<PAGE>
Registration No. 33-25007
S E C U R I T I E S A N D E X C H A N G E C O M M I S
S I O
N
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 6
to
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF
1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact Name of Trust:
TAX EXEMPT SECURITIES TRUST,
SERIES 292
B.
Name of Depositor:
SMITH BARNEY INC.
<TABLE>
<S> <C>
C. Complete address of depositor's principal executive
office:
SMITH BARNEY
INCORPORATED
1345 Avenue of the Americas
New York, New York 10105
D. Name and complete address of agent for service:
STEPHEN J. TREADWAY
Smith Barney
Incorporated
1345 Avenue of the Americas
New York, New York 10105
</TABLE>
It is proposed that this filing will become effective February 20,
1995
pursuant to paragraph (b) of Rule 485.
<PAGE>
TAX EXEMPT SECURITIES TRUST
CROSS-REFERENCE SHEET
Pursuant to Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction
as to the Prospectus in Form S-6)
<TABLE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
I. Organization and General Information
<C> <S> <C>
1. . . . . . . . . (a) Name of trust Prospectus front cover
(b) Title of securities issued . .
2.Name and address of each depositor Sponsors: Prospectus back
cover
3. . . . Name and address of trustee Trustee
4.Name and address of each principal underwriterSponsors:
Prospectus back cover
5. . .State of organization of trust Tax Exempt Securities
Trust
6.Execution and termination of trust agreementTax Exempt
Securities Trust - The
Trust:
Amendment and Termination
of the Trust Agreement 7. .
. . . . . . . . Changes of name *
8. . . . . . . . . . . . Fiscal year *
9. . . . . . . . . . . . .Litigation *
II. General Description of the Trust and
Securities of the Trust
10.(a) Registered or bearer securities Rights of Unit Holders
(b) Cumulative or distributive securities
(c) Redemption . . . . . . . . . .
(d) Conversion, transfer, etc. . .
(e) Periodic payment plan. . . . . *
(f) Voting rights. . . . . . . . .
(g) Notice to certificate holders Rights of Unit Holders -
Reports and Records:
Sponsors -
Responsibility: Trustee -
Resignation: Amendment
and Termination of the
Trust Agreement -
Amendment
(h) Consents required. . . . . . . Sponsors - Responsibility:
Amendment and Termination
of the Trust Agreement (i) Other
provisions . . . . . . . Tax Exempt Securities Trust - Tax Status
11.Type of securities comprising units Prospectus front cover:
Tax Exempt Securities
Trust - Portfolio
12.Certain information regarding periodic
payment certificates. . . . . . . *
13.. .(a) Load, fees, expenses, etc. Prospectus front cover:
Summary of Essential
Information; Public
Offering - Offering
Price; Public Offering -
Sponsors' and
Underwriters' Profits:
Tax Exempt Securities
Trust - Expenses and
Charges
<PAGE>
Form N-89B-2 Form S-6
Item Number Heading in Prospectus
II. General Description of the Trust and
Securities of the Trust
<C> <S> <C>
(b) Certain information regarding periodic
payment certificates . . . . *
(c) Certain percentages. . . . . . Public Offering - Offering
Price
(d) Certain other fees, etc, payable by holders
Rights of Unit Holders - Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons . . . . . . Public Offering - Sponsors'
and Underwriters' Profits:
Rights of Unit Holders -
Redemption of Units -
Purchase by the Sponsors of
Units Tendered for
Redemption
(f) Ratio of annual charges to income*
14.. .Issuance of trust's securities Tax Exempt Securities
Trust - The Trust: Rights
of Unit Holders -
Certificates
15.Receipt and handling of payments from purchasers*
16.Acquisition and disposition of underlying
securities . . . . . . . . . . . . Tax Exempt Securities Trust
- Portfolio: Sponsors -
Responsibility
17.. . . . .Withdrawal or redemption Rights of Unit Holders -
Redemption of Units
18.(a) Receipt, custody and disposition of incomeRights of Units
Holders - Distribution of
Interest and Principal:
Rights of Unit Holders -
Reports and Records
(b) Reinvestment of distributions *
(c) Reserves or special funds. . . Rights of Unit Holders -
Distribution of Interest
and Principal: Tax Exempt
Securities Trust - Expenses
and Charges - Other Charges (d) Schedule of
distributions. . . *
19.. . Records, accounts and reports Rights of Unit Holders -
Reports and Records:
Rights of Unit Holders -
Distribution of Interest
and Principal
20.Certain miscellaneous provisions of trust agreementAmendment
and Termination of the Trust
(a) Amendment. . . . . . . . . . . Agreement: Trustee -
Resignation: Trustee -
(b) Termination . . . . . . . . . Resignation: Trustee -
Limitations on Liability:
(c) and (d) Trustee, removal and successorSponsors -
Responsibility: Sponsors - Resignation
(e) and (f) Depositors, removal and successor
21.. . . . Loans to security holders *
22.. . . . .Limitations on liability Sponsors - Limitations on
Liability: Trustee -
Limitations on Liability:
Tax Exempt Securities
Trust - Portfolio
23.. . . . . . .Bonding arrangements *
24.Other material provisions of trust agreement*
______
* Inapplicable, answer negative or not required.
<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
III. Organization, Personnel and
Affiliated Persons of Depositor
<C> <S> <C>
25.. . . .Organization of depositors Sponsors
26.. . . Fees received by depositors *
27.. . . . . .Business of depositors Sponsors
28.Certain information as to officials and
affiliated persons of depositors [Contents of Registration
Statement]
29.. Voting securities of depositors *
30.. .Persons controlling depositors *
31.Payments by depositor for certain services
rendered to trust . . . . . . . . *
32.Payments by depositors for certain other services
rendered to trust . . . . . . . . *
33.Remuneration of employees of depositors for
certain services rendered to trust *
34.Remuneration of other persons for certain services
rendered to trust . . . . . . . . *
IV. General Description of the Trust and
Securities of the Trust
35.Distribution of trust's securities by statesPublic Offering -
Distribution of Units
36.Suspension of sales of trust's securities*
37.Revocation of authority to distribute*
38.. . . .(a) Method of distribution Public Offering -
Distribution of Units
(b) Underwriting agreements. . . .
(c) Selling agreements . . . . . .
39.(a) Organization of principal underwritersSponsors
(b) N.A.S.D. membership of principal underwriters
40.Certain fees received by principal underwriters*
41.(a) Business of principal underwritersSponsors
(b) Branch offices of principal underwriters*
(c) Salesmen of principal underwriters*
42.Ownership of trust's securities by certain persons*
43.Certain brokerage commissions received by principal
underwriters. . . . . . . . . . . *
44.. . . . . (a) Method of valuation Prospectus front cover:
Public Offering -
Offering Price: Public
Offering - Distribution
of Units
(b) Schedule as to offering price *
(c) Variation in offering price to certain personsPublic
Offering - Distribution of Units
45.. Suspension of redemption rights *
46.. . . . .(a) Redemption Valuation Rights of Unit Holders -
Redemption of Units -
Computation of Redemption
Price per Unit
(b) Schedule as to redemption price *
47.Maintenance of position in underlying securities
Public Offering - Market for Units: Rights of Unit Holders -
Redemption of Units - Purchase by the Sponsors of Units
tendered for Redemption; Rights of Unit Holders - Redemption
of Units - Computation of Redemption Price per Unit
______
* Inapplicable, answer negative or not required.<PAGE>
<PAGE> Form N-89B-2 Form S-6
Item Number Heading in Prospectus
V. Information Concerning the Trustee
or Custodian
<C> <S> <C>
48.Organization and regulation of trusteeTrustee
49.. . .Fees and expenses of trustee Tax Exempt Securities
Trust - Expenses and
Charges
50.. . . . . . . . . .Trustee's lien Tax Exempt Securities
Trust - Expenses and
Charges - Other Charges
VI. Information Concerning Insurance of
Holders of Securities
51.Insurance of holders of trust's securities*
VI. Policy of Registrant
52. (a) Provisions of trust agreement with respect to
selection or elimination of underlying securitiesProspectus
front cover: Sponsors-Responsibility
(b)Transactions involving elimination of
underlying securities . . . . . *
(c)Policy regarding substitution or elimination
of underlying securities. . . . Sponsors - Responsibility
(d)Fundamental policy not otherwise covered*
53. Tax status of trust . . . . . . Prospectus front cover: Tax
Exempt Securities Trust -
Tax Status
VIII. Financial and Statistical Information
54. Trust's securities during last ten years*
55. . . . . . . . . . . . . . . . . *
56. Certain information regarding periodic payment
securities . . . . . . . . . . . . *
57. . . . . . . . . . . . . . . . . *
58. . . . . . . . . . . . . . . . . *
59. Financial statements (Instruction 1(c) to form S-6)
Statement of Financial Condition of The Tax Exempt Securities
Trust
______
* Inapplicable, answer negative or not required.
<PAGE>
</TABLE>
New Jersey Trust 85
Pennsylvania Trust 85
[S] [C]
In the opinion of counsel, under existing law interest income to the
Trusts and, with certain exceptions, to Unit holders is exempt from
all Federal income tax. In addition, in the opinion of counsel, the
interest income of each State Trust is similarly exempt from state
income taxes in the state for which such Trust is named. Capital
gains, if any, are subject to tax. Investors should retain both parts
of this Prospectus for future reference.
THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS
HAS BEEN COMPLETED. THE UNITS OFFERED HEREBY
ARE ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN
ACQUIRED BY THE SPONSORS EITHER BY PURCHASE
FROM THE TRUSTEE OF UNITS TENDERED FOR
REDEMPTION OR IN THE SECONDARY MARKET. SEE PART
B, "RIGHTS OF UNIT HOLDERS--REDEMPTION OF UNITS--
PURCHASE BY THE SPONSORS OF UNITS TENDERED FOR
REDEMPTION" AND "MARKET FOR UNITS". THE PRICE AT
WHICH THE UNITS OFFERED HEREBY WERE ACQUIRED
WAS NOT LESS THAN THE REDEMPTION PRICE
DETERMINED AS PROVIDED HEREIN. SEE PART B,
"RIGHTS OF UNIT HOLDERS--REDEMPTION OF UNITS--
COMPUTATION OF REDEMPTION PRICE PER UNIT".
THE TAX EXEMPT SECURITIES TRUST, SERIES 292 consists
of 2 underlying separate unit investment trusts (the "Trusts")
designated as New Jersey Trust 85 and Pennsylvania Trust 85 (the
New Jersey and Pennsylvania Trusts being herein called collectively
the "State Trusts") each formed for the purpose of obtaining for its
Unit holders tax-exempt interest income and conservation of capital
through investment in a fixed portfolio of municipal bonds rated at
the time of deposit A or better by Standard & Poor's Corporation
or Moody's Investors Service, with certain ratings being provisional
or conditional. (See "Portfolio of Securities".) Each State Trust is
comprised of a fixed portfolio of interest-bearing obligations issued
primarily by or on behalf of the State for which such Trust is
named and counties, municipalities, authorities and political
subdivisions thereof. The interest on all bonds in each State Trust
is, in the opinion of recognized bond counsel to the issuers of the
obligations, (i) exempt under existing law (except in certain
instances depending upon the Unit holders) from all Federal
income tax, (ii) exempt from state income taxes in the State for
which such Trust is named (see Part C, "Tax Exempt Securities
Trust - Taxes") and (iii) subject to the alternative minimum tax
under the Tax Reform Act of 1986 as respects the required
inclusion in the alternative minimum tax base of one-half of
adjusted net book income of corporate Unit holders. (See Part B,
"Tax Exempt Securities Trust - Tax Status.")
THE OBJECTIVES of the Trusts are tax-exempt income and
conservation of capital through an investment in a diversified
portfolio consisting primarily of municipal bonds. There is, of
course, no guarantee that the Trusts' objectives will be achieved
since the payment of interest and preservation of principal are
dependent upon the continued ability of the issuers of the bonds
to meet such obligations.
THE PUBLIC OFFERING PRICE of the Units of each State Trust
is equal to the aggregate bid price of the underlying securities in
the State Trust's portfolio divided by the number of Units
outstanding in such Trust, plus a sales charge. This charge will be
equal to 3.25% and 5% of the Public Offering Price (3.359% and
5.263% of the aggregate bid price of the securities per Unit). A
proportional share of accrued and undistributed interest on the
Securities at the date of delivery of the Units to the purchaser is
also added to the Public Offering Price.
