File No. 33-21773
CIK #832699
Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 10
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Insured Municipals Income Trust and Investors' Quality Tax-Exempt Trust,
Multi-Series 81
(Exact Name of Trust)
Van Kampen American Capital Distributors, Inc.
(Exact Name of Depositor)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Complete address of Depositor's principal executive offices)
Van Kampen American Capital Distributors, Inc. Chapman and Cutler
Attention: Don G. Powell Attention: Mark J. Kneedy
One Parkview Plaza 111 West Monroe Street
Oakbrook Terrace, Illinois 60181 Chicago, Illinois 60603
(Name and complete address of agents for service)
( X ) Check if it is proposed that this filing will become effective
on October 25, 1996 pursuant to paragraph (b) of Rule 485.
MULTI-SERIES 81
Florida IM-IT/21
Pennsylvania IM-IT/100
Texas IM-IT/2
Maryland Quality/35
PROSPECTUS PART ONE
NOTE: Part One of this Prospectus may not be distributed unless accompanied by
Part Two.Please retain both parts of this Prospectus for future reference.
In the opinion of counsel, interest to the Fund and to Unitholders, with
certain exceptions, is exempt under existing law from all Federal income
taxes. In addition the interest income of each State Trust is, in the opinion
of counsel, exempt to the extent indicated from state and local taxes, when
held by residents of the state where the issuer of Bonds in such Trust are
located. Capital gains, if any, are subject to Federal tax
THE FUND
The above-named series of Insured Municipals Income Trust and Investors'
Quality Tax-Exempt Trust (the "Fund") consists of a number of underlying
separate unit investment trusts. The various trusts in the Fund are
collectively referred to herein as the "Trusts". Each Trust consists of a
portfolio of interest-bearing obligations (the "Bonds" or "Securities") issued
by or on behalf of municipalities and other governmental authorities, the
interest on which is, in the opinion of recognized bond counsel to the issuing
governmental authority, exempt from all Federal income taxes under existing
law. In addition, the interest income of each State Trust is, in the opinion
of counsel, 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. Each Unit represents a fractional undivided interest in the principal
and net income of the respective Trust (see "Summary of Essential Information"
in this Part One and "The Fund" in Part Two).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Sponsor in the secondary market or from the
Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Sponsor. No proceeds from
the sale of Units will be received by the Fund.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units of each Trust during the secondary
market will include the aggregate bid price of the Securities in such Trust,
an applicable sales charge, cash, if any, in the Principal Account held or
owned by such Trust, and accrued interest, if any. See "Summary of
Essential Financial Information" in this Part One.
ESTIMATED CURRENT AND LONG-TERM RETURNS
Estimated Current and Long-Term Returns to Unitholders are indicated under
"Summary of Essential Information" in this Part One. The methods of
calculating Estimated Current Returns and Estimated Long-Term Return are set
forth in Part Two of this Prospectus.
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.
The Date of this Prospectus is October 16, 1996
Van Kampen American Capital
INSURED MUNICIPALS INCOME TRUST AND
INVESTORS' QUALITY TAX-EXEMPT TRUST, MULTI-SERIES 81
Summary of Essential Financial Information
As of August 1, 1996
Sponsor: Van Kampen American Capital Distributors, Inc.
Evaluator: American Portfolio Evaluation Services
(A division of an affiliate of the Sponsor)
Trustee: The Bank of New York
The income, expense and distribution data set forth below have been calculated
for Unitholders electing to receive monthly distributions. Unitholders
choosing distributions semi-annually will receive a slightly higher net annual
interest income because of the lower Trustee's fees and expenses under such
plan.
<TABLE>
<CAPTION>
Florida Pennsylvania Texas Maryland
IM-IT IM-IT IM-IT Quality
Trust Trust Trust Trust
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
General Information
Principal Amount (Par Value) of Securities..................... $ 2,055,000 $ 4,105,000 $ 4,760,000 $ 1,850,000
Number of Units................................................ 2,583 5,519 4,868 2,782
Fractional Undivided Interest in Trust per Unit................ 1/2,583 1/5,519 1/4,868 1/2,782
Public Offering Price:
Aggregate Bid Price of Securities in Portfolio................ $ 2,093,952.80 $ 4,298,447.15 $ 5,111,592.80 $ 1,933,800.50
Aggregate Bid Price of Securities per Unit.................... $ 810.67 $ 778.85 $ 1,050.04 $ 695.11
Sales charge 2.041 % (2.0 % of Public Offering Price
excluding principal cash) for the Florida IM-IT Trust, 2.302 %
(2.2 % of Public Offering Price excluding principal cash) for
the Pennsylvania IM-IT and Texas IM-IT Trusts, and 1.010 %
(1.0 % of Public Offering Price excluding principal cash) for
the Maryland Quality Trust .................................... $ 16.54 $ 17.92 $ 24.14 $ 7.02
Principal Cash per Unit....................................... $ 78.68 $ (.36) $ (1.25) $ .01
Public Offering Price per Unit <F1>........................... $ 905.89 $ 796.41 $ 1,072.93 $ 702.14
Redemption Price per Unit...................................... $ 889.35 $ 778.49 $ 1,048.79 $ 695.12
Excess of Public Offering Price per Unit over Redemption Price
per Unit....................................................... $ 16.54 $ 17.92 $ 24.14 $ 7.02
Minimum Value of the Trust under which Trust Agreement may be
terminated..................................................... $ 600,000.00 $ 1,180,000.00 $ 1,180,000.00 $ 610,000.00
Annual Premium on Portfolio Insurance.......................... $ 312.08 $ 1,550.00 $ 1,853.80 $ --
Evaluator's Annual Fee <F4>.................................... $ 992 $ 2,339 $ 2,099 $ 1,061
Special Information
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit..................... $ 59.89 $ 57.33 $ 75.50 $ 49.02
Less: Estimated Annual Expense................................ $ 2.43 $ 2.19 $ 2.32 $ 2.16
Less: Annual Premium on Portfolio Insurance................... $ .12 $ .28 $ .38 $ --
Estimated Net Annual Interest Income per Unit................. $ 57.34 $ 54.86 $ 72.80 $ 46.86
Calculation of Estimated Interest Earnings per Unit:
Estimated Net Annual Interest Income.......................... $ 57.34 $ 54.86 $ 72.80 $ 46.86
Divided by 12................................................. $ 4.78 $ 4.57 $ 6.07 $ 3.91
Estimated Daily Rate of Net Interest Accrual per Unit.......... $ .15929 $ .15237 $ .20223 $ .13016
Estimated Current Return Based on Public Offering Price
<F2><F3>....................................................... 6.93 % 6.89 % 6.78 % 6.67 %
Estimated Long-Term Return <F2><F3>............................ 4.09 % 4.56 % 4.28 % 4.36 %
- ----------
<FN>
<F1>Plus accrued interest to the date of settlement (three business days after
purchase) of $4.51, $3.96, $5.25 and $3.38 for the Florida IM-IT Trust,
Pennsylvania IM-IT Trust, Texas IM-IT Trust and Maryland Quality Trust,
respectively.
<F2>The Estimated Current Returns and Estimated Long-Term Returns are increased
for transactions entitled to a reduced sales charge.
<F3>The Estimated Current Return and Estimated Long-Term Return on an identical
portfolio without the insurance obtained by the Florida IM-IT Trust,
Pennsylvania IM-IT Trust and Texas IM-IT Trust would have been slightly higher.
<F4>Notwithstanding information to the Contrary in Part Two of this Prospectus,
the Trust Indenture provides that as compensation for its services, the
Evaluator shall receive a fee of $.30 per $1,000 principal amount of Bonds per
Trust annually. This fee may be adjusted for increases in consumer prices for
services under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
</TABLE>
Summary of Essential Financial Information (continued)
Evaluations for purpose of sales, purchase or redemption of Units are made as
of 4:00 P.M. Eastern time on days of trading on the New York Stock Exchange
next following receipt of an order for a sale or purchase of Units or receipt
by The Bank of New York of Units tendered for redemption.
<TABLE>
<CAPTION>
<S> <C>
Minimum Principal Distribution.......$1.00 per Unit
Date of Deposit......................July 7, 1988
Mandatory Termination Date...........December 31, 2037
Evaluator's Annual Supervisory Fee...Maximum of $0.25 per Unit
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Record and Computation Dates...TENTH day of the month as follows: monthly - each month; semi-annual - January and July for the
Florida IM-IT, Pennsylvania IM-IT and Texas IM-IT Trusts and May and November for the Maryland
Quality Trust.
Distribution Dates.............TWENTY-FIFTH day of the month as follows: monthly - each month; semi-annual - January and July for
the Florida IM-IT, Pennsylvania IM-IT and Texas IM-IT Trusts and May and November for the Maryland
Quality Trust.
Trustee's Annual Fee...........$1.19 and $0.66 per $1,000 principal amount of Bonds respectively, for those portions of the Trusts
under the monthly and semi-annual distribution plans.
</TABLE>
PORTFOLIO
In selecting Bonds for the Florida Insured Municipals Income Trust, Series 21,
the following facts, among others, were considered: (i) either the Standard &
Poor's, A Division of the McGraw-Hill Companies rating of the Bonds was in no
case less than "BBB-", or the Moody's Investors Service, Inc. rating of the
Bonds was in no case less than "Baa", including provisional or conditional
ratings, respectively (see "Description of Securities Ratings" in Part Two),
(ii) the prices of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance for the prompt payment
of principal and interest on the Bonds and (iv) the diversification of Bonds
as to purpose of issue and location of issuer. As of June 30, 1996, the Trust
consists of 9 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows:
Airport, 1 (9%); Pre-refunded, 3 (30%); Retail Electric, 1 (9%); Single Family
Mortgage Revenue, 1 (6%); Water and Sewer, 2 (44%) and Miscellaneous, 1 (2%).
See "Bond Portfolio" herein and "Description of Securities Ratings" in Part
Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1989<F1> 1990 1991 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period............................ $ 951.00 $ 1,035.05 $ 1,013.74 $ 1,022.89
============= ============= ============= =============
Net asset value per Unit at end of period.................................. $ 1,035.05 $ 1,013.74 $ 1,022.89 $ 1,031.88
============= ============= ============= =============
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding for
entire period) <F2>........................................................ $ 42.64 $ 73.44 $ 72.33 $ 71.40
============= ============= ============= =============
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)............................................. $ -- $ -- $ 5.57 $ 22.36
============= ============= ============= =============
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period)............................................................. $ 57.49 $ (27.25) $ 14.92 $ 31.94
============= ============= ============= =============
Distributions of investment income by frequency of payment <F2>
Monthly................................................................... $ 52.60 $ 72.71 $ 71.84 $ 70.79
Semiannual................................................................ $ 22.50 $ 73.52 $ 72.89 $ 72.18
Units outstanding at end of period......................................... 2,822 2,740 2,736 2,736
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION (continued)
<TABLE>
<CAPTION>
1993 1994 1995 1996
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period ............................... $ 1,031.88 $ 1,036.45 $ 979.02 $ 939.35
============= ============ ========== ===========
Net asset value per Unit at end of period....................................... $ 1,036.45 $ 979.02 $ 939.35 $ 923.22
============= ============ ========== ===========
Distributions to Unitholders of investment income including accrued interest to
carry paid on Units redeemed (average Units outstanding for entire period) <F2>. $ 69.84 $ 68.39 $ 68.63 $ 67.49
============= ============ ========== ===========
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)................................................... $ 18.27 $ 20.91 $ 31.27 $ --
============= ============ ========== ===========
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at end of
period) ......................................................................... $ 23.76 $ (35.95) $ (5.70) $ (15.34)
============= ============ ========== ===========
Distributions of investment income by frequency of payment <F2>..................
Monthly ........................................................................ $ 69.16 $ 67.56 $ 66.16 $ 65.69
Semiannual .................................................................... $ 70.46 $ 69.01 $ 67.52 $ 66.79
Units outstanding at end of period ............................................. 2,736 2,718 2,699 2,583
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Pennsylvania Insured Municipals Income Trust,
Series 100, the following facts, among others, were considered: (i) either the
Standard & Poor's, A Division of the McGraw-Hill Companies rating of the Bonds
was in no case less than "BBB-", or the Moody's Investors Service, Inc. rating
of the Bonds was in no case less than "Baa", including provisional or
conditional ratings, respectively (see "Description of Securities Ratings" in
Part Two), (ii) the prices of the Bonds relative to other bonds of comparable
quality and maturity, (iii) the availability and cost of insurance for the
prompt payment of principal and interest on the Bonds and (iv) the
diversification of Bonds as to purpose of issue and location of issuer. As of
June 30, 1996, the Trust consists of 7 issues which are payable from the
income of a specific project or authority. The portfolio is divided by purpose
of issue as follows: Escrowed, 1 (13%); Health Care System, 2 (27%);
Pre-refunded, 3 (36%) and Single Family Mortgage Revenue, 1 (24%). See "Bond
Portfolio" herein and "Description of Securities Ratings" in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1989<F1> 1990 1991 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period............................ $ 951.00 $ 1,034.13 $ 1,015.66 $ 1,019.97
============= ============= ============= =============
Net asset value per Unit at end of period.................................. $ 1,034.13 $ 1,015.66 $ 1,019.97 $ 1,051.84
============= ============= ============= =============
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding for
entire period) <F2>........................................................ $ 39.40 $ 72.80 $ 72.77 $ 73.09
============= ============= ============= =============
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)............................................. $ -- $ -- $ -- $ --
============= ============= ============= =============
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period)............................................................. $ 52.27 $ (18.52) $ 4.29 $ 31.74
============= ============= ============= =============
Distributions of investment income by frequency of payment <F2>
Monthly................................................................... $ 54.31 $ 72.16 $ 72.12 $ 72.12
Semiannual................................................................ $ 24.37 $ 72.90 $ 72.90 $ 72.90
Units outstanding at end of period......................................... 6,007 6,000 5,996 5,905
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION (continued)
<TABLE>
<CAPTION>
1993 1994 1995 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period ............................ $ 1,051.84 $ 1,092.23 $ 1,056.92 $ 1,055.53
============= ============ ============ ============
Net asset value per Unit at end of period.................................... $ 1,092.23 $ 1,056.92 $ 1,055.53 $ 800.52
============= ============ ============ ============
Distributions to Unitholders of investment income including accrued interest
to carry paid on Units redeemed (average Units outstanding for entire period)
<F2>. ........................................................................ $ 72.56 $ 72.55 $ 73.36 $ 75.54
============= ============ ============ ============
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)................................................ $ -- $ -- $ -- $ 232.95
============= ============ ============ ============
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at end
of period) ................................................................... $ 40.70 $ (35.11) $ (1.71) $ (32.00)
============= ============ ============ ============
Distributions of investment income by frequency of payment <F2>...............
Monthly ..................................................................... $ 72.12 $ 72.12 $ 72.12 $ 72.53
Semiannual ................................................................. $ 72.90 $ 72.90 $ 72.90 $ 76.60
Units outstanding at end of period .......................................... 5,900 5,899 5,794 5,534
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Texas Insured Municipals Income Trust, Series 2,
the following facts, among others, were considered: (i) either the Standard &
Poor's, A Division of the McGraw-Hill Companies rating of the Bonds was in no
case less than "BBB-", or the Moody's Investors Service, Inc. rating of the
Bonds was in no case less than "Baa", including provisional or conditional
ratings, respectively (see "Description of Securities Ratings" in Part Two),
(ii) the prices of the Bonds relative to other bonds of comparable quality and
maturity, (iii) the availability and cost of insurance for the prompt payment
of principal and interest on the Bonds and (iv) the diversification of Bonds
as to purpose of issue and location of issuer. As of June 30, 1996, the Trust
consists of 9 issues which are payable from the income of a specific project
or authority. The portfolio is divided by purpose of issue as follows:
Escrowed, 1 (13%); Health Care System, 2 (6%); Industrial Revenue, 1 (18%) and
Pre-refunded, 5 (63%). See "Bond Portfolio" herein and "Description of
Securities Ratings" in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1989<F1> 1990 1991 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period............................ $ 951.00 $ 1,048.91 $ 1,020.64 $ 1,038.26
============= ============= ============= =============
Net asset value per Unit at end of period.................................. $ 1,048.91 $ 1,020.64 $ 1,038.26 $ 1,096.54
============= ============= ============= =============
Distributions to Unitholders of investment income including accrued
interest to carry paid on Units redeemed (average Units outstanding for
entire period) <F2>........................................................ $ 45.86 $ 74.23 $ 73.51 $ 73.45
============= ============= ============= =============
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)............................................. $ -- $ -- $ -- $ --
============= ============= ============= =============
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at
end of period)............................................................. $ 72.83 $ (31.76) $ 16.94 $ 58.20
============= ============= ============= =============
Distributions of investment income by frequency of payment <F2>
Monthly................................................................... $ 53.45 $ 73.14 $ 73.08 $ 73.08
Semiannual................................................................ $ 23.09 $ 73.80 $ 73.80 $ 73.80
Units outstanding at end of period......................................... 6,049 5,768 5,689 5,689
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION (continued)
<TABLE>
<CAPTION>
1993 1994 1995 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period ............................ $ 1,096.54 $ 1,153.27 $ 1,102.55 $ 1,094.99
============= ============ ============ ============
Net asset value per Unit at end of period.................................... $ 1,153.27 $ 1,102.55 $ 1,094.99 $ 1,072.57
============= ============ ============ ============
Distributions to Unitholders of investment income including accrued interest
to carry paid on Units redeemed (average Units outstanding for entire period)
<F2>. ........................................................................ $ 73.79 $ 73.90 $ 73.56 $ 76.30
============= ============ ============ ============
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)................................................ $ -- $ -- $ -- $ --
============= ============ ============ ============
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at end
of period) ................................................................... $ 53.13 $ (55.91) $ (8.81) $ (29.22)
============= ============ ============ ============
Distributions of investment income by frequency of payment <F2>...............
Monthly ..................................................................... $ 73.08 $ 73.08 $ 73.08 $ 74.51
Semiannual ................................................................. $ 73.80 $ 73.80 $ 73.80 $ 75.41
Units outstanding at end of period .......................................... 5,526 5,348 5,279 4,907
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PORTFOLIO
In selecting Bonds for the Maryland Investors' Quality Tax-Exempt Trust,
Series 35, the following facts, among others, were considered: (i) either the
Standard & Poor's, A Division of the McGraw-Hill Companies rating of the Bonds
was in no case less than "A-", or the Moody's Investors Service, Inc. rating
of the Bonds was in no case less than "A", including provisional or
conditional ratings, respectively or, if not rated the Bonds had, in the
opinion of the Sponsor, credit characteristics sufficiently similar to credit
characteristics of interest-bearing tax-exempt obligations that were so rated
as to be acceptable acquisition by the Fund (see "Description of Securities
Ratings" in Part Two), (ii) the prices of the Bonds relative to other bonds of
comparable quality and maturity, (iii) the availability and cost of insurance
for the prompt payment of principal and interest on the Bonds and (iv) the
diversification of Bonds as to purpose of issue and location of issuer. As of
June 30, 1996, the Trust consists of 6 issues which are payable from the
income of a specific project or authority. The portfolio is divided by purpose
of issue as follows: Higher Education, 1 (12%); Multi-Family Mortgage Revenue,
1 (5%); Pre-refunded, 3 (59%) and Single Family Mortgage Revenue, 1 (24%). See
"Bond Portfolio" herein and "Description of Securities Ratings" in Part Two.
PER UNIT INFORMATION
<TABLE>
<CAPTION>
1989<F1> 1990 1991 1992
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period.............................. $ 951.00 $ 1,031.06 $ 1,005.54 $ 929.32
============= ============= ============= ===========
Net asset value per Unit at end of period.................................... $ 1,031.06 $ 1,005.54 $ 929.32 $ 967.31
============= ============= ============= ===========
Distributions to Unitholders of investment income including accrued interest
to carry paid on Units redeemed (average Units outstanding for entire
period) <F2>................................................................. $ 50.56 $ 71.85 $ 70.54 $ 64.24
============= ============= ============= ===========
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)............................................... $ -- $ -- $ 81.22 $ --
============= ============= ============= ===========
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at end
of period)................................................................... $ 61.23 $ (25.90) $ 13.34 $ 37.83
============= ============= ============= ===========
Distributions of investment income by frequency of payment <F2>
Monthly..................................................................... $ 53.50 $ 71.29 $ 69.76 $ 63.84
Semiannual.................................................................. $ 47.95 $ 72.06 $ 71.15 $ 64.60
Units outstanding at end of period........................................... 3,101 3,075 3,075 3,075
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
PER UNIT INFORMATION (continued)
<TABLE>
<CAPTION>
1993 1994 1995 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net asset value per Unit at beginning of period .................................. $ 967.31 $ 998.14 $ 974.14 $ 967.28
=========== =========== ========== ===========
Net asset value per Unit at end of period.......................................... $ 998.14 $ 974.14 $ 967.28 $ 788.44
=========== =========== ========== ===========
Distributions to Unitholders of investment income including accrued interest to
carry paid on Units redeemed (average Units outstanding for entire period) <F2>. ... $ 64.29 $ 64.18 $ 64.82 $ 64.41
=========== =========== ========== ===========
Distributions to Unitholders from Bond redemption proceeds (average Units
outstanding for entire period)...................................................... $ -- $ -- $ -- $ 158.57
=========== =========== ========== ===========
Unrealized appreciation (depreciation) of Bonds (per Unit outstanding at end of
period) ............................................................................ $ 30.97 $ (24.07) $ (8.05) $ (28.16)
=========== =========== ========== ===========
Distributions of investment income by frequency of payment <F2>.....................
Monthly ........................................................................... $ 63.84 $ 63.60 $ 63.84 $ 62.79
Semiannual ....................................................................... $ 64.60 $ 64.60 $ 64.60 $ 64.21
Units outstanding at end of period ................................................ 3,075 3,070 2,973 2,782
- ----------
<FN>
<F1>For the period from July 7, 1988 (date of deposit) through June 30, 1989.
<F2>Unitholders may elect to receive distributions on a monthly or semi-annual
basis.
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Van Kampen American Capital Distributors, Inc.
and the Unitholders of Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 81:
We have audited the accompanying statements of condition (including the
analyses of net assets) and the related portfolio of Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 81 (Florida IM-IT,
Pennsylvania IM-IT, Texas IM-IT and Maryland Quality Trusts) as of June 30,
1996, and the related statements of operations and changes in net assets for
the three years ended June 30, 1996. These statements are the responsibility
of the Trustee and the Sponsor. Our responsibility is to express an opinion on
such statements based on our audit.
We conducted our audit 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 tax-exempt securities owned at June 30,
1996 by correspondence with the Trustee. An audit also includes assessing the
accounting principles used and significant estimates made by the Trustee and
the Sponsor, as well as evaluating the overall financial statement
presentation. We believe our audit provides 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 Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 81 (Florida IM-IT,
Pennsylvania IM-IT, Texas IM-IT and Maryland Quality Trusts) as of June 30,
1996, and the results of operations and changes in net assets for the three
years ended June 30, 1996, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Chicago, Illinois
August 18, 1996
<TABLE>
INSURED MUNICIPALS INCOME TRUST AND
INVESTORS' QUALITY TAX-EXEMPT TRUST, MULTI-SERIES 81
Statements of Condition
June 30, 1996
<CAPTION>
Florida Pennsylvania Texas Maryland
IM-IT IM-IT IM-IT Quality
Trust Trust Trust Trust
------------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
Trust property
Cash.................................................................... $ 26,336 $ 3,420 $ -- $ --
Tax-exempt securities at market value, (cost $2,182,227, $4,065,058,
$4,658,093 and $2,003,850, respectively) (note 1)........................ 2,310,276 4,327,113 5,147,552 2,190,560
Accrued interest........................................................ 48,065 111,332 123,421 68,000
Receivable for securities sold.......................................... -- -- -- --
$ 2,384,677 $ 4,441,865 $ 5,270,973 $ 2,258,560
============= =============== ============= =============
Liabilities and interest to Unitholders
Cash overdraft.......................................................... $ -- $ -- $ 7,883 $ 65,127
Redemptions payable..................................................... -- 11,805 -- --
Interest to Unitholders................................................. 2,384,677 4,430,060 5,263,090 2,193,433
$ 2,384,677 $ 4,441,865 $ 5,270,973 $ 2,258,560
============= =============== ============= =============
Analyses of Net Assets
Interest of Unitholders (2,583, 5,534, 4,907 and 2,782 Units,
respectively of fractional undivided interest outstanding)
Cost to original investors of 3,076, 6,049, 6,049 and 3,101 Units,
respectively (note 1).................................................... $ 3,076,000 $ 6,049,000 $ 6,049,000 $ 3,101,000
Less initial underwriting commission (note 3)........................... 150,695 296,343 296,347 151,921
------------- --------------- ------------- -------------
2,925,305 5,752,657 5,752,653 2,949,079
Less redemption of Units (493, 515, 1,142 and 319 Units, respectively).. 478,915 496,510 1,203,781 296,964
------------- --------------- ------------- -------------
2,446,390 5,256,147 4,548,872 2,652,115
Undistributed net investment income
Net investment income................................................... 1,532,853 3,395,172 3,278,186 1,604,587
Less distributions to Unitholders....................................... 1,469,027 3,265,071 3,155,822 1,567,600
------------- --------------- ------------- -------------
63,826 130,101 122,364 36,987
Realized gain (loss) on Bond sale or redemption......................... 14,544 106,526 102,395 19,920
Unrealized appreciation (depreciation) of Bonds (note 2)................ 128,049 262,055 489,459 186,710
Distributions to Unitholders of Bond sale or redemption proceeds........ (268,132) (1,324,769) -- (702,299)
Net asset value to Unitholders.......................................... $ 2,384,677 $ 4,430,060 $ 5,263,090 $ 2,193,433
============= =============== ============= =============
Net asset value per Unit (Units outstanding of 2,583, 5,534, 4,907 and
2,782, respectively)..................................................... $ 923.22 $ 800.52 $ 1,072.57 $ 788.44
============= =============== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
FLORIDA INSURED MUNICIPALS INCOME TRUST, SERIES 21
Statements of Operations
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Investment income
Interest income................................................ $ 190,304 $ 184,062 $ 176,996
Expenses
Trustee fees and expenses...................................... 3,939 3,912 3,840
Evaluator fees................................................. 983 915 992
Insurance expense.............................................. 312 312 312
Supervisory fees............................................... 708 544 650
------------ ------------ ------------
Total expenses................................................. 5,942 5,683 5,794
------------ ------------ ------------
Net investment income.......................................... 184,362 178,379 171,202
Realized gain (loss) from Bond sale or redemption
Proceeds....................................................... 55,000 95,000 117,440
Cost........................................................... 55,275 95,475 115,554
------------ ------------ ------------
Realized gain (loss)........................................... (275) (475) 1,886
Net change in unrealized appreciation (depreciation) of Bonds... (97,720) (15,379) (39,622)
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.$ 86,367 $ 162,525 $ 133,466
============ ============ ============
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income................................................................... $ 184,362 $ 178,379 $ 171,202
Realized gain (loss) on Bond sale or redemption......................................... (275) (475) 1,886
Net change in unrealized appreciation (depreciation) of Bonds........................... (97,720) (15,379) (39,622)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations......................... 86,367 162,525 133,466
Distributions to Unitholders from:
Net investment income................................................................... (186,567) (185,918) (179,039)
Bonds sale or redemption proceeds....................................................... (57,034) (84,700) --
Redemption of Units (17,518) (17,580) (105,050)
------------- ------------- -------------
Total increase (decrease)............................................................... (174,752) (125,673) (150,623)
Net asset value to Unitholders
Beginning of period..................................................................... 2,835,725 2,660,973 2,535,300
------------- ------------- -------------
End of period (including undistributed net investment income of $79,202, $71,663 and
$63,826, respectively)................................................................... $ 2,660,973 $ 2,535,300 $ 2,384,677
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
PENNSYLVANIA INSURED MUNICIPALS INCOME TRUST, SERIES 100
Statements of Operations
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------- ----------- -------------
<S> <C> <C> <C>
Investment income
Interest income................................................ $ 439,963 $ 436,605 $ 399,708
Expenses
Trustee fees and expenses...................................... 7,792 7,709 7,806
Evaluator fees................................................. 2,241 2,129 2,339
Insurance expense.............................................. 1,550 1,550 1,550
Supervisory fees............................................... 1,529 1,173 1,394
------------- ----------- -------------
Total expenses................................................. 13,112 12,561 13,089
------------- ----------- -------------
Net investment income.......................................... 426,851 424,044 386,619
Realized gain (loss) from Bond sale or redemption
Proceeds....................................................... -- 104,158 1,545,346
Cost........................................................... -- 102,353 1,445,814
------------- ----------- -------------
Realized gain (loss)........................................... -- 1,805 99,532
Net change in unrealized appreciation (depreciation) of Bonds... (207,113) (9,899) (177,109)
------------- ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.$ 219,738 $ 415,950 $ 309,042
============= =========== =============
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income................................................................. $ 426,851 $ 424,044 $ 386,619
Realized gain (loss) on Bond sale or redemption....................................... -- 1,805 99,532
Net change in unrealized appreciation (depreciation) of Bonds......................... (207,113) (9,899) (177,109)
------------- ------------- ---------------
Net increase (decrease) in net assets resulting from operations....................... 219,738 415,950 309,042
Distributions to Unitholders from:
Net investment income................................................................. (428,051) (429,373) (429,598)
Bonds sale or redemption proceeds..................................................... -- -- (1,324,769)
Redemption of Units (1,079) (105,590) (240,372)
------------- ------------- ---------------
Total increase (decrease)............................................................. (209,392) (119,013) (1,685,697)
Net asset value to Unitholders
Beginning of period................................................................... 6,444,162 6,234,770 6,115,757
------------- ------------- ---------------
End of period (including undistributed net investment income of $178,409, $173,080
and $130,101, respectively)............................................................ $ 6,234,770 $ 6,115,757 $ 4,430,060
============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
TEXAS INSURED MUNICIPALS INCOME TRUST, SERIES 2
Statements of Operations
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Investment income
Interest income................................................ $ 415,589 $ 401,596 $ 384,680
Expenses
Trustee fees and expenses...................................... 7,612 7,286 7,130
Evaluator fees................................................. 2,120 1,977 2,099
Insurance expense.............................................. 2,503 2,212 1,953
Supervisory fees............................................... 1,442 1,074 1,255
------------- ------------ -------------
Total expenses................................................. 13,677 12,549 12,437
------------- ------------ -------------
Net investment income.......................................... 401,912 389,047 372,243
Realized gain (loss) from Bond sale or redemption
Proceeds....................................................... 196,560 70,890 392,539
Cost........................................................... 176,173 65,436 353,545
------------- ------------ -------------
Realized gain (loss)........................................... 20,387 5,454 38,994
Net change in unrealized appreciation (depreciation) of Bonds... (299,017) (46,517) (143,368)
------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.$ 123,282 $ 347,984 $ 267,869
============= ============ =============
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income................................................................... $ 401,912 $ 389,047 $ 372,243
Realized gain (loss) on Bond sale or redemption......................................... 20,387 5,454 38,994
Net change in unrealized appreciation (depreciation) of Bonds........................... (299,017) (46,517) (143,368)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations......................... 123,282 347,984 267,869
Distributions to Unitholders from:
Net investment income................................................................... (405,246) (390,953) (388,740)
Bonds sale or redemption proceeds....................................................... -- -- --
Redemption of Units (194,560) (73,021) (396,508)
------------- ------------- -------------
Total increase (decrease)............................................................... (476,524) (115,990) (517,379)
Net asset value to Unitholders
Beginning of period..................................................................... 6,372,983 5,896,459 5,780,469
------------- ------------- -------------
End of period (including undistributed net investment income of $140,767, $138,861 and
$122,364, respectively).................................................................. $ 5,896,459 $ 5,780,469 $ 5,263,090
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
MARYLAND INVESTORS' QUALITY TAX-EXEMPT TRUST, SERIES 35
Statements of Operations
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Investment income
Interest income................................................ $ 203,438 $ 200,286 $ 175,390
Expenses
Trustee fees and expenses...................................... 4,279 4,227 3,991
Evaluator fees................................................. 1,079 1,026 1,061
Insurance expense.............................................. -- -- --
Supervisory fees............................................... 796 611 710
------------ ------------ ------------
Total expenses................................................. 6,154 5,864 5,762
------------ ------------ ------------
Net investment income.......................................... 197,284 194,422 169,628
Realized gain (loss) from Bond sale or redemption
Proceeds....................................................... -- 92,872 596,565
Cost........................................................... -- 90,900 559,136
------------ ------------ ------------
Realized gain (loss)........................................... -- 1,972 37,429
Net change in unrealized appreciation (depreciation) of Bonds... (73,888) (23,923) (78,331)
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.$ 123,396 $ 172,471 $ 128,726
============ ============ ============
</TABLE>
<TABLE>
Statements of Changes in Net Assets
Years ended
June 30,
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income................................................................... $ 197,284 $ 194,422 $ 169,628
Realized gain (loss) on Bond sale or redemption......................................... -- 1,972 37,429
Net change in unrealized appreciation (depreciation) of Bonds........................... (73,888) (23,923) (78,331)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations......................... 123,396 172,471 128,726
Distributions to Unitholders from:
Net investment income................................................................... (197,109) (195,949) (183,825)
Bonds sale or redemption proceeds....................................................... -- -- (452,547)
Redemption of Units (4,963) (91,410) (174,638)
------------- ------------- -------------
Total increase (decrease)............................................................... (78,676) (114,888) (682,284)
Net asset value to Unitholders
Beginning of period..................................................................... 3,069,281 2,990,605 2,875,717
------------- ------------- -------------
End of period (including undistributed net investment income of $52,711, $51,184 and
$36,987, respectively)................................................................... $ 2,990,605 $ 2,875,717 $ 2,193,433
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
(IM-IT AND QUALITY MULTI-SERIES 81)
FLORIDA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of June 30,
1996
<CAPTION>
June 30,
1996
Port- Redemption Market
folio Aggregate Name of Issuer, Title, Interest Rate and Maturity Rating Feature Value
Item Principal Date (Note 2) (Note 2) (Note 1)
- --------- ------------------ ----------------------------------------------------- ------------ --------------------- -------------
<S> <C> <C> <C> <C> <C>
A $ 130,000 Florida Housing Finance Agency, Residential Mortgage
Revenue Bonds, 1986 Series 1 (FGIC Insured) 8.000% 1996 @ 103
Due 12/15/12 ........................................ AAA 2012 @ 100 S.F. $ 133,422
- -----------------------------------------------------------------------------------------------------------------------------------
B 235,000 The Cape Canaveral Hospital District (Florida)
Refunding and Improvement Revenue Certificates,
Series 1988A (AMBAC Indemnity Insured) 8.000% Due 1997 @ 102
01/01/13 ............................................ AAA 1997 @ 102 P.R. 243,474
- -----------------------------------------------------------------------------------------------------------------------------------
C 300,000 Hospital Board of Directors of Lee County, Florida,
Hospital Revenue Refunding Bonds (Lee Memorial
Hospital Project) 1988 Series A (BIG Insured) 1998 @ 102
8.000% Due 04/01/14 ................................. AAA 1998 @ 102 P.R. 323,325
- -----------------------------------------------------------------------------------------------------------------------------------
D 210,000 Sarasota-Manatee Airport Authority (Florida) Airport
System Fixed Rate Series 1984-B Revenue Bonds (BIG
Insured) 0M-7.800% Due 08/01/14 210M-7800% Due -0-
08/01/14............................................. AAA 1996 @ 102 212,665
- -----------------------------------------------------------------------------------------------------------------------------------
E 500,000 City of Tampa, Florida, Water and Sewer Systems
Subordinate Lien Revenue Bonds, Series 1988A (AMBAC 1998 @ 102
Indemnity Insured) 7.750% Due 10/01/14 ............. AAA 2009 @ 100 S.F. 526,220
- -----------------------------------------------------------------------------------------------------------------------------------
F 50,000 The City of Miami, Florida, Special Revenue
Refunding Bonds, Series 1987 (MBIA Insured) 0.000%
Due 01/01/15 ........................................ AAA 2009 @ 62.459 S.F. 15,456
- -----------------------------------------------------------------------------------------------------------------------------------
G 500,000 City of Ocala, Florida, Water and Sewer Revenue
Refunding Bonds, Series 1988 (AMBAC Indemnity 1996 @ 102
Insured) 7.875% Due 10/01/15 ....................... AAA 2008 @ 100 S.F. 508,115
- -----------------------------------------------------------------------------------------------------------------------------------
H 140,000 City of Tampa, Florida, Utilities Tax and Special 1997 @ 102
Revenue Refunding Bonds, Series 1988 (AMBAC 2008 @ 100 S.F.
Indemnity Insured) 8.125% Due 10/01/15 ............. AAA 1997 @ 102 P.R. 149,398
- -----------------------------------------------------------------------------------------------------------------------------------
I 200,000 Jacksonville Electric Authority (Jacksonville,
Florida) St. Johns River Power Park System Refunding
Revenue Bonds, Issue Two, Series One 6.000% Due 1996 @ 100
10/01/16 ............................................ AA 2015 @ 100 S.F. 198,200
$ 2,265,000 $ 2,310,275
================== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
(IM-IT AND QUALITY MULTI-SERIES 81)
PENNSYLVANIA INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of June 30,
1996
<CAPTION>
June 30,
1996
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- --------- ------------------ -------------------------------------------------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C> <C>
A $ - 0 - City of Philadelphia, Pennsylvania, General Obligation
Refunding Bonds, Series 1986 (FGIC Insured) 8.250% Due
02/15/09 ............................................... $ - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
B - 0 - Allegheny County Hospital Development Authority
(Pennsylvania) Hospital Revenue Bonds, Series 1985 (St.
Francis Medical Center Project) AMBAC Indemnity Insured
8.125% Due 06/01/13 ................................... - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
C - 0 - City of Pittsburgh, Pennsylvania, General Obligation
Bonds, Series A of 1986 (AMBAC Indemnity Insured)
6.000% Due 03/01/14 .................................... - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
D 990,000 Latrobe Municipal Authority (Westmoreland County,
Pennsylvania) Water Revenue Bonds, Series of 1988A 1998 @ 100
(AMBAC Indemnity Insured) 7.875% Due 03/01/14 ......... AAA 1998 @ 100 P.R. 1,060,330
- -----------------------------------------------------------------------------------------------------------------------------------
E 850,000 Dauphin County Hospital Authority (Pennsylvania)
Hospital Revenue Refunding Bonds (Harrisburg Hospital) 1997 @ 102
Series of 1987 (MBIA Insured) 8.250% Due 07/01/14 ..... AAA 2008 @ 100 S.F. 879,138
- -----------------------------------------------------------------------------------------------------------------------------------
F 250,000 Allegheny County Hospital Development Authority
(Pennsylvania) Hospital Revenue Refunding Bonds, 1988
Series C (Presbyterian-University Hospital) MBIA 1998 @ 102
Insured 7.625% Due 07/01/15 ........................... AAA 2003 @ 100 S.F. 260,800
- -----------------------------------------------------------------------------------------------------------------------------------
G 1,000,000 Pennsylvania Housing Finance Agency, Family Mortgage 1997 @ 102
Revenue Bonds, Series P 8.000% Due 04/01/16 ........... AA+ 2008 @ 100 S.F. 1,023,460
- -----------------------------------------------------------------------------------------------------------------------------------
H 550,000 The Pittsburgh (Pennsylvania) Water and Sewer
Authority, Water and Sewer System Revenue Refunding
Bonds, Series of 1986 (FGIC Insured) 6.000% Due
09/01/16** ............................................. AAA 551,347
- -----------------------------------------------------------------------------------------------------------------------------------
I 500,000 The Philadelphia Municipal Authority, Philadelphia, 1998 @ 102
Pennsylvania, Criminal Justice Center Refunding Revenue 2000 @ 100 P.R.
Bonds, Series of 1988 (FGIC Insured) 490M-7.800% Due AAA 1998 @ 102 541,293
04/01/18 10M-7.800% Due 04/01/18 ....................... AAA 2000 @ 100 P.R. 10,745
$ 4,140,000 $ 4,327,113
=================== =============
</TABLE>
The accompanying notes are an integral part of these statements.
**The issuer of these Bonds has placed funds or securities in escrow against
payment of the issue on the date or dates indicated.
<TABLE>
(IM-IT AND QUALITY MULTI-SERIES 81)
TEXAS INSURED MUNICIPALS INCOME TRUST
PORTFOLIO as of June 30,
1996
<CAPTION>
June 30,
1996
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- --------- ------------------ -------------------------------------------------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C> <C>
A $ 320,000 Texas Municipal Power Agency Refunding Revenue Bonds, 1997 @ 102
Series 1987 (BIG Insured) 7.250% Due 09/01/11 ......... AAA 1997 @ 102 P.R. $ 337,226
- -----------------------------------------------------------------------------------------------------------------------------------
B 125,000 Tarrant County (Texas) Health Facilities Development
Corporation, Harris Methodist Health System Revenue 1997 @ 102
Bonds, Series 1987B (FGIC Insured) 6.875% Due 09/01/12 AAA 2005 @ 100 S.F. 127,775
- -----------------------------------------------------------------------------------------------------------------------------------
C 625,000 Texas Public Building Authority Building Revenue
Refunding Bonds, Series 1986 (MBIA Insured) 6.000% Due
08/01/14** ............................................. AAA 632,775
- -----------------------------------------------------------------------------------------------------------------------------------
D 590,000 Harris County, Texas, Toll Road Unlimited Tax and 1998 @ 102
Subordinate Lien Revenue Refunding Bonds, Series 1988 2013 @ 100 S.F.
8.125% Due 08/01/15 .................................... AAA 1998 @ 102 P.R. 644,032
- -----------------------------------------------------------------------------------------------------------------------------------
E 465,000 City of Austin, Texas, Combined Utility Systems Revenue 2001 @ 100
Bonds, Series 1986A 8.000% Due 11/15/16 ............... AAA 2001 @ 100 P.R. 528,054
- -----------------------------------------------------------------------------------------------------------------------------------
F 900,000 Rio Grande Valley (Texas) Health Facilities Development
Corporation Hospital Revenue Refunding Bonds (Valley 1998 @ 102
Baptist Medical Center Project) Series 1988 (BIG 1998 @ 102 P.R.
Insured) 765M-8.000% Due 08/01/17 135M-8.000% Due AAA 1998 @ 102 833,169
08/01/17 ............................................... AAA 2009 @ 100 S.F. 143,350
- -----------------------------------------------------------------------------------------------------------------------------------
G - 0 - City of Houston, Texas, Sewer System Prior Lien Revenue
Bonds, Series 1987 8.125% Due 12/01/17 ................ - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
H 900,000 Northeast Hospital Authority Hospital Revenue Bonds,
Northeast Medical Center Hospital (Humble, Texas) 1998 @ 102
Series 1988 (FGIC Insured) 8.125% Due 07/01/18 ........ AAA 1998 @ 102 P.R. 979,857
- -----------------------------------------------------------------------------------------------------------------------------------
I 875,000 Brazos River Authority (Texas) Collateralized Revenue
Refunding Bonds (Houston Lighting and Power Company
Project) Series 1988 C (BIG Insured) 8.100% Due
05/01/19 ............................................... AAA 1998 @ 102 921,314
$ 4,800,000 $ 5,147,552
================== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
**The issuer of these Bonds has placed funds or securities in escrow against
payment of the issue on the date or dates indicated.
<TABLE>
(IM-IT AND QUALITY MULTI-SERIES 81)
MARYLAND INVESTORS' QUALITY TAX-EXEMPT TRUST
PORTFOLIO as of June 30,
1996
<CAPTION>
June 30,
1996
Port- Redemption Market
folio Aggregate Rating Feature Value
Item Principal Name of Issuer, Title, Interest Rate and Maturity Date (Note 2) (Note 2) (Note 1)
- --------- ------------------ -------------------------------------------------------- ------------ ------------------ -------------
<S> <C> <C> <C> <C> <C>
A $ - 0 - Baltimore County, Maryland, Housing Mortgage Revenue
Bonds, Series 1985 (GNMA Collateralized -- Spring Hill
Apartments Project) 9.125% Due 09/20/10 ............... $ - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
B - 0 - Anne Arundel County, Maryland, Water and Sewer
Unlimited Tax General Obligation Bonds, Series 1986
6.250% Due 04/01/15 .................................... - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
C 500,000 Community Development Administration, Department of
Economic and Community Development, State of Maryland
Single Family Program Bonds, 1986 Third Series 7.250% 1996 @ 103
Due 04/01/16 ........................................... AA* 2007 @ 100 S.F. 508,555
- -----------------------------------------------------------------------------------------------------------------------------------
D - 0 - Baltimore County, Maryland, General Obligation Bonds,
Baltimore County Pension Funding Bonds, 1988 Series
7.750% Due 07/01/16 .................................... - 0 -
- -----------------------------------------------------------------------------------------------------------------------------------
E 250,000 Maryland Health and Higher Educational Facilities
Authority Project and Refunding Revenue Bonds, Greater
Baltimore Medical Center Issue, Series 1986 7.100%
Due 07/01/17 ........................................... 255,000
- -----------------------------------------------------------------------------------------------------------------------------------
F 500,000 Mayor and City Council of Baltimore Refunding Revenue
Bonds (Baltimore City Parking System Facilities) Series 1997 @ 102
1987A (FGIC Insured) 6.750% Due 07/01/18 .............. AAA 1997 @ 102 P.R. 521,830
- -----------------------------------------------------------------------------------------------------------------------------------
G 100,000 Housing Opportunities Commission of Montgomery County
(Montgomery County, Maryland) Multifamily Mortgage 1998 @ 102
Revenue Bonds, 1988 Series A 8.250% Due 07/01/19 ...... A* 2009 @ 100 S.F. 103,527
- -----------------------------------------------------------------------------------------------------------------------------------
H 250,000 Maryland Health and Higher Educational Facilities
Authority, Refunding Revenue Bonds, Johns Hopkins 1998 @ 102
University Issue, Series 1988 7.500% Due 07/01/20 ..... AA- 2009 @ 100 S.F. 259,668
- -----------------------------------------------------------------------------------------------------------------------------------
I 500,000 Maryland Health and Higher Educational Facilities
Authority Revenue Bonds, North Arundel Hospital Issue, 1998 @ 102
Series 1988 (BIG Insured) 7.875% Due 07/01/21 ......... AAA 1998 @ 102 P.R. 541,980
$ 2,100,000 $ 2,190,560
=================== =============
</TABLE>
The accompanying notes are an integral part of these statements.
INSURED MUNICIPALS INCOME TRUST
AND INVESTORS' QUALITY TAX-EXEMPT TRUST,
MULTI-SERIES 81
Notes to Financial Statements
June 30, 1994, 1995 and 1996
- --------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation - Tax-exempt municipal securities are stated at the value
determined by the Evaluator, American Portfolio Evaluation Services (a
division of an affiliate of the Sponsor). The Evaluator may determine the
value of the Bonds (1) on the basis of current bid prices of the Bonds
obtained from dealers or brokers who customarily deal in Bonds comparable to
those held by each of the Trusts, (2) on the basis of bid prices for
comparable Bonds, (3) by determining the value of the Bonds by appraisal or
(4) by any combination of the above. The Florida IM-IT, Pennsylvania IM-IT and
Texas IM-IT Trusts maintain insurance which provides for the timely payment
when due, of all principal and interest on Bonds owned by it. Except in cases
in which Bonds are in default, or significant risk of default, the valuation
of the Bonds in such Trusts does not include any value attributable to this
insurance feature since the insurance terminates as to any Bond at the time of
its disposition.
Security Cost - The original cost to each of the Trusts (Florida IM-IT,
Pennsylvania IM-IT, Texas IM-IT and Maryland Quality) was based on the
determination by Interactive Data Corporation of the offering prices of the
Bonds on the date of deposit (July 7, 1988). Since the valuation is based upon
the bid prices, such Trusts (Florida IM-IT, Pennsylvania IM-IT, Texas IM-IT
and Maryland Quality) recognized downward adjustments of $21,055, $43,344,
$44,684 and $23,079, respectively, on the date of deposit resulting from the
difference between the bid and offering prices. These downward adjustments
were included in the aggregate amount of unrealized appreciation reported in
the financial statements for each Trust for the period ended June 30, 1989.
Unit Valuation - The redemption price per Unit is the pro rata share of each
Unit in each Trust based upon (1) the cash on hand in such Trust or monies in
the process of being collected, (2) the Bonds in such Trust based on the value
determined by the Evaluator and (3) interest accrued thereon, less accrued
expenses of the Trust, if any.
Federal Income Taxes - The Trust is not taxable for Federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of such Trust and, accordingly, no provision has been made for Federal income
taxes.
Other - The financial statements are presented on the accrual basis of
accounting. Any realized gains or losses from securities transactions are
reported on an identified cost basis.
NOTE 2 - PORTFOLIO
Ratings - The source of all ratings, exclusive of those designated N/R or * is
Standard & Poor's, A Division of the McGraw-Hill Companies. Ratings marked *
are by Moody's Investors Service, Inc. as these Bonds are not rated by
Standard & Poor's, A Division of the McGraw-Hill Companies. N/R indicates that
the Bond is not rated by Standard & Poor's, A Division of the McGraw-Hill
Companies or Moody's Investors Service, Inc. The ratings shown represent the
latest published ratings of the Bonds. For a brief description of rating
symbols and their related meanings, see "Description of Securities
Ratings" in Part Two.
Redemption Feature - There is shown under this heading the year in which each
issue of Bonds is initially or currently callable and the call price for that
year. Each issue of Bonds continues to be callable at declining prices
thereafter (but not below par value) except for original issue discount Bonds
which are redeemable at prices based on the issue price plus the amount of
original issue discount accreted to redemption date plus, if applicable, some
premium, the amount of which will decline in subsequent years. "S.F."
indicates a sinking fund is established with respect to an issue of Bonds.
"P.R." indicates a bond has been prerefunded. Redemption pursuant to
call provisions generally will, and redemption pursuant to sinking fund
provisions may, occur at times when the redeemed Bonds have an offering side
evaluation which represents a premium over par. To the extent that the Bonds
were deposited in the Trust at a price higher than the price at which they are
redeemed, this will represent a loss of capital when compared with the
original Public Offering Price of the Units. Conversely, to the extent that
the Bonds were acquired at a price lower than the redemption price, this will
represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions will generally be reduced by the
amount of the income which would otherwise have been paid with respect to
redeemed Bonds and there will be distributed to Unitholders the principal
amount in excess of $1 per Unit semi-annually and any premium received on such
redemption. However, should the amount available for distribution in the
Principal Account exceed $10.00 per Unit, the Trustee will make a special
distribution from the Principal Account on the next succeeding monthly
distribution date to holders of record on the related monthly record date. The
Estimated Current Return in this event may be affected by such redemptions.
For the Federal tax effect on Unitholders of such redemptions and resultant
distributions, see paragraph (3) under "Federal Tax Status of the
Trusts" and "Annual Unit Income and Estimated Current Returns" in
Part Two.
NOTE 2 - PORTFOLIO (continued)
Insurance - Insurance coverage providing for the timely payment when due of
all principal and interest on the Bonds in the Florida IM-IT, Pennsylvania
IM-IT and Texas IM-IT Trusts has been obtained by the Trusts or by one of the
Preinsured Bond Insurers (as indicated in the Bond name). Such insurance does
not guarantee the market value of the Bonds or the value of the Units. For
Bonds covered under the Trust's insurance policy the insurance is effective
only while Bonds thus insured are held in the Trust and the insurance premium,
which is a Trust obligation, is paid on a monthly basis. The premium for
insurance which has been obtained from various insurance companies by the
issuer of the Bond involved is payable by the issuer. Insurance expense for
the period reflects adjustments for redeemed or sold Bonds.
An Accounting and Auditing Guide issued by the American Institute of Certified
Public Accountants states that, for financial reporting purposes, insurance
coverage of the type acquired by the Trust does not have any measurable value
in the absence of default of the underlying Bonds or indication of the
probability of such default. In the opinion of the Evaluator, there is no
indication of a probable default of Bonds in the portfolio as of the date of
these financial statements.
Unrealized Appreciation and Depreciation - An analysis of net unrealized
appreciation (depreciation) at June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Florida Pennsylvania Texas Maryland
IM-IT IM-IT IM-IT Quality
Trust Trust Trust Trust
------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C>
Unrealized Appreciation $ 128,049 $ 262,055 $ 489,459 $ 186,710
Unrealized Depreciation -- -- -- --
------------ ----------------- ----------- -------------
$ 128,049 $ 262,055 $ 489,459 $ 186,710
============ ================= =========== =============
</TABLE>
NOTE 3 - OTHER
Marketability - Although it is not obligated to do so, the Sponsor intends to
maintain a market for Units and to continuously offer to purchase Units at
prices, subject to change at any time, based upon the aggregate bid price of
the Bonds in the portfolio of each Trust, plus interest accrued to the date of
settlement. If the supply of Units exceeds demand, or for other business
reasons, the Sponsor may discontinue purchases of Units at such prices. In the
event that a market is not maintained for the Units, a Unitholder 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.
Cost to Investors - The cost to original investors was based on the
Evaluator's determination of the aggregate offering price of the Bonds per
Unit on the date of an investor's purchase, plus a sales charge of 4.9% of the
public offering price which is equivalent to 5.152% of the aggregate offering
price of the Bonds. The secondary market cost to investors is based on the
Evaluator's determination of the aggregate bid price of the Bonds per Unit on
the date of an investor's purchase plus a sales charge based upon the years to
average maturity of the Bonds in the portfolio. The sales charge ranges from
1.0% of the public offering price (1.010% of the aggregate bid price of the
Bonds) for a Trust with a portfolio with less than two years to average
maturity to 5.40% of the public offering price (5.708% of the aggregate bid
price of the Bonds) for a Trust with a portfolio with twenty-one or more years
to average maturity.
Compensation of Evaluator - The Evaluator receives a fee for providing
portfolio supervisory services for each of the Trusts ($.25 per Unit, not to
exceed the aggregate cost of the Evaluator for providing such services to all
applicable Trusts). In addition, the Evaluator receives an annual fee for
regularly evaluating each of the Trust's portfolios. Both fees may be adjusted
for increases under the category "All Services Less Rent of Shelter" in the
Consumer Price Index.
NOTE 4 - REDEMPTION OF UNITS
Units were presented for redemption as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Florida IM-IT Trust 18 19 116
Pennsylvania IM-IT Trust 1 105 260
Texas IM-IT Trust 178 69 372
Maryland Quality Trust 5 97 191
</TABLE>
NATIONAL AND STATE
INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS
Part Two
In the opinion of counsel, interest to each Trust and to Unitholders, with
certain exceptions, is excludable under existing law from gross income for
Federal income taxes. In addition, except for the National Trust, the interest
income of each Trust is, in the opinion of counsel, 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. Capital gains, if any,
are subject to Federal tax.
INTRODUCTION
The Fund. The objectives of the Fund are Federal and, in the case of a State
Trust, state tax-exempt income and conservation of capital through an
investment in a diversified portfolio of tax-exempt bonds. There is, of
course, no guarantee that the Fund's objectives will be achieved. The Fund
consists of a series of separate National and State unit investment trusts,
some of which may be included in various series of Investors' Quality
Tax-Exempt Trust, Multi-State or Multi-Series. The various trusts collectively
are referred to hereinas the "Trusts" The "National Trusts"
include various series of The First National Dual Series Tax-Exempt Bond Trust
(Income Trust), Investors' Municipal-Yield Trust and Investors' Quality
Tax-Exempt Trust and the other Trusts are collectively referred to herein as
the "State Trusts" Each Trust consists of interest-bearing
obligations (the "Bonds" or "Securities" issued by or on
behalf of municipalities and other governmental authorities, the interest on
which is, in the opinion of recognized bond counsel to the issuing
governmental authority, exempt from all Federal income tax under existing law.
In addition, the interest income of each State Trust is, in the opinion of
counsel, 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. All the Securities deposited in each Trust were rated "A" or
better by Standard & Poor's, A Division of the McGraw-Hill Companies, Inc.
("Standard & Poor's" or "A" or better by Moody's Investors
Service, Inc.
Public Offering Price. The secondary market Public Offering Price of each
Trust will include the aggregate bid price of the Securities in such Trust, an
applicable sales charge, cash, if any, in the Principal Account held or owned
by such Trust, accrued interest and Purchased Interest, if any. If the
Securities in each Trust were available for direct purchase by investors, the
purchase price of the Securities would not include the sales charge included
in the Public Offering Price of the Units.
Estimated Current Return and Estimated Long-Term Return. The Estimated Current
Return is calculated by dividing the Estimated Net Annual Interest Income per
Unit by the Public Offering Price. The Estimated Net Annual Interest Income
per Unit will vary with changes in fees and expenses of the Trustee and the
Evaluator and with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with changes in
the bid price of the underlying Securities; therefore, there is no assurance
that the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income and Public
Offering Price. Neither rate reflects the true return to Unitholders which is
lower because neither includes the effect of the delay in the first payment to
Unitholders.
Risk Factors. An investment in the Trust should be made with an understanding
of the risks associated therewith, including, among other factors, the
inability of the issuer to pay the principal of or interest on a bond when
due, volatile interest rates, early call provisions, and changes to the tax
status of the Bonds. See "Risk Factors" Units of the Trusts are not
deposits or obligations of, or guaranteed or endorsed by, any bank and are not
federally insured or otherwise protected by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency and involve
investment risk, including the possible loss of principal.
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE
Both parts of this Prospectus should be retained for future reference.
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.
This Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Van Kampen American Capital
DESCRIPTION OF THE FUND
Each series of the Fund was created under the laws of the State of New York
pursuant to a Trust Indenture and Agreement (the "Trust Agreement",
dated the Date of Deposit, between Van Kampen American Capital Distributors,
Inc., as Sponsor, American Portfolio Evaluation Services, a division of Van
Kampen American Capital Investment Advisory Corp., as Evaluator, and The Bank
of New York, as Trustee, or their respective predecessors.
The Fund consists of the various series of the National Trust and the State
Trusts, each of which contains a portfolio of interest-bearing obligations
issued by or on behalf of states and territories of the United States, and
political subdivisions and authorities thereof, the interest on which is, in
the opinion of recognized bond counsel to the issuing authorities, excludable
from gross income for Federal income tax under existing law but may be subject
to state and local taxes. All issuers of Securities in a State Trust are
located in the state for which such Trust is named or in United States
territories or possessions and their public authorities; consequently, in the
opinion of recognized bond counsel to such issuers, the related interest
earned on such Securities is exempt to the extent indicated from state and
local taxes of such State. Interest on certain Bonds in the National Quality
AMT Trust will be a preference item for purposes of the alternative minimum
tax. Accordingly, the National Quality AMT Trust may be appropriate only for
investors who are not subject to the alternative minimum tax. Unless otherwise
terminated as provided therein, the Trust Agreement for each Trust will
terminate at the end of the calendar year prior to the fiftieth anniversary of
its execution (except for the Short Term Trusts in which case the termination
date is at the end of the calendar year prior to the sixth anniversary of its
execution). The portfolio of any State Trust or National Quality Trust
consists of Bonds maturing approximately 15 to 40 years from the Date of
Deposit.
Certain of the Bonds in certain of the Trusts are "zero coupon" bonds.
Zero coupon bonds are purchased at a deep discount because the buyer receives
only the right to receive a final payment at the maturity of the bond and does
not receive any periodic interest payments. The effect of owning deep discount
bonds which do not make current interest payments (such as the zero coupon
bonds) is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of such obligation.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest the income on such obligation at a rate as high as
the implicit yield on the discount obligation, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this
reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently. See Part One of
this Prospectus.
Each Unit of each Trust represents a fractional undivided interest in the
principal and net income of such Trust. To the extent that any Units of a
Trust are redeemed by the Trustee, the fractional undivided interest in such
Trust represented by each unredeemed Unit will increase, although the actual
interest in such Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor, or until the termination of the
Trust Agreement.
SECURITIES SELECTION
In selecting Securities for the Trusts the following facts, among others, were
considered by the Sponsor: (a) either the Standard & Poor's ("Standard &
Poor's" rating of the Securities was in no case less than "A" or
the Moody's Investors Service, Inc. rating of the Securities was in no case
less than "A" including provisional or conditional ratings,
respectively, or, if not rated, the Securities had, in the opinion of the
Sponsor, credit characteristics sufficiently similar to the credit
characteristics of interest-bearing tax-exempt obligations that were so rated
as to be acceptable for acquisition by a Trust (see "Description of
Securities Ratings", (b) the prices of the Securities relative to other
bonds of comparable quality and maturity and (c) the diversification of
Securities as to purpose of issue and location of issuer. Subsequent to the
Date of Deposit, a Security may cease to be rated or its rating may be reduced
below the minimum required as of the Date of Deposit. Neither event requires
elimination of such Security from the portfolio of a Trust but may be
considered in the Sponsor's determination as to whether or not to direct the
Trustee to dispose of the Security (see "Portfolio Administration".
To the best knowledge of the Sponsor, there is no litigation pending as of the
Date of Deposit in respect of any Securities which might reasonably be
expected to have a material adverse effect upon the Fund or any of the Trusts.
At any time after the Date of Deposit, litigation may be initiated on a
variety of grounds with respect to Securities in the Fund. Such litigation,
as, for ex ample, suits challenging the issuance of pollution control revenue
bonds under environmental protection statutes, may affect the validity of such
Securities or the tax-free nature of the interest thereon. While the outcome
of litigation of such nature can never be entirely predicted, the Fund has
received or will receive opinions of bond counsel to the issuing authorities
of each Security on the date of issuance to the effect that such Securities
have 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 meet obligations undertaken
with respect to the Securities.
RISK FACTORS
Certain of the Bonds in certain of the Trusts may be general obligations of a
governmental entity that are backed by the taxing power of such entity. In
view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. All other Bonds in the Trusts are revenue bonds
payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. There are, of course, variations in the
security of the different Bonds in the Fund, both within a particular
classification and between classifications, depending on numerous factors.
Certain of the Bonds in certain of the Trusts are obligations which derive
their payments from mortgage loans. Certain of such housing bonds may be FHA
insured or may be single family mortgage revenue bonds issued for the purpose
of acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned by
persons of low or moderate income. In view of this an investment in such a
Trust should be made with an understanding of the characteristics of such
issuers and the risks which such an investment may entail. Mortgage loans are
generally partially or completely prepaid prior to their final maturities as a
result of events such as sale of the mortgaged premises, default, condemnation
or casualty loss. Because these bonds are subject to extraordinary mandatory
redemption in whole or in part from such prepayments of mortgage loans, a
substantial portion of such bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates. Extraordinary
mandatory redemption without premium could also result from the failure of the
originating financial institutions to make mortgage loans in sufficient
amounts within a specified time period. Additionally, unusually high rates of
default on the underlying mortgage loans may reduce revenues available for the
payment of principal of or interest on such mortgage revenue bonds. These
bonds were issued under Section 103A of the Internal Revenue Code, which
Section contains certain requirements relating to the use of the proceeds of
such bonds in order for the interest on such bonds to retain its tax-exempt
status. In each case the issuer of the bonds has covenanted to comply with
applicable requirements and bond counsel to such issuer has issued an opinion
that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have
considered various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the housing bonds
held by the Trust, the Sponsor has not had any direct communications with any
of the issuers thereof, but at the Date of Deposit it was not aware that any
of the respective issuers of such Bonds were actively considering the
redemption of such Bonds prior to their respective stated initial call dates.
Certain of the Bonds in certain of the Trusts are health care revenue bonds.
In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Ratings of bonds issued for health care facilities
are often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and conditions
including, among other things, demand for services and the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, competition with other health care
facilities, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, government regulation
and the termination or restriction of governmental financial assistance,
including that associated with Medicare, Medicaid and other similar third
party payor programs. Pursuant to recent Federal legislation, Medicare
reimbursements are currently calculated on a prospective basis utilizing a
single nationwide schedule of rates. Prior to such legislation Medicare
reimbursements were based on the actual costs incurred by the health facility.
The current legislation may adversely affect reimbursements to hospitals and
other facilities for services provided under the Medicare program. Such
adverse changes also may adversely affect the ratings of Securities held in
the portfolios of the Fund.
Certain of the Bonds in certain of the Trusts are obligations of public
utility issuers, including those selling wholesale and retail electric power
and gas. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in
absorbing utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. All of such issuers have been
experiencing certain of these problems in varying degrees. In addition,
Federal, state and municipal governmental authorities may from time to time
review existing, and impose additional, regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely affect
the ability of the issuers of certain of the Bonds in the portfolio to make
payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts are industrial revenue bonds
("IRBs". In view of this an investment in such a Trust should be made
with an understanding of the characteristics of such issuers and the risks
which such an investment may entail. IRBs have generally been issued under
bond resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from a
corporate restructuring pursuant to a leveraged buy-out, takeover or
otherwise. Such a restructuring may result in the operator of a project
becoming highly leveraged which may impact on such operator's creditworthiness
which in turn would have an adverse impact on the rating and/or market value
of such Bonds. Further, the possibility of such a restructuring may have an
adverse impact on the market for and consequently the value of such Bonds,
even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
whose revenues are derived from the sale of water and/or sewerage services. In
view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Such bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate
rate increases, population decline resulting in decreased user fees, the
difficulty of financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, the increasing difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. All of such issuers have been
experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations that are
secured by lease payments of a governmental entity (hereinafter called "
lease obligations". In view of this an investment in such a Trust should
be made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Although the lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation lease is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. A governmental
entity that enters into such a lease agreement cannot obligate future
governments to appropriate for and make lease payments but covenants to take
such action as is necessary to include any lease payments due in its budgets
and to make the appropriations therefor. A governmental entity's failure to
appropriate for and to make payments under its lease obligation could result
in insufficient funds available for payment of the obligations secured
thereby. Although "non-appropriation" lease obligations are secured by
the leased property, disposition of the property in the event of foreclosure
might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes or
for higher education systems, from tuition, dormitory revenues, grants and
endowments. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which
such an investment may entail. General problems relating to school bonds
include litigation contesting the State constitutionality of financing public
education in part from ad valorem taxes, thereby creating a disparity in
educational funds available to schools in wealthy areas and schools in poor
areas. Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age
individuals, possible inability to raise tuitions and fees sufficiently to
cover increased operating costs, the uncertainty of continued receipt of
Federal grants and state funding, and government legislation or regulations
which may adversely affect the revenues or costs of such issuers. All of such
issuers have been experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation
of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers
and the risks which such an investment may entail. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Bonds related to other facilities is dependent
on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Resource recovery facilities are
designed to process solid waste, generate steam and convert steam to
electricity. Resource recovery bonds may be subject to extraordinary optional
redemption at par upon the occurrence of certain circumstances, including but
not limited to: destruction or condemnation of a project; contracts relating
to a project becoming void, unenforceable or impossible to perform; changes in
the economic availability of raw materials, operating supplies or facilities
necessary for the operation of a project or technological or other unavoidable
changes adversely affecting the operation of a project; administrative or
judicial actions which render contracts relating to the projects void,
unenforceable or impossible to perform; or impose unreasonable burdens or
excessive liabilities. The Sponsor cannot predict the causes or likelihood of
the redemption of resource recovery bonds in such a Trust prior to the stated
maturity of the Bonds.
BOND REDEMPTIONS
Because certain of the Bonds in certain of the Trusts may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and because the proceeds from such events will be distributed
to Unitholders and will not be reinvested, no assurance can be given that any
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.
Certain of the Bonds in certain of the Trusts may be subject to redemption
prior to their stated maturity date pursuant to sinking fund provisions, call
provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution
of principal and may result in a reduction in the amount of subsequent
interest distributions; it may also affect the current return on Units of the
Trust involved. Each Trust portfolio contains a listing of the sinking fund
and call provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Bonds or may require the mandatory
redemption of Bonds include, among others: a final determination that the
interest on the Bonds is taxable; the substantial damage or destruction by
fire or other casualty of the project for which the proceeds of the Bonds were
used; an exercise by a local, state or Federal governmental unit of its power
of eminent domain to take all or substantially all of the project for which
the proceeds of the Bonds were used; changes in the economic availability of
raw materials, operating supplies or facilities or technological or other
changes which render the operation of the project for which the proceeds of
the Bonds were used uneconomic; changes in law or an administrative or
judicial decree which renders the performance of the agreement under which the
proceeds of the Bonds were made available to finance the project impossible or
which creates unreasonable burdens or which imposes excessive liabilities,
such as taxes, not imposed on the date the Bonds are issued on the issuer of
the Bonds or the user of the proceeds of the Bonds; an administrative or
judicial decree which requires the cessation of a substantial part of the
operations of the project financed with the proceeds of the Bonds; an
overestimate of the costs of the project to be financed with the proceeds of
the Bonds resulting in excess proceeds of the Bonds which may be applied to
redeem Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Bonds. See "Trust Portfolio" and note (3) in "Notes
to Portfolio" in Part One of this Prospectus. See also the discussion of
single family mortgage and multi-family revenue bonds above for more
information on the call provisions of such bonds.
DISTRIBUTIONS
General. Distributions of interest received by a Trust, pro rated on an annual
basis, will be made semi-annually unless the Unitholder has elected to receive
them monthly or quarterly, if applicable. Distributions of funds from the
Principal Account, if any, will be made on a semi-annual basis, except under
certain special circumstances. See "Distributions of Interest and
Principal" below. Record dates for monthly distributions for each Trust
are the tenth day of each month and record dates for quarterly and semi-annual
distributions for each Trust are the tenth day of the months indicated under
"Per Unit Information" in Part One of this Prospectus. Distributions
are made on the fifteenth day of the month subsequent to the respective record
dates. Unitholders of the Short Term Trusts will only receive distributions
semi-annually with record dates being May 10 and November 10 of each year.
Unitholders of Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213-246 will receive distributions of income
and principal, if any, on a monthly basis.
Change of Distribution Option. The plan of distribution selected by a
Unitholder remains in effect until changed. Unitholders purchasing Units in
the secondary market will initially receive distributions in accordance with
the election of the prior owner. Unitholders may change the plan of
distribution in which they are participating. For the convenience of
Unitholders, the Trustee will furnish a card for this purpose; cards may also
be obtained upon request from the Trustee. Unitholders desiring to change
their plan of distribution may so indicate on the card and return it, together
with their certificate and such other documentation that the Trustee may then
require, to the Trustee. Certificates should only be sent by registered or
certified mail to minimize the possibility of their being lost or stolen. If
the card and certificate are properly presented to the Trustee, the change
will become effective for all subsequent distributions.
Distributions of Interest and Principal. Interest received by each Trust,
including that part of the proceeds of any disposition of Securities which
represents Purchased Interest, if any, and/or accrued interest, is credited by
the Trustee to the Interest Account for the appropriate Trust. Other receipts
are credited to the Principal Account for the appropriate Trust. All
distributions will be net of applicable expenses. The pro rata share of cash
in the Principal Account of a Trust will be computed as of the semi-annual
record date and distributions to the Unitholders as of such record date will
be made on or shortly after the twenty-fifth day of such month. For Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213-246 such computation and distribution will occur monthly. Proceeds
received from the disposition of any of the Securities after such record date
and prior to the following distribution date will be held in the Principal
Account and not distributed until the next distribution date. The Trustee is
not required to pay interest on funds held in any Principal or Interest
Account (but may itself earn interest thereon and therefore benefits from the
use of such funds) nor to make a distribution from the Principal Account
unless the amount available for distribution therein shall equal at least
$1.00 per Unit.
The distribution to the Unitholders of a Trust 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 such portion of the Unitholder's
prorata share of the Estimated Net Annual Interest Income in the Interest
Account of such Trust after deducting estimated expenses attributable as is
consistent with the distribution plan chosen. Only monthly distributions will
be available for Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213-246. Because interest payments are not
received by a Trust at a constant rate throughout the year, such interest
distribution may be more or less than the amount credited to such Interest
Account as of the record date. For the purpose of minimizing fluctuations in
the distributions from an Interest Account, the Trustee is authorized to
advance such amounts as may be necessary to provide interest distributions of
approximately equal amounts. The Trustee shall be reimbursed, without
interest, for any such advances from funds in the applicable Interest Account
on the ensuing record date. Persons who purchase Units between a record date
and a distribution date will receive their first distribution on the second
distribution date after the purchase, under the applicable plan of
distribution. Only monthly distributions will be available for Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213-246. As of the tenth day of each month, the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of each Trust. The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of
each Trust. Amounts so withdrawn shall not be considered a part of each
Trust's assets until such time as the Trustee shall return all or any part of
such amounts to the appropriate Accounts. In addition, the Trustee may
withdraw from the Interest and Principal Accounts such amounts as may be
necessary to cover redemptions of Units by the Trustee.
CERTIFICATES
The Trustee is authorized to treat as the record owner of Units that person
who is registered as such owner on the books of the Trustee. Ownership of
Units of the Trust is evidenced by separate registered certificates executed
by the Trustee and the Sponsor. Certificates are transferable by presentation
and surrender to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer. A Unitholder must sign exactly as his
name appears on the face of the certificate with the signature guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("
STAMP" or such other signature guaranty program in addition to or in
substitution for, STAMP, as may be acceptable to the Trustee. 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. Certificates will be
issued in denominations of one Unit or any multiple thereof.
Although no such charge is now made or contemplated, the Trustee may require a
Unitholder to pay a reasonable fee for each certificate re-issued (other than
as a result of a change in plan of distribution) or transferred and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity, evidence of
ownership and payment of expenses incurred. Mutilated certificates must be
surrendered to the Trustee for replacement.
ESTIMATED CURRENT RETURNS AND ESTIMATED LONG-TERM RETURNS
As of the opening of business on the date indicated therein, the Estimated
Current Returns, and the Estimated Long-Term Returns for each Trust under the
monthly, quarterly, if applicable, and semi-annual distribution plans were as
set forth under "Per Unit Information" for the applicable Trust in
Part One of this Prospectus. Estimated Current Return is calculated by
dividing the Estimated Net Annual Interest Income per Unit by the Public
Offering Price. The Estimated Net Annual Interest Income per Unit will vary
with changes in fees and expenses of the Trustee and the Evaluator and with
the principal prepayment, redemption, maturity, exchange or sale of Securities
while the Public Offering Price will vary with changes in the offering price
of the underlying Securities and with changes in Purchased Interest for those
series which contain Purchased Interest; therefore, there is no assurance that
the present Estimated Current Return will be realized in the future. Estimated
Long-Term Return is calculated using a formula which (1) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Securities in the Trust and (2) takes into account the expenses and sales
charge associated with each Trust Unit. Since the market values and estimated
retirements of the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will be realized
in the future. Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned while Estimated
Current Return calculations include only Net Annual Interest Income and Public
Offering Price.
ACCRUED INTEREST
Accrued Interest (Accrued Interest to Carry) Accrued interest to carry is
included in the Public Offering Price for Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi-Series 212 and prior series.
Accrued interest to carry consists of two elements. The first element arises
as a result of accrued interest which is the accumulation of unpaid interest
on a bond from the last day on which interest thereon was paid. Interest on
Securities in each Trust is actually paid either monthly, quarterly, if
applicable, or semi-annually to such Trust. However, interest on the
Securities in each Trust is accounted for daily on an accrual basis. Because
of this, each Trust always has an amount of interest earned but not yet
collected by the Trustee because of coupons that are not yet due. For this
reason, the Public Offering Price will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities
in such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that there
will generally be positive cash balances and since the funds held by the
Trustee may be used by it to earn interest thereon, it benefits thereby. If a
Unitholder sells or redeems all or a portion of his Units or if the Bonds in a
Trust are sold or otherwise removed or if a Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest to carry
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption.
Purchased and Accrued Interest. Included in the Public Offering Price for
Insured Municipals Income Trust, 152nd-173rd Insured Multi-Series and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213-246 is Purchased Interest and accrued interest.
Purchased Interest. Purchased Interest is a portion of the unpaid interest
that has accrued on the Securities from the later of the last payment date on
the Securities or the date of issuance thereof through the First Settlement
Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in Part One of this Prospectus for the amount of Purchased
Interest per Unit for each Trust. Purchased Interest is an element of the
price Unitholders will receive in connection with the sale or redemption of
Units prior to the termination of a Trust.
Accrued Interest. Accrued Interest is an accumulation of unpaid interest on
securities which generally is paid semi-annually, although a Trust accrues
such interest daily. Because of this, a Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reasons, the Public
Offering Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will receive on the
next distribution date of a Trust the amount, if any, of accrued interest paid
on their Units.
As indicated in "Purchased Interest" , accrued interest as of the First
Settlement Date includes Purchased Interest. In an effort to reduce the amount
of Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may advance a portion of such accrued interest to the Sponsor as
the Unitholder of record as of the First Settlement Date. Consequently, the
amount of accrued interest to be added to the Public Offering Price of Units
will include only accrued interest from the First Settlement Date to the date
of settlement (other than the Purchased Interest already included therein),
less any distributions from the Interest Account subsequent to the First
Settlement Date. See "Distributions--Distribution of Interest and
Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the Purchased Interest and accrued interest from
the purchaser of his Units. Since the Trustee has the use of the funds
(including Purchased Interest) held in the Interest Account for distributions
to Unitholders and since such Account is non-interest-bearing to Unitholders,
the Trustee benefits thereby.
Accrued Interest. Included in the Public Offering Price for Insured Municipal
Income Trust and Investors Quality Tax-Exempt Trust, Multi-Series 247 and
subsequent series is accrued interest. Accrued interest is an accumulation of
unpaid interest on securities which generally is paid semi-annually, although
the Trust accrues such interest daily. Because of this, the Trust always has
an amount of interest earned but not yet collected by the Trustee. For this
reason, with respect to sales settling subsequent to the First Settlement
Date, the Public Offering Price of Units will have added to it the
proportionate share of accrued interest to the date of settlement. Unitholders
will receive on the next distribution date of the Trust the amount, if any, of
accrued interest paid on their Units.
In an effort to reduce the amount of accrued interest which would otherwise
have to be paid by Unitholders, the Trustee will advance the amount of accrued
interest to the Sponsor as the Unitholder of record as of the First Settlement
Date. Consequently, the amount of accrued interest to be added to the Public
Offering Price of Units will include only accrued interest from the First
Settlement Date to the date of settlement, less any distributions from the
Interest Account subsequent to the First Settlement Date. See "Public
Offering--Distributions of Interest and Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the accrued interest from the purchaser of his
Units. Since the Trustee has the use of the funds held in the Interest Account
for distributions to Unitholders and since such Account is
non-interest-bearing to Unitholders, the Trustee benefits thereby.
PUBLIC OFFERING PRICE
Units are offered at the Public Offering Price. The secondary market public
offering price is based on the bid prices of the Securities in each Trust, an
applicable sales charge as determined in accordance with the tale set forth
below, which is based upon the estimated long term return of each Trust, cash,
if any, in the Principal Account held or owned by such Trust, accrued interest
and Purchased Interest, if any. For purposes of computation, Bonds will be
deemed to mature on their expressed maturity dates unless: (a) the Bonds have
been called for redemption or are subject to redemption on an earlier call
date, in which case such call date will be deemed to be the date upon which
they mature; or (b) such Bonds are subject to a "mandatory tender" , in
which case such mandatory tender will be deemed to be the date upon which they
mature.
The effect of this method of sales charge computation will be that different
sales charge rates will be applied to each Trust based upon the estimated long
term return life of such Trust's Portfolio, in accordance with the following
schedule:
<TABLE>
<CAPTION>
Years To Maturity Sales Charge Years To Maturity Sales Charge
<S> <C> <C> <C>
1 1.010% 12 4.712%
2 1.523 13 4.822
3 2.041 14 4.932
4 2.302 15 5.042
5 2.564 16 5.152
6 2.828 17 5.263
7 3.093 18 5.374
8 3.627 19 5.485
9 4.167 20 5.597
10 4.384 21 to 30 5.708
11 4.603
</TABLE>
The sales charges in the above table are expressed as a percentage of the
aggregate bid prices of the Securities in a Trust. Expressed as a percent of
the Public Offering Price (excluding Purchased Interest for those Trusts which
contain Purchased Interest), the sales charge on a Trust consisting entirely
of a portfolio of Bonds with 15 years to maturity would be 4.80%.
As indicated above, the price of the Units as of the opening of business on
the date of Part One of this Prospectus was determined by adding to the
determination of the aggregate bid price of the Securities an amount equal to
the applicable sales charge expressed as a percentage of the aggregate bid
price of the Securities plus Purchased Interest for those trusts which contain
Purchased Interest and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross commission equal to such sales
charged expressed as a percentage of the Public Offering Price.
For secondary market purposes an appraisal and adjustment with respect to a
Trust will be made by the Evaluator as of 4:00 P.M. Eastern time on days in
which the New York Stock Exchange is open for each day on which any Unit of
such Trust is tendered for redemption, and it shall determine the aggregate
value of any Trust as of 4:00 P.M. Eastern time at such other times as may be
necessary.
The aggregate price of the Securities in each Trust has been and will be
determined on the basis of bid prices as follows: (a) on the basis of current
market prices for the Securities obtained from dealers or brokers who
customarily deal in bonds comparable to those held by the Trust; (b) if such
prices are not available for any particular Securities, on the basis of
current market prices for comparable bonds; (c) by causing the value of the
Securities to be determined by others engaged in the practice of evaluation,
quoting or appraising comparable bonds; or (d) by any combination of the
above. Market prices of the Securities will generally fluctuate with changes
in market interest rates.
Although payment is normally made three business days following the order for
purchase, payment may be made prior thereto. A person will become the owner of
Units on the date of settlement provided payment has been received. Cash, if
any, made available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be deemed to
be a benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. Delivery of certificates representing Units so ordered
will be made three business days following such order or shortly thereafter.
See "Redemption of Units" below for information regarding the ability
to redeem Units ordered for purchase.
MARKET FOR UNITS
Although they are not obligated to do so, the Sponsor intends to, and certain
of the dealers may, maintain a market for the Units offered hereby and to
offer continuously to purchase such Units at prices, subject to change at any
time, based upon the aggregate bid prices of the Securities in the portfolio
of each Trust plus Purchased Interest, if any, plus interest accrued to the
date of settlement and plus any principal cash on hand, less any amounts
representing taxes or other governmental charges payable out of the Trust and
less any accrued Trust expenses. If the supply of Units exceeds demand or if
some other business reason warrants it, the Sponsor and/or the dealers may
either discontinue all purchases of Units or discontinue purchases of Units at
such prices. In the event that a market is not maintained for the Units and
the Unitholder cannot find another purchaser, a Unitholder of any Trust
desiring to dispose of his Units may be able to dispose of such Units only by
tendering them to the Trustee for redemption at the Redemption Price, which is
based upon the aggregate bid price of the Securities in the portfolio of such
Trust plus Purchased Interest, if any, and any accrued interest. The aggregate
bid prices of the underlying Securities in a Trust are expected to be less
than the related aggregate offering prices. See "Redemption of Units"
below. A Unitholder who wishes to dispose of his Units should inquire of his
broker as to current market prices in order to determine whether there is in
existence any price in excess of the Redemption Price and, if so, the amount
thereof.
REINVESTMENT OPTION
Unitholders of all unit investment trusts sponsored by Van Kampen American
Capital Distributors, Inc., may elect to have each distribution of interest
income, capital gains and/or principal on their Units automatically reinvested
in shares of any Van Kampen American Capital mutual funds (except for B
shares) which are registered in the Unitholder's state of residence. Such
mutual funds are hereinafter collectively referred to as the "Reinvestment
Funds"
Each Reinvestment Fund has investment objectives which differ in certain
respects from those of the Trusts. The prospectus relating to each
Reinvestment Fund describes the investment policies of such fund and sets
forth the procedures to follow to commence reinvestment. A Unitholder may
obtain a prospectus for the respective Reinvestment Funds from Van Kampen
American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Texas residents who desire to reinvest may request that a
broker-dealer registered in Texas send the prospectus relating to the
respective fund.
After becoming a participant in a reinvestment plan, each distribution of
interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as
directed by such person, as of such distribution date by the Trustee to
purchase shares (or fractions thereof) of the applicable Reinvestment Fund at
a net asset value as computed as of the close of trading on the New York Stock
Exchange on such date. Unitholders with an existing Guaranteed Reinvestment
Option (GRO) Program account (whereby a sales charge is imposed on
distribution reinvestments) may transfer their existing account into a new GRO
account which allows purchases of Reinvestment Fund shares at net asset value
as described above.
Confirmations of all reinvestments by a Unitholder into a Reinvestment Fund
will be mailed to the Unitholder by such Reinvestment Fund. A participant may
at any time prior to five days preceding the next succeeding distribution
date, by so notifying the Trustee in writing, elect to terminate his or her
reinvestment plan and receive future distributions of his or her Units in
cash. There will be no charge or other penalty for such termination. Each
Reinvestment Fund, its sponsor and investment adviser shall have the right to
terminate at any time the reinvestment plan relating to such fund.
