . . . . . . . . . . . . . . . . A-
2
Insured Series 16
Financial and Statistical Information . . . . . . . . . . . . . . . . . . . . . . A-
3
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . A-3
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-
4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolios of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6
10,077 Units
Tax Exempt Securities Trust - Insured Series. . . . . . . . . . . . . . . . . . . 1
The Trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Estimated Current Return and Estimated Long-Term Return . . . . . . . . . . . . 36
PROSPECTUS
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Dated August 18, 1995
Insurance on the Bonds in the Portfolio of a Trust. . . . . . . . . . . . . . . 41
Insurance Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Expenses and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Offering Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Method of Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Sponsor
Distribution of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Market for Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SMITH BARNEY INC.
Exchange Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Reinvestment Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Sponsor's Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Rights of Unit Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
388 Greenwich Street
Distribution of Interest and Principal. . . . . . . . . . . . . . . . . . . . . 49
New York, New York 10013
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
(800) 298-UNIT
Redemption of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Evaluator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Limitations on Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Amendment and Termination of the Trust Agreement. . . . . . . . . . . . . . . . . 55
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
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.
<PAGE>
<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, 1146-2511
Telephone 212/770-414
Smith Barney Incorporated
1345 Avenue of the Americas
New York, NY 10105
RE:Tax Exempt Securities Trust
Insured Series 16
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-21414 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 July 28, 1995 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
August 3, 1995
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Insured Series 14,
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 3rd day of August, 1995.
Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith
Barney Incorporated have signed this Post-Effective Amendment
pursuant to Powers of Attorney authorizing the person signing
this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
John F. Lyness
Jack L. Rivkin
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