THE SPONSORS, although not obligated to do so, intend to
maintain a market for the Units of the Trusts at prices based upon
the aggregate bid price of the underlying Securities, as more fully
described in Part B, "Market for Units". If such a market is not
maintained, a Unit holder may be able to dispose of his Units only
through redemption, at prices based upon the aggregate bid price
of the underlying Securities.
MONTHLY DISTRIBUTIONS of principal and interest received by
each Trust will be made on or shortly after the fifteenth day of
each month to holders of record on the first day of that month.
For further information regarding the distributions by each Trust,
see the "Summary of Essential Information".
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Part A dated February 20, 1995
Note: Part A of this Prospectus may not be distributed unless
accompanied by Part B.
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
SUMMARY OF ESSENTIAL INFORMATION AS OF
DECEMBER 6, 1994+
Sponsor: SMITH BARNEY INC.
Trustee: UNITED STATES TRUST COMPANY OF NEW YORK
Evaluator: KENNY S&P EVALUATION SERVICES
New JerseyPennsylvania
Trust 85Trust 85
<S><C><C>
Principal Amount of Securities in Trust$2,010,000$2,325,000
Number of Units 2,6692,921
Fractional Undivided Interest in Trust per Unit 1/2,6691/2,921
Minimum Value of Trust:
Trust may be terminated if Principal Amount is less
than$1,500,000$1,500,000
Trust must be terminated if Principal Amount is
less than $750,000$750,000
Principal Amount of Securities in Trust per Unit
$753.09$795.96
Public Offering Price per Unit#*$788.09$840.15
Sales Charge (3.25% and 5%, respectively, of Public Offering
Price)# 25.61 42.01
Approximate Redemption and Sponsor's Repurchase Price
per Unit (per Unit Bid Price of Securities)#**$762.48$798.14
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit$56.10$59.71
Less Estimated Annual Expenses per Unit 1.73 1.72
Estimated Net Annual Income per Unit$54.37$57.99
Monthly Income Distribution per Unit$4.53$4.83
Daily Rate (360-day basis) of Income Accrual per Unit$.1510$.1610
Estimated Current Return Based on Public Offering Price#
6.89%6.90%
Estimated Long-Term Return# 6.06%6.25%
<FN>
#Subject to changes in the prices of the underlying securities. The
aggregate bid price of the securities is determined on each business
day as of the Evaluation Time.
*Plus $12.21 and $12.59 per Unit, representing accrued interest and
the net of cash on hand, accrued expenses and amounts
distributable to Unit holders, attributable to the Units of New
Jersey Trust and Pennsylvania Trust, respectively, through the
expected date of settlement (five business days after December 6,
1994).
The sales charge of the New Jersey Trust was previously reduced
because prerefundings of Portfolio securities have shortened the
average life of the Trust.
**Plus $11.47 and $11.16 per Unit, representing accrued interest
and the net of cash on hand, accrued expenses and amounts
distributable to Unit holders, attributable to the Units of New
Jersey Trust and Pennsylvania Trust, respectively, as of December
6, 1994 on a pro rata basis. (See "Redemption of Units-
Computation of Redemption Price per Unit".)<PAGE>
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
Record Dates: The 1st day of each month
Distribution Dates: The 15th day of each month
Evaluation Time: Close of trading on the New York Stock Exchange
(currently 4:00 P.M. New York Time)
Date of Deposit and
Trust Agreement: December 14, 1988
Mandatory Termination Date: January 1, 2038
Trustee's Annual Fee: $1.26 per $1,000 principal amount
of bonds ($5,462 per year on the
basis of bonds in the principal
amount of $4,335,000) plus
expenses.
Evaluator's Fee: $.30 per bond per evaluation
As of December 6, 1994, 5 (61%) of the Bonds in the New Jersey
Trust were rated by Standard & Poor's Corporation (34% being rated
AAA, 21% being rated AA and 6% being rated A) and 3 (39%) were
rated by Moody's Investors Service (13% being rated Aa and 26%
being rated Baa); 4 (60%) of the Bonds in the Pennsylvania Trust
were rated by Standard & Poor's (25% being rated AAA and 35%
being rated AA) and 3 (40%) were rated by Moody's (29% being
rated A and 11% being rated Baa). Ratings assigned by rating
services are subject to change from time to time.
Additional Considerations - Investment in any Trust should be
made with an understanding that the value of the underlying Portfolio
may decline with increases in interest rates. Approximately 31% of
the Bonds in the New Jersey Trust and 38% of the Bonds in the
Pennsylvania Trust consist of hospital revenue bonds (including
obligations of health care facilities). Approximately 17% of the
Bonds in the Pennsylvania Trust consist of obligations of municipal
housing authorities. Obligations of issuers located in the
Commonwealth of Puerto Rico represent approximately 13% of the
Bonds in the New Jersey Trust. (See Part B "Tax Exempt Securities
Trust-Portfolio" for a brief summary of additional considerations
relating to certain of these issues.)
+ The percentages referred to in this summary are each computed
on the basis of the aggregate bid price of the Bonds as of December
6, 1994.
<PAGE>
<PAGE>
<TABLE>TAX EXEMPT SECURITIES TRUST, SERIES 292
FINANCIAL AND STATISTICAL INFORMATION
Selected data for each Unit outstanding
IncomePrincipal
UnitsNet AssetDistributionsDistributions
Period EndedOutstandingValue Per UnitPer UnitPer Unit
<C><S><C><C><C><C>
October 31, 1992New Jersey Trust2,948$1,052.47$76.68$15.67
Pennsylvania Trust3,0001,046.4278.90-
October 31, 1994New Jersey Trust2,948$1,007.56$71.94$87.24
Pennsylvania Trust2,9211,096.8078.84-
October 31, 1994New Jersey Trust2,669$781.35$68.84$151.71
Pennsylvania Trust2,921903.8866.70119.86
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
BALANCE SHEETS
October 31, 1994
ASSETS
New JerseyPennsylvania
Trust 85Trust 85
<S><C><C>
Investments in tax exempt bonds, at market value
(Cost $1,928,055 and $2,501,017, respectively)
(Note 3 to Portfolio of Securities)$2,046,708$2,592,582
Accrued interest 54,827 78,017
Total Assets$2,101,535$2,670,599
LIABILITIES AND NET ASSETS
Overdraft payable$15,397$29,607
Accrued expenses 690 750
Total Liabilities 16,087 30,357
Net Assets (Units of fractional undivided interest
outstanding - 2,669 and 2,921, respectively):
Original cost to investors (Note 1) 3,127,5603,125,007
Less initial underwriting commission (sales charge) (Note 1)
147,000 147,000
2,980,5602,978,007
Cost of bonds sold or redeemed since date of deposit
(December 14, 1988) (1,052,505)(476,990)
Net unrealized market appreciation 118,653 91,565
2,046,7082,592,582
Undistributed net investment income 40,263 47,651
Undistributed proceeds from bonds sold or redeemed
(1,523) 9
Net Assets 2,085,448 2,640,242
Total Liabilities and Net Assets$2,101,535$2,670,599
Net asset value per unit$781.35$903.88
The accompanying Notes to Financial Statements are an
integral part of these statements.
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
NEW JERSEY TRUST 85
STATEMENTS OF OPERATIONS
For the years ended October 31, 1994, 1993 and 1992
1994 1993 1992
<S><C><C><C>
Investment Income-interest (Note 2)$ 200,046$ 216,313$
233,623
Less expenses:
Trustee's fees and expenses 4,5504,6234,720
Evaluator's fees 726 779 596
Total expenses 5,276 5,402 5,316
Net investment income 194,770 210,911 228,307
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on securities transactions
(Note 5) (61,372)23,7507,281
Net increase (decrease) in unrealized market
appreciation (150,226) 102,188 (13,771)
Net gain (loss) on investments (211,598) 125,938 (6,490)
Net increase (decrease) in net assets resulting from
operations$(16,828)$336,849$221,817
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$194,770$210,911$228,307
Net realized gain (loss) on securities transactions
(Note 5) (61,372)23,7507,281
Net increase (decrease) in unrealized market
appreciation (150,226) 102,188 (13,771)
Net increase (decrease) in net assets resulting from
operations (16,828) 336,849 221,817
Distributions to Unit Holders:
Net investment income (Note 4) (198,817)(212,079)(228,319)
Proceeds from securities sold or redeemed (424,636) (257,184)
(46,587)
Total Distributions (623,453) (469,263) (274,906)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption (3,760)- (764)
Value of Units at date of redemption (240,798) -
(54,482)
Total Redemptions (244,558) - (55,246)
Decrease in net assets (884,839)(132,414)(108,335)
Net Assets:
Beginning of year 2,970,287 3,102,701 3,211,036
End of year (including undistributed net
investment income of $40,263, $48,070 and
$49,238, respectively)$2,085,448$2,970,287$3,102,701
The accompanying Notes to Financial Statements are an integral part
of these statements.<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
PENNSYLVANIA TRUST 85
STATEMENTS OF OPERATIONS
For the years ended October 31, 1994, 1993 and 1992
1994 1993 1992
Investment Income-interest (Note 2)$ 200,363$ 238,834$
242,331
Less expenses:
Trustee's fees and expenses 4,6585,0574,905
Evaluator's fees 683 753 443
Total expenses 5,341 5,810 5,348
Net investment income 195,022 233,024 236,983
Realized and unrealized gain (loss) on investments:
Net realized loss on securities transactions (Note 5) - (41,365)-
Net increase (decrease) in unrealized market
appreciation (213,616) 195,782 10,389
Net gain (loss) on investments (213,616) 154,417 10,389
Net increase (decrease) in net assets resulting from
operations$(18,594)$387,441$247,372
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended October 31, 1994, 1993 and 1992
1994 1993 1992
Operations:
Net investment income$195,022$233,024$236,983
Net realized loss on securities transactions (Note 5) - (41,365)-
Net increase (decrease) in unrealized market
appreciation (213,616) 195,782 10,389
Net increase (decrease) in net assets resulting from
operations (18,594) 387,441 247,372
Distributions to Unit Holders:
Net investment income (Note 4) (194,831) (236,520) (236,700)
Proceeds from securities sold or redeemed (350,111) -
-
Total Distributions (544,942) (236,520) (236,700)
Unit Redemptions by Unit Holders (Note 3):
Accrued interest at date of redemption - (920)-
Value of Units at date of redemption - (85,505) -
Total Redemptions - (86,425) -
Increase (decrease) in net assets (563,536)64,49610,672
Net Assets:
Beginning of year 3,203,778 3,139,282 3,128,610
End of year (including undistributed net
investment income of $47,651, $47,460 and
$51,876, respectively)$2,640,242$3,203,778$3,139,282
The accompanying Notes to Financial Statements are an integral part
of these statements.
<PAGE>
</TABLE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
October 31, 1994
NOTES TO FINANCIAL STATEMENTS
(1) The original cost to the investors represents the aggregate initial
public offering price as of the date of deposit (December 14, 1988),
exclusive of accrued interest, computed on the basis of the aggregate
offering price of the securities. The initial underwriting commission
(sales charge) was 4.70% of the aggregate Public Offering Price
(4.932% of the aggregate offering price of the securities per Unit)
for the New Jersey Trust and Pennsylvania Trust, respectively.
(2) Interest income represents interest earned on the Trust's portfolio
and has been recorded on the accrual basis.
(3) 331 Units and 79 Units in the New Jersey Trust and Pennsylvania
Trust, respectively, were redeemed by the Trustee during the three
years ended October 31, 1994 (279 Units in the New Jersey Trust
being redeemed in 1994. 79 Units in the Pennsylvania Trust being
redeemed in 1993. 52 Units in the New Jersey Trust being
redeemed in 1992).
(4) Interest received by the Trust is distributed to Unit holders on the
fifteenth day of each month, after deducting applicable expenses.
(5) The gain (loss) from the sale or redemption of securities is
computed on the basis of the average cost of the issue sold or
redeemed.
(6) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of
each Trust and is responsible for establishing and maintaining a
system of internal control directly related to, and designed to
provide reasonable assurance as to the integrity and reliability of,
financial reporting of each Trust. The Trustee is also responsible
for all estimates of expenses and accruals reflected in each Trust's
financial statements. The Evaluator determines the price for each
underlying Bond included in each Trust's Portfolio of Securities on
the basis set forth in Part B, "Public Offering - Offering Price".
Under the Securities Act of 1933, as amended (the "Act"), the
Sponsor is deemed to be issuer of each Trust's Units. As such, the
Sponsor has the responsibility of issuer under the Act with respect
to financial statements of each Trust included in the Registration
Statement.