REDEMPTION OF UNITS
A Unitholder may redeem all or a portion of his Units by tender to the Trustee
at its Unit Investment Trust Division, 101 Barclay Street, 20th Floor, New
York, New York 10286 of the certificates representing the Units to be
redeemed, duly endorsed or accompanied by proper instruments of transfer with
signature guaranteed (or by providing satisfactory indemnity, as in connection
with lost, stolen or destroyed certificates) and by payment of applicable
governmental charges, if any. Thus, redemption of Units cannot be effected
until certificates representing such Units have been delivered to the person
seeking redemption or satisfactory indemnity provided. No redemption fee will
be charged. On the third business day following such tender, the Unitholder
will be entitled to receive in cash an amount for each Unit equal to the
Redemption Price per Unit next computed after receipt by the Trustee of such
tender of Units. The "date of tender" is deemed to be the date on
which Units are received by the Trustee, except that as regards Units received
after 4:00 P.M. Eastern time on days 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.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold 20% of the principal amount of a Unit redemption if the
Trustee has not been furnished the redeeming Unitholder's tax identification
number in the manner required by such regulations. Any amount so withheld is
transmitted to the Internal Revenue Service and may be recovered by the
Unitholder only when filing a return. Under normal circumstances the Trustee
obtains the Unitholder's tax identification number from the selling broker.
However, at any time a Unitholder elects to tender Units for redemption, such
Unitholder should provide a tax identification number to the Trustee in order
to avoid this possible "back-up withholding" in the event the Trustee
has not been previously provided such number.
Purchased Interest, if any, and accrued interest paid on redemption shall be
withdrawn from the Interest Account of such Trust or, if the balance therein
is insufficient, from the Principal Account of such Trust. All other amounts
will be withdrawn from the Principal Account of such Trust. The Trustee is
empowered to sell underlying Securities of a Trust in order to make funds
available for redemption. Units so redeemed shall be cancelled.
The Redemption Price per Unit will be determined on the basis of the bid price
of the Securities in each Trust as of 4:00 P.M. Eastern time on days of
trading on the New York Stock Exchange on the date such determination is made.
While the Trustee has the power to determine the Redemption Price per Unit
when Units are tendered for redemption, such authority has been delegated to
the Evaluator which determines the price per Unit on a daily basis. The
Redemption Price per Unit is the pro rata share of each Unit in each Trust on
the basis of (i) the cash on hand in such Trust or moneys in the process of
being collected, (ii) the value of the Securities in such Trust based on the
bid prices of the Securities therein, (iii) Purchased Interest, if any, and
(iv) interest accrued thereon, less (a) amounts representing taxes or other
governmental charges payable out of such Trust and (b) the accrued expenses of
such Trust. The Evaluator may determine the value of the Securities in each
Trust by employing any of the methods set forth in "Public Offering
Price."
The price at which Units may be redeemed could be less than the price paid by
the Unitholder. As stated above, the Trustee may sell Securities to cover
redemptions. When Securities are sold, the size and diversity of the affected
Trust will be reduced. Such sales may be required at a time when Securities
would not otherwise be sold and might result in lower prices than might
otherwise be realized.
The right of redemption may be suspended and payment postponed for any period
during which the New York Stock Exchange is closed, other than for customary
weekend and holiday closings, or during which the Securities and Exchange
Commission determines that trading on that Exchange is restricted or an
emergency exists, as a result of which disposal or evaluation of the
Securities in a Trust is not reasonably practicable, or for such other periods
as the Securities and Exchange Commission may by order permit. Under certain
extreme circumstances the Sponsor may apply to the Securities and Exchange
Commission for an order permitting a full or partial suspension of the right
of Unitholders to redeem their Units.
REPORTS PROVIDED
The Trustee shall furnish Unitholders of a Trust in connection with each
distribution a statement of the amount of interest and, if any, the amount of
other receipts (received since the preceding distribution) being distributed
expressed in each case as a dollar amount representing the pro rata share of
each Unit of a Trust outstanding. For as long as the Trustee deems it to be in
the best interests of the Unitholders, the accounts of each Trust shall be
audited, not less frequently than annually, by independent certified public
accountants and the report of such accountants shall be furnished by the
Trustee to Unitholders of the respective Trusts upon request. Within a
reasonable period of time after the end of each calendar year, the Trustee
shall furnish to each person who at any time during the calendar year was a
registered Unitholder of a Trust a statement (i) as to the Interest Account:
interest received (including amounts representing interest received upon any
disposition of Securities) and the percentage of such interest by states in
which the issuers of the Securities are located, the amount of Purchased
Interest, if any, deductions for applicable taxes and for fees and expenses of
such Trust, for redemptions of Units, if any, and the balance remaining after
such distributions and deductions, expressed in each case 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; (ii) as to
the Principal Account: the dates of disposition of any Securities and the net
proceeds received therefrom (excluding any portion representing accrued
interest), the amount paid for redemptions of Units, if any, deductions for
payment of applicable taxes and fees and expenses of the Trustee 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; (iii) a
list of the Securities held and the number of Units outstanding on the last
business day of such calendar year; (iv) the Redemption Price per Unit based
upon the last computation thereof made during such calendar year; and (v)
amounts actually distributed during such calendar year from the Interest and
Principal Accounts, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Securities in the Trust furnished to it by the Evaluator.
Each distribution statement will reflect pertinent information in respect of
the other plan or plans of distribution so that Unitholders may be informed
regarding the results of such other distribution option or options.
FEDERAL TAX STATUS OF EACH TRUST
At the time of the closing for each Trust, Chapman and Cutler, Counsel for the
Sponsor, rendered an opinion under then existing law, substantially to the
effect that:
Each Trust is not an association taxable as a corporation for Federal income
tax purposes and interest and accrued original issue discount on Bonds which
is excludable from gross income under the Internal Revenue Code of 1986 (the
"Code" will retain its status when distributed to Unitholders;
however such interest may be taken into account in computing the alternative
minimum tax, an additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax", as noted below. A
Unitholder's share of the interest on certain Bonds in the National Quality
AMT Trust will be included as an item of tax preference for both individuals
and corporations subject to the alternative minimum tax ("AMT Bonds".
In the case of certain corporations owning Units, interest and accrued
original issue discount with respect to Bonds other than AMT Bonds held by a
Trust (including the National Quality AMT Trust) may be subject to the
alternative minimum tax, an additional tax on branches of foreign corporations
and the environmental tax (the "Superfund Tax";
Each Unitholder is considered to be the owner of a pro rata portion of the
respective Trust under subpart E, subchapter J of chapter 1 of the Code and
will have a taxable event when such Trust disposes of a Bond, or when the
Unitholder redeems or sells his Units. Unitholders must reduce the tax basis
of their Units for their share of accrued interest received by the respective
Trust, if any, on Bonds delivered after the Unitholders pay for their Units to
the extent that such interest accrued on such Bonds during the period from the
Unitholder's settlement date to the date such Bonds are delivered to the
respective Trust and, consequently, such Unitholders may have an increase in
taxable gain or reduction in capital loss upon the disposition of such Units.
Gain or loss upon the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis of the Units. If
the Trustee disposes of Bonds (whether by sale, payment on maturity,
redemption or otherwise), gain or loss is recognized to the Unitholder. The
amount of any such gain or loss is measured by comparing the Unitholder's pro
rata share of the total proceeds from such disposition with the Unitholder's
basis for his or her fractional interest in the asset disposed of. In the case
of a Unitholder who purchases Units, such basis (before adjustment for earned
original issue discount and amortized bond premium, if any) is determined by
apportioning the cost of the Units among each of the Trust assets ratably
according to value as of the valuation date nearest the date of acquisition of
the Units. The tax basis reduction requirements of the Code relating to
amortization of bond premium may, under some circumstances, result in the
Unitholder realizing a taxable gain when his Units are sold or redeemed for an
amount less than or equal to his original cost;
For purposes of computing the alternative minimum tax for individuals and
corporations and the Superfund Tax for corporations, interest on certain
private activity bonds (which includes most industrial and housing revenue
bonds) issued on or after August 8, 1986 such as the AMT Bonds, is included as
an item of tax preference. With the exception of certain Bonds in the National
Quality AMT Trust, the Trusts do not include any such AMT Bonds.
Sections 1288 and 1272 of the Code provide a complex set of rules governing
the accrual of original issue discount. These rules provide that original
issue discount accrues either on the basis of a constant compound interest
rate or ratably over the term of the Bond, depending on the date the Bond was
issued. In addition, special rules apply if the purchase price of a Bond
exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "
adjusted issue price" to prior owners. The application of these rules
will also vary depending on the value of the Bond on the date a Unitholder
acquires his Units and the price the Unitholder pays for his Units.
Unitholders should consult with their tax advisers regarding these rules and
their application.
"The Revenue Reconciliation Act of 1993" (the "Tax Act"
subjects tax-exempt bonds to the market discount rules of the Code effective
for bonds purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds an
investor's purchase price (except to the extent that such difference, if any,
is attributable to original issue discount not yet accrued), subject to a
statutory de minimis rule. Market discount can arise based on the price a
Trust pays for Bonds or the price a Unitholder pays for his or her Units.
Under the Tax Act, accretion of market discount is taxable as ordinary income;
under prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust holds a Bond would be recognized as
ordinary income by the Unitholders when principal payments are received on the
Bond, upon sale or at redemption (including early redemption), or upon the
sale or redemption of his or her Units, unless a Unitholder elects to include
market discount in taxable income as it accrues. The market discount rules are
complex and Unitholders should consult their tax advisers regarding these
rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depends upon
the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than an S Corporation, Regulated
Investment Company, Real Estate Investment Trust, or REMIC) is an amount equal
to 75% of the excess of such corporation's "adjusted current earnings"
over an amount equal to its alternative minimum taxable income (before such
adjustment item and the alternative tax net operating loss deduction). "
Adjusted current earnings" includes all tax exempt interest, including
interest on all of the Bonds in the Fund. Under the provisions of Section 884
of the Code, a branch profits tax is levied on the "effectively connected
earnings and profits" of certain foreign corporations which include
tax-exempt interest such as interest on the Bonds in the Trust. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units of a
Trust is not deductible for Federal income tax purposes. The Internal Revenue
Service has taken the position that such indebtedness need not be directly
traceable to the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to purchase or improve
a personal residence). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units. On December 7,
1995, the U.S. Treasury Department released proposed legislation that, if
enacted, would generally extend the financial institution rules to all
corporations, effective for obligations acquired after the date of
announcement. Investors with questions regarding this issue should consult
with their tax advisers.
In the case of certain of the Bonds in the Fund, 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 these Bonds, or persons
related thereto, for periods while such Bonds are held by such a user or
related person, will not be excludible from Federal gross income, although
interest on such Bonds received by others would be excludible from Federal
gross income. "Substantial user" and "related person" are
defined under the Code and U.S. Treasury Regulations. Any person who believes
that he or she may be a "substantial user" or a "related
person" as so defined should contact his or her tax adviser.
In the opinion of special counsel to the Fund for New York tax matters, under
existing law, the Fund and each Trust are not associations taxable as
corporations and the income of each Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other tax purposes are the opinions of counsel and are
to be so construed.
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
Fund of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35%, effective for long-term capital gains realized in
taxable years beginning on or after January 1, 1993. For taxpayers other than
corporations, net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year.
Section 86 of the Code, in general, provides that 50% of Social Security
benefits are includible in gross income to the extent that the sum of "
modified adjusted gross income" plus 50% of the Social Security benefits
received exceeds a "base amount" The base amount is $25,000 for
unmarried taxpayers, $32,000 for married taxpayers filing a joint return and
zero for married taxpayers who do not live apart at all times during the
taxable year and who file separate returns. Modified adjusted gross income is
adjusted gross income determined without regard to certain otherwise allowable
deductions and exclusions from gross income and by including tax-exempt
interest. To the extent that Social Security benefits are includible in gross
income, they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after December 31,
1993, up to 85% of Social Security benefits are includible in gross income to
the extent that the sum of "modified adjusted gross income" plus 50%
of Social Security benefits received exceeds an "adjusted base amount."
The adjusted base amount is $34,000 for unmarried taxpayers, $44,000 for
married taxpayers filing a joint return, and zero for married taxpayers who do
not live apart at all times during the taxable year and who file separate
returns.
Although tax-exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income, no tax-exempt interest, including
that received from a Trust, will be subject to tax. A taxpayer whose adjusted
gross income already exceeds the base amount or the adjusted base amount must
include 50% or 85%, respectively, of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A taxpayer whose
modified adjusted gross income (after inclusion of tax-exempt interest) does
not exceed the base amount need not include any Social Security benefits in
gross income.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation, corporations
subject to either the environmental tax or the branch profits tax, financial
institutions, certain insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and taxpayers
who may be deemed to have incurred (or continued) indebtedness to purchase or
carry tax-exempt obligations. Prospective investors should consult their tax
advisors as to the applicability of any collateral consequences. On December
7, 1995, the U.S. Treasury Department released proposed legislation that, if
adopted, could affect the United States federal income taxation of non-United
States Unitholders and the portion of the Trust's income allocable to
non-United States Unitholders.
For a discussion of the state tax status of income earned on Units of a Trust,
see "Tax Status" for the applicable Trust. Except as noted therein,
the exemption of interest on state and local obligations for Federal income
tax purposes discussed above does not necessarily result in exemption under
the income or other tax laws of any State or City. The laws of the several
States vary with respect to the taxation of such obligations.
RISK FACTORS AND STATE TAX STATUS OF STATE TRUSTS
The information below describes some of the more significant events relating
to the various State Trusts and sets forth the tax status of each State Trust
under applicable state law. The Sponsor makes no representation regarding the
accuracy or completion of the information, but believes it to be complete and
has itself relied upon such information. The portfolio of each State Trust
consists of obligations issued by entities located in such state or in the
Commonwealth of Puerto Rico.
Prospective investors should study with care the portfolio of Bonds in a Trust
and should consult with their investment advisors as to the merits of
particular issues in a portfolio.
Alabama Trusts
Alabama Economy. Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990, manufacturing accounted
for 26.7% of Alabama's Real Gross State Product (the total value of goods and
services produced in Alabama). During the 1960s and 1970s the State's
industrial base became more diversified and balanced, moving away from primary
metals into pulp and paper, lumber, furniture, electrical machinery,
transportation equipment, textiles (including apparel), chemicals, rubber and
plastics. Since the early 1980s, modernization of existing facilities and an
increase in direct foreign investments in the State has made the manufacturing
sector more competitive in domestic and international markets.
Among several leading manufacturing industries have been pulp and papers and
chemicals. In recent years Alabama has ranked as the fifth largest producer of
timber in the nation. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper. Mining, oil and gas
production and service industries are also important to Alabama's economy.
Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth potential
include the research and medical training and general health care industries,
most notably represented by the University of Alabama medical complex in
Birmingham and the high technology research and development industries
concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a comprehensive
measure of economic performance for the State of Alabama. Alabama's RGSP is
defined as the total value of all final goods and services produced in the
State in constant dollar terms. Hence, changes in RGSP reflect changes in
final output. From 1984 to 1990 RGSP originating in manufacturing increased by
22.99% whereas RGSP originating in all the non-manufacturing sectors grew by
17.88%.
Those non-manufacturing sectors exhibiting large percentage increases in RGSP
originating between 1984 and 1990 were 1) Services; 2) Trade; 3) Farming; and
4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP originating in
Services increased by 35.07%; Trade grew by 21.53%; Farming increased by
19.78%; and the gain in Finance, Insurance and Real Estate was 19.19%. The
present movement toward diversification of the State's manufacturing base and
a similar present trend toward enlargement and diversification of the service
industries in the State are expected to lead to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979, and
was followed by a decrease in activity. The national economic recession was
principally responsible for this decline. The State's industrial structure is
particularly sensitive to high interest rates and monetary policy, and the
resulting unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited the
State. The economic recovery experienced on the national level since 1982 has
been experienced in Alabama as well, but to a different degree and with a time
lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in certain
other Southeastern states. The national economic recession in the early 1980s
caused a decline in manufacturing activity and natural resource consumption,
and Alabama's unemployment rate was 14.4% in 1982, significantly higher than
the national average. Unemployment remains high in certain rural areas of the
State. A trend towards diversification of the State's economic base and an
expansion of service industries may lead to improved economic stability in the
future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing authority.
In addition, the Alabama Supreme Court has held that a governmental unit may
first use its taxes and other revenues to pay the expenses of providing
governmental services before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions which result in
a proration procedure in the event estimated budget resources in a fiscal year
are insufficient to pay in full all appropriations for that year. Proration
has a materially adverse effect on public entities that are dependent upon
State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and other
governmental revenues, as well as revenues to be used to service various
revenue obligations, such as industrial development obligations. Such
difficulties could affect the market value of the bonds held by the Alabama
Trust and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Alabama Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by
the Alabama Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the Fund
for Alabama tax matters rendered an opinion under then existing Alabama income
tax law applicable to taxpayers whose income is subject to Alabama income
taxation substantially to the effect that:
In the opinion of special counsel to the Fund for Alabama tax matters, under
existing Alabama income tax law applicable to taxpayers whose income is
subject to Alabama income taxation:
The Alabama Trust is not taxable as a corporation for purposes of the Alabama
income tax.
Income of the Alabama Trust, to the extent it is taxable, will be taxable to
the Unitholders, not the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trust's net income will be
treated as the income of the Unitholder for purposes of the Alabama income tax.
Interest on obligations held by the Alabama Trust which is exempt from the
Alabama income tax will retain its tax-exempt character when the distributive
share thereof is distributed or deemed distributed to each Unitholder.
Any proceeds paid to the Alabama Trust under insurance policies issued to the
Sponsor or under individual policies obtained by the Sponsor, the issuer or
underwriter of the respective obligations which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from Alabama income
tax if and to the same extent as such interest would be exempt from such taxes
if paid directly by the issuer of such obligations.
Each Unitholder will, for purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama Trust as though the Bonds were sold or disposed of
directly by the Unitholders.
Gains realized on the sale or redemption of Units by Unitholders, who are
subject to the Alabama income tax, will be includable in the Alabama income of
such Unitholders.
Arizona Trusts
The following brief summary regarding the economy of Arizona is based upon
information drawn from publicly available sources and is included for the
purpose of providing the information about general economic conditions that
may or may not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic sectors include services, tourism and manufacturing. Mining and
agriculture are also significant, although they tend to be more capital than
labor intensive. Services is the single largest economic sector. Many of these
jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may
be adversely affected by the closing of a major air force base near Phoenix
and the bankruptcy of several major employers, including America West Airlines.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting
surplus of completed inventory. This decline adversely affected both the
construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to experience problems
until the excess inventories of commercial and residential properties are
absorbed. The problems of the financial institutions have adversely affected
employment and economic activity. Longer-term prospects are brighter. Arizona
has been, and is projected to continue to be, one of the fastest growing areas
in the United States. Over the last several decades the State has outpaced
most other regions of the country in virtually every major category of growth,
including population, personal income, gross state product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ended June 30, 1995.
Total General Fund revenues of $4.3 billion are expected during fiscal year
1995. Approximately 44.5% of this budgeted revenue comes from sales and use
taxes, 44.4% from income taxes (both individual and corporate) and 4.4% from
property taxes. All taxes total approximately $4.0 billion, or 93% of General
Fund revenues. Non-tax revenue includes items such as income from the state
lottery, licenses, fees and permits, and interest.
For fiscal year 1994, the budget called for expenditures of approximately $4.1
billion. These expenditures fell into the following major categories:
education (47.4%), health and welfare (26.3%), protection and safety (4.0%),
general government (15.5%) and inspection and regulation, natural resources,
transportation and other (6.8%). The States's general fund expenditures for
fiscal year 1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value or marketability
of any of the Bonds issued by an entity other than the State of Arizona will
be affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded
indebtedness and other matters. For example, the state legislature cannot
appropriate revenues in excess of 7% of the total personal income of the state
in any fiscal year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in Roosevelt
Elementary School District Number 66, et al v. Dianne Bishop, et al (the "
Roosevelt Opinion". In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the
Arizona School Boards Association, with the approval of the appellants and the
appellees to the Roosevelt Opinion, and certain Arizona school districts,
filed with the Arizona Supreme court motions for clarification of the
Roosevelt Opinion, specifically with respect to seeking prospective
application of the Roosevelt Opinion. On July 29, 1994, the Arizona Supreme
Court clarified the Roosevelt Opinion to hold that such opinion will have
prospective effect only.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona
Trust. The Arizona Legislature has in the past sought to enact health care
cost control legislation. Certain other health care regulatory laws have
expired. It is expected that the Arizona legislature will at future sessions
continue to attempt to adopt legislation concerning health care cost control
and related regulatory matters. The effect of any such legislation or of the
continued absence of any legislation restricting hospital bed increased and
limiting new hospital construction on the ability of Arizona hospitals and
other health care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, Arizona Health Care
Cost Containment System ("AHCCCS", which provides health care to
indigent persons meeting certain financial eligibility requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed approximately
60% by federal funds, 29% by state funds, and 11% by county funds.
Under state law, hospitals retain the authority to raise with notification and
review by, but not approval from, the Department of Health Services. Hospitals
in Arizona have experienced profitability problems along with those in other
states. At least two Phoenix based hospitals have defaulted on or reported
difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operation costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric"
filed involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to
force Tucson Power to reorganize under the supervision of the bankruptcy
court. On December 31, 1991, the Bankruptcy Court approved the utility's
motion to dismiss the July petition after five months of negotiations between
Tucson Electric and its creditors to restructure the utility's debts and other
obligations. In December 1992, Tucson Electric announced that it had completed
its financial restructuring. In January 1993, Tucson Electric asked the
Arizona Corporation Commission for a 9.3% average rate increase. Tucson
Electric serves approximately 270,000 customers, primarily in the Tucson area.
Inability of any regulated public utility to secure necessary rate increases
could adversely affect, to an indeterminable extent, its ability to pay debt
service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6
million in tax refunds in fiscal year 1994. A combination of tax refunds and
tax credits will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations issued by
or on behalf of the State of Arizona (the "State", its political
subdivisions and authorities (the "Bonds", provided the interest on
such Bonds received by the Trust is exempt from State income taxes.
In the opinion of Chapman and Cutler counsel to the Sponsor, under existing
law:
For Arizona income tax purposes, each Unitholder will be treated as the owner
of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by the
Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes.
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed or
paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for correction of any discount or
amortization of any premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Unitholder's settlement
date and the date such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust which represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Arkansas Trusts
The Constitution of Arkansas specifically Prohibits the creation of any State
general obligation debt unless authorized in a Statewide general election.
Although the state of Arkansas defaulted on some of its general obligation
debt during the depression in the later 1930, it has not failed to pay the
principal and interest on any of its general obligations when due since that
time.
Act 496 of 1981, as amended, the "Arkansas Water Resources Development Act
of 1981," ("Act 496", authorizes the issuance of State Water
Resources Development General Obligation Bonds by the State of Arkansas,
acting by and through the Arkansas Soil and Water Conservation Commission. The
issuance of bonds pursuant to Act 496 was approved by the electors of the
State at the general election on November 2,1982. The total principal amount
of bonds issued during any fiscal biennium may not exceed $15,000,000, and the
total principal of all bonds issued under Act 496 may not exceed $100,000,000.
All bonds to be issued under Act 496 shall be direct general obligations of
the State, the principal and interest of which are payable from the general
revenues of the State. The State of Arkansas has outstanding two series of
bonds in the aggregate principal amount of approximately $34,725,000 under Act
496 as of January 1,1995.
Act 686 of 1987, the "Arkansas Waste Disposal and Pollution Abatement
Facilities Financing Act of 1987" ("Act 686", authorizes the
issuance of Arkansas Waste Disposal and Pollution Abatement Facilities General
Obligation Bonds by the State of Arkansas, acting by and through the Arkansas
Soil and Water Conservation Commission. The issuance of bonds pursuant to Act
686 was approved by the electors of the State at the general election on
November 8,1988. The total principal amount of bonds issued during any fiscal
biennium may not exceed $50,000,000, and the total principal of all bonds
issued under Act 686 may not exceed $250,000,000. All bonds to be issued under
Act 686 shall be direct general obligations of the State, the principal and
interest of which are payable from the general revenues of the State. The
State of Arkansas has outstanding two series of bonds in the aggregate
principal amount of approximately $20,720,000 under Act 686 as of January
1,1995.
Act 683 of 1989, the "Arkansas College Saving Bond Act of 1989" ("Act
683"), authorizes the issuance of Arkansas College Savings General Obligation
Bonds by the State of Arkansas, acting by and through the Arkansas Development
Finance Authority. The issuance of bonds pursuant to Act 683 was approved by
the electors of the State at the general election on November 6,1990. The
total principal amount of bonds issued during any fiscal biennium may not
exceed $100,000,000, and the total principal of all bonds issued under Act 683
may not exceed $300,000,000. All bonds to be issued under Act 683 shall be
direct general obligations of the State, the principal and interest of which
are payable from the general revenues of the State. The State of Arkansas has
outstanding four series of bonds in the aggregate principal amount of
approximately $88,666,069 under Act 683 as of June 30,1994.
Deficit spending has been prohibited by statute in Arkansas since 1945. The
Revenue Stabilization Law requires that before any State spending can take
place, there must be an appropriation by the General Assembly and there must
be funds available in the fund from which the appropriation has been made. The
State is prohibited from borrowing money to put into any State fund from which
appropriations can be paid.
Information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in Arkansas. The Arkansas economy represents
approximately 2.0% of the total United States' economy. Its small size causes
the Arkansas economy to follow the national economy. Fluctuations in the
national economy are often mirrored by coinciding or delayed fluctuations in
the Arkansas economy.
Arkansas' economy is both agricultural and manufacturing based. Thus, the
State of Arkansas feels the full force of the business cycle and also sees the
growth swing from positive to negative as conditions in agriculture change.
Agriculture has had a depressant effect on the Arkansas economy regardless of
the phase the business cycle was in. In recent years, agricultural employment
in Arkansas has been on the decline. From 1988 to 1989 and from 1989 to 1990,
agricultural employment declined by 1.6%. Employment in Arkansas' construction
industry decreased by 1.8% from 1989 to 1990 and by 4.4% from 1990 to 1991.
This followed a 2.3% decline from 1988 to 1989.
During the past two decades, Arkansas' economic base has shifted from
agriculture to light manufacturing. The State is now moving toward a heavier
manufacturing base involving more sophisticated processes and products such as
electrical machinery, transportation equipment, fabricated metals and
electronics. In fact, Arkansas now has a higher percentage of workers involved
in manufacturing than the national average. The diversification of economic
interest has lessened the States cyclical sensitivity to impact by any single
sector.
Manufacturing continues to be a leading component of Arkansas' economy.
Manufacturing contributes over 25% of the total wage and salary component of
personal income. There is an almost equal division between durable and
nondurable goods. Non-manufacturing and non-agricultural goods provide a
balanced proportion of the overall economy and tend to insulate any adverse
economic conditions which affect manufacturing. Manufacturing employment in
Arkansas had an average annual growth of 0.9% from 1990 to 1992.
From 1990 to 1992, total employment had an average annual increase of 2.1% and
total nonagricultural payrolls had an average annual increase of 7.2%. The
average unemployment rate decreased from 7.2% in 1992 to 6.2% in 1993. Total
personal income had an average annual growth of 7.4% from 1990 to 1992. Per
capita personal income increased from $13,779 in 1990 to $15,635 in 1992,
reflecting an average annual growth of 6.%%. Retail sales had an average
annual increase of 1.1% from 1990 to 1992.
Counties and municipalities may issue general obligation bonds (pledging an ad
valorem tax), special obligation bonds (pledging other specific tax revenues)
and revenue bonds (pledging only specific revenues from sources other than tax
revenues). School districts may issue general obligation bonds (pledging ad
valorem taxes). Revenue bonds may also be issued by agencies and
instrumentalities of counties, municipalities and the State of Arkansas but,
as in all cases of revenue bonds, neither the full faith and credit nor the
taxing power of the State of Arkansas or any municipality or county thereof is
pledged to the repayment of those bonds. Revenue bonds can be issued only for
public purposes, including, but not limited to, industry, housing, health care
facilities, airports, port facilities and water and sewer projects.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete description of all adverse conditions to which the
issuers in the Arkansas Trust are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could affect or
could have an adverse impact on the financial condition of the State, various
agencies and political subdivisions and private businesses located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Arkansas Trust to pay interest on or principal of the
Bonds.
At the time of the closing for each Arkansas Trust, Special Counsel to each
Arkansas Trust for Arkansas tax matters rendered an opinion under then
existing Arkansas income tax law applicable to taxpayers whose income is
subject to Arkansas income taxation substantially to the effect that:
The Arkansas Trust is not an association taxable as a corporation or otherwise
for purposes of Arkansas income taxation;
Each Arkansas Unitholder will be treated as the owner of a pro rata portion of
the Arkansas Trust for Arkansas income tax purposes, and will have a taxable
event when the Arkansas Trust disposes of a Bond or when the Unitholder sells,
exchanges, redeems or otherwise disposes of his Units;
Any gains realized upon the sale, exchange, maturity, redemption or other
disposition of Bonds held by the Arkansas Trust resulting in the distribution
of income to Arkansas Unitholders will be subject to Arkansas income taxation
to the extent that such income would be subject to Arkansas income taxation if
the Bonds were held, sold, exchanged, redeemed or otherwise disposed of by the
Arkansas Unitholders; and
Interest on Bonds, issued by the State of Arkansas, or by or on behalf of
political subdivisions, thereof, that would be exempt from Federal income
taxation when paid directly to an Arkansas Unitholder will be exempt from
Arkansas income taxation when received by the Arkansas Trust and attributed to
such Arkansas Unitholder and when distributed to such Arkansas Unitholder.
California Trusts
The Trust will invest substantially all of its assets in California Municipal
Obligations. The Trust is therefore susceptible to political, economic or
regulatory factors affecting issuers of California Municipal Obligations.
These include the possible adverse effects of certain California
constitutional amendments, legislative measures, voter initiatives and other
matters that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State" and is derived from sources that are
generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any
of the following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of almost 32 million represents 12.3% of
the total United States population and grew by 27% in the 1980s. While the
State's substantial population growth during the 1980s stimulated local
economic growth and diversification and sustained a real estate boom between
1984 and 1990, it has increased strains on the State's limited water resources
and its infrastructure. Resultant traffic congestion, school over-crowding and
high housing costs have increased demands for government services and may
impede future economic growth. Population growth has slowed between 1991 and
1993 even while substantial immigration has continued, due to a significant
increase in denigration by California residents. Generally, the household
incomes of new residents have been departing households, which may have a
major long-term socioeconomic and fiscal impact. However, with the California
economy improving, the recent net outmigration within the Continental U.S. is
expected to decrease or be reversed.
From mid-1990 to late 1993, the State's economy suffered its worst recession
since the 1930s, with recovery starting later than for the nation as a whole.
The State has experienced the worst job losses of any post-war recession.
Prerecession job levels may not be realized until near the end of the decade.
The largest job losses have been in Southern California, led by declines in
the aerospace and construction industries. Weakness statewide occurred in
manufacturing, construction, services and trade. Additional military base
closures will have further adverse effects on the State's economy later in the
decade.
Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, transportation, recreation and services. This growth has offset the
continuing but slowing job losses in the aerospace industry and restructuring
of the finance and utility sectors, Unemployment in the State was down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate. Retail sales were up strongly in 1994
from year-earlier figures. Delay or slowdown in recovery will adversely affect
State revenues.
Certain California Municipal Obligations may be obligations of issuers which
rely in whole or in part, directly or indirectly, on ad valorem property taxes
as a source of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California Constitution, enacted
by the voters in 1978 and commonly known as "Proposition 13." Briefly,
Article XIIIA limits to 1% of full cash value the rate of ad valorem property
taxes on real property and generally restricts the reassessment of property to
2% per year, except upon new construction or change of ownership (subject to a
number of exemptions). Taxing entities may, however, raise ad valorem taxes
above the 1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special
tax." Court decisions, however, allowed non-voter approved levy of "
general taxes" which were not dedicated to a specific use. In response to
these decisions, the voters of the State in 1986 adopted an initiative statute
which imposed significant new limits on the ability of local entities to raise
or levy general taxes, except by receiving majority local voter approval.
Significant elements of this initiative, "Proposition 62," have been
overturned in recent court cases. An initiative proposed to re-enact the
provisions of Proposition 62 as a constitutional amendment was defeated by the
voters in November 1990, but such a proposal may be renewed in the future.
California and its local governments are subject to an annual "
appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending "
appropriations subject to limitation" in excess of the appropriations
limit imposed. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," which consists of tax
revenues and certain other funds, including proceeds from regulatory licenses,
user charges or other fees, to the extent that such proceeds exceed the cost
of providing the product or service, but "proceeds of taxes" excludes
most State subventions to local governments. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees and certain other non-tax funds, including
bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, (2) appropriations arising
from certain emergencies declared by the Governor, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to follow more closely
growth in California's economy.
"Excess" revenues are measured over a two-year cycle. With respect to
local governments, excess revenues must be returned by a revision of tax rates
or fee schedules within the two subsequent fiscal years. The appropriations
limit for a local government may be overridden by referendum under certain
conditions for up to four years at a time. With respect to the State, 50% of
any excess revenues is to be distributed to K-12 school districts and
community college districts (collectively, "K-14 districts" and the
other 50% is to be refunded to taxpayers. With more liberal annual adjustment
factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California Municipal Obligations or on the ability of
California or local governments to pay debt service on such California
Municipal Obligations. It is not presently possible to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Future initiative or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. Total
outstanding general obligation bond and lease purchase debt of the State
increased from $9.4 billion at June 30, 1987 to $23.5 billion at June 30,
1994. In FY 1993-94, debt service on general obligation bonds and lease
purchase debt was approximately 5.2% of General Fund revenues.
The principal sources of General Fund revenues in 1993-94 were the California
personal income tax (44% of total revenues), the sales tax (35%), bank and
corporation taxes (12%), and the gross premium tax on insurance (3%).
California maintains a Special Fund for Economic Uncertainties (the "
Economic Uncertainties Fund", derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund.
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
33%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. These structural
concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
As a result of these factors, among others, from the late 1980's until
1992-1993, the State had a period of nearly chronic budget imbalance, with
expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the Special
Fund for Economic Uncertainties ("SFEU" approaching $2.8 billion at
its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
year thereafter, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance and to close large "
budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
years 1991-92 to 1994-95, including: significant cuts in health and welfare
program expenditures; transfers of program responsibilities and funding from
the State to local governments, coupled with some reduction in mandates on
local government; transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other
districts to local school districts, thereby reducing State funding for
schools; reduction in growth of support for higher education programs, coupled
with increases in student fees; revenue increases (particularly in the 1992-92
Fiscal Year budget), most of which were for a short duration; increased
reliance on aid from the federal government to offset the costs of
incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal
aid than the State Administration has requested) and various on-time
adjustments and accounting changes.
Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive
balances. By the start of the 1993-94 Fiscal Year, the accumulated deficit was
so large (almost $2.8 billion) that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end
of the fiscal year. When the economy failed to recover sufficiently in
1993-94, a second two-year plan was implemented in 1994-95, to carry the final
retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94
and 1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995.
A consequence of the accumulated budget deficits in the early 1990's, together
with other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to
pay its ongoing obligations. When the Legislature and the Governor failed to
adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have
allowed the State to carry out its normal annual cash flow borrowing to
replenish its cash reserves, the State Controller was forced to issue
registered warrants ("IOUs" to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from
court orders. Available funds were used to make constitutionally-mandated
payments, such as debt service on bonds and warrants. Between July 1 and
September 4, 1992 the State Controller issued a total of approximately $3.8
billion of registered warrants. After that date, all remaining outstanding
registered warrants (about $2.9 billion) were called for redemptions from
proceeds of the issuance of 1992 Interim Notes after the budget was adopted.
The State's cash condition became so serious in late spring of 1992 that the
State Controller was required to issue revenue anticipation warrants maturing
in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt
markets to meet its cash needs, as a succession of notes and warrants (both
forms of short-term cash flow financing) were issued in the period from June
1992 to July 1994, often needed to pay previously-maturing notes or warrants.
These borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year.
The State issued $7.0 billion of short-term debt in July, 1994 to meet its
cash flow needs and to finance the deferral of part of the accumulated budget
deficit to the 1995-96 fiscal year. In order to assure repayment of the $4
billion, 22-month part of this borrowing, the State enacted legislation (the
"Trigger Law" which can lead to automatic, across-the-board cuts in
General Fund expenditures in either the 1994-95 or 1995-96 fiscal years if
cash flow projections made at certain times during those years show
deterioration from the projections made in July 1994 when the borrowings were
made. On November 15, 1994, the State Controller as part of the Trigger Law
reported that the cash position of the General Fund on June 30, 1995 would be
about $580 million better than earlier projected, so no automatic budget
adjustments were required in 1994-95. The Controller's report showed that loss
of federal funds was offset by higher revenues, lower expenditures, and
certain other increases in cash resources.
For the first time in four years, the State entered the 1995-96 fiscal year
with strengthening revenues based on an improving economy. The major feature
of the Governor's proposed Budget, a 15% phased tax cut, was rejected by the
Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34 days
after the start of the fiscal year. The Budget Act projects General Fund
revenues and transfers of $44.1 billion. Expenditures are budgeted at $43.4
billion. The Department of Finance projects that, after repaying the last of
the carryover budget deficit, there will be positive balance of less than $30
million in the budget reserve, the Special Fund for Economic Uncertainties, at
June 30, 1996, providing no margin for adverse results during the year.
The Department of Finance projects cash flow borrowings in the 1995-96 Fiscal
Year will be the smallest in many years, comprising about $2 billion of notes
to be issued in April, 1996, and maturing by June 30, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the
Department sees no further need for borrowing over the end of the fiscal year.
The Department projects that available cash resources to pay State obligations
will be almost $2 billion at June 30, 1996. This "cushion" will be
re-examined by the State Controller on October 15, 1995, in the third step in
the Budget Adjustment Law process. If the Controller believes the available
cash resources on June 30, 1996 will, in fact, be zero or less, her report
would start a process which could lead to automatic budget cuts starting in
December, 1995.
The principal features of the 1995-96 Budget Act, in addition to those noted
above, are additional cuts in health and welfare expenditures (some of which
are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.
State general obligation bonds ratings were reduced in July, 1994 to "
A1" by Moody's and "A" by S&P. Both of these ratings were reduced
from "AAA" levels which the State held until late 1991. There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of the State
to make payment on such local obligations in the event of default.
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require
the State to make significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include a deferral of
payments by the State to the Public Employees Retirement System, reductions in
welfare payments, and the use of certain cigarette tax funds for health costs.
All of these cases are subject to further proceedings and appeals, and if the
State eventually loses, the final remedies may not have to be implemented in
one year.
There are a number of State agencies, instrumentalities and political
subdivisions of the State that issue Municipal Obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and
the credit quality of the securities issued by them may vary considerably from
the credit quality of the obligations backed by the full faith and credit of
the State.
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. Total local assistance from the
State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years, including the effect of implementing reductions
in certain aid programs. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local governments to
transfer $3.9 billion of property tax revenues to school districts,
representing loss of the post-Proposition 13 "bailout" aid. The
largest share of these transfers came from counties, and the balance from
cities, special districts and redevelopment agencies. In order to make up this
shortfall, the Legislature proposed and voters approved in 1993 dedicating
0.5% of the sales tax to counties and cities for public safety purposes. In
addition, the Legislature has changed laws to relieve local governments of
certain mandates, allowing them to reduce costs.
To the extent the State should be constrained by its Article XIII
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be further reduced. Any such reductions in
State aid could compound the serious fiscal constraints already experienced by
many local governments, particularly counties. At lease one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in
August 1990, although such plans were put off after the Governor approved
legislation to provide additional funds for the county. Other counties have
also indicated that their budgetary condition is extremely grave. The Richmond
Unified School District (Contra Costa County) entered bankruptcy proceedings
in May 1991 but the proceedings have been dismissed. Los Angeles County, the
largest in the State, has reported severe fiscal problems, leading to a
nominal $1.2 billion deficit in its $11 billion budget for the 1995-96 Fiscal
Year. To balance the budget, the county has imposed severe cuts in services,
particularly for health care. The Legislature is considering actions to help
alleviate the County's fiscal problems, but none were completed before August
15, 1995. As a result of its bankruptcy proceedings (discussed further below)
Orange County also has implemented stringent cuts in services and has laid off
workers.
California Municipal Obligations which are assessment bonds may be adversely
affected by a general decline in real estate values or a slowdown in real
estate sales activity. In many cases, such bonds are secured by land which is
undeveloped at the time of issuance but anticipated to be developed within a
few years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed,
the lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds
in the event of delinquency in the payment of assessments or taxes, except
from amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically payable from
the general fund of the municipality, are subject to "abatement" in
the event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not a
default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs.
The most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Several years ago the Richmond Unified School District (the "District"
) entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were
taken over by a State receiver (including a brief period under bankruptcy
court protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The trial
court has upheld the validity of the District's lease, and the case has been
settled. Any judgment in any future case against the position asserted by the
Trustee in the Richmond case may have adverse implications for lease
transactions of a similar nature by other California entities.
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (e.g., because of a major
natural disaster such as an earthquake), the tax increment revenue may be
insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after the
enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
Issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Northern California in 1989 and Southern California in
1994 experienced major earthquakes causing billions of dollars in damages. The
federal government provided more than $1.8 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Portfolio could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
On January 17, 1994, a major earthquake with an estimated magnitude 6.8 on the
Richter scale struck the Los Angeles area, causing significant property damage
to public and private facilities, presently estimated at $15-20 billion. While
over $9.5 billion of federal aid, and a projected $1.9 billion of State aid,
plus insurance proceeds, will reimburse much of that loss, there were bill be
come ultimate loss of health and income in the region, in addition to costs of
the disruption caused by the event. Short-term economic projections are
generally neutral, as the infusion of aid will restore billions of dollars to
the local economy within a few months; already the local construction industry
has picked up. Although the earthquake will hinder recovery from the recession
in Southern California, already hard-hit, its long-term impact is not expected
to be material in the context of the overall wealth of the region. Almost five
years after the event, there are few remaining effects of the 1989 Loma Prieta
earthquake in northern California (which, however, caused less severe damage
than Northridge).
On December 7, 1994, Orange County, California (the "County",
together with its pooled investment fund (the "Pools" filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Pools had suffered significant market losses in its investments caused a
liquidity crisis for the Pools and the County. Approximately 180 other public
entities, most but not all located in the County, were also depositors in the
Pools. The County estimated the Pools' loss at about $1.64 billion, or 23%, of
its initial deposits of around $7.5 billion. Many of the entities which kept
moneys in the Pools, including the County, faced cash flow difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects. Moody's and Standard & Poor's have suspended, reduced to
below investment grade levels, or placed on "Credit Watch" various
securities of the County and the entities participating in the Pools.
On May 2, 1995, the Bankruptcy Court approved a settlement agreement covering
claims of the other participating entities against the County and the Pools.
Most participants have received in cash 80% (90% for school districts) of
their Pools' investment; the balance is to be paid in the future. The County
succeeded in deferring, by consent, until June 30, 1996, the repayment of $800
million of short-term obligations due in July and August, 1995; these notes
are, however, considered to be in default by Moody's and S&P. On June 27,
1995, County voters turned down a proposal for a temporary 0.5% increase in
the local sales tax, making the County's fiscal recovery much harder.
The State of California has no obligation with respect to any obligations or
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate. All school districts were
able to meet their obligations in the 1994-95 Fiscal Year.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
In the opinion of Orrick, Herrington & Sutcliffe, special counsel to the Fund
for California tax matters, under existing California income and property tax
law applicable to individuals who are California residents:
the California Trust is not an association taxable as a corporation and the
income of the California Trust will be treated as the income of the
Unitholders under the income tax laws of California;
amounts treated as interest on the underlying Securities in the California
Trust which are exempt from tax under California personal income tax and
property tax laws when received by the California Trust will, under such laws,
retain their status as tax-exempt interest when distributed to Unitholders.
However, interest on the underlying Securities attributed to a Unitholder
which is a corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its California
franchise tax. Further, certain interest which is attributable to a Unitholder
subject to the California personal income tax and which is treated as an item
of tax preference for purposes of the federal alternative minimum tax pursuant
to Section 57(a)(5) of the Internal Revenue Code of 1986 may also be treated
as an item of tax preference that must be taken into account in computing such
Unitholder's alternative minimum taxable income for purposes of the California
alternative minimum tax enacted by 1987 California Statutes, chapter 1138.
However, because of the provisions of the California Constitution exempting
the interest on bonds issued by the State of California, or by local
governments within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise exempt from
the California personal income tax in some cases may be unclear;
under California income tax law, each Unitholder in the California Trust will
have a taxable event when the California Trust disposes of a Security (whether
by sale, exchange, redemption, or payment at maturity) or when the Unitholder
redeems or sells Units. Because of the requirement that tax cost basis be
reduced to reflect amortization of bond premium, under some circumstances a
Unitholder may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost of each
Unit in the California Trust to a Unitholder is allocated among each of the
Bond issues held in the California Trust (in accordance with the proportion of
the California Trust comprised by each Bond issue) in order to determine his
per Unit tax cost for each Bond issue; and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per Unit
tax cost of each Bond issue. Unitholders' bases in their units, and the bases
for their fractional interest in each Trust asset, may have to be adjusted for
their pro rata share of accrued interest received, if any, on Securities
delivered after the Unitholders' respective settlement dates;
under the California personal property tax laws, bonds (including the
Securities in the California Trust) or any interest therein is exempt from
such tax;
any proceeds paid under the insurance policy issued to the California Trust
with respect to the Securities which represent maturing interest on defaulted
obligations held by the Trustee will be exempt from California personal income
tax if, and to the same extent as, such interest would have been so exempt if
paid by the issuer of the defaulted obligations; and
under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units of
the California Trust is not deductible for the purposes of the California
personal income tax. While there presently is no California authority
interpreting this provision, Section 17280(b)(2) directs the California
Franchise Tax Board to prescribe regulations determining the proper allocation
and apportionment of interest costs for this purpose. The Franchise Tax Board
has not yet proposed or prescribed such regulations. In interpreting the
generally similar Federal provision, the Internal Revenue Service has taken
the position that such indebtedness need not be directly traceable to the
purchase or carrying of Units (although the Service has not contended that a
deduction for interest on indebtedness incurred to purchase or improve a
personal residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or other
California authority, the California Franchise Tax Board generally has
interpreted California statutory tax provisions in accord with Internal
Revenue Service interpretations of similar Federal provisions.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Orrick, Herrington & Sutcliffe acted as bond counsel to issuers of Securities,
and as such made a review of proceedings relating to the issuance of certain
Securities at the time of their issuance, Orrick, Herrington & Sutcliffe has
not made any special review for the California Trust of the proceedings
relating to the issuance of the Securities or of the basis for such opinions.
Colorado Trust
The State Constitution requires that expenditures for any fiscal year not
exceed revenues for such fiscal year. By statute, the amount of General Fund
revenues available for appropriation is based upon revenue estimates which,
together with other available resources, must exceed annual appropriations by
the amount of the unappropriated reserve (the "Unappropriated Reserve"
). The Unappropriated Reserve requirement for fiscal year 1991, 1992 and 1993
was set at 3% of total appropriations from the General Fund. For fiscal years
1994 and thereafter, the Unappropriated Reserve requirement is set at 4%. In
addition to the Unappropriated Reserve, a constitutional amendment approved by
Colorado voters in 1992 requires the State and each local government to
reserve a certain percentage of its fiscal year spending (excluding bonded
debt service) for emergency use (the "Emergency Reserve". The minimum
Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years. For
fiscal year 1992 and thereafter, General Fund appropriations are also limited
by statute to an amount equal to the cost of performing certain required
reappraisals of taxable property plus an amount equal to the lesser of (i)
five percent of Colorado personal income or (ii) 106% of the total General
Fund appropriations for the previous fiscal year. This restriction does not
apply to any General Fund appropriations which are required as a result of a
new federal law, a final state or federal court order or moneys derived from
the increase in the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election. In
addition, the statutory limit on the level of General Fund appropriations may
be exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1993 fiscal General Fund balance was $326.8 million, which was $196.9
million over the combined Unappropriated Reserve and Emergency Reserve
requirement. The 1994 fiscal year ending General Fund balance was $405.1
million, or $234.0 million over the required Unappropriated Reserve and
Emergency Reserve. Based on June 20, 1995 estimates, the 1995 fiscal year
ending General Fund balance is expected to be $427.0 million, or $204.8
million over the required Unappropriated Reserve and Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment" which, in general, became effective December 31,
1992, and which could restrict the ability of the State and local governments
to increase revenues and impose taxes. The Amendment applies to the State and
all local governments, including home rule entities ("Districts".
Enterprises, defined as government-owned businesses authorized to issue
revenue bonds and receiving under 10% of annual revenue in grants from all
Colorado state and local governments combined, are excluded from the
provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to
the Amendment, local government spending is to be limited by the same formula
as the limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in State population in the
prior calendar year. The basis for initial spending and revenue limits are
fiscal year 1992 spending and 1991 property taxes collected in 1992. The basis
for spending and revenue limits for fiscal year 1994 and later years will be
the prior fiscal year's spending and property taxes collected in the prior
calendar year. Debt service changes, reductions and voter-approved revenue
changes are excluded from the calculation basis. The Amendment also prohibits
new or increased real property transfer tax rates, new State real property
taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment has been
brought in the Colorado courts. The litigation deals with three principal
issues: (i) whether Districts can increase mill levies to pay debt service on
general obligation bonds without obtaining voter approval; (ii) whether a
multi-year lease purchase agreement subject to annual appropriations is an
obligation which requires voter approval prior to execution of the agreement;
and (iii) what constitutes an "enterprise" which is excluded from the
provisions of the Amendment. In September, 1994, the Colorado Supreme Court
held that Districts can increase mill levies to pay levies to pay debt service
on general obligation bonds issued after the effective date of the Amendment;
in June, 1995 the Colorado Supreme Cort validated mill levy increases to pay
general obligation bonds issued prior to the Amendment. In late 1994, the
Colorado Court of Appeals held that multi-year lease-purchase agreements
subject to annual appropriation do not require voter approval. The time to
file an appeal in that case has expired. Finally, in May, 1995, the Colorado
Supreme Court ruled that entities with the power to levy taxes may not
themselves be "enterprises" for purposes of the Amendment; however,
the Court did not address the issue of how valid enterprises may be created.
Future litigation in the "enterprise" arena may be filed in the future
to clarify these issues.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1994-95,
June 20, 1995 (the "Economic Report", inflation for 1993 was 4.2% and
population grew at the rate of 2.9% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1995 fiscal year will be
limited to 7.1% over expenditures during the 1994 fiscal year. The 1994 fiscal
year is the base year for calculating the limitation for the 1995 fiscal year.
The limitation for the 1996 fiscal year is projected to be 7.0%, based on
projected inflation of 4.4% for 1994 and projected population growth of 2.6%
during 1994. For the 1994 fiscal year, General Fund revenues totalled $3,725.2
million and program revenues (cash funds) totalled $1,659.9 million, resulting
in total estimated base revenues of $5,385.1 million. Expenditures for the
1995 fiscal year, therefore, cannot exceed $5,767.4 million. However, the 1995
fiscal year General Fund and program revenues (cash funds) are projected to be
only $5,664.7 million, or $102.7 million less than expenditures allowed under
the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$16.3 million in fiscal year 1991, $133.3 million in fiscal year 1992, $326.6
million in fiscal year 1993 and $320.4 million in fiscal year 1994. The fiscal
year 1995 unrestricted General Fund is currently projected to be $427.0
million.
For fiscal year 1994, the following tax categories generated the following
respective revenue percentages of the State's $3,725.2 million total gross
receipts: individual income taxes represented 51.5% of gross fiscal year 1994
receipts; sales, use and excise taxes represented 32.4% of gross fiscal year
1994 receipts; and corporate income taxes represented 3.9% of gross fiscal
year 1994 receipts. The final budget for fiscal year 1995 projects General
Fund revenues of approximately $3,929.6 million and appropriations of
approximately $3,905.9 million. The percentages of General Fund revenue
generated by type of tax for fiscal year 1995 are not expected to be
significantly different from fiscal year 1994 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of financing
for such local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or enterprise
or from the proceeds of an excise tax, or assessment bonds payable from
special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1994 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the
State's economy and of Denver as a regional economic and transportation hub.
The government and manufacturing sectors followed as the next largest
employment sectors in the State, representing approximately 17.5% and 10.9%,
respectively, of non-agricultural employment in the State in 1994. The Office
of Planning and Budgeting projects similar concentrations for 1995 and 1996.
According to the Economic Report, the unemployment rate improved slightly from
an average of 5.2% during 1993 to 4.9% during 1994. Total retail sales
increased by 12.2% during 1994. Colorado continued to surpass the job growth
rate of the U.S. with a 2.8% rate of growth projected for Colorado in 1995, as
compared with 2.7% for the nation as a whole. However, the rate of job growth
in Colorado is expected to be lower in 1995 than the 1994 rate as a result of
layoffs at Lowry Air Force Base, Public Service Company, Continental Airlines
and US West.
Personal income rose 7.5% in Colorado during 1993 and 7.6% in 1992. During
1994, personal income rose 6.6% in Colorado, as compared with 6.1% for the
nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although Chapman and Cutler
expresses no opinion with respect to the issuance of the Bonds, in rendering
its opinion expressed herein, it has assumed that: (i) the Bonds were validly
issued, (ii) the interest thereon is excludable from gross income for federal
income tax purposes, and (iii) interest on the Bonds, if received directly by
a Unitholder, would be exempt from the income tax imposed by the State that is
applicable to individuals and corporations (the "State Income Tax".
This opinion does not address the taxation of persons other than full time
residents of Colorado.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under existing
Colorado law:
Because Colorado income tax law is based upon the Federal law, the Colorado
Trust is not an association taxable as a corporation for purposes of Colorado
income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
Each Colorado Unitholder will be treated as owning a pro rata share of each
asset of the Colorado Trust for Colorado income tax purposes in the proportion
that the number of Units of such Trust held by the Unitholder bears to the
total number of outstanding Units of the Colorado Trust, and the income of the
Colorado Trust will therefore be treated as the income of each Colorado
Unitholder under Colorado law in the proportion described and an item of
income of the Colorado Trust will have the same character in the hands of a
Colorado Unitholder as it would have in the hands of the Trustee;
Interest on Bonds that would not be includable in income for Colorado income
tax purposes when paid directly to a Colorado Unitholder will be exempt from
Colorado income taxation when received by the Colorado Trust and attributed to
such Colorado Unitholder and when distributed to such Colorado Unitholder;
Any proceeds paid under an insurance policy or policies issued to the Colorado
Trust with respect to the Bonds in the Colorado Trust which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Colorado adjusted gross income if, and to the same extent as, such interest
would have been so excludable if paid by the issuer of the defaulted
obligations provided that, at the time such policies are purchased, the
amounts paid for such policies are reasonable, customary and consistent with
the reasonable expectation that the issuer of the obligations, rather than the
insurer, will pay debt service on the obligations;
Any proceeds paid under individual policies obtained by issuers of Bonds in
the Colorado Trust which represent maturing interest on defaulted obligations
held by the Trustee will not be includable in income for Colorado income tax
purposes if, and to the same extent as, such interest would not have been so
includable if paid by the issuer of the defaulted obligations provided that,
at the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation that
the issuer of the obligations, rather than the insurer, will pay debt service
on the obligations;
Each Colorado Unitholder will realize taxable gain or loss when the Colorado
Trust disposes of a Bond (whether by sale, exchange, redemption, or payment at
maturity) or when the Colorado Unitholder redeems or sells Units at a price
that differs from original cost as adjusted for amortization of bond discount
or premium and other basis adjustments (including any basis reduction that may
be required to reflect a Colorado Unitholder's share of interest, if any,
accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado Trust,
if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Colorado Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost; and
If interest on indebtedness incurred or continued by a Colorado Unitholder to
purchase Units in the Colorado Trust is not deductible for federal income tax
purposes, it also will be non-deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Colorado law. Ownership of the Units may result in
collateral Colorado tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Connecticut Trusts
The following information is only a summary of risk factors associated with
Connecticut. It has been compiled from official government statements and
other publicly available documents. Although the Sponsor has not independently
verified the information, it has no reason to believe that it is not correct
in all material respects.
Connecticut's manufacturing industry, which has historically been of prime
economic importance to the State, its municipalities and its residents, has
been in decline for several years. Although Connecticut's manufacturing
industry is diversified between transportation equipment (primarily aircraft
engines, helicopters and submarines), non-electrical machinery, fabricated
metal products and electrical machinery, defense-related business represents a
relatively high proportion of manufacturing receipts. As a result, reductions
in defense spending have had a substantial adverse effect on Connecticut's
manufacturing industry.
Connecticut's manufacturing employment peaked in 1970 at over 441,000 workers
but had declined 35.4% by 1994. Although the loss of manufacturing jobs was
partially offset by a 66.3% rise in other non-agricultural employment during
the same period, Connecticut's growth in non-manufacturing employment has
lagged behind the New England region and the nation as a whole. Moreover,
Connecticut's largest defense contractors have announced plans to reduce their
labor forces substantially over the next four years.
From 1986 through 1994, Connecticut's unemployment rate was generally lower
than the unemployment rate for the U.S. as a whole, and average per capita
personal income of Connecticut residents was higher than that of residents of
other states. The average unemployment rate (seasonally adjusted) in
Connecticut increased from a low of 3.0% in 1988 to 7.5% in 1992 and, after a
number of important changes in the method of calculation, was reported to be
5.6% in 1994. Average per capita personal income of Connecticut residents
increased in every year from 1985 to 1994, rising from $18,268 to $29,044.
However, pockets of significant unemployment and poverty exist in some
Connecticut cities and towns, and Connecticut is now in a recession, the depth
and duration of which are uncertain.
For the four fiscal years ended June 30, 1991, the General Fund ran operating
deficits of approximately $115,600,000, $28,000,000, $259,000,000 and
$808,500,000, respectively. At the end of the 1990-1991 fiscal year, the
General Fund had an accumulated unappropriated deficit of $965,712,000. For
the four fiscal years ended June 30, 1995, the General Fund ran operating
surpluses of approximately $110,200,000, $113,500,000, $19,700,000 and
$80,500,000, respectively. General Fund budgets for the biennium ending June
30, 1997, were adopted in 1995. General Fund expenditures and revenues are
budgeted to be approximately $9,800,000,000 and $10,150,000,000, for the
1995-1996 and 1996-1997 fiscal years, respectively.
In 1991, to address the General Fund's growing deficit, legislation was
enacted by which the State imposed an income tax on individuals, trusts and
estates for taxable years generally commencing in 1992. For each fiscal year
starting with the 1991-1992 fiscal year, the General Fund has operated at a
surplus with over 60% of the State's tax revenues being generated by the
income tax and the sales and use tax. However, the State's budgeted
expenditures have more than doubled from approximately $4,300,000 for the
1986-1987 fiscal year to approximately $10,150,000,000 for the 1996-1997
fiscal year.
The 1991 legislation also authorized the State Treasurer to issue Economic
Recovery Notes to fund the General Fund's accumulated deficit of $965,712,000
as of June 30, 1991, and during 1991 the State issued a total of $965,710,000
Economic Recovery Notes, of which $315,710,000 were outstanding as of
September 15, 1995. The notes were to be payable no later than June 30, 1996,
but as part of the budget adopted for the biennium ending June 30, 1997,
payment of the remaining notes scheduled to be paid over the four fiscal years
ending June 30, 1999.
The State's primary method for financing capital projects is through the sale
of general obligation bonds. As of September 15, 1995, the State had
authorized general obligation bonds totaling $10,513,394,000, of which
$9,068,876,000 had been approved for insurance by the State Bond Commission,
$7,715,675,000 had been issued, and $6,186,518,000 were outstanding.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The improvements are to be financed by $18 million of general
obligation bonds of the State and $962 million bonds of the University. The
University's bonds will be secured by a State debt service commitment, the
aggregate amount of which is limited to $382 million for the three fiscal
years ending June 30, 1999, and $580 million for the four fiscal years ending
June 30, 2005.
In addition to the bonds described above, the State also has limited or
contingent liability on a significant amount of other bonds. Such bonds have
been issued by the following quasi-public agencies: the Connecticut Higher
Education Supplemental Loan Authority, the Connecticut Resources Recovery
Authority and the Connecticut Health and Education Facilities Authority. Such
bonds have also been issued by the cities of Bridgeport and West Haven and the
Southeastern Connecticut Water Authority. As of September 15, 1995, the amount
of bonds outstanding on which the State has limited or contingent liability
totaled $3,755,500,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2000, is currently estimated to be
$11.2 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $4.7 billion share of such cost by issuing $4.2
billion of special tax obligation ("STO" bonds. The STO bonds are
payable solely from specified motor fuel taxes, motor vehicle receipts, and
license, permit and fee revenues pledged therefor and credited to the Special
Transportation Fund, which was established to budget and account for such
revenues.
As of September 15, 1995, the General Assembly had authorized $4,157,900,000
of such STO bonds, of which $3,269,700,000 had been issued. It is anticipated
that additional STO bonds will be authorized annually in amounts necessary to
finance and to complete the infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged revenue
coverage requirements are met. The State expects to continue to offer bonds
for this program.
On March 29, 1990, Standard & Poor's reduced its ratings of the State's
general obligation bonds from AA+ to AA, and on April 9, 1990, Moody's reduced
its ratings from Aa1 to Aa. On September 13, 1991, Standard & Poor's further
reduced its ratings of the State's general obligation bonds and certain
obligations that depend in part on the creditworthiness of the State to AA-.
On March 17, 1995, Fitch reduced its ratings of the State's general obligation
bonds from AA+ to AA.
The State, its officers and its employees are defendants in numerous lawsuits.
Although it is not possible to determine the outcome of these lawsuits, the
Attorney General has opined that an adverse decision in any of the following
cases might have a significant impact on the State's financial position: (i)
an action by inmates of the Department of Correction seeking damages and
injunctive relief with respect to alleged violations of statutory and
constitutional rights as a result of the monitoring and recording of their
telephone calls from the State's correctional institutions; (ii) litigation on
behalf of black and Hispanic school children in the City of Hartford seeking
"integrated education" within the Greater Hartford metropolitan area;
(iii) litigation involving claims by Indian tribes to less than 1/10 of 1% of
the State's land area; (iv) litigation challenging the State's method of
financing elementary and secondary public schools on the ground that it denies
equal access to education; (v) an action on behalf of all persons with
retardation or traumatic brain injury, claiming that their constitutional
rights are violated by placement in State hospitals alleged not to provide
adequate treatment and training, and seeking placement in community
residential settings with appropriate support services; (vi) an action by the
Connecticut Hospital Association and 3 hospitals seeking to require the State
to reimburse hospitals for in-patient medical services on a basis more
favorable to them; (vii) a class action by the Connecticut Criminal Defense
Lawyers Association claiming a campaign of illegal surveillance activity and
seeking damages and injunctive relief; and (viii) an action to enforce the
spending cap provision of the State's constitution by seeking to require that
the General Assembly define certain terms used therein and to enjoin certain
increases in "general budget expenditures" until this is done. In
addition, a number of corporate taxpayers have filed refund requests for
corporation business tax, asserting that interest on federal obligations may
not be included in the measure of that tax, on the grounds that to do so
allegedly violates federal law because interest on certain obligations of the
State is not included in the measure of the tax. The State has attempted to
eliminate the basis for these refund requests by enacting legislation that
takes by eminent domain the rights of corporate holders to exclude the
interest on such obligations. The State will compensate such corporate holders.
General obligation bonds issued by municipalities are payable primarily from
ad valorem taxes on property tax base is subject to many factors outside the
control of the municipality, including the decline in Connecticut's
manufacturing industry. In addition to general obligation bonds backed by the
full faith and credit of the municipality, certain municipal authorities
finance projects by issuing bonds that are not considered to be debts of the
municipality. Such bonds may be repaid only from revenues of the financed
project, the revenues from which may be insufficient to service the related
debt obligations.
In recent years, certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits. The
most notable of these is the City of Bridgeport, which filed a bankruptcy
petition on June 7, 1991. The State opposed the petition. The United States
Bankruptcy Court for the District of Connecticut held that Bridgeport has
authority to file such a petition but that its petition should be dismissed on
the grounds that Bridgeport was not insolvent when the petition was filed.
Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt
service on borrowings could result in declines, possibly severe, in the value
of their outstanding obligations, increases in their future borrowing costs,
and impairment of their ability to pay debt service on their obligations.
At the time of the closing for each Connecticut Trust, Special Counsel to the
Fund for Connecticut tax matters rendered an opinion under then existing
Connecticut income tax law applicable to taxpayers whose income is subject to
Connecticut income taxation substantially to the effect that:
The assets of the Connecticut Trust will consist of obligations (the "
Bonds"; certain of the Bonds have been issued by or on behalf of the
State of Connecticut or its political subdivisions or other public
instrumentalities, state or local authorities, districts, or similar public
entities created under the laws of the State of Connecticut ("Connecticut
Bonds" and the balance of the Bonds have been issued by or on behalf of
entities classified for the relevant purposes as territories or possessions of
the United States, including one or more of Puerto Rico, Guam, or the Virgin
Islands, the interest on the obligations of which Federal law would prohibit
Connecticut from taxing if received directly by the Unitholders. Certain
Connecticut Bonds in the Connecticut Trust were issued prior to the enactment
of the Connecticut income tax on the Connecticut taxable income of
individuals, trusts, and estates (the "Connecticut Income Tax";
therefore, bond counsel to the issuers of such Bonds did not opine as to the
exemption of the interest on such Bonds from such tax. However, the Sponsor
and special counsel to the Trusts for Connecticut tax matters believe that
such interest will be so exempt. Interest on Bonds in the Connecticut Trust
issued by other issuers, if any, is, in the opinion of bond counsel to such
issuers, exempt from state taxation.
The Connecticut Income Tax was enacted in August, 1991. Generally, a
Unitholder recognizes gain or loss for purposes of this tax to the same extent
as he recognizes gain or loss for Federal income tax purposes. Ordinarily this
would mean that gain or loss would be recognized by a Unitholder upon the
maturity, redemption, sale, or other disposition by the Connecticut Trust of a
Bond held by it, or upon the redemption, sale or other disposition of a Unit
of the Connecticut Trust held by the Unitholder.
However, on June 19, 1992, Connecticut legislation was adopted that provides
that gains and losses from the sale or exchange of Connecticut Bonds held as
capital assets will not be taken into account for purposes of the Connecticut
Income Tax for taxable years starting on or after January 1, 1992. Regulations
effective for taxable years starting on or after January 1, 1994, clarify that
this provision also applies to gain or loss recognized by a Unitholder upon
the maturity or redemption of a Connecticut Bond held by the Connecticut
Trust. However, it is not clear whether this provision would apply, to the
extent attributable to Connecticut Bonds held by the Connecticut Trust, to
gain or loss recognized by a Unitholder upon the redemption, sale, or other
disposition of a Unit of the Connecticut Trust held by the Unitholder.
Unitholders are urged to consult their own tax advisors concerning these
matters.
In the opinion of Day, Berry & Howard, special counsel to the Fund for
Connecticut tax matters, which relies explicitly on the opinion of Chapman and
Cutler regarding Federal income tax matters, under existing Connecticut law:
The Connecticut Trust is not liable for any tax on or measured by net income
imposed by the State of Connecticut.
Interest income of the Connecticut Trust from a Bond issued by or on behalf of
the State of Connecticut, any political subdivision thereof, or public
instrumentality, state or local authority, district, or similar public entity
created under the laws of the State of Connecticut (a "Connecticut
Bond", or from a Bond issued by United States territories or possessions
the interest on which Federal law would prohibit Connecticut from taxing if
received directly by a Unitholder from the issuer thereof, is not taxable
under the Connecticut tax on the Connecticut taxable income of individuals,
trusts, and estates (the "Connecticut Income Tax", when any such
interest is received by the Connecticut Trust or distributed by it to such a
Unitholder.
Insurance proceeds received by the Connecticut Trust representing maturing
interest on defaulted Bonds held by the Connecticut Trust are not taxable
under the Connecticut Income Tax if, and to the same extent as, such interest
would not be taxable thereunder if paid directly to the Connecticut Trust by
the issuer of such Bonds.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
Trust of a Bond held by the Connecticut Trust or upon the redemption, sale, or
other disposition of a Unit of the Connecticut Trust held by a Unitholder are
taken into account as gains or losses, respectively, for purposes of the
Connecticut Income Tax, except that, in the case of a Unitholder holding a
Unit of the Connecticut Trust as a capital asset, such gains and losses
recognized upon the maturity, redemption, sale or exchange of a Connecticut
Bond held by the Connecticut Trust are excluded from gains and losses taken
into account for purposes of such tax and no opinion is expressed as to the
treatment for purposes of such tax of gains and losses recognized to the
extent attributable to Connecticut Bonds upon the redemption, sale, or other
disposition by a Unitholder of a Unit of the Connecticut Trust held by him.
The portion of any interest income or capital gain of the Connecticut Trust
that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax.
An interest in a Unit of the Connecticut Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable
in his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
Delaware Trusts
The State ended fiscal 1989 with a cumulative cash balance of $185.4 million,
more than 15% of total expenditures for the year. The Budgetary Reserve Fund
was fully funded at the 5% level or $62.5 million during the fiscal year.
General Fund revenue grew by 8.9% during fiscal 1989. General fund
expenditures were $1,092.2 million in fiscal 1989, an increase of 5.1% over
fiscal1988. The increase funded additional spending in welfare programs,
teacher compensation, and a salary increase for State employees.
Projected General Fund revenue of $1,139.4 million for fiscal 1990 is 5.3%
higher than fiscal 1989. This growth reflects the continuing strength of the
Delaware economy, although this estimate, issued March 19, 1990, is $18.7
million less than an estimate issued in December, 1989, reflecting a cooling
of the Delaware economy and decreased franchise taxes because of mergers and
acquisitions. Taken with the unencumbered balance from the previous year,
$1,324.8 million is available for expenditure in fiscal 1990. Projected
General Fund expenditures of $1,176.7 million are 9.7% greater than spending
in fiscal 1989.
The State Constitution was amended in May 1980 to limit tax increases. Any tax
increase or the imposition of any new tax must be passed by a three-fifths
vote of each house of the General Assembly, rather than by a simple majority
vote, except for tax increases to meet debt service on outstanding obligations
of the State for which insufficient revenue is available when such debt
service is due. The intended impact of this amendment is to make it easier to
lower expenditures than to increase taxes. The amendment also provides that
the State shall appropriate, prior to each fiscal year of the State, sums
sufficient to meet debt service in the following fiscal year, a practice the
State has always followed.
The State Constitution limits annual appropriations by majority vote of both
houses of the General Assembly to 98% of estimated General Fund revenue plus
the unencumbered General Fund balance from the previous fiscal year. Any
appropriation exceeding this limit may be made in the event of certain
emergencies with the approval of a three-fifths vote of the members of each
house of the General Assembly, but no appropriation may be made exceeding 100%
of estimated General Fund revenue plus the unencumbered General Fund balance
from the previous fiscal year.
The State Constitution also provides that the excess of any unencumbered
General Fund revenue at the end of a fiscal year must be placed in a reserve
account ("Budgetary Reserve Account" within 45 days following the end
of the fiscal year. The Budgetary Reserve Account is designed to provide a
cushion against unanticipated deficits. The money in the Budgetary Reserve
Account accumulates until the fund reaches a maximum of 5% of the General Fund
estimated revenue (including tax money that may be refunded) for the ensuing
fiscal year. Transfers of $9.2 million were made to fund the Budgetary Reserve
Account for fiscal 1989. Transfers are made in August based on June
projections. Access to these monies is authorized with the approval of the
three-fifths vote of the members of each house of the General Assembly for use
only in the event of the necessity to fund an unanticipated General Fund
deficit or to provide funds required as a result of the enactment of
legislation reducing taxes.
There is no Constitutional debt limit of the State. The Delaware Code
presently provides that the total amount of authorized bonds issued and
unissued for the payment of which the full faith and credit of the State may
be pledged shall not exceed 1.5 times the total gross revenue deposited in the
State's General Fund for the preceding fiscal year. Applying that calculation,
the current debt limit is $1,799 million. As of May 1, 1990, the amount of
general obligation debt outstanding will be $398.4 million, and the amount of
authorized, but unissued general obligation bonds was approximately $72.0
million. Bonds or bond anticipation notes issued by the State to provide the
local share of the cost of school construction are not included in the
calculation of the aforesaid debt limit, no rare revenue anticipation notes of
the State. There is no debt limit applicable to the issuance of revenue
anticipation notes; however there has not been a State issue of revenue notes
since fiscal 1977 and the State does not plan to issue revenue notes in fiscal
1990.
Under Delaware Code, the authorization of general obligation debt of the State
is limited in any State fiscal year to an amount equal to (a) 75% of the
principal retirement of general obligations debt of the State in the prior
State fiscal year plus (b) the amount of previously authorized and unissued
general obligation debt and/or guaranteed debt the authorization for which is
repealed in such fiscal year. This law can be supplemented, amended or
repealed by subsequently enacted legislation.
Since the employment impact of the Financial Center Development Act was
initially felt in 1982, the Delaware unemployment rate has been below the
national and regional average. For calendar 1989, Delaware unemployment was
3.5% compared to 4.4% in the region and 5.3% in the United States. Delaware
per capita personal income has been above the national level since 1980. For
1987, the latest year for which figures are available, Delaware per capita
personal income was 106% of the national average.
General obligation debt of Delaware is rated AA by Moody's and AA+ by Standard
and Poor's.
There is no pending litigation attacking the constitutionality of any Delaware
revenue source or the method of collection from that source.
At the time of the closing for each Delaware Trust, Special Counsel to each
Delaware Trust for Delaware tax matters rendered an opinion under then
existing Delaware income tax law applicable to taxpayers whose income is
subject to Delaware income taxation substantially to the effect that:
Distributions of interest income to Unitholders that would not be taxable if
received directly by a Delaware resident are not subject to personal income
tax under the Delaware personal income tax imposed by 30 Del. C. et seq.;
Distributions of interest income to Unitholders which are estates or trusts
that would not be taxable if received directly by a Delaware resident estate
or trust are not subject to the personal income tax imposed by 30 Del. C. et
seq.;
Distributions of interest income to Unitholders which are corporations that
would not be taxable for Delaware income tax purposes if received directly by
a corporation will not be subject to the Delaware corporate income tax imposed
by 30 Del. C. 1 et seq.;
To the extent that any gain or loss from the sale of obligations held by the
Fund or from the sale of a Unit by a Unitholder is includable or deductible in
the calculation of a resident individual's, estate's or trust's adjusted gross
income for federal income tax purposes, any such gain or loss will be
includable or deductible in the calculation of taxable income for the purposes
of Delaware resident personal income taxes;
To the extent that any gain or loss from the sale of obligations held by the
Fund or from the sale of a Unit by a Unitholder is includable or deductible in
the calculation of taxable income for purposes of federal income tax imposed
upon a corporation, such gain or loss shall not be includable or deductible in
the calculation of taxable income for purposes of the Delaware corporate
income tax since gains or losses from the sale or other disposition of
securities issued by the State of Delaware or political subdivisions thereof
are not included in computing the taxable income of a corporation for Delaware
corporate income tax purposes.
Any proceeds paid under insurance policies issued to the Trustee or obtained
by issuers or underwriters of the Bonds, the Sponsor, or others which
represent interest on defaulted obligations held by the Trustee will be
excludable from Delaware gross income for individuals, trusts and estates, or
corporations, if, and to the same extent as, such proceeds would have been so
excludable from federal income taxation;
Interest income received by a Unitholder is not exempt from the franchise tax
imposed on banking organizations under 5 Del. C. et seq. and the franchise tax
imposed on building and loan associates imposed under 5 Del. C. et seq.; and
The Units are not exempt from Delaware inheritance, estate and gift tax.
Florida Trusts
Florida's economy has in the past been highly dependent on the construction
industry and construction related manufacturing. This dependency has declined
in recent years and continues to do so as a result of continued
diversification of the State's economy. For example, in 1980 total contract
construction employment as a share of total non-farm employment was just over
seven percent and in 1993 the share had edged downward to five percent. This
trend is expected to continue as Florida's economy continues to diversify.
Florida, nevertheless, has a dynamic construction industry with single and
multi-family housing starts accounting for 8.5% of total U.S. housing starts
in 1993 while the State's population is 5.3% of the U.S. total population.
Florida's housing starts since 1980 have represented an average of 11.0% of
the U.S.'s total annual starts, and since 1980 total housing starts have
averaged 156,450 a year.
A driving force behind the State's construction industry has been the
State's rapid rate of population growth. Although the State currently is the
fourth most populous state, its annual population growth is now projected to
decline as the number of people moving into the State is expected to hover
near the mid 250,000 range annually throughout the 1990's. This population
trend should provide fuel for business and home builders to keep construction
activity lively in Florida for some time to come. However, other factors do
influence the level of construction in the State. For example, federal tax
reform in 1986 and other changes to the federal income tax code have
eliminated tax deductions for owners of more than two residential real estate
properties and have lengthened depreciation schedules on investment and
commercial properties. Economic growth and existing supplies of homes also
contribute to the level of construction activity in the State.
Since 1980, the State's job creation rate is almost twice the rate for the
nation as a whole, and its growth rate in new non-agricultural jobs is the
fastest of the must populous states, second only to California in the absolute
number of new jobs created. Contributing to the State's rapid rate of growth
in employment and income is international trade. Since 1980, the State's
unemployment rate has generally been below that of the U.S. In recent years,
however, as the State's economic growth has slowed from its previous high the
State's unemployment rate has tracked above the national average. The average
rate in Florida since 1980 has been 6.5% while the national average is 7.1%.
According to the U.S. Department of Commerce, the Florida Department of Labor
and Employment Security, and the Florida Consensus Economic Estimating
Conference (together, the "Organization", the State's unemployment
rate was 8.2% during 1992. As of January 1994, the Organization estimates that
the unemployment rate will be 6.1% for 1994-95 and 6.1% in 1995-96.
The rate of job creation in Florida's manufacturing sector has exceeded that
of the U.S. From the beginning of 1980 through 1993, the State added over
50,000 new manufacturing jobs, an 11.7% increase. During the same period,
national manufacturing employment declined ten out of the fourteen years, for
a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 3.6% in 1994-95
and rise 3.3% in 1995-96. Trade and services, the two largest sources of
employment in the State, account for more than half of the total non-farm
employment. Employment in the service sectors should experience an increase of
5.4% in 1994-95 while growing 4.7% in 1995-96. Trade is expected to expand
3.1% in 1995 and 3.2% in 1996. The service sector is now the State's largest
employment category.
Tourism is one of the State's most important industries. Approximately 41.1
million tourists visited the State in 1993, as reported by the Florida
Department of Commerce. In terms of business activities and State tax
revenues, tourists in Florida in 1993 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals are expected to increase by 5.0% this year, and
3.4% next year. Tourist arrivals to Florida by air are expected to increase by
9.2% this year and 2.9% next year, while arrivals by car are expected to rise
0.7% in 1994-95 and 4.0% in 1995-96. By the end of the State's current fiscal
year, 42.1 million domestic and international tourists are expected to have
visited the State. In 1995-96 tourist arrivals should approximate 43.6 million.
The State's per capita personal income in 1993 of $20,857 was slightly above
the national average of $20,817 and significantly ahead of that for the
southeast United States, which was $18,753. Real personal income in the State
is estimated to increase 4.5% in 1994-95 and 4.2% in 1995-96. By the end of
1995-96, real personal income per capita in the State is projected to average
4.5% higher than its 1993-94 level.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest, and rent) and transfer payments (Social
Security and pension benefits, among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1993 was 62% of total personal income,
while a similar figure for the nation was 72%. Transfer payments are typically
less sensitive to the business cycle than employment income and, therefore,
act as stabilizing forces in weak economic periods.
Estimated fiscal year 1994-95 General Revenue plus Working Capital and Budget
Stabilization funds available to the State total $14,624.4 million, a 5.7%
increase over 1993-94. This reflects a transfer of $159.0 million in
non-recurring revenue due to Hurricane Andrew, to a hurricane relief trust
fund. Of the total General Revenue plus Working Capital and Budget
Stabilization funds available to the State, $13,858.4 million of that is
Estimated Revenues (excluding the Hurricane Andrew impact), which represents
an increase of 7.9% over the previous year's Estimated Revenues. With
effective General Revenues plus Working Capital Fund and Budget Stabilization
appropriations at $14,311.1 million, unencumbered reserves at the end of
1994-95 are estimated at $313.3 million. Estimated fiscal year 1995-96 General
Revenue plus Working Capital and Budget Stabilization funds available total
$15,145.9 million, a 3.6% increase over 1994-95. The $14,647.2 million in
Estimated Revenues represents an increase of 5.7% over the previous year's
Estimated Revenues.
In fiscal year 1993-94, approximately 66% of the State's total direct
revenue to its three operating funds was derived from State taxes and fees,
with Federal grants and other special revenue accounting for the balance.
State sales and use tax, corporate income tax, intangible personal property
tax and beverage tax amounted to 66%, 8%, 4% and 4%, respectively, of total
General Revenue Funds available during fiscal 1993-94. In that same year,
expenditures for education, health and welfare, and public safety amounted to
approximately 49%, 32%, and 12%, respectively, of total expenditures from the
General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the State's
single largest source of tax receipts. Sightly less than 10% of the State's
sales and use tax is designated for local governments and is distributed to
the respective counties in which collected for use by the counties, and the
municipalities therein. In addition to this distribution, local governments
may assess (by referendum) a 0.5% or a 1.0% discretionary sales surtax within
their county. Proceeds from this local option sales tax are earmarked for
funding local infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided under
applicable Florida law. Certain charter counties have other additional taxing
powers, and non-consolidated counties with a population in excess of 800,000
may levy a local option sales tax to fund indigent health care. It alone
cannot exceed 0.5% and when combined with the infrastructure surtax cannot
exceed 1.0%. For the fiscal year ended June 30,1994, sales and use tax
receipts (exclusive of the tax on gasoline and special fuels) totalled
$10,012.5 million, an increase of 6.9% over fiscal year 1992-93.
The second largest source of State tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage wholesale tax (excise tax) on beer,
wine, and liquor. This tax is one of the State's major tax sources, with
revenues totalling $439.8 million in fiscal year ending June 30,1994.
Alcoholic beverage tax receipts decreased about 1.0% from the previous year's
total. The revenues collected from this tax are deposited into the State's
General Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year ended
June 30,1994, receipts from this source were $1,047.4 million, an increase of
23.7% from fiscal year 1992-93.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totalled $775.0 million during fiscal year
1993-94, a 21.3% increase from the previous fiscal year. Beginning in fiscal
year 1992-93, 71.29% of these taxes is to be deposited to the General Revenue
Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax collections are
credited to the State's Public Education Capital Outlay and Debt Service
Trust Fund. In fiscal year 1993-94, this amounted to $459.4 million.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes, governmental
leaseholds, and certain other intangibles not secured by a lien on Florida
real property. The annual rate of tax is 2 mils. The State also imposes a
non-recurring 2 mil tax on mortgages and other obligations secured by liens on
Florida real property. In fiscal year 1993-94, total intangible personal
property tax collections were $836.0 million, a 6.7% increase over the prior
year. Of the tax proceeds, 66.5% is distributed to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50.0% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0%, for costs of administering the
lottery. Fiscal year 1993-94 lottery ticket sales totalled $2.15 billion,
providing education with approximately $816.2 million.
The State's severance tax taxes oil, gas and sulphur production, as well as
the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $54.8 million during fiscal year 1993-94, down
15.0% from the previous year. Currently 60% of this amount is transferred to
the General Revenue Fund.
At the end of fiscal 1993, approximately $5.61 billion in principal amount of
debt secured by the full faith and credit of the State was outstanding. In
addition, since July 1, 1993, the State issued about $1.36 billion in
principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget, as a whole,
and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believe a deficit will occur in any State fund, by statute, he must certify
his opinion to the Administrative Commission, which then is authorized to
reduce all State agency budgets and releases by a sufficient amount to prevent
a deficit in any fund. Additionally, the State Constitution prohibits issuance
of State obligations to fund State operations.