INDEPENDENT AUDITORS' REPORT
To the Unit Holders, Sponsor and Trustee of
Tax Exempt Securities Trust, Series 292:
We have audited the accompanying balance sheets of Tax Exempt
Securities Trust, Series 292 (comprising, respectively, New Jersey Trust
85 and Pennsylvania Trust 85), including the portfolio of securities, as of
October 31, 1994, and the related statements of operations and changes
in net assets for each of the years in the three-year period ended
October 31, 1994. These financial statements are the responsibility of
the Trustee (see Note 6). Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities
owned as of October 31, 1994 by correspondence with the Trustee. An
audit also includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
Trusts constituting Tax Exempt Securities Trust, Series 292 as of October
31, 1994, and the results of their operations and changes in their net
assets for each of the years in the three-year period ended October 31,
1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
February 3, 1995
<PAGE>
<TABLE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
NEW JERSEY TRUST 85 - PORTFOLIO OF SECURITIES -
October 31, 1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
<S><C><C><C><C>
New Jersey Building Authority,
State Building Revenue Bonds, Aa*12/15/97 @ 103$250,000$267,643
7.20% due 6/15/2013S.F. 6/15/08 @ 100
New Jersey Health Care Facilities
Financing Authority Revenue Bonds,
Chilton Memorial Hospital Issue,A-7/1/96 @ 102115,000125,344
9.375% due 7/1/2013 (p)
New Jersey Health Care Facilities
Financing Authority Revenue Bonds,
New Jersey Geriatric Center of
Workmen's Circle, Inc., Issue, FHA AAA8/1/98 @ 102235,000250,252
Insured Mortgage, 8.00% due 2/1/2028
New Jersey Health Care Facilities
Financing Authority Revenue Bonds,
Rahway Hospital Issue, Baa1*7/1/98 @ 102250,000261,832
7.75% due 7/1/2014S.F. 7/1/07 @ 100
New Jersey Highway Authority, Garden
State Parkway, Senior Parkway RevenueAA-1/1/96 @
100500,000430,425
Bonds, 5.50% due 1/1/2016
The Camden County, New Jersey,
Municipal Utilities Authority, County
Agreement Sewer Revenues Bonds,AAA12/1/97 @ 102250,000271,080
8.25% due 12/1/2017S.F. 12/1/08 @ 100
Rutgers, The State University of
New Jersey, Revenue Bonds, AAA5/1/98 @ 102160,000177,587
8.00% due 5/1/2018 (p)
Puerto Rico Industrial Medical & Higher
Educational & Environmental Bonds,
Pollution Control Facility Authority,
American Airlines Inc., Baa1*12/1/95 @ 102 250,000 262,545
8.75% due 12/1/2025
$2,010,000$2,046,708
The accompanying Notes are an integral part of this Portfolio.
A-9<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
PENNSYLVANIA TRUST 85 - PORTFOLIO OF SECURITIES -
October 31, 1994
RatingsRedemptionPrincipalMarket
Security Description (1) Provisions (2) Amount Value (3)
Pennsylvania Higher Educational
Facilities Authority, Trustee of the
University of Pennsylvania Revenue AA1/1/97 @
100$330,000$320,549
Bonds, 6.625% due 1/1/2017S.F. 1/1/08 @ 100
Pennsylvania Turnpike Commission,
Pennsylvania Turnpike Revenue Bonds,A1*12/1/96 @
100500,000453,560
6.00% due 12/1/2017S.F. 12/1/16 @ 100
Butler County, Pennsylvania, Industrial
Development Authority, First Mortgage
Revenue Refunding Bonds, Pittsburgh
Lifetime Care Community, Sherwood A-6/1/96 @ 102370,000396,636
Oaks Project, 8.75% due 6/1/2016S.F. 6/1/01 @ 100
Chester County, Pennsylvania Hospital
Authority, Hospital Revenue Bonds,A-7/1/97 @ 102425,000429,645
Brandywine Hospital, 7.00% due 7/1/2010S.F. 7/1/00 @ 100
The Hospitals and Higher Education
Facilities Authority of Philadelphia,
Pennsylvania, Hospital Revenue Bonds,
Nazareth Hospital Project, Ba1*7/1/95 @ 102250,000252,713
9.375% due 7/1/2015S.F. 7/1/00 @ 100
Westmoreland County, Pennsylvania,
Industrial Development Authority,
Hospital Revenue Refunding Bonds,
Citizens General Hospital,A*7/1/97 @ 102200,000216,174
8.25% due 7/1/2013S.F. 7/1/03 @ 100
York County, Pennsylvania, Solid Waste
and Refuse Authority, Industrial
Development Revenue Bonds, Resource AA-12/1/97 @
103250,000268,305
Recovery Project, 8.20% due 12/1/2014S.F. 12/1/08 @ 100
York County, Pennsylvania, Industrial
Development Authority, Pollution Control
Revenue Bonds, Public Service Electric
and Gas Company Peach Bottom Project, A2*11/1/94 @ 102
250,000 255,000
10.375% due 11/1/2012 (p)
$2,575,000$2,592,582
The accompanying Notes are an integral part of this Portfolio.
A-10
<PAGE>
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 292
PORTFOLIO OF SECURITIES - October 31, 1994
(Continued)
At October 31, 1994 the net unrealized market appreciation of all tax
exempt bonds was comprised of the following:
New JerseyPennsylvania
Trust 85Trust 85
<S><C><C>
Gross unrealized market appreciation$126,212$146,892
Gross unrealized market depreciation (7,559) (55,327)
Net unrealized market appreciation $118,653$91,565
</TABLE>
NOTES TO PORTFOLIO OF SECURITIES:
(1) All Ratings are by Standard & Poor's Corporation, except those
identified by an asterisk (*) which are by Moody's Investors
Service. The meaning of the applicable rating symbols is set
forth in Part B, "Ratings".
(2) There is shown under this heading the year in which each issue
of bonds initially or currently is redeemable and the redemption
price for that year; unless otherwise indicated, each issue
continues to be redeemable at declining prices thereafter, but
not below par. "S.F." indicates a sinking fund has been or will
be established with respect to an issue of bonds. The prices at
which bonds may be redeemed or called prior to maturity may
or may not include a premium and, in certain cases, may be less
than the cost of the bonds to the Trust. Certain bonds in the
portfolios, including bonds not listed as being subject to
redemption provisions, may be redeemed in whole or in part
other than by operation of the stated redemption or sinking fund
provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and
provisions of such bonds. For example, see discussion of
obligations of municipal housing authorities under "Tax Exempt
Securities Trust-Portfolio" in Part B.
(3) The market value of securities as of October 31, 1994 was
determined by the Evaluator on the basis of bid prices for the
securities at such date.
(p) It is anticipated that these bonds will be redeemed prior
to their scheduled maturity, pursuant to a pre-refunding,
as reflected under the column "Redemption Provisions".
A-11
<PAGE>
PROSPECTUS-PART B
Note: Part B of this Prospectus may not be
distributed
unless accompanied by Part A
TAX EXEMPT SECURITIES TRUST
Each State Trust or Umbrella Series is one of a
series of similar but separate unit investment trusts created under
the laws of the State of New York
by a Trust Indenture and Agreement and related Reference Trust
Agreement (collectively, the "Trust Agreement"), dated the Date of
Deposit, among the sponsors, United States Trust Company of New
York, as trustee (the "Trustee"),
and J.J. Kenny Co., Inc., as evaluator (the "Evaluator"). As of
the date of this Prospectus, the sponsor is Smith Barney Inc. (the
"Sponsor" ). Each trust contains Bonds of a State for which such
Trust is named herein (a "State
Trust"). On the Date of Deposit the Sponsor deposited with the
Trustee interest-bearing obligations (the "Bonds"), including
contracts for the purchase of certain
such obligations for the State Trusts and all other Trusts
(hereinafter referred to
as the "Umbrella Series")(such Bonds and Deposited Units being
referred to herein collectively as the "Securities"). The Trustee
thereafter delivered to the
Sponsor registered certificates of beneficial interest (the
"Certificates") representing the units (the "Units") comprising the
entire ownership of each State Trust or Umbrella Series. The
initial public offering of Units in each State
Trust and Umbrella Series has been completed. The Units offered
<PAGE>
hereby are issued and outstanding Units which have been acquired by
the Sponsor either by purchase from the Trustee of Units tendered
for redemption or in the secondary
market. References to multiple Trusts in Part B herein should be
read as references to a single Trust if Part A indicates the
creation of only one Trust.
See "Rights of Unit Holders -- Redemption of Units -- Purchase by
the Sponsor of Units Tendered for Redemption" and "Public Offering
- -- Market for Units."
Objectives
The objectives of each State Trust and Umbrella
Series are tax-exempt income and conservation of capital through an
investment in a diversified portfolio of municipal bonds. There
is, of course, no guarantee that a Multistate Trust's or Umbrella
Series' objectives will be achieved since the payment of interest
and the preservation of principal are dependent upon the continued
ability of the issuers of the Bonds to meet such obligations.
Portfolio
The following factors, among others, were
considered in selecting the Bonds for each State Trust and Umbrella
Series: (1) all the Bonds deposited
in a State Trust or an Umbrella Series are obligations of the State
for which such State Trust is named or of the counties or
municipalities of such State, territories or possessions of the
United States, and authorities or political
subdivisions thereof, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental
authorities given on the
date of the original delivery of the Bonds, be exempt from Federal
income tax under existing law and from state income taxes in the
state for which such Trust is named in each case to the extent
indicated in "Tax Exempt Securities Trust -
Taxes", (2) the Bonds are diversified as to purpose of issue, and
(3) in the opinion of the Sponsor, the Bonds are fairly valued
relative to other bonds of comparable quality and maturity. The
rating of each issue is also set forth in
Part A, "Portfolio of Securities." For a description of the
meaning of the applicable rating symbols as published by Standard
& Poor's and Moody's, see
"Ratings." It should be emphasized, however, that the ratings of
Standard & Poor's and Moody's represent their opinions as to the
quality of the Bonds which they undertake to rate, and that these
ratings are general and are not absolute standards of quality.
References to State Trusts, in the following
discussion, also relate to other Trusts comprising Umbrella Series.
The Bonds in the Portfolio of a State Trust were
chosen in part on the basis of their respective maturity dates. The
<PAGE>
actual maturity date of each of the Bonds contained in a State
Trust is indicated in Part A. A sale or other
disposition of a Bond by the Trust prior to the maturity of such
Bond may be at a price which results in a loss to the State Trust
or Umbrella Series. The inability of an issuer to pay the principal
amount due upon the maturity of a Bond would result in a loss to
the State Trust or Umbrella Series.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust
and Umbrella Series are subject to redemption prior to their stated
maturity date pursuant to
sinking fund or call provisions. (See Part A-"Portfolio Summary as
of Date of Deposit" for information relating to the particular
State Trust and Umbrella
Series described therein.) In general, a call or redemption
provision is more likely to be exercised when the offering price
valuation of a bond is higher than
its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less
than the bond's call or redemption price.
To the extent that a Bond was deposited in a State Trust and
Umbrella Series at a price higher than the price at which it is
redeemable, redemption will result
in a loss of capital when compared with the original public
offering price of the Units. Conversely, to the extent that a Bond
was acquired at a price lower than
the redemption price, redemption will result in an increase in
capital when compared with the original public offering price of
the Units. Monthly distributions will generally be reduced by the
amount of the income which would
otherwise have been paid with respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the
Units may be affected by such redemptions. Each Portfolio of
Securities in Part A contains a listing of
the sinking fund and call provisions, if any, with respect to each
of the Bonds in a State Trust and Umbrella Series. Because certain
of the Bonds may from time to time under certain circumstances be
sold or redeemed or will mature in
accordance with their terms and the proceeds from such events will
be distributed to Unit holders and will not be reinvested, no
assurance can be given that a State Trust and Umbrella Series will
retain for any length of time its
present size and composition. Neither the Sponsor nor the Trustee
shall be liable in any way for any default, failure or defect in
any Bond.
The Portfolio of the State Trust and Umbrella
Series may consist of some Bonds whose current market values were
below face value on the Date
of Deposit. A primary reason for the market value of such Bonds
being less than face value at maturity is that the interest coupons
<PAGE>
of such Bonds are at lower rates than the current market interest
rate for comparably rated Bonds, even
though at the time of the issuance of such Bonds the interest
coupons thereon represented then prevailing interest rates on
comparably rated Bonds then newly
issued. Bonds selling at market discounts tend to increase in
market value as they approach maturity when the principal amount is
payable. A market discount
tax-exempt Bond held to maturity will have a larger portion of its
total return in the form of taxable ordinary income and less in the
form of tax-exempt
income than a comparable Bond bearing interest at current market
rates. Under the provisions of the Internal Revenue Code in effect
on the date of this Prospectus any ordinary income attributable to
market discount will be taxable but will not be realized until
maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of
Deposit", the State Trust and Umbrella Series may contain or be
concentrated in one or more of the classifications of Bonds
referred to below. A State Trust and Umbrella
Series is considered to be "concentrated" in a particular category
when the Bonds in that category constitute 25% or more of the
aggregate value of the
Portfolio. (See Part A-"Portfolio Summary as of Date of Deposit"
for information relating to the particular State Trust and Umbrella
Series described therein.) An investment in Units of the State
Trust and Umbrella Series should be made with an understanding of
the risks that these investments may entail,
certain of which are described below.
General Obligation Bonds. Certain of the Bonds in
the Portfolio may be general obligations of a governmental entity
that are secured by the taxing power of the entity. General
obligation bonds are backed by the issuer's
pledge of its full faith, credit and taxing power for the payment
of principal and interest. However, the taxing power of any
governmental entity may be limited
by provisions of state constitutions or laws and an entity's credit
will depend on many factors, including an erosion of the tax base
due to population declines, natural disasters, declines in the
state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding
the tax base and the extent to which the entity relies on Federal
or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse
impact upon both their revenues and expenditures, as well as other
factors, many state and local governments are confronting deficits
and potential deficits which are the most
severe in recent years. Many issuers are facing highly difficult
<PAGE>
choices about significant tax increases and/or spending reductions
in order to restore budgetary
balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits
or cash flow needs.
In addition, certain of the Bonds in the State
Trust and Umbrella Series may be obligations of issuers (including
California issuers) who rely in
whole or in part on ad valorem real property taxes as a source of
revenue. Certain proposals, in the form of state legislative
proposals or voter initiatives, to limit ad valorem real property
taxes have been introduced in various states,
and an amendment to the constitution of the State of California,
providing for strict limitations on ad valorem real property taxes,
has had a significant impact
on the taxing powers of local governments and on the financial
conditions of school districts and local governments in California.
It is not possible at this time to predict the final impact of such
measures, or of similar future legislative
or constitutional measures, on school districts and local
governments or on their abilities to make future payments on their
outstanding debt obligations.
Industrial Development Revenue Bonds ("IDRs").
IDRs, including pollution control revenue bonds, are tax-exempt
securities issued by states,
municipalities, public authorities or similar entities ("issuers")
to finance the cost of acquiring, constructing or improving various
projects, including pollution
control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are
not general obligations of governmental entities backed by their
taxing power. Issuers are only obligated
to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or
revenues of the issuer under arrangements between the issuer and
the corporate operator of a project. These
arrangements may be in the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in
each case the payments to the issuer are designed to be sufficient
to meet the payments of amounts due on the IDRs.
IDRs are generally issued under bond resolutions,
agreements or trust indentures pursuant to which the revenues and
receipts payable under the issuer's arrangements with the corporate
operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee
for the benefit of the holders of the IDRs. In certain cases, a
mortgage on the underlying project has been assigned to the holders
of the IDRs or a trustee as additional
security for the IDRs. In addition, IDRs are frequently directly
<PAGE>
guaranteed by the corporate operator of the project or by another
affiliated company. Regardless of the structure, payment of IDRs is
solely dependent upon the creditworthiness of the corporate
operator of the project or corporate guarantor.
Corporate operators or guarantors that are industrial companies may
be affected by many factors which may have an adverse impact on the
credit quality of the particular company or industry. These include
cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or
environmentally-caused illnesses, extensive competition (including
that of low-cost foreign companies), unfunded pension fund
liabilities or off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of
the IDRs in the Portfolio may be additionally insured or secured by
letters of credit issued by banks or otherwise
guaranteed or secured to cover amounts due on the IDRs in the event
of default in payment by an issuer.
Hospital and Health Care Facility Bonds. The
ability of hospitals and other health care facilities to meet their
obligations with respect to revenue bonds issued on their behalf is
dependent on various factors, including the level of payments
received from private third-party payors and government programs
and the cost of providing health care services.
A significant portion of the revenues of hospitals
and other health care facilities is derived from private
third-party payors and government
programs, including the Medicare and Medicaid programs. Both
private third-party payors and government programs have undertaken
cost containment measures designed to limit payments made to health
care facilities. Furthermore,
government programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all
of which may materially decrease the rate of program payments for
health care facilities. There can be no assurance that payments
under governmental programs will remain at levels comparable to
present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in such
programs. In addition, there can be no assurance that a particular
hospital or other health care facility will continue to meet the
requirements for participation in such programs.
The costs of providing health care services are
subject to increase as a result of, among other factors, changes in
medical technology and increased labor costs. In addition, health
care facility construction and operation is subject
to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and
procedures, rate-setting, and compliance with building codes and
environmental laws. Facilities are subject to periodic inspection
by governmental and other authorities to assure continued
<PAGE>
compliance with the various standards necessary for licensing and
accreditation. These regulatory requirements are subject to change
and, to comply, it may be necessary for a hospital or other health
care facility to incur substantial capital
expenditures or increased operating expenses to effect changes in
its facilities, equipment, personnel and services.
Hospitals and other health care facilities are
subject to claims and legal actions by patients and others in the
ordinary course of business. Although these claims are generally
covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care
facility or that insurance coverage will be available to a
facility. In addition, a substantial
increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility.
The Clinton Administration may
impose regulations which could limit price increases for hospitals
or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available
to more individuals, which would reduce
profits for hospitals. Some states, such as New Jersey, have
significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising
rates, financial difficulties may arise.
Also, Blue Cross has denied reimbursement for some hospitals for
services other than emergency room services. The lost volume would
reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital
facilities to a non-affiliated entity, if the hospital becomes
subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to
call bonds at par if the hospital may be legally required because
of the bonds to perform procedures against specified religious
principles or to disclose information that
is considered confidential or privileged. Certain FHA-insured bonds
may provide that all or a portion of these bonds, otherwise
callable at a premium, can be called at par in certain
circumstances. If a hospital defaults upon a bond
obligation, the realization of Medicare and Medicaid receivables
may be uncertain and, if the bond obligation is secured by the
hospital facilities, legal
restrictions on the ability to foreclose upon the facilities and
the limited alternative uses to which a hospital can be put may
severely reduce its collateral value.
The Internal Revenue Service is currently engaged
in a program of intensive audits of certain large tax-exempt
hospital and health care facility organizations. Although these
audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations
<PAGE>
may be revoked. At this time, it is uncertain whether any of the
hospital and health care facility bonds held by the State Trust and
Umbrella Series will be affected by such audit proceedings.
Single Family and Multi-Family Housing Bonds.
Multi-family housing revenue bonds and single family mortgage
revenue bonds are state and
local housing issues that have been issued to provide financing for
various housing projects. Multi-family housing revenue bonds are
payable primarily from the revenues derived from mortgage loans to
housing projects for low to
moderate income families. Single-family mortgage revenue bonds are
issued for the purpose of acquiring from originating financial
institutions notes secured by mortgages on residences.
Housing obligations are not general obligations of
the issuer although certain obligations may be supported to some
degree by Federal, state or local housing subsidy programs.
Budgetary constraints experienced by these
programs as well as the failure by a state or local housing issuer
to satisfy the qualifications required for coverage under these
programs or any legal or administrative determinations that the
coverage of these programs is not
available to a housing issuer, probably will result in a decrease
or elimination of subsidies available for payment of amounts due on
the issuer's obligations. The ability of housing issuers to make
debt service payments on their obligations
will also be affected by various economic and non-economic
developments including, among other things, the achievement and
maintenance of sufficient
occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single
family issues and the ability of
mortgage insurers to pay claims, employment and income conditions
prevailing in local markets, increases in construction costs,
taxes, utility costs and other operating expenses, the managerial
ability of project managers, changes in laws
and governmental regulations and economic trends generally in the
localities in which the projects are situated. Occupancy of
multi-family housing projects may also be adversely affected by
high rent levels and income limitations imposed under Federal,
state or local programs.
All single family mortgage revenue bonds and
certain multi-family housing revenue bonds are prepayable over the
life of the underlying mortgage or mortgage pool, and therefore the
average life of housing obligations cannot
be determined. However, the average life of these obligations will
ordinarily be less than their stated maturities. Single-family
issues are subject to mandatory
redemption in whole or in part from prepayments on underlying
mortgage loans; mortgage loans are frequently partially or
completely prepaid prior to their final
<PAGE>
stated maturities as a result of events such as declining interest
rates, sale of the mortgaged premises, default, condemnation or
casualty loss. Multi-family issues
are characterized by mandatory redemption at par upon the
occurrence of monetary defaults or breaches of covenants by the
project operator. Additionally, housing obligations are generally
subject to mandatory partial
redemption at par to the extent that proceeds from the sale of the
obligations are not allocated within a stated period (which may be
within a year of the date of
issue). To the extent that these obligations were valued at a
premium when a Holder purchased Units, any prepayment at par would
result in a loss of capital to the Holder and, in any event, reduce
the amount of income that would otherwise have been paid to
Holders.
The tax exemption for certain housing revenue bonds
depends on qualification under Section 143 of the Internal Revenue
Code of 1986, as amended (the "Code"), in the case of single family
mortgage revenue bonds or
Section 142(a)(7) of the Code or other provisions of Federal law in
the case of certain multi-family housing revenue bonds (including
Section 8 assisted bonds).
These sections of the Code or other provisions of Federal law
contain certain ongoing requirements, including requirements
relating to the cost and location
of the residences financed with the proceeds of the single family
mortgage revenue bonds and the income levels of tenants of the
rental projects financed with the proceeds of the multi-family
housing revenue bonds. While the issuers
of the bonds and other parties, including the originators and
servicers of the single-family mortgages and the owners of the
rental projects financed with the
multi-family housing revenue bonds, generally covenant to meet
these ongoing requirements and generally agree to institute
procedures designed to ensure that
these requirements are met, there can be no assurance that these
ongoing requirements will be consistently met. The failure to meet
these requirements could cause the interest on the bonds to become
taxable, possibly retroactively
to the date of issuance, thereby reducing the value of the bonds,
subjecting the Holders to unanticipated tax liabilities and
possibly requiring the Trustee to sell
the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under
the applicable mortgage or permit the holder to accelerate payment
of the bond or require the
issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be
required before insurance proceeds would become payable to redeem
the mortgage bonds.
Power Facility Bonds. The ability of utilities to
<PAGE>
meet their obligations with respect to revenue bonds issued on
their behalf is dependent on
various factors, including the rates they may charge their
customers, the demand
for a utility's services and the cost of providing those services.
Utilities, in particular investor-owned utilities, are subject to
extensive regulations relating to the rates which they may charge
customers. Utilities can experience
regulatory, political and consumer resistance to rate increases.
Utilities engaged in long-term capital projects are especially
sensitive to regulatory lags in granting rate increases. Any
difficulty in obtaining timely and adequate rate
increases could adversely affect a utility's results of operations.
The demand for a utility's services is influenced
by, among other factors, competition, weather conditions and
economic conditions. Electric utilities, for example, have
experienced increased competition as a result of the
availability of other energy sources, the effects of conservation
on the use of electricity, self-generation by industrial customers
and the generation of electricity by co-generators and other
independent power producers. Also, increased competition will
result if federal regulators determine that utilities must open
their transmission lines to competitors. Utilities which distribute
natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business
making the cost of generating electricity more expensive and
heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost
of capital, the availability and cost of fuel and other factors. In
addition, natural gas pipeline and distribution companies have
incurred increased costs as a result of long-term
natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is
not taken by them. There can
be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities
incur substantial capital expenditures
for plant and equipment. In the future they will also incur
increasing capital and operating expenses to comply with
environmental legislation such as the Clean
Air Act of 1990, and other energy, licensing and other laws and
regulations relating to, among other things, air emissions, the
quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and
siting and licensing of facilities. Environmental legislation and
regulations are changing rapidly and are the subject of current
public policy debate and legislative proposals. It is increasingly
likely that some or many utilities will be subject to more
<PAGE>
stringent environmental standards in the future that could result
in significant capital expenditures. Future legislation and
regulation could include, among other things, regulation of
so-called electromagnetic fields associated with electric
transmission and distribution lines as well as emissions of carbon
dioxide and other so-called greenhouse gases associated with the
burning of fossil fuels. Compliance with these requirements may
limit a utility's operations or require substantial investments in
new equipment and, as a result, may adversely affect a utility's
results of operations.