Currently under litigation are several issues relating to State actions or
State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse affect on
Florida's financial position.
Florida law provides preferential tax treatment to insurers who maintain a
home office in the State. Certain insurers challenged the constitutionality of
this tax preference and sought a refund of taxes paid. Recently, the State
Supreme Court ruled in favor of the State. This case and others, along with
pending refund claims, total about $150 million.
Previously, the State imposed a $295 fee on the issuance of certificates of
title for motor vehicles previously titled outside the State. Plaintiffs sued
the State alleging that this fee violated the Commerce Clause of the U.S.
Constitution. The Circuit Court in which the case was filed granted summary
judgment for the plaintiffs, enjoined further collection of the impact fee and
ordered refunds to all those who have paid the fee since the collection of the
fee went into effect. In the State's appeal of the lower court's decision,
the Florida Supreme Court ruled that this fee was unconstitutional under the
Commerce Clause. Thus, the Supreme Court approved the lower court's order
enjoining further collection of the fee and requiring refund of the previously
collected fees. The refund exposure of the State has been estimated to be in
excess of $100 million.
Florida maintains a bond rating of Aa, AA and AA from Moody's Investors
Service, Standard & Poor's and Fitch, respectively, on the majority of its
general obligation bonds, although the rating of a particular series of
revenue bonds relates primarily to the project, facility, or other revenue
sources from which such series derives funds for repayment. While these
ratings and some of the information presented above indicate that Florida is
in satisfactory economic health, there can be no assurance that there will not
be a decline in economic conditions or that particular Municipal Obligations
purchased by the Fund will not be adversely affected by any such changes.
The sources for the information presented above include official statements
and financial statements of the State of Florida. While the Sponsor has not
independently verified this information, the Sponsor has no reason to believe
that the information is not correct in all material respects.
At the time of the closing for each Florida Trust, Chapman and Cutler, Counsel
to each Florida Trust for Florida tax matters, rendered an opinion under then
existing Florida income tax law applicable to taxpayers whose income is
subject to Florida income taxation substantially to the effect that:
The Bonds were accompanied by opinions of Bond Counsel to the respective
issuers thereof to the effect that the Bonds were exempt from the Florida
intangibles tax. Neither the Sponsor nor its counsel have independently
reviewed such opinions or examined the Bonds to be deposited in and held by
the Florida Trust and have assumed the correctness as of the date of deposit
of the opinions of Bond Counsel.
"Non-Corporate Unitholder" means a Unitholder of the Florida Trust who
is an individual not subject to the Florida state income tax on corporations
under Chapter 220, Florida Statutes and "Corporate Unitholder" means a
Unitholder of the Florida Trust that is a corporation, bank or savings
association or other entity subject to Florida state income tax on
corporations or franchise tax imposed on banks or savings associations under
Chapter 220, Florida Statutes.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under existing
law:
For Florida state income tax purposes, the Florida Trust will not be subject
to the Florida income tax imposed by Chapter 220, Florida Statutes.
Because Florida does not impose an income tax on individuals, Non-Corporate
Unitholders residing in Florida will not be subject to any Florida income
taxation on income realized by the Florida Trust. Any amounts paid to the
Florida Trust or to Non-Corporate Unitholders under an insurance policy issued
to the Florida Trust or the Sponsor which represent maturing interest on
defaulted obligations held by the Trustee will not be subject to the Florida
income tax imposed by Chapter 220, Florida Statutes.
Corporate Unitholders with commercial domiciles in Florida will be subject to
Florida income or franchise taxation on income realized by the Florida Trust
and on payments of interest pursuant to any insurance policy to the extent
such income constitutes "non business income" as defined by Chapter
220 or is otherwise allocable to Florida under Chapter 220. Other Corporate
Unitholders will be subject to Florida income or franchise taxation on income
realized by the Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does not
constitute "non-business income" as defined by Chapter 220 and if such
income is otherwise allocable to Florida under Chapter 220.
Units will be subject to Florida estate tax only if held by Florida residents.
However, the Florida estate tax is limited to the amount of the credit for
state death taxes provided for in Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax, the Florida intangible personal property tax or the Florida
sales or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Florida law. Ownership of the Units may result in
collateral Florida tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Georgia Trusts
The following brief summary regarding the economy of Georgia is based upon
information drawn from publicly available sources and is included for purposes
of providing information about general economic conditions that may or may not
affect issuers of the Georgia obligations. The Sponsor has not independently
verified any of the information contained in such publicly available documents.
Constitutional Considerations. The Georgia Constitution permits the issuance
by the State of general obligation debt and of certain guaranteed revenue
debt. The State may in our guaranteed revenue debt by guaranteeing the payment
of certain revenue obligations issued by an instrumentality of the State. The
Georgia Constitution prohibits the incurring of any general obligation debt or
guaranteed revenue debt if the highest aggregate annual debt service
requirement for the then current year or any subsequent fiscal year for
outstanding general obligation debt and guaranteed revenue debt, including the
proposed debt, exceed 10 percent of the total revenue receipts, less refunds,
of the State treasury in the fiscal year immediately preceding the year in
which any such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to supply
a temporary deficit in the State treasury in any fiscal year created by a
delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State
treasury in the fiscal year immediately preceding the year in which such debt
is incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred to supply a temporary deficit in the
State treasury. No such short-term debt has been incurred under this provision
since the inception of the constitutional authority referred to in this
paragraph.
Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other
political subdivisions and public authorities thereof are required by law to
be validated and confirmed in a judicial proceeding prior to issuance. The
legal effect of an approved validation in Georgia is to render incontestable
the validity of the pertinent bond issue and the security therefor.
The State and Its Economy. The State operates on a fiscal year beginning July
1 and ending June 30. Thus, the 1994 fiscal year ended June 30, 1994. Based on
data from the Georgia Department of Revenue, estimated receipts of the State
from income tax and sales tax for the 1992 fiscal year comprised approximately
48.8% and 37.5%, respectively, of the total State tax revenues. Such data
shows that total estimated State treasury receipts for the 1992 fiscal year
increased by approximately 2.16% over such collections in the 1991 fiscal
year. The estimated 1993 fiscal year figures indicate that receipts of the
State from income tax and sales tax for the 1993 fiscal year comprised
approximately 48.1% and 38%, respectively, of the total State tax revenues.
Total estimated State tax revenue collections for the 1993 fiscal year
indicated an increase of approximately 9.89% over such collections in the 1992
fiscal year. The estimated 1994 fiscal year figures indicate that receipts of
the State from income tax and sales tax for the 1994 fiscal year will comprise
approximately 48.8% and 37.9%, respectively, of the total State tax revenues.
Total estimated State tax revenue collections for the 1994 fiscal year
indicate an increase of approximately 9.56% over such collections in the 1993
fiscal year.
Georgia experienced an economic slowdown in the late 1980s that continued into
1992. The 1991 fiscal year ended with a balanced budget, but only because the
State had borrowed approximately $90 million from surpluses maintained for
special uses. In light of weaker. than expected monthly revenue collections in
May and June of 1991, Georgia lawmakers, in a special legislative session, cut
budgeted expenditures for the 1992 fiscal year by $415 million. Georgia ended
its 1992 fiscal year, however, with strong monthly revenue collections. For
the last four months of fiscal year 1992, Georgia's revenues were more than 6%
higher than revenues reported one year earlier for the same time period. By
year-end, revenue collections fell only .1% short of that expected to cover
1992 expenditures. This shortfall was made up from funds allocated to but not
used by state agencies. The authorized 1993 fiscal year budget consists of an
$8.3 billion spending plan and approximately $750 million in new general
obligation debt. On March 23, 1993. The Georgia General Assembly approved an
$8.9 billion budget for the 1994 fiscal year which includes authorization for
$792 million of general obligation borrowing.
The Georgia economy has performed relatively well during recent years and
generally has expanded at a rate greater than the national average during that
period. However, growth in 1988 through 1992 slowed somewhat and was modest
compared to the pace of the early 1980's. Georgia's economy, however, has made
a robust recovery through the 1993 and 1994 fiscal years. Total estimated
State tax revenue collections for the 1994 fiscal year indicate an increase of
approximately 9.56% over such collections in the 1993 fiscal year. The 1992
annual average unemployment rate for Georgia was 6.9% as compared to the 1992
national annual average unemployment rate of 7.4%. The 1993 annual average
unemployment rate for Georgia was 5.7% as compared to the 1993 national annual
average unemployment rate of 6.7%. Throughout 1994, the monthly unemployment
rate for Georgia (not seasonally adjusted) has remained below the national
average monthly unemployment rate (not seasonally adjusted). In April and May
1994, the two most current months for which information is available,
Georgia's unemployment rate of 6.2% and 5.9%. In July, 1994, widespread
flooding in central and southern Georgia caused extensive damage and
destruction of farmland, private residences, businesses and local and state
government facilities. As of July 12, 1994, Governor Zell Miller refused to
estimate the dollar value of the damage but other sources estimate that damage
could exceed $300 million. Thirty-one counties have been declared federal
disaster areas. Moody's Investors Service, Inc. and Standard and Poor's
Corporation are observing the situation in Georgia, but neither rating agency
has expressed any immediate credit concerns.
Bond Ratings. Currently, Moody's Investors Service, Inc. rates Georgia general
obligation bonds Aaa and Standard & Poor's rates such bonds AA+.
Legal Proceedings. Georgia is involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. Several lawsuits have been
filed against Georgia asserting that the decision in Davis v. Michigan
Department of Treasury, 489 U.S. 803 (1989), invalidating Michigan's practice
of taxing retirement benefits paid by the federal government while exempting
state retirement benefits, also invalidates Georgia's tax treatment of Federal
Retirement Benefits for years prior to 1989. Under Georgia's applicable 3 year
statute of limitation the maximum potential liability under these suits
calculated to August 15, 1993 would appear to be no greater than 100 million
dollars. The plaintiffs in these suits, however, have requested refunds for a
period from 1980 to 1988 which could result in a maximum potential liability
in the range of 591 million dollars. Any such liability would be predicated on
a holding by the State of Georgia Supreme Court or the United States Supreme
Court that the Davis decision is applicable to Georgia's prior method of
taxing Federal Retirement Benefits and that the Davis decision is to be given
a retroactive effect, i.e., that the decision affects prior tax years and that
a refund remedy is appropriate. In Georgia's "test case" , the Georgia
Supreme Court held that no refunds are due. The plaintiff's petition to the
U.S. Supreme Court for a writ of certiorari was granted on February 22, 1994.
Three suits have been filed against the State of Georgia seeking refunds of
liquor taxes under O.C.G.A. Section 48-2-35, in light of Bacchus Imports, Ltd.
v. Dias, 468 U.S. 263 (1984) under Georgia's pre-Bacchus statute. In the Beam
case, 501 U.S. 529 (decided June 20, 1991) the Supreme Court indicated that
Bacchus was retroactive, but only within the bounds of State statutes of
limitations and procedural bars, and left State courts to determine any remedy
in light of reliance interests, equitable considerations, and other defenses.
Georgia's statute of limitations in O.C.G.A. Section 48-2-35 has run on all
pre-Bacchus claims for refund except five pending claims seeking 31.7 million
dollars in tax plus interest. On remand, the Fulton County Superior Court has
ruled that procedural bars and other defenses bar any recovery by taxpayers on
Beam's claims for refund. The Georgia Supreme Court has affirmed, and Beam has
petitioned the United States Supreme Court for a writ of certiorari.
Two additional suits have been filed with the State of Georgia by foreign
producers of alcoholic beverages seeking $96 million in refunds of alcohol
import taxes imposed under O.C.G.A. Section 3-4-60. These claims constitute
99% of all such taxes paid during the preceding three years.
In Board of Public Education for Savannah/Chatham County v. State of Georgia,
the local school board claimed that the State should finance the major portion
of the costs of its desegregation program. The Savannah Board originally
requested restitution in the amount of $30 million, but the Federal District
Court set forth a formula which would require a State payment in the amount of
approximately $6 million. Both sides have moved for reconsideration. In a
similar complaint, DeKalb County has requested restitution in the amount of
$90 million, and there are approximately five other school districts which
could file similar claims. It is not possible to quantify such potential
claims at this time.
The foregoing information does not purport to be a complete or exhaustive
description of all conditions to which the issuers of Bonds in the Georgia
Insured Trust are subject. Many factors including national economic, social
and environmental policies and conditions, which are not within the control of
the issuers of Bonds could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. Since Georgia Bonds in the Georgia Insured
Trust (other than general obligation bonds issued by the State) are payable
from revenue derived from a specific source or authority, the impact of a
pronounced decline in the national economy or difficulties in significant
industries within the State could result in a decrease in the amount of
revenues realized from such source or by such authority and thus adversely
affect the ability of the respective issuers of the Georgia Bonds in the
Georgia Insured Trust to pay the debt service requirements on the Georgia
Bonds. Similarly, such adverse economic developments could result in a
decrease in tax revenues realized by the State and thus could adversely affect
the ability of the State to pay the debt service requirements of any Georgia
general obligation bonds in the Georgia Insured Trust.
At the time of the closing for each Georgia Trust, Special Counsel to the Fund
for Georgia tax matters rendered an opinion under then existing Georgia income
tax law applicable to taxpayers whose income is subject to Georgia income
taxation substantially to the effect that:
In the opinion of Chapman and Cutler, counsel to the Sponsor, under existing
Georgia law:
(1)For Georgia income tax purposes, the Georgia Trust is not an association
taxable as a corporation, and the income of the Georgia Trust will be treated
as the income of the Unitholders. Interest on the Georgia Bonds which is
exempt from Georgia income tax when received by the Georgia Trust, and which
would be exempt from Georgia income tax if received directly by a Unitholder,
will retain its status as tax-exempt interest when distributed by the Georgia
Trust and received by the Unitholders.
(2)If the Trustee disposes of a Georgia Bond (whether by sale, exchange,
payment on maturity, retirement or otherwise) or if a Unitholder redeems or
sells his Unit, the Unitholder will recognize gain or loss for Georgia income
tax purposes to the same extent that gain or loss would be recognized for
federal income tax purposes (except in the case of Georgia Bonds issued before
March 11, 1987 issued with original issue discount owned by the Georgia Trust
in which case gain or loss for Georgia income tax purposes may differ from the
amount recognized for federal income tax purposes because original issue
discount on such Georgia Bonds may be determined by accruing said original
issue discount on a ratable basis). Due to the amortization of bond premium
and other basis adjustments required by the Internal Revenue Code, a
Unitholder, under some circumstances, may realize taxable gain when his or her
Units are sold or redeemed for an amount less than or equal to their original
cost.
(3)Because obligations or evidences of debt of Georgia, its political
subdivisions and public institutions are exempt from the Georgia intangible
personal property tax, the Georgia Trust will not be subject to such tax as
the result of holding such obligations, evidences of debt or bonds.
(4)Amounts paid under an insurance policy or policies issued to the Georgia
Trust, if any, with respect to the Georgia Bonds in the Georgia Trust which
represent maturing interest on defaulted obligations held by the Trustee will
be exempt from State income taxes if, and to the extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased the amounts paid for
such policies are reasonable and customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
(5)We express no opinion regarding whether a Unitholder's ownership of an
interest in the Georgia Trust is subject to the Georgia intangible personal
property tax. Although the application of the Georgia intangible property tax
to the ownership of the Units by the Unitholders is not clear, representatives
of the Georgia Department of Revenue have in the past advised us orally that,
for purposes of the intangible property tax, the Department considers a
Unitholder's ownership of an interest in the Georgia Trust as a whole to be
taxable intangible property separate from any ownership interest in the
underlying tax-exempt Georgia Bonds.
(6)Neither the Georgia Bonds nor the Units will be subject to Georgia sales or
use tax.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Georgia law. Ownership of the Units may result in
collateral Georgia tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Hawaii Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Hawaii is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Hawaii.
Hawaii was admitted to the Union on August 21,1959 as the 50th state and is
currently the 41st most populous state. Hawaii's population was 1,115,274 in
1990, as reported by the Census. According to the Census, about 75% of this
population lives on Oahu, the site of the State's capital. Hawaii's population
contains great ethnic diversity, consisting of immigrants from the Far East
and Europe, as well as the mainland U.S.
The Hawaiian economy is based primarily on tourism with most employment
located in the service and retail trade sectors and with tourists paying a
large portion of the General Excise Tax and the Transient Accommodation Tax.
The General Excise and Use Tax made up 53.7% of net receipts without
adjustments for 1992 and the Transient Accommodations Tax were the fourth
largest individual tax of net receipts in 1992. Approximately 6.5 million
tourists came to the State in 1992, spending an estimated $9.6 billion while
in the State. This number of tourists decreased 5.2% from 1991, mostly due to
the U.S. recession as westbound visitors (80% from U.S.) fell from 4.7 million
in 1990, to 4.6 million in 1991, to 4.0 million in 1992. Eastbound visitors,
however, increased from 2.2 million in 1990, to 2.3 million in 1991, to 3.5
million in 1992. Total visitors to the State for the first half of 1993 fell
by 6.5% from those of 1992.
The unemployment rate in the state of Hawaii was 4.8% as of June 1993,
significantly below the national rate of 6.8%.
The State's revised total personal income was an estimated $24.8 billion in
1992 and has increased at a 7.5% average annual rate since 1980, slightly
faster than the national rate over this decade. The State's revised per capita
personal income was $21,218 in 1992, higher than the 1992 U.S. figure of
$19,841. The per capita personal income in the State has increased at a 5.8%
average annual rate since 1980, slightly lower than the 5.9% rate for the
nation. Hawaii's total personal income for the first quarter of 1993 was
$25,571, up 2.9% from $24,844 for the same period last year.
The General Fund revenues in 1992 grew at an actual annual growth rate of
1.5%. In 1993, the Council on Revenues estimates, as of April 1993, that the
General Fund revenues will increase by 3.2%. Any time the General Fund balance
at the close of each two successive fiscal years exceeds 5% of General Fund
Revenues for the two fiscal years, the Legislature in the next regular session
will provide a credit to state taxpayers credit has been issued from 1981 to
1992, inclusive. As of May 1993, the Department of Budget and Finance projects
the General Fund balance at fiscal year-end to be $314.8 million.
Inflation adjusted single family home construction fell 9.0% in 1992, but is
expected to be offset by increases in alterations and additions. Employment in
the construction industry has declined, but is expected to return to 1991 peak
levels due to repair work from Hurricane Iniki. The hurricane hit island Kuaui
in September 1992 causing an estimated $1.7 billion worth of property,
agricultural, and commercial damage as estimated by the Department of
Business, Economic Development, and Tourism. The State has not experienced any
materially adverse economic or financial impact so far, as the federal
government has provided additional funding to the state in the form of public
assistance, loans, and grants with minimum state matching requirements from
the General Fund.
Currently, Moody's Investors Service rates Hawaii general obligation bonds
"Aa" and Standard & Poor's rates Hawaii general obligation bonds "
AA." Although these ratings indicate that the state of Hawaii is in
relatively good economic health, there can, of course, be no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in state or local economic conditions. Also, it should be
noted that the creditworthiness of obligations issued by local Hawaii issuers
may be unrelated to the creditworthiness of obligations issued by the state of
Hawaii, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Hawaii Trust are subject. Additionally,
many factors including national economic, social and environmental policies
and conditions, which are not within the control of the issuers of the Bonds,
could affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Hawaii Trust to pay interest on or principal on the
Bonds.
At the time of the closing for each Hawaii Trust, Special Counsel to the Fund
for Hawaii tax matters rendered an opinion under then existing Hawaii income
tax law applicable to taxpayers whose income is subject to Hawaii income
taxation substantially to the effect that:
(1)The Hawaii Trust is not an association taxable as a corporation and each
Unitholder of the Hawaii Trust will be treated as the owner of a pro rata
portion of the Hawaii Trust, and the income of such portion of the Hawaii
Trust will therefore be treated as the income of the Unitholder for Hawaii
Income Tax purposes;
(2)Income on the Bonds which is exempt from the Hawaii Income Tax when
received by a Unitholder of the Hawaii Trust and which would be exempt from
the Hawaii Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the Hawaii Trust and
distributed to such Unitholder;
(3)To the extent that interest on the Bonds, if any, is includible in the
computation of "alternative minimum taxable income" for federal income
tax purposes, such interest will also be includible in the computation of "
alternative minimum taxable income" for purposes of Hawaii's corporate
alternative minimum tax on corporations;
(4)Each Unitholder of the Hawaii Trust will recognize gain or loss for Hawaii
Income Tax purposes if the Trustee disposes of a Bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the Hawaii
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for federal income tax purposes;
(5)Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable gain
for Hawaii Income Tax purposes when their Units are sold or redeemed for an
amount equal to or less than their original cost;
(6)Proceeds, if any, paid under individual insurance policies obtained by
issuers of Bonds or the Trustee which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Hawaii net income if,
and to the same extent as, such interest would have been so excludible if paid
in the normal course by the issuer of the defaulted obligation provided that,
at the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation that
the issuer of the bonds, rather than the insurer, will pay debt service on the
bonds; and
(7)To the extent that interest derived from the Hawaii Trust by a Unitholder
with respect to any Possession Bonds is excludible from gross income for
federal income tax purposes pursuant to 48 U.SC. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will also not be
subject to the Hawaii Income Tax. It should be noted that interest relating to
Possession Bonds is subject to tax in the case of certain banks and financial
institutions subject to the Hawaii's franchise tax and corporations subject to
Hawaii's corporate alternative minimum tax.
We have not examined any of the Bonds to be deposited and held in the Hawaii
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Kansas Trusts
Recovery from the adverse effects of layoffs, business closures and widespread
flooding that occurred in 1993 characterized the Kansas economy in 1994. The
continued effects of layoffs and restructuring slowed employment growth in
Kansas for the second consecutive year. Employment growth lagged behind the
national rate.
With employment growth in the civilian labor force, the number of unemployed
workers expanded by 5,400. This pushed the unemployment rate from a 5.0% level
in 1993 to a monthly average of 5.3% in 1994. This was the second consecutive
year in which the unemployment rate had increased in Kansas. The 1994 increase
was in contract to a substantial decline in the national unemployment rate.
However, the high unemployment rates occurred early in the year. In fact,
since mid-year, the unemployment rate has been at or below earlier year rates.
The January unemployment rate of 7.3% was an anomaly associated with a major
revision in the methodology used to determine unemployment. Thus, the monthly
unemployment average for 1994 in slightly overstated.
As was the case a year ago, the slowdown in employment growth was concentrated
in the goods producing industries of manufacturing and mining. In 1994,
manufacturing employed an average of 600 fewer workers than a year earlier,
and mining employment was 200 below 1993.
Based on the most recent detailed comparable data, employment growth in Kansas
has trailed national employment growth. Between 1992 and 1993, Kansas
employment growth of 1.2% lagged behind the U.S. rate of 1.7%. Kansas
employment growth was less than the national growth rate in all major
employment categories except manufacturing and government.
Higher personal interest income contributed to a higher rate of growth of
Kansas personal income in 1994. Compared with a 4.0% advance in 1993, Kansas
personal income is forecast to grow 5.3% in 1994. Personal income for the
United States is forecast to increase 5.9% in 1994.
Salary and wage growth is expected to be 5.8% in 1994, a large improvement
over the 3.4% a year earlier. Other labor income is forecast to rise 7.0% in
1994 compared with an 8.0% advance in 1993. Nonfarm proprietors' income will
grow 6.9%, a slower pace than the 7.9% growth a year earlier. Farm
proprietors' income is expected to move higher than a year earlier when
flooding reduced yields.
Of the major industry groups, certain sectors displayed significant growth in
terms of salaries and wages. The sectors that displayed this growth were the
construction sector, the transportation and public utilities industry and the
service sector.
The Governor's recommendations for Fiscal Year 1995 reflect significant
savings in school finance requirements and a reduction in the funding
requirements for group health insurance costs for state employees. In
addition, the Governor recommends that the remaining two-year obligation for
the military retirement settlement be escrowed in Fiscal Year 1995 and that
the tax on original construction be repealed effective March 1, 1995 to
provide one quarter of a year of tax relief in Fiscal Year 1995.
Major spending adjustments were necessary in the Governor's Fiscal Year 1995
recommendations because of shortfall in Regents institutions' tuition and fee
collections, underfunding of the Kansas Public Employees Retirement System
(KPERS) obligation, additional indigents defense assigned counsel funding and
payments made to settle a Fair Labor Standards Act lawsuit. Before any of
these adjustments were recommended, a thorough analysis of agency expenditures
to date was made, revenues other than the State General Fund were maximized
and the need for any supplemental funding was carefully scrutinized.
The State's Revenues for Fiscal Year 1995 are expected to total $3,702.0
million (which includes a $455.1 million Ending Balance from 1994).
Expenditures are expected to total $3,342.3 million, which is an increase of
7.4% over the previous year's Expenditures. The Ending Balance for Fiscal Year
1995 is forecast to be $359.7 million. The budget includes a total of 43,334
full-time employee positions and 1,418 special project positions.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Kansas Trust are subject. Additionally, many
factors including national economic, social, and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds, or the ability of the respective issuers of the Bonds acquired by
the Kansas Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Kansas Trust, Special Counsel to each
Kansas Trust for Kansas tax matters, rendered an opinion under then existing
Kansas income tax law applicable to taxpayers whose income is subject to
Kansas income taxation substantially to the effect that:
The Trust is not an association taxable as a corporation for Kansas income tax
purposes;
Each Unitholder of the Trust will be treated as the owner of a pro rata
portion of the Trust, and the income and deductions of the Trust will
therefore be treated as income of the Unitholder under Kansas law;
Interest on Bonds issued after December 31, 1987 by the State of Kansas or any
of its political subdivisions will be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) however, interest on
Bonds issued prior to January 1, 1988 by the State of Kansas or any of its
political subdivisions will not be exempt from income taxation imposed on
individuals, corporations and fiduciaries (other than insurance companies,
banks, trust companies or savings and loan associations) unless the laws of
the State of Kansas authorizing the issuance of such Bonds specifically exempt
the interest on the Bonds from income taxation by the State of Kansas;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on banks, trust companies and
savings and loan associations under Article 11, Chapter 79 of the Kansas
statutes;
Interest on Bonds issued by the State of Kansas or any of its political
subdivisions will be subject to the tax imposed on insurance companies under
Article 40, Chapter 28 of the Kansas statutes unless the laws of the State of
Kansas authorizing the issuance of such Bonds specifically exempt the interest
on the Bonds from income taxation by the State of Kansas; interest on the
Bonds which is exempt from Kansas income taxation when received by the Trust
will continue to be exempt when distributed to a Unitholder (other than a
bank, trust company or savings and loan association);
Each Unitholder of the Trust will recognize gain or loss for Kansas income tax
purposes if the Trustee disposes of a Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if the Unitholder redeems or sells
Units of the Trust to the extent that such transaction results in a recognized
gain or loss for federal income tax purposes;
Interest received by the Trust on the Bonds is exempt from intangibles
taxation imposed by any counties, cities and townships pursuant to present
Kansas law; and
No opinion is expressed regarding whether the gross earnings derived from the
Units is subject to intangibles taxation imposed by any counties, cities and
townships pursuant to present Kansas law.
Kentucky Trusts
The Commonwealth of Kentucky leads the nation in total tonnage of coal
produced and ranks among the top 10 states in the value of all minerals
produced. Tobacco is the dominant agricultural crop and Kentucky ranks second
among the states in the total cash value of tobacco raised. The manufacturing
mix in the state reflects a significant diversification. In addition to the
traditional concentration of tobacco processing plants and bourbon
distilleries, there is considerable durable goods production, such as
automobiles, heavy machinery, consumer appliances, and office equipment. The
State's parks system and the horse breeding and racing industry, symbolized
by the Kentucky Derby, play an important role in an expanding tourist business
in the state.
Current economic problems, including particularly the continuing high
unemployment rate, have had varying effects on the differing geographic areas
of the State and the political subdivisions located within such geographic
areas. Although revenue obligations of the State or its political subdivisions
may be payable from a specific source or project, there can be no assurance
that further economic difficulties and the resulting impact on State and local
governmental finances will not adversely affect the market value of the Bonds
in the Kentucky Quality Trust or the ability of the respective obligors to pay
debt service of such Bonds.
Prospective investors should study with care the portfolio of Bonds in the
Kentucky Quality Trust and should consult with their investment advisors as to
the merits of particular issues in the portfolio.
At the time of the closing for each Kentucky Trust, Special Counsel to each
Kentucky Trust for Kentucky tax matters rendered an opinion under then
existing Kentucky income tax law applicable to taxpayers whose income is
subject to Kentucky income taxation substantially to the effect that:
In the opinion of Harper, Ferguson & Davis, special counsel to the Fund for
Kentucky tax matters, under existing Kentucky law:
Because Kentucky income tax law is based upon the Federal law and in explicit
reliance upon the opinion of Chapman and Cutler referred to above, and in
further reliance on the determination letter to us of the Revenue Cabinet of
Kentucky dated May 10, 1984, it is our opinion that the application of
existing Kentucky income tax law would be as follows:
Each Kentucky Unitholder will be treated as the owner of a pro rata portion of
the Kentucky Quality Trust for Kentucky income tax purposes, and the income of
the Kentucky Quality Trust will therefore be treated as the income of the
Kentucky Unitholders under Kentucky law;
Interest on Bonds that would be exempt from Federal income taxation when paid
directly to a Kentucky Unitholder will be exempt from Kentucky income taxation
when: (i) received by the Kentucky Quality Trust and attributed to such
Kentucky Unitholder; and (ii) when distributed to such Kentucky Unitholder;
Each Kentucky Unitholder will realize taxable gain or loss when the Kentucky
Quality Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when the Kentucky Unitholder redeems or sells Units at
a price that differs from original cost as adjusted for amortization or
accrual, as appropriate, of bond discount or premium and other basis
adjustments (including any basis reduction that may be required to reflect a
Kentucky Unitholder's share of interest, if any, accruing on Bonds during the
interval between the Kentucky Unitholder's settlement date and the date such
Bonds are delivered to the Kentucky Quality Trust, if later);
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Kentucky Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost;
Units of the Kentucky Quality Trust, to the extent the same represent an
ownership in obligations issued by or on behalf of the Commonwealth of
Kentucky or governmental units of the Commonwealth of Kentucky, the interest
on which is exempt from Federal and Kentucky income taxation will not be
subject to ad valorem taxation by the Commonwealth of Kentucky or any
political subdivision thereof; and
If interest or indebtedness incurred or continued by a Kentucky Unitholder to
purchase Units in the Kentucky Quality Trust is not deductible for Federal
income tax purposes, it also will be nondeductible for Kentucky income tax
purposes.
Maine
The State of Maine, which includes nearly one-half of the total land area of
the six New England states, currently has a population of 1,235,000. The
structure of the Maine economy is quite similar to that of the nation as a
whole, except that Maine has proportionately more activity in manufacturing
and tourism, and less activity in finance and services.
During the 1980s Maine's economy grew rapidly. However, due largely to an
overheating of the New England construction/real estate markets in 1987-88,
the New England and Maine economies were much softer in 1989 and the first
portion of 1990. The Maine Economic Growth Index, a broad measure of overall
growth corrected for inflation declined 2.9% in 1991 and rose 2.0% in 1992.
The United States Economic Growth Index reflected a decline of 1.4% in 1991
and an increase of 1. 4% in 1992.
The largest industries in Main in 1993 were services (134,000 jobs) and retail
and wholesale trade (130,100 jobs) followed by government (95,00 jobs),
finance, insurance and real estate (25,600 jobs) and transportation and public
utilities (21,900 jobs).
The unemployment rates for Maine in 1992 and 1993 were 7.1% and 7.9%,
respectively. Although not strictly comparable, the preliminary seasonally
adjusted rate for August 1994 was 6.9%. According to the Maine State Planning
Office, per capita income in Maine was $17,125 in 1990, $17,442 in 1991 and
$18,226 in 1992. The corresponding U.S. per capita income figures were
$18,635, $19,091 and $19,841 for 1990, 1991 and 1992 respectively.
The Constitution of the State of Maine provides that the Legislature shall not
create any debt which exceeds $2,000,000 except to suppress insurrection, to
repel invasion or for purposes of war except when two-thirds of the
Legislature and a minority of the voters authorize the issuance of debt. The
Constitution also provides that tax anticipation loans must be repaid during
the fiscal year of issuance. Constitutional amendments have been adopted which
also allow the Legislature to authorize the issuance of bonds: to insure
payments on revenue bonds of up to $4,800,000 for local public school building
projects; in the amount of up to $4,000,000 to guarantee student loans; to
insure payments on up to $1,000,000 of mortgage loans for Indian housing; to
insure payments on up to $4,000,000 of mortgage loans or small business loans
to war veterans; and to insure payments on up to $90,000,000 of mortgage loans
for industrial, manufacturing, fishing, agricultural, and recreational
enterprises. This last authorization has been limited statutorily to a maximum
of $87,500,000 available for issue through the Finance Authority of Maine.
The First Regular Session of the 116th Legislature convened in January, 1993
and on June 30, 1993 adopted budgets for the fiscal years ending June 30, 1994
and June 30, 1995. As enacted, the budgets provide in fiscal year 1994 for
General Fund expenditures of $1,577,877,634 and Highway Fund expenditures of
$196,051,619 and for fiscal year 1995 General Fund expenditures of
$1,626,771,903 and Highway Fund expenditures of $197,593,241.
The budgets for the fiscal 199-95 biennium include the extension of the one
cent increase in the sales tax that was temporarily enacted for the previous
two year period and statutory language that would continue the increase if
certain economic conditions exist. The budgets also include the introduction
of a 7% gross receipts tax on prepared meals in establishments licensed for
consumption of alcoholic beverages and for receipts tax on prepared meals in
establishments licensed for consumption of alcoholic beverages and for nursing
home receipts, and a 35 year reamortization of the unfunded liability of the
Maine State Retirement System. Proposed General Fund expenditures for fiscal
year 1994 reflect a reduction of16% from fiscal year 1993 and a 3.17%
increase from fiscal year 1994 to fiscal year 1995.
The fiscal 1996-97 biennial budget was presented by the Governor to the
legislature on February 10, 1995 and must be adopted by July 1, 1995. The
General Fund revenue forecast for the fiscal 1996-97 biennial budget is
$3,491.1 million. Revenues will be obtained from the following sources in the
following percentages: Individual Income Tax (37.5%), Sales & Use Tax (37.0%),
Gross Receipts Tax (4.2%), Corporate Income Tax (3.7%), Cigarette Tax (2.6%),
Lottery (2.5%), Insurance Co. Tax (2.2%), Public Utilities Co. Tax (1.5%),
Alcoholic Beverage (1.3%), Inheritance & Estate Tax (.7%), Unorganized
Territory Property Tax (.6%), Investment Income (-.2%)) and Other Revenues
(6.4%).
For the fiscal 1996-97 biennial budget, the Governor has recommended $3,491.1
million in appropriations. The funds will be allocated as follows: Education
(50.7%), Human Services (31.2%), General Government (7.7%), General
Government--Debt Service (4.6%), Natural Resources (2.4%), Economic
Development (1.7%), Public Protection (.8%), Statewide Initiatives (.4%),
Labor (.3%) and Transportation (.2%).
Maine's outstanding general obligations are currently rated AA+ by Standard &
Poor's and Aa1 by Moody's Investors Service, Inc. Maine has currently slowed
its issuance of general obligation debt as a result of the State's fiscal
situation. Maine has $555,500,000 of outstanding general obligation debt and
$155,200,000 in authorized unissued debt. Nevertheless, due in large part to
the State's low debt burden and rapid debt amortization, the public rating
agencies do not consider debt burden a negative factor.
The Portfolio may contain obligations of the Maine Municipal Bond Bank. All
Maine Municipal Bond Bank debt is secured by loan repayments of borrowing
municipalities and the State's moral obligation pledge. The state of the
economy in Maine could impact the ability of municipalities to pay debt
service on their obligations. Maine Municipal Bond Bank debt continues to
carry a AA rating from Standard & Poor's and a Aa rating from Moody's
Investors Service, Inc.
The Portfolio may contain obligations issued by Regional Waste Systems, Inc.,
a quasi-municipal corporation organized pursuant to an interlocal agreement
among approximately 20 Southern Maine communities ("RWS" or other
quasi-municipal solid waste disposal facilities. RWS and other similar solid
waste disposal projects operate regional solid waste disposal facilities and
process the solid waste of the participating municipalities as well as the
solid waste of other non-municipal users. The continued viability of such
facilities is dependent, in part, upon the approach taken by the State of
Maine with respect to solid waste disposal generally. Pursuant to a Public Law
1989 Chapter 585, the newly formed Maine Waste Management Agency is charged
with preparation and adoption by rule of an analysis and a plan for the
management, reduction and recycling of solid waste for the State of Maine. The
plan to be developed by the Maine Waste Management Agency is based on the
waste management priorities and recycling goals established by State law.
Pursuant to State law, Maine has established minimum goals for recycling and
composting requiring that a minimum of 25% of the municipal solid waste stream
be recycled or composted by 1992 and 50% be recycled or composted by 1994.
Although RWS may participate in the mandated recycling activities, its
principal existing facility consists of a mass burn 250 ton per day furnace
boiler with associated equipment for production of electric energy. Thus, the
source material for the RWS' primary facility could be substantially reduced
as a result of implementation of the State's recycling goals. Other mass burn
solid waste disposal facilities in the State have experienced seasonal
shortages in waste fuel.
Revenue bonds are issued by the Maine Health and Higher Education Facilities
Authority to finance hospitals and other health care facilities. The revenues
of such facilities consist, in varying but typically material amounts, of
payment from insurers and third-party reimbursement programs, including
Medicaid, Medicare and Blue Cross. The health care industry in Maine is
becoming increasingly competitive. The utilization of new programs and
modified benefits by third-party reimbursement programs and the advent of
alternative health care delivery systems such as health maintenance
organizations contribute to the increasingly competitive nature of the health
care industry. This increase in competition could adversely impact the ability
of health care facilities in Maine to satisfy their financial obligations.
Further, health care providers are subject to regulatory actions, changes in
law and policy changes by agencies that administer third-party reimbursement
programs and regulate the health care industry. Any such changes could
adversely impact the financial condition of such facilities.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Maine Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by
the Maine Trust to pay interest on or principal of the Bonds.
The assets of the Maine Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Maine (the "State" or
counties, municipalities, authorities or political subdivisions thereof (the
"Maine Bonds" or by the Commonwealth of Puerto Rico, Guam and the
United States Virgin Islands (the "Possession Bonds" (collectively,
the "Bonds".
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Maine Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for Federal income tax purposes, (iii) interest on the Maine Bonds, if
received directly by a Unitholder, would be exempt from the Maine income tax
applicable to individuals, trusts and estates and corporations ("Maine
Income Tax", and (iv) interest on the Bonds will not be taken into
account by individuals and corporations in computing an additional tax ("
Maine Minimum Tax" or in the case of corporations, a surcharge ("
Maine Corporate Income Tax Surcharge" imposed under the Maine Income Tax.
The opinion set forth below does not address the taxation of persons other
than full time residents of Maine.
In the opinion of Chapman and Cutler, Special Counsel to the Fund for Maine
tax matters, under existing law as of the date of this prospectus and based
upon the assumptions set forth above:
the Maine Trust is not an association taxable as a corporation, thus each
Unitholder of the Trust will be essentially treated as the owner of a pro rag
portion of the Maine Trust and the income of such portion of the Maine Trust
will be treated as the income of the Unitholder for Maine Income Tax purposes;
interest on the Bonds which is exempt from the Maine Income Tax when received
by the Maine Trust, and which would be exempt from the Maine Income Tax and
the Maine Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Maine Income Tax and the Maine Minimum Tax when
received by the Maine Trust \xd4 and distributed to the Unitholder;
to the extent that interest derived from the Maine Trust by a Unitholder with
respect to the Possession Bonds is excludible from gross income for Federal
income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a
and 48 U.S.C. Section 1403, such interest will not be subject to the Maine
Income Tax;
each Unitholder of the Maine ~ Trust will recognize gain or loss for Maine
Income Tax purposes if the Trustee disposes of a bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the Maine
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for Federal income tax purposes; and
the Maine Income Tax does not permit a deduction of interest paid or incurred
on indebtedness incurred or continued to purchase or carry Units in the Maine
Trust, the interest on which is exempt from the Tax.
Prospective purchasers subject to the Maine Franchise Tax should be advised
that for purposes of the Maine Franchise Tax, interest on the Bonds received
by the Trust and distributed to a Unitholder subject to such tax will be added
to the Unitholder's Federal taxable income and therefore will be taxable.
Maryland Trusts
The public indebtedness of the State of Maryland, its instrumentalities and
its local governments is divided into three basic types. The State, and the
counties and municipalities of the State, issue general obligation bonds for
capital improvements and for various projects to the payment of which an ad
valorem property tax is exclusively pledged.
Certain authorities of the State and certain local governments issue
obligations payable solely from specific non-tax, enterprise fund revenues and
for which the issuer has no liability and has given no moral obligation
assurance. The principal of and interest on bonds issued by these bodies are
payable solely from various sources, principally fees generated from use of
the facilities or enterprises financed by the bonds.
The special authorities of the State and local government entities have
outstanding bonds backed exclusively by revenues derived from projects and
facilities financed by the bond issue. The holders of these bonds have no
claim against the general credit of the State or any governmental unit for the
payment of those bonds.
There is no general debt limit imposed on the State of Maryland by the State
Constitution or public general laws, but a special committee created by
statute annually makes an estimate of the maximum amount of new general
obligation debt that the State may prudently authorize.
There can be no assurance that particular bond issues may not be adversely
affected by changes in State or local economic or political conditions.
Investors are, therefore, advised to study with care the Portfolio for the
Maryland Quality Trust appearing elsewhere in this Prospectus and consult
their own investment advisers as to the merits of particular issues in that
Portfolio.
At the time of the closing for each Maryland Trust, Special Counsel to each
Maryland Trust for Maryland tax matters rendered an opinion under then
existing Maryland income tax law applicable to taxpayers whose income is
subject to Maryland income taxation substantially to the effect that:
In the opinion of Weinberg and Green, special counsel to the Fund for Maryland
tax matters, under existing Maryland income tax law applicable to taxpayers
whose income is subject to Maryland income taxation:
(1)For Maryland State and local income tax purposes, the Maryland Quality
Trust will not be recognized as an association taxable as a corporation, but
rather as a fiduciary whose income will not be subject to Maryland State and
local income taxation.
(2)To the extent that interest derived from the Maryland Quality Trust by a
Unitholder with respect to the obligations of the State of Maryland and its
political subdivisions is excludable from Federal gross income, such interest
will not be subject to Maryland State or local income taxes. Interest paid to
a "financial institution" will be subject to the Maryland State
franchise tax on financial institutions.
(3)In the case of taxpayers who are individuals, Maryland presently imposes an
income tax on items of tax preference with reference to such items as defined
in the Internal Revenue Code, as amended from time to time, for purposes of
calculating the federal alternative minimum tax. Interest paid on certain
private activity bonds constitutes a tax preference item for the purpose of
calculating the federal alternative minimum tax. Accordingly, if the Maryland
Quality Trust holds such bonds, 50% of the interest on such bonds in excess of
a threshold amount is taxable in Maryland.
(4)Capital gain, including gain realized by a Unitholder from the redemption,
sale or other disposition of a Unit, will be included in the Maryland taxable
base of Unitholders for Maryland State and local income taxation purposes.
However, Maryland defines the taxable net income of individuals as Federal
adjusted gross income with certain modifications. Likewise, the Maryland
taxable net income of corporations is Federal taxable income with certain
modifications. There is available to Maryland income taxpayers a modification
which allows those taxpayers to subtract from the Maryland taxable base the
gain included in Federal adjusted gross income or Federal taxable income, as
the case may be, which is realized from the disposition of Securities by the
Maryland Quality Trust. Consequently, by making that modification, a
Unitholder who is entitled to make the subtraction modification will not be
subject to Maryland State or local income tax with respect to gain realized
upon the disposition of Securities by the Maryland Quality Trust. Profit
realized by a "financial institution" from the sale or exchange of
Bonds will be subject to the Maryland Franchise Tax.
These opinions relate only to the treatment of the Maryland Quality Trust and
the Units under the Maryland State and local income tax laws and Maryland
franchise tax laws. Unitholders should consult tax counsel as to other
Maryland tax consequences not specifically considered in these opinions. For
example, no opinion is expressed as to the treatment of the Units under the
Maryland inheritance and estate tax laws.
Massachusetts Trusts
As described above, the Massachusetts Trust will invest substantially all of
its net assets in obligations issued by or on behalf of the Commonwealth of
Massachusetts, political subdivisions thereof, or agencies or
instrumentalities of the Commonwealth or its political subdivisions (the "
Bonds". The Massachusetts Trust is therefore susceptible to general or
particular political, economic, or regulatory factors that may affect issuers
of such Massachusetts Investments. The following information constitutes only
a brief summary of some of the many complex factors that may have an effect.
The information may not be applicable to "conduit" obligations on
which the public issuer itself has no financial responsibility. This
information is derived from official statements of the Commonwealth and
certain of its agencies or instrumentalities in connection with the issuance
of securities, and from other publicly available documents, and is believed to
be accurate. No independent verification has been made of any of the following
information.
The Massachusetts Economy. After declining since 1987, Massachusetts
employment in 1993 has shown positive annual growth. While Massachusetts had
benefited from an annual job growth rate of approximately 2% since the early
1980's, by 1989, employment had started to decline. Nonagricultural employment
declined 0.7% in 1989, 4.0% in 1990, 5.5% in 1991, 0.9% in 1992, and 1.7% in
1993. A comparison of total, nonagricultural employment in November 1993 with
that in November 1994 indicates an increase of 2.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly lower
than the national average. By 1990, however, unemployment reached 6.0%,
exceeding the national average for the first time since 1977. The
Massachusetts unemployment rate peaked in 1991 at 9.0% and dropped to 6.9% in
1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. From 1992 to 1993, nominal per capita income in Massachusetts
increased 3.6% as compared to 3.2% for the nation as a whole.
The Commonwealth, while the third most densely populated state according to
the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to less than one-half the rate of increase in the
United States population as a whole.
Massachusetts possesses a diversified economic base which includes traditional
manufacturing, high technology and service industries, served by an extensive
transportation system and related facilities. The Massachusetts service
sector, at approximately 34.3% of the state work force in November of 1994, is
the largest sector in the Massachusetts economy. Government employment is
below the national average, representing less than 14% of the Massachusetts
work force. In recent years, the construction, manufacturing and trade sectors
have experienced the greatest decreases in employment in Massachusetts, with
more modest declines taking place in the government, finance, insurance and
real estate, and service sectors. From 1990 to November of 1994, manufacturing
employment in Massachusetts declined by some 15.5%. At the same time, there
has occurred a reversal of the dramatic growth which occurred during the
1980's in the finance, insurance and real estate sector and in the
construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction agenda
which is expected not only to improve mobility, but to provide a substantial
number of construction and related employment opportunities, including the
major Central Artery/Tunnel project involving the construction of a third
tunnel under Boston Harbor linking the MassPike and downtown Boston with Logan
International Airport, and the depression into tunnels of the Central Artery
that traverses the City of Boston. Federal funds are expected to cover
approximately 90% of the cost of this project. The Central Artery/Tunnel
project is expected to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the mid-1990's.
State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories--Medicaid,
debt service, public assistance, group health insurance and transit
subsidies--grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall combined
with steadily escalating costs contributed to serious budgetary and financial
difficulties which have affected the credit standing and borrowing abilities
of Massachusetts and certain of its public bodies and municipalities, and
which have contributed to higher interest rates on debt obligations issued by
them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budgeted program expenditures for fiscal 1992 and fiscal 1993 and fiscal 1994
have moderated these difficulties, and the Commonwealth has shown significant
surpluses of revenues and other sources over expenditures and other uses in
the Commonwealth's budgeted operating funds for those years. For fiscal 1995,
the cash flow projection prepared by the office of the State Treasurer in
December 1994, based upon actual results through October 1994, upon revenue
and spending estimates as of December 1994, and upon various other
assumptions, estimates the fiscal 1995 year-end cash position of the
Commonwealth to be approximately $447 million. Although the Secretary for
Administration and Finance has revised tax revenue estimates downward since
then, the fiscal 1995 non-tax revenue estimate has been revised upon upward,
and is projected to offset the expected decline in tax revenues.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Massachusetts Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Massachusetts Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust, Special Counsel to
each Massachusetts Trust for Massachusetts tax matters rendered an opinion
under then existing Massachusetts income tax law applicable to taxpayers whose
income is subject to Massachusetts income taxation substantially to the effect
that:
In the opinion of Peabody & Arnold, special counsel to the Fund, under
existing Massachusetts law:
(1)For Massachusetts income tax purposes, the Massachusetts Trust will be
treated as a corporate trust under Section 8 of Chapter 62 of the
Massachusetts General Laws and not as a grantor trust under Section 10(e) of
Chapter 62 of the Massachusetts General Laws.
(2)The Massachusetts Trust will not be held to be engaging in business in
Massachusetts within the meaning of said Section 8 and will, therefore, not be
subject to Massachusetts income tax.
(3)Massachusetts Unitholders who are subject to Massachusetts income taxation
under Chapter 62 of Massachusetts General Laws will not be required to include
their respective shares of the earnings of or distributions from the
Massachusetts Trust in their Massachusetts gross income to the extent that
such earnings or distributions represent tax-exempt interest for federal
income tax purposes received by the Massachusetts Trust on obligations issued
by Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States territories or
possessions.
(4)Any proceeds of insurance obtained by the Trustee of the Trust or by the
issuer of a Bond held by the Massachusetts Trust which are paid to
Massachusetts Unitholders and which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Massachusetts gross
income of a Massachusetts Unitholder if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
Bond.
(5)The Massachusetts Trust's capital gains and/or capital losses realized upon
disposition of Bonds held by it will be includable pro rata in the federal
gross income of Massachusetts Unitholders who are subject to Massachusetts
income taxation under Chapter 62 of the Massachusetts General Laws, and such
gains and/or losses will be included as capital gains and/or losses in the
Massachusetts Unitholders' Massachusetts gross income, except where capital
gain is specifically exempted from income taxation under acts authorizing
issuance of said Bonds.
(6)Gains or losses realized upon sale or redemption of Units by Massachusetts
Unitholders who are subject to Massachusetts income taxation under Chapter 62
of the Massachusetts General Laws will be includable in their Massachusetts
gross income.
(7)In determining such gain or loss Massachusetts Unitholders will, to the
same extent required for Federal tax purposes, have to adjust their tax bases
for their Units for accrued interest received, if any, on Bonds delivered to
the Trustee after the Unitholders pay for their Units and for amortization of
premiums, if any, on obligations held by the Massachusetts Trust.
(8)The Units of the Massachusetts Trust are not subject to any property tax
levied by Massachusetts or any political subdivision thereof, nor to any
income tax levied by any such political subdivision. They are includable in
the gross estate of a deceased Massachusetts Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
Michigan Trusts
Investors should be aware that the economy of the State of Michigan has, in
the past, proven to be cyclical, due primarily to the fact that the leading
sector of the State's economy is the manufacturing of durable goods. While the
State's efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable goods
sector has fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable
goods manufacturing still represents a sizable portion of the State's economy.
As a result, any substantial national economic downturn is likely to have an
adverse effect on the economy of the State and on the revenues of the State
and some of its local governmental units.
In July 1995, Moody's Investors Service, Inc. raised the State's general
obligation bond rating to "Aa" In October 1989, Standard & Poor's
raised its rating on the State's general obligation bonds to "AA"
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
In recent years, the State has reported its financial results in accordance
with generally accepted accounting principles. For the fiscal years ended
September 30, 1990 and 1991, the State reported negative year-end balances in
the General Fund/School Aid Fund of $310.4 million and $169.4 million,
respectively. The State ended each of the 1992, 1993 and 1994 fiscal years
with its General Fund/School Aid Fund in balance, after having made
substantial transfers to the Budget Stabilization Fund in 1993 and 1994. A
positive cash balance in the combined General Fund/School Aid Fund was
recorded at September 30, 1990. In the 1991 through 1993 fiscal years, the
State experienced deteriorating cash balances which necessitated short-term
borrowing and the deferral of certain scheduled cash payments. The State did
not borrow for cash flow purposes in 1994, but borrowed $500 million on March
9, 1995, which was repaid on September 29, 1995. The State anticipates
borrowing for cash flow purposes in the current fiscal year. The State's
Budget Stabilization Fund received year-end transfers from the General Fund of
$283 million in 1993 and $464 million in 1994, bringing the balance in the
Budget Stabilization Fund to $779 million at September 30, 1994.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the prior
calendar year. In the event that the State's total revenues exceeds the limit
by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increased the State
sales tax rate from 4% to 6% and placed a cap on property assessment increases
for all property taxes. Concurrent legislation cut the State's income tax rate
from 4.6% to 4.4%, reduced some property taxes and altered local school
funding sources to a combination of property taxes and state revenues, some of
which is provided from other new or increased State taxes. The legislation
also contained other provisions that alter (and, in some cases, may reduce)
the revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted,
investors should be alert to the potential effect of such measures upon the
operations and revenues of Michigan local units of government.
In addition, the State Legislature recently adopted a package of state tax
cuts, including a phase out of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in single business tax.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet
debt service requirements upon such bonds. In the 1991 fiscal year, the State
deferred certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact
on the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year, up $34.4 million in
the 1992 fiscal year, $45.5 million in the 1993 fiscal year, $54.5 million in
the 1994 fiscal year, and $67.0 million (budgeted) in the 1995 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the
local unit, are payable from property taxes levied without limitation as to
rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of the
local unit for debt service purposes is subject to constitutional, statutory
and charter tax rate limitations. In addition, several major industrial
corporations have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State. If successful,
such challenges could have an adverse impact on the ad valorem tax bases of
such units which could adversely affect their ability to raise funds for
operation and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust for Michigan tax matters rendered an opinion under then
existing Michigan income tax law applicable to taxpayers whose income is
subject to Michigan income taxation substantially to the effect that:
In the opinion of Miller, Canfield, Paddock and Stone, P.L.C., special counsel
to the Fund for Michigan tax matters, under existing Michigan law:
The Michigan Trust and the owners of Units will be treated for purposes of the
Michigan income tax laws and the Single Business Tax in substantially the same
manner as they are for purposes of the Federal income tax laws, as currently
enacted. Accordingly, we have relied upon the opinion of Messrs. Chapman and
Cutler as to the applicability of Federal income tax under the Internal
Revenue Code of 1986 to the Michigan Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan Trust is not
an association taxable as a corporation; the income of the Michigan Trust will
be treated as the income of the Unitholders and be deemed to have been
received by them when received by the Michigan Trust. Interest on the
underlying Bonds which is exempt from tax under these laws when received by
Michigan Trust will retain its status as tax exempt interest to the
Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by the Michigan Trust, and each Unitholder will have a taxable event
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when the Unitholder redeems or sells his
Certificate to the extent the transaction constitutes a taxable event for
Federal income tax purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in the same
manner as such cost is established and allocated for Federal income tax
purposes.
Under the Michigan Intangibles Tax, the Michigan Trust is not taxable and the
pro rata ownership of the underlying Bonds, as well as the interest thereon,
will be exempt to the Unitholders to the extent the Michigan Trust consists of
obligations of the State of Michigan or its political subdivisions or
municipalities, or of obligations of possessions of the United States. The
Intangibles Tax is being phased out, with reductions of twenty-five percent
(25%) in 1994 and 1995, fifty percent (50%) in 1996, and seventy-five percent
(75%) in 1997, with total repeal effective January 1, 1998.
The Michigan Single Business Tax replaced the tax on corporate and financial
institution income under the Michigan Income Tax, and the Intangible Tax with
respect to those intangibles of persons subject to the Single Business Tax the
income from which would be considered in computing the Single Business Tax.
Persons are subject to the Single Business Tax only if they are engaged in
"business activity" , as defined in the Act. Under the Single Business
Tax, both interest received by the Michigan Trust on the underlying Bonds and
any amount distributed from the Michigan Trust to a Unitholder, if not
included in determining taxable income for Federal income tax purposes, is
also not included in the adjusted tax base upon which the Single Business Tax
is computed, of either the Michigan Trust or the Unitholders. If the Michigan
Trust or the Unitholders have a taxable event for Federal income tax purposes
when the Michigan Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or the Unitholder redeems or sells his
Certificate, an amount equal to any gain realized from such taxable event
which was included in the computation of taxable income for Federal income tax
purposes (plus an amount equal to any capital gain of an individual realized
in connection with such event but excluded in computing that individual's
Federal taxable income) will be included in the tax base against which, after
allocation, apportionment and other adjustments, the Single Business Tax is
computed. The tax base will be reduced by an amount equal to any capital loss
realized from such a taxable event, whether or not the capital loss was
deducted in computing Federal taxable income in the year the loss occurred.
Unitholders should consult their tax advisor as to their status under Michigan
law.
Any proceeds paid under an insurance policy issued to the Trustee of the
Trust, or paid under individual policies obtained by issuers of Bonds, which,
when received by the Unitholders, represent maturing interest on defaulted
obligations held by the Trustee, will be excludable from the Michigan income
tax laws and the Single Business Tax if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax is not
premised upon the characterization of such proceeds under the Internal Revenue
Code, the Michigan Department of Treasury should adopt the same approach as
under the Michigan income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for tax
years beginning after December 31, 1986, the federal adjusted gross income,
the computation base for the Michigan Income Tax, of a Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan Trust disposes of a Bond or when the Unitholder redeems or sells a
Unit, to the extent such transaction constitutes a taxable event for Federal
income tax purposes.
Minnesota Trusts
In the early 1980's the State of Minnesota experienced financial difficulties
due to a downturn in the State's economy resulting from the national
recession. As a consequence, the State's revenues were significantly lower
than anticipated in the July 1, 1979 to June 30, 1981 biennium and the July 1,
1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and increased the
State sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local government, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases, revenues of
local governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation reduced
its rating on the State's outstanding general obligation bonds from AAA to AA+
in August 1981 and to AA in March 1982. Moody's Investors Service, Inc.
lowered its rating on the State's outstanding general obligation bonds from
Aaa to Aa in April 1982. The State's economy recovered in the July 1, 1983 to
June 30, 1985 biennium, and substantial reductions in the individual income
tax were enacted in 1984 and 1985. Standard & Poor's raised its rating on the
State's outstanding general obligation bonds to AA+ in January 1985. In 1986,
1987, 1991, 1992 and 1993, legislation was required to eliminate projected
budget deficits by raising additional revenue, reducing expenditures,
including aids to political subdivisions and higher education, reducing the
State's budget reserve (cash flow account), imposing a sales tax on purchases
by local governmental units, and making other budgetary adjustments. A budget
forecast released by the Minnesota Department of Finance on March 1, 1994
projects a balanced General Fund at the end of the current biennium, June 30,
1995, plus an increase in the State's cash flow account from $360 million to
$500 million. Total projected expenditures and transfers for the biennium are
$17.0 billion. The forecast also projects, however, a shortage of $29.5
million in the Local Government Trust Fund at June 30, 1995, against total
projected expenditures from the Fund of $1.8 billion for the biennium.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect
to Bonds that are revenue obligations of the issuer and not general
obligations of the State, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability
of the Bonds or the ability of the respective obligors to pay interest on and
principal of the Bonds.
At the time of the closing for each Minnesota Trust, Special Counsel to each
Minnesota Trust for Minnesota tax matters rendered an opinion under then
existing Minnesota income tax law applicable to taxpayers whose income is
subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting of (i)
interest from bonds issued by the State of Minnesota and its political and
governmental subdivisions, municipalities and governmental agencies and
instrumentalities and bonds issued by possessions of the United States which
would be exempt from federal and Minnesota income taxation when paid directly
to an individual, trust or estate (the "Bonds", (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held by the
Trustee.
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Minnesota that is applicable to individuals, trusts and
estates (the "Minnesota Income Tax". It should be noted that interest
on the Bonds is subject to tax in the case of corporations subject to the
Minnesota Corporate Franchise Tax or the Corporate Alternative Minimum Tax and
is a factor in the computation of the Minimum Fee applicable to financial
institutions. The opinion set forth below does not address the taxation of
persons other than full time residents of Minnesota.
The Minnesota State Legislature recently enacted legislation that provides
that interest received on certain Minnesota municipal bonds issued on or after
July 1, 1995 will be subject to Minnesota income taxation. The Governor of
Minnesota must sign the legislation in order to make it law. No prediction can
be made regarding whether the Governor will sign such legislation. Unitholders
are advised to consult their own tax advisors regarding the tax consequences
regarding this legislation.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under existing
Minnesota income tax law as of the date of this prospectus and based upon the
assumptions above:
(1)The Minnesota Trust is not an association taxable as a corporation and each
Unitholder of the Minnesota Trust will be treated as the owner of a pro rata
portion of the Minnesota Trust, and the income of such portion of the
Minnesota Trust will therefore be treated as the income of the Unitholder for
Minnesota Income Tax purposes;
(2)Income on the Bonds which is exempt from the Minnesota Income Tax when
received by a Unitholder of the Minnesota Trust and which would be exempt from
the Minnesota Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the Minnesota Trust and
distributed to such Unitholder;
(3)To the extent that interest on the Bonds, if any, which is includible in
the computation of "alternative minimum taxable income" for federal
income tax purposes, such interest will also be includible in the computation
of "alternative minimum taxable income" for purposes of the Minnesota
Alternative Minimum Tax imposed on individuals, estates and trusts and on
corporations;
(4)Each Unitholder of the Minnesota Trust will recognize gain or loss for
Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Minnesota Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax purposes;
(5)Tax cost reduction requirements relating to amortization of bond premium
may, under some circumstances, result in Unitholders realizing taxable gain
for Minnesota Income Tax purposes when their Units are sold or redeemed for an
amount equal to or less than their original cost;
(6)Proceeds, if any, paid under individual insurance policies obtained by
issuers of Bonds or the Trustee which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Minnesota net income
if, and to the same extent as, such interest would have been so excludible
from Minnesota net income if, and to the same extent as, such interest would
have been so excludible if paid in the normal course by the issuer of the
defaulted obligation provided that, at the time such policies are purchased,
the amounts paid for such policies are reasonable, customary and consistent
with the reasonable expectation that the issuer of the bonds, rather than the
insurer, will pay debt service on the bonds; and
(7)To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is excludible from gross
income for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a and 48 U.S.C. Section 1403, such interest will not be
subject to either the Minnesota Income Tax or the Minnesota alternative
minimum tax imposed on individuals, estates and trusts. It should be noted
that interest relating to Possession Bonds is subject to tax in the case of
corporations subject to the Minnesota Corporate Franchise Tax or the Corporate
Alternative Minimum Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Missouri Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
Currently, Missouri has a population of over 5 million people. Missouri's
population has climbed steadily upward, averaging an increase of approximately
6% each decade. Population projections indicate by the year 2010, there will
be about 5.5 million people in Missouri, a continuation of the steady,
moderate growth which has been the trend. Farming plays a vital role in
Missouri's economy. Cash receipts from sales of crops and livestock average
$3.8 billion annually. These cash receipts come from a variety of agricultural
commodities produced in the State. The largest portion of the State's
agricultural income comes from the production of meat animals (36.6%). Oil
crops account for 18.9%; feed crops 13.3%; dairy products 8.6%; poultry and
eggs 11.2%; food grains 4.0%; miscellaneous crops 3.3%; cotton 3.4% and
miscellaneous 0.7%.
According to data obtained by the Missouri Division of Employment Security, in
1993 over two million workers had nonagricultural jobs in Missouri. Nearly 27%
of these workers were employed in services, approximately 24% were employed in
wholesale and retail trade, and 17% were employed in manufacturing. In the
last ten years, Missouri has experienced a significant increase in employment
in the service sector and in wholesale and retail trade. In 1993, per capita
personal income in Missouri was $19,463, a 2.6% increase over the 1992 figure
of $18,970. For the United States as a whole, per capita income in 1993 was
$20,817, a 3.6% increase over the 1992 per capita income of $20,105.
The total value of Missouri's annual mineral production in 1992 exceeded $1.1
billion. The State ranked first nationally in the production of lime and lead.
It ranked second in production of crude iron oxide pigments; third in barite,
fire clay and iron pigments; fourth in zinc; fifth in portland cement; sixth
in copper and eighth in sliver. Mining employment totaled 4,700 jobs. Missouri
ranks 11th in the nation in the production of non-fuel minerals.
Although the June 1993 revenue estimate had been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due primarily
to delayed spending for desegregation capital projects. The downward revision
in revenues was considered necessary because of weak economic performance, and
more importantly an economic outlook for the second half of Fiscal Year 1993
which projected slower growth than was anticipated in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri were
obtained from individual income taxes (53.1%), sales and use taxes (30.0%),
corporate income taxes (5.9%) and county foreign insurance taxes (3.0%). Major
expenditures for Fiscal Year 1994 included elementary and secondary education
(30.6%), human services (25.4%), higher education (14.8%), desegregation
(8.9%), corrections and public safety (5.1%) and judiciary and general
assembly (2.7%).
The Fiscal Year 1994 budget balanced resources and obligations based on the
consensus revenue and refund estimate and an opening balance resulting from
continued withholdings and delayed spending for desegregation capital
projects. The total general revenue operating budget for Fiscal Year 1994
exclusive of desegregation is $3,844.6 million. The court-ordered
desegregation estimate in $377.7 million, an increase of $30.7 million over
the revised Fiscal Year 1993 estimate.
For Fiscal Year 1995 revenues are projected at $5,225.5 million. This does not
include $64 million in transfers or a carryover balance of approximately
$274.6 million. Expenditures are projected at $5,270.8 million, including $58
million reserved for supplemental appropriations for Fiscal Year 1995.
Legislation enacted in 1989 required any surplus resulting from revenues
raised net of refunds and revenues lost to be deposited in the Budget
Stabilization (Rainy Day) Fund. The fund was used to pay general revenue costs
associated with the floods of 1993 and will be replenished (subject to
appropriation) to the pre-flood level of $28.4 million.
Legislation enacted in 1983 and a Constitutional Amendment passed in 1986
created a Cash Operating Reserve Fund to meet cash flow requirements of the
State. A total of $130 million in general revenue was transferred to the Fund
in Fiscal Year 1985 beginning balance was $202.2 million.
According to the United States Bureau of Labor Statistics, the 1993
unemployment rate in Missouri was 6.4% and the 1994 rate was 4.9%. Although
not strictly comparable, the preliminary seasonally adjusted rate for July of
1995 was 5.0%.
Currently, Moody's Investors Service rates Missouri general obligation bonds
"Aaa" and Standard & Poor's rates Missouri general obligation bonds
"AAA" Although these ratings indicate that the State of Missouri is
in relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay interest
on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued by or
on behalf of the State of Missouri (the "State" or counties,
municipalities, authorities or political subdivisions thereof (the "
Missouri Bonds" or by the Commonwealth of Puerto Rico, Guam and the
United States Virgin Islands (the "Possession Bonds" (collectively,
the "Bonds".
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri Trust. However, although no opinion
is expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for Federal income tax purposes and (iii) interest on the Missouri Bonds, if
received directly by a Unitholder, would be exempt from the Missouri income
tax applicable to individuals and corporations ("Missouri state income
tax". The opinion set forth below does not address the taxation of
persons other than full time residents of Missouri.
In the opinion of Chapman and Cutler, counsel to the Sponsor under existing
law:
(1)The Missouri Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Missouri Trust will
be treated as the owner of a pro rata portion of the Missouri Trust and the
income of such portion of the Missouri Trust will be treated as the income of
the Unitholder for Missouri state income tax purposes.
(2)Interest paid and original issue discount, if any, on the Bonds which would
be exempt from the Missouri state income tax if received directly by a
Unitholder will be exempt from the Missouri state income tax when received by
the Missouri Trust and distributed to such Unitholder; however, no opinion is
expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and distributed
to Unitholders under any other tax imposed pursuant to Missouri law, including
but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(3)Each Unitholder of the Missouri Trust will recognize gain or loss for
Missouri state income tax purposes if the Trustee disposes of a bond (whether
by redemption, sale, or otherwise) or if the Unitholder redeems or sells Units
of the Missouri Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an amount
less than or equal to their original cost.
(4)Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross income for
Federal income tax purposes will be excludable from the Missouri state income
tax to the same extent as such interest would have been paid by the issuer of
such Bonds held by the Missouri Trust; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if any, on
the Bonds received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not limited to
the franchise tax imposed on financial institutions pursuant to Chapter 148 of
the Missouri Statutes.
(5)The Missouri state income tax does not permit a deduction of interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units
in the Trust, the interest on which is exempt from such Tax.
(6)The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the Bonds
held by the Missouri Trust will not generally be subject to the Kansas City,
Missouri Earnings and Profits Tax or the City of St. Louis Earnings Tax
(except that no opinion is expressed in the case of certain Unitholders,
including corporations, otherwise subject to the St. Louis City Earnings Tax).
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Missouri law. Ownership of the Units may result in
collateral Missouri tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Nebraska Trusts
Unemployment. The Nebraska unemployment rate has been among the lowest in the
nation in recent years. The annual average Nebraska unemployment rates during
the last several years have been 2.2 percent in 1990, 2.8 percent in 1991, 3.0
percent in 1992, 2.6 percent in 1993 and 2.8 percent (preliminary) in 1994;
compared to 5.5 percent, 6.7 percent, 7.4 percent, 6.8 percent and 6.1 percent
overall in the United States.
Job Growth. Growth in non-farm payroll employment in Nebraska has generally
been positive in recent months and years. From November 1993 to November 1994,
preliminary U.S. Department of Labor data suggest non-farm payroll employment
increased by approximately 27,600 in Nebraska, or by 3.6 percent. Thirty
percent of that estimated job growth was in the service sector.
In 1990, the average number of Nebraska non-farm payroll jobs was 730,100.
That number increased 1.2 percent to 739,200 in 1991; another 1.5 percent to
750,000 in 1992; and another 1.7 percent to 762,700 in 1993. Over the same
period, U.S. non-agricultural employment decreased 1.1 percent in 1991;
increased 0.3 percent in 1992 and increased 1.8 percent in 1993.
Manufacturing Job Growth. Manufacturing jobs have grown in Nebraska in recent
years, while generally declining nationally. Nebraska manufacturing jobs
totaled an estimated 108,300 in November 1994, or 3.6 percent more than a year
earlier.
The number of manufacturing jobs in Nebraska averaged 97,800 in 1990; then
increased to 99,600 in 1991 (1.8 percent); increased to 100,700 in 1992 (1.1
percent) and increased to 102,900 in 1993 (2.2 percent). Overall in the United
States, the number of manufacturing jobs declined 3.5 percent in 1991; fell
1.6 percent in 1992 and decreased 0.6 percent in 1993.
Income. Nebraska's per capita income has historically been below the average
of the United States, although the gap has closed in recent years. In 1989,
Nebraska per capita income was 90.7 percent of the national average; in 1993,
it was 95.1 percent.
Per capita personal income in the state grew from $17,379 in 1990 to $18,047
in 1991, a 3.8 percent increase; to $19,228 in 1992, a 6.5 percent increase;
and to $19,757 in 1993, a 2.8 percent increase. From 1992 to 1993, national
per capita income grew from #20,131 to #20,781, a 3.2 percent increase. Total
personal income in Nebraska increased 3.2 percent in 1993, or from
$30,775,000,000 in 1992 to $31,754,000,000 in 1993. That was below the
national growth rate of 4.4 percent.
Cost of Living. The cost of living in Nebraska is generally below the national
average. Where the national average is 100.0, the five Nebraska communities
surveyed average a composite 92.2 rating in the third quarter of 1994. In
individual cost of living sectors, Nebraska scored well below the national
average in the indices for housing, utilities, health care and miscellaneous
goods and services. Three of the five Nebraska communities in the survey,
including Omaha and Lincoln, were above the national average in transportation
costs; one of the state's three non-metropolitan cities in the survey was
above the national average for grocery items.
Population. With Nebraska's economic gains in recent years have come
population increases through positive net migration. Reversing a long period
of net out-migration from 1974 to 1990, an estimated 2,300 more people moved
to Nebraska than left from 1990 to 1991. Net in-migration ceased in 1992, but
a natural increase (births exceeding deaths) helped boost the state's total
population from the 1,578,417 recorded in the 1990 Census to an estimated
1,622,858 in 1994.
Economic Future. The Bureau of Business Research of the University of
Nebraska-Lincoln estimates that annual average non-farm employment in the
state will grow 1.5 percent in 1994; 1.5 percent in 1995 and 1.3 percent in
1996. Personal income is expected to grow 4.1 percent in 1994 and 5.3 percent
in 1995 and 1996. Consequently, taxable retail sales are expected to grow an
estimated 4.1 percent in 1994; 6.4 percent in 1995 and 4.9 percent in 1996.
For Fiscal Year 1996, the beginning balance of Nebraska's General Fund is
forecast to be $114.4 million, with a deficit of 5.0 million for a total of
$109.4 million. Total estimated net receipts for Fiscal Year 1996 is $1,792.0
million. Appropriations total $1,794.9 million, a 4.7 percent increase over
Fiscal Year 1995, which includes appropriations for aid to individual and
local governments, state operations and higher education, salary increases and
capital construction. The ending balance for Fiscal Year 1996 is expected to
be $106.5 million, with a cash reserve of $33.3 million. The following
programs received major increases in state aid; Medicaid, education, state
retirement system, salary increases for state employees, capital construction
projects and juvenile services. Over half of the increased spending for Fiscal
Year 1996 is a result of increases to Medicaid and education.
A major component in the budget is maximizing of federal funds going to the
Department of Social Services and Public Institutions ($23.2 million in Fiscal
Year 1996). This is being done through a revenue enhancement project in which
programs currently funded with general funds are eligible for federal
reimbursement with proper classification and documentation.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Nebraska Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the bonds or the ability of the respective issuers of the Bonds acquired by
the Nebraska Trust to pay interest on or principal of the bonds.
The assets of the Nebraska Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Nebraska (the "State" or
counties, municipalities, authorities or political subdivisions thereof (the
"Nebraska Bonds" or by the Commonwealth of Puerto Rico, Guam and the
United States Virgin Islands (the "Possession Bonds" (collectively,
the "Bonds".
Neither the Sponsor nor its counsel have independently examined the Bonds
to be deposited in and held in the Nebraska Trust. With respect to certain
Nebraska Bonds which may be held by the Nebraska Trust, the opinions of bond
counsel to the issuing authorities for such Bonds have indicated that the
interest on such Bonds is included in computing the Nebraska Alternative
Minimum Tax imposed by Section 77-2715 (2) of the Revised Nebraska Statutes
(the "Nebraska Minimum Tax" (the "Nebraska AMT Bonds".
However, although no opinion is expressed herein regarding such matters, it is
assumed that: (i) the Bonds were validly issued, (ii) the interest thereon is
excludible from gross income for Federal income tax purposes, (iii) none of
the Bonds (other than the Nebraska AMT Bonds, if any) are "specified
private activity bonds" the interest on which is included as an item of
tax preference in the computation of the Alternative Minimum Tax for federal
income tax purposes, (iv) interest on the Nebraska Bonds (other than the
Nebraska AMT Bonds, if any), if received directly by a Unitholder, would be
exempt from both the Nebraska income tax, imposed by Section 77-2714 et. seq.
of the Revised Nebraska Statutes (other than the Nebraska Minimum Tax) (the
"Nebraska State Income Tax" and the Nebraska Minimum Tax imposed by
Section 77-2715 (2) of the Revised Nebraska Statutes (the "Nebraska
Minimum Tax", and (v) interest on the Nebraska AMT Bonds, if any, if
received directly by a Unitholder, would be exempt from the Nebraska State
Income Tax. The opinion set forth below does not address the taxation of
persons other than full time residents of Nebraska.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under
existing law as of the date of this prospectus and based upon the assumptions
set forth above:
(1)The Nebraska Trust is not an association taxable as a corporation, each
Unitholder of the Nebraska Trust will be treated as the owner of a pro rata
portion of the Nebraska Trust, and the income of such portion of the Nebraska
Trust will therefore be treated as the income of the Unitholder for both
Nebraska State Income Tax and the Nebraska Minimum Tax purposes;
(2)Interest on the Bonds which is exempt from both the Nebraska State Income
Tax and the Nebraska Minimum Tax when received by the Nebraska Trust, and
which would be exempt from both the Nebraska State Income Tax and the Nebraska
Minimum Tax if received directly by a Unitholder, will retain its status as
exempt from such taxes when received by the Nebraska Trust and distributed to
a Unitholder;
(3)Interest on the Nebraska AMT Bonds, if any, which is exempt from the
Nebraska State Income Tax but is included in the computation of the Nebraska
Minimum Tax when received by the Nebraska Trust, and which would be exempt
from the Nebraska State Income Tax but would be included in the computation of
the Nebraska Minimum Tax if received directly by a Unitholder, will retain its
status as exempt from the Nebraska State Income Tax but included in the
computation of the Nebraska Minimum Tax when received by the Nebraska Trust
and distributed to a Unitholder;
(4)To the extent that interest derived from the Nebraska Trust by a Unitholder
with respect to the Possession Bonds is excludable from gross income for
Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
either the Nebraska State Income Tax or the Nebraska Minimum Tax;
(5)Each Unitholder of the Nebraska Trust will recognize gain or loss for both
Nebraska State Income Tax and Nebraska Minimum Tax purposes if the Trustee
disposes of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Nebraska Trust to the extent that
such a transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes;
(6)The Nebraska State Income Tax does not permit a deduction for interest paid
or incurred on indebtedness incurred or continued to purchase or carry Units
in the Nebraska Trust, the interest on which is exempt from such Tax; and
(7)In the case of a Unitholder subject to the State financial institutions
franchise tax, the income derived by such Unitholder from his pro rata portion
of the Bonds held by the Nebraska Trust may affect the determination of such
Unitholder's maximum franchise tax.
We have not examined any of the Bonds to be deposited and held in the Nebraska
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from either the Nebraska State Income Tax or the Nebraska Minimum
Tax of interest on the Nebraska Bonds if received directly by a Unitholder.
New Jersey Trusts
As described above, the New Jersey Trust consists of a portfolio of Bonds. The
Trust is therefore susceptible to political, economic or regulatory factors
affecting issuers of the Bonds. The following information provides only a
brief summary of some of the complex factors affecting the financial situation
in New Jersey (the "State" and is derived from sources that are
generally available to investors and is believed to be accurate. It is based
in part on information obtained from various State and local agencies in New
Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 people per square mile, it is the most
densely populated of all the states. The state's economic base is
diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita income has been
well above the national average, and in 1993 the State ranked second among
states in per capita personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and
1989 employment in New Jersey's manufacturing sector failed to benefit from
the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum.
In the meantime, the prolonged fast growth in the State in the mid 1980s
resulted in a tight labor market situation, which has led to relatively high
wages and housing prices. This means that, while the incomes of New Jersey
residents are relatively high, the State's business sector has become more
vulnerable to competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition,
the national recession caused an employment downturn in such previously
growing sectors as wholesale trade, retail trade, finance, utilities and
trucking and warehousing. Reflecting the downturn, the rate of unemployment in
the State rose from a low of 3.6% during the first quarter of 1989 to an
estimated 6.1% in November 1995, which is higher than the national average of
5.6% in November 1995. Economic recovery is likely to be slow and uneven in
New Jersey, with unemployment receding at a correspondingly slow pace, due to
the fact that some sectors may lag due to continued excess capacity. In
addition, employers even in rebounding sectors can be expected to remain
cautious about hiring until they become convinced that improved business will
be sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1993, there was a total authorized bond indebtedness of
approximately $8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.38 billion
was unissued. The appropriation for the debt service obligation on such
outstanding indebtedness was $103.5 million for fiscal year 1994.
New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. At the end of fiscal year 1989,
there was a surplus in the State's general fund (the fund into which all
State revenues not otherwise restricted by statute are deposited and from
which appropriations are made) of $411.2 million. At the end of fiscal year
1990, there was a surplus in the general fund of $1 million. At the end of
fiscal year 1991, there was a surplus in the general fund of $1.4 million. New
Jersey closed its fiscal year 1992 with a surplus of $760.8 million. It is
estimated that New Jersey closed its fiscal year 1993 with a surplus of $937.4
million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the increase
in the State's sales and use tax rate from 6% to 7% and the elimination of
exemptions for certain products and services not previously subject to the
tax, such as telephone calls, paper products (which has since been
reinstated), soaps and detergents, janitorial services, alcoholic beverages
and cigarettes. At the time of enactment, it was projected that these taxes
would raise approximately $1.5 billion in additional revenue. Projections and
estimates of receipts from sales and use taxes, however, have been subject to
variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the form of
an increased state income tax on individuals. At the time of enactment, it was
projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead
rebate program and state assumption of welfare and social services costs.
Projections and estimates of receipts from income taxes, however, have also
been subject to variance in recent fiscal years. Under the legislation, income
tax rates increased from their previous range of 2% to 3.5% to a new range of
2% to 7%, with the higher rates applying to married couples with incomes
exceeding $70,000 who file joint returns, and to individuals filing single
returns with incomes of more than $35,000.
The Florio administration had contended that the income tax package will help
reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion was
proposed to be sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from 7%
to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates took effect. Governor Whitman
recently signed into law further reductions up to 15% for some taxpayers
effective January 1, 1996, completing her campaign promise to reduce income
taxes by up to 30% for most taxpayers within three years.
On June 30, 1995, Governor Whitman signed the New Jersey Legislature's $16.0
billion budget for Fiscal Year 1996. The balanced budget, which includes $541
million in surplus, is $300 million more than the 1995 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are cases challenging the following:
the formula relating to State aid to public schools, the method by which the
State shares with its counties maintenance recoveries and costs for residents
in State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, various provisions,
and the constitutionality of the Fair Automobile Insurance Reform Act of 1990,
the State's role in a consent order concerning the construction of a resource
facility in Passaic County, actions taken by the New Jersey Bureau of
Securities against an individual, the State's actions regarding alleged
chromium contamination of State-owned property in Hudson County, the issuance
of emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters could have
the potential for either a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure for
these claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds
"Aaa" and "AAA" , respectively. On July 3, 1991, however,
Standard and Poor's Corporation downgraded New Jersey general obligation
bonds to "AA+." On June 4, 1992, Standard and Poor's Corporation
placed New Jersey general obligation bonds on CreditWatch with negative
implications, citing as its principal reason for its caution the unexpected
denial by the federal government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These funds were
critical to closing a $1 billion gap in the State's $15 billion budget for
fiscal year 1992 which ended on June 30, 1992. Under New Jersey state law, the
gap in the budget was required to be closed before the new budget year began
on July 1, 1992. Standard and Poor's suggested the State could close fiscal
1992's budget gap and help fill fiscal 1993's hole by a reversion of $700
million of pension contributions to its general fund under a proposal to
change the way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. However, on July
27, 1994, Standard and Poor's announced that it was changing the State's
outlook from negative to stable due to a brightening of the State's prospects
as a result of Governor Whitman's effort to trim spending and cut taxes,
coupled with an improving economy. Standard and Poor's reaffirmed its "
AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aa1," stating that the reduction
reflected a developing pattern of reliance on nonrecurring measures to achieve
budgetary balance, four years of financial operations marked by revenue
shortfalls and operating deficits, and the likelihood that serious financial
pressures will persist. On August 5, 1994, Moody's reaffirmed its "
Aa1" rating, citing on the positive side New Jersey's broad-based
economy, high income levels, history of maintaining a positive financial
position and moderate (albeit rising) debt ratios, and on the negative side, a
continued reliance on one-time revenue and a dependence on pension-related
savings to achieve budgetary balance.
At the time of the closing for each New Jersey Trust, Special Counsel to each
New Jersey Trust for New Jersey tax matters rendered an opinion under then
existing New Jersey income tax law applicable to taxpayers whose income is
subject to New Jersey income taxation substantially to the effect that:
In the opinion of Pitney, Hardin, Kipp & Szuch, special counsel to the Fund
for New Jersey tax matters, under existing law:
(1)The New Jersey Trust will be recognized as a trust and not an association
taxable as a corporation. The New Jersey Trust will not be subject to the New
Jersey Corporation Business Tax or the New Jersey Corporation Income Tax.
(2)With respect to the non-corporate Unitholders who are residents of New
Jersey, the income of the New Jersey Trust which is allocable to each such
Unitholder will be treated as the income of such Unitholder under the New
Jersey Gross Income Tax. Interest on the underlying Bonds which would be
exempt from New Jersey Gross Income Tax if directly received by such
Unitholder will retain its status as tax-exempt interest when received by the
New Jersey Trust and distributed to such Unitholder. Any proceeds paid under
the insurance policy issued to the Trustee of the New Jersey Trust with
respect to the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing interest on defaulted obligations held by the Trustee
will be exempt from New Jersey Gross Income Tax if, and to the same extent as,
such interest would have been so exempt if paid by the issuer of the defaulted
obligations.