The electric utility industry in general is subject
to various external factors including (a) the effects of inflation
upon the costs of operation and construction, (b) substantially
increased capital outlays and longer construction
periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased
financing requirements coupled with limited availability of
capital, (e) exposure to cancellation and
penalty charges on new generating units under construction, (f)
problems of cost and availability of fuel, (g) compliance with
rapidly changing and complex environmental, safety and licensing
requirements, (h) litigation and proposed
legislation designed to delay or prevent construction of generating
and other facilities, (i) the uncertain effects of conservation on
the use of electric energy, (j) uncertainties associated with the
development of a national energy policy, (k) regulatory, political
and consumer resistance to rate increases and (l) increased
competition as a result of the availability of other energy
sources. These factors may delay the construction and increase the
cost of new facilities, limit the use
of, or necessitate costly modifications to, existing facilities,
impair the access of electric utilities to credit markets, or
substantially increase the cost of credit for
electric generating facilities. The Sponsor cannot predict at this
time the ultimate effect of such factors on the ability of any
issuers to meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which
became law in October, 1992, makes it mandatory for a utility to
permit non-utility generators of electricity access to its
transmission system for wholesale customers, thereby
increasing competition for electric utilities. NEPA also mandated
demand-side management policies to be considered by utilities. NEPA
prohibits the Federal Energy Regulatory Commission from mandating
electric utilities to engage in
retail wheeling, which is competition among suppliers of electric
generation to provide electricity to retail customers (particularly
industrial retail customers) of a utility. However, under NEPA, a
state can mandate retail wheeling under certain conditions.
There is concern by the public, the scientific
community, and the U.S. Congress regarding environmental damage
<PAGE>
resulting from the use of fossil fuels. Congressional support for
the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or
recently enacted legislative proposals which may affect the
electric utility industry. In particular,
on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments").
The 1990 Amendments seek to improve the ambient air quality
throughout the United States by the year 2000.
A main feature of the 1990 Amendments is the reduction of sulphur
dioxide and nitrogen oxide emissions caused by electric utility
power plants, particularly those fueled by coal. Under the 1990
Amendments the U.S. Environmental Protection Agency ("EPA") must
develop limits for nitrogen oxide emissions by 1993. The sulphur
dioxide reduction will be achieved in two phases. Phase I addresses
specific generating units named in the 1990 Amendments. In Phase II
the total U.S. emissions will be capped at 8.9 million tons by the
year 2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated
levels. An allowance is defined as the
authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible
further regulation of toxic air emissions from electric generating
units pending the results of several federal government studies to
be conducted over the next three to four years with respect to
anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear
power plants are exposed to risks inherent in the nuclear industry.
These risks include exposure to new requirements resulting from
extensive federal and state regulatory
oversight, public controversy, decommissioning costs, and spent
fuel and radioactive waste disposal issues. While nuclear power
construction risks are no
longer of paramount concern, the emerging issue is radioactive
waste disposal. In addition, nuclear plants typically require
substantial capital additions and
modifications throughout their operating lives to meet safety,
environmental, operational and regulatory requirements and to
replace and upgrade various plant
systems. The high degree of regulatory monitoring and controls
imposed on nuclear plants could cause a plant to be out of service
or on limited service for
long periods. When a nuclear facility owned by an investor-owned
utility or a state or local municipality is out of service or
operating on a limited service
basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability
also arise from the operation of nuclear facilities and from the
use, handling, and possible radioactive emissions associated with
nuclear fuel. Insurance may not cover all
<PAGE>
types or amounts of loss which may be experienced in connection
with the ownership and operation of a nuclear plant and severe
financial consequences
could result from a significant accident or occurrence. The Nuclear
Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for
the eventual decommissioning of
licensed nuclear facilities. These funds are to be accrued from
revenues in amounts currently estimated to be sufficient to pay for
decommissioning costs.
The ability of state and local joint action power
agencies to make payments on bonds they have issued is dependent in
large part on payments made to them pursuant to power supply or
similar agreements. Courts in
Washington, Oregon and Idaho have held that certain agreements
between the Washington Public Power Supply System ("WPPSS") and the
WPPSS participants are unenforceable because the participants did
not have the authority to enter into the agreements. While these
decisions are not specifically applicable to agreements entered
into by public entities in other states, they may cause a
reexamination of the legal structure and economic viability of
certain projects financed by joint power agencies, which might
exacerbate some of the problems referred to above and possibly lead
to legal proceedings questioning the
enforceability of agreements upon which payment of these bonds may
depend.
Water and Sewer Revenue Bonds. Water and sewer
bonds are generally payable from user fees. The ability of state
and local water and sewer authorities to meet their obligations may
be affected by failure of municipalities
to utilize fully the facilities constructed by these authorities,
economic or population decline and resulting decline in revenue
from user charges, rising
construction and maintenance costs and delays in construction of
facilities, impact of environmental requirements, failure or
inability to raise user charges
in response to increased costs, the difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation
programs and the impact of
"no growth" zoning ordinances. In some cases this ability may be
affected by the continued availability of Federal and state
financial assistance and of
municipal bond insurance for future bond issues.
University and College Bonds. The ability of
universities and colleges to meet their obligations is dependent
upon various factors, including
the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and restrictions
on the use of endowments
and other funds, the quality and maintenance costs of campus
<PAGE>
facilities, and, in the case of public institutions, the financial
condition of the relevant state or
other governmental entity and its policies with respect to
education. The institution's ability to maintain enrollment levels
will depend on such factors as
tuition costs, demographic trends, geographic location, geographic
diversity and quality of the student body, quality of the faculty
and the diversity of program offerings.
Legislative or regulatory action in the future at
the Federal, state or local level may directly or indirectly affect
eligibility standards or reduce or
eliminate the availability of funds for certain types of student
loans or grant programs, including student aid, research grants and
work-study programs, and may affect indirect assistance for
education.
Lease Rental Bonds. Lease rental bonds are issued
for the most part by governmental authorities that have no taxing
power or other means of directly
raising revenues. Rather, the authorities are financing vehicles
created solely for the construction of buildings (administrative
offices, convention centers and
prisons, for example) or the purchase of equipment (police cars and
computer systems, for example) that will be used by a state or
local government (the
"lessee"). Thus, the bonds are subject to the ability and
willingness of the lessee
government to meet its lease rental payments which include debt
service on the bonds. Willingness to pay may be subject to changes
in the views of citizens and
government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to
the annual appropriation risk,
i.e., the lessee government is not legally obligated to budget and
appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject
to the risk of abatement in many states-rental bonds cease in the
event that damage, destruction or condemnation of the project
prevents its use by the
lessee. (In these cases, insurance provisions and reserve funds
designed to alleviate this risk become important credit factors).
In the event of default by the
lessee government, there may be significant legal and/or practical
difficulties involved in the reletting or sale of the project. Some
of these issues, particularly
those for equipment purchase, contain the so-called "substitution
safeguard", which bars the lessee government, in the event it
defaults on its rental payments,
from the purchase or use of similar equipment for a certain period
of time. This safeguard is designed to insure that the lessee
government will appropriate the
necessary funds even though it is not legally obligated to do so,
<PAGE>
but its legality remains untested in most, if not all, states.
Capital Improvement Facility Bonds. The Portfolio
of a State Trust and Umbrella Series may contain Bonds which are in
the capital improvement
facilities category. Capital improvement bonds are bonds issued to
provide funds to assist political subdivisions or agencies of a
state through acquisition of the
underlying debt of a state or local political subdivision or agency
which bonds are secured by the proceeds of the sale of the bonds,
proceeds from investments and the indebtedness of a local political
subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or
failure of payment of proceeds on and default of the underlying
debt.
Solid Waste Disposal Bonds. Bonds issued for solid
waste disposal facilities are generally payable from tipping fees
and from revenues that may be
earned by the facility on the sale of electrical energy generated
in the combustion of waste products. The ability of solid waste
disposal facilities to meet their obligations depends upon the
continued use of the facility, the
successful and efficient operation of the facility and, in the case
of waste-to-energy facilities, the continued ability of the
facility to generate electricity on a commercial basis. All of
these factors may be affected by a
failure of municipalities to fully utilize the facilities, an
insufficient supply of waste for disposal due to economic or
population decline, rising construction and
maintenance costs, any delays in construction of facilities,
lower-cost alternative modes of waste processing and changes in
environmental regulations. Because
of the relatively short history of this type of financing, there
may be technological risks involved in the satisfactory
construction or operation of the
projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state
and local level has a significant impact on waste disposal
facilities. While regulation requires more
waste producers to use waste disposal facilities, it also imposes
significant costs on the facilities. These costs include compliance
with frequently changing and complex regulatory requirements, the
cost of obtaining construction and
operating permits, the cost of conforming to prescribed and
changing equipment standards and required methods of operation and,
for incinerators or waste-to-energy facilities, the cost of
disposing of the waste residue that
remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face
substantial opposition by environmental groups and officials to
their location and operation, to the possible
adverse effects upon the public health and the environment that may
<PAGE>
be caused by wastes disposed of at the facilities and to alleged
improper operating procedures. Waste disposal facilities benefit
from laws which require waste to
be disposed of in a certain manner but any relaxation of these laws
could cause a decline in demand for the facilities' services.
Finally, waste-to-energy facilities
are concerned with many of the same issues facing utilities insofar
as they derive revenues from the sale of energy to local power
utilities (see Power Facility Bonds above).
Moral Obligation Bonds. The State Trust and
Umbrella Series may also include "moral obligation" bonds. If an
issuer of moral obligation bonds is
unable to meet its obligations, the repayment of the bonds becomes
a moral commitment but not a legal obligation of the state or
municipality in question. Even though the state may be called on to
restore any deficits in capital reserve
funds of the agencies or authorities which issued the bonds, any
restoration generally requires appropriation by the state
legislature and accordingly does not
constitute a legally enforceable obligation or debt of the state.
The agencies or authorities generally have no taxing power.
Refunded Bonds. Refunded Bonds are typically
secured by direct obligations of the U.S. Government, or in some
cases obligations guaranteed by
the U.S. Government, placed in an escrow account maintained by an
independent trustee until maturity or a predetermined redemption
date. These obligations are generally noncallable prior to maturity
or the predetermined redemption date. In a few isolated instances
to date, however, bonds which were thought to be escrowed to
maturity have been called for redemption prior to
maturity.
Airport, Port and Highway Revenue Bonds. Certain
facility revenue bonds are payable from and secured by the revenues
from the ownership and operation of particular facilities, such as
airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and
port authorities. For example, the major portion of gross airport
operating income is generally
derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use,
occupancy of certain terminal
space, facilities, service fees, concessions and leases. Airport
operating income may therefore be affected by the ability of the
airlines to meet their obligations
under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity,
increased aviation fuel costs, deregulation, traffic constraints,
the recent recession and other factors. As a result, several
airlines are experiencing severe financial difficulties. Several
<PAGE>
airlines including America West Airlines have
sought protection from their creditors under Chapter 11 of the
Bankruptcy Code. In addition, other airlines such as Midway
Airlines, Inc., Eastern Airlines, Inc.
and Pan American Corporation have been liquidated. However, within
the past few months Northwest Airlines, Continental Airlines and
Trans World Airlines have emerged from bankruptcy. The Sponsor
cannot predict what effect these
industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines
and their usage of the particular airport facility.
Similarly, payment on bonds related to other
facilities is dependent on revenues from the projects, such as use
fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors and
increased cost of maintenance or decreased use of a facility, lower
cost of alternative modes of transportation or scarcity of fuel and
reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable
from and secured by the revenues derived by a municipality from a
particular tax such as a tax
on the rental of a hotel room, on the purchase of food and
beverages, on the rental of automobiles or on the consumption of
liquor. Special tax bonds are not
secured by the general tax revenues of the municipality, and they
do not represent general obligations of the municipality.
Therefore, payment on special
tax bonds may be adversely affected by a reduction in revenues
realized from the underlying special tax due to a general decline
in the local economy or
population or due to a decline in the consumption, use or cost of
the goods and services that are subject to taxation. Also, should
spending on the particular goods or services that are subject to
the special tax decline, the municipality may
be under no obligation to increase the rate of the special tax to
ensure that sufficient revenues are raised from the shrinking
taxable base.
Tax Allocation Bonds. Tax allocation bonds are
typically secured by incremental tax revenues collected on property
within the areas where redevelopment projects, financed by bond
proceeds are located ("project areas").