(3)A non-corporate Unitholder will not be subject to the New Jersey Gross
Income Tax on any gain realized either when the New Jersey Trust disposes of a
Bond (whether by sale, exchange, redemption, or payment at maturity), when the
Unitholder redeems or sells his Units or upon payment of any proceeds under
the insurance policy issued to the Trustee of the New Jersey Trust with
respect to the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by the
Trustee. Any loss realized on such disposition may not be utilized to offset
gains realized by such Unitholder on the disposition of assets the gain on
which is subject to the New Jersey Gross Income Tax.
(4)Units of the New Jersey Trust may be taxable on the death of a Unitholder
under the New Jersey Transfer Inheritance Tax Law or the New Jersey Estate Tax
Law.
(5)If a Unitholder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from the Bonds in
the New Jersey Trust which is allocable to such corporation will be includable
in its entire net income for purposes of the New Jersey Corporation Business
Tax or New Jersey Corporation Income Tax, less any interest expense incurred
to carry such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by such
corporation on the disposition of the Bonds by the New Jersey Trust or on the
disposition of its Units will be included in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax. Any proceeds paid under the insurance policy issued to the Trustee
of the New Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or maturing
principal on defaulted obligations held by the Trustee will be included in its
entire net income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax if, and to the same extent as, such interest
or proceeds would have been so included if paid by the issuer of the defaulted
obligations.
New York Trusts
A resident of New York State (or New York City) will be subject to New York
State (or New York City) personal income tax with respect to gains realized
when New York Obligations held in the New York Trust are sold, redeemed or
paid at maturity or when his Units are sold or redeemed, such gain will equal
the proceeds of sale, redemption or payment less the tax basis of the New York
Obligation or Unit (adjusted to reflect (a) the amortization of premium or
discount, if any, on New York Obligations held in the Trust, (b) accrued
original issue discount, with respect to each New York Obligation which, at
the time the New York Obligation was issued had original issue discount, and
(c) the deposit of New York Obligations with accrued interest in the Trust
after the Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is not a
resident of New York State (or New York City) will not be subject to New York
State (or New York City) personal income tax, unless the Units are property
employed in a business, trade, profession or occupation carried on in New York
State (or New York City).
Amounts paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will be
excludable from income for New York State and New York City income tax
purposes, if and to the same extent as, such interest would have been
excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State
and New York City tax purposes. The purchase of Units may be considered to
have been made with borrowed funds even though such funds are not directly
traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued by New York
State (the "State", by its various public bodies (the "
Agencies", and/or by other entities located within the State, including
the City of New York (the "City".
Some of the more significant events relating to the financial situation in New
York are summarized below. This section provides only a brief summary of the
complex factors affecting the financial situation in New York and is based in
part on Official Statements issued by, and on other information reported by
the State, the City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued throughout
the State's 1990-91 fiscal year and was followed by a period of weak economic
growth during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow faster
than 1992, but still at a very moderate rate, as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry,
cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approved a $32.08
billion budget. Following enactment of the budget the 1993-94 State Financial
Plan was formulated on April 16, 1993. This Plan projects General Fund
receipts and transfers from other funds at $32.367 billion and disbursements
and transfers to other funds at $32.300 billion. In comparison to the
Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
While a portion of the increased receipts was the result of a $487 million
increase in the State's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 1993-94 State Financial
Plan contains a package of mandate relief, cost containment and other
proposals to reduce the costs of many programs for which local governments
provide funding. There can be no assurance, however, that localities that
suffer cuts will not be adversely affected, leading to further requests for
State financial assistance.
There can be no assurance that the State will not face substantial potential
budget gaps in the future resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions
to align recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit to the
refund reserve account of $671 million, General Fund receipts in 1992-93 would
have been $716 million higher than originally projected. This year-end deposit
effectively reduced 1992-93 receipts by $671 million and made those receipts
available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS" on April 28, 1993. The State does not project the need to
issue additional TRANS during the State's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds
and $140 million in new commercial paper issuances. In addition, the State
expects to issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has authorized the
issuance of up to $85 million in certificates of participation during the
State's 1993-94 fiscal year for personal and real property acquisitions during
the State's 1993-94 fiscal year. The projection of the State regarding its
borrowings for the 1993-94 fiscal year may change if actual receipts fall
short of State projections or if other circumstances require.
In June 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC", a public benefit
corporation empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's annual seasonal
borrowing. To date, LGAC has issued its bonds to provide net proceeds of $3.28
billion. LGAC has been authorized to issue additional bonds to provide net
proceeds of $703 million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April 23,
1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993, an
improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having been A1
since May 27, 1986. S&P lowered its rating from A to A- on January 13, 1992.
S&P's previous ratings were A from March 1990 to January 1992, AA- from August
1987 to March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board" to
review and approve the City's budgets and City four-year financial plans (the
financial plans also apply to certain City-related public agencies (the "
Covered Organizations".
In February 1975, the New York State Urban Development Corporation ("
UDC", which had approximately $1 billion of outstanding debt, defaulted
on certain of its short-term notes. Shortly after the UDC default, the City
entered a period of financial crisis. Both the State Legislature and the
United States Congress enacted legislation in response to this crisis. During
1975, the State Legislature (i) created MAC to assist with long-term financing
for the City's short-term debt and other cash requirements and (ii) created
the State Financial Control Board (the "Control Board" to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations").
Over the past three years, the rate of economic growth in the City has slowed
substantially, and the City's economy is currently in recession. The City
projects, and its current four-year financial plan assumes, a recovery early
in the 1993 calendar year. The Mayor is responsible for preparing the City's
four-year financial plan, including the City's current financial plan. The
City Comptroller has issued reports concluding that the recession of the
City's economy will be more severe and last longer than is assumed in the
financial plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP". The City was required to close
substantial budget gaps in its 1990, 1991 and 1992 fiscal years in order to
maintain balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of the
State Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make progress
towards establishing a balanced budget process. The Control Board's report
identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and
$2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-1994 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on "recurring revenues that fund recurring
expenditures." Given the foregoing factors, there can be no assurance that
the City will continue to maintain a balanced budget, or that it can maintain
a balanced budget without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's economic
base.
Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the occurrence
of an annual operating deficit of more than $100 million or the loss of access
to the public credit markets to satisfy the City's capital and seasonal
financial requirements, the Control Board would be required by State law to
exercise certain powers, including prior approval of City financial plans,
proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. As a result of the national and
regional economic recession, the State's projections of tax revenues for its
1991 and 1992 fiscal years were substantially reduced. For its 1993 fiscal
year, the State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992 reported a potential
budget deficit of $4.8 billion. If the State experiences revenue shortfalls or
spending increases beyond its projections during its 1993 fiscal year or
subsequent years, such developments could also result in reductions in
projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow
and additional City expenditures as a result of such delays.
The City's projections set forth in its financial plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor or the
State Legislature and the cooperation of MAC with respect to various other
actions proposed in such financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to reimburse
the City's general fund for capital expenditures already incurred. In
addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public bond
and note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs and
other issues may affect the market for outstanding City general obligation
bonds and notes. If the City were unable to sell its general obligation bonds
and notes, it would be prevented from meeting its planned operating and
capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the State
Deputy Comptroller for the City of New York (the "OSDC" and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and
future expenditures may be greater than those forecast in the financial plan.
In addition, the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet
the costs of its expenditure increases and to provide necessary services. It
is reasonable to expect that such reports and statements will continue to be
issued and to engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating results
as reported in accordance with GAAP for the 1992 fiscal year. During the 1990
and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines in City revenue sources and increased public assistance
needs due to the recession. Such actions included $822 million of tax
increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification" projected a
balanced budget in accordance with GAAP for the 1992 fiscal year after taking
into account a discretionary transfer of $455 million to the 1993 fiscal year
as the result of a 1992 fiscal year surplus. In order to achieve a balanced
budget for the 1992 fiscal year, during the 1991 fiscal year, the City
proposed various actions for the 1992 fiscal year to close a projected gap of
$3.3 billion in the 1992 fiscal year.
On November 19, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan", and which relates to the City, the Board of Education
("BOE" and the City University of New York ("CUNY". The
1993-1996 Financial Plan projects revenues and expenditures of $29.9 billion
each for the 1993 fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification". The February Modification projects budget gaps for fiscal
years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other actions
to decrease expenditures or increase revenues to maintain a balanced financial
plan.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted against
the City arising out of alleged constitutional violations, torts, breaches of
contracts, and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the proceedings and claims are
not currently predictable, adverse determinations in certain of them might
have a material adverse effect upon the City's ability to carry out its
financial plan. As of June 30, 1992, legal claims in excess of $341 billion
were outstanding against the City for which the City estimated its potential
future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baa1 and S&P's rating stood at A-. On February 11,
1991, Moody's had lowered its rating from A.
On March 30, 1993, in confirming its Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year
budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget is
offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy
is broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New York City's
single-'A-' rating.
Previously, Moody's had raised its rating to A in May, 1988, to Baa1 in
December, 1985, to Baa in November, 1983 and to Ba1 in November, 1981. S&P had
raised its rating to A- in November, 1987, to BBB+ in July, 1985 and to BBB in
March, 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25
billion in notes then being sold. On April 29, 1991, S&P revised downward its
rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial difficulties
which could adversely affect the ability of such Agencies to make payments of
interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under so-called "
moral obligation" provisions which are non-binding statutory provisions
for State appropriations to maintain various debt service reserve funds) to
appropriate funds on behalf of the Agencies. Moreover, it is expected that the
problems faced by these Agencies will continue and will require increasing
amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur,
would be likely to have a significant adverse effect on investor confidence
in, and therefore the market price of, obligations of the defaulting Agencies.
In addition, any default in payment on any general obligation of any Agency
whose bonds contain a moral obligation provision could constitute a failure of
certain conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen Agencies
that each had outstanding debt of $100 million or more. These eighteen
Agencies had an aggregate of $62.2 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of
significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the
future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages in an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"
), petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised
1992-1993 State Financial Plan and the recommended 1993-94 State Financial
Plan includes a significant reduction in State aid to localities in such
programs as revenue sharing and aid to education from projected base-line
growth in such programs. It is expected that such reductions will result in
the need for localities to reduce their spending or increase their revenues.
The potential impact on the State of such actions by localities is not
included in projections of State receipts and expenditures in the State's
1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers"
resulted in the creation of the Financial Control Board for the City of
Yonkers (the "Yonkers Board" by the State in 1984. The Yonkers Board
is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1991, the total indebtedness of all localities in the
State was approximately $31.6 billion, of which $16.8 billion was debt of New
York City (excluding $6.7 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Fifteen localities had outstanding indebtedness for state
financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, New York City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State, including notes or bonds in the New York Trust, could be adversely
affected. Localities also face anticipated and potential problems resulting
from certain pending litigation, judicial decisions, and long-range economic
trends. The longer-range potential problems of declining urban population,
increasing expenditures, and other economic trends could adversely affect
localities and require increasing State assistance in the future.
At the time of the closing for each New York Trust, Special Counsel to each
New York Trust for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect that:
In the opinion of Tanner Propp LLP, special counsel to the Fund for New York
tax matters, under existing New York law:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be subject to New
York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
North Carolina Trust
See "Portfolio" for a list of the Bonds included in the North Carolina
Trust. The portions of the following discussion regarding the financial
condition of the State government may not be relevant to general obligation or
revenue bonds issued by political subdivisions of the State. Those portions
and the sections which follow regarding the economy of the State are included
for the purpose of providing information about general economic conditions
that may or may not affect issuers of the North Carolina Bonds. None of the
information is relevant to Bonds issued by territories or possessions of the
United States that may be included in the portfolio of the North Carolina
Trust.
General obligations of a city, town or county in North Carolina are payable
from the general revenues of the entity, including ad valorem tax revenues on
property within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable exclusively from
revenue-producing governmental enterprises and (2) industrial revenue bonds,
college and hospital revenue bonds and other "private activity bonds"
which are essentially non-governmental debt issues and which are payable
exclusively by private entities such as non-profit organizations and business
concerns of all sizes. State and local governments have no obligation to
provide for payment of such private activity bonds and in many cases would be
legally prohibited from doing so. The value of such private activity bonds may
be affected by a wide variety of factors relevant to particular localities or
industries, including economic developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself
of the provisions of Chapter 9 of the United States Bankruptcy Code, but only
with the consent of the Local Government Commission of the State and of the
holders of such percentage or percentages of the indebtedness of the issuer as
may be required by the Bankruptcy Code (if any such consent is required).
Thus, although limitations apply, in certain circumstances political
subdivisions might be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution requires that
the total expenditures of the State for the fiscal period covered by each
budget not exceed the total of receipts during the fiscal period and the
surplus remaining in the State Treasury at the beginning of the period. The
State's fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections. The
General Assembly responded by enacting a number of new taxes and fees to
generate additional revenue and reduce allowable departmental operating
expenditures and continuation funding. The spending reductions were based on
recommendations from the Governor, the Government Performance Audit Committee
and selected reductions identified by the General Assembly.
The State, like the nation, has experienced economic recovery since 1991. In
the opinion of the State Controller, the growth in the economy and the
legislative actions taken in 1991 had a positive effect on the State's revenue
collections over the past several years. The State had a budget surplus of
approximately $865 million at the end of fiscal 1993-94. After review of the
1994-95 continuation budget adopted in 1993, the General Assembly approved
spending expansion funds, in part to restore certain employee salaries to
budgeted levels, which amounts had been deferred to balance the budgets in
1989-1993, and to authorize funding for new initiatives for economic
development, education, human services and environmental programs. (The
cutback in funding for infrastructure and social development projects had been
cited by agencies rating State obligations, following the 1991 reductions, as
cause for concern about the long-term consequences of those reductions on the
economy of the State and the State's fiscal prospects.)
Because of growth in State tax and fee revenues, the General Fund balance at
the end of the 1994-95 fiscal year was reported at approximately $300 million.
The State budget is based upon estimated revenues and a multitude of existing
and assumed State and non-State factors including State and national economic
conditions, international activity and federal government policies and
legislation. The Congress of the United States is considering a number of
matters affecting the federal government's relationship with state governments
that, if enacted into law, could affect fiscal and economic policies of the
states, including North Carolina.
In April 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning on or after January 1, 1995, the tax levied on various
forms of intangible personal property. The intangibles tax revenues receivable
by counties and municipalities will no longer be received. Instead, the
legislature has provided for specific appropriations to counties and
municipalities.
It is unclear what effect these developments at the State level may have on
the value of the Bonds in the North Carolina Trust.
Litigation. Litigation against the State includes the following.
Leandro, et al. v. State of North Carolina and State Board of Education -- In
May, 1994 students and boards of education in five counties in the State filed
suit in state court requesting a declaration that the public education system
of North Carolina, including its system of funding, violates the State
constitution by failing to provide adequate or substantially equal educational
opportunities and denying due process of law, and violates various statutes
relating to public education. The suit is similar to a number of suits in
other states, some of which resulted in holdings that the respective systems
of public education funding were unconstitutional under the applicable state
law. The defendants in such suit have filed a motion to dismiss, which was
denied. After trial at the Superior Court level, the plaintiff petitioned the
North Carolina Supreme Court for discretionary review prior to a determination
by the Court of Appeals; this motion was denied. The North Carolina Attorney
General's Office believes that sound legal arguments support the State's
position, but no significant financial impact is expected to result from the
ultimate resolution of this case, even if adverse to the State.
Francisco Case -- In August, 1994 a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and
has failed to supervise local school systems in administering programs for
them. The complaint does not allege an amount in controversy, but asks the
Court to order the defendants to fund a comprehensive program to ensure equal
educational opportunities for children with limited English proficiency. The
North Carolina Attorney General's Office believes that sound legal arguments
support the State's position, but no significant financial impact is expected
to result from the ultimate resolution of this case, even if adverse to the
State.
Faulkenbury v. Teachers' and State Employees' Retirement System; Peele v.
Teachers' and State Employees' Retirement System; Woodard v. Local
Governmental Employees' Retirement System -- Plaintiffs are disability
retirees who brought class actions in state court challenging changes in the
formula for payment of disability retirement benefits and claiming impairment
of contract rights, breach of fiduciary duty, violation of other federal
constitutional rights, and violation of state constitutional and statutory
rights. The State estimates that the cost in damages and higher prospective
benefit payments to class members would probably amount to $50 million or more
in Faulkenbury, $50 million or more in Peele, and $15 million or more in
Woodward, all ultimately payable, at least initially, from the state
retirement systems funds.
Upon review in Faulkenbury, the North Carolina Court of Appeals and Supreme
Court have held that claims made in Faulkenbury substantially similar to those
in Peele and Woodward -- for breach of fiduciary duty and violation of federal
constitutional rights brought under the federal Civil Rights Act -- either do
not state a cause of action or are barred by the statute of limitations. In
1994 plaintiffs took voluntary dismissals of their claims for impairment of
contract rights in violation of the United States Constitution and filed new
actions in federal court asserting the same claims, along with claims for
violation of constitutional rights in the taxation of retirement benefits. The
remaining state court claims in all cases are yet to be heard. The federal
court actions have been stayed pending the trial in state court. The North
Carolina Attorney General's Office believes that sound legal arguments support
the State's position.
Fulton Corporation v. Justus, Secretary of Revenue --The State's intangible
personal property tax levied on certain shares of stock (repealed as of the
tax year beginning January 1, 1995) has been challenged by the plaintiff on
grounds that it violates the Commerce Clause of the United States Constitution
by discriminating against stock issued by corporations that do all or part of
their business outside the State. The plaintiff, a North Carolina corporation,
paid the intangibles tax on stock it owns in other corporations. The plaintiff
seeks to invalidate the tax in its entirety and to recover the intangibles
taxes it paid for the 1990 tax year.
The North Carolina Court of Appeals invalidated the taxable percentage
deduction and excised it from the statute beginning with the 1994 tax year.
The effect of this ruling was to increase collections by rendering all stock
taxable on 100% of its value. The North Carolina Supreme Court reversed the
Court of Appeals and held that the tax is valid and constitutional. The
plaintiff's petition for review by the U.S. Supreme Court was granted; after
argument, a decision is expected in 1996. The North Carolina Attorney
General's Office believes that sound legal arguments support the State's
position.
Other Tax Cases: In Davis v. Michigan (1989), the United States Supreme Court
ruled that a Michigan income tax statute which taxed federal retirement
benefits while exempting those paid by state and local governments violated
the constitutional doctrine of intergovernmental tax immunity. At the time of
the Davis decision, North Carolina law contained similar exemptions in favor
of state and local retirees. Those exemptions were repealed prospectively,
beginning with the 1989 tax year. All public pension and retirement benefits
are now entitled to a $4,000 annual exclusion.
The Swanson Cases -- Following Davis, federal retirees filed a class action
suit in federal court in 1989 seeking damages equal to the North Carolina
income tax paid on federal retirement income by the class members. A companion
suit was filed in state court in 1990. The complaints alleged that the amount
in controversy exceeded $140 million. The North Carolina Department of Revenue
estimated refunds and interest liability of $280.89 million as of June 30,
1994.
The North Carolina Supreme Court ultimately held in favor of the State in the
case brought in State court, and the United States Supreme Court denied the
plaintiffs' request for review of that decision, thereby concluding the State
litigation. Plaintiffs also were unsuccessful in the federal court action. The
federal retirees continue to seek relief through State legislation.
Patton v. State -- In connection with the legislature's repeal of the tax
exemption for state retirees in 1989, certain adjustments were adopted that
reduced the state retirees' tax burden. In May 1995, federal retirees filed a
lawsuit in State court for tax refunds for the years 1989 through 1994
alleging that these adjustments also constitute unlawful discrimination
against federal retirees. The amount of the claim has not been set forth. This
case is still pending in superior court.
The Bailey Cases -- State and local government retirees filed a class action
suit in 1990 as a result of the repeal of the income tax exemptions for state
and local government retirement benefits. The original suit was dismissed
after the North Carolina Supreme Court ruled in 1991 that the plaintiffs had
failed to comply with state law requirements for challenging unconstitutional
taxes and the United States Supreme Court denied review.
In 1992, many of the same plaintiffs filed a new lawsuit alleging essentially
the same claims, including breach of contract, unconstitutional impairment of
contract rights by the State in taxing benefits that were allegedly promised
to be tax-exempt, and violation of several state constitutional provisions.
Although the Superior Court ruled largely in the plaintiff's favor, appeals
are expected from both sides. Additional suits have been filed to recover
taxes subsequently paid. The North Carolina Attorney General's Office
estimates that the amount in controversy is approximately $40-$45 million
annually for the tax years 1989 through 1992. The North Carolina Attorney
General's Office believes that sound legal arguments support the State's
position.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,657,106 as reported by the 1990 federal census and the State
rose from twelfth to tenth in population. The State's estimate of population
as of June 30, 1995 is 7,165,298. Notwithstanding its rank in population size,
North Carolina is primarily a rural state, having only five municipalities
with populations in excess of 100,000.
The labor force has undergone significant change during recent years as the
State has moved from an agricultural to a service and goods producing economy.
Those persons displaced by farm mechanization and farm consolidations have, in
large measure, sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been able to
maintain, to a large extent, their rural habitation practices. During the
period 1980 to 1994, the State labor force grew about 26% (from 2,855,200 to
3,609,000). Per capita income during the period 1980 to 1993 grew from $7,999
to $18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of November 1994, the State was reported
to rank ninth among the states in non-agricultural employment and eighth in
manufacturing employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward trend since
1991. The following table reflects the fluctuations in certain key employment
categories.
<TABLE>
<CAPTION>
Category (All Seasonally Adjusted) June 1991 June 1992 June 1993 June 1994 June 1995
<S> <C> <C> <C> <C> <C>
Civilian Labor Force 3,228,000 3,495,000 3,504,000 3,560,000 3,578,000
Nonagricultural Employment 3,059,000 3,135,000 3,203,400 3,358,000 3,419,100
Goods Producing Occupations (mining, construction and
manufacturing) 973,600 980,800 993,600 1,021,500 1,036,700
Service Occupations 2,085,400 2,154,200 2,209,800 2,337,200 2,382,400
Wholesale/Retail Occupations 704,100 715,100 723,200 749,000 776,900
Government Employees 496,700 513,400 515,400 554,600 555,300
Miscellaneous Services 596,300 638,300 676,900 731,900 742,200
Agricultural Employment 88,700 102,800 88,400 53,000 53,000
</TABLE>
The seasonally adjusted unemployment rate in October 1995 was estimated to be
3.9% of the labor force, as compared with 5.5% nationwide.
As of 1994, the State was ninth in the nation in gross agricultural income of
which nearly the entire amount (approximately $5.5 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1994, the
State ranked first in the nation in the production of flue-cured tobacco,
total tobacco, turkeys and sweet potatoes; second in hog production, trout and
the production of cucumbers for pickles; fourth in commercial broilers,
blueberries and strawberries; fifth in burley tobacco and sixth in peaches.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production, which had been the leading source of agricultural income
in the State, declined in 1994, based on preliminary figures. For 1994,
commercial broiler production and pork production surpassed tobacco among
sources of agricultural income, providing 30% and 15.5%, respectively, of
gross agricultural income compared to 14.8% for tobacco. Tobacco farming in
North Carolina has been and is expected to continue to be affected by major
Federal legislation and regulatory measures regarding tobacco production and
marketing and by international competition. Measures adverse to tobacco
farming could have negative effects on farm income and the North Carolina
economy generally.
The number of farms has been decreasing; in 1995 there were approximately
58,000 farms in the State, down from approximately 72,000 in 1987 (a decrease
of about 19% in eight years). However, a strong agribusiness sector also
supports farmers with farm inputs (fertilizer, insecticide, pesticide and farm
machinery) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing). North Carolina's agriculture industry,
including food, fiber and forest products, contributes over $42 billion
annually to the State's economy.
The State Department of Commerce, Travel and Tourism Division reports that in
1993 more than $8 billion was spent on tourism in the State. The Department
estimates that two-thirds of total expenditures came from out-of-state
travelers, and that approximately 250,000 people were employed in
tourism-related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation bonds
as Aaa and Standard & Poor's rates such bonds as AAA. Standard & Poor's also
reaffirmed its stable outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects the State's
strong economic characteristics, sound financial performance, and low debt
levels.
The Sponsor believes the information summarized above describes some of the
more significant events relating to the North Carolina Trust. The sources of
this information are the official statements of issuers located in North
Carolina, State agencies, publicly available documents, publications of rating
agencies and statements by, or news reports of statements by State officials
and employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any matters contained in this
Prospectus other than the tax opinions set forth below under North Carolina
Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel to
each North Carolina Trust for North Carolina tax matters rendered an opinion
under then existing North Carolina income tax law applicable to taxpayers
whose income is subject to North Carolina income taxation substantially to the
effect that.
In the opinion of Hunton & Williams, special counsel to the Fund for North
Carolina tax matters, under existing North Carolina law:
Upon the establishing of the North Carolina Quality Trust and the Units
thereunder:
The North Carolina Quality Trust is not an "association" taxable as a
corporation under North Carolina law with the result that income of the North
Carolina Quality Trust will be deemed to be income of the Unitholders.
Interest on the Bonds that is exempt from North Carolina income tax when
received by the North Carolina Quality Trust will retain its tax-exempt status
when received by the Unitholders.
Unitholders will realize a taxable event when the North Carolina Quality Trust
disposes of a Bond (whether by sale, exchange, redemption or payment at
maturity) or when a Unitholder redeems or sells his Units (or any of them),
and taxable gains for Federal income tax purposes may result in gain taxable
as ordinary income for North Carolina income tax purposes. However, when a
Bond has been issued under an act of the North Carolina General Assembly that
provides that all income from such Bond, including any profit made from the
sale thereof, shall be free from all taxation by the State of North Carolina,
any such profit received by the North Carolina Quality Trust will retain its
tax-exempt status in the hands of the Unitholders.
Unitholders must amortize their proportionate shares of any premium on a Bond.
Amortization for each taxable year is accomplished by lowering the
Unitholder's basis (as adjusted) in his Units with no deduction against gross
income for the year.
The Units are exempt from the North Carolina tax on intangible personal
property so long as the corpus of the North Carolina Quality Trust remains
composed entirely of Bonds or, pending distribution, amounts received on the
sale, redemption or maturity of the Bonds and the Trustee periodically
supplies to the North Carolina Department of Revenue at such times as required
by the Department of Revenue a complete description of the North Carolina
Quality Trust and also the name, description and value of the obligations held
in the corpus of the North Carolina Quality Trust.
The opinion of Hunton & Williams is based, in part, on the opinion of Chapman
and Cutler regarding Federal tax status.
Ohio Trusts
As described above, the Ohio will invest most of its net assets in securities
issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of
the State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio Obligations". The Ohio is therefore susceptible
to general or particular economic, political or regulatory factors that may
affect issuers of Ohio Obligations. The following information constitutes only
a brief summary of some of the many complex factors that may have an effect.
The information does not apply to "conduit" obligations on which the
public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in
connection with their issuance of securities and from other publicly available
information, and is believed to be accurate. No independent verification has
been made of any of the following information.
Generally, creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary,
and is not intended as a discussion of any specific factors that may affect
any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by bond insurance purchased by the issuers, the Ohio or other
parties. Ohio Obligations may not be subject to the factors referred to in
this section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1994
is 11,102,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products
and household appliances. As a result, general economic activity, as in many
other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However,
for the last four years the State rates were below the national rates (5.5%
versus 6.1% in 1994). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY" or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund ("GRF"
), for which personal income and sales-use taxes are the major sources. Growth
and depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF" , a cash
and budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-1993, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11,
1991, $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected
and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately
$184 million; the $100.4 million BSF balance, and additional amounts from
certain other funds were transferred late in the FY to the GRF, and
adjustments made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF
spending reductions and subsequent executive and legislative action (a
combination of tax revisions and additional spending reductions). The June 30,
1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to BSF replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.
The 1994-1995 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million has been transferred into the BSF (which had
a January 4, 1996 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on June 28,
1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance with
the appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, has
been transferred to the BSF and other funds including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters have
authorized the incurrence of State debt and the pledge to taxes or excises to
its payment. At January 4, 1996, $898 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
awaiting delivery. The only such State debt at that date still authorized to
be incurred were portions of the highway bonds, and the following: (a) up to
$100 million of obligations for coal research and development may be
outstanding at any one time ($45.3 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no
more than $120 million of which may be issued in any calendar year ($685.4
million outstanding or awaiting delivery); and (c) up to $200 million in
general obligation bonds for parks, recreation and natural resources purposes
which may be outstanding at any one time ($47.2 million outstanding, with no
more than $50 million to be issued in any one year).
The Electors approved in the November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more that
$1.2 billion to be outstanding at any time and not more than $220 million to
be issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly that
would submit a constitutional amendment relating to certain other aspects of
State debt. The proposal would authorize, among other things, the issuance of
general obligation debt for a variety of purposes with debt service on all
State general obligation debt and GRF-supported obligations not to exceed 5%
of the preceeding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building
Authority, and certain obligations issued by the State Treasurer, $4.5 billion
of which was outstanding at January 4, 1996.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has
never been implemented, apart from a "guarantee fund" approach funded
especially from program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of
each house or by a majority vote of the electors. It cannot be predicted
whether required Senate concurrence to submission will be received.
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued)
are limited in duration to the agency's fiscal period, and are renewable only
upon appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
in the range of 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 117 districts
from voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial court
concluded that aspects of the system (including basic operating assistance)
are unconstitutional and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State appealed and a court of
appeals reversed the trial court's findings for plaintiff districts. The case
is now pending on appeal in the Ohio Supreme Court. A small number of the
State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion
of State subsidy distributions to repayment if needed. Recent borrowings under
this program totalled $94.5 million for 27 districts (including $75 million
for one) in FY 1993, and $41.1 million for 28 districts in FY 1994, and $71.1
million for 29 districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cities and villages; for 19 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed
valuation (commonly referred to as the "ten-mill limitation". Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
At the time of the closing for each Ohio Trust, Special Council to each Ohio
Trust for Ohio tax matters rendered an opinion under then existing Ohio income
tax law applicable to taxpayers whose income is subject to Ohio income
taxation substantially to the effect that:
Commencing in 1985, Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to
income taxes imposed on their residents and entities doing business therein.
In the opinion of Squire, Sanders & Dempsey, special counsel to the Fund for
Ohio tax matters, under existing law:
The Ohio Trust is not taxable as a corporation or otherwise for purposes of
the Ohio personal income tax, school district income taxes in Ohio, the Ohio
corporation franchise tax, or the Ohio dealers in intangibles tax.
Distributions with respect to Units of the Ohio Trust ("Distributions"
) will be treated as the income of the Unitholders for purposes of the Ohio
personal income tax, and school district and municipal income taxes in Ohio
and the Ohio corporation franchise tax in proportion to the respective
interest therein of each Unitholder.
Distributions properly attributable to interest on obligations issued by or on
behalf of the State of Ohio, political subdivisions thereof, or agencies or
instrumentalities thereof ("Ohio Obligations", or by the governments
of Puerto Rico, the Virgin Islands or Guam ("Territorial Obligations"
held by the Trust are exempt from the Ohio personal income tax, school
district and municipal income taxes, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed distributed
to Unitholders.
Distributions properly attributable to proceeds of insurance paid to the Ohio
Trust that represent maturing or matured interest on defaulted obligations
held by the Ohio Trust and that are excluded from gross income for federal
income tax purposes will be exempt from Ohio personal income tax, and school
district and municipal income taxes in Ohio and the net income base of the
Ohio corporation franchise tax.
Distributions of profit made on the sale, exchange or other disposition by the
Ohio Trust of Ohio Obligations including Distributions of "capital gain
dividends" as defined in Section 852(b)(3)(C) of the Code, properly
attributable to the sale, exchange or other disposition of Ohio Obligations
are exempt from Ohio personal income tax, and school district and municipal
income taxes in Ohio, and are excluded from the net income base of the Ohio
corporation franchise tax.
Oregon Trusts
Oregon's economy continued to expand through the first half of 1994, though
signs of slowing were clearly evident. The latest data on employment (second
quarter 1994) and personal income (first quarter 1994) show growth rate
decreases compared to the previous quarter. Construction and high technology
manufacturing continued to expand rapidly in the second quarter of 1994; but
the rest of the State economy was essentially flat. On a seasonally adjusted
basis, activity in the timber industry dropped off during the Spring of 1994
after a two-quarter spurt.
According to the Oregon Employment Department, Oregon's overall employment
continued its steady increase. The seasonally adjusted unemployment rate for
April 1994 was 2.5 percent above the same month in 1993, although there was a
slight and probably temporary decline from March 1994 to April 1994. Oregon's
seasonally adjusted unemployment rate measured 5.8 percent in May 1994, a
decline of one tenth of a percentage point from the April rate. Comparatively,
the national seasonally adjusted unemployment rate fell four tenths of a point
to 6.0 percent in May 1994. While the gap between the Oregon and national
unemployment rated narrowed in May, Oregon remained below the national level
for two consecutive months.
High lumber prices temporarily increased employment in early 1994 in the
lumber and wood products sector, and it is expected that the long-term
employment decline in this industry will return during the latter part of
1994. The State's numerous smaller manufacturing operations continued to grow;
and in general the non-manufacturing sector did not show its usual strength.
Although the construction sector has remained flat at around 58,000 jobs in
1994, employment is ten percent above 1993 levels. The finance, insurance and
real estate sector experienced a 6.6 percent increase in 1994 as compared to
1993 and along with the construction sector, its growth was fueled by the
combination of low interest rates and strong in-migration. Restrictions on the
growth of property taxes has prevented the state and local government sector
from growing. The services sector in 1994 was somewhat weak, with April's
figure the same as the December 1993 figures.
Oregon's high technology manufacturing and construction sectors provided
sufficient momentum to fuel healthy job and income growth through the end of
1994. At that point, higher interest rates and slowing national conditions are
expected to weaken these key sectors and moderate the State's overall growth
rate. Nonetheless, a recovering Japanese economy (one of Oregon's leading
foreign trading partners) and continued population growth should provide
enough impetus to keep jobs and inflation-adjusted income in the State growing
through 1995.
Semiconductor operations are likely to continue expanding in Oregon through
the next two years. This is expected to boost employment in the electronics
industry by 11.6 percent in 1994 and 7.6 percent in 1995. Between the end of
1995 and the end of 1991, jobs in the industry are projected to have increased
by 6,600 or 37 percent. Jobs in the non-electrical machinery industry, which
includes office equipment, are expected to grow 7.7 percent in 1994 and 3.2
percent in 1995. High technology manufacturing jobs are projected to account
for 25 percent of Oregon's manufacturing employment in 1995 compared to 21.9
percent in 1985.
The State's construction sector is expected to record one more quarter of
rapid employment growth (fourth quarter 1994) before higher interest rates
begin to constrain activity. Construction employment was forecasted to rise 11
percent for 1994 as a whole before slowing to 5.1 percent in 1995. Housing
starts are projected to total 20,900 in 1994, a gain of 10 percent over 1993
but turn flat in 1995. Commercial and industrial projects are expected to make
up an increasingly larger share of construction activity through 1996. The
completion of large infrastructure projects, expansion of high technology
manufacturing capacity, and falling vacancy rates for commercial real estate
all suggest that non-residential construction activity will be robust in the
short-term.
Property values have continued to increase. The Oregon Department of Revenue
reports that overall property values grew by ten percent in 1993. Residential
property values increased 14 percent which includes improvements made to
property during 1993. Many homeowners continue to see little or no decrease in
property taxes as value increases offset declining tax rates.
The General Fund revenue forecast is $6,333.2 million for the 1993-95
biennium. The forecast has been increased $88.2 from the December 1993
estimate and $127.7 million from the previous estimate as of the close of the
1993 Legislative Session. The major changes in the current forecast are as
follows: a $51.7 million increase in personal income taxes, a $36.5 million
increase in corporate income taxes, a $6.1 million decrease in liquor
apportionment revenue and a $5.0 million increase in gift and inheritance tax
revenue.
General Fund revenue is expected to reach $6,907.7 million for the 1995-97
biennium. Combining the revenue estimate with the projected $330.9 million
ending balance for the 1993-95 biennium results in an estimated $7,238.6
million in available General Fund resources for the 1995-97 budget period. The
June 1994 resource estimate is $14 million or 2.0 percent more than the March
1994 forecast.
According to the June 1994 forecast of the Oregon Office of Economic Analysis,
Oregon's economy is expected to continue expanding through 1995 though the
rate of growth is likely to moderate as credit sensitive sectors feel the
impact of higher interest rates. As the State's durable goods, manufacturing
and construction sectors soften, migration from other states can be expected
to continue generating jobs in services and trade. Oregon's income and job
growth are expected to remain above the national average in 1995.
Migration from other states, particularly California, is expected to greatly
influence the State's economy. Oregon's population was expected to have grown
by 63,000 in 1994, with two-thirds of the gain coming from net in-migration.
Growth is expected to slow to 58,000 in 1995 as the California economy slowly
rebounds. According to the Western Blue Chip consensus forecast, jobs in
California were expected to the decline a further 0.6 percent in 1994 before
turning around and increasing 1.0 percent in 1995. The rebound in California
should slow Oregon population growth but will increase demand for Oregon
products.
The recent increase in the lumber and wood products industry is not expected
to continue. Lumber prices peaked in December of 1993 and have generally
fallen through April of 1994. More importantly, supply is limited even if
there is release of federal timber following implementation of the new federal
forest plan. The timber harvest is expected to fall from 5.5 billion board
feet (BBF) in 1993 to 5.3 BBF in 1994 and 5.0 BBF in 1995. Employment was
expected to rise marginally in both the second and third quarters before
starting a steady decline at the end of 1994. For 1994 as a whole, employment
in lumber and wood products is expected to increase 4.6 percent then decline
5.8 percent in 1995.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Oregon Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by
the Oregon Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Oregon Trust, Special Counsel to each
Oregon Trust for Oregon tax matters rendered an opinion under then existing
Oregon income tax law applicable to taxpayers whose income is subject to
Oregon income taxation substantially to the effect that:
The assets of the Oregon Trust will consist of interest-bearing obligations
issued by or on behalf of the State of Oregon (the "State" or
counties, municipalities, authorities or political subdivisions thereof (the
"Oregon Bonds" or by the Commonwealth of Puerto Rico, Guam and the
United States Virgin islands (the "Possession Bonds" (collectively,
the "Bonds". Neither the Sponsor nor its counsel have independently
examined the Bonds to be deposited in and held in the Oregon Trust. However,
although no opinion is expressed herein regarding such matters, it is assumed
that: (i) the Bonds were validly issued; (ii) the interest thereon is
excludable from gross income for Federal income tax purposes; and (iii)
interest on the Bonds, if received directly by an Oregon Unitholder, would be
exempt from the Oregon income tax applicable to individuals (the "Oregon
Personal Income Tax".
In the opinion of Chapman and Cutler, counsel to the Sponsor, under existing
Oregon law and based on the assumptions set forth above:
The Oregon Trust is not an association taxable as a corporation and based upon
an administrative rule of the Oregon State Department of Revenue, each Oregon
Unitholder of the Oregon Trust will be essentially treated as the owner of a
pro rata portion of the Oregon Trust and the income of such portion of the
Oregon Trust will be treated as the income of the Oregon Unitholder for Oregon
Personal Income Tax purposes;
Interest on the Bonds which is exempt from the Oregon Personal Income Tax when
received by the Oregon Trust, and which would be exempt from the Oregon
Personal Income Tax if received directly by an Oregon Unitholder, will retain
its status as exempt from such tax when received by the Oregon Trust and
distributed to an Oregon Unitholder;
To the extent that interest derived from the Oregon Trust by an Oregon
Unitholder with respect to the Possession Bonds is excludable from gross
income for Federal income tax purposes pursuant to 48 U.S.C. Section 745, 48
U.S.C. Section 1423a and 48 U.S.C. Section 1403, such interest will not be
subject to the Oregon Personal Income Tax. Each Oregon Unitholder of the
Oregon Trust will recognize gain or loss for Oregon Personal Income Tax
purposes if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Oregon Unitholder redeems or sells Units of the Oregon
Trust to the extent that such a transaction results in a recognized gain or
loss to such Oregon Unitholder for Federal income tax purposes; and
The Oregon Personal Income Tax does not permit a deduction of interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Oregon Trust, the interest on which is exempt from such Tax.
Investors should consult their tax advisers regarding collateral tax
consequences under Oregon law relating to the ownership of the Units,
including, but not limited to, the calculation of "net pension income"
tax credits for retirees and the applicability of other Oregon taxes.
Chapman and Cutler has not examined any of the Bonds to be deposited and held
in the Oregon Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto and therefore it expresses no
opinion as to the exemption from the Oregon Personal Income Tax of interest on
the Bonds if received directly by an Oregon Unitholder. In addition,
prospective purchasers subject to the Oregon corporate income tax should be
advised that for purposes of the Oregon Corporate Income (Excise) Tax,
interest on the Bonds received by the Oregon Trust and distributed to an
Oregon Unitholder subject to such tax will be added to the corporate Oregon
Unitholder's Federal taxable income and therefore will be taxable. No opinion
is expressed regarding the Oregon taxation of foreign or domestic insurance
companies.
Pennsylvania Trusts
Investors should be aware of certain factors that might affect the financial
conditions of the Commonwealth of Pennsylvania. Pennsylvania historically has
been identified as a heavy industry state although that reputation has changed
recently as the industrial composition of the Commonwealth diversified when
the coal, steel and railroad industries began to decline. A more diversified
economy was necessary as the traditionally strong industries in the
Commonwealth declined due to a long-term shift in jobs, investment and workers
away from the northeast part of the nation. The major sources of growth in
Pennsylvania are in the service sector, including trade, medical and the
health services, education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the Commonwealth's
economic structure, accounting for more than $3.6 billion in crop and
livestock products annually, while agribusiness and food related industries
support $39 billion in economic activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1 percent during
the recessionary period from 1980 to 1983. In 1984, the declining trend was
reversed as employment grew by 2.9 percent over 1983 levels. From 1983 to
1990, Commonwealth employment continued to grow each year, increasing an
additional 14.3 percent. For the three years ended 1993, unemployment in the
Commonwealth declined 1.2 percent.
Back to back recessions in the early 1980s reduced the manufacturing sector's
employment levels moderately during 1980 and 1981, sharply during 1982, and
even further in 1983. Non-manufacturing employment has increased steadily
since 1980 to its 1993 level of 81.6 percent of total Commonwealth employment.
Consequently, manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 18.4 percent
of 1993 non-agricultural employment, has fallen behind both the services
sector and the trade sector as the largest single source of employment within
the Commonwealth. In 1993 the services sector accounted for 29.9 percent of
all non-agricultural employment while the trade sector accounted for 22.4
percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise to 6.9 percent
in 1991 and 7.5 percent in 1992. The resumption of faster economic growth
resulted in a decrease in the Commonwealth's unemployment rate to 7.1 percent
in 1993. As of March 1995, the seasonally adjusted unemployment rate for the
Commonwealth was 6.0 percent compared to 5.5 percent for the United States.
The five year period from fiscal 1990 through fiscal 1994 was marked by public
health and welfare costs growing at a rate double the growth rate for all the
state expenditures. Rising caseloads, increased utilization of services and
rising prices joined to produce the rapid rise of public health and welfare
costs at a time when a national recession caused tax revenues to stagnate and
even decline. During the period from fiscal 1989 through fiscal 1993, public
health and welfare costs rose by an average annual rate of 9.4 percent while
tax revenues were growing at an average annual rate of 5.8 percent.
Consequently, spending on other budget programs was restrained to a growth
rate below 4.7 percent and sources of revenues other than taxes became larger
components of fund revenues. Among those sources are transfers from other
funds and hospital and nursing home pooling of contributions to use as federal
matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase enacted for fiscal 1992 brought financial
stability to the General Fund. That tax increase included several taxes with
retroactive effective dates which generated some one-time revenues during
fiscal 1992. The absence of those revenues in fiscal 1993 contributed to the
decline in tax revenues shown for fiscal 1993. Fiscal 1994 revenues increased
4.1 percent, but a decline in other revenues caused by the end of medical
assistance pooled financing in fiscal 1993 held total revenues to a 1.8
percent gain. Expenditures for fiscal 1994 rose by 4.3 percent.
It should be noted that the creditworthiness of obligations issued by local
Pennsylvania issuers may be unrelated to the creditworthiness of obligations
issued by the Commonwealth of Pennsylvania, and there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the
event of default.
Financial information for the principal operating funds of the Commonwealth is
maintained on a budgetary basis of accounting. A budgetary basis of accounting
is used for the purpose of ensuring compliance with the enacted operating
budget and is governed by applicable statutes of the Commonwealth and by
administrative procedures. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting principles ("
GAAP". The budgetary basis financial information maintained by the
Commonwealth to monitor and enforce budgetary control is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
Fiscal 1992 Financial Results. GAAP Basis: During fiscal 1992 the General Fund
reported a $1.1 billion operating surplus. This operating surplus was achieved
through legislated tax rate increases and tax base broadening measures enacted
in August 1991 and by controlling expenditures through numerous cost reduction
measures implemented throughout the fiscal year. As a result of the fiscal
1992 operating surplus, the fund balance increased to $87.5 million and the
unreserved-undesignated deficit dropped to $138.6 million from its fiscal 1991
level of $1,146.2 million.
Budgetary Basis: Total revenues for the fiscal year were $14,516.8 million, a
$2,654.5 million increase over cash revenues during fiscal 1991. Largely due
to the tax revisions enacted for the budget, corporate tax receipts totalled
$3,761.2 million, up from $2,656.3 million in fiscal 1991, sales tax receipts
increased by $302 million to $4,499.7 million, and personal income tax
receipts totalled $4,807.4 million, an increase of $1,443.8 million over
receipts in fiscal 1991.
Spending increases in the fiscal 1992 budget were largely accounted for by
increases for education, social services and corrections programs.
Commonwealth funds for the support of public schools were increased by 9.8
percent to provide a $438 million increase to $4.9 billion for fiscal 1992.
Child welfare appropriations supporting county operated child welfare programs
were increased $67 million, more than 31.5 percent over fiscal 1991. Other
social service areas such as medical and cash assistance also received
significant funding increases as costs rose quickly as a result of the
economic recession and high inflation rates of medical care costs. The costs
of corrections programs, reflecting the marked increase in the prisoner
population, increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with General Fund
appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing transactions.
These pooling transactions replaced $135 million of Commonwealth funds,
allowing total spending under the budget to increase by an equal amount.
Fiscal 1993 Financial Results. GAAP Basis: The fund balance of the General
Fund increased by $611.4 million during the fiscal year, led by an increase in
the unreserved balance of $576.8 million over the prior fiscal year balance.
At June 30, 1993, the fund balance totalled $698.9 and the
unreserved/undesignated balance totalled $64.4 million. The increase in the
fund balance and a return to a positive unreserved-undesignated balance
provided indication of a continuing recovery of the Commonwealth's financial
condition.
Budgetary Basis: The 1993 fiscal year closed with revenues higher than
anticipated and expenditures about as projected, resulting in an ending
unappropriated balance surplus (prior to the ten percent transfer to the Tax
Stabilization Reserve Fund) of $242.3 million, slightly higher than estimated.
Cash revenues were $41.5 million above the budget estimate and totalled
$14.633 billion representing less than a one percent increase over revenues
for the 1992 fiscal year. A reduction in the personal income tax rate in July
1992 and the one-time receipt of revenues from retroactive corporate tax
increases in fiscal 1992 were responsible, in part, for the low revenue growth
in fiscal 1993.
Appropriations less lapses totalled $13.870 billion representing a 1.1 percent
increase over expenditures during fiscal 1992. The low growth in spending is a
consequence of a low rate of revenue growth, significant one-time expenses
during fiscal 1992, increased tax refund reserves to cushion against adverse
decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds.
By state statute, ten percent of the budgetary basis unappropriated surplus at
the end of a fiscal year is to be transferred to the Tax Stabilization Reserve
Fund. The transfer for the fiscal 1993 balance was $24.2 million. The
remaining unappropriated surplus of $218.0 million was carried forward into
the 1994 fiscal year.
Fiscal 1994 Financial Results. GAAP Basis: The fund balance increased $194.0
million due largely to an increased reserve for encumbrances and an increase
in other designated funds. The unreserved-undesignated balance increased by
$14.8 million to $72.2 million. Revenues and other sources increased by 1.8
percent over the prior fiscal year while expenditures and other uses increased
by 4.3 percent. Consequently, the operating surplus declined to $179.4 million
for fiscal 1994 from $686.3 million for fiscal 1993.
Budgetary Basis: Commonwealth revenues during the fiscal year totalled
$15,210.7 million, $38.6 million above the fiscal year estimate, and 3.9
percent over Commonwealth revenues during the previous fiscal year. The sales
tax was an important contributor to the higher than estimated revenues.
Collections from the sales tax were $5.124 billion, a 6.1 percent increase
from the prior fiscal year and $81.3 million above estimate. The strength of
collections from the sales tax offset the lower than budgeted performance of
the personal income tax which ended the fiscal year $74.4 million below
estimate. The shortfall in the personal income tax was largely due to
shortfalls in income not subject to withholding such as interest, dividends
and other income. Tax refunds in fiscal 1994 were reduced substantially below
the $530 million amount provided in fiscal 1993. The higher fiscal 1993 amount
and the reduced fiscal 1994 amount occurred because reserves of approximately
$160 million were added to fiscal 1993 tax refunds to cover potential payments
if the Commonwealth lost litigation known as Philadelphia Suburban Corp v.
Commonwealth. Those reserves were carried into fiscal 1994 until the
litigation was decided in the Commonwealth's favor in December 1993 and
$147.3 million of reserves for tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of all fiscal
1994 appropriation lapses, totalled $14,934.4 million representing a 7.2
percent increase over fiscal 1993 expenditures. Medical assistance and
corrections spending contributed to the rate of spending growth for the fiscal
year.
The Commonwealth maintained an operating balance on a budgetary basis for
fiscal 1994 producing a fiscal year ending unappropriated surplus of $335.8
million. By state statute, ten percent ($33.6 million) of that surplus
transferred to the Tax Stabilization Reserve Fund and the remaining balance
was carried over into the fiscal 1995 fiscal year. The balance in the Tax
Stabilization Reserve Fund as of March 31, 1995 was $65.3 million.
Fiscal 1995 Budget. The approved fiscal 1995 budget provided for $15,665.7
million of appropriations from Commonwealth funds, an increase of 4.0 percent
over appropriations, including supplemental appropriations, for fiscal 1994.
Medical assistance expenditures represent the largest single increase in the
budget ($221 million) representing a nine percent increase over the prior
fiscal year. The budget includes a reform of the state-funded public
assistance program that added certain categories of eligibility to the program
but also limited the availability of such assistance to other eligible
persons. Education subsidies to local school districts were increased by
$132.2 million to continue the increased funding for the poorest school
districts in the state.
Several tax reductions were enacted with the fiscal 1995 budget. Low income
working families will benefit from an increase to the dependent exemption to
$3,000 from $1,500 for the first dependent and from $1,000 for all additional
dependents. A reduction to the corporate net income tax rate from 12.25
percent to 9.99 percent to be phased in over a period of four years was
enacted. A net operating loss provision has been added to the corporate net
income tax and will be phased in over three years with an annual $500,000 cap
on losses used to offset profits. Several other tax changes to the sales tax,
the inheritance tax and the capital stock and franchise tax also were enacted.
Estimated commonwealth revenue reductions from these tax cuts have been raised
from $166.4 million to $173.4 million based on upward revised estimates of
commonwealth revenues for the fiscal 1995 to 6.3 percent, excluding the effect
of the fiscal 1995 tax reductions, and is largely due to actual and
anticipated higher collections of the corporate net income tax, the sales and
use tax and miscellaneous collections.
After a review of the fiscal 1994 budget in January 1995, $64.9 million of
additional appropriation needs were identified for the fiscal year. Of this
amount, the largest are for medical assistance ($21.8 million) and general
assistance cash grants ($10.3 million). The balance of the additional
appropriation needs are for other public welfare programs, educational
subsidies and office relocation costs due to a fire. The supplemental
appropriations requested are proposed to be funded from appropriation lapses
estimated to total $172 million for the fiscal year.
With the revised estimates for revenues, appropriations and lapses for the
1994 fiscal year, an unappropriated balance prior to transfers to the Tax
Stabilization Reserve Fund of $395.5 million is projected, an increase from
the $335.8 million fiscal year 1993 ending balance (prior to transfers).
Fiscal 1996 Budget. The fiscal 1996 budget was approved by the Governor on
June 30, 1995. The budget includes spending growth of 2.7%. It includes a
reduction of the Corporate Net Income Tax from 10.99% to 9.99% retroactive to
January 1, 1995. The budget includes a proportionate increase in funds for
public safety and education and a proportionate decrease in funds for welfare.
Proposed Fiscal 1996 Budget. On February 6, 1996, Pennsylvania Governor Tom
Ridge presented his proposed budget to the General Assembly for the fiscal
year beginning July 1, 1996. Ridge's budget proposes that state spending be
reduced from $16.22 billion to $16.19 billion, a $30 million cut. The proposed
budget provides a $60 million tax cut to spur economic growth, including a new
$30 million Job Creation Tax Credit, and the partial elimination of the sales
tax on computer services. The General Assembly will proceed with its
consideration of the fiscal 1997 budget.
All outstanding general obligation bonds of the Commonwealth are rated AA- by
S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must be obtained
from the rating agencies. There is no assurance that any ratings will continue
for any period of time or that they will not be revised or withdrawn.
The City of Philadelphia ("Philadelphia" is the largest city in the
Commonwealth, with an estimated population of 1,585,577 according to the 1990
Census. Philadelphia functions both as a city of the first class and a county
for the purpose of administering various governmental programs.
For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. The audit findings
for the fiscal year ending June 30, 1992, placed the Cumulative General Fund
balance deficit at $224.9.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA" to assist first class
cities in remedying fiscal emergencies was enacted by the General Assembly and
approved by the Governor in June, 1991. PICA is designed to provide assistance
through the issuance of funding debt to liquidate budget deficits and to make
factual findings and recommendations to the assisted city concerning its
budgetary and fiscal affairs. An intergovernmental cooperation agreement
between Philadelphia and PICA was approved by City Council on January 3, 1992,
and approved by the PICA Board and signed by the Mayor on January 8, 1992. At
this time, Philadelphia is operating under a five year fiscal plan approved by
PICA on April 17, 1995 in which Philadelphia projects a balanced budget in
each of the five years (fiscal years 1996 through 2000) covered by the plan.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. PICA issued $643,430,000 in July 1993 and
$178,675,000 in August 1993 of Special Tax Revenue Bonds to refund certain
general obligation bonds of the City and to fund additional capital projects.
In December 1994, PICA issued $122,020,000 of Special Tax Revenue Bonds to
fund additional capital projects.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated Baa by Moody's
and BBB- by S&P. Any explanation concerning the significance of such ratings
must be obtained from the rating agencies. There is no assurance that any
ratings will continue for any period of time or that they will not be revised
or withdrawn.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of the Bonds in the Pennsylvania Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Pennsylvania Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion under
then existing Pennsylvania income tax law applicable to taxpayers whose income
is subject to Pennsylvania income taxation substantially to the effect that:
In the opinion of Saul, Ewing, Remick & Saul, counsel to the Fund for
Pennsylvania tax matters, under existing law:
Units evidencing fractional undivided interest in the Pennsylvania Trust,
which are represented by obligations 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 are not taxable under any of the personal property taxes
presently in effect in Pennsylvania;
distributions of interest income to Unitholders that would not be taxable it
received directly by a Pennsylvania resident are not subject to personal
income tax under the Pennsylvania Tax Reform Code of 1971; nor will such
interest be taxable under the Philadelphia School District Investment Income
Tax imposed on Philadelphia resident individuals;
a Unitholder will have a taxable event under the Pennsylvania state and local
income taxes referred to in the preceding paragraph upon the redemption or
sale of his Units. Units will be taxable under the Pennsylvania inheritance
and estate taxes;
a Unitholder which is a corporation will have a taxable event under the
Pennsylvania Corporate Net Income Tax when it redeems or sells its Units.
Interest income distributed to Unitholders which are corporations is not
subject to Pennsylvania Corporate Net Income Tax or Mutual Thrift Institutions
Tax. However, banks, title insurance companies and trust companies may be
required to take the value of the Units into account in determining the
taxable value of their shares subject to the Shares Tax;
under Act No. 68 of December 3, 1993, gains derived by the Fund from the sale,
exchange or other disposition of Bonds may be subject to Pennsylvania personal
or corporate income taxes. Those gains which are distributed by the Fund to
Unitholders who are individuals may be subject to Pennsylvania Personal Income
Tax. For Unitholders which are corporations, the distributed gains may be
subject to Corporate Net Income Tax or Mutual Thrift Institutions Tax. Gains
which are not distributed by the Fund may nevertheless be taxable to
Unitholders if derived by the Fund from the sale, exchange or other
disposition of Bonds issued on or after February 1, 1994. Gains which are not
distributed by the Fund will remain nontaxable to Unitholders if derived by
the Fund from the sale, exchange or other disposition of Bonds issued prior to
February 1, 1994;
any proceeds paid under insurance policies issued to the Trustee or obtained
by the issuers of the Bonds with respect to the Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Pennsylvania gross income if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted obligations; and
the Fund is not taxable as a corporation under Pennsylvania tax laws
applicable to corporations.
On December 3, 1993, changes to Pennsylvania laws affecting taxation of income
and gains from the sale of Commonwealth of Pennsylvania and local obligations
were enacted. Among these changes was the repeal of the exemption from tax of
gains realized upon the sale or other disposition of such obligations. The
Pennsylvania Department of Revenue has issued proposed regulations concerning
these changes. The opinions expressed above are based on our analysis of the
law and proposed regulations but are subject to modification upon review of
final regulations or other guidance that may be issued by the Department of
Revenue or future court decisions.
In rendering its opinion, Saul, Ewing, Remick & Saul has not, for timing
reasons, made an independent review of proceedings related to the issuance of
the Bonds. It has relied on Van Kampen American Capital Distributors, Inc. for
assurance that the Bonds have been issued by the Commonwealth of Pennsylvania
or by or on behalf of municipalities or other governmental agencies within the
Commonwealth.
South Carolina Trusts
Although all of the Bonds in the South Carolina Quality Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of South Carolina itself, there can be
no assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds. The
information regarding the financial condition of the State is included for the
purpose of providing information about general economic conditions that may
affect issuers of the Bonds in South Carolina.
South Carolina is primarily a manufacturing state. In 1994, nearly one-quarter
of all jobs in the State were in the manufacturing industry, compared to
fifteen percent nationally. While the textile industry is still the major
industrial employer in the State, since 1950 the State's economy has undergone
a gradual transition. The economic base of the State has diversified as the
trade and service sectors developed and with the added development of the
durable goods manufacturing industries, South Carolina's economy now resembles
more closely that of the United States.
Personal income in South Carolina grew five and four-tenths percent (5.4%)
during the third quarter of 1994 compared to income growth of six and
three-tenths percent (6.3%) nationwide. During all of 1993 personal income
grew at an average annual rate of five and one-tenths percent (5.1%) in South
Carolina. During the same period the nation's income grew four and four-tenths
percent (4.4%) and personal income in the Southeast region grew five and
seven-tenths percent (5.7%). Over the five year period 1988-1993 personal
income in South Carolina rose at a compounded annual rate of six and
three-tenths percent (6.3%), matching the annual income growth for the
Southeast region, and outpacing the five and seven-tenths percent (5.7%)
growth in the United States in the same period.
Through January, 1995, the State's economy has added 36,100 jobs compared to
the same period in 1994, employment in the State increased two and four-tenths
percent (2.4%) while the rate of employment growth in the United States was
two and six-tenths percent (2.6%). Monthly unemployment rates in the State
have equaled or been above comparable national rates during 1994. The
unemployment rate for January, 1995, was the same as the nation's rate at five
and seven-tenths percent (5.7%).
The State Constitution requires the General Assembly to provide a balanced
budget and requires that if there be a deficit, such deficit shall be provided
for in the succeeding fiscal year. The State Constitution also provides that
the State Budget and Control Board may, if a deficit appears likely, effect
such reductions in appropriations as may be necessary to prevent a deficit. At
the November 6, 1984 general election there was approved a constitutional
amendment providing that annual increases in State appropriations may not
exceed the average growth rate of the economy of the State and that the annual
increase in the number of State employees may not exceed the average growth of
population of the State. The State Constitution also establishes a General
Reserve Fund to be maintained in an amount equal to 4% of General Fund revenue
for the latest fiscal year. Despite the efforts of the State Budget and
Control Board, deficits were experienced in each of the fiscal years ended
June 30, 1981, June 30, 1982, June 30, 1985 and June 30, 1986. All deficits
have been funded out of the General Reserve Fund. For the fiscal years ending
June 30, 1983 and 1984, the State had cash surpluses. As of June 30, 1985 the
balance in the General Reserve Fund was $89,100,000.
In 1993 the General Assembly provided that beginning with appropriations for
fiscal year 1994-1995, appropriations in the annual general appropriations act
may not exceed the base revenue estimate. The base revenue estimate is defined
as the lesser of (i) the total of recurring general fund revenues collected in
the latest completed fiscal year before the General Assembly first considers
the annual general appropriations bill plus an increase of seventy-five
percent of the difference between the general fund revenue estimate of the
Board of Economic Advisors for the upcoming fiscal year and the actual revenue
collections from the latest completed fiscal year; or (ii) the Board of
Economic Advisors general fund revenue estimate for the upcoming fiscal year.
At its July, 1985 meeting the State Budget and Control Board, acting upon
advice that a shortfall in General Fund revenues for the fiscal year ending
June 30, 1985 might develop, froze all supplemental appropriations pending the
final accounting of the General Fund for fiscal year 1985. On August 8, 1985,
the Office of the Comptroller General advised the State Budget and Control
Board that General Fund expenditures for the fiscal year ended June 30, 1985
did exceed General Fund revenues by $11,936,636. Obedient to the
constitutional mandate that a casual deficit shall be provided for in the
succeeding fiscal year, the State Budget and Control Board delayed certain
hiring and capital improvements scheduled to be made in fiscal year 1986 in an
amount sufficient to meet the fiscal year 1985 budget shortfall. In January of
the fiscal year ended June 30, 1986 the State Budget and Control Board was
advised of a possible shortfall of $46,346,968. The Board immediately reduced
State agency appropriations by the amount of the anticipated shortfall.
Notwithstanding this action, at the end of fiscal year 1986, it became
apparent that a shortfall would result. In August of 1986, the State Budget
and Control Board voted to fund the deficit by transferring $37,353,272 from
the General Reserve Fund to the General Fund, bringing the balance in the
General Reserve Fund to $51.8 million.
At the November 5, 1986 meeting of the Budget and Control Board, the Board of
Economic Advisors advised that it had reduced its revenue estimate for the
current fiscal year by $87,434,452. As required by the provisions of the
Capital Expenditure Fund, the Board applied $27,714,661 budgeted for this fund
to the anticipated shortfall. This action left a remaining shortfall of
$59,719,791 which the Budget and Control Board funded by imposing a 2.6% cut
in expenditures. In a February, 1987 meeting of the Board, a further cut in
expenditures of 0.8% was ordered.
After net downward revisions of $122 million in estimated revenues during the
year, the actual revenue collections exceeded the final estimate of $37
million, resulting in a surplus for the fiscal year ending June 30, 1987, of
$20.5 million. The General Reserve Fund received $6.6 million during the year
in accordance with the Appropriation Act, and $17 million of the year-end
surplus was transferred to the General Reserve Fund, bringing the balance in
the General Reserve Fund to $75.4 million at June 30, 1987.
On August 5, 1988, it was announced that for the fiscal year ending June 30,
1988, the Budgetary General Fund had a surplus of $107.5 million. The surplus
resulted from a $117.3 million excess of revenues over expenditures. The State
will use $52.6 million of the surplus to fund supplemental appropriations,
$28.3 million to fund the Capital Reserve, and $20.5 million for an early
buy-out of a school bus lease agreement. The General Assembly will decide how
the State will spend the remaining $6.1 million.
The General Reserve Fund received $25.1 million during the 1987-88 fiscal year
in accordance with the Appropriation Act. During the year, the General
Assembly reduced the required funding of the General Reserve Fund from 4% to
3% of the latest completed fiscal year's actual revenue. The General Assembly
used $14.4 million of the resulting excess to fund the 1987-1988 Supplemental
Appropriation Act, leaving $86.1 million in the General Reserve Fund at June
30, 1988. The full-funding amount at that date, however, was only $80.8
million. In accordance with the 1988-1989 Appropriation Act, the excess of
$5.3 million will help fund 1988-1989 appropriations.
At the November 8, 1988 general election there was approved a constitutional
amendment reducing from 4% to 3% the amount of General Fund revenue which must
be kept in the General Reserve Fund, and removing the provisions requiring a
special vote to adjust this percentage. The amendment also created a Capital
Reserve Fund equal to 2% of General Fund revenue. Before March 1 of each year,
the Capital Reserve Fund must be used to offset mid-year budget reductions
before mandating cuts in operating appropriations, and after March 1, the
Capital Reserve Fund may be appropriated by a special vote in separate
legislation by the General Assembly to finance in cash previously authorized
capital improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the
Capital Reserve Fund not appropriated or any appropriation for a particular
project or item which has been reduced due to application of the monies to
year-end deficit, must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Reserve Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year 1989-1990, the
State Budget and Control Board committed $42.4 million of the $58.7 million
Capital Reserve Fund in April, 1990. Lack of sufficient funding at year end
resulted in an additional use of $4.5 million from the Capital Reserve Fund.
After the above reductions, the State had a fiscal year 1989-1990 surplus of
$13,159,892 which was used to fund supplemental appropriations of $1,325,000
and the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in
the General Reserve Fund was $94,114,351.
During 1990-91 fiscal year, the State Budget and Control Board has approved
mid-year budget changes in November of 1990 and again in February of 1991, to
offset lower revenue estimates. Those changes included committing the Capital
Reserve Fund appropriation ($62,742,901) and reducing agency appropriations in
an additional amount necessary to offset (together with automatic expenditure
reductions that are tied to revenue levels) what would otherwise be a
projected deficit of approximately $132.6 million. On May 14 and May 21, 1991,
the Budget and Control Board, responding to April revenue figures and
unofficial estimates indicating an additional shortfall of $30 to $50 million,
ordered an immediate freeze on all personnel activities, from hiring to
promotions; a freeze on purchasing, with limited exceptions; and an indefinite
halt to new contracts and contract renewals. The Board also asked the General
Assembly for the power to furlough government workers periodically during the
next fiscal year.
In the past, the State's budgetary accounting principles allowed revenue to be
recorded only when the State received the related cash. On July 30, 1991, the
Budget and Control Board approved a change in this principle for sales tax
revenue beginning with the fiscal year ended June 30, 1991. The Board's
resolution requires that sales taxes collected by merchants in June and
received by the State in July be reported as revenue in June rather than in
July. This change resulted in a $5.2 million decrease in reported 1990-91
sales tax revenue and a one-time $83.1 million addition to fund balance. The
one-time adjustment increases the fund balance to the level it would be if the
new principle had been in effect in years before 1990-91. Following such
action, the year-end balance in the General Reserve Fund was $33.4 million.
At its July 30, 1991, meeting the Budget and Control Board also took action
with respect to the 1991-92 fiscal year. On July 26, 1991, the Board of
Economic Advisors advised the Budget and Control Board that it projected a
revenue shortfall of $148 million for the fiscal year 1991-92 budget of $3.581
billion. In response, the Budget and Control Board eliminated the two percent
(2%) Capital Reserve Fund appropriation of $65.9 million and reduced other
expenditures across the board by three percent (3%). On February 10, 1992, the
Board of Economic Advisers advised the Budget and Control Board that it had
revised its estimate of revenues for the current fiscal year downward by an
additional $55 million. At its February 11, 1992 meeting, the Budget and
Control Board responded by imposing an additional one percent (1%) across the
board reduction of expenditures (except with respect to approximately $10
million for certain agencies). At its February 13, 1992 meeting, the Budget
and Control Board restored a portion of the one percent (1%) reduction to four
(4) education-related agencies totalling approximately $5.7 million. These
expenditure reduction measures, when coupled with revenue increases projected
by the Budget and Control Board, resulted in an estimated balance of
approximately $1.4 million in the General Fund for the fiscal year 1991-92.
Despite such actions, expenditures exceeded revenues by $38.2 million and, as
required by the South Carolina Constitution, such amount was withdrawn from
the General Reserve Fund to cover the shortfall.
Responding to these recurrent operating deficits, Standard & Poor's Corp. has
placed the State's AAA-rated general obligation debt on its CreditWatch, and
on January 29, 1993, this rating was reduced to AA+.
On August 22, 1992, the Budget and Control Board adopted a plan to reduce
appropriations under the 1992 Appropriations Act because of revenue shortfall
projections of approximately $200 million for the 1992-93 fiscal year. These
reductions were based on the rate of growth in each agency's budget over the
past year. On September 15, 1992, the Supreme Court of South Carolina enjoined
the Budget and Control Board from implementing its proposed plan for budget
reductions on the grounds that the Board had authority to make budget
reductions only across the board based on total appropriations. In response to
this decision, the Board instituted a 4% across the board reduction. On
November 10, 1992, the Budget and Control Board permanently reduced the $88.1
million in appropriations which were set aside on September 15, 1992. This
action along with improved actual revenue collections created a budgetary
surplus of approximately $101 million.
For the Fiscal Year ended June 30,1994, the State had a budgetary surplus of
$273.48 million.
Prospective investors should study with care the portfolio of Bonds in the
South Carolina Quality Trust and should consult with their investment advisers
as to the merits of particular issues in the portfolio.
At the time of the closing for each South Carolina Trust, Special Counsel for
each South Carolina Trust for South Carolina tax matters rendered an opinion
under then existing South Carolina income tax law applicable to taxpayers
whose income is subject to South Carolina income taxation substantially to the
effect that:
In the opinion of Sinkler & Boyd, special counsel to the Fund for South
Carolina tax matters, under existing South Carolina law:
By the provision of paragraph (j) of Section 3 of Article 10 of the South
Carolina Constitution (revised 1977) intangible personal property is
specifically exempted from any and all ad valorem taxation.
Pursuant to the provisions of Section 12-1-60 the interest of all bonds, notes
or certificates of indebtedness issued by or on behalf of the State of South
Carolina and any authority, agency, department or institution of the State and
all counties, school districts, municipalities, divisions and subdivisions of
the State and all agencies thereof are exempt from income taxes and that the
exemption so granted extends to all recipients of interest paid thereon
through the Trust. (This opinion does not extend to so-called 63-20
obligations.)
The income of the Trust would be treated as income to each Unitholder of the
Trust in the proportion that the number of Units of the Trust held by the
Unitholder bears to the total number of Units of the Trust outstanding. For
this reason, interest derived by the Trust that would not be includable in
income for South Carolina income tax purposes when paid directly to a South
Carolina Unitholder will be exempt from South Carolina income taxation when
received by the Trust and attributed to such South Carolina Unitholder.
Each Unitholder will recognize gain or loss for South Carolina state income
tax purposes if the Trustee disposes of a Bond (whether by sale, payment on
maturity, retirement or otherwise) or if the Unitholder redeems or sells his
Unit.
The Trust would be regarded, under South Carolina law, as a common trust fund
and therefore not subject to taxation under any income tax law of South
Carolina.
The above described opinion of Sinkler & Boyd has been concurred in by an
informal ruling of the South Carolina Tax Commission pursuant to Section
12-3-170 of the South Carolina Code.
Virginia Trusts
The Commonwealth's financial condition is supported by a broad-based economy,
including manufacturing, tourism, agriculture, ports, mining and fisheries.
Manufacturing continues to be a major source of employment, ranking behind
only services, wholesale and retail trade, and government (Federal, state and
local). The Federal government is a major employer in Virginia due to the
heavy concentration of Federal employees in the metropolitan Washington, D.C.
segment of northern Virginia and the military employment in the Hampton Roads
area, which houses the nation's largest concentration of military
installations, although civilian defense employment has been affected by the
retrenchment of the military sector and is likely to decrease further.
Although the Commonwealth enjoyed an economic boom in the mid-1980's, the
Commonwealth's economy began to slow toward the end of the decade, and went
into a recession with the rest of the nation after July, 1990. Gradual
recovery has continued since the recession's end in March, 1991, with the
Virginia economy providing reason for restrained optimism in fiscal year 1994.
Employment figures furnished more encouragement than did income data. The
state unemployment rates continued to be a bright spot, dropping to 4.9
percent for fiscal year 1994, compared to 6.4 percent nationally. However, the
possibility of more defense cutbacks and additional plant downsizings provided
two cautionary notes. Real taxable sales have nearly reached the pre-recession
level of fiscal year 1990.
The impact of national trends on the Commonwealth is clearly seen in personal
income figures. While year-to-year percentage changes in the Commonwealth
personal income generally parallel those at the national level, the
Commonwealth figures were higher during the first half of the 1980's. The
differential has narrowed since 1988. In the first quarter of 1994, the most
recent available, Virginia's growth rate was 6.1 percent compared to 3.9
percent for the nation. While Virginia's real per capita personal income
surpassed the national figure in 1982 and has continued to exceed it, the
relative differential has been narrowing since 1989 and is now the smallest
since 1985. Virginia's 1989 maximum was 106 percent of national per capita
income while the 1993 figure was 104 percent. In comparison with the South
Atlantic region, Virginia's real per capita income has declined from a peak of
108 percent in 1989 to 106 percent in 1993.
Virginia's nonagricultural employment figure has also mirrored the national
economy. For fiscal year 1994 Virginia's nonagricultural employment rose 2.9
percent, comparable to the pre-recession rate. Total nonagricultural
employment for Virginia in June 1994 was a record high. During the period
1988-1990, the Commonwealth substantially outpaced the nation in growth of
nonagricultural employment, with 4.1 percent average annual growth compared to
2.8 percent nationally; however, the trend lines for both have been nearly
parallel since 1990. For the period 1985-1990, the Commonwealth went ahead of
the South Atlantic region, but was hit harder by the recession in 1990 and the
defense adjustment. Since then, the region has outperformed the Commonwealth.
With respect to unemployment, Virginia's unemployment rate has consistently
been below that of the nation. For the decade of 1980 to 1990, the
differential has been two percentage points, although it decreased to below
one percentage point in 1991 and 1992. For the first six months of fiscal year
1994, the Commonwealth's unemployment rate was 4.9 percent, compared to the
national rate of 6.4 percent.
Employment trends in Virginia have varied from sector to sector and from
region to region. Most sectors showed dramatic improvement compared to the
anemic performance in fiscal year 1993. Employment grew in seven of ten
categories. This past fiscal year's growth was led by a 5.4 percent employment
jump in the construction sector and 5.3 percent in services. Federal civilian
employment slipped 3 percent, the result of continued defense cutbacks and an
effort to downsize. Once again, the greatest percent loss was in mining, which
suffered a 7.7 percent drop, a 40 percent greater loss than the previous year.
The service sector continued to grow and mining and manufacturing are now at
lower levels than in 1980. Employment trends also varied among regions. All of
the Commonwealth's metropolitan statistical areas showed increased employment
from fiscal year 1993 to fiscal year 1994, ranging from 1.1 percent to 4.3
percent, with most employment increases being experienced in metropolitan
areas.
Highest rates of unemployment were found in southwest Virginia where mining
jobs have been lost and the lowest unemployment rates were seen in northern
Virginia where much federally-related employment is concentrated. As would be
expected, there was great overlap between areas of lowest unemployment and
those of highest per capita income.
Virginia appears to have fully participated in the national economic recovery,
which has been slow by historic standards. The State has not yet returned to
pre-recession growth rates for several measures, particularly real per capita
personal income. The next round of defense cutbacks and the uncertain duration
of the economic recovery are continuing sources of concern. A growing
diversification of the State's export base is encouraging for the long-term
but will not insulate the State from vulnerability to increased competition
against its major products and to economic conditions abroad.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1994, fiscal year, the General
Fund had an ending fund balance computed on a budgetary cash basis of $518.7
million, of which $81 million was in required reserve; Approximately $430
million thereof was designated for expenditure during the next fiscal year,
leaving an undesignated, unreserved fund balance of $7.6 million, the third
consecutive such undesignated fund balance. Computed on a modified accrual
basis in accordance with generally accepted accounting principles, the General
Fund balance at the end of the fiscal year ended June 30, 1994, was $185.3
million, compared with a General Fund balance at the end of the fiscal year
ended June 30, 1993, of minus $78.8 million. This is the second year since
1989 that the General Fund, measured on a modified accrual basis, has shown a
positive fund balance.
As of June 30, 1994, total debt of the Commonwealth aggregated $8.4 billion.
Of that amount, $2.5 billion was tax-supported. Outstanding general obligation
debt backed by the full faith and credit of the Commonwealth was $792 million
at June 30, 1994. Of that amount, $500 million was also secured by revenue
producing capital projects.
The Virginia Constitution contains limits on the amount of general obligation
bonds which the Commonwealth can issue. These limits are substantially in
excess of current levels of outstanding bonds, and at June 30, 1994 would
permit an additional total of approximately $5.6 billion of bonds secured by
revenue-producing projects and approximately $5.8 billion of unsecured general
obligation bonds, with not more than approximately $921 million of the latter
to be issued in any four-year period. Bonds which are not secured by
revenue-producing projects must be approved in a state-wide election.
The Commonwealth of Virginia maintains a "triple A" rating from
Standard & Poor's, Moody's and Fitch Investors Service on its general
obligation indebtedness, reflecting in part its sound fiscal management,
diversified economic base and low debt ratios. There can be no assurance that
these conditions will continue. Nor are these same conditions necessarily
applicable to securities which are not general obligations of the
Commonwealth. Securities issued by specific municipalities, governmental
authorities or similar issuers may be subject to economic risks or
uncertainties peculiar to the issuers of such securities or the sources from
which they are to be paid.
At the time of the closing for each Virginia Trust, Special Counsel to each
Virginia Trust for Virginia tax matters rendered an opinion under then
existing Virginia income tax law applicable to taxpayers whose income is
subject to Virginia income taxation substantially to the effect that:
The assets of the Trust will consist of interest-bearing obligations issued by
or on behalf of the Commonwealth of Virginia ("Virginia" or counties,
municipalities, authorities or political subdivisions thereof (the "
Bonds".
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Virginia that is applicable to individuals and
corporations (the "Virginia Income Tax". The opinion set forth below
does not address the taxation of persons other than full time residents of
Virginia.
In the opinion of Chapman and Cutler, special counsel to the Fund for Virginia
tax matters, under existing law as of the date of this prospectus and based
upon the assumptions set forth above:
The Virginia Quality Trust is not an association taxable as a corporation for
purposes of the Virginia Income Tax and each Unitholder of the Trust will be
treated as the owner of a pro rata portion of each of the assets held by the
Trust and the income of such portion of the Virginia Quality Trust will be
treated as income of the Unitholder for purposes of the Virginia Income Tax.
Income on the Bonds which is exempt from Virginia Income Tax when received by
the Virginia Quality Trust, and which would be exempt from Virginia Income Tax
if received directly by a Unitholder, will retain its status as exempt from
such tax when received by the Trust and distributed to such Unitholder.
Each Unitholder will recognize gain or loss for purposes of the Virginia
Income Tax if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Unitholder redeems or sells Units of the Trust to the
extent that such a transaction results in a recognized gain or loss to such
Unitholder for federal income tax purposes, except as described in this
paragraph. Virginia has by law provided that all income from certain
tax-exempt obligations issued under the laws of Virginia, including any
profits made from the sale of such Bonds, shall be exempt from all taxation by
Virginia. Although we express no opinion, the Virginia Department of Taxation
has indicated that the gain on the sale of such tax-exempt obligations,
recognized for federal income tax purposes, would not be subject to Virginia
income taxation. Accordingly, any such gain relating to the disposition of any
Bond that would not be subject to Virginia Income Tax if the Bond was held
directly by a Unitholder will retain its tax-exempt status for purposes of the
Virginia Income Tax when the Bond is disposed of by the Virginia Quality Trust
or when the Unitholder is deemed to have disposed of his pro rata portion of
such Bond upon the disposition of his Unit, provided that such gain can be
determined with reasonable certainty and substantiated.
The Virginia Income Tax does not permit a deduction of interest paid on
indebtedness incurred or continued to purchase or carry Units in the Virginia
Quality Trust to the extent that interest income related to the ownership of
Units is exempt from the Virginia Income Tax.
In the case of Unitholders subject to the Virginia Bank Franchise Tax, the
income derived by such a Unitholder from his pro rata portion of the Bonds
held by the Virginia Quality Trust may affect the determination of such
Unitholder's Bank Franchise Tax. Prospective investors subject to the Virginia
Bank Franchise Tax should consult their tax advisors. Chapman and Cutler has
expressed no opinion with respect to taxation under any other provisions of
Virginia law. Ownership of the Units may result in collateral Virginia tax
consequences to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral consequences.
THE SPONSOR
Sponsor. Van Kampen American Capital Distributors, Inc., a Delaware
corporation, is the Sponsor of the Trust. Van Kampen American Capital
Distributors, Inc. is primarily owned by Clayton, Dubilier & Rice, Inc., a New
York-based private investment firm. Van Kampen American Capital Distributors,
Inc. management owns a significant minority equity position. Van Kampen
American Capital Distributors, Inc. specializes in the underwriting and
distribution of unit investment trusts and mutual funds. The Sponsor is a
member of the National Association of Securities Dealers, Inc. and has offices
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 and
2800 Post Oak Boulevard, Houston, Texas, 77056, (713) 993-0500. It maintains a
branch office in Philadelphia and has regional representatives in Atlanta,
Dallas, Los Angeles, New York, San Francisco, Seattle and Tampa. As of
December 31, 1995 the total stockholders' equity of Van Kampen American
Capital Distributors, Inc. was $123,165,000 (unaudited). (This paragraph
relates only to the Sponsor and not to the Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust or to any Multi-Series thereof or to any
other Underwriter. The information is included herein only for the purpose of
informing investors as to the financial responsibility of the Sponsor and its
ability to carry out its contractual obligations. More detailed financial
information will be made available by the Sponsor upon request.)
As of December 31, 1995, the Sponsor and its affiliates managed or supervised
approximately $56.0 billion of investment products, of which over $24.8
billion is invested in municipal securities. The Sponsor and its affiliates
managed $44.0 billion of assets, consisting of $22.2 billion for 63 open end
mutual funds (of which 47 are distributed by Van Kampen American Capital
Distributors, Inc.), $11.4 billion for 38 closed-end funds and $5.6 billion
for 84 institutional accounts. The Sponsor has also deposited approximately
$26 billion of unit investment trusts. Based on cumulative assets deposited,
the Sponsor believes that it is the largest sponsor of insured municipal unit
investment trusts, primarily through the success of its Insured Municipals
Income Trust(R)or the IM-IT(R)trust. The Sponsor also provides
surveillance and evaluation services at cost for approximately $13 billion of
unit investment trust assets outstanding. Since 1976, the Sponsor has serviced
over two million investor accounts, opened through retail distribution firms.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and
not exceeding amounts prescribed by the Securities and Exchange Commission,
(ii) terminate the Trust Agreement and liquidate the Trust as provided therein
or (iii) continue to act as Trustee without terminating the Trust Agreement.
All costs and expenses incurred in creating and establishing the Fund,
including the cost of the initial preparation, printing and execution of the
Trust Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses have been borne by the Sponsor at no
cost to the Fund.
THE TRUSTEE
Except for the various series of the Pennsylvania Trusts referred to in the
next paragraph, the Trustee is The Bank of New York, a trust company organized
under the laws of New York. The Bank of New York has its offices at 101
Barclay Street, New York, New York 10286 (800-221-7668). The Bank of New York
is subject to supervision and examination by the Superintendent of Banks of
the State of New York and the Board of Governors of the Federal Reserve
System, and its deposits are insured by the Federal Deposit Insurance
Corporation to the extent permitted by law. The Trustee commenced operations
on February 3, 1986 when it acquired the unit investment trust division of
Fidata Trust Company, New York. The duties of the Trustee are primarily
ministerial in nature. It did not participate in the selection of Bonds for
the portfolios of any of the Trusts.