Such payments are expected to be made from projected increases in
tax revenues derived from higher assessed values of property
resulting from development in the particular project area and not
from an increase in tax rates. Special risk
considerations include: reduction of, or a less than anticipated
increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a
relocation out of the project area by one
<PAGE>
or more major property owners) or by destruction of property due to
natural or other disasters; successful appeals by property owners
of assessed valuations; substantial delinquencies in the payment of
property taxes; or imposition of any
constitutional or legislative property tax rate decrease.
Transit Authority Bonds. Mass transit is generally
not self-supporting from fare revenues. Therefore, additional
financial resources must be made available to ensure operation of
mass transit systems as well as
the timely payment of debt service. Often such financial resources
include Federal and state subsidies, lease rentals paid by funds of
the state or local government or a pledge of a special tax such as
a sales tax or a property tax. If
fare revenues or the additional financial resources do not increase
appropriately to pay for rising operating expenses, the ability of
the issuer to adequately service the debt may be adversely
affected.
Convention Facility Bonds. The Portfolio of a State
Trust and Umbrella Series may contain Bonds of issuers in the
convention facilities category. Bonds in the convention facilities
category include special limited
obligation securities issued to finance convention and sports
facilities payable from rental payments and annual governmental
appropriations. The governmental agency is not obligated to make
payments in any year in which the
monies have not been appropriated to make such payments. In
addition, these facilities are limited use facilities that may not
be used for purposes other than as convention centers or sports
facilities.
Puerto Rico. The Portfolio may contain bonds of
issuers which will be affected by general economic conditions in
Puerto Rico. Puerto Rico's unemployment rate remains significantly
higher than the U.S. unemployment rate. Furthermore, the economy is
largely dependent for its development upon U.S. policies and
programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of
Commonwealth and Federal investment incentive programs. For
example, Section 936 of the Internal Revenue Code (the "Code")
provides for a credit
against Federal income taxes for U.S. companies operating on the
island if certain requirements are met. The Omnibus Budget
Reconciliation Act of 1993
imposes limits on such credit, effective for tax years beginning
after 1993. In addition, from time to time proposals are introduced
in Congress which, if enacted into law, would eliminate some or all
of the benefits of Section 936.
Although no assessment can be made at this time of the precise
effect of such limitation, it is expected that the limitation of
Section 936 credits would have a negative impact on Puerto Rico's
economy.
Aid for Puerto Rico's economy has traditionally
depended heavily on Federal programs, and current Federal budgetary
policies suggest that an expansion of aid to Puerto Rico is
unlikely. An adverse effect on the Puerto
Rican economy could result from other U.S. policies, including a
reduction of tax benefits for distilled products, further reduction
in transfer payment programs such as food stamps, curtailment of
military spending and policies which could lead to a stronger
dollar.
In a plebiscite held in November, 1993, the Puerto
Rican electorate chose to continue Puerto Rico's Commonwealth
status. Previously proposed
legislation, which was not enacted, would have preserved the
federal tax exempt status of the outstanding debts of Puerto Rico
and its public corporations
regardless of the outcome of the referendum, to the extent that
similar obligations issued by states are so treated and subject to
the provisions of the Code currently in effect. There can be no
assurance that any pending or future
legislation finally enacted will include the same or similar
protection against loss of tax exemption. The November 1993
plebiscite can be expected to have both
direct and indirect consequences on such matters as the basic
characteristics of future Puerto Rico debt obligations, the markets
for these obligations, and the
types, levels and quality of revenue sources pledged for the
payment of existing and future debt obligations. Such possible
consequences include, without limitation, legislative proposals
seeking restoration of the status of Section 936
benefits otherwise subject to the limitations discussed above.
However, no assessment can be made at this time of the economic and
other effects of a change in federal laws affecting Puerto Rico as
a result of the November 1993 plebiscite.
Insurance. Certain Bonds (the "Insured Bonds") may
be insured or guaranteed by AMBAC Indemnity Corporation ("AMBAC"),
Asset Guaranty Reinsurance Company ("Asset Guaranty"), Capital
Guaranty Insurance Company ("CGIC"), Capital Markets Assurance
Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie Lee"),
Financial Guaranty Insurance Company "Financial Guaranty"),
Financial Security Assurance Inc. ("FSA"), or Municipal
Bond Investors Assurance Corporation ("MBIA") (collectively, the
"Insurance Companies"). The claims-paying ability of each of these
companies, unless otherwise indicated, is rated AAA by Standard &
Poor's or another acceptable national rating service. The ratings
are subject to change at any time at the
discretion of the rating agencies. In determining whether to insure
bonds, the Insurance Companies severally apply their own standards.
The cost of this insurance is borne either by the issuers or
previous owners of the bonds or by the Sponsor. The insurance
policies are non-cancellable and will continue in
<PAGE>
force so long as the Insured Bonds are outstanding and the insurers
remain in business. The insurance policies guarantee the timely
payment of principal and interest on but do not guarantee the
market value of the Insured Bonds or the
value of the Units. The insurance policies generally do not provide
for accelerated payments of principal or, except in the case of any
portfolio insurance policies, cover redemptions resulting from
events of taxability. If the
issuer of any Insured Bond should fail to make an interest or
principal payment, the insurance policies generally provide that
the Trustee or its agent shall give
notice of nonpayment to the Insurance Company or its agent and
provide evidence of the Trustee's right to receive payment. The
Insurance Company is then required to disburse the amount of the
failed payment to the Trustee or its
agent and is thereafter subrogated to the Trustee's right to
receive payment from the issuer.
The following are brief descriptions of certain of
the insurance companies that may insure or guarantee certain Bonds.
The financial information presented for each company has been
determined on a statutory basis and is
unaudited.
AMBAC is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of the State of
Wisconsin, and licensed to do business in various states, with
admitted assets of approximately
$2,060,000,000 and policyholders' surplus of approximately
$1,178,000,000 as of June 30, 1994. AMBAC is a wholly-owned
subsidiary of AMBAC Inc., a financial holding company which is
publicly owned following a complete divestiture by Citibank during
the first quarter of 1992.
Asset Guaranty is a New York State insurance
company licensed to write financial guarantee, credit, residual
value and surety insurance. Asset Guaranty commenced operations in
mid-1988 by providing reinsurance to
several major monoline insurers. Asset Guaranty also issued limited
amounts of primary financial guaranty insurance, but not in direct
competition with the primary mono-line companies for which it acts
as a reinsurer. The parent
holding company of Asset Guaranty, Asset Guarantee Inc. (AGI),
merged with Enhance Financial Services (EFS) in June, 1990 to form
Enhance Financial Services Group Inc. (EFSG). The two main,
100%-owned subsidiaries of EFSG, Asset Guaranty and Enhance
Reinsurance Company (ERC), share common management and physical
resources. After an initial public offering
completed in February 1992 and the sale by Merrill Lynch & Co. of
its stake, EFSG is 49.8%-owned by the public, 29.9% by US West
Financial Services, 14.1% by Manufacturers Life Insurance Co. and
6.2% by senior management. Both ERC and Asset Guaranty are rated
"AAA" for claims paying ability by
<PAGE>
Duff & Phelps. ERC is rated triple-A for claims-paying ability by
both S&P and Moody's. Asset Guaranty received a "AA"
claims-paying-ability rating from
S&P during August 1993, but remains unrated by Moody's. As of
December 31, 1993 Asset Guaranty had admitted assets of
approximately $138,000,000 and policyholders' surplus of
approximately $73,000,000.
CAPMAC commenced operations in December 1987, as
the second mono-line financial guaranty insurance company (after
FSA) organized solely to insure non-municipal obligations. CAPMAC,
a New York corporation, is a wholly-owned subsidiary of CAPMAC
Holdings, Inc. (CHI), which was sold
in 1992 by Citibank (New York State) to a group of 12 investors led
by the following: Dillon Read's Saratoga Partners Il; L.P.
(Saratoga), an acquisition
fund; Caprock Management, Inc., representing Rockefeller family
interests; Citigrowth Fund, a Citicorp venture capital group; and
CAPMAC senior management and staff. These groups control
approximately 70% of the stock of
CHI. CAPMAC had traditionally specialized in guaranteeing consumer
loan and trade receivable asset-backed securities. Under the new
ownership group CAPMAC intends to become involved in the municipal
bond insurance business, as well as their traditional non-municipal
business. As of December 31, 1993
CAPMAC's admitted assets were approximately $182,000,000 and its
policyholders' surplus was approximately $146,000,000.
CGIC, a monoline bond insurer headquartered in San
Francisco, California, was established in November 1986 to assume
the financial guaranty business of United States Fidelity and
Guaranty Company ("USF&G'). It is a
wholly-owned subsidiary of Capital Guaranty Corporation ("CGC")
whose stock is owned by: Constellation Investments, Inc., an
affiliate of Baltimore Gas &
Electric, Fleet/Norstar Financial Group, Inc., Safeco Corporation,
Sibag Finance Corporation, an affiliate of Siemens AG, and USF&G,
the 8th largest property/casualty company in the U.S. as measured
by net premiums written,
and CGC management. As of June 30, 1994, CGIC had total admitted
assets of approximately $286,825,253 (unaudited) and total
statutory policyholders' surplus of approximately $168,000,000
(unaudited).
Connie Lee is a wholly owned subsidiary of College
Construction Loan Insurance Association ("CCLIA"), a
government-sponsored enterprise
established by Congress to provide American academic institutions
with greater access to low-cost capital through enhancement. Connie
Lee, the operating insurance company, was incorporated in 1987 and
began business as a reinsurer of tax-exempt bonds of colleges,
universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth quarter of
<PAGE>
1991 Connie Lee began underwriting primary bond insurance which
will focus largely on the
college and university sector. CCLIA's founding shareholders are
the U.S. Department of Education, which owns 36% of CCLIA, and the
Student Loan Marketing Association ("Sallie Mae"), which owns 14%.
The other principal
owners are: Pennsylvania Public School Employees' Retirement
System, Metropolitan Life Insurance Company, Kemper Financial
Services, Johnson family funds and trusts, Northwestern University,
Rockefeller & Co., Inc. administered trusts and funds, and Stanford
University. Connie Lee is domiciled
in the state of Wisconsin and has licenses to do business in 47
states and the District of Columbia. As of June 30, 1994, its total
admitted assets were approximately $13,006,058 and policyholders'
surplus was approximately $105,009,992 (unaudited).
Financial Guaranty, a New York stock insurance
company, is a wholly-owned subsidiary of FGIC Corporation which is
wholly-owned by General Electric Capital Corporation. The investors
in the FGIC Corporation are not obligated to pay the debts of or
the claims against Financial Guaranty.
Financial Guaranty commenced its business of providing insurance
and financial guarantees for a variety of investment instruments in
January 1984 and is currently authorized to provide insurance in 49
states and the District of
Columbia. It files reports with state regulatory agencies and is
subject to audit and review by those authorities. As of June 30,
1994, its total admitted assets were approximately $1,947,000,000
and its policyholders' surplus was approximately $850,000,000.
FSA is a monoline property and casualty insurance
company incorporated in New York in 1984. It is a wholly-owned
subsidiary of Financial Security Assurance Holdings Ltd., a New
York Stock Exchange listed company which is in turn approximately
60.5% owned by U.S. West Capital Corportion
(U.S. West) 7.6% by Fund American Enterprises Holdings Inc. and
7.4% by the Tokio Marine and Fire Insurance Co. Ltd. FSA is
licensed directly or indirectly through its subsidiaries to engage
in the special guaranty insurance
business in all 50 states, the District of Columbia, Puerto Rico
and the United Kingdom.
U.S. West is a subsidiary of U.S. West, Inc., which
operates businesses involved in communications, data solutions,
marketing services and capital assets, including the provision of
telephone services in 14 states in the western and midwestern
United States.
Pursuant to an intercompany agreement, liabilities
on financial guaranty insurance written by FSA or either of its
subsidiaries proportional to their respective capital surplus and
reserves, subject to applicalbe statutory risk
limitations. In addition, FSA reinsures a portion of its
<PAGE>
liabilities under certain of its financial guaranty insurance
policies with other reinsureres under various
quota-share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by FSA as a risk management device and
to comply with certain
statutory and rating agency requirements; it does not alter or
limit FSA's obligations under any financial guaranty insurance
policy. As of June 30, 1994 total shaoreholder equity of FSA and
its wholly-owned subsidiaries was (unaudited) $530,024,000 and
total unearned premium reserves was (unaudited)
$206,026,000.