In the case of the various series of Investors' Municipal Pennsylvania Unit
Trusts and Tax-Exempt Trusts for Pennsylvania Residents, First Combined Series
(Investors' Municipal Pennsylvania Unit Trust, 3rd Series), the Trustee is
United States Trust Company of New York, with its principal place of business
at 45 Wall Street, New York, New York 10005 and its corporate trust office at
770 Broadway, New York, New York 10003. United States Trust Company of New
York, established in 1853, has, since its organization, engaged primarily in
the management of trust and agency accounts for individuals and corporations.
The Trustee is a member of the New York Clearing Housing Association and is
subject to supervision and examination by the Superintendent of Banks of the
State of New York, the Federal Deposit Insurance Corporation and the Board of
Governors of the Federal Reserve System.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Trust. Such
records shall include the name and address of, and the certificates issued by
the Trust to, every Unitholder of the Trust. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may
from time to time be required under any applicable state or Federal statute,
rule or regulation (see "Unitholder Explanations-Public Offering Reports
Provided". The Trustee is required to keep a certified copy or duplicate
original of the Trust Agreement on file in its office available for inspection
at all reasonable times during the usual business hours by any Unitholder,
together with a current list of the Securities held in the Trust.
Under the Trust Agreement, the Trustee or any successor trustee may resign and
be discharged of the Trusts created by the Trust Agreement by executing an
instrument in writing and filing the same with the Sponsor. The Trustee or
successor trustee must mail a copy of the notice of resignation to all Fund
Unitholders then of record, not less than 60 days before the date specified in
such notice when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a successor
trustee promptly. If, upon the Trustee's resignation, no successor trustee has
been appointed and has accepted the appointment within 30 days after
notification, the retiring Trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The Sponsor may remove the
Trustee and appoint a successor trustee as provided in the Trust Agreement at
any time with or without cause. Notice of such removal and appointment shall
be mailed to each Unitholder by the Sponsor. Upon execution of a written
acceptance of such appointment by such successor trustee, all the rights,
powers, duties and obligations of the original trustee shall vesting the
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.
Any corporation into which a Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a banking corporation organized under the laws of the United States or
any state and having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
EXPENSES OF THE TRUST
The Sponsor will not receive any fees in connection with its activities
relating to a Trust. However, in connection with certain series of the Trusts
American Portfolio Evaluation Services, a division of Van Kampen American
Capital Investment Advisory Corp., an affiliate of the Sponsor, will receive
an annual supervisory fee as indicated under "Summary of Essential
Financial Information" in Part One of this Prospectus for providing
portfolio supervisory services for such series of such Trusts. Such fee (which
is based on the number of Units outstanding on January 1 of each year) may
exceed the actual costs of providing such supervisory services for such series
of such Trust, but at no time will the total amount received for portfolio
supervisory services rendered to all such series of such Trusts in any
calendar year exceed the aggregate cost to the Evaluator of supplying such
services in such year. In addition, for regularly evaluating Trust portfolios,
the Evaluator shall receive an annual evaluation fee as also indicated under
"Summary of Essential Financial Information" For its services the
Trustee receives a fee based on the aggregate outstanding principal amount of
Securities in each Trust as of the opening of business on January 2 and July 2
of each year as set forth under "Per Unit Information" in Part I of
this Prospectus. The Trustee's fees are payable monthly on or before the
twenty-fifth day of each month from the Interest Account of each Trust to the
extent funds are available and then from the Principal Account of each Trust,
with such payments being based on each Trust's portion of such expenses. The
Trustee's fees will not be increased in future years in order to make up for
any reduction in the Trustee's fees described in Part I of this Prospectus
under "Per Unit Information" for the applicable Trust. Since the
Trustee has the use of the funds being held in the Principal and Interest
Accounts for future distributions, payment of expenses and redemptions and
since such Accounts are non-interest bearing to Unitholders, the Trustee
benefits thereby. Part of the Trustee's compensation for its services to each
Trust is expected to result from the use of these funds. For a discussion of
the services rendered by the Trustee pursuant to its obligations under the
Trust Agreement, see "Public Offering--Reports Provided" and "
Trust Administration and Expenses"
Both the Evaluator's fees and the Trustee's fees may be increased without
approval of the Unitholders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer
Price Index published by the United States Department of Labor or, if such
category is no longer published, in a comparable category. The Sponsor and the
dealers will receive sales commissions and may realize other profits (or
losses) in connection with the sale of Units as described under "Public
Offering"
The following additional charges may be incurred by the Trusts: (a) fees of
the Trustee for extraordinary services, (b) expenses of the Trustee (including
legal and auditing expenses) and of counsel designated by the Sponsor, (c)
various governmental charges, (d) expenses and costs of any action taken by
the Trustee to protect the Trusts and the rights and interests of Unitholders,
(e) indemnification of the Trustee for any loss, liability or expenses
incurred by it in the administration of the Fund without negligence, bad faith
or willful misconduct on its part and (f) expenditures incurred in contacting
Unitholders upon termination of the Trust.
The fees and expenses set forth herein are payable out of the respective
Trusts. When such fees and expenses are paid by or owing to the Trustee, they
are secured by a lien on the portfolio of the applicable Trust. If the
balances in the Interest and Principal Accounts are insufficient to provide
for amounts payable by a Trust, the Trustee has the power to sell Securities
to pay such amounts.
PORTFOLIO ADMINISTRATION
The Trustee is empowered to sell, for the purpose of redeeming Units tendered
by any Unitholder, and for the payment of expenses for which funds may not be
available, such of the Bonds designated by the Evaluator as the Trustee in its
sole discretion may deem necessary. The Evaluator, in designating such
Securities, will consider a variety of factors, including (a)interest rates,
(b) market value and (c) marketability. The Sponsor, in connection with the
respective Trusts, may direct the Trustee to dispose of Bonds upon default in
payment of principal or interest, institution of certain legal proceedings,
default under other documents adversely affecting debt service, default in
payment of principal or interest on other obligations of the same issuer,
decline in projected income pledged for debt service on revenue bonds or
decline in price or the occurrence of other market or credit factors,
including advance refunding (i.e., the issuance of refunding securities and
the deposit of the proceeds thereof in trust or escrow to retire the refunded
securities on their respective redemption dates), so that in the opinion of
the Sponsor the retention of such Bonds would be detrimental to the interest
of the Unitholders. Because of such restrictions on the Trustee under certain
circumstances the Sponsor may seek a full or partial suspension of the right
of Unitholders to redeem their Units. See "Public Offering Redemption of
Units" The Sponsor is empowered, but not obligated, to direct the Trustee
to dispose of Bonds in the event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of any of the Securities to issue new obligations in exchange or
substitution for any Security pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the Sponsor may deem
proper if (1) the issuer is in default with respect to such Security or (2) in
the written opinion of the Sponsor the issuer will probably default with
respect to such Security in the reasonably foreseeable future. Any obligation
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
Securities originally deposited thereunder. Within five days after the deposit
of obligations in exchange or substitution for underlying Securities, the
Trustee is required to give notice thereof to each Unitholder of the Trust
thereby affected, identifying the Securities eliminated and the Securities
substituted therefor. Except as provided herein, the acquisition by a Trust of
any securities other than the Securities initially deposited is not permitted.
If any default in the payment of principal or interest on any Security occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Security within 30 days after notification by
the Trustee to the Sponsor of such default, the Trustee may in its discretion
sell the defaulted Security and not be liable for any depreciation or loss
thereby incurred.
PURCHASE OF UNITS BY THE SPONSOR
The Trustee shall notify the Sponsor of any tender of Units for redemption. If
the Sponsor's bid in the secondary market at that time equals or exceeds the
Redemption Price per Unit, it may purchase such Units by notifying the Trustee
before the close of business on the second succeeding business day and by
making payment therefor to the Unitholder not later than the day on which the
Units would otherwise have been redeemed by the Trustee. Units held by the
Sponsor may be tendered to the Trustee for redemption as any other Units.
The offering price of any Units acquired by the Sponsor will be in accord with
the Public Offering Price described in the then currently effective prospectus
describing such Units. 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 its acquisition of such Units.
AMENDMENT OR TERMINATION
The Sponsor and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unitholders when such an amendment is (a) to
cure an 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 (b) to make such other provisions as shall not adversely
affect the interest of the Unitholders (as determined in good faith by the
Sponsor and the Trustee), provided that the Trust Agreement may not be amended
to increase the number of Units Isabel thereunder or to permit the deposit or
acquisition of securities either in addition to or in substitution for any of
the Securities initially deposited in a Trust, except for the substitution of
certain refunding securities for such Securities. In the event of any
amendment, the Trustee is obligated to notify promptly all Unitholders of the
substance of such amendment.
A Trust may be terminated by the Trustee when the value of such Trust, as
shown by any semi-annual evaluation, is less than that indicated under "
Summary of Essential Financial Information" in Part One of this
Prospectus. In addition, all Trusts other than those indicated in the next
sentence may be terminated at any time by the consent of the holders
representing 100% of the Units of such Trust then outstanding. Each Trust in
Investors' Quality Tax- Exempt Trust, 6th Multi-State, 7th Multi-State, 8th
Multi-Series and subsequent series may be terminated at any time by consent of
the holders representing 51% of the Units of such Trust then outstanding. The
Trust Agreement provides that each Trust shall terminate upon the redemption,
sale or other disposition of the last Security held in such Trust, but in no
event shall it continue beyond the end of the year preceding the fiftieth
anniversary of the Trust Agreement. In the event of termination of the Fund or
any Trust, written notice thereof will be sent by the Trustee to each
Unitholder of such Trust at his address appearing on the registration books of
the Fund maintained by the Trustee. Within a reasonable time thereafter, the
Trustee shall liquidate any Securities then held in such Trust and shall
deduct from the funds of such Trust any accrued costs, expenses or indemnities
provided by the Trust Agreement, including estimated compensation of the
Trustee and costs of liquidation and any amounts required as a reserve to
provide for payment of any applicable taxes or other governmental charges. The
sale of Securities in the Trust upon termination may result in a lower amount
than might otherwise be realized if such sale were not required at such time.
For this reason, among others, the amount realized by a Unitholder upon
termination may be less than the principal amount of Securities represented by
the Units held by such Unitholder. The Trustee shall then distribute to each
Unitholder his share of the balance of the Interest and Principal Accounts.
With such distribution, the Unitholder shall be furnished a final distribution
statement of the amount distributable. At such time as the Trustee in its sole
discretion shall determine that any amounts held in reserve are no longer
necessary, it shall make distribution thereof to Unitholders in the same
manner.
LIMITATION ON LIABILITIES
The Sponsor, the Evaluator and the Trustee shall be under no liability to
Unitholders for taking any action or for refraining from taking any action in
good faith pursuant to the Trust Agreement, or for errors in judgment, but
shall be liable only for their own willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of their reckless
disregard of their obligations and duties hereunder. The Trustee shall not be
liable for depreciation or loss incurred by reason of the sale by the Trustee
of any of the Securities. In the event of the failure of the Sponsor to act
under the Trust Agreement, the Trustee may act thereunder and shall not be
liable for any action taken by it in good faith under the Trust Agreement.
The Trustee shall not be liable for any taxes or other governmental charges
imposed upon or in respect of the Securities or upon the interest thereon or
upon it as Trustee under the Trust Agreement or upon or in respect of a Trust
which the Trustee may be required to pay under any present or future law of
the United States of America or of any other taxing authority having
jurisdiction. In addition, the Trust Agreement contains other customary
provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders 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,
Sponsor or Unitholders for errors in judgment. This provision shall not
protect the Evaluator in any case of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
UNIT DISTRIBUTION
Units repurchased in the secondary market, if any, may be offered by this
Prospectus at the secondary Public Offering Price (which includes Purchased
Interest in those Trusts which contain Purchased Interest) plus accrued
undistributed interest to the settlement date. Broker-dealers or others will
be allowed a concession or agency commission in connection with secondary
market transactions in the amount of 70% of the applicable sales charge as
determined using the table found in "Public Offering" Certain
commercial banks are making Units of the Trust available to their customers on
an agency basis. A portion of the sale charge (equal to the agency commission
referred to above) is retained by or remitted to the banks. Under the
Glass-Steagall Act, banks are prohibited from underwriting Trust Units;
however, the Glass-Steagall Act does permit certain agency transactions and
the banking regulators have not indicated that these particular agency
transactions are not permitted under such Act. In addition, state securities
laws on this issue may differ from the interpretations of federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law. The minimum purchase in the
secondary market will be one Unit.
Broker-dealers of the Trust may be eligible to participate in a program in
which such firms receive from the Sponsor a nominal award for each of their
registered representatives who have sold a minimum number of units of unit
investment trusts created by the Sponsor during a specified time period. In
addition, at various times the Sponsor may implement other programs under
which the sales force of a broker or dealer may be eligible to win other
nominal awards for certain sales efforts, or under which the Sponsor will
reallow to any such broker or dealer that sponsors sales contests or
recognition programs conforming to criteria established by the Sponsor, or
participates in sales programs sponsored by the Sponsor, an amount not
exceeding the total applicable sales charges on the sales generated by such
person at the public offering price during such programs. Also, the Sponsor in
its discretion may from time to time pursuant to objective criteria
established by the Sponsor pay fees to qualifying brokers or dealers for
certain services or activities which are primarily intended to result in sales
of Units of the Trust. Such payments are made by the Sponsor out of its own
assets, and not out of the assets of the Trust. These programs will not change
the price Unitholders pay for their Units or the amount that the Trust will
receive from the Units sold.
The Sponsor reserves the right to reject, in whole or in part, any order for
the purchase of Units and to change the amount of the concession or agency
commission to dealers and others from time to time.
SPONSOR AND DEALER COMPENSATION
Dealers will receive the gross sales commission as described under "Public
Offering Price"
As stated under "Market for Units" , the Sponsor intends to, and
certain of the dealers may, maintain a secondary market for the Units of the
Trust. In so maintaining a market, such person or persons will realize profits
or sustain losses in the amount of any difference between the price at which
Units are purchased and the price at which Units are resold (which price is
based on the bid prices of the Securities in such Trust and includes a sales
charge). In addition, such person or persons will also realize profits or
sustain losses resulting from a redemption of such repurchased Units at a
price above or below the purchase price for such Units, respectively.
LEGAL OPINIONS
The legality of the Units offered hereby has been passed upon by Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor. The counsel which has provided a state tax opinion to the respective
State Trust under "Description and State Tax Status of State Trusts"
has acted as special counsel to the Fund for the tax matters of such State.
Various Counsel have acted as counsel for the Trustee and as special counsel
for the Fund for New York tax matters. None of the special counsel for the
Fund has expressed any opinion regarding the completeness or materiality of
any matters contained in this Prospectus other than the tax opinion set forth
by such special counsel.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The statements of condition and the related securities portfolio for each
Trust included in Part One of this Prospectus have been audited at the date
indicated therein by Grant Thornton LLP, independent certified public
accountants, as set forth in their report in Part One of this Prospectus, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
DESCRIPTION OF SECURITIES 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.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangements under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
Plus (+) or Minus (-): To provide more detailed indications of credit quality,
the ratings from "AA" to "BBB" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: A provisional rating "p" assumes the successful
completion of the project being financed by the issuance of the bonds being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to
completion, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk. Moody's Investors Service,
Inc. A brief description of the applicable Moody's Investors Service, Inc.
("Moody's" rating symbols and their meanings follow:
Aaa--Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "
gilt edge" Interest payments are protected by a large, or by an
exceptionally stable, margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
With the occasional exception of oversupply in a few specific instances, the
safety of obligations of this class is so absolute that their market value is
affected solely by money market fluctuations.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of
oversupply in a few specific instances.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds maybe influenced to some degree by
credit circumstances during a sustained period of depressed business
conditions. During periods of normalcy, bonds of this quality frequently move
in parallel with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the
high end of its 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.
Con--Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. 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. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
*As published by the rating companies.
No person is authorized to give any information or to make any representations
not contained in this Prospectus, and any information or representation not
contained herein must not be relied upon as having been authorized by the
Fund, the Sponsor or any dealer. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Introduction................................................. 1
Description of The Funds..................................... 2
Securities Selection......................................... 2
Risk Factors................................................. 2
Bond Redemptions............................................. 4
Distributions................................................ 4
Certificates................................................. 5
Estimated Current Returns and Estimated Long-Term Returns.... 5
Accrued Interest............................................. 5
Accrued Interest (Accrued Interest To Carry)................. 5
Purchased and Accrued Interest............................... 5
Accrued Interest............................................. 6
Public Offering Price........................................ 6
Market for Units............................................. 7
Reinvestment Option.......................................... 7
Redemption of Units.......................................... 7
Reports Provided............................................. 8
Federal Tax Status of Each Trust............................. 8
Risk Factors and State Tax Status of State Trust............. 10
Alabama Trusts............................................... 10
Arizona Trusts............................................... 11
Arkansas Trusts.............................................. 12
California Trusts............................................ 14
Colorado Trusts.............................................. 18
Connecticut Trusts........................................... 20
Delaware Trusts.............................................. 22
Florida Trusts............................................... 23
Georgia Trusts............................................... 26
Hawaii Trusts................................................ 27
Kansas Trusts................................................ 28
Kentucky Trusts.............................................. 29
Maine Trusts................................................. 30
Maryland Trusts.............................................. 32
Massachusetts Trusts......................................... 32
Michigan Trusts.............................................. 34
Minnesota Trusts............................................. 35
Missouri Trusts.............................................. 36
Nebraska Trusts.............................................. 38
New Jersey Trusts............................................ 39
New York Trusts.............................................. 41
North Carolina Trusts........................................ 46
Ohio Trusts.................................................. 49
Oregon Trusts................................................ 51
Pennsylvania Trusts.......................................... 52
South Carolina Trusts........................................ 55
Virginia Trusts.............................................. 57
The Sponsor.................................................. 59
The Trustee.................................................. 59
Expenses of the Trust........................................ 60
Portfolio Administration..................................... 60
Purchase of Units by the Sponsor............................. 61
Amendment or Termination..................................... 61
Limitation on Liabilities.................................... 61
Unit Distribution............................................ 61
Sponsor and Dealer Compensation.............................. 62
Legal Opinions............................................... 62
Independent Certified Public Accounts........................ 62
Description of Securities Ratings............................ 62
</TABLE>
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of the information set forth in the registration
statements and exhibits relating thereto, which the Fund 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.
NATIONAL AND STATE INVESTORS' QUALITY
TAX-EXEMPT TRUST
PROSPECTUS
PART TWO
Note: This Prospectus May Be Used Only
When Accompanied by Part One. Both
Parts of this Prospectus should be
retained for future reference.
Dated as of the date
of the Prospectus
Part One accompanying
this Prospectus
Part Two.
Sponsor:
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
2800 Post Oak Boulevard
Houston, Texas 77056
A Wealth of Knowledge A Knowledge of Wealth(sm)
VAN KAMPEN AMERICAN CAPITAL
STATE
INSURED MUNICIPALS
INCOME TRUST
FIRST FAMILY PROSPECTUS
OF TRUSTS Part Two
In the opinion of counsel, interest to the Fund and to Unitholders, with
certain exceptions, is excludable under existing law from gross income for
Federal income taxes. In addition, the interest income of each Trust is, in
the opinion of counsel, 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. Capital gains, if any, are subject to Federal tax.
INTRODUCTION
The Fund. The objectives of the Fund are Federal and state tax-exempt income
(to the extent indicated) and conservation of capital through an investment in
a diversified, insured portfolio of tax-exempt bonds. The Fund consists of a
series of separate unit investment trusts. The various trusts collectively are
referred to herein as the "Trusts" . Each Trust consists of such securities as
may continue to be held (the "Bonds" or "Securities"). Such Securities are
interest-bearing obligations issued by or on behalf of municipalities and
other governmental authorities, the interest on which is, in the opinion of
recognized bond counsel to the issuing governmental authority, exempt from all
Federal income taxes under existing law. In addition, the interest income of
each Trust is, in the opinion of counsel, 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. See "Risk Factors and State Tax Status of
the Trusts".
The Fund and "AAA" Rating. Insurance guaranteeing the payments of
principal and interest, when due, on the Securities in the portfolio of each
Trust has been obtained from a municipal bond insurance company either by the
Trust, by a prior owner of the Bonds, by the issuer of the Bonds involved or
by the Sponsor prior to the deposit of the Bonds in the Fund. Bonds for which
insurance has been obtained by the issuer thereof or by the Sponsor prior to
the deposit of such Bonds in the Fund are referred to herein as "
Preinsured Bonds" . All issues of a Trust are insured under one or more
insurance policies obtained by the Trust, if any, except for certain issues of
certain Trusts which are Preinsured Bonds. Insurance obtained by a Trust, if
any, applies only while Bonds are retained in such Trust while insurance
obtained on Preinsured Bonds is effective so long as such Bonds are
outstanding. The Trustee, upon sale of a Bond insured under an insurance
policy obtained by a Trust, has a right to obtain from the insurer involved
permanent insurance for such Bond upon the payment of a single predetermined
insurance premium and any expenses related thereto from the proceeds of the
sale of such Bond. Insurance relates only to the Bonds in the respective Trust
and not to the Units offered hereby or to the market value thereof. As a
result of such insurance, the Units of each Trust received a rating of "
AAA" by Standard & Poor's, A Division of the McGraw-Hill Companies, Inc.
("Standard & Poor's" on the date the Trust was created. Standard &
Poor's has indicated that this rating is not a recommendation to buy, hold or
sell Units nor does it take into account the extent to which expenses of each
Trust or sales by each Trust of Bonds for less than the purchase price by such
Trust will reduce payment to Unitholders of the interest and principal
required to be paid on such Bonds. See "lnsurance on the Bonds". No
representation is made as to any insurer's ability to meet its commitments.
Units of the Trusts are not deposits or obligations of, or guaranteed or
endorsed by, any bank and are not federally insured or otherwise protected by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency and involve investment risk, including the possible loss of
principal.
Public Offering Price. The secondary market Public Offering Price of each
Trust will include the aggregate bid price of the Securities in such Trust, an
applicable sales charge, cash, if any, in the Principal Account held or owned
by such Trust, accrued interest and Purchased Interest, if any. If the
Securities in each Trust were available for direct purchase by investors, the
purchase price of the Securities would not include the sales charge included
in the Public Offering Price of the Units.
NOTE: THIS PROSPECTUS MAY BE USED ONLY WHEN ACCOMPANIED BY PART ONE.
Both parts of this Prospectus should be retained for future reference.
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 COMMISSIONOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus is dated as of the date of the Prospectus Part I accompanying
this Prospectus Part II.
Van Kampen American Capital
DESCRIPTION OF THE FUND
Each series of the Fund was created under the laws of the State of New York
pursuant to a Trust Indenture and Agreement (the "Trust Agreement"),
dated the Date of Deposit, between Van Kampen American Capital Distributors,
Inc., as Sponsor, American Portfolio Evaluation Services, a division of Van
Kampen American Capital Investment Advisory Corp., as Evaluator, and The Bank
of New York, as Trustee, or their predecessors.
The Fund consists of various Trusts, each of which contains a portfolio of
interest bearing obligations issued by or on behalf of states and territories
of the United States, and political subdivisions and authorities thereof, the
interest on which is, in the opinion of recognized bond counsel to the issuing
authorities, excludable from gross income for Federal income tax under
existing law. All issuers of Securities in a Trust, are located in the State
for which such Trust is named, in the Commonwealth of Puerto Rico or in
certain territories of the United States; consequently, in the opinion of
recognized bond counsel to such State issuers, the related interest earned on
such Securities is exempt to the extent indicated from state and local taxes
of such State. Unless otherwise terminated as provided therein, the Trust
Agreement for each Trust (other than a State Intermediate Laddered Maturity
Trust) will terminate at the end of the calendar year prior to the fiftieth
anniversary of its execution and the Trust Agreement for any State
Intermediate Laddered Maturity Trust will terminate at the end of the calendar
year prior to the twentieth anniversary of its execution.
The portfolio of any Trust (other than a State Intermediate Laddered Maturity
Trust) consists of Bonds maturing approximately 15 to 40 years from the Date
of Deposit. The approximate range of maturities from the Date of Deposit for
Bonds in any State Intermediate Laddered Maturity Trust is 5 to 10 years. The
portfolio of any State Intermediate Laddered Maturity Trust is structured so
that approximately 20% of the Bonds contained in such portfolio will mature
each year, commencing in approximately the fifth year of the Trust, entitling
each Unitholder to a return of principal. This return of principal may offer
Unitholders the opportunity to respond to changing economic conditions and to
specific financial needs that may arise between the fifth and tenth years of a
State Intermediate Laddered Maturity Trust. However, the flexibility provided
by the return of principal may at the same time eliminate a Unitholders's
ability to reinvest the amount returned at a rate as high as the implicit
yield on the obligations which matured.
Certain of the Bonds in the Fund are "zero coupon" bonds. Zero coupon
bonds are purchased at a deep discount because the buyer receives only the
right to receive a final payment at the maturity of the bond and does not
receive any periodic interest payments. The effect of owning deep discount
bonds which do not make current interest payments (such as the zero coupon
bonds) is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount earned during the life of such obligation.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest the income on such obligation at a rate as high as
the implicit yield on the discount obligation, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this
reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
securities of comparable quality which pay interest currently.
Each Unit of each Trust represents a fractional undivided interest in the
principal and net income of such Trust. To the extent that any Units are
redeemed by the Trustee, the fractional undivided interest in a Trust
represented by each unredeemed Unit will increase, although the actual
interest in such Trust represented by such fraction will remain unchanged.
Units will remain outstanding until redeemed upon tender to the Trustee by
Unitholders, which may include the Sponsor, or until the termination of the
Trust Agreement.
OBJECTIVES AND SECURITIES SELECTION
The objectives of the Fund are income exempt from Federal and state (to the
extent indicated) income taxation and conservation of capital through an
investment in diversified, insured portfolios of Federal and state (to the
extent indicated) tax-exempt obligations. A State Intermediate Laddered
Maturity Trust has additional objectives of providing protection against
changes in interest rates and investment flexibility through an investment in
a laddered portfolio of intermediate-term interest-bearing obligations with
maturities ranging approximately 5 to 10 years in which roughly 20% of the
obligations contained in such portfolio will mature each year commencing in
approximately the fifth year of the Trust. There is, of course, no guarantee
that the Fund will achieve its objectives. The Fund may be an appropriate
investment vehicle for investors who desire to participate in a portfolio of
tax-exempt fixed income securities with greater diversification than they
might be able to acquire individually. In addition, securities of the type
deposited in the Fund are often not available in small amounts.
Insurance guaranteeing the timely payment, when due, of all principal and
interest on the Bonds in each Trust has been obtained by such Trust from
either AMBAC Indemnity Corporation ("AMBAC Indemnity", Financial
Guaranty Insurance Company ("Financial Guaranty" or "FGIC" or
a combination thereof (collectively, the "Portfolio Insurers" or by
the issuer of such Bonds, a prior owner of such Bonds, or the Sponsor prior to
the deposit of such Bonds in such Trust from (1) AMBAC Indemnity or one of its
subsidiaries, American Municipal Bond Assurance Corporation ("AMBAC"
or MGIC Indemnity Corporation ("MGIC Indemnity", (2) Financial
Guaranty, (3) MBIA Insurance Corporation ("MBIA", (4) Bond Investors
Guaranty Insurance Company ("BIG", (5) National Union Fire Insurance
Company of Pittsburgh, PA. ("National Union", (6) Capital Guaranty
Insurance Company ("Capital Guaranty", (7) Capital Markets Assurance
Corporation ("CapMAC" and/or (8) Financial Security Assurance Inc.
("Financial Security" or "FSA" (collectively, the "
Preinsured Bond Insurers" (see "Insurance on the Bonds".
Insurance obtained by a Trust is effective only while the Bonds thus insured
are held in such Trust. The Trustee has the right to acquire permanent
insurance from a Portfolio Insurer with respect to each Bond insured by the
respective Portfolio Insurer under a Trust portfolio insurance policy.
Insurance relating to Preinsured Bonds is effective so long as such Bonds are
outstanding. Bonds insured under a policy of insurance obtained by the issuer,
a prior owner, or the Sponsor from one of the Preinsured Bond Issuers are not
additionally insured by a Trust. There is, of course, no guarantee that the
Fund's objectives will be achieved. No representation is made as to any
insurer's ability to meet its commitments.
Neither the Public Offering Price nor any evaluation of Units for purposes of
repurchases or redemptions reflects any element of value for the insurance
obtained by a Trust, if any, unless Bonds are in default in payment of
principal or interest or in significant risk of such default. See "Public
Offering--Offering Price" . On the other hand, the value, if any, of
insurance obtained on Preinsured Bonds is reflected and included in the market
value of such Bonds.
In order for bonds to be eligible for insurance, they must have credit
characteristics which would qualify them for at least the Standard & Poor's
rating of "BBB" or at least the Moody's Investors Service, Inc. rating
of "Baa" , which in brief represent the lowest ratings for securities
of investment grade (see "Description of Securities Ratings".
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. lf
an issue is accepted for insurance, a non-cancellable policy for the prompt
payment of interest and principal on the bonds, when due, is issued by the
insurer. Any premium or premiums relating to Preinsured Bond insurance in paid
by the issuer, a prior owner of such Bonds or the Sponsor and a monthly
premium is paid by a Trust for the portfolio insurance, if any, obtained by
such Trust. The Trustee has the right to obtain permanent insurance from a
Portfolio Insurer in connection with the sale of a Bond insured under the
insurance policy obtained from the respective Portfolio Insurer by a Trust
upon the payment of a single predetermined insurance premium from the proceeds
of the sale of such Bond. Accordingly, any Bond in a Trust is eligible to be
sold on an insured basis. All bonds insured by the Portfolio Insurers and the
Preinsured Bond Insurers received a "AAA" rating by Standard & Poor's
on the date such bonds were deposited into the Fund. See "lnsurance on the
Bonds".
In selecting Securities for a Trust the following facts, among others, were
considered by the Sponsor: (a) either the Standard & Poor's rating of the
Securities was in no case less than "BBB" , or the Moody's Investors
Service, Inc. rating the Securities was in no case less than "Baa"
including provisional or conditional ratings, respectively, or, if not rated,
the Securities had, in the opinion of the Sponsor, credit characteristics
sufficiently similar to the credit characteristics of interest-bearing
tax-exempt obligations that were so rated as to be acceptable for acquisition
by the Trust (see "Description of Securities Ratings", (b) the prices
of the Securities relative to other bonds of comparable quality and maturity,
(c) the diversification of Securities as to purpose of issue and location of
issuer and (d) the availability and cost of insurance for the prompt payment
of principal and interest, when due, on the Securities. Subsequent to the Date
of Deposit, a Security may cease to be rated or its rating may be reduced
below the minimum required as of the Date of Deposit. Neither event requires
elimination of such Security from the portfolio of a Trust but may be
considered in the Sponsor's determination as to whether or not to direct the
Trustee to dispose of the Security (see "Trust Administration and
Expenses--Portfolio Administration").
To the best knowledge of the Sponsor, there is no litigation pending as of the
date hereof in respect of any Securities which might reasonably be expected to
have a material adverse effect upon any Trust. At any time after the date
hereof, litigation may be initiated on a variety of grounds with respect to
Securities in a Trust. Such litigation, as, for example, suits challenging the
issuance of pollution control revenue bonds under environmental protection
statutes, may affect the validity of such Securities or the tax-free nature of
the interest thereon. While the outcome of litigation of such nature can never
be entirely predicted, the Fund has received or will receive opinions of bond
counsel to the issuing authorities of each Security on the date of issuance to
the effect that such Securities have 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
meet obligations undertaken with such respect to the Securities.
TRUST PORTFOLIO
Risk Factors. Certain of the Bonds in certain of the Trusts may be general
obligations of a governmental entity that are backed by the taxing power of
such entity. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which
such an investment may entail. All other Bonds in the Trusts are revenue bonds
payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds, on the other hand, are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. There are, of course, variations in the
security of the different Bonds in the Fund, both within a particular
classification and between classifications, depending on numerous factors.
Certain of the Bonds in certain of the Trusts are obligations which derive
their payments from mortgage loans. Included among such Bonds may be bonds
which are single family mortgage revenue bonds issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages
on residences located within the issuer's boundaries and owned by persons of
low or moderate income and mortgage revenue bonds which are FHA insured. In
view of this an investment in the Fund should be made with an understanding of
the characteristics of such issuers and the risks which such an investment may
entail. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these bonds are
subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will
probably be redeemed prior to their scheduled maturities or even prior to
their ordinary call dates. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial institutions
to make mortgage loans in sufficient amounts within a specified time period.
Additionally, unusually high rates of default on the underlying mortgage loans
may reduce revenues available for the payment of principal of or interest on
such mortgage revenue bonds. These bonds were issued under Section 103A of the
Internal Revenue Code, which Section contains certain requirements relating to
the use of the proceeds of such bonds in order for the interest on such bonds
to retain its tax-exempt status. In each case the issuer of the bonds has
covenanted to comply with applicable requirements and bond counsel to such
issuer has issued an opinion that the interest on the bonds is exempt from
Federal income tax under existing laws and regulations. Certain issuers of
housing bonds have considered various ways to redeem bonds they have issued
prior to the stated first redemption dates for such bonds. In connection with
the housing Bonds held by the Trust, the Sponsor has not had any direct
communications with any of the issuers thereof, but at the Date of Deposit it
was not aware that any of the respective issuers of such Bonds were actively
considering the redemption of such Bonds prior to their respective stated
initial call dates.
Certain of the Bonds in certain of the Trusts are health care revenue bonds.
In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. Ratings of bonds issued for health care facilities
are often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service will be affected by future events and conditions
including, among other things, demand for services and the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, economic developments in the service area,
competition, efforts by insurers and governmental agencies to limit rates,
legislation establishing state rate-setting agencies, expenses, the cost and
possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and government
regulation and the termination or restriction of governmental financial
assistance, including that associated with Medicare, Medicaid and other
similar third party payor programs. Pursuant to recent Federal legislation,
Medicare reimbursements are currently calculated on a prospective basis
utilizing a single nationwide schedule of rates. Prior to such legislation
Medicare reimbursements were based on the actual costs incurred by the health
facility. The current legislation may adversely affect reimbursements to
hospitals and other facilities for services provided under the Medicare
program. Such adverse changes also may adversely affect the ratings of
Securities held in the portfolio of a Trust; however, because of the insurance
obtained by each Trust, the "AAA" rating of the Units of each Trust
would not be affected.
Certain of the Bonds in certain of the Trusts are obligations of public
utility issuers, including those selling wholesale and retail electric power
and gas. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in
absorbing utility debt, the difficulty in obtaining fuel at reasonable prices
and the effect of energy conservation. All of such issuers have been
experiencing certain of these problems in varying degrees. In addition,
Federal, state and municipal governmental authorities may from time to time
review existing, and impose additional, regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely affect
the ability of the issuers of certain of the Bonds in the portfolio to make
payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts are industrial revenue bonds
("IRBs"). In view of this an investment in such a Trust should be made
with an understanding of the characteristic of such issuers and the risks
which such an investment may entail. IRBs have generally been issued under
bond resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the IRBs. Regardless of the structure,
payment of IRBs is solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an adverse impact on
the credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or environmentally-caused
illnesses, extensive competition and financial deterioration resulting from a
corporate restructuring pursuant to a leveraged buy-out, takeover or
otherwise. Such a restructuring may result in the operator of a project
becoming highly leveraged which may impact on such operator's creditworthiness
which in turn would have an adverse impact on the rating and/or market value
of such Bonds. Further, the possibility of such a restructuring may have an
adverse impact on the market for and consequently the value of such Bonds,
even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
whose revenues are derived from the sale of water and/or sewerage services. In
view of this an investment in such Trust should be made with an understanding
of the characteristics of such issuers and the risks which such an investment
may entail. Such bonds are generally payable from user fees. The problems of
such issuers include the ability to obtain timely and adequate rate increases,
population decline resulting in decreased user fees, the difficulty of
financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the impact of "no-growth"
zoning ordinances. All of such issuers have been experiencing certain of these
problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations that are
secured by lease payments of a governmental entity (hereinafter called "
lease obligations". In view of this an investment in such a Trust should
be made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Although the lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to appropriate for and make the payments
due under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. A governmental entity that enters into
such a lease agreement cannot obligate future governments to appropriate for
and make lease payments but covenants to take such action as is necessary to
include any lease payments due in its budgets and to make the appropriations
therefor. A governmental entity's failure to appropriate for and to make
payments under its lease obligation could result in insufficient funds
available for payment of the obligations secured thereby. Although "
non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of issuers
which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly ad valorem taxes or for
higher education systems, from tuition, dormitory revenues, grants and
endowments. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which
such an investment may entail. General problems relating to school bonds
include litigation contesting the State constitutionality of financing public
education in part from ad valorem taxes, thereby creating a disparity in
educational funds available to schools in wealthy areas and schools in poor
areas. Litigation or legislation on this issue may affect the sources of funds
available for the payment of school bonds in the Trusts. General problems
relating to college and university obligations include the prospect of a
declining percentage of the population consisting of "college" age
individuals, possible inability to raise tuitions and fees sufficiently to
cover increased operating costs, the uncertainty of continued receipt of
Federal grants and state funding, and government legislation or regulations
which may adversely affect the revenues or costs of such issuers. All of such
issuers have been experiencing certain of these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the ownership and operation
of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers
and the risks which such an investment may entail. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual payments
for leases, occupancy of certain terminal space and service fees. Airport
operating income may therefore be affected by the ability of the airlines to
meet their obligations under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to increased
competition, excess capacity, increased costs, deregulation, traffic
constraints and other factors, and several airlines are experiencing severe
financial difficulties. The Sponsor cannot predict what effect these industry
conditions may have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the particular airport
facility. Similarly, payment on Bonds related to other facilities is dependent
on revenues from the projects, such as user fees from ports, tolls on
turnpikes and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors as increased
cost of maintenance, decreased use of a facility, lower cost of alternative
modes of transportation, scarcity of fuel and reduction or loss of rents.
Certain of the Bonds in certain of the Trusts may be obligations which are
payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the
risks which such an investment may entail. Resource recovery facilities are
designed to process solid waste, generate steam and convert steam to
electricity. Resource recovery bonds may be subject to extraordinary optional
redemption at par upon the occurrence of certain circumstances, including but
not limited to: destruction or condemnation of a project; contracts relating
to a project becoming void, unenforceable or impossible to perform; changes in
the economic availability of raw materials, operating supplies or facilities
necessary for the operation of a project or technological or other unavoidable
changes adversely affecting the operation of a project; administrative or
judicial actions which render contracts relating to the projects void,
unenforceable or impossible to perform; or impose unreasonable burdens or
excessive liabilities. The Sponsor cannot predict the causes or likelihood of
the redemption of resource recovery bonds in such a Trust prior to the stated
maturity of the Bonds.
Bond Redemptions. Because certain of the Bonds in certain of the Trusts may
from time to time under certain circumstances be sold or redeemed or will
mature in accordance with their terms and because the proceeds from such
events will be distributed to Unitholders and will not be reinvested, no
assurance can be given that any 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.
Certain of the Bonds in certain of the Trusts may be subject to redemption
prior to their stated maturity date pursuant to sinking fund provisions, call
provisions or extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which is subject to
redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a debt obligation is redeemed, at or before
maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution
of principal and may result in a reduction in the amount of subsequent
interest distributions and it may also offset the current return on Units of a
Trust. Each Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events including, but not limited to, a final
determination that the interest on the Bonds is taxable; the substantial
damage or destruction by fire or other casualty of the project for which the
proceeds of the Bonds were used; an exercise by a local, state or Federal
governmental unit of its power of eminent domain to take all or substantially
all of the project for which the proceeds of the Bonds were used; changes in
the economic availability of raw materials, operating supplies or facilities
or technological or other changes which render the operation of the project
for which the proceeds of the Bonds were used uneconomic; changes in law or an
administrative or judicial decree which renders the performance of the
agreement under which the proceeds of the Bonds were made available to finance
the project impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the Bonds are
issued on the issuer of the Bonds or the user of the proceeds of the Bonds; an
administrative or judicial decree which requires the cessation of a
substantial part of the operations of the project financed with the proceeds
of the Bonds; an overestimate of the costs of the project to be financed with
the proceeds of the Bonds resulting in excess proceeds of the Bonds which may
be applied to redeem Bonds; or an underestimate of a source of funds securing
the Bonds resulting in excess funds which may be applied to redeem Bonds. The
issuer of certain Bonds in a Trust may have sold or reserved the right to
sell, upon the satisfaction of certain conditions, to third parties all or any
portion of its rights to call Bonds in accordance with the stated redemption
provisions of such Bonds. In such a case the issuer no longer has the right to
call the Bonds for redemption unless it reacquires the rights from such third
party. A third party pursuant to these rights may exercise the redemption
provisions with respect to a Bond at a time when the issuer of the Bond might
not have called a Bond for redemption had it not sold such rights. The Sponsor
is unable to predict all of the circumstances which may result in such
redemption of an issue of Bonds. See "Trust Portfolio" and note (3) in
"Notes to Portfolio" in Part One of this Prospectus. See also the
discussion of single family mortgage and multi-family revenue bonds above for
more information on the call provisions of such Bonds.
Distributions. Distributions of interest received by a Trust, pro-rated on an
annual basis, will be made semi-annually unless the Unitholder elects to
receive them monthly. Distributions of funds from the Principal Account, if
any, will be made on a semi-annual basis, except under certain special
circumstances (see "Public Offering--Distributions of Interest and
Principal". Record dates for monthly distributions for each Trust are the
tenth day of each month and record dates for semi-annual distributions for
each Trust are the tenth day of the months indicated under "Per Unit
Information" in Part One of this Prospectus. Distributions are made on the
twenty-fifth day of the month subsequent to the respective record dates.
Unitholders of Insured Municipals Income Trust, 152nd-173rd Insured
Multi-Series and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213-246 will receive distributions of income
and principal, if any, on a monthly basis.
Change of Distribution Option. The plan of distribution selected by a
Unitholder remains in effect until changed. Unitholders purchasing Units in
the secondary market will initially receive distributions in accordance with
the election of the prior owner. Unitholders may change the plan of
distribution in which they are participating. For the convenience of
Unitholders, the Trustee will furnish a card for this purpose; cards may also
be obtained upon request from the Trustee. Unitholders desiring to change
their plan of distribution may so indicate on the card and return it, together
with their certificate and such other documentation that the trustee may then
require, to the Trustee. Certificates should be sent only by registered or
certified mail to minimize the possibility of their being lost or stolen. If
the card and certificate are properly presented to the Trustee, the change
will become effective for all subsequent distributions.
Certificates. The Trustee is authorized to treat as the record owner of Units
that person who is registered as such owner on the books of the Trustee.
Ownership of Units of each Trust is evidenced by separate registered
certificates executed by the Trustee and the Sponsor. Certificates are
transferable by presentation and surrender to the Trustee properly endorsed or
accompanied by a written instrument or instruments of transfer. A Unitholder
must sign exactly as his name appears on the face of the certificate with the
signature guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP" or such other signature guaranty program
in addition to, or in substitution for, STAMP, as may be acceptable to the
Trustee. 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. Certificates will be issued in denominations of one Unit or any
multiple thereof.
Although no such charge is now made or contemplated, the Trustee may require a
Unitholder to pay a reasonable fee for each certificate re-issued (other than
as a result of a change in plan of distribution) or transferred and to pay any
governmental charge that may be imposed in connection with each such transfer
or interchange. Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity, evidence of
ownership and payment of expenses incurred. Mutilated certificates must be
surrendered to the Trustee for replacement.
ESTIMATED CURRENT RETURNS AND ESTIMATED LONG-TERM RETURNS
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each Trust under the
monthly and semi-annual distribution plans were as set forth under "Per
Unit Information" for the applicable Trust in Part One of this Prospectus.
Estimated Current Return is calculated by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price. The Estimated Net
Annual Interest Income per Unit will vary with changes in fees and expenses of
the Trustee and the Evaluator and with the principal prepayment, redemption,
maturity, exchange or sale of Securities while the Public Offering Price will
vary with changes in the offering price of the underlying Securities and with
changes in Purchased Interest for those series which contain Purchased
Interest; therefore, there is no assurance that the present Estimated Current
Return will be realized in the future. Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration, and determines
and factors in the relative weightings of, the market values, yields (which
takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in the Trust and
(2) takes into account the expenses and sales charge associated with each
Trust Unit. Since the market values and estimated retirements of the
Securities and the expenses of the Trust will change, there is no assurance
that the present Estimated Long-Term Return will be realized in the future.
Estimated Current Return and Estimated Long-Term Return are expected to differ
because the calculation of Estimated Long-Term Return reflects the estimated
date and amount of principal returned while Estimated Current Return
calculations include only Net Annual Interest Income and Public Offering Price.
PUBLIC OFFERING
General. Units are offered at the Public Offering Price. The secondary market
public offering price is based on the bid prices of the Securities in each
Trust, an applicable sales charge as determined in accordance with the table
set forth below, which is based upon the estimated long term return life of
each Trust, cash, if any, in the Principal Account held or owned by such
Trust, accrued interest and Purchased Interest, if any. For purposes of
computation, Bonds will be deemed to mature on their expressed maturity dates
unless: (a) the Bonds have been called for redemption or are subject to
redemption on an earlier call date, in which case such call date will be
deemed to be the date upon which they mature; or (b) such Bonds are subject to
a "mandatory tender" , in which case such mandatory tender will be
deemed to be the date upon which they mature. The effect of this method of
sales charge computation will be that different sales charge rates will be
applied to each Trust based upon the estimated long term return life of such
Trust's Portfolio, in accordance with the following schedule:
<TABLE>
<CAPTION>
Years To Maturity Sales Charge Years To Maturity Sales Charge
<S> <C> <C> <C>
1................... 1.010% 12................... 4.712%
2................... 1.523 13................... 4.822
3................... 2.041 14................... 4.932
4................... 2.302 15................... 5.042
5................... 2.564 16................... 5.152
6................... 2.828 17................... 5.263
7................... 3.093 18................... 5.374
8................... 3.627 19................... 5.485
9................... 4.167 20................... 5.597
10.................. 4.384 21 to 30............. 5.708
11.................. 4.603
</TABLE>
The sales charges in the above table are expressed as a percentage of the
aggregate bid prices of the Securities in a Trust. Expressed as a percent of
the Public Offering Price (excluding Purchased Interest for those Trusts which
contain Purchased Interest), the sales charge on a Trust consisting entirely
of a portfolio of Bonds with 15 years to maturity would be 4.80%.
Employees of Van Kampen American Capital Distributors Inc. and its
subsidiaries may purchase Units of the Trust at the current Public Offering
Price less the underwriting commission or less the dealer's concession in the
absence of an underwriting commission. Registered representatives of selling
Underwriters may purchase Units of the Fund at the current Public Offering
Price less the underwriting commission during the initial offering period, and
less the dealer's concession for secondary market transactions. Registered
representatives of selling brokers, dealers, or agents may purchase Units of
the Fund at the current Public Offering Price less the dealer's concession
during the initial offering period and for secondary market transactions.
Units may be purchased in the primary or secondary market at the Public
Offering Price (for purchases which do not qualify for a sales charge
reduction for quantity purchases) less the concession the Sponsor typically
allows to brokers and dealers for purchases (see "Trust
Administration--General--Unit Distribution" by (1) investors who purchase
Units through registered investment advisers, certified financial planners and
registered broker-dealers who in each case either charge periodic fees for
financial planning, investment advisory or asset management services, or
provide such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" charge is imposed, (2)
bank trust departments investing funds over which they exercise exclusive
discretionary investment authority and that are held in a fiduciary, agency,
custodial or similar capacity, (3) any person who for at least 90 days, has
been an officer, director or bona fide employee of any firm offering Units for
sale to investors or their immediate family members (as described above) and
(4) officers and directors of bank holding companies that make Units available
directly or through subsidiaries or bank affiliates. Notwithstanding anything
to the contrary in this Prospectus, such investors, bank trust departments,
firm employees and bank holding company officers and directors who purchase
Units through this program will not receive sales charge reductions for
quantity purchases.
Accrued Interest (Accrued Interest to Carry). Accrued interest to carry is
included in the Public Offering Price for Insured Municipals Income Trust,
151st Insured Multi-Series and prior series and Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 212 and prior
series. Accrued interest to carry consists of two elements. The first element
arises as a result of accrued interest which is the accumulation of unpaid
interest on a bond from the last day on which interest thereon was paid.
Interest on Securities in each Trust is actually paid either monthly,
quarterly, if applicable, or semi-annually to such Trust. However, interest on
the Securities in each Trust is accounted for daily on an accrual basis.
Because of this, each Trust always has an amount of interest earned but not
yet collected by the Trustee because of coupons that are not yet due. For this
reason, the Public Offering Price will have added to it the proportionate
share of accrued and undistributed interest to the date of settlement.
The second element of accrued interest to carry arises because of the
structure of the Interest Account. The Trustee has no cash for distribution to
Unitholders of a Trust until it receives interest payments on the Securities
in such Trust. The Trustee is obligated to provide its own funds, at times, in
order to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that there
will generally be positive cash balances and since the funds held by the
Trustee may be used by it to earn interest thereon, it benefits thereby. If a
Unitholder sells or redeems all or a portion of his Units or if the Bonds in a
Trust are sold or otherwise removed or if a Trust is liquidated, he will
receive at that time his proportionate share of the accrued interest to carry
computed to the settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption.
Purchased and Accrued Interest. Included in the Public Offering Price for
Insured Municipals Income Trust, 152nd-173rd Insured Multi-Series and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
213-246 is Purchased Interest and accrued interest.
Purchased Interest. Purchased Interest is a portion of the unpaid interest
that has accrued on the Securities from the later of the last payment date on
the Securities or the date of issuance thereof through the First Settlement
Date and is included in the calculation of the Public Offering Price.
Purchased Interest will be distributed to Unitholders as Units are redeemed or
Securities mature or are called. See "Summary of Essential Financial
Information" in Part One of this Prospectus for the amount of Purchased
Interest per Unit for each Trust. Purchased Interest is an element of the
price Unitholders will receive in connection with the sale or redemption of
Units prior to the termination of a Trust.
Accrued Interest. Accrued Interest is an accumulation of unpaid interest on
securities which generally is paid semi-annually, although a Trust accrues
such interest daily. Because of this, a Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reasons, the Public
Offering Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will receive on the
next distribution date of a Trust the amount, if any, of accrued interest paid
on their Units.
As indicated in "Purchased Interest" , accrued interest as of the First
Settlement Date includes Purchased Interest. In an effort to reduce the amount
of Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may advance a portion of such accrued interest to the Sponsor as
the Unitholder of record as of the First Settlement Date. Consequently, the
amount of accrued interest to be added to the Public Offering Price of Units
will include only accrued interest from the First Settlement Date to the date
of settlement (other than the Purchased Interest already included therein),
less any distributions from the Interest Account subsequent to the First
Settlement Date. See "Public Offering--Distribution of Interest and
Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the Purchased Interest and accrued interest from
the purchaser of his Units. Since the Trustee has the use of the funds
(including Purchased Interest) held in the Interest Account for distributions
to Unitholders and since such Account is non-interest-bearing to Unitholders,
the Trustee benefits thereby.
Accrued Interest. Included in the Public Offering Price for Insured Municipals
Income Trust, 174th Insured Multi-Series and subsequent series and Insured
Municipals Income Trust and Investors' Quality Tax-Exempt Trust, Multi-Series
247 and subsequent series is accrued interest. Accrued interest is an
accumulation of unpaid interest on securities which generally is paid
semi-annually, although the Trust accrues such interest daily. Because of
this, the Trust always has an amount of interest earned but not yet collected
by the Trustee. For this reason, with respect to sales settling subsequent to
the First Settlement Date, the Public Offering Price of Units will have added
to it the proportionate share of accrued interest to the date of settlement.
Unitholders will receive on the next distribution date of the Trust the
amount, if any, of accrued interest paid on their Units.
In an effort to reduce the amount of accrued interest which would otherwise
have to be paid by Unitholders, the Trustee will advance the amount of accrued
interest to the Sponsor as the Unitholder of record as of the First Settlement
Date. Consequently, the amount of accrued interest to be added to the Public
Offering Price of Units will include only accrued interest from the First
Settlement Date to the date of settlement, less any distributions from the
Interest Account subsequent to the First Settlement Date. See "Public
Offering--Distributions of Interest and Principal."
Because of the varying interest payment dates of the Securities, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. If a Unitholder
sells or redeems all or a portion of his Units, he will be entitled to receive
his proportionate share of the accrued interest from the purchaser of his
Units. Since the Trustee has the use of the funds held in the Interest Account
for distributions to Unitholders and since such Account is
non-interest-bearing to Unitholders, the Trustee benefits thereby.
Offering Price. The Public Offering Price of the Units will vary from the
amounts stated under "Summary of Essential Financial Information" in
Part One of this Prospectus in accordance with fluctuations in the prices of
the underlying Securities in each Trust.
As indicated above, the price of the Units as of the opening of business on
the date of Part One of this Prospectus was determined by adding to the
determination of the aggregate bid price of the Securities an amount equal to
the applicable sales charge expressed as a percentage of the aggregate bid
price of the securities plus Purchased Interest for those Trusts which contain
Purchased Interest and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross commission equal to such sales
charge expressed as a percentage of the Public Offering Price (excluding
Purchased Interest).
For secondary market purposes an appraisal and adjustment with respect to a
Trust will be made by the Evaluator as of 4:00 P.M. Eastern time on days in
which the New York Stock Exchange is open for each day on which any Unit of
such Trust is tendered for redemption, and it shall determine the aggregate
value of any Trust as of 4:00 P.M. Eastern time at such other times as may be
necessary.
The aggregate price of the Securities in each Trust has been and will be
determined on the basis of bid prices as follows: (a) on the basis of current
market prices for the Securities obtained from dealers or brokers who
customarily deal in bonds comparable to those held by the Trust; (b) if such
prices are not available for any particular Securities, on the basis of
current market prices for comparable bonds; (c) by causing the value of the
Securities to be determined by others engaged in the practice of evaluation,
quoting or appraising comparable bonds; or (d) by any combination of the
above. Market prices of the Securities will generally fluctuate with changes
in market interest rates. Unless Bonds are in default in payment of principal
or interest or in significant risk of such default, the Evaluator will not
attribute any value to the insurance obtained by the Trust.
The Evaluator will consider in its evaluation of Bonds which are in default in
payment of principal or interest or, in the Sponsor's opinion, in significant
risk of such default (the "Defaulted Bonds" the value of the
insurance guaranteeing interest and principal payments. The value of the
insurance will be equal to the difference between (i) the market value of
Defaulted Bonds assuming the exercise of the right to obtain Permanent
Insurance (less the insurance premiums and related expenses attributable to
the purchase of Permanent Insurance) and (ii) the market value of such
Defaulted Bonds not covered by Permanent Insurance. In addition, the Evaluator
will consider the ability of the affected Portfolio to meet its commitments
under any Trust insurance policy, including the commitments to issue Permanent
Insurance. It is the position of the Sponsor that this is a fair method of
valuing insured Bonds and reflects a proper valuation method in accordance
with the provisions of the Investment Company Act of 1940.
Although payment is normally made three business days following the order for
purchase, payment may be made prior thereto. A person will become the owner of
Units on the date of settlement provided payment has been received. Cash, if
any, made available to the Sponsor prior to the date of settlement for the
purchase of Units may be used in the Sponsor's business and may be deemed to
be a benefit to the Sponsor, subject to the limitations of the Securities
Exchange Act of 1934. Delivery of certificates representing Units so ordered
will be made three business days following such order or shortly thereafter.
See "Redemption of Units" below for information regarding the ability
to redeem Units ordered for purchase.
Market for Units. Although they are not obligated to do so, the Sponsor
intends to, and certain of the dealers may, maintain a market for the Units
offered hereby and to offer continuously to purchase such Units at prices,
subject to change at any time, based upon the aggregate bid prices of the
Securities in the portfolio of each Trust plus Purchased Interest, if any,
plus interest accrued to the date of settlement and plus any principal cash on
hand, less any amounts representing taxes or other governmental charges
payable out of the Trust and less any accrued Trust expenses. lf the supply of
Units exceeds demand or if some other business reason warrants it, the Sponsor
and/or the dealers may either discontinue all purchases of Units or
discontinue purchases of Units at such prices. In the event that a market is
not maintained for the Units and the Unitholder cannot find another purchaser,
a Unitholder of any Trust desiring to dispose of his Units may be able to
dispose of such Units only by tendering them to the Trustee for redemption at
the Redemption Price, which is based upon the aggregate bid price of the
Securities in the portfolio of such Trust plus Purchased Interest, if any, and
any accrued interest. The aggregate bid prices of the underlying Securities in
a Trust are expected to be less than the related aggregate offering prices.
See "Redemption of Units" below. A Unitholder who wishes to dispose of
his Units should inquire of his broker as to current market prices in order to
determine whether there is in existence any price in excess of the Redemption
Price and, if so, the amount thereof.
Distributions of Interest and Principal. Interest received by a Trust,
including that part of the proceeds of any disposition of Securities which
represents Purchased Interest, if any, and/or accrued interest, is credited by
the Trustee to the Interest Account for the Trust. Other receipts are credited
to the Principal Account for the Trust. All distributions will be net of
applicable expenses. The pro rata share of cash in the Principal Account of a
Trust will be computed as of the semi-annual record date and distributions to
the Unitholders as of such record date will be made on or shortly after the
twenty-fifth day of such month. For Insured Municipals Income Trust,
152nd-173rd Insured Multi-Series and Insured Municipals Income Trust and
Investors' Quality Tax-Exempt Trust, Multi-Series 213-246 such computation and
distribution will occur monthly. Proceeds received from the disposition of any
of the Securities after such record date and prior to the following
distribution date will be held in the Principal Account and not distributed
until the next distribution date. The Trustee is not required to pay interest
on funds held in any Principal or Interest Account (but may itself earn
interest thereon and therefore benefits from the use of such funds) nor to
make a distribution from the Principal Account unless the amount available for
distribution therein shall equal at least $1.00 per Unit.
The distribution to the Unitholders of a Trust 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 such portion of the Unitholder's
pro rata share of the Estimated Net Annual Interest Income in the Interest
Account of such Trust after deducting estimated expenses attributable as is
consistent with the distribution plan chosen. Only monthly distributions are
available for Insured Municipals Income Trust, 152nd-173rd Insured
Multi-Series and Insured Municipals Income Trust and Investors' Quality
Tax-Exempt Trust, Multi-Series 213-246. Because interest payments are not
received by a Trust at a constant rate throughout the year, such interest
distribution may be more or less than the amount credited to such Interest
Account as of the record date. For the purpose of minimizing fluctuations in
the distributions from an Interest Account, the Trustee is authorized to
advance such amounts as may be necessary to provide interest distributions of
approximately equal amounts. The Trustee will be reimbursed without interest
for any such advances from funds in the applicable Interest Account on the
ensuing record date. Persons who purchase Units between a record date and a
distribution date will receive their first distribution on the second
distribution date after the purchase, under the applicable plan of
distribution. Only monthly distributions are available for Insured Municipals
Income Trust, 152nd-173rd Insured Multi-Series and Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 213-246.
On or before the twenty-fifth day of each month, the Trustee will deduct from
the Interest Account and, to the extent funds are not sufficient therein, from
the Principal Account, amounts necessary to pay the expenses of the Trust (as
determined on the basis set forth under "Trust Administration and
Expenses". The Trustee also may withdraw from said accounts such amounts,
if any, as it deems necessary to establish a reserve for any governmental
charges payable out of the Trust. Amounts so withdrawn will 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 proper Accounts. In addition, the Trustee
may withdraw from the Interest and Principal Accounts such amounts as may be
necessary to cover redemptions of Units by the Trustee.
Reinvestment Option. Unitholders of all unit investment trusts sponsored by
Van Kampen American Capital Distributors, Inc., may elect to have each
distribution of interest income, capital gains and/or principal on their Units
automatically reinvested in shares of any Van Kampen American Capital mutual
funds (except for B shares) which are registered in the Unitholder's state of
residence. Such mutual funds are hereinafter collectively referred to as the
"Reinvestment Funds" .
Each Reinvestment Fund has investment objectives which differ in certain
respects from those of the Trusts. The prospectus relating to each
Reinvestment Fund describes the investment policies of such fund and sets
forth the procedures to follow to commence reinvestment. A Unitholder may
obtain a prospectus for the respective Reinvestment Funds from Van Kampen
American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Texas residents who desire to reinvest may request that a
broker-dealer registered in Texas send the prospectus relating to the
respective fund.
After becoming a participant in a reinvestment plan, each distribution of
interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as
directed by such person, as of such distribution date by the Trustee to
purchase shares (or fractions thereof) of the applicable Reinvestment Fund at
a net asset value as computed as of the close of trading on the New York Stock
Exchange on such date. Unitholders with an existing Guaranteed Reinvestment
Option (GRO) Program account (whereby a sales charge is imposed on
distribution reinvestments) may transfer their existing account into a new GRO
account which allows purchases of Reinvestment Fund shares at net asset value
as described above.
Confirmations of all reinvestments by a Unitholder into a Reinvestment Fund
will be mailed to the Unitholder by such Reinvestment Fund. A participant may
at any time prior to five days preceding the next succeeding distribution
date, by so notifying the Trustee in writing, elect to terminate his or her
reinvestment plan and receive future distributions of his or her Units in
cash. There will be no charge or other penalty for such termination. Each
Reinvestment Fund, its sponsor and investment adviser shall have the right to
terminate at any time the reinvestment plan relating to such fund.
Unitholders of New York Trusts, other than residents of Massachusetts, may
elect to have distributions reinvested in shares of First Investors New York
Insured Tax Free Fund, Inc. subject to a sales charge of $1.50 per $100
reinvested (paid to First Investors Management Company, Inc.).
Redemption of Units. A Unitholder may redeem all or a portion of his Units by
tender to the Trustee at its Unit Investment Trust Division, 101 Barclay
Street, New York, New York 10286, of the certificates representing the Units
to be redeemed, duly endorsed or accompanied by proper instruments of transfer
with signature guaranteed (or by providing satisfactory indemnity, as in
connection with lost, stolen or destroyed certificates) and by payment of
applicable governmental charges, if any. Thus, redemption of Units cannot be
effected until certificates representing such Units have been delivered to the
person seeking redemption or satisfactory indemnity provided. No redemption
fee will be charged. On the third business day following such tender the
Unitholder will be entitled to receive in cash an amount for each Unit equal
to the Redemption Price per Unit next computed after receipt by the Trustee of
such tender of Units. The "date of tender" is deemed to be the date on
which Units are received by the Trustee, except that as regards Units received
after 4:00 P.M. Eastern time on days 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.
Under regulations issued by the Internal Revenue Service, the Trustee will be
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnished the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any
amount so withheld is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, at any time a Unitholder elects to tender
Units for redemption, such Unitholder should provide a tax identification
number to the Trustee in order to avoid this possible "back-up
withholding" in the event the Trustee has not been previously provided
such number.
Purchased Interest, if any, and 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 will be withdrawn
from the Principal Account. The Trustee is empowered to sell underlying
Securities of a Trust in order to make funds available for redemption. Units
so redeemed shall be cancelled. The Redemption Price per Unit will be
determined on the basis of the bid price of the Securities in each Trust as of
4:00 P.M. Eastern time on days of trading on the New York Stock Exchange on
the date any such determination is made. While the Trustee has the power to
determine the Redemption Price per Unit when Units are tendered for
redemption, such authority has been delegated to the Evaluator which
determines the price per Unit on a daily basis.
The Redemption Price per Unit is the pro rata share of each Unit in each Trust
on the basis of (i) the cash on hand in such Trust or moneys in the process of
being collected, (ii) the value of the Securities in such Trust based on the
bid prices of the Securities therein, except for cases in which the value of
insurance has been included, (iii) Purchased Interest, if any, and (iv)
interest accrued thereon, less (a) amounts representing taxes or other
governmental charges payable out of such Trust and (b) the accrued expenses of
such Trust. The Evaluator may determine the value of the Securities in each
Trust by employing any of the methods set forth in "Public Offering
Price." In determining the Redemption Price per Unit no value will be
assigned to the portfolio insurance maintained on the Bonds in a Trust unless
such Bonds are in default in payment of principal or interest or in
significant risk of such default. On the other hand, Bonds insured under a
policy obtained by the issuer thereof are entitled to the benefits of such
insurance at all times and such benefits are reflected and included in the
market value of such Bonds. For a description of the situations in which the
Evaluator may value the insurance obtained by the Trust, see "Public
Offering Price" .
The price at which Units may be redeemed could be less than the price paid by
the Unitholder. As stated above, the Trustee may sell Securities to cover
redemptions. When Securities are sold, the size and diversity of the Trust
will be reduced. Such sales may be required at a time when Securities would
not otherwise be sold and might result in lower prices than might otherwise be
realized.
The right of redemption may be suspended and payment postponed for any period
during which the New York Stock Exchange is closed, other than for customary
weekend and holiday closings, or during which the Securities and Exchange
Commission determines that trading on that Exchange is restricted or an
emergency exists, as a result of which disposal or evaluation of the
Securities in the Trust is not reasonably practicable, or for such other
periods as the Securities and Exchange Commission may by order permit. Under
certain extreme circumstances the Sponsor may apply to the Securities and
Exchange Commission for an order permitting a full or partial suspension of
the right of Unitholders to redeem their Units.
Reports Provided. The Trustee shall furnish Unitholders of a Trust in
connection with each distribution a statement of the amount of interest and
the amount of other receipts (received since the preceding distribution), if
any, being distributed expressed in each case as a dollar amount representing
the pro rata share of each Unit of a Trust outstanding. For as long as the
Trustee deems it to be in the best interests of the Unitholders the accounts
of each Trust shall be audited, not less frequently than annually, by
independent certified public accountants and the report of such accountants
shall be furnished by the Trustee to Unitholders upon request. Within a
reasonable period of time after the end of each calendar year, the Trustee
shall furnish to each person who at any time during the calendar year was a
registered Unitholder of a Trust a statement (i) as to the Interest Account:
interest received (including amounts representing interest received upon any
disposition of Securities) and the percentage of such interest by states in
which the issuers of the Securities are located, the amount of Purchased
Interest, if any, deductions for applicable taxes and for fees and expenses of
the Trust, for redemptions of Units, if any, and the balance remaining after
such distributions and deductions, expressed in each case 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; (ii) as to
the Principal Account: the dates of disposition of any Securities and the net
proceeds received therefrom (excluding any portion representing accrued
interest), the amount paid for redemptions of Units, if any, deductions for
payment of applicable taxes and fees and expenses of the Trustee, the amount
of "when issued" interest treated as a return of capital, if any, 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;
(iii) a list of the Securities held and the number of Units outstanding on the
last business day of such calendar year; (iv) the Redemption Price per Unit
based upon the last computation thereof made during such calendar year; and
(v) amounts actually distributed during such calendar year from the Interest
and Principal Accounts, separately stated, expressed both as total dollar
amounts and as dollar amounts representing the pro rata share of each Unit
outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Securities in a Trust furnished to it by the Evaluator.
Each distribution statement will reflect pertinent information in respect of
the other plan of distribution so that Unitholders may be informed regarding
the results of such other plan of distribution.
INSURANCE ON THE BONDS
Insurance has been obtained by each Trust or by a prior owner or by the Bond
issuer or by the Sponsor prior to the deposit of such Bonds in a Trust
guaranteeing prompt payment of interest and principal, when due, in respect of
the Bonds in such Trust. See "Objectives and Securities Selection" . An
insurance policy obtained by a Trust is non-cancellable and will continue in
force so long as such Trust is in existence, the respective Portfolio Insurer
is still in business and the Bonds described in the policy continue to be held
by such Trust. Any portfolio insurance premium for a Trust, which is an
obligation of such Trust, is paid by each Trust on a monthly basis. Nonpayment
of premiums on the policy obtained by a Trust will not result in the
cancellation of insurance but will force the insurer to take action against
the Trustee to recover premium payments due it. The Trustee in turn will be
entitled to recover such payments from such Trust. Premium rates for each
issue of Bonds protected by the policy obtained by a Trust are fixed for the
life of the Trust. The premium for any insurance policy or policies obtained
on Preinsured Bonds has been paid in advance by such issuer by a prior owner
of such Bonds or the Sponsor and any such policy or policies are
non-cancellable and will continue in force so long as the Bonds so insured are
outstanding and the insurer referred to below remains in business. If the
provider of an original issuance insurance policy is unable to meet its
obligations under such policy or if the rating assigned to the claims-paying
ability of any such insurer deteriorates, the Portfolio Insurers have no
obligation to insure any issue adversely affected by either of the above
described events.
The aforementioned portfolio insurance obtained by a Trust guarantees the
timely payment of principal and interest on the Bonds as they fall due. For
the purposes of insurance obtained by a Trust, "when due" generally
means the stated maturity date for the payment of principal and interest.
However, in the event (a) an issuer of a Bond defaults in the payment of
principal or interest on such Bond, (b) such issuer enters into a bankruptcy
proceeding or (c) the maturity of such Bond is accelerated, the affected
Portfolio Insurer has the option, in its sole discretion, after receiving
notice of the earliest to occur of such a default, bankruptcy proceeding or
acceleration to pay the outstanding principal amount of such Bond plus accrued
interest to the date of such payment and thereby retire the Bond from the
affected Trust prior to such Bond's stated maturity date. The insurance does
not guarantee the market value of the Bonds or the value of the Units.
Insurance obtained by a Trust, if any, is only effective as to Bonds owned by
and held in such Trust. In the event of a sale of any such Bond by the
Trustee, such insurance terminates as to such Bond on the date of sale.
Pursuant to an irrevocable commitment of the Portfolio Insurers, the Trustee,
upon the sale of a Bond covered under a portfolio insurance policy obtained by
a Trust, has the right to obtain permanent insurance with respect to such Bond
(i.e., insurance to maturity of the Bonds regardless of the identity of the
holder thereof) (the "Permanent Insurance" upon the payment of a
single predetermined insurance premium and any expenses related thereto from
the proceeds of the sale of such Bond. Accordingly, any Bond in a Trust is
eligible to be sold on an insured basis. It is expected that the Trustee would
exercise the right to obtain Permanent Insurance only if upon such exercise
the affected Trust would receive net proceeds (sale of Bond proceeds less the
insurance premium and related expenses attributable to the Permanent
Insurance) from such sale in excess of the sale proceeds if such Bonds were
sold on an uninsured basis. The insurance premium with respect to each Bond
eligible for Permanent Insurance would be determined based upon the
insurability of each Bond as of the Date of Deposit and would not be increased
or decreased for any change in the creditworthiness of each Bond.
The Sponsor believes that the Permanent Insurance option provides an advantage
to a Trust in that each Bond insured by a Trust insurance policy may be sold
out of the affected Trust with the benefits of the insurance attaching
thereto. Thus, the value of the insurance, if any, at the time of sale, can be
realized in the market value of the Bond so sold (which is not the case in
connection with any value attributable to a Trust's portfolio insurance). See
"Public Offering-Offering Price" . Because any such insurance value may
be realized in the market value of the Bond upon the sale thereof upon
exercise of the Permanent Insurance option, the Sponsor anticipates that (a)
in the event a Trust were to be comprised of a substantial percentage of Bonds
in default or significant risk of default, it is much less likely that such
Trust would need at some point in time to seek a suspension of redemptions of
Units than if such Trust were to have no such option (see "Public
Offering-Redemption of Units" and (b) at the time of termination of a
Trust, if such Trust were holding defaulted Bonds or Bonds in significant risk
of default such Trust would not need to hold such Bonds until their respective
maturities in order to realize the benefits of such Trust's portfolio
insurance (see "General-Amendment or Termination".
Except as indicated below, insurance obtained by a Trust, if any, has no
effect on the price or redemption value of Units. lt is the present intention
of the Evaluator to attribute a value for such insurance for the purpose of
computing the price or redemption value of Units if the Bonds covered by such
insurance are in default in payment of principal or interest or in significant
risk of such default. The value of the insurance will be the difference
between the market value of a Bond in default in payment of principal or
interest or in significant risk of such default and the market value of
similar bonds which are not in such situation as determined in accordance with
the Trust's method of valuing defaulted Bonds. See "Public
Offering--Offering Price" . It is also the present intention of the Trustee
not to sell such Bonds to effect redemptions or for any other reason but
rather to retain them in the portfolio because value attributable to the
insurance cannot be realized upon sale. See "Public OfferingOffering
Price" herein for a more complete description of a Trust's method of
valuing defaulted Bonds and Bonds which have a significant risk of default.
Insurance obtained on a Preinsured Bond is effective so long as such Bond is
outstanding. Therefore, any such insurance may be considered to represent an
element of market value in regard to the Bonds thus insured, but the exact
effect, if any, of this insurance on such market value cannot be predicted.
Any policy obtained by a Trust with respect to the Bonds in such Trust and any
policy obtained on a Preinsured Bond was issued by one of the Portfolio
Insurers or one of the Preinsured Bond Insurers.
AMBAC Indemnity Corporation ("AMBAC Indemnity" is a
Wisconsin-domiciled stock insurance corporation regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin and licensed to do
business in 50 states, the District of Columbia and the Commonwealth of Puerto
Rico, with admitted assets of approximately $2,145,000,000 (unaudited) and
statutory capital of approximately $782,000,000 (unaudited) as of December 31,
1994. Statutory capital consists of AMBAC Indemnity's policyholders' surplus
and statutory contingency reserve. AMBAC Indemnity is a wholly owned
subsidiary of AMBAC Inc., a 100% publicly-held company. Moody's Investors
Service, Inc. and Standard & Poor's have both assigned a triple-A
claims-paying ability rating to AMBAC Indemnity.
Copies of its financial statements prepared in accordance with statutory
accounting standards are available from AMBAC Indemnity. The address of AMBAC
Indemnity's administrative offices and its telephone number are One State
Street Plaza, 17th Floor, New York, New York, 10004 and (212) 668-0340.
AMBAC Indemnity has entered into quota share reinsurance agreements under
which a percentage of the insurance underwritten pursuant to certain municipal
bond insurance programs of AMBAC Indemnity has been and will be assumed by a
number of foreign and domestic unaffiliated reinsurers.
MBIA Insurance Corporation ("MBIA") is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company. MBIA Inc.
is not obligated to pay the debts of or claims against MBIA. MBIA is a limited
liability corporation rather than a several liability association. MBIA is
domiciled in the State of New York and licensed to do business in all fifty
states, the District of Columbia, the Commonwealth of the Northern Mariana
Islands, the Commonwealth of Puerto Rico, the Virgin Islands of the United
States and the Territory of Guam. As of September 30, 1995 MBIA had admitted
assets of $3.7 billion (unaudited), total liabilities of $2.5 billion
(unaudited), and total capital and surplus of $1.2 billion (unaudited)
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities. As of December 31, 1994, the
Insurer had admitted assets of $3.4 billion (audited), total liabilities of
$2.3 billion (audited), and total capital and surplus of $1.1 billion
(audited) determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities. Copies of MBIA's
year end financial statements prepared in accordance with statutory accounting
practices are available from MBIA. The address of MBIA is 113 King Street,
Armonk, New York 10504.
Effective December 31, 1989, MBIA Inc. acquired Bond Investors Group, Inc. On
January 5, 1990, MBIA acquired all of the outstanding stock of Bond Investors
Group, Inc., the parent of Bond Investors Guaranty Insurance Company (BIG),
now known as MBIA Insurance Corp. of Illinois. Through a reinsurance
agreement, BIG has ceded all of its net insured risks, as well as its unearned
premium and contingency reserves, to MBIA and MBIA has reinsured BIG's net
outstanding exposure.
Moody's Investors Service, Inc. rates all bond issues insured by MBIA "
Aaa" and short term loans "MIG 1," both designated to be of the
highest quality.
Standard & Poor's rates all new issues insured by MBIA "AAA" Prime
Grade.
The Moody's Investors Service, Inc. rating of MBIA should be evaluated
independently of the Standard & Poor's rating of MBIA. No application has been
made to any other rating agency in order to obtain additional ratings on the
Bonds. The ratings reflect the respective rating agency's current assessment
of the creditworthiness of MBIA and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Bonds, and
such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of either or both ratings
may have an adverse effect on the market price of the Bonds.
Financial Guaranty Insurance Company ("Financial Guaranty" or "
FGIC" is a wholly-owned subsidiary of FGIC Corporation (the "
Corporation", a Delaware holding company. The Corporation is a
wholly-owned subsidiary of General Electric Capital Corporation ("GECC"
). Neither the Corporation nor GECC is obligated to pay the debts of or the
claims against Financial Guaranty. Financial Guaranty is domiciled in the
State of New York and is subject to regulation by the State of New York
Insurance Department. As of December 31, 1995, the total capital and surplus
of Financial Guaranty was approximately $1,000,520,000. Copies of Financial
Guaranty's financial statements, prepared on the basis of statutory accounting
principles, and the Corporation's financial statements, prepared on the basis
of generally accepted accounting principles, may be obtained by writing to
Financial Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department, telephone number: (212) 312-3000 or to the New York
State Insurance Department at 160 West Broadway, 18th Floor, New York, New
York 10013, Attention: Property Companies Bureau, telephone number: (212)
621-0389.
In addition, Financial Guaranty Insurance Company is currently licensed to
write insurance in all 50 states and the District of Columbia.
Financial Security Assurance, Inc. ("Financial Security" or "
FSA" is a monoline insurance company incorporated on March 16, 1984 under
the laws of the State of New York. The operations of Financial Security
commenced on July 25, 1985, and Financial Security received its New York State
insurance license on September 23, 1985. Financial Security and its two wholly
owned subsidiaries are licensed to engage in the financial guaranty insurance
business in 49 states, the District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write financial
guaranty insurance in respect of municipal and other obligations and reinsure
financial guaranty insurance policies written by other leading insurance
companies. In general, financial guaranty insurance consists of the issuance
of a guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of those securities, in consideration for payment
of a premium to the insurer.
Financial Security is approximately 91.6% owned by U S WEST, Inc. and 8.4%
owned by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"
). Neither U S WEST, Inc. nor Tokio Marine is obligated to pay the debts of or
the claims against Financial Security. Financial Security is domiciled in the
State of New York and is subject to regulation by the State of New York
Insurance Department. As of March 31, 1993, the total policyholders' surplus
and contingency reserves and the total unearned premium reserve, respectively,
of Financial Security and its consolidated subsidiaries were, in accordance
with generally accepted accounting principles, approximately $479,110,000
(unaudited) and $220,078,000 (unaudited), and the total shareholders' equity
and the total unearned premium reserve, respectively, of Financial Security
and its consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $628,119,000 (unaudited) and $202,493,000
(unaudited). Copies of Financial Security's financial statements may be
obtained by writing to Financial Security at 350 Park Avenue, New York, New
York, 10022, Attention: Communications Department. Its telephone number is
(212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security or either of its subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with unaffiliated reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit
Financial Security's obligations under any financial guaranty insurance policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc., and "AAA" by Standard & Poor's, Nippon
Investors Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd.
Such ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
Capital Guaranty Insurance Company ("Capital Guaranty" is a "
Aaa/AAA" rated monoline stock insurance company incorporated in the State
of Maryland, and is a wholly owned subsidiary of Capital Guaranty Corporation,
a Maryland insurance holding company. Capital Guaranty Corporation is a
publicly owned company whose shares are traded on the New York Stock Exchange.
Capital Guaranty is authorized to provide insurance in all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, Guam and the U.S.
Virgin Islands. Capital Guaranty focuses on insuring municipal securities and
our policies guaranty the timely payment of principal and interest when due
for payment on new issue and secondary market issue municipal bond
transactions. Capital Guaranty's claims-paying ability is rated "
Triple-A" by both Moody's and Standard & Poor's. Therefore, if Capital
Guaranty insures an issue with a stand alone rating of less than "
Triple-A," such issue would be "upgraded" to "Aaa/AAA" by
virtue of Capital Guaranty's Insurance.
As of September 30, 1995, Capital Guaranty had more than $19.0 billion in net
exposure outstanding (excluding defeased issues). The total statutory
policyholders' surplus and contingency reserve of Capital Guaranty was
$204,642,000, and the total admitted assets were $326,802,226 as reported to
the Insurance Department of the State of Maryland as of September 30, 1995.
Financial statements for Capital Guaranty Insurance Company, that have been
prepared in accordance with statutory insurance accounting standards, are
available upon request. The address of Capital Guaranty's headquarters and its
telephone number are Steuart Tower, 22nd Floor, One Market Plaza, San
Francisco, CA 94105-1413 and (415) 995-8000.
CapMAC is a New York-domiciled monoline stock insurance company which engages
only in the business of financial guarantee and surety insurance. CapMAC is
licensed in 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial obligations
in the U.S. and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc., "AAA" by Standard & Poor's, "AAA" by Duff &
Phelps Credit Rating Co. and "AAA" by Nippon Investors Service Inc.
Such ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CapMAC is wholly owned by CapMAC Holdings Inc. ("Holdings", a company
that is owned by a group of institutional and other investors, including
CapMAC's management and employees. Neither Holdings nor any of its
stockholders is obligated to pay any claims under any policy issued by CapMAC
or any debts of CapMAC or to make additional capital contributions.
CapMAC is regulated by the Superintendent of Insurance of the State of New
York. In addition, CapMAC is subject to regulation by the insurance
departments of the other jurisdictions in which it is licensed. Such insurance
laws regulate, among other things, the amount of net exposure per risk that
CapMAC may retain, capital transfers, dividends, investment of assets, changes
in control, transactions with affiliates and consolidations and acquisitions.
CapMAC is subject to periodic regulatory examinations by the same regulatory
authorities.
CapMAC's obligations under the Policy(s) may be reinsured. Such reinsurance
does not relieve CapMAC of any of its obligations under the Policy(s).
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As at December 31, 1994 and 1993, CapMAC had qualified statutory capital
(which consists of policyholders' surplus and contingency reserve) of
approximately $170 million and $168 million, respectively, and had not
incurred any debt obligations. Article 69 of the New York State Insurance Law
requires CapMAC to establish and maintain the contingency reserve, which is
available to cover claims under policies issued by CapMAC.
Copies of CapMAC's financial statements prepared in accordance with statutory
accounting standards, which differ from generally accepted accounting
principles, and filed with the Insurance Department of the State of New York
are available upon request. CapMAC is located at 885 Third Avenue, New York,
New York 10022, and its telephone number is (212) 755-1155.
In order to be in a Trust, Bonds must be insured by one of the Preinsured Bond
Insurers or be eligible for the insurance being obtained by such Trust. In
determining eligibility for insurance, the Preinsured Bond Insurers, AMBAC
Indemnity and Financial Guaranty, have applied their own standards which
correspond generally to the standards they normally use in establishing the
insurability of new issues of municipal bonds and which are not necessarily
the criteria used in the selection of Bonds by the Sponsor. To the extent the
standards of the Preinsured Bond Insurers, AMBAC Indemnity and Financial
Guaranty, are more restrictive than those of the Sponsor, the previously
stated Trust investment criteria have been limited with respect to the Bonds.
This decision is made prior to the Date of Deposit, as debt obligations not
eligible for insurance are not deposited in a Trust. Thus, all of the Bonds in
the portfolios of the Trusts in the Fund are insured either by the respective
Trust, by the issuer of the Bonds, by a prior owner of such Bonds or by the
Sponsor prior to the deposit of the Bonds in a Trust.
Because the Bonds are insured by one of the Portfolio Insurers or one of the
Preinsured Bond Insurers as to the timely payment of principal and interest,
when due, and on the basis of the various reinsurance agreements in effect,
Standard & Poor's has assigned to the Units of each Trust its "AAA"
investment rating. See "Description of Securities Ratings" . The
obtaining of this rating by a Trust should not be construed as an approval of
the offering of the Units by Standard & Poor's or as a guarantee of the market
value of such Trust or of the Units.
On the date indicated therein, the Estimated Current Return and the Estimated
Long-Term Return for the respective Trust is that percentage set forth in Part
One of this Prospectus. The Estimated Current Return and the Estimated
Long-Term Return on an identical portfolio without the insurance obtained by
the Trust would have been higher.
An objective of portfolio insurance obtained by a Trust is to obtain a higher
yield on the portfolio of such Trust than would be available if all the
Securities in such portfolio had Standard & Poor's "AAA" rating and
yet at the same time to have the protection of insurance of prompt payment of
interest and principal, when due, on the Bonds. There is, of course, no
certainty that this result will be achieved. Preinsured Bonds in a Trust (all
of which are rated "AAA" by Standard & Poor's) may or may not have a
higher yield than uninsured bonds rated "AAA" by Standard & Poor's. In
selecting such Bonds for a Trust, the Sponsor has applied the criteria
hereinbefore described.
In the event of nonpayment of interest or principal, when due, in respect of a
Bond, AMBAC Indemnity shall make such payment not later than 30 days and
Financial Guaranty shall make such payment within one business day after the
respective insurer has been notified that such nonpayment has occurred or is
threatened (but not earlier than the date such payment is due). The insurer,
as regards any payment it may make, will succeed to the rights of the Trustee
in respect thereof. All policies issued by the Portfolio Insurers and the
Preinsured Bond Insurers are substantially identical insofar as obligations to
a Trust are concerned.
The Internal Revenue Service has issued a letter ruling which holds in effect
that insurance proceeds representing maturing interest on defaulted municipal
obligations paid to holders of insured bonds, under policy provisions
substantially identical to the policies described herein, will be excludable
from Federal gross income under Section 103(a)(1) of the Internal Revenue Code
to the same extent as if such payments were made by the issuer of the
municipal obligations. Holders of Units in a Trust should discuss with their
tax advisers the degree of reliance which they may place on this letter
ruling. However, Chapman and Cutler, counsel for the Sponsor, has given an
opinion to the effect such payment of proceeds would be excludable from
Federal gross income if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted obligations. See
"Federal Tax Status of the Trusts" .
Each Portfolio Insurer is subject to regulation by the department of insurance
in the state in which it is qualified to do business. Such regulation,
however, is no guarantee that they will be able to perform on their contracts
of insurance in the event a claim should be made thereunder at some time in
the future. At the date hereof, it is reported that no claims have been
submitted or are expected to be submitted to any of the Portfolio Insurers
which would materially impair the ability of such company to meet its
commitments pursuant to any contract of bond or portfolio insurance.
The information relating to each Portfolio Insurer has been furnished by such
companies. The financial information with respect to each Portfolio Insurer
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. Neither the Fund, the Units nor any portfolio is insured directly or
indirectly by the Sponsor.
FEDERAL TAX STATUS OF THE TRUSTS
At the time of the closing for each Trust, Chapman and Cutler, Counsel for the
Sponsor, rendered an opinion under then existing law substantially to the
effect that:
Each Trust is not an association taxable as a corporation for Federal income
tax purposes and interest and accrued original issue discount on Bonds which
is excludable from gross income under the Internal Revenue Code of 1986 (the
"Code" will retain its status when distributed to Unitholders;
however such interest may be taken into account in computing the alternative
minimum tax, an additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax", as noted below;
Each Unitholder is considered to be the owner of a pro rata portion of the
respective Trust under subpart E, subchapter J of chapter 1 of the Code and
will have a taxable event when such Trust disposes of a Bond, or when the
Unitholder redeems or sells his Units. Unitholders must reduce the tax basis
of their Units for their share of accrued interest received by the respective
Trust, if any, on Bonds delivered after the Unitholders pay for their Units to
the extent that such interest accrued on such Bonds during the period from the
Unitholder's settlement date to the date such Bonds are delivered to the
respective Trust and, consequently, such Unitholders may have an increase in
taxable gain or reduction in capital loss upon the disposition of such Units.
Gain or loss upon the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis of the Units. If
the Trustee disposes of Bonds (whether by sale, payment on maturity,
redemption or otherwise), gain or loss is recognized to the Unitholder. The
amount of any such gain or loss is measured by comparing the Unitholder's pro
rata share of the total proceeds from such disposition with the Unitholder's
basis for his or her fractional interest in the asset disposed of. In the case
of a Unitholder who purchases Units, such basis (before adjustment for earned
original issue discount and amortized bond premium, if any) is determined by
apportioning the cost of the Units among each of the Trust assets ratably
according to value as of the valuation date nearest the date of acquisition of
the Units. The tax basis reduction requirements of the Code relating to
amortization of bond premium may, under some circumstances, result in the
Unitholder realizing a taxable gain when his Units are sold or redeemed for an
amount less than or equal to his original cost;
Any proceeds paid under an insurance policy or policies dated the Date of
Deposit, issued to an Insured Trust by AMBAC Indemnity, Financial Guaranty or
a combination thereof with respect to the Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Federal gross income if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted obligations provided
that, at the time such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations; and
Any proceeds paid under individual policies obtained by issuers of Bonds which
represent maturing interest on defaulted obligations held by the Trustee will
be excludable from Federal gross income if, and to the same extent as, such
interest would have been excludable if paid in the normal course by the issuer
of the defaulted obligations provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the obligations,
rather than the insurer, will pay debt service on the obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules governing
the accrual of original issue discount. These rules provide that original
issue discount accrues either on the basis of a constant compound interest
rate or ratably over the term of the Bond, depending on the date the Bond was
issued. In addition, special rules apply if the purchase price of a Bond
exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "
adjusted issue price" to prior owners. The application of these rules
will also vary depending on the value of the Bond on the date a Unitholder
acquires his Units and the price the Unitholder pays for his Units.
Unitholders should consult with their tax advisers regarding these rules and
their application.
"The Revenue Reconciliation Act of 1993" (the "Tax Act"
subjects tax-exempt bonds to the market discount rules of the Code effective
for bonds purchased after April 30, 1993. In general, market discount is the
amount (if any) by which the stated redemption price at maturity exceeds an
investor's purchase price (except to the extent that such difference, if any,
is attributable to original issue discount not yet accrued), subject to a
statutory de minimis rule. Market discount can arise based on the price a
Trust pays for Bonds or the price a Unitholder pays for his or her Units.
Under the Tax Act, accretion of market discount is taxable as ordinary income;
under prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust holds a Bond would be recognized as
ordinary income by the Unitholders when principal payments are received on the
Bond, upon sale or at redemption (including early redemption), or upon the
sale or redemption of his or her Units, unless a Unitholder elects to include
market discount in taxable income as it accrues. The market discount rules are
complex and Unitholders should consult their tax advisers regarding these
rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax for taxable years beginning after December 31, 1986 depends upon
the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than an S Corporation, Regulated
Investment Company, Real Estate Investment Trust, or REMIC) is an amount equal
to 75% of the excess of such corporation's "adjusted current earnings"
over an amount equal to its alternative minimum taxable income (before such
adjustment item and the alternative tax net operating loss deduction). "
Adjusted current earnings" includes all tax exempt interest, including
interest on all of the Bonds in the Fund. Under the provisions of Section 884
of the Code, a branch profits tax is levied on the "effectively connected
earnings and profits" of certain foreign corporations which include
tax-exempt interest such as interest on the Bonds in the Trust. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units of a
Trust is not deductible for Federal income tax purposes. The Internal Revenue
Service has taken the position that such indebtedness need not be directly
traceable to the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to purchase or improve
a personal residence). Also, under Section 265 of the Code, certain financial
institutions that acquire Units would generally not be able to deduct any of
the interest expense attributable to ownership of such Units. On December 7,
1995, the U.S. Treasury Department released proposed legislation that, if
enacted, would generally extend the financial institution rules to all
corporations, effective for obligations acquired after the date of
announcement. Investors with questions regarding this issue should consult
with their tax advisers.
In the case of certain of the Bonds in the Fund, 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 these Bonds, or persons
related thereto, for periods while such Bonds are held by such a user or
related person, will not be excludible from Federal gross income, although
interest on such Bonds received by others would be excludible from Federal
gross income. "Substantial user" and "related person" are
defined under the Code and U.S. Treasury Regulations. Any person who believes
that he or she may be a "substantial user" or a "related
person" as so defined should contact his or her tax adviser.
In the opinion of special counsel to the Fund for New York tax matters, under
existing law, the Fund and each Trust are not associations taxable as
corporations and the income of each Trust will be treated as the income of the
Unitholders under the income tax laws of the State and City of New York.
All statements of law in the Prospectus concerning exclusion from gross income
for Federal, state or other tax purposes are the opinions of counsel and are
to be so construed.
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
Fund of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
In the case of corporations, the alternative tax rate applicable to long-term
capital gains is 35%, effective for long-term capital gains realized in
taxable years beginning on or after January 1, 1993. For taxpayers other than
corporations, net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year.
Section 86 of the Code, in general, provides that 50% of Social Security
benefits are includible in gross income to the extent that the sum of "
modified adjusted gross income" plus 50% of the Social Security benefits
received exceeds a "base amount" . The base amount is $25,000 for
unmarried taxpayers, $32,000 for married taxpayers filing a joint return and
zero for married taxpayers who do not live apart at all times during the
taxable year and who file separate returns. Modified adjusted gross income is
adjusted gross income determined without regard to certain otherwise allowable
deductions and exclusions from gross income and by including tax-exempt
interest. To the extent that Social Security benefits are includible in gross
income, they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after December 31,
1993, up to 85% of Social Security benefits are includible in gross income to
the extent that the sum of "modified adjusted gross income" plus 50%
of Social Security benefits received exceeds an "adjusted base amount."
The adjusted base amount is $34,000 for unmarried taxpayers, $44,000 for
married taxpayers filing a joint return, and zero for married taxpayers who do
not live apart at all times during the taxable year and who file separate
returns.
Although tax-exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income, no tax-exempt interest, including
that received from a Trust, will be subject to tax. A taxpayer whose adjusted
gross income already exceeds the base amount or the adjusted base amount must
include 50% or 85%, respectively, of his Social Security benefits in gross
income whether or not he receives any tax-exempt interest. A taxpayer whose
modified adjusted gross income (after inclusion of tax-exempt interest) does
not exceed the base amount need not include any Social Security benefits in
gross income.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation, corporations
subject to either the environmental tax or the branch profits tax, financial
institutions, certain insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and taxpayers
who may be deemed to have incurred (or continued) indebtedness to purchase or
carry tax-exempt obligations. Prospective investors should consult their tax
advisors as to the applicability of any collateral consequences. On December
7, 1995, the U.S. Treasury Department released proposed legislation that, if
adopted, could affect the United States federal income taxation of non-United
States Unitholders and the portion of the Trust's income allocable to
non-United States Unitholders.
For a discussion of the state tax status of income earned on Units of a Trust,
see "Tax Status" for the applicable Trust. Except as noted therein,
the exemption of interest on state and local obligations for Federal income
tax purposes discussed above does not necessarily result in exemption under
the income or other tax laws of any State or City. The laws of the several
States vary with respect to the taxation of such obligations.
RISK FACTORS AND STATE TAX STATUS OF THE TRUSTS
Alabama Trusts
Alabama Economy. Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990, manufacturing accounted
for 26.7% of Alabama's Real Gross State Product (the total value of goods and
services produced in Alabama). During the 1960s and 1970s the State's
industrial base became more diversified and balanced, moving away from primary
metals into pulp and paper, lumber, furniture, electrical machinery,
transportation equipment, textiles (including apparel), chemicals, rubber and
plastics. Since the early 1980s, modernization of existing facilities and an
increase in direct foreign investments in the State has made the manufacturing
sector more competitive in domestic and international markets.
Among several leading manufacturing industries have been pulp and papers and
chemicals. In recent years Alabama has ranked as the fifth largest producer of
timber in the nation. The State's growing chemical industry has been the
natural complement of production of wood pulp and paper. Mining, oil and gas
production and service industries are also important to Alabama's economy.
Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth potential
include the research and medical training and general health care industries,
most notably represented by the University of Alabama medical complex in
Birmingham and the high technology research and development industries
concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a comprehensive
measure of economic performance for the State of Alabama. Alabama's RGSP is
defined as the total value of all final goods and services produced in the
State in constant dollar terms. Hence, changes in RGSP reflect changes in
final output. From 1984 to 1990 RGSP originating in manufacturing increased by
22.99% whereas RGSP originating in all the non-manufacturing sectors grew by
17.88%.
Those non-manufacturing sectors exhibiting large percentage increases in RGSP
originating between 1984 and 1990 were 1) Services; 2) Trade; 3) Farming; and
4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP originating in
Services increased by 35.07%; Trade grew by 21.53%; Farming increased by
19.78%; and the gain in Finance, Insurance and Real Estate was 19.19%. The
present movement toward diversification of the State's manufacturing base and
a similar present trend toward enlargement and diversification of the service
industries in the State are expected to lead to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979, and
was followed by a decrease in activity. The national economic recession was
principally responsible for this decline. The State's industrial structure is
particularly sensitive to high interest rates and monetary policy, and the
resulting unemployment during 1981-1984 was acute. Unemployment rates have
improved as the impact of the national economic recovery has benefited the
State. The economic recovery experienced on the national level since 1982 has
been experienced in Alabama as well, but to a different degree and with a time
lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in certain
other Southeastern states. The national economic recession in the early 1980s
caused a decline in manufacturing activity and natural resource consumption,
and Alabama's unemployment rate was 14.4% in 1982, significantly higher than
the national average. Unemployment remains high in certain rural areas of the
State. A trend towards diversification of the State's economic base and an
expansion of service industries may lead to improved economic stability in the
future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing authority.
In addition, the Alabama Supreme Court has held that a governmental unit may
first use its taxes and other revenues to pay the expenses of providing
governmental services before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions which result in
a proration procedure in the event estimated budget resources in a fiscal year
are insufficient to pay in full all appropriations for that year. Proration
has a materially adverse effect on public entities that are dependent upon
State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and other
governmental revenues, as well as revenues to be used to service various
revenue obligations, such as industrial development obligations. Such
difficulties could affect the market value of the bonds held by the Alabama
IM-IT Trust and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Alabama IM-IT Trust are subject. Additionally,
many factors including national economic, social and environmental policies
and conditions, which are not within the control of the issuers of Bonds,
could affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Alabama IM-IT Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the Fund
for Alabama tax matters rendered an opinion under then existing Alabama income
tax law applicable to taxpayers whose income is subject to Alabama income
taxation substantially to the effect that:
the Alabama IM-IT Trust is not taxable as a corporation for purposes of the
Alabama income tax.
income of the Alabama IM-IT Trust, to the extent it is taxable, will be
taxable to the Unitholders, not the Alabama IM-IT Trust.
each Unitholder's distributive share of the Alabama IM-IT Trust's net income
will be treated as the income of the Unitholder for purposes of the Alabama
income tax.
interest on obligations held by the Alabama IM-IT Trust which is exempt from
the Alabama income tax will retain its tax-exempt character when the
distributive share thereof is distributed or deemed distributed to each
Unitholder.
any proceeds paid to the Alabama IM-IT Trust under insurance policies issued
to the Sponsor or under individual policies obtained by the Sponsor, the
issuer or underwriter of the respective obligations which represent maturing
interest on defaulted obligations held by the Trustee will be exempt from
Alabama income tax if and to the same extent as such interest would be exempt
from such taxes if paid directly by the issuer of such obligations.
each Unitholder will, for purposes of the Alabama income tax, treat his
distributive share of gains realized upon the sale or other disposition of the
Bonds held by the Alabama IM-IT Trust as though the Bonds were sold or
disposed of directly by the Unitholders.
gains realized on the sale or redemption of Units by Unitholders, who are
subject to the Alabama income tax, will be includable in the Alabama income of
such Unitholders.
Arizona Trusts
The following brief summary regarding the economy of Arizona is based upon
information drawn from publicly available sources and is included for the
purpose of providing the information about general economic conditions that
may or may not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic sectors include services, tourism and manufacturing. Mining and
agriculture are also significant, although they tend to be more capital than
labor intensive. Services is the single largest economic sector. Many of these
jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may
be adversely affected by the closing of a major air force base near Phoenix
and the bankruptcy of several major employers, including America West Airlines.
In 1986, the value of Arizona real estate began a steady decline, reflecting a
market which had been overbuilt in the previous decade with a resulting
surplus of completed inventory. This decline adversely affected both the
construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to experience problems
until the excess inventories of commercial and residential properties are
absorbed. The problems of the financial institutions have adversely affected
employment and economic activity. Longer-term prospects are brighter. Arizona
has been, and is projected to continue to be, one of the fastest growing areas
in the United States. Over the last several decades the State has outpaced
most other regions of the country in virtually every major category of growth,
including population, personal income, gross state product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ended June 30, 1995.
Total General Fund revenues of $4.3 billion are expected during fiscal year
1995. Approximately 44.5% of this budgeted revenue comes from sales and use
taxes, 44.4% from income taxes (both individual and corporate) and 4.4% from
property taxes. All taxes total approximately $4.0 billion, or 93% of General
Fund revenues. Non-tax revenue includes items such as income from the state
lottery, licenses, fees and permits, and interest.
For fiscal year 1994, the budget called for expenditures of approximately $4.1
billion. These expenditures fell into the following major categories:
education (47.4%), health and welfare (26.3%), protection and safety (4.0%),
general government (15.5%) and inspection and regulation, natural resources,
transportation and other (6.8%). The States's general fund expenditures for
fiscal year 1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the State
of Arizona, and are not supported by the State's taxing powers. The particular
source of payment and security for each of the Bonds is detailed in the
instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value or marketability
of any of the Bonds issued by an entity other than the State of Arizona will
be affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by
Arizona's constitution with respect to ad valorem taxation, bonded
indebtedness and other matters. For example, the state legislature cannot
appropriate revenues in excess of 7% of the total personal income of the state
in any fiscal year. These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in Roosevelt
Elementary School District Number 66, et al v. Dianne Bishop, et al (the "
Roosevelt Opinion". In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the
Arizona School Boards Association, with the approval of the appellants and the
appellees to the Roosevelt Opinion, and certain Arizona school districts,
filed with the Arizona Supreme court motions for clarification of the
Roosevelt Opinion, specifically with respect to seeking prospective
application of the Roosevelt Opinion. On July 29, 1994, the Arizona Supreme
Court clarified the Roosevelt Opinion to hold that such opinion will have
prospective effect only.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Arizona
Trust. The Arizona Legislature has in the past sought to enact health care
cost control legislation. Certain other health care regulatory laws have
expired. It is expected that the Arizona legislature will at future sessions
continue to attempt to adopt legislation concerning health care cost control
and related regulatory matters. The effect of any such legislation or of the
continued absence of any legislation restricting hospital bed increased and
limiting new hospital construction on the ability of Arizona hospitals and
other health care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered Medicaid program.
Instead, the state administers an alternative program, Arizona Health Care
Cost Containment System ("AHCCCS", which provides health care to
indigent persons meeting certain financial eligibility requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed approximately
60% by federal funds, 29% by state funds, and 11% by county funds.
Under state law, hospitals retain the authority to raise with notification and
review by, but not approval from, the Department of Health Services. Hospitals
in Arizona have experienced profitability problems along with those in other
states. At least two Phoenix based hospitals have defaulted on or reported
difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue bonds
are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operation costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric"
filed involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to
force Tucson Power to reorganize under the supervision of the bankruptcy
court. On December 31, 1991, the Bankruptcy Court approved the utility's
motion to dismiss the July petition after five months of negotiations between
Tucson Electric and its creditors to restructure the utility's debts and other
obligations. In December 1992, Tucson Electric announced that it had completed
its financial restructuring. In January 1993, Tucson Electric asked the
Arizona Corporation Commission for a 9.3% average rate increase. Tucson
Electric serves approximately 270,000 customers, primarily in the Tucson area.
Inability of any regulated public utility to secure necessary rate increases
could adversely affect, to an indeterminable extent, its ability to pay debt
service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6
million in tax refunds in fiscal year 1994. A combination of tax refunds and
tax credits will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the Fund
for Arizona tax matters rendered an opinion under then existing Arizona income
tax law applicable to taxpayers whose income is subject to Arizona income
taxation substantially to the effect that:
for Arizona income tax purposes, each Unitholder will be treated as the owner
of a pro rata portion of the Arizona IM-IT Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
for Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona IM-IT Trust, and which would be excludable from
Federal gross income and exempt from Arizona income taxes if received directly
by a Unitholder, will retain its status as tax-exempt interest when received
by the Arizona IM-IT Trust and distributed to the Unitholders.
to the extent that interest derived from the Arizona IM-IT Trust by a
Unitholder with respect to the Bonds is excludable from Federal gross income,
such interest will not be subject to Arizona income taxes.
each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona IM-IT Trust are sold, exchanged,
redeemed or paid at maturity, or when the Unitholder redeems or sells Units,
at a price that differs from original cost as adjusted for correction of any
discount or amortization of any premium and other basis adjustments, including
any basis reduction that may be required to reflect a Unitholder's share of
interest, if any, accruing on Bonds during the interval between the
Unitholder's settlement date and the date such Bonds are delivered to the
Arizona IM-IT Trust, if later.
amounts paid by the Insurer under an insurance policy or policies issued to
the Trust, if any, with respect to the Bonds in the Trust which represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
IM-IT Trust, the interest on which is exempt from Arizona income taxes.
neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
California Trusts
The Trust will invest substantially all of its assets in California Municipal
Obligations. The Trust is therefore susceptible to political, economic or
regulatory factors affecting issuers of California Municipal Obligations.
These include the possible adverse effects of certain California
constitutional amendments, legislative measures, voter initiatives and other
matters that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State" and is derived from sources that are
generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any
of the following information. It is based in part on information obtained from
various State and local agencies in California or contained in official
statements for various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of California Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of almost 32 million represents 12.3% of
the total United States population and grew by 27% in the 1980s. While the
State's substantial population growth during the 1980s stimulated local
economic growth and diversification and sustained a real estate boom between
1984 and 1990, it has increased strains on the State's limited water resources
and its infrastructure. Resultant traffic congestion, school over-crowding and
high housing costs have increased demands for government services and may
impede future economic growth. Population growth has slowed between 1991 and
1993 even while substantial immigration has continued, due to a significant
increase in outmigration by California residents. Generally, the household
incomes of new residents have been departing households, which may have a
major long-term socioeconomic and fiscal impact. However, with the California
economy improving, the recent net outmigration within the Continental U.S. is
expected to decrease or be reversed.
From mid-1990 to late 1993, the State's economy suffered its worst recession
since the 1930s, with recovery starting later than for the nation as a whole.
The State has experienced the worst job losses of any post-war recession.
Prerecession job levels may not be realized until near the end of the decade.
The largest job losses have been in Southern California, led by declines in
the aerospace and construction industries. Weakness statewide occurred in
manufacturing, construction, services and trade. Additional military base
closures will have further adverse effects on the State's economy later in the
decade.
Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, transportation, recreation and services. This growth has offset the
continuing but slowing job losses in the aerospace industry and restructuring
of the finance and utility sectors, Unemployment in the State was down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate. Retail sales were up strongly in 1994
from year-earlier figures. Delay or slowdown in recovery will adversely affect
State revenues.
Certain California Municipal Obligations may be obligations of issuers which
rely in whole or in part, directly or indirectly, on ad valorem property taxes
as a source of revenue. The taxing powers of California local governments and
districts are limited by Article XIIIA of the California Constitution, enacted
by the voters in 1978 and commonly known as "Proposition 13." Briefly,
Article XIIIA limits to 1% of full cash value the rate of ad valorem property
taxes on real property and generally restricts the reassessment of property to
2% per year, except upon new construction or change of ownership (subject to a
number of exemptions). Taxing entities may, however, raise ad valorem taxes
above the 1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special
tax." Court decisions, however, allowed non-voter approved levy of "
general taxes" which were not dedicated to a specific use. In response to
these decisions, the voters of the State in 1986 adopted an initiative statute
which imposed significant new limits on the ability of local entities to raise
or levy general taxes, except by receiving majority local voter approval.
Significant elements of this initiative, "Proposition 62," have been
overturned in recent court cases. An initiative proposed to re-enact the
provisions of Proposition 62 as a constitutional amendment was defeated by the
voters in November 1990, but such a proposal may be renewed in the future.
California and its local governments are subject to an annual "
appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending "
appropriations subject to limitation" in excess of the appropriations
limit imposed. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," which consists of tax
revenues and certain other funds, including proceeds from regulatory licenses,
user charges or other fees, to the extent that such proceeds exceed the cost
of providing the product or service, but "proceeds of taxes" excludes
most State subventions to local governments. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees and certain other non-tax funds, including
bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January
1, 1979, or subsequently authorized by the voters, (2) appropriations arising
from certain emergencies declared by the Governor, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect changes
in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to follow more closely
growth in California's economy.
"Excess" revenues are measured over a two-year cycle. With respect to
local governments, excess revenues must be returned by a revision of tax rates
or fee schedules within the two subsequent fiscal years. The appropriations
limit for a local government may be overridden by referendum under certain
conditions for up to four years at a time. With respect to the State, 50% of
any excess revenues is to be distributed to K-12 school districts and
community college districts (collectively, "K-14 districts" and the
other 50% is to be refunded to taxpayers. With more liberal annual adjustment
factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California Municipal Obligations or on the ability of
California or local governments to pay debt service on such California
Municipal Obligations. It is not presently possible to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Future initiative or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. Total
outstanding general obligation bond and lease purchase debt of the State
increased from $9.4 billion at June 30, 1987 to $23.5 billion at June 30,
1994. In FY 1993-94, debt service on general obligation bonds and lease
purchase debt was approximately 5.2% of General Fund revenues.
The principal sources of General Fund revenues in 1993-94 were the California
personal income tax (44% of total revenues), the sales tax (35%), bank and
corporation taxes (12%), and the gross premium tax on insurance (3%).
California maintains a Special Fund for Economic Uncertainties (the "
Economic Uncertainties Fund", derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund.
Throughout the 1980s, State spending increased rapidly as the State population
and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
33%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (education, health, welfare
and corrections) growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. These structural
concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
As a result of these factors, among others, from the late 1980's until
1992-1993, the State had a period of nearly chronic budget imbalance, with
expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the Special
Fund for Economic Uncertainties ("SFEU" approaching $2.8 billion at
its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
year thereafter, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance and to close large "
budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
years 1991-92 to 1994-95, including: significant cuts in health and welfare
program expenditures; transfers of program responsibilities and funding from
the State to local governments, coupled with some reduction in mandates on
local government; transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other
districts to local school districts, thereby reducing State funding for
schools; reduction in growth of support for higher education programs, coupled
with increases in student fees; revenue increases (particularly in the 1992-92
Fiscal Year budget), most of which were for a short duration; increased
reliance on aid from the federal government to offset the costs of
incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal
aid than the State Administration has requested) and various on-time
adjustments and accounting changes.
Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive
balances. By the start of the 1993-94 Fiscal Year, the accumulated deficit was
so large (almost $2.8 billion) that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end
of the fiscal year. When the economy failed to recover sufficiently in
1993-94, a second two-year plan was implemented in 1994-95, to carry the final
retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94
and 1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995.
A consequence of the accumulated budget deficits in the early 1990's, together
with other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to
pay its ongoing obligations. When the Legislature and the Governor failed to
adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have
allowed the State to carry out its normal annual cash flow borrowing to
replenish its cash reserves, the State Controller was forced to issue
registered warrants ("IOUs" to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from
court orders. Available funds were used to make constitutionally-mandated
payments, such as debt service on bonds and warrants. Between July 1 and
September 4, 1992 the State Controller issued a total of approximately $3.8
billion of registered warrants. After that date, all remaining outstanding
registered warrants (about $2.9 billion) were called for redemptions from
proceeds of the issuance of 1992 Interim Notes after the budget was adopted.
The State's cash condition became so serious in late spring of 1992 that the
State Controller was required to issue revenue anticipation warrants maturing
in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt
markets to meet its cash needs, as a succession of notes and warrants (both
forms of short-term cash flow financing) were issued in the period from June
1992 to July 1994, often needed to pay previously-maturing notes or warrants.
These borrowings were used also in part to spread out the repayment of the
accumulated budget deficit over the end of a fiscal year.
The State issued $7.0 billion of short-term debt in July, 1994 to meet its
cash flow needs and to finance the deferral of part of the accumulated budget
deficit to the 1995-96 fiscal year. In order to assure repayment of the $4
billion, 22-month part of this borrowing, the State enacted legislation (the
"Trigger Law" which can lead to automatic, across-the-board cuts in
General Fund expenditures in either the 1994-95 or 1995-96 fiscal years if
cash flow projections made at certain times during those years show
deterioration from the projections made in July 1994 when the borrowings were
made. On November 15, 1994, the State Controller as part of the Trigger Law
reported that the cash position of the General Fund on June 30, 1995 would be
about $580 million better than earlier projected, so no automatic budget
adjustments were required in 1994-95. The Controller's report showed that loss
of federal funds was offset by higher revenues, lower expenditures, and
certain other increases in cash resources.
For the first time in four years, the State entered the 1995-96 fiscal year
with strengthening revenues based on an improving economy. The major feature
of the Governor's proposed Budget, a 15% phased tax cut, was rejected by the
Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34 days
after the start of the fiscal year. The Budget Act projects General Fund
revenues and transfers of $44.1 billion. Expenditures are budgeted at $43.4
billion. The Department of Finance projects that, after repaying the last of
the carryover budget deficit, there will be positive balance of less than $30
million in the budget reserve, the Special Fund for Economic Uncertainties, at
June 30, 1996, providing no margin for adverse results during the year.
The Department of Finance projects cash flow borrowings in the 1995-96 Fiscal
Year will be the smallest in many years, comprising about $2 billion of notes
to be issued in April, 1996, and maturing by June 30, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the
Department sees no further need for borrowing over the end of the fiscal year.
The Department projects that available cash resources to pay State obligations
will be almost $2 billion at June 30, 1996. This "cushion" will be
re-examined by the State Controller on October 15, 1995, in the third step in
the Budget Adjustment Law process. If the Controller believes the available
cash resources on June 30, 1996 will, in fact, be zero or less, her report
would start a process which could lead to automatic budget cuts starting in
December, 1995.
The principal features of the 1995-96 Budget Act, in addition to those noted
above, are additional cuts in health and welfare expenditures (some of which
are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.
State general obligation bonds ratings were reduced in July, 1994 to "
A1" by Moody's and "A" by S&P. Both of these ratings were reduced
from "AAA" levels which the State held until late 1991. There can be
no assurance that such ratings will be maintained in the future. It should be
noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State of California, and that there is no obligation on the part of the State
to make payment on such local obligations in the event of default.
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require
the State to make significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include a deferral of
payments by the State to the Public Employees Retirement System, reductions in
welfare payments, and the use of certain cigarette tax funds for health costs.
All of these cases are subject to further proceedings and appeals, and if the
State eventually loses, the final remedies may not have to be implemented in
one year.
There are a number of State agencies, instrumentalities and political
subdivisions of the State that issue Municipal Obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and
the credit quality of the securities issued by them may vary considerably from
the credit quality of the obligations backed by the full faith and credit of
the State.
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California Legislature
enacted measures to provide for the redistribution of the State's General Fund
surplus to local agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by the State to
assist municipal issuers to raise revenues. Total local assistance from the
State's General Fund was budgeted at approximately 75% of General Fund
expenditures in recent years, including the effect of implementing reductions
in certain aid programs. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local governments to
transfer $3.9 billion of property tax revenues to school districts,
representing loss of the post-Proposition 13 "bailout" aid. The
largest share of these transfers came from counties, and the balance from
cities, special districts and redevelopment agencies. In order to make up this
shortfall, the Legislature proposed and voters approved in 1993 dedicating
0.5% of the sales tax to counties and cities for public safety purposes. In
addition, the Legislature has changed laws to relieve local governments of
certain mandates, allowing them to reduce costs.
To the extent the State should be constrained by its Article XIII
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be further reduced. Any such reductions in
State aid could compound the serious fiscal constraints already experienced by
many local governments, particularly counties. At lease one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in
August 1990, although such plans were put off after the Governor approved
legislation to provide additional funds for the county. Other counties have
also indicated that their budgetary condition is extremely grave. The Richmond
Unified School District (Contra Costa County) entered bankruptcy proceedings
in May 1991 but the proceedings have been dismissed. Los Angeles County, the
largest in the State, has reported severe fiscal problems, leading to a
nominal $1.2 billion deficit in its $11 billion budget for the 1995-96 Fiscal
Year. To balance the budget, the county has imposed severe cuts in services,
particularly for health care. The Legislature is considering actions to help
alleviate the County's fiscal problems, but none were completed before August
15, 1995. As a result of its bankruptcy proceedings (discussed further below)
Orange County also has implemented stringent cuts in services and has laid off
workers.
California Municipal Obligations which are assessment bonds may be adversely
affected by a general decline in real estate values or a slowdown in real
estate sales activity. In many cases, such bonds are secured by land which is
undeveloped at the time of issuance but anticipated to be developed within a
few years after issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing the risk of a
default on the bonds. Because the special assessments or taxes securing these
bonds are not the personal liability of the owners of the property assessed,
the lien on the property is the only security for the bonds. Moreover, in most
cases the issuer of these bonds is not required to make payments on the bonds
in the event of delinquency in the payment of assessments or taxes, except
from amounts, if any, in a reserve fund established for the bonds.
Certain California long-term lease obligations, though typically payable from
the general fund of the municipality, are subject to "abatement" in
the event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not a
default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs.
The most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due.
Several years ago the Richmond Unified School District (the "District"
) entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were
taken over by a State receiver (including a brief period under bankruptcy
court protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The trial
court has upheld the validity of the District's lease, and the case has been
settled. Any judgment in any future case against the position asserted by the
Trustee in the Richmond case may have adverse implications for lease
transactions of a similar nature by other California entities.
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (e.g., because of a major
natural disaster such as an earthquake), the tax increment revenue may be
insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after the
enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
Issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject to
major seismic activity. Northern California in 1989 and Southern California in
1994 experienced major earthquakes causing billions of dollars in damages. The
federal government provided more than $1.8 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Portfolio could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the Federal or State
government to appropriate sufficient funds within their respective budget
limitations.
On January 17, 1994, a major earthquake with an estimated magnitude 6.8 on the
Richter scale struck the Los Angeles area, causing significant property damage
to public and private facilities, presently estimated at $15-20 billion. While
over $9.5 billion of federal aid, and a projected $1.9 billion of State aid,
plus insurance proceeds, will reimburse much of that loss, there were bill be
come ultimate loss of health and income in the region, in addition to costs of
the disruption caused by the event. Short-term economic projections are
generally neutral, as the infusion of aid will restore billions of dollars to
the local economy within a few months; already the local construction industry
has picked up. Although the earthquake will hinder recovery from the recession
in Southern California, already hard-hit, its long-term impact is not expected
to be material in the context of the overall wealth of the region. Almost five
years after the event, there are few remaining effects of the 1989 Loma Prieta
earthquake in northern California (which, however, caused less severe damage
than Northridge).
On December 7, 1994, Orange County, California (the "County",
together with its pooled investment fund (the "Pools" filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Pools had suffered significant market losses in its investments caused a
liquidity crisis for the Pools and the County. Approximately 180 other public
entities, most but not all located in the County, were also depositors in the
Pools. The County estimated the Pools' loss at about $1.64 billion, or 23%, of
its initial deposits of around $7.5 billion. Many of the entities which kept
moneys in the Pools, including the County, faced cash flow difficulties
because of the bankruptcy filing and may be required to reduce programs or
capital projects. Moody's and Standard & Poor's have suspended, reduced to
below investment grade levels, or placed on "Credit Watch" various
securities of the County and the entities participating in the Pools.
On May 2, 1995, the Bankruptcy Court approved a settlement agreement covering
claims of the other participating entities against the County and the Pools.
Most participants have received in cash 80% (90% for school districts) of
their Pools' investment; the balance is to be paid in the future. The County
succeeded in deferring, by consent, until June 30, 1996, the repayment of $800
million of short-term obligations due in July and August, 1995; these notes
are, however, considered to be in default by Moody's and S&P. On June 27,
1995, County voters turned down a proposal for a temporary 0.5% increase in
the local sales tax, making the County's fiscal recovery much harder.
The State of California has no obligation with respect to any obligations or
securities of the County or any of the other participating entities, although
under existing legal precedents, the State may be obligated to ensure that
school districts have sufficient funds to operate. All school districts were
able to meet their obligations in the 1994-95 Fiscal Year.
At the time of the closing for each California Trust, Special Counsel to each
California Trust for California tax matters, rendered an opinion under then
existing California income tax law applicable to taxpayers whose income is
subject to California income taxation substantially to the effect that:
the California IM-IT Trust is not an association taxable as a corporation and
the income of the California IM-IT Trust will be treated as the income of the
Unitholders under the income tax laws of California;
amounts treated as interest on the underlying Securities in the California
IM-IT Trust which are exempt from tax under California personal income tax and
property tax laws when received by the California IM-IT Trust will, under such
laws, retain their status as tax-exempt interest when distributed to
Unitholders. However, interest on the underlying Securities attributed to a
Unitholder which is a corporation subject to the California franchise tax laws
may be includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is attributable to a
Unitholder subject to the California personal income tax and which is treated
as an item of tax preference for purposes of the federal alternative minimum
tax pursuant to Section 57(a)(5) of the Internal Revenue Code of 1986 may also
be treated as an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for purposes of
the California alternative minimum tax enacted by 1987 California Statutes,
chapter 1138. However, because of the provisions of the California
Constitution exempting the interest on bonds issued by the State of
California, or by local governments within the state, from taxes levied on
income, the application of the new California alternative minimum tax to
interest otherwise exempt from the California personal income tax in some
cases may be unclear;
under California income tax law, each Unitholder in the California IM-IT Trust
will have a taxable event when the California IM-IT Trust disposes of a
Security (whether by sale, exchange, redemption, or payment at maturity) or
when the Unitholder redeems or sells Units. Because of the requirement that
tax cost basis be reduced to reflect amortization of bond premium, under some
circumstances a Unitholder may realize taxable gains when Units are sold or
redeemed for an amount equal to, or less than, their original cost. The total
cost of each Unit in the California IM-IT Trust to a Unitholder is allocated
among each of the Bond issues held in the California IM-IT Trust (in
accordance with the proportion of the California IM-IT Trust comprised by each
Bond issue) in order to determine his per Unit tax cost for each Bond issue;
and the tax cost reduction requirements relating to amortization of bond
premium will apply separately to the per Unit tax cost of each Bond issue.
Unitholders' bases in their units, and the bases for their fractional interest
in each Trust asset, may have to be adjusted for their pro rata share of
accrued interest received, if any, on Securities delivered after the
Unitholders' respective settlement dates;
under the California personal property tax laws, bonds (including the
Securities in the California IM-IT Trust) or any interest therein is exempt
from such tax;
any proceeds paid under the insurance policy issued to the California IM-IT
Trust with respect to the Securities which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from California
personal income tax if, and to the same extent as, such interest would have
been so exempt if paid by the issuer of the defaulted obligations; and
under Section 17280(b)(2) of the California Revenue and Taxation Code,
interest on indebtedness incurred or continued to purchase or carry Units of
the California IM-IT Trust is not deductible for the purposes of the
California personal income tax. While there presently is no California
authority interpreting this provision, Section 17280(b)(2) directs the
California Franchise Tax Board to prescribe regulations determining the proper
allocation and apportionment of interest costs for this purpose. The Franchise
Tax Board has not yet proposed or prescribed such regulations. In interpreting
the generally similar Federal provision, the Internal Revenue Service has
taken the position that such indebtedness need not be directly traceable to
the purchase or carrying of Units (although the Service has not contended that
a deduction for interest on indebtedness incurred to purchase or improve a
personal residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or other
California authority, the California Franchise Tax Board generally has
interpreted California statutory tax provisions in accord with Internal
Revenue Service interpretations of similar Federal provisions.
At the respective times of issuance of the Securities, opinions relating to
the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special counsel acted as bond counsel to issuers of Securities, and as such
made a review of proceedings relating to the issuance of certain Securities at
the time of their issuance, Special Counsel has not made any special review
for the California IM-IT Trust of the proceedings relating to the issuance of
the Securities or of the basis for such opinions.
Colorado Trusts
The State Constitution requires that expenditures for any fiscal year not
exceed revenues for such fiscal year. By statute, the amount of General Fund
revenues available for appropriation is based upon revenue estimates which,
together with other available resources, must exceed annual appropriations by
the amount of the unappropriated reserve (the "Unappropriated Reserve"
). The Unappropriated Reserve requirement for fiscal year 1991, 1992 and 1993
was set at 3% of total appropriations from the General Fund. For fiscal years
1994 and thereafter, the Unappropriated Reserve requirement is set at 4%. In
addition to the Unappropriated Reserve, a constitutional amendment approved by
Colorado voters in 1992 requires the State and each local government to
reserve a certain percentage of its fiscal year spending (excluding bonded
debt service) for emergency use (the "Emergency Reserve". The minimum
Emergency Reserve is set at 2% for 1994 and 3% for 1995 and later years. For
fiscal year 1992 and thereafter, General Fund appropriations are also limited
by statute to an amount equal to the cost of performing certain required
reappraisals of taxable property plus an amount equal to the lesser of (i)
five percent of Colorado personal income or (ii) 106% of the total General
Fund appropriations for the previous fiscal year. This restriction does not
apply to any General Fund appropriations which are required as a result of a
new federal law, a final state or federal court order or moneys derived from
the increase in the rate or amount of any tax or fee approved by a majority of
the registered electors of the State voting at any general election. In
addition, the statutory limit on the level of General Fund appropriations may
be exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1993 fiscal General Fund balance was $326.8 million, which was $196.9
million over the combined Unappropriated Reserve and Emergency Reserve
requirement. The 1994 fiscal year ending General Fund balance was $405.1
million, or $234.0 million over the required Unappropriated Reserve and
Emergency Reserve. Based on June 20, 1995 estimates, the 1995 fiscal year
ending General Fund balance is expected to be $427.0 million, or $204.8
million over the required Unappropriated Reserve and Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional amendment
(the "Amendment" which, in general, became effective December 31,
1992, and which could restrict the ability of the State and local governments
to increase revenues and impose taxes. The Amendment applies to the State and
all local governments, including home rule entities ("Districts".
Enterprises, defined as government-owned businesses authorized to issue
revenue bonds and receiving under 10% of annual revenue in grants from all
Colorado state and local governments combined, are excluded from the
provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior to tax increases, creation of debt, or
mill levy or valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues to specified
percentages. The Amendment requires that District property tax revenues yield
no more than the prior year's revenues adjusted for inflation, voter approved
changes and (except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School districts are
allowed to adjust tax levies for changes in student enrollment. Pursuant to
the Amendment, local government spending is to be limited by the same formula
as the limitation for property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues (cash funds) to
the growth in inflation plus the percentage change in State population in the
prior calendar year. The basis for initial spending and revenue limits are
fiscal year 1992 spending and 1991 property taxes collected in 1992. The basis
for spending and revenue limits for fiscal year 1994 and later years will be
the prior fiscal year's spending and property taxes collected in the prior
calendar year. Debt service changes, reductions and voter-approved revenue
changes are excluded from the calculation basis. The Amendment also prohibits
new or increased real property transfer tax rates, new State real property
taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment has been
brought in the Colorado courts. The litigation deals with three principal
issues: (i) whether Districts can increase mill levies to pay debt service on
general obligation bonds without obtaining voter approval; (ii) whether a
multi-year lease purchase agreement subject to annual appropriations is an
obligation which requires voter approval prior to execution of the agreement;
and (iii) what constitutes an "enterprise" which is excluded from the
provisions of the Amendment. In September, 1994, the Colorado Supreme Court
held that Districts can increase mill levies to pay levies to pay debt service
on general obligation bonds issued after the effective date of the Amendment;
in June, 1995 the Colorado Supreme Court validated mill levy increases to pay
general obligation bonds issued prior to the Amendment. In late 1994, the
Colorado Court of Appeals held that multi-year lease-purchase agreements
subject to annual appropriation do not require voter approval. The time to
file an appeal in that case has expired. Finally, in May, 1995, the Colorado
Supreme Court ruled that entities with the power to levy taxes may not
themselves be "enterprises" for purposes of the Amendment; however,
the Court did not address the issue of how valid enterprises may be created.
Future litigation in the "enterprise" arena may be filed in the future
to clarify these issues.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1994-95,
June 20, 1995 (the "Economic Report", inflation for 1993 was 4.2% and
population grew at the rate of 2.9% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1995 fiscal year will be
limited to 7.1% over expenditures during the 1994 fiscal year. The 1994 fiscal
year is the base year for calculating the limitation for the 1995 fiscal year.
The limitation for the 1996 fiscal year is projected to be 7.0%, based on
projected inflation of 4.4% for 1994 and projected population growth of 2.6%
during 1994. For the 1994 fiscal year, General Fund revenues totalled $3,725.2
million and program revenues (cash funds) totalled $1,659.9 million, resulting
in total estimated base revenues of $5,385.1 million. Expenditures for the
1995 fiscal year, therefore, cannot exceed $5,767.4 million. However, the 1995
fiscal year General Fund and program revenues (cash funds) are projected to be
only $5,664.7 million, or $102.7 million less than expenditures allowed under
the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction of
appropriations by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On a GAAP basis,
the State had unrestricted General Fund balances at June 30 of approximately
$16.3 million in fiscal year 1991, $133.3 million in fiscal year 1992, $326.6
million in fiscal year 1993 and $320.4 million in fiscal year 1994. The fiscal
year 1995 unrestricted General Fund is currently projected to be $427.0
million.
For fiscal year 1994, the following tax categories generated the following
respective revenue percentages of the State's $3,725.2 million total gross
receipts: individual income taxes represented 51.5% of gross fiscal year 1994
receipts; sales, use and excise taxes represented 32.4% of gross fiscal year
1994 receipts; and corporate income taxes represented 3.9% of gross fiscal
year 1994 receipts. The final budget for fiscal year 1995 projects General
Fund revenues of approximately $3,929.6 million and appropriations of
approximately $3,905.9 million. The percentages of General Fund revenue
generated by type of tax for fiscal year 1995 are not expected to be
significantly different from fiscal year 1994 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of financing
for such local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments in the State
can issue revenue bonds payable from the revenues of a utility or enterprise
or from the proceeds of an excise tax, or assessment bonds payable from
special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning and
Budgeting as presented in the Economic Report, over 50% of non-agricultural
employment in Colorado in 1994 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism to the
State's economy and of Denver as a regional economic and transportation hub.
The government and manufacturing sectors followed as the next largest
employment sectors in the State, representing approximately 17.5% and 10.9%,
respectively, of non-agricultural employment in the State in 1994. The Office
of Planning and Budgeting projects similar concentrations for 1995 and 1996.
According to the Economic Report, the unemployment rate improved slightly from
an average of 5.2% during 1993 to 4.9% during 1994. Total retail sales
increased by 12.2% during 1994. Colorado continued to surpass the job growth
rate of the U.S. with a 2.8% rate of growth projected for Colorado in 1995, as
compared with 2.7% for the nation as a whole. However, the rate of job growth
in Colorado is expected to be lower in 1995 than the 1994 rate as a result of
layoffs at Lowry Air Force Base, Public Service Company, Continental Airlines
and US West.
Personal income rose 7.5% in Colorado during 1993 and 7.6% in 1992. During
1994, personal income rose 6.6% in Colorado, as compared with 6.1% for the
nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado IM-IT Trust), which, to varying degrees, have also experienced
reduced revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing Colorado
income tax law applicable to taxpayers whose income is subject to Colorado
income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the Colorado
IM-IT Trust is not an association taxable as a corporation for purposes of
Colorado income taxation.
With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
each Colorado Unitholder will be treated as owning a pro rata share of each
asset of the Colorado IM-IT Trust for Colorado income tax purposes in the
proportion that the number of Units of such Trust held by the Unitholder bears
to the total number of outstanding Units of the Colorado IM-IT Trust, and the
income of the Colorado IM-IT Trust will therefore be treated as the income of
each Colorado Unitholder under Colorado law in the proportion described and an
item of income of the Colorado IM-IT Trust will have the same character in the
hands of a Colorado Unitholder as it would have in the hands of the Trustee;
interest on Bonds that would not be includable in income for Colorado income
tax purposes when paid directly to a Colorado Unitholder will be exempt from
Colorado income taxation when received by the Colorado IM-IT Trust and
attributed to such Colorado Unitholder and when distributed to such Colorado
Unitholder;
any proceeds paid under an insurance policy or policies issued to the Colorado
IM-IT Trust with respect to the Bonds in the Colorado IM-IT Trust which
represent maturing interest on defaulted obligations held by the Trustee will
be excludable from Colorado adjusted gross income if, and to the same extent
as, such interest would have been so excludable if paid by the issuer of the
defaulted obligations provided that, at the time such policies are purchased,
the amounts paid for such policies are reasonable, customary and consistent
with the reasonable expectation that the issuer of the obligations, rather
than the insurer, will pay debt service on the obligations;
any proceeds paid under individual policies obtained by issuers of Bonds in
the Colorado IM-IT Trust which represent maturing interest on defaulted
obligations held by the Trustee will not be includable in income for Colorado
income tax purposes if, and to the same extent as, such interest would not
have been so includable if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations;
each Colorado Unitholder will realize taxable gain or loss when the Colorado
IM-IT Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity) or when the Colorado Unitholder redeems or sells Units at
a price that differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any basis reduction
that may be required to reflect a Colorado Unitholder's share of interest, if
any, accruing on Bonds during the interval between the Colorado Unitholder's
settlement date and the date such Bonds are delivered to the Colorado IM-IT
Trust, if later);
tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Colorado Unitholders realizing taxable
gain when their Units are sold or redeemed for an amount equal to or less than
their original cost; and
if interest on indebtedness incurred or continued by a Colorado Unitholder to
purchase Units in the Colorado IM-IT Trust is not deductible for federal
income tax purposes, it also will be non-deductible for Colorado income tax
purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado IM-IT Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Colorado law. Ownership of the Units may result in
collateral Colorado tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Connecticut Trusts
The following information is only a summary of risk factors associated with
Connecticut. It has been compiled from official government statements and
other publicly available documents. Although the Sponsor has not independently
verified the information, it has no reason to believe that it is not correct
in all material respects.
Connecticut's manufacturing industry, which has historically been of prime
economic importance to the State, its municipalities and its residents, has
been in decline for several years. Although Connecticut's manufacturing
industry is diversified between transportation equipment (primarily aircraft
engines, helicopters and submarines), non-electrical machinery, fabricated
metal products and electrical machinery, defense-related business represents a
relatively high proportion of manufacturing receipts. As a result, reductions
in defense spending have had a substantial adverse effect on Connecticut's
manufacturing industry.
Connecticut's manufacturing employment peaked in 1970 at over 441,000 workers
but had declined 35.4% by 1994. Although the loss of manufacturing jobs was
partially offset by a 66.3% rise in other non-agricultural employment during
the same period, Connecticut's growth in non-manufacturing employment has
lagged behind the New England region and the nation as a whole. Moreover,
Connecticut's largest defense contractors have announced plans to reduce their
labor forces substantially over the next four years.
From 1986 through 1994, Connecticut's unemployment rate was generally lower
than the unemployment rate for the U.S. as a whole, and average per capita
personal income of Connecticut residents was higher than that of residents of
other states. The average unemployment rate (seasonally adjusted) in
Connecticut increased from a low of 3.0% in 1988 to 7.5% in 1992 and, after a
number of important changes in the method of calculation, was reported to be
5.6% in 1994. Average per capita personal income of Connecticut residents
increased in every year from 1985 to 1994, rising from $18,268 to $29,044.
However, pockets of significant unemployment and poverty exist in some
Connecticut cities and towns, and Connecticut is now in a recession, the depth
and duration of which are uncertain.
For the four fiscal years ended June 30, 1991, the General Fund ran operating
deficits of approximately $115,600,000, $28,000,000, $259,000,000 and
$808,500,000, respectively. At the end of the 1990-1991 fiscal year, the
General Fund had an accumulated unappropriated deficit of $965,712,000. For
the four fiscal years ended June 30, 1995, the General Fund ran operating
surpluses of approximately $110,200,000, $113,500,000, $19,700,000 and
$80,500,000, respectively. General Fund budgets for the biennium ending June
30, 1997, were adopted in 1995. General Fund expenditures and revenues are
budgeted to be approximately $9,800,000,000 and $10,150,000,000, for the
1995-1996 and 1996-1997 fiscal years, respectively.
In 1991, to address the General Fund's growing deficit, legislation was
enacted by which the State imposed an income tax on individuals, trusts and
estates for taxable years generally commencing in 1992. For each fiscal year
starting with the 1991-1992 fiscal year, the General Fund has operated at a
surplus with over 60% of the State's tax revenues being generated by the
income tax and the sales and use tax. However, the State's budgeted
expenditures have more than doubled from approximately $4,300,000 for the
1986-1987 fiscal year to approximately $10,150,000,000 for the 1996-1997
fiscal year.
The 1991 legislation also authorized the State Treasurer to issue Economic
Recovery Notes to fund the General Fund's accumulated deficit of $965,712,000
as of June 30, 1991, and during 1991 the State issued a total of $965,710,000
Economic Recovery Notes, of which $315,710,000 were outstanding as of
September 15, 1995. The notes were to be payable no later than June 30, 1996,
but as part of the budget adopted for the biennium ending June 30, 1997,
payment of the remaining notes scheduled to be paid over the four fiscal years
ending June 30, 1999.
The State's primary method for financing capital projects is through the sale
of general obligation bonds. As of September 15, 1995, the State had
authorized general obligation bonds totaling $10,513,394,000, of which
$9,068,876,000 had been approved for insurance by the State Bond Commission,
$7,715,675,000 had been issued, and $6,186,518,000 were outstanding.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The improvements are to be financed by $18 million of general
obligation bonds of the State and $962 million bonds of the University. The
University's bonds will be secured by a State debt service commitment, the
aggregate amount of which is limited to $382 million for the three fiscal
years ending June 30, 1999, and $580 million for the four fiscal years ending
June 30, 2005.
In addition to the bonds described above, the State also has limited or
contingent liability on a significant amount of other bonds. Such bonds have
been issued by the following quasi-public agencies: the Connecticut Higher
Education Supplemental Loan Authority, the Connecticut Resources Recovery
Authority and the Connecticut Health and Education Facilities Authority. Such
bonds have also been issued by the cities of Bridgeport and West Haven and the
Southeastern Connecticut Water Authority. As of September 15, 1995, the amount
of bonds outstanding on which the State has limited or contingent liability
totaled $3,755,500,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2000, is currently estimated to be
$11.2 billion, to be met from federal, state, and local funds. The State
expects to finance most of its $4.7 billion share of such cost by issuing $4.2
billion of special tax obligation ("STO" bonds. The STO bonds are
payable solely from specified motor fuel taxes, motor vehicle receipts, and
license, permit and fee revenues pledged therefor and credited to the Special
Transportation Fund, which was established to budget and account for such
revenues.
As of September 15, 1995, the General Assembly had authorized $4,157,900,000
of such STO bonds, of which $3,269,700,000 had been issued. It is anticipated
that additional STO bonds will be authorized annually in amounts necessary to
finance and to complete the infrastructure program. Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged revenue
coverage requirements are met. The State expects to continue to offer bonds
for this program.
On March 29, 1990, Standard & Poor's reduced its ratings of the State's
general obligation bonds from AA+ to AA, and on April 9, 1990, Moody's reduced
its ratings from Aa1 to Aa. On September 13, 1991, Standard & Poor's further
reduced its ratings of the State's general obligation bonds and certain
obligations that depend in part on the creditworthiness of the State to AA-.
On March 17, 1995, Fitch reduced its ratings of the State's general obligation
bonds from AA+ to AA.
The State, its officers and its employees are defendants in numerous lawsuits.
Although it is not possible to determine the outcome of these lawsuits, the
Attorney General has opined that an adverse decision in any of the following
cases might have a significant impact on the State's financial position: (i)
an action by inmates of the Department of Correction seeking damages and
injunctive relief with respect to alleged violations of statutory and
constitutional rights as a result of the monitoring and recording of their
telephone calls from the State's correctional institutions; (ii) litigation on
behalf of black and Hispanic school children in the City of Hartford seeking
"integrated education" within the Greater Hartford metropolitan area;
(iii) litigation involving claims by Indian tribes to less than 1/10 of 1% of
the State's land area; (iv) litigation challenging the State's method of
financing elementary and secondary public schools on the ground that it denies
equal access to education; (v) an action on behalf of all persons with
retardation or traumatic brain injury, claiming that their constitutional
rights are violated by placement in State hospitals alleged not to provide
adequate treatment and training, and seeking placement in community
residential settings with appropriate support services; (vi) an action by the
Connecticut Hospital Association and 3 hospitals seeking to require the State
to reimburse hospitals for in-patient medical services on a basis more
favorable to them; (vii) a class action by the Connecticut Criminal Defense
Lawyers Association claiming a campaign of illegal surveillance activity and
seeking damages and injunctive relief; and (viii) an action to enforce the
spending cap provision of the State's constitution by seeking to require that
the General Assembly define certain terms used therein and to enjoin certain
increases in "general budget expenditures" until this is done. In
addition, a number of corporate taxpayers have filed refund requests for
corporation business tax, asserting that interest on federal obligations may
not be included in the measure of that tax, on the grounds that to do so
allegedly violates federal law because interest on certain obligations of the
State is not included in the measure of the tax. The State has attempted to
eliminate the basis for these refund requests by enacting legislation that
takes by eminent domain the rights of corporate holders to exclude the
interest on such obligations. The State will compensate such corporate holders.
General obligation bonds issued by municipalities are payable primarily from
ad valorem taxes on property tax base is subject to many factors outside the
control of the municipality, including the decline in Connecticut's
manufacturing industry. In addition to general obligation bonds backed by the
full faith and credit of the municipality, certain municipal authorities
finance projects by issuing bonds that are not considered to be debts of the
municipality. Such bonds may be repaid only from revenues of the financed
project, the revenues from which may be insufficient to service the related
debt obligations.
In recent years, certain Connecticut municipalities have experienced severe
fiscal difficulties and have reported operating and accumulated deficits. The
most notable of these is the City of Bridgeport, which filed a bankruptcy
petition on June 7, 1991. The State opposed the petition. The United States
Bankruptcy Court for the District of Connecticut held that Bridgeport has
authority to file such a petition but that its petition should be dismissed on
the grounds that Bridgeport was not insolvent when the petition was filed.
Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt
service on borrowings could result in declines, possibly severe, in the value
of their outstanding obligations, increases in their future borrowing costs,
and impairment of their ability to pay debt service on their obligations.
At the time of the closing for each Connecticut Trust, Special Counsel to the
Fund for Connecticut tax matters rendered an opinion under then existing
Connecticut income tax law applicable to taxpayers whose income is subject to
Connecticut income taxation substantially to the effect that:
The Connecticut IM-IT Trust is not liable for any tax on or measured by net
income imposed by the State of Connecticut.
Interest income of the Connecticut IM-IT Trust from a Bond issued by or on
behalf of the State of Connecticut, any political subdivision thereof, or
public instrumentality, state or local authority, district, or similar public
entity created under the laws of the State of Connecticut (a "Connecticut
Bond", or from a Bond issued by United States territories or possessions
the interest on which Federal law would prohibit Connecticut from taxing if
received directly by a Unitholder from the issuer thereof, is not taxable
under the Connecticut tax on the Connecticut taxable income of individuals,
trusts, and estates (the "Connecticut Income Tax", when any such
interest is received by the Connecticut IM-IT Trust or distributed by it to
such a Unitholder.
Insurance proceeds received by the Connecticut IM-IT Trust representing
maturing interest on defaulted Bonds held by the Connecticut IM-IT Trust are
not taxable under the Connecticut Income Tax if, and to the same extent as,
such interest would not be taxable thereunder if paid directly to the
Connecticut IM-IT Trust by the issuer of such Bonds.
Gains and losses recognized by a Unitholder for Federal income tax purposes
upon the maturity, redemption, sale, or other disposition by the Connecticut
IM-IT Trust of a Bond held by the Connecticut IM-IT Trust or upon the
redemption, sale, or other disposition of a Unit of the Connecticut IM-IT
Trust held by a Unitholder are taken into account as gains or losses,
respectively, for purposes of the Connecticut Income Tax, except that, in the
case of a Unitholder holding a Unit of the Connecticut IM-IT Trust as a
capital asset, such gains and losses recognized upon the maturity, redemption,
sale or exchange of a Connecticut Bond held by the Connecticut IM-IT Trust are
excluded from gains and losses taken into account for purposes of such tax and
no opinion is expressed as to the treatment for purposes of such tax of gains
and losses recognized to the extent attributable to Connecticut Bonds upon the
redemption, sale, or other disposition by a Unitholder of a Unit of the
Connecticut IM-IT Trust held by him.
The portion of any interest income or capital gain of the Connecticut IM-IT
Trust that is allocable to a Unitholder that is subject to the Connecticut
corporation business tax is includable in the gross income of such Unitholder
for purposes of such tax.
An interest in a Unit of the Connecticut IM-IT Trust that is owned by or
attributable to a Connecticut resident at the time of his death is includable
in his gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
Florida Trusts
Florida's economy has in the past been highly dependent on the construction
industry and construction related manufacturing. This dependency has declined
in recent years and continues to do so as a result of continued
diversification of the State's economy. For example, in 1980 total contract
construction employment as a share of total non-farm employment was just over
seven percent and in 1993 the share had edged downward to five percent. This
trend is expected to continue as Florida's economy continues to diversify.
Florida, nevertheless, has a dynamic construction industry with single and
multi-family housing starts accounting for 8.5% of total U.S. housing starts
in 1993 while the State's population is 5.3% of the U.S. total population.
Florida's housing starts since 1980 have represented an average of 11.0% of
the U.S.'s total annual starts, and since 1980 total housing starts have
averaged 156,450 a year.
A driving force behind the State's construction industry has been the
State's rapid rate of population growth. Although the State currently is the
fourth most populous state, its annual population growth is now projected to
decline as the number of people moving into the State is expected to hover
near the mid 250,000 range annually throughout the 1990's. This population
trend should provide fuel for business and home builders to keep construction
activity lively in Florida for some time to come. However, other factors do
influence the level of construction in the State. For example, federal tax
reform in 1986 and other changes to the federal income tax code have
eliminated tax deductions for owners of more than two residential real estate
properties and have lengthened depreciation schedules on investment and
commercial properties. Economic growth and existing supplies of homes also
contribute to the level of construction activity in the State.
Since 1980, the State's job creation rate is almost twice the rate for the
nation as a whole, and its growth rate in new non-agricultural jobs is the
fastest of the must populous states, second only to California in the absolute
number of new jobs created. Contributing to the State's rapid rate of growth
in employment and income is international trade. Since 1980, the State's
unemployment rate has generally been below that of the U.S. In recent years,
however, as the State's economic growth has slowed from its previous high the
State's unemployment rate has tracked above the national average. The average
rate in Florida since 1980 has been 6.5% while the national average is 7.1%.
According to the U.S. Department of Commerce, the Florida Department of Labor
and Employment Security, and the Florida Consensus Economic Estimating
Conference (together, the "Organization", the State's unemployment
rate was 8.2% during 1992. As of January 1994, the Organization estimates that
the unemployment rate will be 6.1% for 1994-95 and 6.1% in 1995-96.
The rate of job creation in Florida's manufacturing sector has exceeded that
of the U.S. From the beginning of 1980 through 1993, the State added over
50,000 new manufacturing jobs, an 11.7% increase. During the same period,
national manufacturing employment declined ten out of the fourteen years, for
a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 3.6% in 1994-95
and rise 3.3% in 1995-96. Trade and services, the two largest sources of
employment in the State, account for more than half of the total non-farm
employment. Employment in the service sectors should experience an increase of
5.4% in 1994-95 while growing 4.7% in 1995-96. Trade is expected to expand
3.1% in 1995 and 3.2% in 1996. The service sector is now the State's largest
employment category.
Tourism is one of the State's most important industries. Approximately 41.1
million tourists visited the State in 1993, as reported by the Florida
Department of Commerce. In terms of business activities and State tax
revenues, tourists in Florida in 1993 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals are expected to increase by 5.0% this year, and
3.4% next year. Tourist arrivals to Florida by air are expected to increase by
9.2% this year and 2.9% next year, while arrivals by car are expected to rise
0.7% in 1994-95 and 4.0% in 1995-96. By the end of the State's current fiscal
year, 42.1 million domestic and international tourists are expected to have
visited the State. In 1995-96 tourist arrivals should approximate 43.6 million.
The State's per capita personal income in 1993 of $20,857 was slightly above
the national average of $20,817 and significantly ahead of that for the
southeast United States, which was $18,753. Real personal income in the State
is estimated to increase 4.5% in 1994-95 and 4.2% in 1995-96. By the end of
1995-96, real personal income per capita in the State is projected to average
4.5% higher than its 1993-94 level.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest, and rent) and transfer payments (Social
Security and pension benefits, among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1993 was 62% of total personal income,
while a similar figure for the nation was 72%. Transfer payments are typically
less sensitive to the business cycle than employment income and, therefore,
act as stabilizing forces in weak economic periods.
Estimated fiscal year 1994-95 General Revenue plus Working Capital and Budget
Stabilization funds available to the State total $14,624.4 million, a 5.7%
increase over 1993-94. This reflects a transfer of $159.0 million in
non-recurring revenue due to Hurricane Andrew, to a hurricane relief trust
fund. Of the total General Revenue plus Working Capital and Budget
Stabilization funds available to the State, $13,858.4 million of that is
Estimated Revenues (excluding the Hurricane Andrew impact), which represents
an increase of 7.9% over the previous year's Estimated Revenues. With
effective General Revenues plus Working Capital Fund and Budget Stabilization
appropriations at $14,311.1 million, unencumbered reserves at the end of
1994-95 are estimated at $313.3 million. Estimated fiscal year 1995-96 General
Revenue plus Working Capital and Budget Stabilization funds available total
$15,145.9 million, a 3.6% increase over 1994-95. The $14,647.2 million in
Estimated Revenues represents an increase of 5.7% over the previous year's
Estimated Revenues.
In fiscal year 1993-94, approximately 66% of the State's total direct
revenue to its three operating funds was derived from State taxes and fees,
with Federal grants and other special revenue accounting for the balance.
State sales and use tax, corporate income tax, intangible personal property
tax and beverage tax amounted to 66%, 8%, 4% and 4%, respectively, of total
General Revenue Funds available during fiscal 1993-94. In that same year,
expenditures for education, health and welfare, and public safety amounted to
approximately 49%, 32%, and 12%, respectively, of total expenditures from the
General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the State's
single largest source of tax receipts. Sightly less than 10% of the State's
sales and use tax is designated for local governments and is distributed to
the respective counties in which collected for use by the counties, and the
municipalities therein. In addition to this distribution, local governments
may assess (by referendum) a 0.5% or a 1.0% discretionary sales surtax within
their county. Proceeds from this local option sales tax are earmarked for
funding local infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided under
applicable Florida law. Certain charter counties have other additional taxing
powers, and non-consolidated counties with a population in excess of 800,000
may levy a local option sales tax to fund indigent health care. It alone
cannot exceed 0.5% and when combined with the infrastructure surtax cannot
exceed 1.0%. For the fiscal year ended June 30,1994, sales and use tax
receipts (exclusive of the tax on gasoline and special fuels) totalled
$10,012.5 million, an increase of 6.9% over fiscal year 1992-93.
The second largest source of State tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage wholesale tax (excise tax) on beer,
wine, and liquor. This tax is one of the State's major tax sources, with
revenues totalling $439.8 million in fiscal year ending June 30,1994.
Alcoholic beverage tax receipts decreased about 1.0% from the previous year's
total. The revenues collected from this tax are deposited into the State's
General Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year ended
June 30,1994, receipts from this source were $1,047.4 million, an increase of
23.7% from fiscal year 1992-93.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totalled $775.0 million during fiscal year
1993-94, a 21.3% increase from the previous fiscal year. Beginning in fiscal
year 1992-93, 71.29% of these taxes is to be deposited to the General Revenue
Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax collections are
credited to the State's Public Education Capital Outlay and Debt Service
Trust Fund. In fiscal year 1993-94, this amounted to $459.4 million.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes, governmental
leaseholds, and certain other intangibles not secured by a lien on Florida
real property. The annual rate of tax is 2 mils. The State also imposes a
non-recurring 2 mil tax on mortgages and other obligations secured by liens on
Florida real property. In fiscal year 1993-94, total intangible personal
property tax collections were $836.0 million, a 6.7% increase over the prior
year. Of the tax proceeds, 66.5% is distributed to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50.0% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0%, for costs of administering the
lottery. Fiscal year 1993-94 lottery ticket sales totalled $2.15 billion,
providing education with approximately $816.2 million.
The State's severance tax taxes oil, gas and sulphur production, as well as
the severance of phosphate rock and other solid minerals. Total collections
from severance taxes total $54.8 million during fiscal year 1993-94, down
15.0% from the previous year. Currently 60% of this amount is transferred to
the General Revenue Fund.
At the end of fiscal 1993, approximately $5.61 billion in principal amount of
debt secured by the full faith and credit of the State was outstanding. In
addition, since July 1, 1993, the State issued about $1.36 billion in
principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget, as a whole,
and each separate fund within the State budget, be kept in balance from
currently available revenues each fiscal year. If the Governor or Comptroller
believe a deficit will occur in any State fund, by statute, he must certify
his opinion to the Administrative Commission, which then is authorized to
reduce all State agency budgets and releases by a sufficient amount to prevent
a deficit in any fund. Additionally, the State Constitution prohibits issuance
of State obligations to fund State operations.
Currently under litigation are several issues relating to State actions or
State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse affect on
Florida's financial position.
Florida law provides preferential tax treatment to insurers who maintain a
home office in the State. Certain insurers challenged the constitutionality of
this tax preference and sought a refund of taxes paid. Recently, the State
Supreme Court ruled in favor of the State. This case and others, along with
pending refund claims, total about $150 million.
Previously, the State imposed a $295 fee on the issuance of certificates of
title for motor vehicles previously titled outside the State. Plaintiffs sued
the State alleging that this fee violated the Commerce Clause of the U.S.
Constitution. The Circuit Court in which the case was filed granted summary
judgment for the plaintiffs, enjoined further collection of the impact fee and
ordered refunds to all those who have paid the fee since the collection of the
fee went into effect. In the State's appeal of the lower court's decision,
the Florida Supreme Court ruled that this fee was unconstitutional under the
Commerce Clause. Thus, the Supreme Court approved the lower court's order
enjoining further collection of the fee and requiring refund of the previously
collected fees. The refund exposure of the State has been estimated to be in
excess of $100 million.
Florida maintains a bond rating of Aa, AA and AA from Moody's Investors
Service, Standard & Poor's and Fitch, respectively, on the majority of its
general obligation bonds, although the rating of a particular series of
revenue bonds relates primarily to the project, facility, or other revenue
sources from which such series derives funds for repayment. While these
ratings and some of the information presented above indicate that Florida is
in satisfactory economic health, there can be no assurance that there will not
be a decline in economic conditions or that particular Municipal Obligations
purchased by the Fund will not be adversely affected by any such changes.
The sources for the information presented above include official statements
and financial statements of the State of Florida. While the Sponsor has not
independently verified this information, the Sponsor has no reason to believe
that the information is not correct in all material respects.
At the time of the closing for each Florida Trust, Chapman and Cutler, Counsel
to each Florida Trust for Florida tax matters, rendered an opinion under then
existing Florida income tax law applicable to taxpayers whose income is
subject to Florida income taxation substantially to the effect that:
For Florida state income tax purposes, the Florida IM-IT Trust will not be
subject to the Florida income tax imposed by Chapter 220, Florida Statutes.
Because Florida does not impose an income tax on individuals, Non-Corporate
Unitholders residing in Florida will not be subject to any Florida income
taxation on income realized by the Florida IM-IT Trust. Any amounts paid to
the Florida IM-IT Trust or to Non-Corporate Unitholders under an insurance
policy issued to the Florida IM-IT Trust or the Sponsor which represent
maturing interest on defaulted obligations held by the Trustee will not be
subject to the Florida income tax imposed by Chapter 220, Florida Statutes.
Corporate Unitholders with commercial domiciles in Florida will be subject to
Florida income or franchise taxation on income realized by the Florida IM-IT
Trust and on payments of interest pursuant to any insurance policy to the
extent such income constitutes "non business income" as defined by
Chapter 220 or is otherwise allocable to Florida under Chapter 220. Other
Corporate Unitholders will be subject to Florida income or franchise taxation
on income realized by the Florida IM-IT Trust (or on payments of interest
pursuant to any insurance policy) only to the extent that the income realized
does not constitute "non-business income" as defined by Chapter 220
and if such income is otherwise allocable to Florida under Chapter 220.
Units will be subject to Florida estate tax only if held by Florida residents.
However, the Florida estate tax is limited to the amount of the credit for
state death taxes provided for in Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad valorem
property tax, the Florida intangible personal property tax or the Florida
sales or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Florida law. Ownership of the Units may result in
collateral Florida tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Georgia Trusts
The following brief summary regarding the economy of Georgia is based upon
information drawn from publicly available sources and is included for purposes
of providing information about general economic conditions that may or may not
affect issuers of the Georgia obligations. The Sponsor has not independently
verified any of the information contained in such publicly available documents.
Constitutional Considerations. The Georgia Constitution permits the issuance
by the State of general obligation debt and of certain guaranteed revenue
debt. The State may in our guaranteed revenue debt by guaranteeing the payment
of certain revenue obligations issued by an instrumentality of the State. The
Georgia Constitution prohibits the incurring of any general obligation debt or
guaranteed revenue debt if the highest aggregate annual debt service
requirement for the then current year or any subsequent fiscal year for
outstanding general obligation debt and guaranteed revenue debt, including the
proposed debt, exceed 10 percent of the total revenue receipts, less refunds,
of the State treasury in the fiscal year immediately preceding the year in
which any such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to supply
a temporary deficit in the State treasury in any fiscal year created by a
delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State
treasury in the fiscal year immediately preceding the year in which such debt
is incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred to supply a temporary deficit in the
State treasury. No such short-term debt has been incurred under this provision
since the inception of the constitutional authority referred to in this
paragraph.
Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other
political subdivisions and public authorities thereof are required by law to
be validated and confirmed in a judicial proceeding prior to issuance. The
legal effect of an approved validation in Georgia is to render incontestable
the validity of the pertinent bond issue and the security therefor.
The State and Its Economy. The State operates on a fiscal year beginning July
1 and ending June 30. Thus, the 1994 fiscal year ended June 30, 1994. Based on
data from the Georgia Department of Revenue, estimated receipts of the State
from income tax and sales tax for the 1992 fiscal year comprised approximately
48.8% and 37.5%, respectively, of the total State tax revenues. Such data
shows that total estimated State treasury receipts for the 1992 fiscal year
increased by approximately 2.16% over such collections in the 1991 fiscal
year. The estimated 1993 fiscal year figures indicate that receipts of the
State from income tax and sales tax for the 1993 fiscal year comprised
approximately 48.1% and 38%, respectively, of the total State tax revenues.
Total estimated State tax revenue collections for the 1993 fiscal year
indicated an increase of approximately 9.89% over such collections in the 1992
fiscal year. The estimated 1994 fiscal year figures indicate that receipts of
the State from income tax and sales tax for the 1994 fiscal year will comprise
approximately 48.8% and 37.9%, respectively, of the total State tax revenues.
Total estimated State tax revenue collections for the 1994 fiscal year
indicate an increase of approximately 9.56% over such collections in the 1993
fiscal year.
Georgia experienced an economic slowdown in the late 1980s that continued into
1992. The 1991 fiscal year ended with a balanced budget, but only because the
State had borrowed approximately $90 million from surpluses maintained for
special uses. In light of weaker. than expected monthly revenue collections in
May and June of 1991, Georgia lawmakers, in a special legislative session, cut
budgeted expenditures for the 1992 fiscal year by $415 million. Georgia ended
its 1992 fiscal year, however, with strong monthly revenue collections. For
the last four months of fiscal year 1992, Georgia's revenues were more than 6%
higher than revenues reported one year earlier for the same time period. By
year-end, revenue collections fell only .1% short of that expected to cover
1992 expenditures. This shortfall was made up from funds allocated to but not
used by state agencies. The authorized 1993 fiscal year budget consists of an
$8.3 billion spending plan and approximately $750 million in new general
obligation debt. On March 23, 1993. The Georgia General Assembly approved an
$8.9 billion budget for the 1994 fiscal year which includes authorization for
$792 million of general obligation borrowing.
The Georgia economy has performed relatively well during recent years and
generally has expanded at a rate greater than the national average during that
period. However, growth in 1988 through 1992 slowed somewhat and was modest
compared to the pace of the early 1980's. Georgia's economy, however, has made
a robust recovery through the 1993 and 1994 fiscal years. Total estimated
State tax revenue collections for the 1994 fiscal year indicate an increase of
approximately 9.56% over such collections in the 1993 fiscal year. The 1992
annual average unemployment rate for Georgia was 6.9% as compared to the 1992
national annual average unemployment rate of 7.4%. The 1993 annual average
unemployment rate for Georgia was 5.7% as compared to the 1993 national annual
average unemployment rate of 6.7%. Throughout 1994, the monthly unemployment
rate for Georgia (not seasonally adjusted) has remained below the national
average monthly unemployment rate (not seasonally adjusted). In April and May
1994, the two most current months for which information is available,
Georgia's unemployment rate of 6.2% and 5.9%. In July, 1994, widespread
flooding in central and southern Georgia caused extensive damage and
destruction of farmland, private residences, businesses and local and state
government facilities. As of July 12, 1994, Governor Zell Miller refused to
estimate the dollar value of the damage but other sources estimate that damage
could exceed $300 million. Thirty-one counties have been declared federal
disaster areas. Moody's Investors Service, Inc. and Standard and Poor's
Corporation are observing the situation in Georgia, but neither rating agency
has expressed any immediate credit concerns.
Bond Ratings. Currently, Moody's Investors Service, Inc. rates Georgia general
obligation bonds Aaa and Standard & Poor's rates such bonds AA+.
Legal Proceedings. Georgia is involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may substantially impair revenues. Several lawsuits have been
filed against Georgia asserting that the decision in Davis v. Michigan
Department of Treasury, 489 U.S. 803 (1989), invalidating Michigan's practice
of taxing retirement benefits paid by the federal government while exempting
state retirement benefits, also invalidates Georgia's tax treatment of Federal
Retirement Benefits for years prior to 1989. Under Georgia's applicable 3 year
statute of limitation the maximum potential liability under these suits
calculated to August 15, 1993 would appear to be no greater than 100 million
dollars. The plaintiffs in these suits, however, have requested refunds for a
period from 1980 to 1988 which could result in a maximum potential liability
in the range of 591 million dollars. Any such liability would be predicated on
a holding by the State of Georgia Supreme Court or the United States Supreme
Court that the Davis decision is applicable to Georgia's prior method of
taxing Federal Retirement Benefits and that the Davis decision is to be given
a retroactive effect, i.e., that the decision affects prior tax years and that
a refund remedy is appropriate. In Georgia's "test case" , the Georgia
Supreme Court held that no refunds are due. The plaintiff's petition to the
U.S. Supreme Court for a writ of certiorari was granted on February 22, 1994.
Three suits have been filed against the State of Georgia seeking refunds of
liquor taxes under O.C.G.A. Section 48-2-35, in light of Bacchus Imports, Ltd.
v. Dias, 468 U.S. 263 (1984) under Georgia's pre-Bacchus statute. In the Beam
case, 501 U.S. 529 (decided June 20, 1991) the Supreme Court indicated that
Bacchus was retroactive, but only within the bounds of State statutes of
limitations and procedural bars, and left State courts to determine any remedy
in light of reliance interests, equitable considerations, and other defenses.
Georgia's statute of limitations in O.C.G.A. Section 48-2-35 has run on all
pre-Bacchus claims for refund except five pending claims seeking 31.7 million
dollars in tax plus interest. On remand, the Fulton County Superior Court has
ruled that procedural bars and other defenses bar any recovery by taxpayers on
Beam's claims for refund. The Georgia Supreme Court has affirmed, and Beam has
petitioned the United States Supreme Court for a writ of certiorari.
Two additional suits have been filed with the State of Georgia by foreign
producers of alcoholic beverages seeking $96 million in refunds of alcohol
import taxes imposed under O.C.G.A. Section 3-4-60. These claims constitute
99% of all such taxes paid during the preceding three years.
In Board of Public Education for Savannah/Chatham County v. State of Georgia,
the local school board claimed that the State should finance the major portion
of the costs of its desegregation program. The Savannah Board originally
requested restitution in the amount of $30 million, but the Federal District
Court set forth a formula which would require a State payment in the amount of
approximately $6 million. Both sides have moved for reconsideration. In a
similar complaint, DeKalb County has requested restitution in the amount of
$90 million, and there are approximately five other school districts which
could file similar claims. It is not possible to quantify such potential
claims at this time.
The foregoing information does not purport to be a complete or exhaustive
description of all conditions to which the issuers of Bonds in the Georgia
Insured Trust are subject. Many factors including national economic, social
and environmental policies and conditions, which are not within the control of
the issuers of Bonds could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. Since Georgia Bonds in the Georgia Insured
Trust (other than general obligation bonds issued by the State) are payable
from revenue derived from a specific source or authority, the impact of a
pronounced decline in the national economy or difficulties in significant
industries within the State could result in a decrease in the amount of
revenues realized from such source or by such authority and thus adversely
affect the ability of the respective issuers of the Georgia Bonds in the
Georgia Insured Trust to pay the debt service requirements on the Georgia
Bonds. Similarly, such adverse economic developments could result in a
decrease in tax revenues realized by the State and thus could adversely affect
the ability of the State to pay the debt service requirements of any Georgia
general obligation bonds in the Georgia Insured Trust.
At the time of the closing for each Georgia Trust, Special Counsel to the Fund
for Georgia tax matters rendered an opinion under then existing Georgia income
tax law applicable to taxpayers whose income is subject to Georgia income
taxation substantially to the effect that:
For Georgia income tax purposes, the Georgia IM-IT Trust is not an association
taxable as a corporation, and the income of the Georgia IM-IT Trust will be
treated as the income of the Unitholders. Interest on the Georgia Bonds which
is exempt from Georgia income tax when received by the Georgia IM-IT Trust,
and which would be exempt from Georgia income tax if received directly by a
Unitholder, will retain its status as tax-exempt interest when distributed by
the Georgia IM-IT Trust and received by the Unitholders.
If the Trustee disposes of a Georgia Bond (whether by sale, exchange, payment
on maturity, retirement or otherwise) or if a Unitholder redeems or sells his
Unit, the Unitholder will recognize gain or loss for Georgia income tax
purposes to the same extent that gain or loss would be recognized for federal
income tax purposes (except in the case of Georgia Bonds issued before March
11, 1987 issued with original issue discount owned by the Georgia IM-IT Trust
in which case gain or loss for Georgia income tax purposes may differ from the
amount recognized for federal income tax purposes because original issue
discount on such Georgia Bonds may be determined by accruing said original
issue discount on a ratable basis). Due to the amortization of bond premium
and other basis adjustments required by the Internal Revenue Code, a
Unitholder, under some circumstances, may realize taxable gain when his or her
Units are sold or redeemed for an amount less than or equal to their original
cost.
Because obligations or evidences of debt of Georgia, its political
subdivisions and public institutions are exempt from the Georgia intangible
personal property tax, the Georgia IM-IT Trust will not be subject to such tax
as the result of holding such obligations, evidences of debt or bonds.
Amounts paid under an insurance policy or policies issued to the Georgia IM-IT
Trust, if any, with respect to the Georgia Bonds in the Georgia IM-IT Trust
which represent maturing interest on defaulted obligations held by the Trustee
will be exempt from State income taxes if, and to the extent as, such interest
would have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased the amounts paid for
such policies are reasonable and customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
We express no opinion regarding whether a Unitholder's ownership of an
interest in the Georgia IM-IT Trust is subject to the Georgia intangible
personal property tax. Although the application of the Georgia intangible
property tax to the ownership of the Units by the Unitholders is not clear,
representatives of the Georgia Department of Revenue have in the past advised
us orally that, for purposes of the intangible property tax, the Department
considers a Unitholder's ownership of an interest in the Georgia IM-IT Trust
as a whole to be taxable intangible property separate from any ownership
interest in the underlying tax-exempt Georgia Bonds.
Neither the Georgia Bonds nor the Units will be subject to Georgia sales or
use tax.
Chapman and Cutler has expressed no opinion with respect to taxation under any
other provision of Georgia law. Ownership of the Units may result in
collateral Georgia tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any
such collateral consequences.
Hawaii Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Hawaii is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Hawaii.
Hawaii was admitted to the Union on August 21,1959 as the 50th state and is
currently the 41st most populous state. Hawaii's population was 1,115,274 in
1990, as reported by the Census. According to the Census, about 75% of this
population lives on Oahu, the site of the State's capital. Hawaii's population
contains great ethnic diversity, consisting of immigrants from the Far East
and Europe, as well as the mainland U.S.
The Hawaiian economy is based primarily on tourism with most employment
located in the service and retail trade sectors and with tourists paying a
large portion of the General Excise Tax and the Transient Accommodation Tax.