MBIA is the principal operating subsidiary of MBIA
Inc. The principal shareholders of MBIA Inc. were originally Aetna
Casualty and Surety Company, The Fund American Companies, Inc.,
subsidiaries of CIGNA Corporation and Credit Local de France,
CAECL, S.A. These principal
shareholders now own approximately 13% of the outstanding common
stock of MBIA Inc., following a series of four public equity
offerings over a five-year period. As of March 31. 1994, MBIA had
admitted assets of approximately $3.2 billion(unaudited) and
policyholders' surplus of approximately $998,000,000.
Insurance companies are subject to regulation and
supervision in the jurisdictions in which they do business under
statutes which delegate regulatory,
supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration
relate, among other things, to: the
standards of solvency which must be met and maintained; the
licensing of insurers and their agents; the nature of and
limitations on investments; deposits of securities for the benefit
of policyholders; approval of policy forms and premium rates;
periodic examinations of the affairs
of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes;
and requirements regarding
reserves for unearned premiums, losses and other matters.
Regulatory agencies require that premium rates not be excessive,
inadequate or unfairly discriminatory. Insurance regulation in many
states also includes "assigned risk"
plans, reinsurance facilities, and joint underwriting associations,
under which all insurers writing particular lines of insurance
within the jurisdiction must accept,
for one or more of those lines, risks unable to secure coverage in
voluntary markets. A significant portion of the assets of insurance
companies is required by law to be held in reserve against
potential claims on policies and is not available to general
creditors.
Although the Federal government does not regulate
the business of insurance, Federal initiatives can significantly
impact the insurance business. Current and proposed Federal
<PAGE>
measures which may significantly affect the
insurance business include pension regulation (ERISA), controls on
medical care costs, minimum standards for no-fault automobile
insurance, national health
insurance, personal privacy protection, tax law changes affecting
life insurance companies or the relative desirability of various
personal investment vehicles and
repeal of the current antitrust exemption for the insurance
business. (If this exemption is eliminated, it will substantially
affect the way premium rates are
set by all property-liability insurers.) In addition, the Federal
government operates in some cases as a co-insurer with the private
sector insurance companies.
Insurance companies are also affected by a variety
of state and Federal regulatory measures and judicial decisions
that define and extend the
risks and benefits for which insurance is sought and provided.
These include judicial redefinitions of risk exposure in areas such
as products liability and state
and Federal extension and protection of employee benefits,
including pension, workers' compensation, and disability benefits.
These developments may result
in short-term adverse effects on the profitability of various lines
of insurance. Longer-term adverse effects can often be minimized
through prompt repricing
of coverages and revision of policy terms. In some instances, these
developments may create new opportunities for business growth. All
insurance companies write policies-and set premiums based on
actuarial assumptions about mortality, injury, the occurrence of
accidents and other insured events. These
assumptions, while well supported by past experience, necessarily
do not take account of future events. The occurrence in the future
of unforeseen circumstances could affect the financial condition of
one or more insurance companies. The insurance business is highly
competitive and with the deregulation of financial service
businesses, it should become more competitive.
In addition, insurance companies may expand into non-traditional
lines of business which may involve different types of risks.
The above financial information relating to the
Insurance Companies has been obtained from publicly available
information. No representation is
made as to the accuracy or adequacy of the information or as to the
absence of material adverse changes since the information was
made available to the public.
Litigation and Legislation. To the best knowledge
of the Sponsor, there is no litigation pending as of the Initial
Date in respect of any Bonds which might reasonably be expected to
have a material adverse effect upon the State
Trust and Umbrella Series. At any time after the Initial Date of
Deposit, litigation may be initiated on a variety of grounds, or
<PAGE>
legislation may be enacted,
with respect to Bonds in the Trust. Litigation, for example,
challenging the issuance of pollution control revenue bonds under
environmental protection
statutes may affect the validity of Bonds or the tax-free nature of
their interest. While the outcome of litigation of this nature can
never be entirely predicted,
opinions of bond counsel are delivered on the date of issuance of
each Bond to the effect that the Bond has been validly issued and
that the interest thereon is exempt from Federal income tax. In
addition, other factors may arise from time
to time which potentially may impair the ability of issuers to make
payments due on the Bonds.
Under the Federal Bankruptcy Act, a political
subdivision or public agency or instrumentality of any state,
including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations,
including those of the
type comprising the State Trust and Umbrella Series's Portfolio.
The Sponsor is unable to predict what effect, if any, this
legislation might have on the State Trust and Umbrella Series.
From time to time Congress considers proposals to
tax the interest on state and local obligations, such as the Bonds.
The Supreme Court clarified
in South Carolina v. Baker (decided April 20, 1988) that the U.S.
Constitution does not prohibit Congress from passing a
nondiscriminatory tax on interest on
state and local obligations. This type of legislation, if enacted
into law, could adversely affect an investment in Units. Holders
are urged to consult their own tax advisers.
Tax Exemption. In the opinion of bond counsel
rendered on the date of issuance of each Bond, the interest on each
Bond is excludable from
gross income under existing law for regular Federal income tax
purposes (except in certain circumstances depending on the Holder)
but may be subject to state
and local taxes. As discussed under Taxes below, interest on some
or all of the Bonds may become subject to regular Federal income
tax, perhaps retroactively to their date of issuance, as a result
of changes in Federal law or as a result of
the failure of issuers (or other users of the proceeds of the
Bonds) to comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on
June 14, 1993 that it will be expanding its examination program
with respect to tax-exempt bonds. The expanded examination program
will consist of, among other measures, increased enforcement
against abusive transactions, broader
audit coverage (including the expected issuance of audit
guidelines) and expanded compliance achieved by means of expected
revisions to the tax-exempt
bond information return forms. At this time, it is uncertain
whether the tax exempt status of any of the Bonds would be affected
by such proceedings, or whether such effect, if any, would be
retroactive.
In certain cases, a Bond may provide that if the
interest on the Bond should ultimately be determined to be taxable,
the Bond would become due and payable by its issuer, and, in
addition, may provide that any related letter
of credit or other security could be called upon if the issuer
failed to satisfy all or part of its obligation. In other cases,
however, a Bond may not provide for
the acceleration or redemption of the Bond or a call upon the
related letter of credit or other security upon a determination of
taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in
which both the issuer and the bank or other entity issuing the
letter of credit or other
security are unable to meet their obligations to pay the amounts
due on the Bond as a result of a determination of taxability, the
Trustee would be obligated to sell
the Bond and, since it would be sold as a taxable security, it is
expected that it would have to be sold at a substantial discount
from current market price. In
addition, as mentioned above, under certain circumstances Holders
could be required to pay income tax on interest received prior to
the date on which the interest is determined to be taxable.
Potential purchasers of the Units of a State Trust
or Umbrella Series should consider the fact that the Trust's
Portfolio consists primarily of Bonds issued by the state for which
such State Trust is named or its
municipalities or authorities and realize the substantial risks
associated with an investment in such Bonds. Moreover, the
California Trust, the Connecticut
Trust, the Florida Trust, the Maryland Trust, the Massachusetts
Trust, the Minnesota Trust, the Missouri Trust, the New Jersey
Trust, the New York Trust, the North Carolina Trust, the Ohio
Trust, the Pennsylvania Trust and the
Texas Trust are subject to certain additional state risk factors.
The Sponsor believes the discussions of risk factors summarized
below describe some of the
more significant aspects of the State Trusts. The sources of such
information are the official statements of issuers as well as other
publicly available documents.
While the Sponsor have not independently verified this information,
they have no reason to believe that such information is not correct
in all material respects. Investments in a State Trust or an
Umbrella Series containing State Trusts
should be made with an understanding that the value of the
underlying Portfolio
may decline with increases in interest rates.
<PAGE>
California Trust
California's economy is the largest among the 50
states. The State's January 1, 1992 population of 31 million
represented approximately
12.0% of the total United States population. Total employment was
about 14 million, the majority of which was in the service, trade
and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the
State has faced the worst economic, fiscal and budget conditions
since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among
others, have all been severely affected. Job losses have been the
worst of any post-war
recession and have continued through the end of 1993. Employment
levels are expected to stabilize before net employment starts to
increase and pre-recession job levels are not expected to be
reached for several more years. Unemployment is expected to remain
above 9% through 1994.
The recession has seriously affected State tax
revenues, which basically mirror economic conditions. It has also
caused increased expenditures
for health and welfare programs. The State is also facing a
structural imbalance
in its budget with the largest programs supported by the General
Fund--K-14 education (kindergarten through community college),
health, welfare and
corrections--growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As a
result, the State entered
a period of chronic budget imbalance, with expenditures exceeding
revenues for four of the last five fiscal years. Revenues declined
in 1990-91 over 1989-90,
the first time since the 1930s. By June 30, 1993, the State's
General Fund had an accumulated deficit, on a budget basis, of
approximately $2.8 billion.
(Special Funds account for revenues obtained from specific revenue
sources, and which are legally restricted to expenditures for
specific purposes.) The 1993-94
Budget Act incorporated a Deficit Reduction Plan to repay this
deficit over two
years. The original budget for 1993-94 reflected revenues which
exceeded expenditures by a approximately $2.8 billion. As a result
of continuing recession, the excess of revenues over expenditures
for the fiscal year is now
expected to be only about $500 million. Thus, the accumulated
budget deficit at June 30, 1994 is now estimated by the Department
of Finance to be approximately $2 billion, and the deficit will not
be retired by June 30, 1995 as planned. The accumulated budget
deficits over the past several years, together
with expenditures for school funding which have not been reflected
<PAGE>
in the budget, and the reduction of available internal borrowable
funds, have combined to significantly depleted the State's cash
resources to pay as ongoing expenses.
In order to meet its cash needs, the State has had to rely for
several years on a series of external borrowings, including
borrowings past the end of a fiscal year.
The State's tax revenue clearly reflects sharp
declines in employment, income and retail sales on a scale not seen
in over 50 years. The
May 1994 revision to the 1994-95 Governor's Budget (the "May
Revision"), released May 20, 1994, assumes that the State will
start recovery from
recessionary conditions in 1994, with a modest upturn beginning in
1994 and continuing into 1995, a year later than predicted in the
May 1993 Department of Finance economic projection. Pre-recession
job levels are not expected to be reached until 1997.
However, there is growing evidence that California
is showing signs of an economic turnaround, and the May Revision is
revised upward from the Governor's January Budget forecast. Since
the Governor's January Budget
forecast, 1993 non-farm employment has been revised upward by
31,000 jobs. Employment in the early months of 1994 has shown
encouraging signs of growth, several months sooner than was
contemplated in the January Budget
forecast. Between December 1993 and April 1994, payrolls are up by
50,000 jobs.
On January 17, 1994 the Northridge earthquake,
measuring an estimated 6.8 on the Richter Scale, struck Los
Angeles. Significant property
damage to private and public facilities occurred in a four-county
area including northern Los Angeles County, Ventura County, and
parts of Orange and San Bernadino Counties, which were declared as
State and federal disaster areas by
January 18. Current estimates of total property damage (private and
public) are in the range of $20 billion or more, but these
estimates are still subject to change.
Despite such damage, on the whole, the vast
majority of structures in the areas, including large manufacturing
and commercial buildings and all
modern high-rise offices, survived the earthquake with minimal or
no damage, validating the cumulative effect of strict building
codes and thorough preparation for such emergency by the State and
local agencies.
Damage to State-owned facilities included
transportation corridors and facilities such as Interstate Highways
5 and 10 and State Highways 14, 118
and 210. Most of the major highways (Interstates 5 and 10) have now
<PAGE>
been reopened. The campus at California State University Northridge
(very near the epicenter) suffered an estimated $350 million
damage, resulting in the temporary
closure of the campus. lt reopened using borrowed facilities
elsewhere and many temporary structures. There was also some damage
to the University of
California at Los Angeles and to the Van Nuys State Office Building
(now open after a temporary closure). Overall, except for the
temporary road and bridge closures, and CSU-Northridge, the
earthquake did not and is not expected to
significantly affect State government operations.
The State in conjunction with the federal
government is committed to providing assistance to local
governments, individuals and businesses
suffering damage as a result of the earthquake, as well as to
provide for the repair and replacement of State owned facilities.
The federal government has provided substantial earthquake
assistance. The President immediately allocated
some available disaster funds, and Congress has approved additional
funds for a total of $9.5 billion of federal funds for earthquake
relief, including assistance
to homeowners and small businesses, and costs for repair of damaged
public facilities. lt is now estimated that the overall effect of
the earthquake on the regional and State economy will not be
serious. The earthquake may have
dampened economic activity briefly during late January and
February, but the rebuilding efforts are now adding a small measure
of stimulus.