The General Excise and Use Tax made up 53.7% of net receipts without
adjustments for 1992 and the Transient Accommodations Tax were the fourth
largest individual tax of net receipts in 1992. Approximately 6.5 million
tourists came to the State in 1992, spending an estimated $9.6 billion while
in the State. This number of tourists decreased 5.2% from 1991, mostly due to
the U.S. recession as westbound visitors (80% from U.S.) fell from 4.7 million
in 1990, to 4.6 million in 1991, to 4.0 million in 1992. Eastbound visitors,
however, increased from 2.2 million in 1990, to 2.3 million in 1991, to 3.5
million in 1992. Total visitors to the State for the first half of 1993 fell
by 6.5% from those of 1992.
The unemployment rate in the state of Hawaii was 4.8% as of June 1993,
significantly below the national rate of 6.8%.
The State's revised total personal income was an estimated $24.8 billion in
1992 and has increased at a 7.5% average annual rate since 1980, slightly
faster than the national rate over this decade. The State's revised per capita
personal income was $21,218 in 1992, higher than the 1992 U.S. figure of
$19,841. The per capita personal income in the State has increased at a 5.8%
average annual rate since 1980, slightly lower than the 5.9% rate for the
nation. Hawaii's total personal income for the first quarter of 1993 was
$25,571, up 2.9% from $24,844 for the same period last year.
The General Fund revenues in 1992 grew at an actual annual growth rate of
1.5%. In 1993, the Council on Revenues estimates, as of April 1993, that the
General Fund revenues will increase by 3.2%. Any time the General Fund balance
at the close of each two successive fiscal years exceeds 5% of General Fund
Revenues for the two fiscal years, the Legislature in the next regular session
will provide a credit to state taxpayers credit has been issued from 1981 to
1992, inclusive. As of May 1993, the Department of Budget and Finance projects
the General Fund balance at fiscal year-end to be $314.8 million.
Inflation adjusted single family home construction fell 9.0% in 1992, but is
expected to be offset by increases in alterations and additions. Employment in
the construction industry has declined, but is expected to return to 1991 peak
levels due to repair work from Hurricane Iniki. The hurricane hit island Kuaui
in September 1992 causing an estimated $1.7 billion worth of property,
agricultural, and commercial damage as estimated by the Department of
Business, Economic Development, and Tourism. The State has not experienced any
materially adverse economic or financial impact so far, as the federal
government has provided additional funding to the state in the form of public
assistance, loans, and grants with minimum state matching requirements from
the General Fund.
Currently, Moody's Investors Service rates Hawaii general obligation bonds
"Aa" and Standard & Poor's Corporation rates Hawaii general obligation
bonds "AA." Although these ratings indicate that the state of Hawaii
is in relatively good economic health, there can, of course, be no assurance
that this will continue or that particular bond issues may not be adversely
affected by changes in state or local economic conditions. Also, it should be
noted that the creditworthiness of obligations issued by local Hawaii issuers
may be unrelated to the creditworthiness of obligations issued by the state of
Hawaii, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Hawaii Quality Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Hawaii Quality Trust to pay
interest on or principal on the Bonds.
We understand that the Hawaii Trust will only have income consisting of (1)
interest from bonds issued by the State of Hawaii and its political and
governmental subdivisions, municipalities and governmental agencies and
instrumentalities and bonds issued by possessions of the United States which
would be exempt from federal and Hawaii income taxation when paid directly to
an individual, trust or estate (the "Bonds", (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held by the Trustee
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Hawaii that is applicable to individuals, trusts and
estates (the "Hawaii Income Tax". It should be noted that interest on
the Bonds is subject to tax in the case of certain banks and financial
institutions subject to Hawaii's franchise tax and corporations subject to
Hawaii's corporate alternative minimum tax. The opinion set forth below does
not address the taxation of persons other than full time residents of Hawaii.
In the opinion of Chapman and Cutler, Counsel to the Sponsor, under existing
Hawaii income tax law as of the date of this prospectus and based upon the
assumptions above:
The Hawaii Trust is not an association taxable as a corporation and each
Unitholder of the Hawaii Trust will be treated as the owner of a pro rata
portion of the Hawaii Trust, and the income of such portion of the Hawaii
Trust will therefore be treated as the income of the Unitholder for Hawaii
Income Tax purposes;
Income on the Bonds which is exempt from the Hawaii Income Tax when received
by a Unitholder of the Hawaii Trust and which would be exempt from the Hawaii
Income Tax if received directly by a Unitholder, will retain its status as
exempt from such tax when received by the Hawaii Trust and distributed to such
Unitholder;
To the extent that interest on the Bonds, if any, is includible in the
computation of "alternative minimum taxable income" for federal income
tax purposes, such interest will also be includible in the computation of "
alternative minimum taxable income" for purposes of Hawaii's corporate
alternative minimum tax on corporations;
Each Unitholder of the Hawaii Trust will recognize gain or loss for Hawaii
Income Tax purposes if the Trustee disposes of a Bond (whether by redemption,
sale or otherwise) or if the Unitholder redeems or sells Units of the Hawaii
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for federal income tax purposes;
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Unitholders realizing taxable gain for
Hawaii Income Tax purposes when their Units are sold or redeemed for an amount
equal to or less than their original cost;
Proceeds, if any, paid under individual insurance policies obtained by issuers
of Bonds or the Trustee which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Hawaii net income if,
and to the same extent as, such interest would have been so excludible if paid
in the normal course by the issuer of the defaulted obligation provided that,
at the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation that
the issuer of the bonds, rather than the insurer, will pay debt service on the
bonds; and
To the extent that interest derived from the Hawaii Trust by a Unitholder with
respect to any Possession Bonds is excludible from gross income for federal
income tax purposes pursuant to 48 U.SC. Section 745, 48 U.S.C. Section 1423a
and 48 U.S.C. Section 1403, such interest will also not be subject to the
Hawaii Income Tax. It should be noted that interest relating to Possession
Bonds is subject to tax in the case of certain banks and financial
institutions subject to the Hawaii's franchise tax and corporations subject to
Hawaii's corporate alternative minimum tax.
We have not examined any of the Bonds to be deposited and held in the Hawaii
Trust or the proceedings for the issuance thereof or the opinions of bond
counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Louisiana Trusts
The following discussion regarding the financial condition of the state
government may not be relevant to general obligation or revenue bonds issued
by political subdivisions of and other issuers in the State of Louisiana (the
"State". Such information, and the following discussion regarding the
economy of the State, is based upon information about general economic
conditions that may or may not affect issuers of the Louisiana obligations.
The Sponsor has not independently verified any of the information contained in
such publicly available documents, but is not aware of any facts which would
render such information inaccurate. On December 19, 1990 the State received a
rating upgrade on its general obligation bonds to the current Standard &
Poor's rating of A from BBB-plus and was placed on Standard & Poor's
Corporation's positive credit watch. Standard & Poor's cited improvements in
the State's cash flow and fiscal reforms approved by voters in the fall of
1990. The current Moody's rating on the State's general obligation bonds
remains unchanged at BBB-plus. There can be no assurance that the economic
conditions on which these ratings were based will continue or that particular
bond issues may not be adversely affected by changes in economic or political
conditions.
The Revenue Estimating Conference (the "Conference" was established
by Act No. 814 of the 1987 Regular Session of the State Legislature. The
Conference was established by the Legislature to provide an official estimate
of anticipated State revenues upon which the executive budget shall be based,
to provide for a more stable and accurate method of financial planning and
budgeting and to facilitate the adoption of a balanced budget as is required
by Article VII, Section 10(B) of the State Constitution. Act No. 814 provides
that the Governor shall cause to be prepared an executive budget presenting a
complete financial and programmatic plan for the ensuing fiscal year based
only upon the official estimate of anticipated State revenues as determined by
the Revenue Estimating Conference. Act No. 814 further provides that at no
time shall appropriations or expenditures for any fiscal year exceed the
official estimate of anticipated State revenues for that fiscal year. During
the 1990 Regular Session of the Louisiana Legislature a constitutional
amendment was approved (Act No. 1096), which was approved by the State
electorate, granting constitutional status to the existence of the Revenue
Estimating Conference without altering its structure, powers, duties and
responsibilities which are currently provided by statute.
The State General Fund is the principal operating fund of the State, and was
established administratively to provide for the distribution of funds
appropriated by the State Legislature for the ordinary expenses of the State
government. Revenue is provided from the direct deposit of federal grants and
the transfer of State revenues from the Bond Security and Redemption Fund
after general obligation debt requirements are met. The Revenue Estimating
Conference met in February of 1991 and reported a projected $437.5 million
State General Fund surplus for the fiscal year ending June 30, 1991. This
surplus will be available for expenditures during the Fiscal Year 1991-92. The
beginning State General Fund surplus for fiscal year 1990-1991 was $702.3
million. The official recurring State General Fund estimate for Fiscal Year
1990-91 (Revenue Estimating Conference February 1991 as revised April 1991) is
$4,173.5 million.
The Transportation Trust Fund was established pursuant to (i) Section 27 of
Article VII of the State Constitution and (ii) Act No. 16 of the First
Extraordinary Session of the Louisiana Legislature for the year 1989
(collectively the "Act" for the purpose of funding construction and
maintenance of state and federal roads and bridges, the statewide
flood-control program, ports, airports, transit and state police traffic
control projects and to fund the Parish Transportation Fund. The
Transportation Trust Fund is funded by a levy of $0.20 per gallon on gasoline
and motor fuels and on special fuels (diesel, propane, butane and compressed
natural gas) used, sold or consumed in the state (the "Gasoline and Motor
Fuels Taxes and Special Fuels Taxes". This levy was increased from $0.16
per gallon (the "Existing Taxes" to the current $0.20 per gallon
pursuant to Act No. 16 of the First Extraordinary Session of the Louisiana
Legislature for the year 1989, as amended. The additional tax of $0.04 per
gallon (the "Act 16 Taxes" became effective January 1, 1990 and will
expire on the earlier of January 1, 2005 or the date on which obligations
secured by the Act No. 16 taxes are no longer outstanding. The Transportation
Infrastructure Model for Economic Development Account (the "TIME
Account" was established in the Transportation Trust Fund. Moneys in the
TIME account will be expended for certain projects identified in the Act
aggregating $1.4 billion and to fund not exceeding $160 million of additional
capital transportation projects. The State issued $263,902,639.95 of Gasoline
and Fuels Tax Revenue Bonds, 1990 Series A, dated April 15, 1990 payable from
the (i) Act No. 16 Taxes, (ii) any Act No. 16 Taxes and Existing Taxes
deposited in the Transportation Trust Fund, and (iii) any additional taxes on
gasoline and motor fuels and special fuels pledged for the payment of said
Bonds.
The Louisiana Recovery District (the "Recovery District" was created
pursuant to Act No. 15 of the first Extraordinary Session of the Legislature
of Louisiana of 1988 to assist the State in the reduction and elimination of a
deficit existing at that time and the delivery of essential services to its
citizens and to assist parishes, cities and other units of local government
experiencing cash flow difficulties. The Recovery District is a special taxing
district the boundaries of which are coterminous with the State and is a body
politic and corporate and a political subdivision of the State. The Recovery
District issued $979,125,000 of Louisiana Recovery District Sales Tax Bonds,
Series 1988, dated July 1, 1988, secured by (i) the revenues derived from the
District's 1% statewide sales and use tax remaining after the costs of
collection and (ii) all funds and accounts held under the Recovery District's
General Bond Resolution and all investment earnings on such funds and
accounts. As of June 30, 1990, the principal amount outstanding was
$851,880,000. The Legislature passed tax measures which are projected to raise
approximately $418 million in additional revenues for Fiscal Year 1990-91, the
most important of which include the following: sales tax $328.3 million;
hazardous waste tax $41.3 million; severance tax $39.2 million; income tax
$14.9 million; and tobacco tax $14.0 million. The Legislature also passed
several constitutional amendments which were approved by the state electorate,
resulting in comprehensive budgetary reforms mandating that: both proposed and
adopted budgets be balanced in accordance with the official forecast of the
Revenue Estimating Conference; any new tax proposal be tied to specific
expenditures; all mineral revenues earned by the State in excess of $750
million be placed in the Revenue Stabilization Mineral Trust Fund, to be used
as a "rainy day fund" ; and, the regular legislative session must end
prior to the completion of the fiscal year in order to streamline budgetary
reporting and planning. The Legislature also adopted a proposed constitutional
amendment which was approved by the State electorate permitting the creation
of a Louisiana lottery. The lottery is projected to generate approximately
$111 million per year in net revenues for the State. Only local governmental
units levy ad valorem taxes at present. Under the 1921 State Constitution a
5.75 mills ad valorem tax was being levied by the State until January 1, 1973
at which time a constitutional amendment to the 1921 Constitution abolished
the ad valorem tax. Under the 1974 State Constitution a State ad valorem tax
of up to 5.75 mills was provided for but is not presently being levied. The
property tax is underutilized at the parish level due to a constitutional
homestead exemption from the property tax applicable to the first $75,000 of
the full market value of single family residences. Homestead exemptions do not
apply to ad valorem property taxes levied by municipalities, with the
exception of the City of New Orleans. Since local governments are also
prohibited from levying an individual income tax by the constitution, their
reliance on State government is increased under the existing tax structure.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of the Louisiana Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors may affect
the issuers of Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the Louisiana Trust
to pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust Special Counsel to each
Louisiana Trust for Louisiana tax matters, rendered an opinion under then
existing Louisiana income tax law applicable to taxpayers whose income is
subject to Louisiana income taxation substantially to the effect that:
The Louisiana Trust will be treated as a trust for Louisiana income tax
purposes and not as an association taxable as a corporation.
The Louisiana income tax on resident individuals is imposed upon the "tax
table income" of resident individuals. The calculation of the "tax
table income" of a resident individual begins with federal adjusted gross
income. Certain modifications are specified, but no such modification requires
the addition of interest on obligations of the State of Louisiana and its
political subdivisions, public corporations created by them and constitutional
authorities thereof authorized to issue obligations on their behalf.
Accordingly, amounts representing interest excludable from gross income for
federal income tax purposes received by the Louisiana Trust with respect to
such obligations will not be taxed to the Louisiana Trust, or, except as
provided below, to the resident individual Unitholder, for Louisiana income
tax purposes. In addition to the foregoing, interest on the respective
Securities may also be exempt from Louisiana income taxes pursuant to the
statutes authorizing their issuance.
To the extent that gain from the sale, exchange or other disposition of
obligations held by the Louisiana Trust (whether as a result of a sale or
exchange of such obligations by the Louisiana Trust or as a result of a sale
or exchange of a Unit by a Unitholder) is includable in the federal adjusted
gross income of a resident individual, such gain will be included in the
calculation of the Unitholder's Louisiana taxable income; and
Gain or loss on the Unit or as to underlying bonds for Louisiana income tax
purposes would be determined by taking into account the basis adjustments for
federal income tax purposes described in this Prospectus.
As no opinion is expressed regarding the Louisiana tax consequences of
Unitholders other than individuals who are Louisiana residents, tax counsel
should be consulted by other prospective Unitholders. The Internal Revenue
Code of 1986, as amended (the "1986 Code", contains provisions
relating to investing in tax-exempt obligations (including, for example,
corporate minimum tax provisions which treat certain tax-exempt interest and
corporate book income which may include tax-exempt interest, as tax preference
items, provisions reducing the deductibility of interest expense by financial
institutions) which could have a corresponding effect on the Louisiana tax
liability of the Unitholders.
In rendering the opinions expressed above, counsel has relied upon the opinion
of Chapman and Cutler that the Louisiana Trust is not an association taxable
as a corporation for Federal income tax purposes, that each Unitholder of the
Louisiana Trust will be treated as the owner of a pro rata portion of such
Louisiana Trust under the 1986 Code and that the income of the Louisiana Trust
will be treated as income of the Unitholders under the 1986 Code.
Tax counsel should be consulted as to the other Louisiana tax consequences not
specifically considered herein, and as to the Louisiana tax status of
taxpayers other than resident individuals who are Unitholders in the Louisiana
Trust. In addition, no opinion is being rendered as to Louisiana tax
consequences resulting from any proposed or future federal or state tax
legislation.
Massachusetts Trusts
As described above, the Massachusetts IM-IT Trust will invest substantially
all of its net assets in obligations issued by or on behalf of the
Commonwealth of Massachusetts, political subdivisions thereof, or agencies or
instrumentalities of the Commonwealth or its political subdivisions (the "
Bonds". The Massachusetts IM-IT Trust is therefore susceptible to general
or particular political, economic, or regulatory factors that may affect
issuers of such Massachusetts Investments. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information may not be applicable to "conduit"
obligations on which the public issuer itself has no financial responsibility.
This information is derived from official statements of the Commonwealth and
certain of its agencies or instrumentalities in connection with the issuance
of securities, and from other publicly available documents, and is believed to
be accurate. No independent verification has been made of any of the following
information.
The Massachusetts Economy. After declining since 1987, Massachusetts
employment in 1993 has shown positive annual growth. While Massachusetts had
benefited from an annual job growth rate of approximately 2% since the early
1980's, by 1989, employment had started to decline. Nonagricultural employment
declined 0.7% in 1989, 4.0% in 1990, 5.5% in 1991, 0.9% in 1992, and 1.7% in
1993. A comparison of total, nonagricultural employment in November 1993 with
that in November 1994 indicates an increase of 2.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly lower
than the national average. By 1990, however, unemployment reached 6.0%,
exceeding the national average for the first time since 1977. The
Massachusetts unemployment rate peaked in 1991 at 9.0% and dropped to 6.9% in
1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. From 1992 to 1993, nominal per capita income in Massachusetts
increased 3.6% as compared to 3.2% for the nation as a whole.
The Commonwealth, while the third most densely populated state according to
the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to less than one-half the rate of increase in the
United States population as a whole.
Massachusetts possesses a diversified economic base which includes traditional
manufacturing, high technology and service industries, served by an extensive
transportation system and related facilities. The Massachusetts service
sector, at approximately 34.3% of the state work force in November of 1994, is
the largest sector in the Massachusetts economy. Government employment is
below the national average, representing less than 14% of the Massachusetts
work force. In recent years, the construction, manufacturing and trade sectors
have experienced the greatest decreases in employment in Massachusetts, with
more modest declines taking place in the government, finance, insurance and
real estate, and service sectors. From 1990 to November of 1994, manufacturing
employment in Massachusetts declined by some 15.5%. At the same time, there
has occurred a reversal of the dramatic growth which occurred during the
1980's in the finance, insurance and real estate sector and in the
construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction agenda
which is expected not only to improve mobility, but to provide a substantial
number of construction and related employment opportunities, including the
major Central Artery/Tunnel project involving the construction of a third
tunnel under Boston Harbor linking the MassPike and downtown Boston with Logan
International Airport, and the depression into tunnels of the Central Artery
that traverses the City of Boston. Federal funds are expected to cover
approximately 90% of the cost of this project. The Central Artery/Tunnel
project is expected to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the mid-1990's.
State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories--Medicaid,
debt service, public assistance, group health insurance and transit
subsidies--grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall combined
with steadily escalating costs contributed to serious budgetary and financial
difficulties which have affected the credit standing and borrowing abilities
of Massachusetts and certain of its public bodies and municipalities, and
which have contributed to higher interest rates on debt obligations issued by
them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budgeted program expenditures for fiscal 1992 and fiscal 1993 and fiscal 1994
have moderated these difficulties, and the Commonwealth has shown significant
surpluses of revenues and other sources over expenditures and other uses in
the Commonwealth's budgeted operating funds for those years. For fiscal 1995,
the cash flow projection prepared by the office of the State Treasurer in
December 1994, based upon actual results through October 1994, upon revenue
and spending estimates as of December 1994, and upon various other
assumptions, estimates the fiscal 1995 year-end cash position of the
Commonwealth to be approximately $447 million. Although the Secretary for
Administration and Finance has revised tax revenue estimates downward since
then, the fiscal 1995 non-tax revenue estimate has been revised upon upward,
and is projected to offset the expected decline in tax revenues.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Massachusetts IM-IT Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or the ability of
the respective issuers of the Bonds acquired by the Massachusetts IM-IT Trust
to pay interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust Special Counsel to
each Massachusetts Trust for Massachusetts tax matters, rendered an opinion
under then existing Massachusetts income tax law applicable to taxpayers whose
income is subject to Massachusetts income taxation substantially to the effect
that:
For Massachusetts income tax purposes, the Massachusetts IM-IT Trust will be
treated as a corporate trust under Section 8 of Chapter 62 of the
Massachusetts General Laws and not as a grantor trust under Section 10(e) of
Chapter 62 of the Massachusetts General Laws.
The Massachusetts IM-IT Trust will not be held to be engaging in business in
Massachusetts within the meaning of said Section 8 and will, therefore, not be
subject to Massachusetts income tax.
Massachusetts Unitholders who are subject to Massachusetts income taxation
under Chapter 62 of Massachusetts General Laws will not be required to include
their respective shares of the earnings of or distributions from the
Massachusetts IM-IT Trust in their Massachusetts gross income to the extent
that such earnings or distributions represent tax-exempt interest for federal
income tax purposes received by the Massachusetts IM-IT Trust on obligations
issued by Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States territories or
possessions.
Any proceeds of insurance obtained by the Trustee of the Trust or by the
issuer of a Bond held by the Massachusetts IM-IT Trust which are paid to
Massachusetts Unitholders and which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Massachusetts gross
income of a Massachusetts Unitholder if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
Bond.
The Massachusetts IM-IT Trust's capital gains and/or capital losses realized
upon disposition of Bonds held by it will be includable pro rata in the
federal gross income of Massachusetts Unitholders who are subject to
Massachusetts income taxation under Chapter 62 of the Massachusetts General
Laws, and such gains and/or losses will be included as capital gains and/or
losses in the Massachusetts Unitholders' Massachusetts gross income, except
where capital gain is specifically exempted from income taxation under acts
authorizing issuance of said Bonds
Gains or losses realized upon sale or redemption of Units by Massachusetts
Unitholders who are subject to Massachusetts income taxation under Chapter 62
of the Massachusetts General Laws will be includable in their Massachusetts
gross income.
In determining such gain or loss Massachusetts Unitholders will, to the same
extent required for Federal tax purposes, have to adjust their tax bases for
their Units for accrued interest received, if any, on Bonds delivered to the
Trustee after the Unitholders pay for their Units and for amortization of
premiums, if any, on obligations held by the Massachusetts IM-IT Trust.
The Units of the Massachusetts IM-IT Trust are not subject to any property tax
levied by Massachusetts or any political subdivision thereof, nor to any
income tax levied by any such political subdivision. They are includable in
the gross estate of a deceased Massachusetts Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
Michigan Trusts
Investors should be aware that the economy of the State of Michigan has, in
the past, proven to be cyclical, due primarily to the fact that the leading
sector of the State's economy is the manufacturing of durable goods. While the
State's efforts to diversify its economy have proven successful, as reflected
by the fact that the share of employment in the State in the durable goods
sector has fallen from 33.1 percent in 1960 to 17.9 percent in 1990, durable
goods manufacturing still represents a sizable portion of the State's economy.
As a result, any substantial national economic downturn is likely to have an
adverse effect on the economy of the State and on the revenues of the State
and some of its local governmental units.
In July 1995, Moody's Investors Service, Inc. raised the State's general
obligation bond rating to "Aa" . In October 1989, Standard & Poor's
raised its rating on the State's general obligation bonds to "AA" .
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
In recent years, the State has reported its financial results in accordance
with generally accepted accounting principles. For the fiscal years ended
September 30, 1990 and 1991, the State reported negative year-end balances in
the General Fund/School Aid Fund of $310.4 million and $169.4 million,
respectively. The State ended each of the 1992, 1993 and 1994 fiscal years
with its General Fund/School Aid Fund in balance, after having made
substantial transfers to the Budget Stabilization Fund in 1993 and 1994. A
positive cash balance in the combined General Fund/School Aid Fund was
recorded at September 30, 1990. In the 1991 through 1993 fiscal years, the
State experienced deteriorating cash balances which necessitated short-term
borrowing and the deferral of certain scheduled cash payments. The State did
not borrow for cash flow purposes in 1994, but borrowed $500 million on March
9, 1995, which was repaid on September 29, 1995. The State anticipates
borrowing for cash flow purposes in the current fiscal year. The State's
Budget Stabilization Fund received year-end transfers from the General Fund of
$283 million in 1993 and $464 million in 1994, bringing the balance in the
Budget Stabilization Fund to $779 million at September 30, 1994.
The Michigan Constitution of 1963 limits the amount of total revenues of the
State raised from taxes and certain other sources to a level for each fiscal
year equal to a percentage of the State's personal income for the prior
calendar year. In the event that the State's total revenues exceeds the limit
by 1 percent or more, the Michigan Constitution of 1963 requires that the
excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform amendment
to the State's Constitution which, among other things, increased the State
sales tax rate from 4% to 6% and placed a cap on property assessment increases
for all property taxes. Concurrent legislation cut the State's income tax rate
from 4.6% to 4.4%, reduced some property taxes and altered local school
funding sources to a combination of property taxes and state revenues, some of
which is provided from other new or increased State taxes. The legislation
also contained other provisions that alter (and, in some cases, may reduce)
the revenues of local units of government, and tax increment bonds could be
particularly affected. While the ultimate impact of the constitutional
amendment and related legislation cannot yet be accurately predicted,
investors should be alert to the potential effect of such measures upon the
operations and revenues of Michigan local units of government.
In addition, the State Legislature recently adopted a package of state tax
cuts, including a phase out of the intangibles tax, an increase in exemption
amounts for personal income tax, and reductions in single business tax.
Although all or most of the Bonds in the Michigan IM-IT Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the ability
of the respective obligors to pay interest on or principal of the Bonds,
particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet
debt service requirements upon such bonds. In the 1991 fiscal year, the State
deferred certain scheduled cash payments to municipalities, school districts,
universities and community colleges. While such deferrals were made up at
specified later dates, similar future deferrals could have an adverse impact
on the cash position of some local governmental units. Additionally, the State
reduced revenue sharing payments to municipalities below that level provided
under formulas by $10.9 million in the 1991 fiscal year, up $34.4 million in
the 1992 fiscal year, $45.5 million in the 1993 fiscal year, $54.5 million in
the 1994 fiscal year, and $67.0 million (budgeted) in the 1995 fiscal year.
The Michigan IM-IT Trust may contain general obligation bonds of local units
of government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22, 1978,
or issued after December 22, 1978 with the approval of the electors of the
local unit, are payable from property taxes levied without limitation as to
rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of the
local unit for debt service purposes is subject to constitutional, statutory
and charter tax rate limitations. In addition, several major industrial
corporations have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State. If successful,
such challenges could have an adverse impact on the ad valorem tax bases of
such units which could adversely affect their ability to raise funds for
operation and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to each
Michigan Trust for Michigan tax matters rendered an opinion under then
existing Michigan income tax law applicable to taxpayers whose income is
subject to Michigan income taxation substantially to the effect that:
The Michigan IM-IT Trust and the owners of Units will be treated for purposes
of the Michigan income tax laws and the Single Business Tax in substantially
the same manner as they are for purposes of the Federal income tax laws, as
currently enacted. Accordingly, we have relied upon the opinion of Messrs.
Chapman and Cutler as to the applicability of Federal income tax under the
Internal Revenue Code of 1986 to the Michigan IM-IT Trust and the Holders of
Units.
Under the income tax laws of the State of Michigan, the Michigan IM-IT Trust
is not an association taxable as a corporation; the income of the Michigan
IM-IT Trust will be treated as the income of the Unitholders and be deemed to
have been received by them when received by the Michigan IM-IT Trust. Interest
on the underlying Bonds which is exempt from tax under these laws when
received by Michigan IM-IT Trust will retain its status as tax exempt interest
to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will be
considered to have received his pro rata share of Bond interest when it is
received by the Michigan IM-IT Trust, and each Unitholder will have a taxable
event when the Michigan IM-IT Trust disposes of a Bond (whether by sale,
exchange, redemption or payment at maturity) or when the Unitholder redeems or
sells his Certificate to the extent the transaction constitutes a taxable
event for Federal income tax purposes. The tax cost of each unit to a
Unitholder will be established and allocated for purposes of these Michigan
tax laws in the same manner as such cost is established and allocated for
Federal income tax purposes.
Under the Michigan Intangibles Tax, the Michigan IM-IT Trust is not taxable
and the pro rata ownership of the underlying Bonds, as well as the interest
thereon, will be exempt to the Unitholders to the extent the Michigan IM-IT
Trust consists of obligations of the State of Michigan or its political
subdivisions or municipalities, or of obligations of possessions of the United
States. The Intangibles Tax is being phased out, with reductions of
twenty-five percent (25%) in 1994 and 1995, fifty percent (50%) in 1996, and
seventy-five percent (75%) in 1997, with total repeal effective January 1,
1998.
The Michigan Single Business Tax replaced the tax on corporate and financial
institution income under the Michigan Income Tax, and the Intangible Tax with
respect to those intangibles of persons subject to the Single Business Tax the
income from which would be considered in computing the Single Business Tax.
Persons are subject to the Single Business Tax only if they are engaged in
"business activity" , as defined in the Act. Under the Single Business
Tax, both interest received by the Michigan IM-IT Trust on the underlying
Bonds and any amount distributed from the Michigan IM-IT Trust to a
Unitholder, if not included in determining taxable income for Federal income
tax purposes, is also not included in the adjusted tax base upon which the
Single Business Tax is computed, of either the Michigan IM-IT Trust or the
Unitholders. If the Michigan IM-IT Trust or the Unitholders have a taxable
event for Federal income tax purposes when the Michigan IM-IT Trust disposes
of a Bond (whether by sale, exchange, redemption or payment at maturity) or
the Unitholder redeems or sells his Certificate, an amount equal to any gain
realized from such taxable event which was included in the computation of
taxable income for Federal income tax purposes (plus an amount equal to any
capital gain of an individual realized in connection with such event but
excluded in computing that individual's Federal taxable income) will be
included in the tax base against which, after allocation, apportionment and
other adjustments, the Single Business Tax is computed. The tax base will be
reduced by an amount equal to any capital loss realized from such a taxable
event, whether or not the capital loss was deducted in computing Federal
taxable income in the year the loss occurred. Unitholders should consult their
tax advisor as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of the
Trust, or paid under individual policies obtained by issuers of Bonds, which,
when received by the Unitholders, represent maturing interest on defaulted
obligations held by the Trustee, will be excludable from the Michigan income
tax laws and the Single Business Tax if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. While treatment under the Michigan Intangibles Tax is not
premised upon the characterization of such proceeds under the Internal Revenue
Code, the Michigan Department of Treasury should adopt the same approach as
under the Michigan income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for tax
years beginning after December 31, 1986, the federal adjusted gross income,
the computation base for the Michigan Income Tax, of a Unitholder will be
increased accordingly to the extent such capital gains are realized when the
Michigan IM-IT Trust disposes of a Bond or when the Unitholder redeems or
sells a Unit, to the extent such transaction constitutes a taxable event for
Federal income tax purposes.
Minnesota Trusts
In the early 1980's the State of Minnesota experienced financial difficulties
due to a downturn in the State's economy resulting from the national
recession. As a consequence, the State's revenues were significantly lower
than anticipated in the July 1, 1979 to June 30, 1981 biennium and the July 1,
1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and increased the
State sales tax, increased income taxes (by increasing rates and eliminating
deductions) and reduced appropriations and deferred payment of State aid,
including appropriations for and aids to local governmental units. The State's
fiscal problems affected other governmental units within the State, such as
local government, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases, revenues of
local governmental units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's Corporation reduced
its rating on the State's outstanding general obligation bonds from AAA to AA+
in August 1981 and to AA in March 1982. Moody's Investors Service, Inc.
lowered its rating on the State's outstanding general obligation bonds from
Aaa to Aa in April 1982. The State's economy recovered in the July 1, 1983 to
June 30, 1985 biennium, and substantial reductions in the individual income
tax were enacted in 1984 and 1985. Standard & Poor's raised its rating on the
State's outstanding general obligation bonds to AA+ in January 1985. In 1986,
1987, 1991, 1992 and 1993, legislation was required to eliminate projected
budget deficits by raising additional revenue, reducing expenditures,
including aids to political subdivisions and higher education, reducing the
State's budget reserve (cash flow account), imposing a sales tax on purchases
by local governmental units, and making other budgetary adjustments. A budget
forecast released by the Minnesota Department of Finance on March 1, 1994
projects a balanced General Fund at the end of the current biennium, June 30,
1995, plus an increase in the State's cash flow account from $360 million to
$500 million. Total projected expenditures and transfers for the biennium are
$17.0 billion. The forecast also projects, however, a shortage of $29.5
million in the Local Government Trust Fund at June 30, 1995, against total
projected expenditures from the Fund of $1.8 billion for the biennium.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect
to Bonds that are revenue obligations of the issuer and not general
obligations of the State, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability
of the Bonds or the ability of the respective obligors to pay interest on and
principal of the Bonds.
At the time of the closing for each Minnesota Trust, Special Counsel to each
Minnesota Trust for Minnesota tax matters rendered an opinion under then
existing Minnesota income tax law applicable to taxpayers whose income is
subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting of (i)
interest from bonds issued by the State of Minnesota and its political and
governmental subdivisions, municipalities and governmental agencies and
instrumentalities and bonds issued by possessions of the United States which
would be exempt from federal and Minnesota income taxation when paid directly
to an individual, trust or estate (the "Bonds", (ii) gain on the
disposition of such Bonds, and (iii) proceeds paid under certain insurance
policies issued to the Trustee or to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held by the
Trustee.
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross income
for federal income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Minnesota that is applicable to individuals, trusts and
estates (the "Minnesota Income Tax". It should be noted that interest
on the Bonds is subject to tax in the case of corporations subject to the
Minnesota Corporate Franchise Tax or the Corporate Alternative Minimum Tax and
is a factor in the computation of the Minimum Fee applicable to financial
institutions. The opinion set forth below does not address the taxation of
persons other than full time residents of Minnesota.
The Minnesota State Legislature recently enacted legislation that provides
that interest received on certain Minnesota municipal bonds issued on or after
July 1, 1995 will be subject to Minnesota income taxation. The Governor of
Minnesota must sign the legislation in order to make it law. No prediction can
be made regarding whether the Governor will sign such legislation. Unitholders
are advised to consult their own tax advisors regarding the tax consequences
regarding this legislation.
The Minnesota Trust is not an association taxable as a corporation and each
Unitholder of the Minnesota Trust will be treated as the owner of a pro rata
portion of the Minnesota Trust, and the income of such portion of the
Minnesota Trust will therefore be treated as the income of the Unitholder for
Minnesota Income Tax purposes;
Income on the Bonds which is exempt from the Minnesota Income Tax when
received by a Unitholder of the Minnesota Trust and which would be exempt from
the Minnesota Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the Minnesota Trust and
distributed to such Unitholder;
To the extent that interest on the Bonds, if any, which is includible in the
computation of "alternative minimum taxable income" for federal income
tax purposes, such interest will also be includible in the computation of "
alternative minimum taxable income" for purposes of the Minnesota
Alternative Minimum Tax imposed on individuals, estates and trusts and on
corporations;
Each Unitholder of the Minnesota Trust will recognize gain or loss for
Minnesota Income Tax purposes if the Trustee disposes of a Bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells Units of
the Minnesota Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for federal income tax purposes;
Tax cost reduction requirements relating to amortization of bond premium may,
under some circumstances, result in Unitholders realizing taxable gain for
Minnesota Income Tax purposes when their Units are sold or redeemed for an
amount equal to or less than their original cost;
Proceeds, if any, paid under individual insurance policies obtained by issuers
of Bonds or the Trustee which represent maturing interest on defaulted
obligations held by the Trustee will be excludible from Minnesota net income
if, and to the same extent as, such interest would have been so excludible
from Minnesota net income if, and to the same extent as, such interest would
have been so excludible if paid in the normal course by the issuer of the
defaulted obligation provided that, at the time such policies are purchased,
the amounts paid for such policies are reasonable, customary and consistent
with the reasonable expectation that the issuer of the bonds, rather than the
insurer, will pay debt service on the bonds; and
To the extent that interest derived from the Minnesota Trust by a Unitholder
with respect to any Possession Bonds is excludible from gross income for
federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a and 48 U.S.C. Section 1403, such interest will not be subject to
either the Minnesota Income Tax or the Minnesota alternative minimum tax
imposed on individuals, estates and trusts. It should be noted that interest
relating to Possession Bonds is subject to tax in the case of corporations
subject to the Minnesota Corporate Franchise Tax or the Corporate Alternative
Minimum Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinions to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Missouri Trusts
The following discussion regarding constitutional limitations and the economy
of the State of Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in Missouri.
Currently, Missouri has a population of over 5 million people. Missouri's
population has climbed steadily upward, averaging an increase of approximately
6% each decade. Population projections indicate by the year 2010, there will
be about 5.5 million people in Missouri, a continuation of the steady,
moderate growth which has been the trend. Farming plays a vital role in
Missouri's economy. Cash receipts from sales of crops and livestock average
$3.8 billion annually. These cash receipts come from a variety of agricultural
commodities produced in the State. The largest portion of the State's
agricultural income comes from the production of meat animals (36.6%). Oil
crops account for 18.9%; feed crops 13.3%; dairy products 8.6%; poultry and
eggs 11.2%; food grains 4.0%; miscellaneous crops 3.3%; cotton 3.4% and
miscellaneous 0.7%.
According to data obtained by the Missouri Division of Employment Security, in
1993 over two million workers had nonagricultural jobs in Missouri. Nearly 27%
of these workers were employed in services, approximately 24% were employed in
wholesale and retail trade, and 17% were employed in manufacturing. In the
last ten years, Missouri has experienced a significant increase in employment
in the service sector and in wholesale and retail trade. In 1993, per capita
personal income in Missouri was $19,463, a 2.6% increase over the 1992 figure
of $18,970. For the United States as a whole, per capita income in 1993 was
$20,817, a 3.6% increase over the 1992 per capita income of $20,105.
The total value of Missouri's annual mineral production in 1992 exceeded $1.1
billion. The State ranked first nationally in the production of lime and lead.
It ranked second in production of crude iron oxide pigments; third in barite,
fire clay and iron pigments; fourth in zinc; fifth in portland cement; sixth
in copper and eighth in sliver. Mining employment totaled 4,700 jobs. Missouri
ranks 11th in the nation in the production of non-fuel minerals.
Although the June 1993 revenue estimate had been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due primarily
to delayed spending for desegregation capital projects. The downward revision
in revenues was considered necessary because of weak economic performance, and
more importantly an economic outlook for the second half of Fiscal Year 1993
which projected slower growth than was anticipated in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri were
obtained from individual income taxes (53.1%), sales and use taxes (30.0%),
corporate income taxes (5.9%) and county foreign insurance taxes (3.0%). Major
expenditures for Fiscal Year 1994 included elementary and secondary education
(30.6%), human services (25.4%), higher education (14.8%), desegregation
(8.9%), corrections and public safety (5.1%) and judiciary and general
assembly (2.7%).
The Fiscal Year 1994 budget balanced resources and obligations based on the
consensus revenue and refund estimate and an opening balance resulting from
continued withholdings and delayed spending for desegregation capital
projects. The total general revenue operating budget for Fiscal Year 1994
exclusive of desegregation is $3,844.6 million. The court-ordered
desegregation estimate in $377.7 million, an increase of $30.7 million over
the revised Fiscal Year 1993 estimate.
For Fiscal Year 1995 revenues are projected at $5,225.5 million. This does not
include $64 million in transfers or a carryover balance of approximately
$274.6 million. Expenditures are projected at $5,270.8 million, including $58
million reserved for supplemental appropriations for Fiscal Year 1995.
Legislation enacted in 1989 required any surplus resulting from revenues
raised net of refunds and revenues lost to be deposited in the Budget
Stabilization (Rainy Day) Fund. The fund was used to pay general revenue costs
associated with the floods of 1993 and will be replenished (subject to
appropriation) to the pre-flood level of $28.4 million.
Legislation enacted in 1983 and a Constitutional Amendment passed in 1986
created a Cash Operating Reserve Fund to meet cash flow requirements of the
State. A total of $130 million in general revenue was transferred to the Fund
in Fiscal Year 1985 beginning balance was $202.2 million.
According to the United States Bureau of Labor Statistics, the 1993
unemployment rate in Missouri was 6.4% and the 1994 rate was 4.9%. Although
not strictly comparable, the preliminary seasonally adjusted rate for July of
1995 was 5.0%.
Currently, Moody's Investors Service rates Missouri general obligation bonds
"Aaa" and Standard & Poor's rates Missouri general obligation bonds
"AAA" . Although these ratings indicate that the State of Missouri is
in relatively good economic health, there can be, of course, no assurance that
this will continue or that particular bond issues may not be adversely
affected by changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Missouri IM-IT Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri IM-IT Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri IM-IT Trust will consist of debt obligations issued
by or on behalf of the State of Missouri (the "State" or counties,
municipalities, authorities or political subdivisions thereof (the "
Missouri Bonds" or by the Commonwealth of Puerto Rico, Guam and the
United States Virgin Islands (the "Possession Bonds" (collectively,
the "Bonds".
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Missouri IM-IT Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for Federal income tax purposes and (iii) interest on the
Missouri Bonds, if received directly by a Unitholder, would be exempt from the
Missouri income tax applicable to individuals and corporations ("Missouri
state income tax". The opinion set forth below does not address the
taxation of persons other than full time residents of Missouri.
The Missouri IM-IT Trust is not an association taxable as a corporation for
Missouri income tax purposes, and each Unitholder of the Missouri IM-IT Trust
will be treated as the owner of a pro rata portion of the Missouri IM-IT Trust
and the income of such portion of the Missouri IM-IT Trust will be treated as
the income of the Unitholder for Missouri state income tax purposes.
Interest paid and original issue discount, if any, on the Bonds which would be
exempt from the Missouri state income tax if received directly by a Unitholder
will be exempt from the Missouri state income tax when received by the
Missouri IM-IT Trust and distributed to such Unitholder; however, no opinion
is expressed herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri IM-IT Trust and
distributed to Unitholders under any other tax imposed pursuant to Missouri
law, including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
Each Unitholder of the Missouri IM-IT Trust will recognize gain or loss for
Missouri state income tax purposes if the Trustee disposes of a bond (whether
by redemption, sale, or otherwise) or if the Unitholder redeems or sells Units
of the Missouri IM-IT Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for Federal income tax purposes.
Due to the amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some circumstances, may
realize taxable gain when his or her Units are sold or redeemed for an amount
less than or equal to their original cost.
Any insurance proceeds paid under policies which represent maturing interest
on defaulted obligations which are excludable from gross income for Federal
income tax purposes will be excludable from the Missouri state income tax to
the same extent as such interest would have been paid by the issuer of such
Bonds held by the Missouri IM-IT Trust; however, no opinion is expressed
herein regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri IM-IT Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law, including
but not limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
The Missouri state income tax does not permit a deduction of interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Trust, the interest on which is exempt from such Tax.
The Missouri IM-IT Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of the Bonds
held by the Missouri IM-IT Trust will not generally be subject to the Kansas
City, Missouri Earnings and Profits Tax or the City of St. Louis Earnings Tax
(except that no opinion is expressed in the case of certain Unitholders,
including corporations, otherwise subject to the St. Louis City Earnings Tax).
New Jersey Trusts
As described above, the New Jersey IM-IT Trust consists of a portfolio of
Bonds. The Trust is therefore susceptible to political, economic or regulatory
factors affecting issuers of the Bonds. The following information provides
only a brief summary of some of the complex factors affecting the financial
situation in New Jersey (the "State" and is derived from sources that
are generally available to investors and is believed to be accurate. It is
based in part on information obtained from various State and local agencies in
New Jersey. No independent verification has been made of any of the following
information.
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 people per square mile, it is the most
densely populated of all the states. The state's economic base is
diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita income has been
well above the national average, and in 1993 the State ranked second among
states in per capita personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and
1989 employment in New Jersey's manufacturing sector failed to benefit from
the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum.
In the meantime, the prolonged fast growth in the State in the mid 1980s
resulted in a tight labor market situation, which has led to relatively high
wages and housing prices. This means that, while the incomes of New Jersey
residents are relatively high, the State's business sector has become more
vulnerable to competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition,
the national recession caused an employment downturn in such previously
growing sectors as wholesale trade, retail trade, finance, utilities and
trucking and warehousing. Reflecting the downturn, the rate of unemployment in
the State rose from a low of 3.6% during the first quarter of 1989 to an
estimated 6.1% in November 1995, which is higher than the national average of
5.6% in November 1995. Economic recovery is likely to be slow and uneven in
New Jersey, with unemployment receding at a correspondingly slow pace, due to
the fact that some sectors may lag due to continued excess capacity. In
addition, employers even in rebounding sectors can be expected to remain
cautious about hiring until they become convinced that improved business will
be sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain
other fees are pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1993, there was a total authorized bond indebtedness of
approximately $8.98 billion, of which $3.6 billion was issued and outstanding,
$4.0 billion was retired (including bonds for which provision for payment has
been made through the sale and issuance of refunding bonds) and $1.38 billion
was unissued. The appropriation for the debt service obligation on such
outstanding indebtedness was $103.5 million for fiscal year 1994.
New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. At the end of fiscal year 1989,
there was a surplus in the State's general fund (the fund into which all
State revenues not otherwise restricted by statute are deposited and from
which appropriations are made) of $411.2 million. At the end of fiscal year
1990, there was a surplus in the general fund of $1 million. At the end of
fiscal year 1991, there was a surplus in the general fund of $1.4 million. New
Jersey closed its fiscal year 1992 with a surplus of $760.8 million. It is
estimated that New Jersey closed its fiscal year 1993 with a surplus of $937.4
million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the increase
in the State's sales and use tax rate from 6% to 7% and the elimination of
exemptions for certain products and services not previously subject to the
tax, such as telephone calls, paper products (which has since been
reinstated), soaps and detergents, janitorial services, alcoholic beverages
and cigarettes. At the time of enactment, it was projected that these taxes
would raise approximately $1.5 billion in additional revenue. Projections and
estimates of receipts from sales and use taxes, however, have been subject to
variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the form of
an increased state income tax on individuals. At the time of enactment, it was
projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead
rebate program and state assumption of welfare and social services costs.
Projections and estimates of receipts from income taxes, however, have also
been subject to variance in recent fiscal years. Under the legislation, income
tax rates increased from their previous range of 2% to 3.5% to a new range of
2% to 7%, with the higher rates applying to married couples with incomes
exceeding $70,000 who file joint returns, and to individuals filing single
returns with incomes of more than $35,000.
The Florio administration had contended that the income tax package will help
reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion was
proposed to be sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from 7%
to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates took effect. Governor Whitman
recently signed into law further reductions up to 15% for some taxpayers
effective January 1, 1996, completing her campaign promise to reduce income
taxes by up to 30% for most taxpayers within three years.
On June 30, 1995, Governor Whitman signed the New Jersey Legislature's $16.0
billion budget for Fiscal Year 1996. The balanced budget, which includes $541
million in surplus, is $300 million more than the 1995 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect the estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are cases challenging the following:
the formula relating to State aid to public schools, the method by which the
State shares with its counties maintenance recoveries and costs for residents
in State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous waste
sites and to compensate other persons for damages incurred as a result of
hazardous waste discharge) based on Federal preemption, various provisions,
and the constitutionality of the Fair Automobile Insurance Reform Act of 1990,
the State's role in a consent order concerning the construction of a resource
facility in Passaic County, actions taken by the New Jersey Bureau of
Securities against an individual, the State's actions regarding alleged
chromium contamination of State-owned property in Hudson County, the issuance
of emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters could have
the potential for either a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure for
these claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds
"Aaa" and "AAA" , respectively. On July 3, 1991, however,
Standard and Poor's Corporation downgraded New Jersey general obligation
bonds to "AA+." On June 4, 1992, Standard and Poor's Corporation
placed New Jersey general obligation bonds on CreditWatch with negative
implications, citing as its principal reason for its caution the unexpected
denial by the federal government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These funds were
critical to closing a $1 billion gap in the State's $15 billion budget for
fiscal year 1992 which ended on June 30, 1992. Under New Jersey state law, the
gap in the budget was required to be closed before the new budget year began
on July 1, 1992. Standard and Poor's suggested the State could close fiscal
1992's budget gap and help fill fiscal 1993's hole by a reversion of $700
million of pension contributions to its general fund under a proposal to
change the way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to meet
lawmakers' revenue projections. It also remained concerned about the recent
federal ruling leaving in doubt how much the State was due in retroactive
Medicaid reimbursements and a ruling by a federal judge, now on appeal, of the
State's method for paying for uninsured hospital patients. However, on July
27, 1994, Standard and Poor's announced that it was changing the State's
outlook from negative to stable due to a brightening of the State's prospects
as a result of Governor Whitman's effort to trim spending and cut taxes,
coupled with an improving economy. Standard and Poor's reaffirmed its "
AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aa1," stating that the reduction
reflected a developing pattern of reliance on nonrecurring measures to achieve
budgetary balance, four years of financial operations marked by revenue
shortfalls and operating deficits, and the likelihood that serious financial
pressures will persist. On August 5, 1994, Moody's reaffirmed its "
Aa1" rating, citing on the positive side New Jersey's broad-based
economy, high income levels, history of maintaining a positive financial
position and moderate (albeit rising) debt ratios, and on the negative side, a
continued reliance on one-time revenue and a dependence on pension-related
savings to achieve budgetary balance.
At the time of the closing for each New Jersey Trust, Special Counsel to each
New Jersey Trust for New Jersey tax matters rendered an opinion under then
existing New Jersey income tax law applicable to taxpayers whose income is
subject to New Jersey income taxation substantially to the effect that:
The New Jersey IM-IT Trust will be recognized as a trust and not an
association taxable as a corporation. The New Jersey IM-IT Trust will not be
subject to the New Jersey Corporation Business Tax or the New Jersey
Corporation Income Tax.
With respect to the non-corporate Unitholders who are residents of New Jersey,
the income of the New Jersey IM-IT Trust which is allocable to each such
Unitholder will be treated as the income of such Unitholder under the New
Jersey Gross Income Tax. Interest on the underlying Bonds which would be
exempt from New Jersey Gross Income Tax if directly received by such
Unitholder will retain its status as tax-exempt interest when received by the
New Jersey IM-IT Trust and distributed to such Unitholder. Any proceeds paid
under the insurance policy issued to the Trustee of the New Jersey IM-IT Trust
with respect to the Bonds or under individual policies obtained by issuers of
Bonds which represent maturing interest on defaulted obligations held by the
Trustee will be exempt from New Jersey Gross Income Tax if, and to the same
extent as, such interest would have been so exempt if paid by the issuer of
the defaulted obligations.
A non-corporate Unitholder will not be subject to the New Jersey Gross Income
Tax on any gain realized either when the New Jersey IM-IT Trust disposes of a
Bond (whether by sale, exchange, redemption, or payment at maturity), when the
Unitholder redeems or sells his Units or upon payment of any proceeds under
the insurance policy issued to the Trustee of the New Jersey IM-IT Trust with
respect to the Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by the
Trustee. Any loss realized on such disposition may not be utilized to offset
gains realized by such Unitholder on the disposition of assets the gain on
which is subject to the New Jersey Gross Income Tax.
Units of the New Jersey IM-IT Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law or the New Jersey
Estate Tax Law.
If a Unitholder is a corporation subject to the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, interest from the Bonds in
the New Jersey IM-IT Trust which is allocable to such corporation will be
includable in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, less any interest expense
incurred to carry such investment to the extent such interest expense has not
been deducted in computing Federal taxable income. Net gains derived by such
corporation on the disposition of the Bonds by the New Jersey IM-IT Trust or
on the disposition of its Units will be included in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax. Any proceeds paid under the insurance policy issued to the Trustee
of the New Jersey IM-IT Trust with respect to the Bonds or under individual
policies obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee will be
included in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax if, and to the same extent
as, such interest or proceeds would have been so included if paid by the
issuer of the defaulted obligations.
New Mexico Trusts
New Mexico is the nation's fifth largest State in terms of geographic size. As
of 1989 the federal government owned 34.1% of New Mexico's land, State
government, 11.8% and Indian tribes, 8.3%, leaving 45.8% in private ownership.
New Mexico has 33 counties and 99 incorporated areas.
Major industries in New Mexico are energy resources (crude petroleum, natural
gas, uranium, and coal), tourism, services, arts and crafts,
agriculture-agribusiness, government (including military), manufacturing, and
mining. Major scientific research facilities at Los Alamos, Albuquerque and
White Sands are also a notable part of the State's economy. New Mexico has a
thriving tourist industry.
According to a June 1991 report of the Bureau of Business and Economic
Research of the University of New Mexico ("BBER", New Mexico's recent
economic growth has been "subdued" and it appears that it will slow
even further before a turnaround occurs. Economic growth in New Mexico was
strong in 1989 and the first half of 1990, but declined substantially in the
third and fourth quarters of 1990. Among the localized events impacting New
Mexico's economy during 1990 were the curtailment of government funding for
fusion research at Los Alamos National Laboratory and for the Star Wars
free-electron laser at White Sands Missile Range and Los Alamos (loss of 600
jobs in the aggregate); the move from Kirtland Air Force Base of a contract
management unit (200 jobs); the generally tight credit conditions,
particularly for land development and construction spending, which followed in
the wake of Resolution Trust Corporation takeovers of most of New Mexico's
major savings and loan associations; and oil prices which kept oil production
in the State on the decline.
Agriculture is a major part of the state's economy. As a high, relatively dry
region with extensive grasslands, New Mexico is ideal for raising cattle,
sheep, and other livestock. Because of irrigation and a variety of climatic
conditions, the state's farmers are able to produce a diverse assortment of
products. New Mexico's farmers are major producers of alfalfa hay, wheat,
chili peppers, cotton, fruits, and pecans. Agricultural businesses include
chili canneries, wineries, alfalfa pellets, chemicals and fertilizer plants,
farm machinery, feed lots, and commercial slaughter plants.
New Mexico nonagricultural employment growth was only 2.3% in 1990. During the
first quarter of 1991, growth was 1.3% compared to the first quarter of 1990
(net increase of 7,100 jobs), following a 1.2% increase in the fourth quarter
of 1990. These increases are about half the long-term trend growth rate of
2.6% of the 1947-1990 period. Income growth remained relatively strong,
increasing 7.1% in the fourth quarter of 1990 (compared to a national increase
of 5.9%).
The services sector continued to be the strongest in the State, accounting for
almost half of new jobs in the first quarter of 1991, a 2.7% growth. Business
services, health services and membership organizations provided the bulk of
services growth. The trade and government sectors had much weaker growth in
the first quarter of 1991, with 1.2% and 1.0% growth rates, respectively.
The mining sector added more than 350 jobs during 1990, most in oil and gas.
Oil well completions increased, even though oil production has been on a slow
decline. Gas well completions and gas production have also grown, as producers
continued to take advantage of the coal seam gas tax credit, which was
available through 1992.
Construction employment declined for 21 consecutive quarters through the first
quarter of 1991, but was down only 0.4% in the first quarter of 1991, after
having averaged a 4.5% decline for each of the previous twenty quarters.
Housing construction remains depressed, with new housing unit authorizations
during 1990, both single family and multifamily, at their lowest levels in
more than fifteen years.
The manufacturing sector showed a small increase (1.3%) during 1990, while
finance/insurance/real estate and transportation/communications/ utilities
demonstrated small declines (1.0% and 0.9%, respectively).
The foregoing information constitutes only a brief summary of information
about New Mexico. It does not describe the financial difficulties which may
impact certain issuers of Bonds and does not purport to be a complete or
exhaustive description of adverse conditions to which the issuers in the New
Mexico IM-IT Trust are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are not
within the control of the issuers of Bonds, could have an adverse impact on
the financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of Bonds,
the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the New Mexico IM-IT Trust to pay
interest on or principal of the bonds.
For a discussion of the Federal tax status of income earned on New Mexico
Trust Units, see "Other Matters--Federal Tax Status" .
The assets of the New Mexico IM-IT Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico ("New
Mexico" or counties, municipalities, authorities or political
subdivisions thereof (the "New Mexico Bonds", and by or on behalf of
the government of Puerto Rico, the government of the Guam, or the government
of the Virgin Islands (collectively the "Possession Bonds"
(collectively the New Mexico Bonds and the Possession Bonds shall be referred
to herein as the "Bonds" the interest on which is expected to qualify
as exempt from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the New Mexico IM-IT Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for federal income tax purposes and (iii) interest on the Bonds,
if received directly by a Unitholder, would be exempt from the New Mexico
income taxes applicable to individuals and corporations (collectively, the
"New Mexico State Income Tax". At the respective times of issuance of
the Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, with respect to the Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the New Mexico State Income Tax. Neither the Sponsor nor its
counsel has made any review for the New Mexico IM-IT Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions
rendered in connection therewith. The opinion set forth below does not address
the taxation of persons other than full time residents of New Mexico.
In the opinion of Chapman and Cutler, Special Counsel to the Fund for New
Mexico tax matters, under existing law as of the date of this Prospectus and
based upon the assumptions set forth above:
The New Mexico IM-IT Trust will not be subject to tax under the New Mexico
State Income Tax.
Income on the Bonds which is exempt from the New Mexico State Income Tax when
received by the New Mexico IM-IT Trust, and which would be exempt from the New
Mexico State Income Tax if received directly by a Unitholder, will retain its
status as exempt from such tax when received by the New Mexico IM-IT Trust and
distributed to such Unitholder provided that the New Mexico Trust complies
with the reporting requirements contained in the New Mexico State Income Tax
regulations.
To the extent that interest income derived from the New Mexico IM-IT Trust by
a Unitholder with respect to Possession Bonds is excludable from gross income
for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to New Mexico State Income Tax.
Each Unitholder will recognize gain or loss for New Mexico Income Tax purposes
if the Trustee disposes of a bond (whether by redemption, sale or otherwise)
or if the Unitholder redeems or sells Units of the New Mexico IM-IT Trust to
the extent that such a transaction results in a recognized gain or loss to
such Unitholder for federal income tax purposes.
The New Mexico State Income Tax does not permit a deduction of interest paid
on indebtedness or other expenses incurred (or continued) in connection with
the purchase or carrying of Units in the New Mexico IM-IT Trust to the extent
that interest income related to the ownership of Units is exempt from the New
Mexico State Income Tax.
Investors should consult their tax advisors regarding collateral tax
consequences under New Mexico law relating to the ownership of the Units,
including, but not limited to, the inclusion of income attributable to
ownership of the Units in "modified gross income" for purposes of
determining eligibility for and the amount of the low income comprehensive tax
rebate, the child day care credit, and the elderly taxpayers' property tax
rebate and the applicability of other New Mexico taxes, such as the New Mexico
estate tax.
New York Trusts
A resident of New York State (or New York City) will be subject to New York
State (or New York City) personal income tax with respect to gains realized
when New York Obligations held in the New York IM-IT Trust are sold, redeemed
or paid at maturity or when his Units are sold or redeemed, such gain will
equal the proceeds of sale, redemption or payment less the tax basis of the
New York Obligation or Unit (adjusted to reflect (a) the amortization of
premium or discount, if any, on New York Obligations held in the Trust, (b)
accrued original issue discount, with respect to each New York Obligation
which, at the time the New York Obligation was issued had original issue
discount, and (c) the deposit of New York Obligations with accrued interest in
the Trust after the Unitholder's settlement date).
Interest or gain from the New York IM-IT Trust derived by a Unitholder who is
not a resident of New York State (or New York City) will not be subject to New
York State (or New York City) personal income tax, unless the Units are
property employed in a business, trade, profession or occupation carried on in
New York State (or New York City).
Amounts paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will be
excludable from income for New York State and New York City income tax
purposes, if and to the same extent as, such interest would have been
excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entire net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part) of
the interest on such indebtedness will not be deductible for New York State
and New York City tax purposes. The purchase of Units may be considered to
have been made with borrowed funds even though such funds are not directly
traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York IM-IT Trust includes obligations issued by New
York State (the "State", by its various public bodies (the "
Agencies", and/or by other entities located within the State, including
the City of New York (the "City".
Some of the more significant events relating to the financial situation in New
York are summarized below. This section provides only a brief summary of the
complex factors affecting the financial situation in New York and is based in
part on Official Statements issued by, and on other information reported by
the State, the City and the Agencies in connection with the issuance of their
respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued throughout
the State's 1990-91 fiscal year and was followed by a period of weak economic
growth during the 1991 calendar year. For calendar year 1992, the national
economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow faster
than 1992, but still at a very moderate rate, as compared to other recoveries.
The national recession has been more severe in the State because of factors
such as a significant retrenchment in the financial services industry,
cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approved a $32.08
billion budget. Following enactment of the budget the 1993-94 State Financial
Plan was formulated on April 16, 1993. This Plan projects General Fund
receipts and transfers from other funds at $32.367 billion and disbursements
and transfers to other funds at $32.300 billion. In comparison to the
Governor's recommended Executive Budget for the 1993-94 fiscal year, as
revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
While a portion of the increased receipts was the result of a $487 million
increase in the State's 1992-93 positive year-end margin at March 31, 1993 to
$671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected additional
payments of $200 million from the Federal government as reimbursements for
indigent medical care, (iii) the early payment of $50 million of personal tax
returns in 1992-93 which otherwise would have been paid in 1993-94; offset by
(iv) the State Legislature's failure to enact $195 million of additional
revenue-raising recommendations proposed by the Governor. There can be no
assurances that all of the projected receipts referred to above will be
received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can be
expected. To offset a portion of such reductions, the 1993-94 State Financial
Plan contains a package of mandate relief, cost containment and other
proposals to reduce the costs of many programs for which local governments
provide funding. There can be no assurance, however, that localities that
suffer cuts will not be adversely affected, leading to further requests for
State financial assistance.
There can be no assurance that the State will not face substantial potential
budget gaps in the future resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions
to align recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit to the
refund reserve account of $671 million, General Fund receipts in 1992-93 would
have been $716 million higher than originally projected. This year-end deposit
effectively reduced 1992-93 receipts by $671 million and made those receipts
available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the deposit
to the refund reserve account discussed above) totalled $30.829 billion, an
increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did not
incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS" on April 28, 1993. The State does not project the need to
issue additional TRANS during the State's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the State's
1993-94 fiscal year will consist of $460 million in general obligation bonds
and $140 million in new commercial paper issuances. In addition, the State
expects to issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has authorized the
issuance of up to $85 million in certificates of participation during the
State's 1993-94 fiscal year for personal and real property acquisitions during
the State's 1993-94 fiscal year. The projection of the State regarding its
borrowings for the 1993-94 fiscal year may change if actual receipts fall
short of State projections or if other circumstances require.
In June 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC", a public benefit
corporation empowered to issue long-term obligations to fund certain payments
to local governments traditionally funded through the State's annual seasonal
borrowing. To date, LGAC has issued its bonds to provide net proceeds of $3.28
billion. LGAC has been authorized to issue additional bonds to provide net
proceeds of $703 million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as a
significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A on April 23,
1993, and S&P's rating stood at A- with a stable outlook on April 26, 1993, an
improvement from S&P's negative outlook prior to April 1993. Previously,
Moody's lowered its rating to A on June 6, 1990, its rating having been A1
since May 27, 1986. S&P lowered its rating from A to A- on January 13, 1992.
S&P's previous ratings were A from March 1990 to January 1992, AA- from August
1987 to March 1990 and A+ from November 1982 to August 1987.
Moody's, in confirming its rating of the State's general obligation bonds, and
S&P, in improving its outlook on such bonds from negative to stable, noted the
State's improved fiscal condition and reasonable revenue assumptions contained
in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and personal
income, and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board" to
review and approve the City's budgets and City four-year financial plans (the
financial plans also apply to certain City-related public agencies (the "
Covered Organizations".
In February 1975, the New York State Urban Development Corporation ("
UDC", which had approximately $1 billion of outstanding debt, defaulted
on certain of its short-term notes. Shortly after the UDC default, the City
entered a period of financial crisis. Both the State Legislature and the
United States Congress enacted legislation in response to this crisis. During
1975, the State Legislature (i) created MAC to assist with long-term financing
for the City's short-term debt and other cash requirements and (ii) created
the State Financial Control Board (the "Control Board" to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations").
Over the past three years, the rate of economic growth in the City has slowed
substantially, and the City's economy is currently in recession. The City
projects, and its current four-year financial plan assumes, a recovery early
in the 1993 calendar year. The Mayor is responsible for preparing the City's
four-year financial plan, including the City's current financial plan. The
City Comptroller has issued reports concluding that the recession of the
City's economy will be more severe and last longer than is assumed in the
financial plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal year
results are projected to be balanced in accordance with generally accepted
accounting principles ("GAAP". The City was required to close
substantial budget gaps in its 1990, 1991 and 1992 fiscal years in order to
maintain balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of the
State Deputy Controller for the City of New York has estimated that under the
modified Financial Plan budget gaps will be $102 million for fiscal year 1994,
$196 million for fiscal year 1995 and $354 million for fiscal year 1996,
primarily due to anticipated higher spending on labor costs.
However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make progress
towards establishing a balanced budget process. The Control Board's report
identified budget gap risks of $1.0 billion, $1.9 billion, $2.3 billion and
$2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-1994 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14, 1993
criticized efforts by the Mayor and City Council to balance the City's budget
which rely primarily on one-shot revenues. The Comptroller added that the
City's budget should be based on "recurring revenues that fund recurring
expenditures." Given the foregoing factors, there can be no assurance that
the City will continue to maintain a balanced budget, or that it can maintain
a balanced budget without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's economic
base.
Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the occurrence
of an annual operating deficit of more than $100 million or the loss of access
to the public credit markets to satisfy the City's capital and seasonal
financial requirements, the Control Board would be required by State law to
exercise certain powers, including prior approval of City financial plans,
proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to balance
its budget and to meet its cash requirements. As a result of the national and
regional economic recession, the State's projections of tax revenues for its
1991 and 1992 fiscal years were substantially reduced. For its 1993 fiscal
year, the State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992 reported a potential
budget deficit of $4.8 billion. If the State experiences revenue shortfalls or
spending increases beyond its projections during its 1993 fiscal year or
subsequent years, such developments could also result in reductions in
projected State aid to the City. In addition, there can be no assurance that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that there will not be adverse effects on the City's cash flow
and additional City expenditures as a result of such delays.
The City's projections set forth in its financial plan are based on various
assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor or the
State Legislature and the cooperation of MAC with respect to various other
actions proposed in such financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. A significant portion of such bond financing is used to reimburse
the City's general fund for capital expenditures already incurred. In
addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public bond
and note sales. In addition, future developments concerning the City and
public discussion of such developments, the City's future financial needs and
other issues may affect the market for outstanding City general obligation
bonds and notes. If the City were unable to sell its general obligation bonds
and notes, it would be prevented from meeting its planned operating and
capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the State
Deputy Comptroller for the City of New York (the "OSDC" and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and
future expenditures may be greater than those forecast in the financial plan.
In addition, the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet
the costs of its expenditure increases and to provide necessary services. It
is reasonable to expect that such reports and statements will continue to be
issued and to engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating results
as reported in accordance with GAAP for the 1992 fiscal year. During the 1990
and 1991 fiscal years, the City implemented various actions to offset a
projected budget deficit of $3.2 billion for the 1991 fiscal year, which
resulted from declines in City revenue sources and increased public assistance
needs due to the recession. Such actions included $822 million of tax
increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification" projected a
balanced budget in accordance with GAAP for the 1992 fiscal year after taking
into account a discretionary transfer of $455 million to the 1993 fiscal year
as the result of a 1992 fiscal year surplus. In order to achieve a balanced
budget for the 1992 fiscal year, during the 1991 fiscal year, the City
proposed various actions for the 1992 fiscal year to close a projected gap of
$3.3 billion in the 1992 fiscal year.
On November 19, 1992, the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan", and which relates to the City, the Board of Education
("BOE" and the City University of New York ("CUNY". The
1993-1996 Financial Plan projects revenues and expenditures of $29.9 billion
each for the 1993 fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993, the
City issued a modification to the 1993-1996 Financial Plan (the "February
Modification". The February Modification projects budget gaps for fiscal
years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8 billion,
respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other actions
to decrease expenditures or increase revenues to maintain a balanced financial
plan.
On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the financial
planning cycle in at least a decade, and concluded that the February
Modification represented a step backward in the City's efforts to bring
recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such litigation
includes, but is not limited to, actions commenced and claims asserted against
the City arising out of alleged constitutional violations, torts, breaches of
contracts, and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the proceedings and claims are
not currently predictable, adverse determinations in certain of them might
have a material adverse effect upon the City's ability to carry out its
financial plan. As of June 30, 1992, legal claims in excess of $341 billion
were outstanding against the City for which the City estimated its potential
future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baa1 and S&P's rating stood at A-. On February 11,
1991, Moody's had lowered its rating from A.
On March 30, 1993, in confirming its Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing imbalance
between the City's expenditures and revenues. The key indication of this
structural imbalance is not necessarily the presence of sizable out-year
budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget is
offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook, stating
that:
The City's key credit factors are marked by a high and growing debt burden,
and taxation levels that are relatively high, but stable. The City's economy
is broad-based and diverse, but currently is in prolonged recession, with slow
growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in aid
from national and state governments. Maintenance of the current rating, and
stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New York City's
single-'A-' rating.
Previously, Moody's had raised its rating to A in May, 1988, to Baa1 in
December, 1985, to Baa in November, 1983 and to Ba1 in November, 1981. S&P had
raised its rating to A- in November, 1987, to BBB+ in July, 1985 and to BBB in
March, 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25
billion in notes then being sold. On April 29, 1991, S&P revised downward its
rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had, respectively, $20.3 billion and
$4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial difficulties
which could adversely affect the ability of such Agencies to make payments of
interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under so-called "
moral obligation" provisions which are non-binding statutory provisions
for State appropriations to maintain various debt service reserve funds) to
appropriate funds on behalf of the Agencies. Moreover, it is expected that the
problems faced by these Agencies will continue and will require increasing
amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur,
would be likely to have a significant adverse effect on investor confidence
in, and therefore the market price of, obligations of the defaulting Agencies.
In addition, any default in payment on any general obligation of any Agency
whose bonds contain a moral obligation provision could constitute a failure of
certain conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen Agencies
that each had outstanding debt of $100 million or more. These eighteen
Agencies had an aggregate of $62.2 billion of outstanding debt, including
refunding bonds, of which the State was obligated under lease-purchase,
contractual obligation or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of
significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the
future.
The State is also engaged in a variety of claims wherein significant monetary
damages are sought. Actions commenced by several Indian nations claim that
significant amounts of land were unconstitutionally taken from the Indians in
violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages in an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York based-brokers incorporated in Delaware. (State
of Delaware v. State of New York.) The State had taken such unclaimed property
under its Abandoned Property Law. The State expects that it may pay a
significant amount in damages during fiscal year 1993-94 but it has indicated
that it has sufficient funds on hand to pay any such award, including funds
held in contingency reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which would be
available to fund such an award which some reports have estimated at $100-$800
million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"
), petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time there
can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial problems
leading to requests for additional State assistance. Both the Revised
1992-1993 State Financial Plan and the recommended 1993-94 State Financial
Plan includes a significant reduction in State aid to localities in such
programs as revenue sharing and aid to education from projected base-line
growth in such programs. It is expected that such reductions will result in
the need for localities to reduce their spending or increase their revenues.
The potential impact on the State of such actions by localities is not
included in projections of State receipts and expenditures in the State's
1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers"
resulted in the creation of the Financial Control Board for the City of
Yonkers (the "Yonkers Board" by the State in 1984. The Yonkers Board
is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1991, the total indebtedness of all localities in the
State was approximately $31.6 billion, of which $16.8 billion was debt of New
York City (excluding $6.7 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Fifteen localities had outstanding indebtedness for state
financing at the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested authorization for
deficit financings. According to the Comptroller, ten local government units
have been authorized to issue deficit financing in the aggregate amount of
$131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some cases
eliminate, Federal funding of some local programs and accordingly might impose
substantial increased expenditure requirements on affected localities. If the
State, New York City or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State, including notes or bonds in the New York IM-IT Trust, could be
adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions, and long-range
economic trends. The longer-range potential problems of declining urban
population, increasing expenditures, and other economic trends could adversely
affect localities and require increasing State assistance in the future.
At the time of the closing for each New York Trust, Special Counsel to each
New York Trust for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be subject to New
York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
Ohio Trusts
As described above, the Ohio IM-IT will invest most of its net assets in
securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of
the State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio Obligations". The Ohio IM-IT is therefore
susceptible to general or particular economic, political or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit"
obligations on which the public issuer itself has no financial responsibility.
This information is derived from official statements of certain Ohio issuers
published in connection with their issuance of securities and from other
publicly available information, and is believed to be accurate. No independent
verification has been made of any of the following information.
Generally, creditworthiness of Ohio Obligations of local issuers is unrelated
to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary,
and is not intended as a discussion of any specific factors that may affect
any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by bond insurance purchased by the issuers, the Ohio IM-IT or other
parties. Ohio Obligations may not be subject to the factors referred to in
this section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count of 10,847,000
indicated a 0.5% population increase from 1980. The Census estimate for 1994
is 11,102,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products
and household appliances. As a result, general economic activity, as in many
other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However,
for the last four years the State rates were below the national rates (5.5%
versus 6.1% in 1994). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio IM-IT portfolio or the ability of particular
obligors to make timely payments of debt service on (or lease payments
relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY" or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund ("GRF"
), for which personal income and sales-use taxes are the major sources. Growth
and depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF" , a cash
and budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-1993, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11,
1991, $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of a continuing uncertain nationwide economic situation, there was projected
and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately
$184 million; the $100.4 million BSF balance, and additional amounts from
certain other funds were transferred late in the FY to the GRF, and
adjustments made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF
spending reductions and subsequent executive and legislative action (a
combination of tax revisions and additional spending reductions). The June 30,
1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to BSF replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals relating to any State obligations.
The 1994-1995 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million has been transferred into the BSF (which had
a January 4, 1996 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on June 28,
1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance with
the appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, has
been transferred to the BSF and other funds including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of the people is,
with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters have
authorized the incurrence of State debt and the pledge to taxes or excises to
its payment. At January 4, 1996, $898 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
awaiting delivery. The only such State debt at that date still authorized to
be incurred were portions of the highway bonds, and the following: (a) up to
$100 million of obligations for coal research and development may be
outstanding at any one time ($45.3 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no
more than $120 million of which may be issued in any calendar year ($685.4
million outstanding or awaiting delivery); and (c) up to $200 million in
general obligation bonds for parks, recreation and natural resources purposes
which may be outstanding at any one time ($47.2 million outstanding, with no
more than $50 million to be issued in any one year).
The Electors approved in the November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more that
$1.2 billion to be outstanding at any time and not more than $220 million to
be issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly that
would submit a constitutional amendment relating to certain other aspects of
State debt. The proposal would authorize, among other things, the issuance of
general obligation debt for a variety of purposes with debt service on all
State general obligation debt and GRF-supported obligations not to exceed 5%
of the preceeding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for certain
purposes, the owners of which do not have the right to have excises or taxes
levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building
Authority, and certain obligations issued by the State Treasurer, $4.5 billion
of which was outstanding at January 4, 1996.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and credit and taxing
power of the State to meeting certain guarantees under the State's tuition
credit program which provides for purchase of tuition credits, for the benefit
of State residents, guaranteed to cover a specified amount when applied to the
cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has
never been implemented, apart from a "guarantee fund" approach funded
especially from program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of
each house or by a majority vote of the electors. It cannot be predicted
whether required Senate concurrence to submission will be received.
State and local agencies issue obligations that are payable from revenues from
or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued)
are limited in duration to the agency's fiscal period, and are renewable only
upon appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
in the range of 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 117 districts
from voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial court
concluded that aspects of the system (including basic operating assistance)
are unconstitutional and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State appealed and a court of
appeals reversed the trial court's findings for plaintiff districts. The case
is now pending on appeal in the Ohio Supreme Court. A small number of the
State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program provides for school
district cash need borrowing directly from commercial lenders, with diversion
of State subsidy distributions to repayment if needed. Recent borrowings under
this program totalled $94.5 million for 27 districts (including $75 million
for one) in FY 1993, and $41.1 million for 28 districts in FY 1994, and $71.1
million for 29 districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cities and villages; for 19 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed
valuation (commonly referred to as the "ten-mill limitation". Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
At the time of the closing for each Ohio Trust, Special Council to each Ohio
Trust for Ohio tax matters rendered an opinion under then existing Ohio income
tax law applicable to taxpayers whose income is subject to Ohio income
taxation substantially to the effect that:
The Ohio IM-IT Trust is not taxable as a corporation or otherwise for purposes
of the Ohio personal income tax, school district income taxes in Ohio, the
Ohio corporation franchise tax, or the Ohio dealers in intangibles tax.
Distributions with respect to Units of the Ohio IM-IT Trust ("
Distributions" will be treated as the income of the Unitholders for
purposes of the Ohio personal income tax, and school district and municipal
income taxes in Ohio and the Ohio corporation franchise tax in proportion to
the respective interest therein of each Unitholder.
Distributions properly attributable to interest on obligations issued by or on
behalf of the State of Ohio, political subdivisions thereof, or agencies or
instrumentalities thereof ("Ohio Obligations", or by the governments
of Puerto Rico, the Virgin Islands or Guam ("Territorial Obligations"
held by the Trust are exempt from the Ohio personal income tax, school
district and municipal income taxes, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed distributed
to Unitholders.
Distributions properly attributable to proceeds of insurance paid to the Ohio
IM-IT Trust that represent maturing or matured interest on defaulted
obligations held by the Ohio IM-IT Trust and that are excluded from gross
income for federal income tax purposes will be exempt from Ohio personal
income tax, and school district and municipal income taxes in Ohio and the net
income base of the Ohio corporation franchise tax.
Distributions of profit made on the sale, exchange or other disposition by the
Ohio IM-IT Trust of Ohio Obligations including Distributions of "capital
gain dividends" as defined in Section 852(b)(3)(C) of the Code, properly
attributable to the sale, exchange or other disposition of Ohio Obligations
are exempt from Ohio personal income tax, and school district and municipal
income taxes in Ohio, and are excluded from the net income base of the Ohio
corporation franchise tax.
Oklahoma Trusts
Investors in the Oklahoma IM-IT Trust should consider that the economy of the
State has been experiencing difficulties as a result of an economic recession
largely attributable to a decline in the agricultural industry and a rapid
decline that was experienced in the early and mid 1980s in the energy industry
which have, in turn, caused declines in the real estate industry, the banking
industry and most other sectors of the State's economy. Continued low levels
of economic activity, another decline in oil and gas production prices, low
growth in the State's major industries or private or public financial
difficulties could adversely affect Bonds in the Portfolio and consequently
the value of Units in the Oklahoma IM-IT Trust.
Governmental expense budgeting provisions in Oklahoma are conservative,
basically requiring a balanced budget each fiscal year unless a debt is
approved by a vote of the people providing for the collection of a direct
annual tax to pay the debt. Certain limited exceptions include: deficiency
certificates issued in the discretion of the Governor (however, the deficiency
certificates may not exceed $500,000 in any fiscal year); and debts to repel
invasion, suppress insurrection or to defend the State in the event of war.
To ensure a balanced annual budget, the State Constitution provides procedures
for certification by the State Board of Equalization of revenues received in
the previous fiscal year and amounts available for appropriation based on a
determination of revenues to be received by the State in the General Revenue
Fund in the next ensuing fiscal year.
Beginning July 1, 1985, surplus funds were to be placed in a Constitutional
Reserve Fund until the Reserve Fund equals 10% of the General Revenue Fund
certification for the preceding fiscal year.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Oklahoma IM-IT Trust are subject. Additionally,
many factors including national economic, social and environmental policies
and conditions, which are not within the control of the issuers of Bonds,
could affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Oklahoma IM-IT Trust to pay interest on or principal of
the Bonds.
For a discussion of the Federal tax status of income earned on Oklahoma Trust
Units, see "Other Matters--Federal Tax Status" .
The assets of the Oklahoma IM-IT Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oklahoma (the "
State" or counties, municipalities, authorities or political subdivisions
thereof (the "Oklahoma Bonds" or by the Commonwealth of Puerto Rico,
Guam and the United States Virgin Islands (the "Possession Bonds"
(collectively, the "Bonds". At the respective times of issuance of
the Oklahoma Bonds, certain, but not necessarily all, of the issues of the
Oklahoma Bonds may have been accompanied by an opinion of bond counsel to the
respective issuing authorities that interest on such Oklahoma Bonds (the "
Oklahoma Tax-Exempt Bonds" are exempt from the income tax imposed by the
State of Oklahoma that is applicable to individuals and corporations (the "
Oklahoma State Income Tax". The Trust may include Oklahoma Bonds the
interest on which is subject to the Oklahoma State Income Tax (the "
Oklahoma Taxable Bonds". See "Portfolio" which indicates by
footnote which Oklahoma Bonds are Oklahoma Tax-Exempt Bonds (all other
Oklahoma Bonds included in the portfolio are Oklahoma Taxable Bonds).
Neither the Sponsor nor its counsel has independently examined the Bonds to be
deposited in and held in the Trust. However, although no opinion is expressed
herein regarding such matters, it is assumed that: (i) the Bonds were validly
issued, (ii) the interest thereon is excludable from gross income for Federal
income tax purposes and (iii) interest on the Oklahoma Tax-Exempt Bonds, if
received directly by a Unitholder, would be exempt from the Oklahoma State
Income Tax. At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the Oklahoma Tax-Exempt Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the Oklahoma State Income Tax. Neither the Sponsor nor its
counsel has made any review for the Trust of the proceedings relating to the
issuance of the Bonds or of the bases for the opinions rendered in connection
therewith. The opinion set forth below does not address the taxation of
persons other than full time residents of Oklahoma.
In the opinion of Chapman and Cutler, Special Counsel to the Fund for Oklahoma
tax matters, under existing laws as of the date of this Prospectus and based
upon the assumptions set forth above:
For Oklahoma State Income Tax purposes, the Trust is not an association
taxable as a corporation, each Unitholder of the Trust will be treated as the
owner of a pro rata portion of the Trust and the income of such portion of the
Trust will be treated as the income of the Unitholder.
Interest paid and original issue discount, if any, on the Bonds which would be
exempt from the Oklahoma State Income Tax if received directly by a Unitholder
will be exempt from the Oklahoma State Income Tax when received by the Trust
and distributed to such Unitholder. A Unitholder's pro rata portion of any
interest paid and original issue discount, if any, on the Bonds which would be
subject to the Oklahoma State Income Tax if received directly by a Unitholder,
including, for example interest paid and original issue discount, if any, on
the Oklahoma Taxable Bonds, will be taxable to such Unitholder for Oklahoma
State Income Tax purposes when received by the Trust.
To the extent that interest paid and original issue discount, if any, derived
from the Trust by a Unitholder with respect to Possession Bonds is excludable
from gross income for Federal income tax purposes pursuant to 48 U.S.C.
Section 745, 48 U.S.C. Section 1423a, and 48 U.S.C. Section 1403, such
interest paid and original issue discount, if any, will not be subject to the
Oklahoma State Income Tax.
Each Unitholder of the Trust will recognize gain or loss for Oklahoma State
Income Tax purposes if the Trustee disposes of a Bond (whether by redemption,
sale, or otherwise) or if the Unitholder redeems or sells Units of the Trust
to the extent that such a transaction results in a recognized gain or loss to
such Unitholder for Federal income tax purposes. Due to the amortization of
bond premium and other basis adjustments required by the Internal Revenue
Code, a Unitholder, under some circumstances, may realize taxable gain when
his or her Units are sold or redeemed for an amount equal to their original
cost.
Although no opinion is expressed herein, we have been informally advised by
the Oklahoma Tax Commission that any insurance proceeds paid under policies
which represent maturing interest on defaulted obligations which are
excludable from gross income for Federal income tax purposes should be
excludable from the Oklahoma State Income Tax to the same extent as such
interest would have been if paid by the issuer of such Bonds held by the Trust
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the obligations.
The Oklahoma State Income Tax does not permit a deduction of interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in
the Trust, the interest on which is exempt from such tax.
Although no opinion is expressed herein, we have been informally advised by
the Oklahoma Tax Commission that the Trust, in part because of its status as a
"grantor trust" for Federal income tax purposes, should not be subject
to the Oklahoma state franchise tax.
The scope of this opinion is expressly limited to the matters set forth
herein, and we express no other opinions of law with respect to the state or
local taxation of the Trust, the purchase, ownership or disposition of Units
or the Unitholders under Oklahoma law.
Pennsylvania Trusts
Investors should be aware of certain factors that might affect the financial
conditions of the Commonwealth of Pennsylvania. Pennsylvania historically has
been identified as a heavy industry state although that reputation has changed
recently as the industrial composition of the Commonwealth diversified when
the coal, steel and railroad industries began to decline. A more diversified
economy was necessary as the traditionally strong industries in the
Commonwealth declined due to a long-term shift in jobs, investment and workers
away from the northeast part of the nation. The major sources of growth in
Pennsylvania are in the service sector, including trade, medical and the
health services, education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the Commonwealth's
economic structure, accounting for more than $3.6 billion in crop and
livestock products annually, while agribusiness and food related industries
support $39 billion in economic activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1 percent during
the recessionary period from 1980 to 1983. In 1984, the declining trend was
reversed as employment grew by 2.9 percent over 1983 levels. From 1983 to
1990, Commonwealth employment continued to grow each year, increasing an
additional 14.3 percent. For the three years ended 1993, unemployment in the
Commonwealth declined 1.2 percent.
Back to back recessions in the early 1980s reduced the manufacturing sector's
employment levels moderately during 1980 and 1981, sharply during 1982, and
even further in 1983. Non-manufacturing employment has increased steadily
since 1980 to its 1993 level of 81.6 percent of total Commonwealth employment.
Consequently, manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 18.4 percent
of 1993 non-agricultural employment, has fallen behind both the services
sector and the trade sector as the largest single source of employment within
the Commonwealth. In 1993 the services sector accounted for 29.9 percent of
all non-agricultural employment while the trade sector accounted for 22.4
percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise to 6.9 percent
in 1991 and 7.5 percent in 1992. The resumption of faster economic growth
resulted in a decrease in the Commonwealth's unemployment rate to 7.1 percent
in 1993. As of March 1995, the seasonally adjusted unemployment rate for the
Commonwealth was 6.0 percent compared to 5.5 percent for the United States.
The five year period from fiscal 1990 through fiscal 1994 was marked by public
health and welfare costs growing at a rate double the growth rate for all the
state expenditures. Rising caseloads, increased utilization of services and
rising prices joined to produce the rapid rise of public health and welfare
costs at a time when a national recession caused tax revenues to stagnate and
even decline. During the period from fiscal 1989 through fiscal 1993, public
health and welfare costs rose by an average annual rate of 9.4 percent while
tax revenues were growing at an average annual rate of 5.8 percent.
Consequently, spending on other budget programs was restrained to a growth
rate below 4.7 percent and sources of revenues other than taxes became larger
components of fund revenues. Among those sources are transfers from other
funds and hospital and nursing home pooling of contributions to use as federal
matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase enacted for fiscal 1992 brought financial
stability to the General Fund. That tax increase included several taxes with
retroactive effective dates which generated some one-time revenues during
fiscal 1992. The absence of those revenues in fiscal 1993 contributed to the
decline in tax revenues shown for fiscal 1993. Fiscal 1994 revenues increased
4.1 percent, but a decline in other revenues caused by the end of medical
assistance pooled financing in fiscal 1993 held total revenues to a 1.8
percent gain. Expenditures for fiscal 1994 rose by 4.3 percent.
It should be noted that the creditworthiness of obligations issued by local
Pennsylvania issuers may be unrelated to the creditworthiness of obligations
issued by the Commonwealth of Pennsylvania, and there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the
event of default.
Financial information for the principal operating funds of the Commonwealth is
maintained on a budgetary basis of accounting. A budgetary basis of accounting
is used for the purpose of ensuring compliance with the enacted operating
budget and is governed by applicable statutes of the Commonwealth and by
administrative procedures. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting principles ("
GAAP". The budgetary basis financial information maintained by the
Commonwealth to monitor and enforce budgetary control is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
Fiscal 1992 Financial Results. GAAP Basis: During fiscal 1992 the General Fund
reported a $1.1 billion operating surplus. This operating surplus was achieved
through legislated tax rate increases and tax base broadening measures enacted
in August 1991 and by controlling expenditures through numerous cost reduction
measures implemented throughout the fiscal year. As a result of the fiscal
1992 operating surplus, the fund balance increased to $87.5 million and the
unreserved-undesignated deficit dropped to $138.6 million from its fiscal 1991
level of $1,146.2 million.
Budgetary Basis: Total revenues for the fiscal year were $14,516.8 million, a
$2,654.5 million increase over cash revenues during fiscal 1991. Largely due
to the tax revisions enacted for the budget, corporate tax receipts totalled
$3,761.2 million, up from $2,656.3 million in fiscal 1991, sales tax receipts
increased by $302 million to $4,499.7 million, and personal income tax
receipts totalled $4,807.4 million, an increase of $1,443.8 million over
receipts in fiscal 1991.
Spending increases in the fiscal 1992 budget were largely accounted for by
increases for education, social services and corrections programs.
Commonwealth funds for the support of public schools were increased by 9.8
percent to provide a $438 million increase to $4.9 billion for fiscal 1992.
Child welfare appropriations supporting county operated child welfare programs
were increased $67 million, more than 31.5 percent over fiscal 1991. Other
social service areas such as medical and cash assistance also received
significant funding increases as costs rose quickly as a result of the
economic recession and high inflation rates of medical care costs. The costs
of corrections programs, reflecting the marked increase in the prisoner
population, increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with General Fund
appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing transactions.
These pooling transactions replaced $135 million of Commonwealth funds,
allowing total spending under the budget to increase by an equal amount.
Fiscal 1993 Financial Results. GAAP Basis: The fund balance of the General
Fund increased by $611.4 million during the fiscal year, led by an increase in
the unreserved balance of $576.8 million over the prior fiscal year balance.
At June 30, 1993, the fund balance totalled $698.9 and the
unreserved/undesignated balance totalled $64.4 million. The increase in the
fund balance and a return to a positive unreserved-undesignated balance
provided indication of a continuing recovery of the Commonwealth's financial
condition.
Budgetary Basis: The 1993 fiscal year closed with revenues higher than
anticipated and expenditures about as projected, resulting in an ending
unappropriated balance surplus (prior to the ten percent transfer to the Tax
Stabilization Reserve Fund) of $242.3 million, slightly higher than estimated.
Cash revenues were $41.5 million above the budget estimate and totalled
$14.633 billion representing less than a one percent increase over revenues
for the 1992 fiscal year. A reduction in the personal income tax rate in July
1992 and the one-time receipt of revenues from retroactive corporate tax
increases in fiscal 1992 were responsible, in part, for the low revenue growth
in fiscal 1993.
Appropriations less lapses totalled $13.870 billion representing a 1.1 percent
increase over expenditures during fiscal 1992. The low growth in spending is a
consequence of a low rate of revenue growth, significant one-time expenses
during fiscal 1992, increased tax refund reserves to cushion against adverse
decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds.
By state statute, ten percent of the budgetary basis unappropriated surplus at
the end of a fiscal year is to be transferred to the Tax Stabilization Reserve
Fund. The transfer for the fiscal 1993 balance was $24.2 million. The
remaining unappropriated surplus of $218.0 million was carried forward into
the 1994 fiscal year.
Fiscal 1994 Financial Results. GAAP Basis: The fund balance increased $194.0
million due largely to an increased reserve for encumbrances and an increase
in other designated funds. The unreserved-undesignated balance increased by
$14.8 million to $72.2 million. Revenues and other sources increased by 1.8
percent over the prior fiscal year while expenditures and other uses increased
by 4.3 percent. Consequently, the operating surplus declined to $179.4 million
for fiscal 1994 from $686.3 million for fiscal 1993.
Budgetary Basis: Commonwealth revenues during the fiscal year totalled
$15,210.7 million, $38.6 million above the fiscal year estimate, and 3.9
percent over Commonwealth revenues during the previous fiscal year. The sales
tax was an important contributor to the higher than estimated revenues.
Collections from the sales tax were $5.124 billion, a 6.1 percent increase
from the prior fiscal year and $81.3 million above estimate. The strength of
collections from the sales tax offset the lower than budgeted performance of
the personal income tax which ended the fiscal year $74.4 million below
estimate. The shortfall in the personal income tax was largely due to
shortfalls in income not subject to withholding such as interest, dividends
and other income. Tax refunds in fiscal 1994 were reduced substantially below
the $530 million amount provided in fiscal 1993. The higher fiscal 1993 amount
and the reduced fiscal 1994 amount occurred because reserves of approximately
$160 million were added to fiscal 1993 tax refunds to cover potential payments
if the Commonwealth lost litigation known as Philadelphia Suburban Corp v.
Commonwealth. Those reserves were carried into fiscal 1994 until the
litigation was decided in the Commonwealth's favor in December 1993 and
$147.3 million of reserves for tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of all fiscal
1994 appropriation lapses, totalled $14,934.4 million representing a 7.2
percent increase over fiscal 1993 expenditures. Medical assistance and
corrections spending contributed to the rate of spending growth for the fiscal
year.
The Commonwealth maintained an operating balance on a budgetary basis for
fiscal 1994 producing a fiscal year ending unappropriated surplus of $335.8
million. By state statute, ten percent ($33.6 million) of that surplus
transferred to the Tax Stabilization Reserve Fund and the remaining balance
was carried over into the fiscal 1995 fiscal year. The balance in the Tax
Stabilization Reserve Fund as of March 31, 1995 was $65.3 million.
Fiscal 1995 Budget. The approved fiscal 1995 budget provided for $15,665.7
million of appropriations from Commonwealth funds, an increase of 4.0 percent
over appropriations, including supplemental appropriations, for fiscal 1994.
Medical assistance expenditures represent the largest single increase in the
budget ($221 million) representing a nine percent increase over the prior
fiscal year. The budget includes a reform of the state-funded public
assistance program that added certain categories of eligibility to the program
but also limited the availability of such assistance to other eligible
persons. Education subsidies to local school districts were increased by
$132.2 million to continue the increased funding for the poorest school
districts in the state.
Several tax reductions were enacted with the fiscal 1995 budget. Low income
working families will benefit from an increase to the dependent exemption to
$3,000 from $1,500 for the first dependent and from $1,000 for all additional
dependents. A reduction to the corporate net income tax rate from 12.25
percent to 9.99 percent to be phased in over a period of four years was
enacted. A net operating loss provision has been added to the corporate net
income tax and will be phased in over three years with an annual $500,000 cap
on losses used to offset profits. Several other tax changes to the sales tax,
the inheritance tax and the capital stock and franchise tax also were enacted.
Estimated commonwealth revenue reductions from these tax cuts have been raised
from $166.4 million to $173.4 million based on upward revised estimates of
commonwealth revenues for the fiscal 1995 to 6.3 percent, excluding the effect
of the fiscal 1995 tax reductions, and is largely due to actual and
anticipated higher collections of the corporate net income tax, the sales and
use tax and miscellaneous collections.
After a review of the fiscal 1994 budget in January 1995, $64.9 million of
additional appropriation needs were identified for the fiscal year. Of this
amount, the largest are for medical assistance ($21.8 million) and general
assistance cash grants ($10.3 million). The balance of the additional
appropriation needs are for other public welfare programs, educational
subsidies and office relocation costs due to a fire. The supplemental
appropriations requested are proposed to be funded from appropriation lapses
estimated to total $172 million for the fiscal year.
With the revised estimates for revenues, appropriations and lapses for the
1994 fiscal year, an unappropriated balance prior to transfers to the Tax
Stabilization Reserve Fund of $395.5 million is projected, an increase from
the $335.8 million fiscal year 1993 ending balance (prior to transfers).
Fiscal 1996 Budget. The fiscal 1996 budget was approved by the Governor on
June 30, 1995. The budget includes spending growth of 2.7%. It includes a
reduction of the Corporate Net Income Tax from 10.99% to 9.99% retroactive to
January 1, 1995. The budget includes a proportionate increase in funds for
public safety and education and a proportionate decrease in funds for welfare.
Proposed Fiscal 1996 Budget. On February 6, 1996, Pennsylvania Governor Tom
Ridge presented his proposed budget to the General Assembly for the fiscal
year beginning July 1, 1996. Ridge's budget proposes that state spending be
reduced from $16.22 billion to $16.19 billion, a $30 million cut. The proposed
budget provides a $60 million tax cut to spur economic growth, including a new
$30 million Job Creation Tax Credit, and the partial elimination of the sales
tax on computer services. The General Assembly will proceed with its
consideration of the fiscal 1997 budget.
All outstanding general obligation bonds of the Commonwealth are rated AA- by
S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must be obtained
from the rating agencies. There is no assurance that any ratings will continue
for any period of time or that they will not be revised or withdrawn.
The City of Philadelphia ("Philadelphia" is the largest city in the
Commonwealth, with an estimated population of 1,585,577 according to the 1990
Census. Philadelphia functions both as a city of the first class and a county
for the purpose of administering various governmental programs.
For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. The audit findings
for the fiscal year ending June 30, 1992, placed the Cumulative General Fund
balance deficit at $224.9.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA" to assist first class
cities in remedying fiscal emergencies was enacted by the General Assembly and
approved by the Governor in June, 1991. PICA is designed to provide assistance
through the issuance of funding debt to liquidate budget deficits and to make
factual findings and recommendations to the assisted city concerning its
budgetary and fiscal affairs. An intergovernmental cooperation agreement
between Philadelphia and PICA was approved by City Council on January 3, 1992,
and approved by the PICA Board and signed by the Mayor on January 8, 1992. At
this time, Philadelphia is operating under a five year fiscal plan approved by
PICA on April 17, 1995 in which Philadelphia projects a balanced budget in
each of the five years (fiscal years 1996 through 2000) covered by the plan.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. PICA issued $643,430,000 in July 1993 and
$178,675,000 in August 1993 of Special Tax Revenue Bonds to refund certain
general obligation bonds of the City and to fund additional capital projects.
In December 1994, PICA issued $122,020,000 of Special Tax Revenue Bonds to
fund additional capital projects.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated Baa by Moody's
and BBB- by S&P. Any explanation concerning the significance of such ratings
must be obtained from the rating agencies. There is no assurance that any
ratings will continue for any period of time or that they will not be revised
or withdrawn.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of the Bonds in the Pennsylvania IM-IT Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could have an adverse impact on the financial condition of
the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such factors
or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Pennsylvania IM-IT Trust to pay interest on or principal
of the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion under
then existing Pennsylvania income tax law applicable to taxpayers whose income
is subject to Pennsylvania income taxation substantially to the effect that:
Units evidencing fractional undivided interest in the Pennsylvania IM-IT
Trust, which are represented by obligations 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 are not taxable under any of the personal property taxes
presently in effect in Pennsylvania;
distributions of interest income to Unitholders that would not be taxable it
received directly by a Pennsylvania resident are not subject to personal
income tax under the Pennsylvania Tax Reform Code of 1971; nor will such
interest be taxable under the Philadelphia School District Investment Income
Tax imposed on Philadelphia resident individuals;
a Unitholder will have a taxable event under the Pennsylvania state and local
income taxes referred to in the preceding paragraph upon the redemption or
sale of his Units. Units will be taxable under the Pennsylvania inheritance
and estate taxes;
a Unitholder which is a corporation will have a taxable event under the
Pennsylvania Corporate Net Income Tax when it redeems or sells its Units.
Interest income distributed to Unitholders which are corporations is not
subject to Pennsylvania Corporate Net Income Tax or Mutual Thrift Institutions
Tax. However, banks, title insurance companies and trust companies may be
required to take the value of the Units into account in determining the
taxable value of their shares subject to the Shares Tax;
under Act No. 68 of December 3, 1993, gains derived by the Fund from the sale,
exchange or other disposition of Bonds may be subject to Pennsylvania personal
or corporate income taxes. Those gains which are distributed by the Fund to
Unitholders who are individuals may be subject to Pennsylvania Personal Income
Tax. For Unitholders which are corporations, the distributed gains may be
subject to Corporate Net Income Tax or Mutual Thrift Institutions Tax. Gains
which are not distributed by the Fund may nevertheless be taxable to
Unitholders if derived by the Fund from the sale, exchange or other
disposition of Bonds issued on or after February 1, 1994. Gains which are not
distributed by the Fund will remain nontaxable to Unitholders if derived by
the Fund from the sale, exchange or other disposition of Bonds issued prior to
February 1, 1994;
any proceeds paid under insurance policies issued to the Trustee or obtained
by the issuers of the Bonds with respect to the Bonds which represent maturing
interest on defaulted obligations held by the Trustee will be excludable from
Pennsylvania gross income if, and to the same extent as, such interest would
have been so excludable if paid by the issuer of the defaulted obligations; and
the Fund is not taxable as a corporation under Pennsylvania tax laws
applicable to corporations.
On December 3, 1993, changes to Pennsylvania laws affecting taxation of income
and gains from the sale of Commonwealth of Pennsylvania and local obligations
were enacted. Among these changes was the repeal of the exemption from tax of
gains realized upon the sale or other disposition of such obligations. The
Pennsylvania Department of Revenue has issued proposed regulations concerning
these changes. The opinions expressed above are based on our analysis of the
law and proposed regulations but are subject to modification upon review of
final regulations or other guidance that may be issued by the Department of
Revenue or future court decisions.
In rendering its opinion, Special Counsel has not, for timing reasons, made an
independent review of proceedings related to the issuance of the Bonds. It has
relied on Van Kampen American Capital Distributors, Inc. for assurance that
the Bonds have been issued by the Commonwealth of Pennsylvania or by or on
behalf of municipalities or other governmental agencies within the
Commonwealth.
Tennessee Trusts
The following brief summary regarding the economy of Tennessee is based upon
information drawn from publicly available sources and is included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of the Tennessee obligations. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
The State Constitution of Tennessee requires a balanced budget. No legal
authority exists for deficit spending from operating purposes beyond the end
of a fiscal year. Tennessee law permits tax anticipation borrowing but any
amount borrowed must be repaid during the fiscal year for which the borrowing
was done. Tennessee has not issued any debt for operating purposes during
recent years with the exception of some advances which were made from the
Federal Unemployment Trust Fund in 1984. No such advances are now outstanding
nor is borrowing of any type for operating purposes contemplated.
The State Constitution of Tennessee forbids the expenditure of the proceeds of
any debt obligation for a purpose other than the purpose for which it was
authorized by statute. Under State law, the term of bonds authorized and
issued cannot exceed the expected life of the projects being financed.
Furthermore, the amount of a debt obligation cannot exceed the amount
authorized by the General Assembly. The recommended State budget for Fiscal
Year 1994-95 is $12,570,380,800. State revenues are scheduled to be obtained
from taxes, each of which will generate a certain percentage of the total
revenues as follows: sales (54%); franchise and excise (12%); gasoline (11%);
gross receipts and privilege (4%); motor vehicle (3%); income and inheritance
(3%); insurance and banking (3%); tobacco, beer, and alcoholic beverages (2%)
and all other taxes (8%).
For Fiscal Year 1994-95, State revenues are scheduled to be allocated in the
following percentages: education (44%); health and social services (22%);
transportation (11%); law, safety and correction (9%); cities and counties
(8%); general government (3%); resources and regulation (2%) and business and
economic development (1%).
Overall, the economic indicators were positive for Tennessee for 1993. After a
slow start, inflation-adjusted personal income in Tennessee rebounded in the
second quarter, resulting in overall growth of 4.4% from the second quarter of
1992 to the second quarter of 1993. Tennessee's employment also grew in 1993,
although its growth was not as impressive as income growth. Third-quarter
statistics for 1993 show that Tennessee nonagricultural employment was 1.7%
above the same quarter in 1992. In 1994, the Tennessee economy continued to
expand. From December, 1993 to December, 1994 Tennessee's seasonally adjusted
employment grew from 2,395,100 people to 2,567,300 people, while its
unemployment rate decreased from 4.6% to 3.8% over that same period.
An increase in consumer spending is reflected in Tennessee taxable sales,
which grew 10.4% from the third quarter of 1992 to the third quarter of 1993.
Long-term average growth for taxable sales 8.5%, but the distinction between
this figure and the recent 10.4% figure is more substantial than first
appearances suggest because the long-term average includes some periods of
significantly higher inflation than the most resent quarters. Adjusted for
inflation, taxable sales grew by 7.5% from the third quarter of 1992 to the
third quarter of 1993, which is triple the long-term inflation-adjusted
average of 2.5%.
The largest contributor to Tennessee's employment growth is services,
accounting for 40.9% of the employment growth that occurred from the third
quarter of 1992 to the third quarter of 1993. While it is still the most
substantial source of employment growth for Tennessee, services has
historically grown at a higher rate. Similarly, the large trade sector is not
as dominant, contributing 27.8% of employment growth from the third quarter of
1992 to the third quarter of 1993. Another sector that has become less
influential on total employment growth in Tennessee is the finance, insurance,
and real estate industry, which contributed nothing to employment growth
during the year ending in the third quarter of 1993.
Tennessee's general obligation bonds are rated Aaa by Moody's and AA+ by
Standard & Poor's. Tennessee's smallest counties have Moody's lowest rating
due to these rural counties' limited economies that make them vulnerable to
economic downturns. Tennessee's four largest counties have the second highest
of Moody's nine investment grades.
Tennessee is involved in certain legal proceedings that, if decided against
the State, may require the State to make significant future expenditures or
may substantially impair revenues. The Tennessee Supreme Court currently is
reviewing a case in which the lower court found that the Tennessee Department
of Revenue improperly defined non-business earnings for tax purposes. Although
this case involves only $925,000, its outcome could affect at least five other
cases and could have a detrimental impact to Tennessee's revenue base. If the
case is affirmed, Tennessee could lose an estimated $80 million to $100
million a year in corporate income taxes. The Tennessee Supreme Court also may
hear a similar case in which the lower court found that the taxpayer's partial
sale of business holdings resulted in taxable business income. A ruling in
favor of the taxpayer could result in a $10 million tax refund.
Two other tax related cases could also affect the State's financial condition.
A recently filed class-action suit seeks damages in excess of $25 million for
the allegedly illegal collection of sales taxes paid on extended warranty
contracts on motor vehicles. In addition, a coalition of more than a dozen
hospitals is considering a class-action suit to challenge the legality of
Tennessee's Medicaid service tax. Tennessee's hospitals currently pay
approximately $504 million dollars in special taxes.
The foregoing information does not purport to be a complete or exhaustive
description of all the conditions to which the issuers of Bonds in the
Tennessee IM-IT Trust are subject. Many factors including national economic,
social and environmental policies and conditions, which are not within the
control of the issuers of Bonds, could affect or could have an adverse impact
on the financial condition of the State and various agencies and political
subdivisions located in the State. Since certain Bonds in the Tennessee IM-IT
Trust (other than general obligation bonds issued by the State) are payable
from revenue derived from a specific source or authority, the impact of a
pronounced decline in the national economy or difficulties in significant
industries within the State could result in a decrease in the amount of
revenues realized from such source or by such authority and thus adversely
affect the ability of the respective issuers of the Bonds in the Tennessee
IM-IT Trust to pay the debt service requirements on the Bonds. Similarly, such
adverse economic developments could result in a decrease in tax revenues
realized by the State and thus could adversely affect the ability of the State
to pay the debt service requirements of any Tennessee general obligation bonds
in the Tennessee IM-IT Trust. The Sponsor is unable to predict whether or to
what extent such factors or other factors may affect the issuers of Bonds, the
market value or marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Tennessee IM-IT Trust to pay interest on
or principal of the Bonds.
For a discussion of the federal tax status of income earned on Tennessee Trust
Units, see "Other Matters--Federal Tax Status."
The assets of the Tennessee IM-IT Trust will consist of bonds issued by the
State of Tennessee (the "State" or any county or any municipality or
political subdivision thereof, including any agency, board, authority or
commission, the interest on which is exempt from the Hall Income Tax imposed
by the State of Tennessee ("Tennessee Bonds" or by the Commonwealth
of Puerto Rico or its political subdivisions (the "Puerto Rico Bonds"
(collectively, the "Bonds".
Under the recently amended provisions of Tennessee law, a unit investment
trust taxable as a grantor trust for federal income tax purposes is entitled
to special Tennessee State tax treatment (as more fully described below) with
respect to its proportionate share of interest income received or accrued with
respect to the Tennessee Bonds. The recent amendments also provide an
exemption for distributions made by a unit investment trust or mutual fund
that are attributable to "bonds or securities of the United States
government or any agency or instrumentality thereof" ("U.S.
Government, Agency or Instrumentality Bonds". If it were determined that
the Trust held assets other than Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds, a proportionate share of distributions from the Trust
would be taxable to Unitholders for Tennessee Income Tax purposes.
Further, because the recent amendments only provide an exemption for
distributions that relate to interest income, distributions by the Trust that
relate to capital gains realized from the sale or redemption of Tennessee
Bonds or U.S. Government, Agency or Instrumentality Bonds are likely to be
treated as taxable dividends for purposes of the Hall Income Tax. However,
capital gains realized directly by a Unitholder when the Unitholder sells or
redeems his Unit will not be subject to the Hall Income Tax. The opinion set
forth below assumes that the interest on the Tennessee Bonds, if received
directly by a Unitholder, would be exempt from the Hall Income Tax under
Tennessee State law. This opinion does not address the taxation of persons
other than full-time residents of the State of Tennessee.
Because the recent amendments only provide an exemption for distributions
attributable to interest on Tennessee Bonds or U.S. Government, Agency or
Instrumentality Bonds, it must be determined whether bonds issued by the
Government of Puerto Rico qualify as U.S. Government, Agency or
Instrumentality Bonds. For Hall Income Tax purposes, there is currently no
published administrative interpretation or opinion of the Attorney General of
Tennessee dealing with the status of distributions made by unit investment
trusts such as the Tennessee Trust that are attributable to interest paid on
bonds issued by the Government of Puerto Rico. However, in a letter dated
August 14, 1992 (the "Commissioner's Letter", the Commissioner of
the State of Tennessee Department of Revenue advised that Puerto Rico would be
an "instrumentality" of the U.S. Government and treated bonds issued
by the Government of Puerto Rico as U.S. Government, Agency or Instrumentality
Bonds. Based on this conclusion, the Commissioner advised that distributions
from a mutual fund attributable to investments in Puerto Rico Bonds are exempt
from the Hall Income Tax. Both the Sponsor and Chapman and Cutler, for
purposes of its opinion (as set forth below), have assumed, based on the
Commissioner's Letter, that bonds issued by the Government of Puerto Rico are
U.S. Government, Agency or Instrumentality Bonds. However, it should be noted
that the position of the Commissioner is not binding, and is subject to
change, even on a retroactive basis.
The Sponsor cannot predict whether new legislation will be enacted into law
affecting the tax status of Tennessee IM-IT Trusts. The occurrence of such an
event could cause distributions of interest income from the Trust to be
subject to the Hall Income Tax. Additional information regarding such
proposals is currently unavailable. Investors should consult their own tax
advisors in this regard.
In the opinion of Special Counsel to the Sponsor, under existing Tennessee
State law as of the date of this prospectus:
For purposes of the Hall Income Tax, the Tennessee Excise Tax imposed by
Section 67-4-806 (the "State Corporate Income Tax", and the Tennessee
Franchise Tax imposed by Section 67-4-903, the Tennessee IM-IT Trust will not
be subject to such taxes.
For Hall Income Tax purposes, a proportionate share of such distributions from
the Tennessee IM-IT Trust to Unitholders, to the extent attributable to
interest on the Tennessee Bonds (based on the relative proportion of interest
received or accrued attributable to Tennessee Bonds) will be exempt from the
Hall Income Tax when distributed to such Unitholders. Based on the
Commissioner's Letter, distributions from the Trust to Unitholders, to the
extent attributable to interest on the Puerto Rico Bonds (based on the
relative proportion of interest received or accrued attributable to the Puerto
Rico Bonds) will be exempt from the Hall Income Tax when distributed to such
Unitholders. A proportionate share of distributions from the Tennessee IM-IT
Trust attributable to assets other than the Bonds would not, under current
law, be exempt from the Hall Income Tax when distributed to Unitholders.
For Tennessee State Corporate Income Tax Purposes, Tennessee law does not
provide an exemption for interest on Tennessee Bonds and requires that all
interest excludible from Federal gross income must be included in calculating
"net earnings" subject to the State Corporate Income Tax. No opinion
is expressed regarding whether such tax would be imposed on the earnings or
distributions of the Tennessee IM-IT Trust (including interest on the Bonds or
gain realized upon the disposition of the Bonds by the Tennessee IM-IT Trust)
attributable to Unitholders subject to the State Corporate Income Tax.
However, based upon prior written advice from the Tennessee Department of
Revenue, earnings and distributions from the Tennessee IM-IT Trust (including
interest on the Tennessee Bonds or gain realized upon the disposition of the
Tennessee Bonds by the Tennessee IM-IT Trust) attributable to the Unitholders
should be exempt from the State Corporate Income Tax. The position of the
Tennessee Department of Revenue is not binding, and is subject to change, even
on a retroactive basis.
Each Unitholder will realize taxable gain or loss for State Corporate Income
Tax purposes when the Unitholder redeems or sells his Units, at a price that
differs from original cost as adjusted for accretion or any discount or
amortization of any premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest,
if any, accruing on Bonds during the interval between the Unitholder's
settlement date and the date such Bonds are delivered to the Tennessee IM-IT
Trust, if later. Tax basis reduction requirements relating to amortization of
bond premium may, under some circumstances, result in Unitholders realizing
taxable gain when the Units are sold or redeemed for an amount equal to or
less than their original cost.
For purposes of the Tennessee Property Tax, the Tennessee IM-IT Trust will be
exempt from taxation with respect to the Bonds it holds. As for the taxation
of the Units held by the Unitholders, although intangible personal property is
not presently subject to Tennessee taxation, no opinion is expressed with
regard to potential property taxation of the Unitholders with respect to the
Units because the determination of whether property is exempt from such tax is
made on a county by county basis.
No opinion is expressed herein regarding whether insurance proceeds paid in
lieu of interest on the Bonds held by the Tennessee IM-IT Trust (including the
Tennessee Bonds) are exempt from the Hall Income Tax. Distributions of such
proceeds to Unitholders may be subject to the Hall Income Tax.
The Bonds and the Units held by the Unitholder will not be subject to
Tennessee sales and use taxes.
We have not examined any of the Bonds to be deposited and held in the
Tennessee Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinion as to the
exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
Texas Trusts
Historically, the primary sources of the State's revenues have been sales
taxes, mineral severance taxes and federal grants. Due to the collapse of oil
and gas prices in 1986 and a resulting enactment by recent legislatures of new
tax measures, including those increasing the rates of existing taxes and
expanding the tax base for certain taxes, there has been a reordering in the
relative importance of the State's taxes in terms of their contribution to the
State's revenue in any year. Due to the State's expansion in Medicaid spending
and other Health and Human Services programs requiring federal matching
revenues, federal receipts became the State's number one source of income in
fiscal 1993. Sales tax, which had been the main source of revenue for the
previous 12 years, dropped to second, accounting for 27% of total revenues in
fiscal 1993. Interest and investment income is now the third largest revenue
source, contributing 6.4% of total revenues in fiscal 1993. The motor fuels
tax is now the State's fourth largest revenue source and the second largest
tax, accounting for approximately 6.2% of total revenue in fiscal year 1993.
Licenses, fees and permits, the State's fifth largest revenue source,
accounted for 6.3% of the total revenue in fiscal year 1993. The remainder of
the State's revenues are derived primarily from other excise taxes. The State
currently has no personal or corporate income tax. The State does, however,
impose a corporate franchise tax based in certain circumstances in part on a
corporation's profit.
Heavy reliance on the energy and agricultural sectors for jobs and income
resulted in a general downturn in the Texas economy beginning in 1982 as those
industries suffered significantly. The effects of this downturn continued to
adversely affect the State's real estate industry and its financial
institutions for several years. As a result of these problems, the general
revenue fund had a $231 million cash deficit at the beginning of the 1987
fiscal year and ended the 1987 fiscal year with a $745 million cash deficit.
In 1987, the Texas economy began to move toward a period of recovery. The
expansion continued in 1988 and 1989. In fiscal year 1993, the State ended the
year with a general revenue fund cash surplus of $1,163 million. This was the
sixth consecutive year that Texas ended a fiscal year with a positive balance.
The 73rd Legislature meeting in 1993 passed the 1994-1995 biennial all funds
budget of $71.2 billion without increasing state taxes. This was accomplished
by cutting spending in certain areas and increasing federal funding. The state
Comptroller has estimated that total state revenues from all sources would
total $65.3 billion for the 1994-1995 biennium.
The Texas Constitution prohibits the State from levying ad valorem taxes on
property for general revenue purposes and limits the rate of such taxes for
other purposes to $.35 per $100 of valuation. The Constitution also permits
counties to levy, in addition to all other ad valorem taxes permitted by the
Constitution, ad valorem taxes on property within the county for flood control
and road purposes in an amount not to exceed $.30 per $100 of valuation. The
Constitution prohibits counties, cities and towns from levying a tax rate
exceeding $.80 per $100 of valuation for general fund and other specified
purposes.
With certain specific exceptions, the Texas Constitution generally prohibits
the creation of debt by or on behalf of the State unless the voters of the
State, by constitutional amendment, authorize the issuance of debt (including
general obligation indebtedness backed by the State's taxing power and full
faith and credit). In excess of $8.49 billion of general obligation bonds have
been authorized in Texas and almost $4.18 billion of such bonds are currently
outstanding. Of these, approximately 76% were issued by the Veterans' Land
Board and the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged for the payment of
all general obligations issued by the State, much of that indebtedness is
designed to be eventually self-supporting from fees, payments, and other
sources of revenues; in some instances, the receipt of such revenues by
certain issuing agencies has been in sufficient amounts to pay the principal
of and interest on the issuer's outstanding bonds without requiring the use of
appropriated funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as presently
amended, the net effective interest rate for any issue or series of Bonds in
the Texas IM-IT Trust is limited to 15%.
From the time Standard & Poor's Corporation began rating Texas general
obligation bonds in 1956 until early 1986, that firm gave such bonds its
highest rating, "AAA." In April 1986, in response to the State
economic problems, Standard & Poor's downgraded its rating of Texas general
obligation bonds to "AA+." Such rating was further downgraded in July
1987 to "AA." Moody's Investors Service, Inc. has rated Texas bonds
since prior to the Great Depression. Moody's upgraded its rating of Texas
general obligation bonds in 1962 from "Aa" to "Aaa" , its
highest rating, following the imposition of a statewide sales tax by the
Legislature. Moody's downgraded such rating to "Aa" in March 1987. No
prediction can be made concerning future changes in ratings by national rating
agencies of Texas general obligation bonds or concerning the effect of such
ratings changes on the market for such issues.
The same economic and other factors affecting the State of Texas and its
agencies also have affected cities, counties, school districts and other
issuers of bonds located throughout the State. Declining revenues caused by
the downturn in the Texas economy in the mid-1980s forced these various other
issuers to raise taxes and cut services to achieve the balanced budget
mandated by their respective charters or applicable State law requirements.
Standard & Poor's Corporation and Moody's Investors Service, Inc. assign
separate ratings to each issue of bonds sold by these other issuers. Such
ratings may be significantly lower than the ratings assigned by such rating
agencies to Texas general obligation bonds.
On April 15, 1991, the Governor signed into law Senate Bill 351, the School
Finance Reform Bill. This bill sets a minimum local property tax rate which
guarantees the local school districts a basic state allotment of a specified
amount per pupil. The funding mechanism is based on tax base consolidation and
creates 188 new taxing units, drawn largely along county lines. Within each
taxing unit, school districts will share the revenue raised by the minimum
local property tax. Local school districts are allowed to "enrich"
programs and provide for facilities construction by levying an additional tax.
In January 1992 the Texas Supreme Court declared the School Finance Reform
Bill unconstitutional because the community education districts are in essence
a state property tax. The legislature was given until September 1, 1993 to
pass a new school finance reform bill. The Supreme Court said that, in the
meantime, the county education districts could continue to levy and collect
property taxes. Several taxpayers have filed suit challenging the right of
such districts to collect a tax that has been declared unconstitutional by the
Supreme Court. In March 1993, the Legislature passed a proposed constitutional
amendment which would allow a limited amount of money to be "
recaptured" from wealthy school districts and redistributed to
property-poor school districts. However, the amendment was rejected by the
voters on May 1, 1993, requiring the Legislature to develop a new school
finance plan. At the end of May 1993, the legislature passed a new school
finance bill that provides school districts with certain choices to achieve
funding equalization. Although a number of both poor and wealthy school
districts have challenged the new funding law, the trial judge has stated that
the new law shall be implemented for at least the 1993-1994 school year before
considering any constitutional challenges.
The Comptroller has estimated that total revenues for fiscal 1994 will be
$33.59 billion, compared to actual revenues of $33.79 billion for fiscal 1993.
The revenue estimate for fiscal 1994 is based on an assumption that the Texas
economy will show a steady growth.
A wide variety of Texas laws, rules and regulations affect, directly, or
indirectly, the payment of interest on, or the repayment of the principal of,
Bonds in the Texas IM-IT Trust. The impact of such laws and regulations on
particular Bonds may vary depending upon numerous factors including, among
others, the particular type of Bonds involved, the public purpose funded by
the Bonds and the nature and extent of insurance or other security for payment
of principal and interest on the Bonds. For example, Bonds in the Texas IM-IT
Trust which are payable only from the revenues derived from a particular
facility may be adversely affected by Texas laws or regulations which make it
more difficult for the particular facility to generate revenues sufficient to
pay such interest and principal, including, among others, laws and regulations
which limit the amount of fees, rates or other charges which may be imposed
for use of the facility or which increase competition among facilities of that
type or which limit or otherwise have the effect of reducing the use of such
facilities generally, thereby reducing the revenues generated by the
particular facility. Bonds in the Texas IM-IT Trust, the payment of interest
and principal on which is payable from annual appropriations, may be adversely
affected by local laws or regulations that restrict the availability of monies
with which to make such appropriations. Similarly, Bonds in the Texas IM-IT
Trust, the payment of interest and principal on which is secured, in whole or
in part, by an interest in real property may be adversely affected by declines
in real estate values and by Texas laws that limit the availability of
remedies or the scope of remedies available in the event of a default on such
Bonds. Because of the diverse nature of such laws and regulations and the
impossibility of predicting the nature or extent of future changes in existing
laws or regulations or the future enactment or adoption of additional laws or
regulations, it is not presently possible to determine the impact of such laws
and regulations on the Bonds in the Texas IM-IT Trust and, therefore, on the
Units.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds in the Texas
IM-IT Trust and does not purport to be a complete or exhaustive description of
all adverse conditions to which the issuers in the Texas IM-IT Trust are
subject. Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bond, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Texas IM-IT Trust to pay
interest on or principal of the Bonds.
For a discussion of the Federal tax status of income earned on Texas Trust
Units, see "Other Matters--Federal Tax Status" .
In the opinion of special counsel to the Fund, under existing Texas law:
Neither the State nor any political subdivision of the State currently imposes
an income tax on individuals. Therefore, no portion of any distribution
received by an individual Unitholder of the Trust in respect of his Units,
including a distribution of the proceeds of insurance in respect of such
Units, is subject to income taxation by the State or any political subdivision
of the State;
Except in the case of certain transportation businesses, savings and loan
associations and insurance companies, no Unit of the Trust is taxable under
any property tax levied in the State;
The "inheritance tax" of the State, imposed upon certain transfers of
property of a deceased resident individual Unitholder, may be measured in part
upon the value of Units of the Trust included in the estate of such
Unitholder; and
With respect to any Unitholder which is subject to the State corporate
franchise tax, Units in the Trust held by such Unitholder, and distributions
received thereon, will be taken into account in computing the "taxable
capital" of the Unitholder allocated to the State, one of the bases by
which such franchise tax is currently measured (the other being a
corporation's "net capital earned surplus" , which is, generally, its
net corporate income plus officers and directors income).
The opinion set forth in clause (2), above, is limited to the extent that
Units of the Trust may be subject to property taxes levied in the State if
held on the relevant date: (i) by a transportation business described in
V.T.C.A., Tax Code, Subchapter A, Chapter 24; (ii) by a savings and loan
association formed under the laws of the State (but only to the extent
described in section 11.09 of the Texas Savings and Loan Act, Vernon's Ann.
Civ. St. art. 852a); or (iii), by an insurance company incorporated under the
laws of the State (but only to the extent described in V.A.T.S., Insurance
Code, Art. 4.01). Each Unitholder described in the preceding sentence should
consult its own tax advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware that in its
first called 1991 session, the Texas Legislature adopted, and the Governor has
signed into law, certain substantial amendments to the State corporate
franchise tax, the effect of which may be to subject to taxation all or a
portion of any gains realized by such a corporate Unitholder upon the sale,
exchange or other disposition of a Unit. The amendments are applicable to
taxable periods commencing January 1991, and to each taxable period
thereafter. Because no authoritative judicial, legislative or administrative
interpretation of these amendments has issued, and there remain many
unresolved questions regarding its potential effect on corporate franchise
taxpayers, each corporation which is subject to the State franchise tax and
which is considering the purchase of Units should consult its tax advisor
regarding the effect of these amendments.
Washington Trusts
Based on the U.S. Census Bureau's 1990 Census, the State is the 18th largest
by population. From 1980 to 1990, the State's population increased at an
average annual rate of 1.8% while the United States' population grew at an
average annual rate of 1.1%. In 1991, the State's population continued its
growth at an annualized rate of 2%.
State Economic Overview. The State's economic performance over the past few
years has been relatively strong when compared to that of the United States as
a whole. The rate of economic growth measured by employment in the State was
4.9% in 1990 slowing to 0.9% in 1991, compared with U.S. growth rates of 1.5%
in 1990 and 0.9% in 1991. Based on preliminary figures and after adjusting for
inflation, growth in per capita income outperformed the national economy
during each year of the 1989-1991 period. A review of employment within
various segments of the economy indicates that this growth in the State's
economy was broadly based.
The economic base of the State includes manufacturing and service industries
as well as agricultural and timber production. Between 1987 and 1991,
employment in the State experienced growth in both manufacturing and
non-manufacturing industries. Sectors of the State's employment base in which
growth exceeded comparable figures reported for the United States during that
period include durable and non-durable goods manufacturing, services and
government.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. On a combined basis, the aerospace, timber
and food processing industries employ about 9% of the State's non-farm
workers. In recent years, however, the non-manufacturing sector has played an
increasingly significant role in contributing to the State's economy.
Recently, The Boeing Company ("Boeing", the State's largest employer,
announced it will reduce production of its commercial aircraft by
approximately 35% over the next 18 months due to the financial problems of
many of the world's airlines which have resulted in deferred deliveries of
aircraft and fewer new orders. It is estimated that Boeing will cut at least
10,500 jobs in the State in 1993 and a total of 20,000 jobs in the State
during the next three years; this is expected to result in the loss of another
30,000 jobs in the rest of the State's economy, primarily in subcontracting,
trade and consumer-related services. While the specific impact of this
employment decrease on the State's economy cannot be quantified at this time,
some economists have predicted that a loss of up to $400 million in 1993-95
State revenues will result. No assurance can be given that additional losses
will not occur, or that the effect of the expected losses will not be more
adverse.
Weakness in the State's manufacturing sector, notably aerospace and lumber and
wood products, combined with a weak national recovery due to fiscal
constraints at the national level, are expected to restrain economic growth in
the State for the remainder of the 1991-93 biennium and into the 1993-95
biennium. Weakness in California's economy is also likely to adversely affect
the State's economic performance.
State Revenues, Expenditures and Fiscal Controls. The State's tax revenues are
primarily comprised of excise and ad valorem taxes. By constitutional
provision, the aggregate of all unvoted tax levies upon real and personal
property by State and local taxing districts may not exceed 1% of the true and
fair value of such property.
By law, State tax revenue growth is limited so that it does not exceed the
growth rate of State personal income averaged over a three-year period. To
date, State revenue increases have remained substantially below the State's
revenue limit.
Expenditures of general State revenues are made pursuant to constitutional and
statutory mandates. Most general State revenue is deposited in the State's
General Fund. During the 1991-93 biennium, money in the General Fund is
expected to be spent on public schools (37.5%), social and health services
(36.4%), higher education (7.0%), community colleges (3.5%), and corrections
(2.5%).
State law requires a balanced biennial budget. Whenever it appears that
disbursements will exceed the aggregate of estimated receipts plus beginning
cash surplus, the Governor is required to reduce expenditures of appropriated
funds. To assist in its financial planning, the State, through its Economic
and Revenue Forecast Council, prepares quarterly economic and revenue
forecasts.
State Debt. The State currently has outstanding general obligation and revenue
bonds in the aggregate principal amount of approximately $4.7 billion.
Issuance of additional general obligation bonds is subject to constitutional
and statutory debt limitations. By statute, additional general obligation
bonds (with certain exceptions) may not be issued if, after giving effect
thereto, maximum annual debt service would exceed 7% of the arithmetic mean of
general State revenues for the preceding three fiscal years. Based on certain
assumptions, the State's remaining general obligation debt capacity is
currently estimated at approximately $1.1 billion.
State Budget. The State operates on a July 1 to June 30 fiscal year and on a
biennial budget basis. The State began the 1991-93 biennium with a $468
million surplus in its General Fund and $260 million in its budget
stabilization account, a "rainy day fund." The original 1991-93
biennium budget reflected expected revenue growth of 12.4%. Weaker than
expected revenue collections for the first six months of fiscal 1991 prompted
the State Economic and Revenue Forecast Council to reduce projected revenue
growth to a rate of 7.2%, resulting in a forecast General Fund cash deficit
for the 1991-93 biennium. In addition, supplemental operating budget
adjustments for State and federally mandated funding of social and health
service programs, prisons and correctional facilities, and K-12 education
contributed to the projected shortfall.
In response to the forecast cash deficit, the Governor, in fulfillment of his
statutory duty to maintain a balanced budget, implemented a 2.5%
across-the-board reduction in General Fund appropriations, effective December
1, 1991. In 1992, a 1991-93 biennium supplemental budget was adopted. Actions
taken include expenditure reductions, selected tax increases and use of a
portion of the budget stabilization account. The result, when taken in
conjunction with the November 1992 revenue forecast, is a projected General
Fund State balance for June 1993 of $170 million with a $100 million balance
in the budget stabilization account. The next revenue forecast is scheduled to
be released in March 1993. There is no assurance that additional actions will
not be necessary to balance the State budget, particularly in light of the
recent unfavorable developments in the aerospace industry.
The 1993-95 biennium budget is currently being considered by the State
Legislature. A shortfall of $1.6 billion to $2.4 billion in a $17 billion
budget has been projected by some analysts. In response, the Governor has
proposed making $800 million in expenditure cuts, and recently has favored a
State income tax. An increase in general sales and business taxes has also
been discussed. No predictions can be made on what steps the State will be
required to take to address the potential deficit, nor can any assurance be
given that such measures will not adversely affect the market value of the
Bonds held in the portfolio of the Trust or the ability of the State (or any
other obligor) to make timely payments of debt service on (or relating to)
these obligations or the State's ability to service its debts.
State Bond Ratings. The State's most recent general obligation bond issue was
rated "Aa" by Moody's and "AA" by S&P and Fitch. No assurance
can be given that the State's recent or projected economic and budgetary
problems will not result in a review or downgrading of these ratings.
Supply System Bondholders' Suit. The Washington Public Power Supply System
(the "Supply System", a municipal corporation of the State, was
established to acquire, construct and operate facilities for the generation
and transmission of electricity. In 1983, the Supply System announced it was
not able to pay debt service on $2.25 billion of bonds issued to finance two
of its nuclear generating projects. Chemical Bank, the trustee for such bonds,
then declared the entire principal and interest on the bonds due and payable
immediately. A substantial amount of litigation followed in various state and
federal courts. Various claims were made against the State, private and public
utilities, the Bonneville Power Administration, the Supply System,
underwriters, attorneys and others. In 1989, a federal court approved a
comprehensive settlement in respect of the securities litigation arising from
the default that involved the State. The State agreed to contribute $10
million to the settlement in return for a complete release, including a
release of claims against the State in a State court action. Based on the
settlement in federal court, the State anticipates that the State court action
will be dismissed, although no assurance can be given that such action will be
dismissed.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of bonds and does not purport
to be a complete or exhaustive description of all adverse conditions to which
the issuers of obligations held by the Washington Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
Issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether or
to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Washington Trust to pay
interest on or principal of the Bonds.
At the time of closing for each Washington Trust, Special Counsel to the Fund
for Washington tax matters, rendered an opinion under then existing Washington
law substantially to the effect that:
Neither the State of Washington nor any of its political subdivisions imposes
an income tax.
The State imposes a business and occupation tax on the gross receipts of all
business activities conducted within the State, with certain exceptions. The
Washington Trust will not be subject to this tax. Distributions of the
Washington Trust income paid to Unit holders who are not engaged in a banking,
loan, securities, or other financial business in the State (which businesses
have been broadly defined) will not be subject to the tax. Unit holders that
are engaged in any of such financial businesses will be subject to the tax.
Currently the business and occupation tax rate is $1.5%. Several cities impose
comparable business and occupation taxes on financial businesses conducted
within such cities. The current rate in Seattle is .415%.
The Units will not be subject to the State's ad valorem property tax, nor will
any sale, transfer or possession of the Units be subject to State or local
sales or use taxes.
Persons considering the purchase of Units should be aware that proposals have
recently been suggested by the Governor and other officials of the State that
would, if enacted, subject interest income received by persons resident in (or
doing business within) the State to the business and occupation tax, whether
or not such persons are engaged in a banking, loan, securities, or other
financial business. It is unclear whether such proposals would exclude
interest income derived from obligations of the State and its political
subdivisions.
The foregoing is an abbreviated summary of certain of the provisions of
Washington statutes and administrative rules presently in effect, with respect
to the taxation of Unit holders of the Washington Trust. These provisions are
subject to change by legislative or administrative actions, or by court
decisions, and any such change may be retroactive with respect to Washington
Trust transactions. Unit holders are advised to consult with their own tax
advisors for more detailed information concerning Washington State and local
tax matters. The foregoing summary assumes that the Washington Trust will not
conduct business activities within Washington.
West Virginia Trusts
The assets of the West Virginia Trust will consist of interest-bearing
obligations issued by or on behalf of the State of West Virginia ("West
Virginia" or counties, municipalities, authorities or political
subdivisions thereof the interest on which is expected to qualify as exempt
from West Virginia income taxes (the "West Virginia Bonds" or by the
Commonwealth of Puerto Rico, Guam or the United States Virgin Islands (the
"Possession Bonds" (collectively, the "Bonds".
Neither the Sponsor nor its counsel have independently examined the Bonds to
be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludable from gross income
for federal income tax purposes and (iii) interest on the West Virginia Bonds,
if received directly by a Unitholder would be exempt from the West Virginia
personal income tax applicable to individuals (the "West Virginia Personal
Income Tax". At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
Federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the West Virginia Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption of
interest from the West Virginia Personal Income Tax. Neither the Sponsor nor
its counsel has made any review for the West Virginia Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions
rendered in connection therewith. The opinion set forth below does not address
the taxation of persons other than full-time residents of West Virginia.
At the time of closing for each West Virginia Trust, Special Counsel to the
Fund for West Virginia tax matters rendered an opinion, based upon the
assumptions set forth above, under then existing West Virginia law
substantially to the effect that:
The West Virginia Trust will not be subject to tax under the West Virginia
Corporation Net Income Tax, the West Virginia Business Franchise Tax, or the
West Virginia Personal Income Tax.
Each Unitholder will be treated as owning directly a pro rata portion of each
asset of the Trust. Accordingly, income on the Bonds which is exempt from the
West Virginia Personal Income Tax when received by the West Virginia Trust,
and which would be exempt from the West Virginia Personal Income Tax if
received directly by a Unitholder, will retain its status as exempt from such
tax when received by the West Virginia Trust and distributed to such
Unitholder.
For Unitholders subject to the West Virginia Corporation Net Income Tax,
income of the West Virginia Trust received by them is not exempt from the West
Virginia Corporation Net Income Tax. However, such Unitholders may be entitled
to a credit against the tax imposed under the West Virginia Corporation Net
Income Tax Law based on their ownership of Units in the West Virginia Trust.
Unitholders should consult their own advisors regarding the applicability and
computation of any such credit.
To the extent that interest income derived from the West Virginia Trust by a
Unitholder with respect to Possession Bonds is excludable from gross income
for federal income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to West Virginia Personal Income Tax.
Each Unitholder will recognize gain or loss for West Virginia Personal Income
Tax purposes if the Trustee disposes of a bond (whether by redemption, sale or
otherwise) or if the Unitholder redeems or sells Units of the West Virginia
Trust to the extent that such a transaction results in a recognized gain or
loss to such Unitholder for federal income tax purposes.
Insurance proceeds paid under policies which represent maturing interest on
defaulted obligations which are excludable from gross income for federal
income tax purposes should be excludable from the West Virginia Personal
Income Tax to the same extent as such interest would have been if paid by the
issuer of such Bonds held by the West Virginia Trust.
The West Virginia Personal Income Tax does not permit a deduction of interest
paid on indebtedness incurred or continued to purchase or carry Units in the
West Virginia Trust to the extent that interest income related to the
ownership of Units is exempt from the West Virginia Personal Income Tax.
We have not examined any of the Bonds to be deposited and held in the West
Virginia Trust or the proceedings for the issuance thereof or the opinions of
bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal income taxation of interest on the Bonds or from the
West Virginia Personal Income Tax of interest or profits on the West Virginia
Bonds if interest thereon had been received directly by a Unitholder.
Moreover, no opinion is expressed herein regarding collateral tax consequences
under West Virginia law relating to the ownership of the Units or the
applicability of other West Virginia taxes, such as the West Virginia property
and estate taxes. We have been informally advised by the Legal Division of the
West Virginia Department of Tax and Revenue that Units may be subject to the
West Virginia property tax (regardless of whether the Bonds held by the West
Virginia Trust would be exempt from such tax if held directly by a
Unitholder).
TRUST ADMINISTRATION AND EXPENSES
Sponsor. Van Kampen American Capital Distributors, Inc., a Delaware
corporation, is the Sponsor of the Trust. Van Kampen American Capital
Distributors, Inc. is primarily owned by Clayton, Dubilier & Rice, Inc., a New
York-based private investment firm. Van Kampen American Capital Distributors,
Inc. management owns a significant minority equity position. Van Kampen
American Capital Distributors, Inc. specializes in the underwriting and
distribution of unit investment trusts and mutual funds. The Sponsor is a
member of the National Association of Securities Dealers, Inc. and has offices
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 and
2800 Post Oak Boulevard, Houston, Texas 77056, (713) 993-0500. It maintains a
branch office in Philadelphia and has regional representatives in Atlanta,
Dallas, Los Angeles, New York, San Francisco, Seattle and Tampa. As of
December 31, 1995 the total stockholders' equity of Van Kampen American
Capital Distributors, Inc. was $123,165,000 (unaudited). (This paragraph
relates only to the Sponsor and not to the Fund thereof or to any other Series
thereof or to any other Underwriter. The information is included herein only
for the purpose of informing investors as to the financial responsibility of
the Sponsor and its ability to carry out its contractual obligations. More
detailed financial information will be made available by the Sponsor upon
request.)
As of December 31, 1995, the Sponsor and its affiliates managed or supervised
approximately $56.0 billion of investment products, of which over $24.8
billion is invested in municipal securities. The Sponsor and its affiliates
managed $44.0 billion of assets, consisting of $22.2 billion for 63 open end
mutual funds (of which 47 are distributed by Van Kampen American Capital
Distributors, Inc.), $11.4 billion for 38 closed-end funds and $5.6 billion
for 84 institutional accounts. The Sponsor has also deposited approximately
$26 billion of unit investment trusts. Based on cumulative assets deposited,
the Sponsor believes that it is the largest sponsor of insured municipal unit
investment trusts, primarily through the success of its Insured Municipals
Income Trust(R)or the IM-IT(R)trust. The Sponsor also provides
surveillance and evaluation services at cost for approximately $13 billion of
unit investment trust assets outstanding. Since 1976, the Sponsor has serviced
over two million investor accounts, opened through retail distribution firms.
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and
not exceeding amounts prescribed by the Securities and Exchange Commission,
(ii) terminate the Trust Agreement and liquidate the Trust as provided therein
or (iii) continue to act as Trustee without terminating the Trust Agreement.
All costs and expenses incurred in creating and establishing the Fund,
including the cost of the initial preparation, printing and execution of the
Trust Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, expenses of the Trustee, initial evaluation
fees and other out-of-pocket expenses have been borne by the Sponsor at no
cost to the Fund.
Compensation of Sponsor and Evaluator. The Sponsor will not receive any fees
in connection with its activities relating to the Trusts. However, American
Portfolio Evaluation Services, a division of Van Kampen American Capital
Investment Advisory Corp., which is an affiliate of the Sponsor, will receive
an annual supervisory fee as indicated under "Summary of Essential
Financial Information" in Part One of this Prospectus for providing
portfolio supervisory services for such series. Such fee (which is based on
the number of Units outstanding on January 1 of each year) may exceed the
actual costs of providing such supervisory services for such series, but at no
time will the total amount received for portfolio supervisory services
rendered to all such series in any calendar year exceed the aggregate cost to
the Evaluator of supplying such services in such year. In addition, the
Evaluator shall receive an annual evaluation fee as indicated under "
Summary of Essential Financial Information" for regularly evaluating each
Trust's portfolio. Both of the foregoing fees may be increased without
approval of the Unitholders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer
Price Index published by the United States Department of Labor or, if such
category is no longer published, in a comparable category. The Sponsor and the
dealers will receive sales commissions and may realize other profits (or
losses) in connection with the sale of Units as described under "Public
Offering" .
Trustee. The Trustee is The Bank of New York, a trust company organized under
the laws of New York. The Bank of New York has its offices at 101 Barclay
Street, New York, New York 10286 (800-221-7668). The Bank of New York is
subject to supervision and examination by the Superintendent of Banks of the
State of New York and the Board of Governors of the Federal Reserve System,
and its deposits are insured by the Federal Deposit Insurance Corporation to
the extent permitted by law.
The duties of the Trustee are primarily ministerial in nature. It did not
participate in the selection of Bonds for the portfolio of any Trust.
In accordance with the Trust Agreement, the Trustee shall keep proper books of
record and account of all transactions at its office for the Fund. Such
records shall include the name and address of, and the certificates issued by
the Fund to, every Unitholder of the Fund. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during the usual
business hours. The Trustee shall make such annual or other reports as may
from time to time be required under any applicable state or Federal statute,
rule or regulation (see "Public Offering Reports Provided". The
Trustee is required to keep a certified copy or duplicate original of the
Trust Agreement on file in its office available for inspection at all
reasonable times during the usual business hours by any Unitholder, together
with a current list of the Securities held in the Fund. Under the Trust
Agreement, the Trustee or any successor trustee may resign and be discharged
of the Trusts created by the Trust Agreement by executing an instrument in
writing and filing the same with the Sponsor. The Trustee or successor trustee
must mail a copy of the notice of resignation to all Fund Unitholders then of
record, not less than 60 days before the date specified in such notice when
such resignation is to take effect. The Sponsor upon receiving notice of such
resignation is obligated to appoint a successor trustee promptly. If, upon
such resignation, no successor trustee has been appointed and has accepted the
appointment within 30 days after notification, the retiring Trustee may apply
to a court of competent jurisdiction for the appointment of a successor. The
Sponsor may remove the Trustee and appoint a successor trustee as provided in
the Trust Agreement at any time with or without cause. Notice of such removal
and appointment shall be mailed to each Unitholder by the Sponsor. Upon
execution of a written acceptance of such appointment by such successor
trustee, all the rights, powers, duties and obligations of the original
trustee shall vest in the 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.
Any corporation into which a Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a banking corporation organized under the laws of the United States or
any state and having at all times an aggregate capital, surplus and undivided
profits of not less than $5,000,000.
Trustee's Fee. For its services the Trustee will receive a fee based on the
aggregate outstanding principal amount of Securities in each Trust as of the
opening of business on January 2 and July 2 of each year as set forth under
"Per Unit Information" in Part I of this Prospectus. The Trustee's
fees are payable monthly on or before the twenty-fifth day of each month from
the Interest Account of each Trust to the extent funds are available and then
from the Principal Account of each Trust, with such payments being based on
each Trust's portion of such expenses. Since the Trustee has the use of the
funds being held in the Principal and Interest Accounts for future
distributions, payment of expenses and redemptions and since such accounts are
non-interest bearing to Unitholders, the Trustee benefits thereby. Part of the
Trustee's compensation for its services to each Trust is expected to result
from the use of these funds. Such fees may be increased without approval of
the Unitholders by amounts not exceeding proportionate increases under the
category "All Services Less Rent of Shelter" in the Consumer Price
Index published by the United States Department of Labor or, if such category
is no longer published, in a comparable category. The Trustee's fees will not
be increased in future years in order to make up any reduction in the
Trustee's fees described under "Per Unit Information" in Part I of
this Prospectus for the applicable Trust. For a discussion of the services
rendered by the Trustee pursuant to its obligations under the Trust Agreement,
see "Rights of Unitholders Reports Provided" and "Trust
Administration" .
Portfolio Administration. The Trustee is empowered to sell, for the purpose of
redeeming Units tendered by any Unitholder, and for the payment of expenses
for which funds may not be available, such of the Bonds designated by the
Evaluator as the Trustee in its sole discretion may deem necessary. The
Evaluator, in designating such Securities, will consider a variety of factors,
including (a) interest rates, (b) market value and (c) marketability. To the
extent that Bonds are sold which are current in payment of principal and
interest in order to meet redemption requests and defaulted Bonds are retained
in the portfolio in order to preserve the related insurance protection
applicable to said Bonds, the overall quality of the Bonds remaining in a
Trust's portfolio will tend to diminish. Except as described below and in
certain other unusual circumstances for which it is determined by the Trustee
to be in the best interests of the Unitholders or if there is no alternative,
the Trustee is not empowered to sell Bonds which are in default in payment of
principal or interest or in significant risk of such default and for which
value has been attributed for the insurance obtained by a Trust. Because of
such restrictions on the Trustee under certain circumstances the Sponsor may
seek a full or partial suspension of the right of Unitholders to redeem their
Units. See "Public Offering Redemption of Units" . The Sponsor is
empowered, but not obligated, to direct the Trustee to dispose of Bonds in the
event of an advanced refunding.
The Sponsor is required to instruct the Trustee to reject any offer made by an
issuer of any of the Securities to issue new obligations in exchange or
substitution for any Security pursuant to a refunding or refinancing plan,
except that the Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the Sponsor may deem
proper if (1) the issuer is in default with respect to such Security or (2) in
the written opinion of the Sponsor the issuer will probably default with
respect to such Security in the reasonably foreseeable future. Any obligation
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
Securities originally deposited thereunder. Within five days after the deposit
of obligations in exchange or substitution for underlying Securities, the
Trustee is required to give notice thereof to each Unitholder of the Trust
thereby affected, identifying the Securities eliminated and the Securities
substituted therefor. Except as provided herein, the acquisition by the Fund
of any securities other than the Securities initially deposited is not
permitted.
If any default in the payment of principal or interest on any Security occurs
and no provision for payment is made therefor within 30 days, the Trustee is
required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Security within 30 days after notification by
the Trustee to the Sponsor of such default, the Trustee may in its discretion
sell the defaulted Security and not be liable for any depreciation or loss
thereby incurred.
Sponsor Purchases of Units. The Trustee shall notify the Sponsor of any tender
of Units for redemption. If the Sponsor's bid in the secondary market at that
time equals or exceeds the Redemption Price per Unit, it may purchase such
Units by notifying the Trustee before the close of business on the second
succeeding business day and by making payment therefor to the Unitholder not
later than the day on which the Units would otherwise have been redeemed by
the Trustee. Units held by the Sponsor may be tendered to the Trustee for
redemption as any other Units.
The offering price of any Units acquired by the Sponsor will be in accord with
the Public Offering Price described in the then currently effective prospectus
describing such Units. 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 its acquisition of such Units.
Insurance Premiums. Insurance premiums, which are obligations of each Trust,
are payable monthly by the Trustee on behalf of the respective Trust so long
as such Trust retains the Bonds. The cost of the portfolio insurance obtained
by the respective Trust is set forth in Part One of this Prospectus. As Bonds
in the portfolio of a Trust are redeemed by their respective issuers or are
sold by the Trustee, the amount of the premium will be reduced in respect of
those Bonds no longer owned by and held in such Trust. If the Trustee
exercises the right to obtain permanent insurance, the premiums payable for
such permanent insurance will be paid solely from the proceeds of the sale of
the related Bonds. The premiums for such permanent insurance with respect to
each Bond will decline over the life of the Bond. A Trust does not incur any
expense for Preinsured Bond Insurance, since the premium or premiums for such
insurance have been paid by the respective issuers or the Sponsor prior to the
deposit of such Preinsured Bonds in a Trust. Preinsured Bonds are not
additionally insured by such Trust.
Miscellaneous Expenses. The following additional charges are or may be
incurred by the Trusts: (a) fees of the Trustee for extraordinary services,
(b) expenses of the Trustee (including legal and auditing expenses) and of
counsel designated by the Sponsor, (c) various governmental charges, (d)
expenses and costs of any action taken by the Trustee to protect the Trusts
and the rights and interests of Unitholders, (e) indemnification of the
Trustee for any loss, liability or expenses incurred by it in the
administration of the Fund without negligence, bad faith or willful misconduct
on its part, (f) any special custodial fees payable in connection with the
sale of any of the bonds in a Trust and (g) expenditures incurred in
contacting Unitholders upon termination of the Trusts.
The fees and expenses set forth herein are payable out of the Trusts. When
such fees and expenses are paid by or owing to the Trustee, they are secured
by a lien on the portfolio or portfolios of the applicable Trust or Trusts. If
the balances in the Interest and Principal Accounts are insufficient to
provide for amounts payable by the Fund, the Trustee has the power to sell
Securities to pay such amounts.
GENERAL
Amendment or Termination. The Sponsor and the Trustee have the power to amend
the Trust Agreement without the consent of any of the Unitholders when such an
amendment is (a) to cure an 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 (b) to make such other provisions as
shall not adversely affect the interest of the Unitholders (as determined in
good faith by the Sponsor and the Trustee), provided that the Trust Agreement
may not be 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 Securities initially deposited in the Fund, except
for the substitution of certain refunding securities for such Securities. In
the event of any amendment, the Trustee is obligated to notify promptly all
Unitholders of the substance of such amendment.
A Trust may be terminated at any time by consent of Unitholders of 51% of the
Units of such Trust then outstanding or by the Trustee when the value of such
Trust, as shown by any semi-annual evaluation, is less than that indicated
under "Summary of Essential Financial Information" in Part One of this
Prospectus. The Trust Agreement provides that each Trust shall terminate upon
the redemption, sale or other disposition of the last Security held in such
Trust, but in no event shall it continue beyond the end of the year preceding
the fiftieth anniversary of the Trust Agreement (except in the case of a State
Intermediate Laddered Maturity Trust which shall in no event continue beyond
the end of the year preceding the twentieth anniversary of the Trust
Agreement). In the event of termination of the Fund or any Trust, written
notice thereof will be sent by the Trustee to each Unitholder of such Trust at
his address appearing on the registration books of the Fund maintained by the
Trustee, such notice specifying the time or times at which the Unitholder may
surrender his certificate or certificates for cancellation. Within a
reasonable time thereafter the Trustee shall liquidate any Securities then
held in such Trust and shall deduct from the funds of such Trust any accrued
costs, expenses or indemnities provided by the Trust Agreement, including
estimated compensation of the Trustee and costs of liquidation and any amounts
required as a reserve to provide for payment of any applicable taxes or other
governmental charges. The sale of Securities in the Trust upon termination may
result in a lower amount than might otherwise be realized if such sale were
not required at such time. For this reason, among others, the amount realized
by a Unitholder upon termination may be less than the principal amount of
Securities represented by the Units held by such Unitholder. The Trustee shall
then distribute to each Unitholder his share of the balance of the Interest
and Principal Accounts. With such distribution the Unitholder shall be
furnished a final distribution statement of the amount distributable. At such
time as the Trustee in its sole discretion shall determine that any amounts
held in reserve are no longer necessary, it shall make distribution thereof to
Unitholders in the same manner.
Notwithstanding the foregoing, in connection with final distributions to
Unitholders, it should be noted that because the portfolio insurance obtained
by a Trust is applicable only while Bonds so insured are held by a Trust, the
price to be received by such Trust upon the disposition of any such Bond which
is in default, by reason of nonpayment of principal or interest, will not
reflect any value based on such insurance. Therefore, in connection with any
liquidation, it shall not be necessary for the Trustee to, and the Trustee
does not currently intend to, dispose of any Bond or Bonds if retention of
such Bond or Bonds, until due, shall be deemed to be in the best interest of
Unitholders, including, but not limited to, situations in which a Bond or
Bonds so insured are in default and situations in which a Bond or Bonds so
insured have a deteriorated market price resulting from a significant risk of
default. Since the Preinsured Bonds will reflect the value of the related
insurance, it is the present intention of the Sponsor not to direct the
Trustee to hold any of such Preinsured Bonds after the date of termination.
All proceeds received, less applicable expenses, from insurance on defaulted
Bonds not disposed of at the date of termination will ultimately be
distributed to Unitholders of record as of such date of termination as soon as
practicable after the date such default ed Bond or Bonds become due and
applicable insurance proceeds have been received by the Trustee.
Limitation on Liabilities. The Sponsor, the Evaluator and the Trustee shall be
under no liability to Unitholders for taking any action or for refraining from
taking any action in good faith pursuant to the Trust Agreement, or for errors
in judgment, but shall be liable only for their own willful misfeasance, bad
faith or gross negligence in the performance of their duties or by reason of
their reckless disregard of their obligations and duties hereunder. The
Trustee shall not be liable for depreciation or loss incurred by reason of the
sale by the Trustee of any of the Securities. In the event of the failure of
the Sponsor to act under the Trust Agreement, the Trustee may act thereunder
and shall not be liable for any action taken by it in good faith under the
Trust Agreement.
The Trustee shall not be liable for any taxes or other governmental charges
imposed upon or in respect of the Securities or upon the interest thereon or
upon it as Trustee under the Trust Agreement or upon or in respect of the Fund
which the Trustee may be required to pay under any present or future law of
the United States of America or of any other taxing authority having
jurisdiction. In addition, the Trust Agreement contains other customary
provisions limiting the liability of the Trustee.
The Trustee, Sponsor and Unitholders 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,
Sponsor or Unitholders for errors in judgment. This provision shall not
protect the Evaluator in any case of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
Unit Distribution. Units repurchased in the secondary market, if any, may be
offered by this Prospectus at the secondary Public Offering Price in the
manner described.
Broker-dealers or others will be allowed a concession or agency commission in
connection with secondary market transactions in the amount of 70% of the
applicable sales charge as determined using the table found in "Public
Offering--General" . Certain commercial banks are making Units of the Fund
available to their customers on an agency basis. A portion of the sales charge
paid by these customers (equal to the agency commission referred to above) is
retained by or remitted to the banks. Under the Glass-Steagall Act, banks are
prohibited from underwriting Units of the Fund; however, the Glass-Steagall
Act does permit certain agency transactions and the banking regulators have
not indicated that these particular agency transactions are not permitted
under such Act. In addition, state securities laws on this issue may differ
from the interpretations of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to
state law. The minimum purchase in the secondary market will be one Unit.
Broker-dealers of a Trust, banks and/or others may be eligible to participate
in a program in which such firms receive from the Sponsor a nominal award for
each of their registered representatives who have sold a minimum number of
units of unit investment trusts created by the Sponsor during a specified time
period. In addition, at various times the Sponsor may implement other programs
under which the sales forces of brokers-dealer, banks and/or others may be
eligible to win other nominal awards for certain sales efforts, or under which
the Sponsor will reallow to any such broker-dealers, banks and /or others that
sponsors sales contests or recognition programs conforming to criteria
established by the Sponsor, or participates in sales programs sponsored by the
Sponsor, an amount not exceeding the total applicable sales charges on the
sales generated by such person at the public offering price during such
programs. Also, the Sponsor in its discretion may from time to time pursuant
to objective criteria established by the Sponsor pay fees to qualifying
brokers-dealers, banks and/or others for certain services or activities which
are primarily intended to result in sales of Units of the Trust. Such payments
are made by the Sponsor out of its own assets, and not out of the assets of
the Trust. These programs will not change the price Unitholders pay for their
Units or the amount that the Trust will receive from the Units sold.
The Sponsor reserves the right to reject, in whole or in part, any order for
the purchase of Units and to change the amount of the concession or agency
commission to dealers and others from time to time.
Sponsor and Dealer Compensation. Dealers will receive the gross sales
commission as described under "Public Offering General" .
As stated under "Public Offering--Market for Units" , the Sponsor
intends to, and certain of the dealers may, maintain a secondary market for
the Units of the Fund. In so maintaining a market, such person or persons will
also realize profits or sustain losses in the amount of any difference between
the price at which Units are purchased and the price at which Units are resold
(which price is based on the bid prices of the Securities in such Trust and
includes a sales charge). In addition, such person or persons will also
realize profits or sustain losses resulting from a redemption of such
repurchased Units at a price above or below the purchase price for such Units,
respectively.
OTHER MATTERS
Legal Opinions. The legality of the Units offered hereby has been passed upon
by Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as
counsel for the Sponsor. The counsel which has provided a state tax opinion to
the respective Trust under "Risk Factors and State Tax Status of the
Trusts" has acted as special counsel to the Fund for the tax matters of
such state. Various counsel have acted as counsel for the Trustee and as
special counsel for the Fund for New York tax matters. None of the special
counsel for the Fund has expressed any opinion regarding the completeness or
materiality of any matters contained in this Prospectus other than the tax
opinions set forth by such special counsel.
Independent Certified Public Accountants. The statements of condition and the
related securities portfolios included in this Prospectus have been audited at
the date indicated therein by Grant Thornton LLP, independent certified public
accountants, as set forth in their report in Part One of this Prospectus, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS*
Standard & Poor's. A Standard & Poor's, A Division of the McGraw-Hill
Companies, Inc. ("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.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I.Likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
II.Nature of and provisions of the obligation.
III.Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangements under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit quality,
the ratings from "AA" to "BBB" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: A provisional rating ("p" assumes the successful
completion of the project being financed by the issuance of the bonds being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to
completion, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. Accordingly, the investor should exercise his own
judgment with respect to such likelihood and risk.
Moody's Investors Service, Inc. A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's" rating symbols and their meanings
follow:
Aaa--Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "
gilt edge" . Interest payments are protected by a large, or by an
exceptionally stable, margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
With the occasional exception of oversupply in a few specific instances, the
safety of obligations of this class is so absolute that their market value is
affected solely by money market fluctuations.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of over
supply in a few specific instances.
A--Bonds which are rated A possess many favorable investment attributes and
are considered as higher medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. The
market value of A rated bonds may be influenced to some degree by credit
circumstances during a sustained period of depressed business conditions.
During periods of normalcy, bonds of this quality frequently move in parallel
with Aaa and Aa obligations, with the occasional exception of oversupply in a
few specific instances.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
As published by the rating companies.
Baa--Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the
high end of its 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.
Con--Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. 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. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
*As published by the rating companies.
No person is authorized to give any information or to make any representations
not contained in this Prospectus; and any information or representation not
contained herein must not be relied upon as having been authorized by the
Trust, the Sponsor or any dealer. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Introduction...............................................1
Description of the Fund....................................2
Objectives and Securities Selection........................2
Trust Portfolio............................................3
Risk Factors...............................................3
Bond Redemptions...........................................4
Distributions..............................................5
Change of Distribution Option..............................5
Certificates...............................................5
Estimated Current Returns and Estimated Long-Term Return...5
Public Offering............................................5
General....................................................5
Accrued Interest (Accrued interest to Carry)...............6
Purchased and Accrued Interest.............................6
Accrued Interest...........................................7
Offering Price.............................................7
Market for Units...........................................7
Distributions of Interest and Principal....................7
Reinvestment Option........................................8
Redemption of Units........................................8
Reports Provided...........................................9
Insurance on the Bonds.....................................9
Federal Tax Status of the Trusts...........................12
Risk Factors and State Tax Status of the Trusts............14
Alabama Trusts.............................................14
Arizona Trusts.............................................15
California Trusts..........................................16
Colorado Trusts............................................21
Connecticut Trusts.........................................23
Florida Trusts.............................................24
Georgia Trusts.............................................27
Hawaii Trusts..............................................28
Louisiana Trusts...........................................30
Massachusetts Trusts.......................................31
Michigan Trusts............................................32
Minnesota Trusts...........................................34
Missouri Trusts............................................35
New Jersey Trusts..........................................36
New Mexico Trusts..........................................38
New York Trusts............................................39
Ohio Trusts................................................44
Oklahoma Trusts............................................46
Pennsylvania Trusts........................................47
Tennessee Trusts...........................................50
Texas Trusts...............................................52
Washington Trusts..........................................53
West Virginia Trusts.......................................55
Trust Administration and Expenses..........................56
Sponsor....................................................56
Compensation of Sponsor and Evaluator......................56
Trustee....................................................56
Trustee's Fee..............................................57
Portfolio Administration...................................57
Sponsor Purchases of Units.................................57
Insurance Premiums.........................................57
Miscellaneous Expenses.....................................57
General....................................................58
Amendment or Termination...................................58
Limitation on Liabilities..................................58
Unit Distribution..........................................59
Sponsor and Dealer Compensation............................59
Other Matters..............................................59
Legal Opinions.............................................59
Independent Certified Public Accountants...................59
Description of Securities Ratings..........................59
</TABLE>
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of the information set forth in the registration
statements and exhibits relating thereto, which the Fund 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.
STATE INSURED MUNICIPALS
INCOME TRUST
PROSPECTUS
PART TWO
Note: This Prospectus May Be Used Only
When Accompanied by Part One. Both
Parts of this Prospectus should be
retained for future reference.
Dated as of the date
of the Prospectus
Part I accompanying
this Prospectus
Part II.
Sponsor:
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
2800 Post Oak Boulevard
Houston, Texas 77056
A Wealth of Knowledge A Knowledge of Wealth(sm)
VAN KAMPEN AMERICAN CAPITAL
Contents of Post-Effective Amendment
to Registration Statement
This Post-Effective Amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Insured Municipals Income Trust and Investors' Quality Tax-
Exempt Trust, Multi-Series 81, certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized, and its seal to
be hereunto affixed and attested, all in the City of Chicago and State of
Illinois on the 25th day of October, 1996.
Insured Municipals Income Trust and Investors'
Quality Tax-Exempt Trust, Multi-Series 81
(Registrant)
By Van Kampen American Capital Distributors,
Inc.
(Depositor)
By Sandra A. Waterworth
Vice President
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this
Post Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities on October 25, 1996:
Signature Title
Don G. Powell Chairman and Chief )
Executive Officer )
)
William R. Molinari President and Chief )
Operating Officer )
)
Ronald A. Nyberg Executive Vice President )
and General Counsel )
)
William R. Rybak Executive Vice President and )
Chief Financial Officer )
Sandra A. Waterworth ) (Attorney in Fact)*
____________________
* An executed copy of each of the related powers of attorney was filed
with the Securities and Exchange Commission in connection with the
Registration Statement on Form S-6 of Insured Municipals Income
Trust and Investors' Quality Tax-Exempt Trust, Multi-Series 203
(File No. 33-65744) and with the Registration Statement on Form S-6
of Insured Municipals Income Trust, 170th Insured Multi-Series (File
No. 33-55891) and the same are hereby incorporated herein by this
reference.
Consent of Independent Certified Public Accountants
We have issued our report dated August 16, 1996 accompanying the
financial statements of Insured Municipals Income Trust and Investors'
Quality Tax-Exempt Trust, Multi-Series 81 as of June 30, 1996, and for
the period then ended, contained in this Post-Effective Amendment No. 10
to Form S-6.
We consent to the use of the aforementioned report in the Post-
Effective Amendment and to the use of our name as it appears under the
caption "Auditors".
Grant Thornton LLP
Chicago, Illinois
October 25, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 21
<NAME> I-FL
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 2182227
<INVESTMENTS-AT-VALUE> 2310276
<RECEIVABLES> 0
<ASSETS-OTHER> 48065
<OTHER-ITEMS-ASSETS> 26336
<TOTAL-ASSETS> 2384677
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2384677
<SHARES-COMMON-STOCK> 2583
<SHARES-COMMON-PRIOR> 2699
<ACCUMULATED-NII-CURRENT> 63826
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 128049
<NET-ASSETS> 2384677
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 176996
<OTHER-INCOME> 0
<EXPENSES-NET> 5794
<NET-INVESTMENT-INCOME> 171202
<REALIZED-GAINS-CURRENT> 1886
<APPREC-INCREASE-CURRENT> (39622)
<NET-CHANGE-FROM-OPS> 133466
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (179039)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 116
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (150623)
<ACCUMULATED-NII-PRIOR> 71663
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 650
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5794
<AVERAGE-NET-ASSETS> 2459989
<PER-SHARE-NAV-BEGIN> 939.35
<PER-SHARE-NII> 66.28
<PER-SHARE-GAIN-APPREC> (14.609)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 923.22
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 100
<NAME> I-PA
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 4065058
<INVESTMENTS-AT-VALUE> 4327113
<RECEIVABLES> 0
<ASSETS-OTHER> 111332
<OTHER-ITEMS-ASSETS> 3420
<TOTAL-ASSETS> 4441865
<PAYABLE-FOR-SECURITIES> 11805
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 11805
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4430060
<SHARES-COMMON-STOCK> 5534
<SHARES-COMMON-PRIOR> 5794
<ACCUMULATED-NII-CURRENT> 130101
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 262055
<NET-ASSETS> 4430060
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 399708
<OTHER-INCOME> 0
<EXPENSES-NET> 13089
<NET-INVESTMENT-INCOME> 386619
<REALIZED-GAINS-CURRENT> 99532
<APPREC-INCREASE-CURRENT> (177109)
<NET-CHANGE-FROM-OPS> 309042
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (429598)
<DISTRIBUTIONS-OF-GAINS> (1324769)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 260
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1685697)
<ACCUMULATED-NII-PRIOR> 173080
<ACCUMULATED-GAINS-PRIOR> 6994
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1394
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13089
<AVERAGE-NET-ASSETS> 5272909
<PER-SHARE-NAV-BEGIN> 1055.53
<PER-SHARE-NII> 69.862
<PER-SHARE-GAIN-APPREC> (14.018)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 239.387
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 800.517
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> I-TX
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 4658094
<INVESTMENTS-AT-VALUE> 5147552
<RECEIVABLES> 0
<ASSETS-OTHER> 123421
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5270973
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7883
<TOTAL-LIABILITIES> 7883
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5263090
<SHARES-COMMON-STOCK> 4907
<SHARES-COMMON-PRIOR> 5279
<ACCUMULATED-NII-CURRENT> 122364
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 102395
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 489459
<NET-ASSETS> 5263090
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 384680
<OTHER-INCOME> 0
<EXPENSES-NET> 12437
<NET-INVESTMENT-INCOME> 372243
<REALIZED-GAINS-CURRENT> 38994
<APPREC-INCREASE-CURRENT> (143368)
<NET-CHANGE-FROM-OPS> 267869
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (388740)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 372
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (517379)
<ACCUMULATED-NII-PRIOR> 138861
<ACCUMULATED-GAINS-PRIOR> 63401
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1255
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12437
<AVERAGE-NET-ASSETS> 5521780
<PER-SHARE-NAV-BEGIN> 1094.99
<PER-SHARE-NII> 75.86
<PER-SHARE-GAIN-APPREC> (21.27)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1072.568
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 35
<NAME> Q-MD
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 2003850
<INVESTMENTS-AT-VALUE> 2190560
<RECEIVABLES> 0
<ASSETS-OTHER> 68000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2258560
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 65127
<TOTAL-LIABILITIES> 65127
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2193433
<SHARES-COMMON-STOCK> 2782
<SHARES-COMMON-PRIOR> 2973
<ACCUMULATED-NII-CURRENT> 36987
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 186710
<NET-ASSETS> 2193433
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 175390
<OTHER-INCOME> 0
<EXPENSES-NET> 5762
<NET-INVESTMENT-INCOME> 169628
<REALIZED-GAINS-CURRENT> 37429
<APPREC-INCREASE-CURRENT> (78331)
<NET-CHANGE-FROM-OPS> 128726
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (183825)
<DISTRIBUTIONS-OF-GAINS> (452547)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 191
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (682284)
<ACCUMULATED-NII-PRIOR> 51184
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 710
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5762
<AVERAGE-NET-ASSETS> 2534575
<PER-SHARE-NAV-BEGIN> 967.28
<PER-SHARE-NII> 60.973
<PER-SHARE-GAIN-APPREC> (14.702)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 162.67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 788.437
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