Sectors which are now contributing to California's
recovery include construction and related manufacturing, wholesale
and retail trade, transportation
and several service industries such as amusements and recreation,
business services and management consulting. Electronics is showing
modest growth and
the rate of decline in aerospace manufacturing is slowly
diminishing. These trends are expected to continue, and by next
year, most of the restructuring in
the finance and utilities industries should be nearly completed. As
a result of these factors, average 1994 non-farm employment is now
forecast to maintain 1993 levels compared to a projected 0.6%
decline in the Governor's January
Budget forecast. 1995 employment is expected to be up 1.6% compared
to 0.7% in the January Budget forecast.
The Northridge earthquake resulted in a downward
revision of this
year's personal income growth from 4% in the Governor's January
Budget forecast to 3.6%. However, this decline is more than
explained by the $5.5
billion charge against rental and proprietor's income---equal to
0.8% of total income reflecting uninsured damage from the quake.
<PAGE>
Next year, without the
quake's effects, income is projected to grow 6.1% compared to 5%
projected in the January Budget forecast. Without the quake's
effects, income was little changed in the May Revision compared to
the January Budget forecast.
The housing forecast remains essentially unchanged
from the January Budget forecast. Although existing sales have
strengthened and subdivision surveys indicated increased new home
sales, building permits are up
only slightly from recession lows. Gains are expected in the months
ahead, but higher mortgage interest rates will dampen the upturn.
Essentially, the Northridge earthquake adds a few thousand housing
units to the forecast, but this effect is offset by higher interest
rates.
Interest rates represent one of several downside
risks to the forecast. The rise in interest rates has occurred more
rapidly than contemplated
in the Governor's January Budget forecast. In addition to affecting
housing, higher rates may also dampen consumer spending, given the
high percentage of California homeowners with adjustable-rate
mortgages. The May Revision forecast includes a further rise in the
Federal Funds rate to nearly 5% by the beginning of 1995. Should
rates rise more steeply, housing and consumer
spending would be adversely affected.
The unemployment upturn is still tenuous. The
Employment Development Department revised down February's
employment gain and March was revised to a small decline.
Unemployment rates in California have been volatile since January,
ranging from 10.1% to a low of 8.6%, with July's figure at 9%. The
small sample size coupled with changes made to the survey
instrument in January contributed to this volatility.
1993-94 Budget
The Governor's Budget, introduced on January 8,
1993, proposed General Fund expenditures of $37.3 billion, with
projected revenues of $39.9
billion. To balance the budget in the face of declining revenues,
the Governor proposed a series of revenue shifts from local
government, reliance on increased
federal aid, and reductions in State spending.
The May Revision of the Governor's budget, released
on May 20,1993, projected the State would have an accumulated
deficit of about $2.75 billion by June 30,1993, essentially
unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month
period. Unlike previous years, the Govenor's Budget and May
Revision did not calculate a
"gap" to be closed, but rather set forth revenue and expenditure
<PAGE>
forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor
on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending. With enactment of the Budget
Act, the State carried out its
regular cash flow borrowing program for the fiscal year with the
issuance of $ billion of revenue anticipation notes maturing June
28, 1994.
The 1993-94 Budget Act was predicated on revenue
and transfer estimates of $40.6 billion, $400 million below 1992-93
(and the second consecutive year of actual decline). The principal
reasons for declining revenue
were the continued weak economy and the expiration (or repeal) of
three fiscal steps taken in 1991 a half cent temporary sales tax,
a deferral -of operating loss carryforwards, and repeal by
initiative of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund
revenues of $11.9 billion, an increase of 2.9% over 1992-93. The
1993-94 Budget Act included General Fund expenditures of $38.5
billion (a 6.3% reduction from
projected 1992-93 expenditures of $41.1 billion), in order to keep
a balanced budget within the available revenues. The Budget also
included Special Fund expenditures of $12.1 billion, a 4.2%
increase. The Budget Act reflected the following major adjustments:
1. Changes in local government financing
to shift about $2.6 billion in property taxes from cities,
counties, special districts and
redevelopment agencies to school and community college districts.
The property tax losses for cities and counties were offset in part
by additional sales tax
revenues and relief from some state mandated programs. Litigation
by local governments challenging this shift has so far been
unsuccessful. In November 1993 the voters approved the permanent
extension of the 0.5% sales tax for local public safety purposes.
2. The Budget projected K-12 Proposition
98 funding on a cash basis at the same per-pupil level as 1992-93
by-providing schools a $609 million loan payable from future years'
Proposition 98 funds.
3. The Budget assumed receipt of $692
million in aid to the State from the federal government to offset
health and welfare costs associated with foreign immigrants living
in the State. About $411 million of this amount was one-time
funding. Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health
and welfare programs.
<PAGE>
5. A 2-year suspension of the renters' tax
credit ($390 million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including
deferral of payment to the Public Employees Retirement Fund ($339
million) and a change in accounting for debt service from accrual
to cash basis, saving $107 million.
Administration reports during the course of the
1993-94 fiscal year have indicated that, although economic recovery
appears to have started in the
second half of the fiscal year, recessionary conditions continued
longer than had been anticipated when the 1993-94 Budget Act was
adopted. Overall, revenues
for the 1993-94 fiscal year were about $800 million lower than
original projections, and expenditures were about $780 million
higher, primarily because
of higher health and welfare caseloads, lower property taxes, which
require greater State support for K-14 education to make up the
shortfall, and lower
than anticipated federal government payments for
immigration-related costs. The
most recent reports, however, in May and June 1994, indicated that
revenues in the second half of the 1993-94 fiscal year have been
very close to the projections made in the Governor's Budget of
January 10, 1994, which is consistent with a slow turnaround in the
economy.
During the 1993-94 fiscal year, the State
implemented the Deficit
Reduction Plan, which was a part of the 1993-94 Budget Act, by
issuing $1.2 billion of revenue anticipation warrants in February
1994, maturing December
21, 1994. This borrowing reduced the cash deficit at the end of the
1993-94 fiscal year. Nevertheless, because of the $1.5 billion
variance from the original
Budget Act assumption, the General Fund ended the fiscal year at
June 30, 1994 carrying forward an accumulated deficit of
approximately $2 billion. Because of
the revenue shortfall and the State's reduced internal borrowing
cash resources, in addition to the $1-2 billion of revenue
anticipation warrants issued as part of
the Deficit Reduction Plan, the State issued an additional $2
billion of revenue anticipation warrants, maturing July 26,1994.
which were needed to fund the State's obligations and expenses
through the end of the 1993-94 fiscal year.
1994-95 Budget
The 1994-95 fiscal year represents the fourth
consecutive year the Governor and Legislature were faced with a
very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary
<PAGE>
adjustments have already been made in the last three years. The
Governor's May Revision
to his Budget proposal recognized that the accumulated deficit
could not be repaid in one year, and proposed a two-year solution.
The May Revision sets forth revenue and expenditure forecasts and
revenue and expenditure proposals which result in operating
surpluses for the budget for both 1994-95 and 1995-96,
and lead to the elimination of the accumulated deficit, estimated
at about $2 billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on
July 8, 1994, projects revenues and transfers of $41.9 billion,
about $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of
an improved economy. Also included in this figure is the projected
receipt of about $360 million from the Federal Government to
reimburse the State for the cost of
incarcerating undocumented immigrants. The State will not know how
much the Federal Government will actually provide until the Federal
fiscal year 1995
Budget is completed, which is expected to be by October 1994. The
Legislature took no action on a proposal in the Governor s January
Budget to undertake expansion of the transfer of certain programs
to counties, which would also have
transferred to counties 0.5% of the State current sales tax. The
Budget Act projects Special Fund revenues of $12.1 billion, a
decrease of 2.4% from 1993-94 estimated levels.
The 1994-95 Budget Act projects General Fund
expenditures of $40.9 billion, an increase of $1.6 billion over
1993-94. The Budget Act also projects Special Fund expenditures of
$13.7 billion, a 5.4% increase over
1993-94 estimated expenditures. The principal features of the
Budget Act were the following:
1. Receipt of additional federal aid in
1994-95 of about $400 million for costs of refugee assistance and
medical care for undocumented
aliens, thereby offsetting a similar General Fund cost. The State
will not know how much of these funds it will receive until the
Federal fiscal year 1994 Budget is passed.
2. Reductions of approximately $l.l
billion in health and welfare programs.
3. A General Fund increase of
approximately $38 million in support for the University of
California and $65 million for the California State
University. It is anticipated that student fees for the U.C. and
the C.S.U will increase up to 10%.
4. Proposition 98 funding for K-14 schools
is increased by $526 million from the 1993-94 levels, representing
<PAGE>
an increase for enrollment growth and inflation. Consistent with
previous budget agreements, Proposition 98 funding provides
approximately $4,217 per student for K-12 schools, equal to the
level in the past three years.
5. Legislation enacted with the Budget Act
clarifies laws passed in 1992 and 1993 requiring counties and other
local agencies to transfer
funds to local school districts, thereby reducing State aid. Some
counties had implemented programs providing less moneys to schools
if there were redevelopment agencies projects. The legislation bans
this method of transfers.
6. The Budget Act provides funding for
anticipated growth in the State's prison inmate population,
including provisions for implementing
recent legislation (the so-called "Three Strikes" law) which
requires mandatory life sentences for certain third-time felony
offenders.
7. Additional miscellaneous cuts ($500
million) and fund transfers ($255 million) totalling in the
aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases.
Under legislation enacted for the 1993-94 Budget, the renters' tax
credit was suspended for 1993 and 1994. A ballot proposition to
permanently restore the renters'
credit after this year failed at the June 1994 election. The
Legislature enacted a further one-year suspension of the renters'
tax credit, saving about $390
million in the 1995-96 fiscal year. The 1994-95 Budget assumes that
the State will use a cash flow borrowing program in 1994-95 which
combines one-year notes and warrants. Issuance of the warrants
allows the State to defer repayment
of approximately $1 billion of its accumulated budget deficit into
the 1995-96 fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94 AND 1994-
1995 FISCAL YEAR BUDGETS IS BASED IN LARGE PART ON
STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA. IN
THAT DOCUMENT, THE STATE INDICATED THAT ITS DISCUSSION
OF THE 1994-95 FISCAL YEAR BUDGET WAS BASED ON ESTIMATES
AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE
CURRENT FISCAL YEAR AND MUST NOT BE CONSTRUED AS
STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS
ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS
FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE
STATE AND THE NATION, AND THAT THERE CAN BE NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
<PAGE>
The State is subject to an annual appropriations
limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"), and is
prohibited from spending "appropriations subject to limitation" in
excess of the
Appropriations Limit. Article XIIIB, originally adopted in 1979,
was modified substantially by Propositions 98 and 111 in 1988 and
1990, respectively.
"Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes", which consist of tax revenues and certain
other funds, including proceeds
from regulatory licenses, user charges or other fees to the extent
that such proceeds exceed the reasonable cost of providing the
regulation, product or
service. The Appropriations Limit is based on the limit for the
prior year, adjusted annually for certain changes, and is tested
over consecutive two-year periods. Any excess of the aggregate
proceeds of taxes received over such two-
year period above the combined Appropriation Limits for those two
years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt
service costs of certain bonds, court or federally mandated costs,
and, pursuant to Proposition
111, qualified capital outlay projects and appropriations or
revenues derived from any increase in gasoline taxes and motor
vehicle weight fees above January
1, 1990 levels. Some recent initiatives were structured to create
new tax revenues dedicated to specific uses and expressly exempted
from the Article XIIIB limits. The Appropriations Limit may also
be exceeded in cases of emergency arising from civil disturbance or
natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so
declared and approved, the Appropriations Limit for the next three
years must be reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on
November 8, 1988, also establishes a minimum level of state funding
for school and community
college districts and requires that excess revenues up to a certain
limit be transferred to schools and community college districts
instead of returned to the taxpayers. Determination of the minimum
level of funding is based on several
tests set forth in Proposition 98. During fiscal year 1991-92
revenues were smaller than expected, thus reducing the payment owed
to schools in 1991-92 under alternate "test" provisions. In
response to the changing revenue situation,
and to fully fund the Proposition 98 guarantee in the 1991-92 and
1992-93 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted
to schools but which exceeded the reduced appropriation was treated
as a non-Proposition 98 short-term loan in
<PAGE>
1991-92. As part of the 1992-93 Budget, $1.1 billion of the amount
budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing
cash outlays in 1992-93 by that amount. To maintain
per-average daily attendance ("ADA") funding, the 1992-93 Budget
included loans of $732 million
to K-12 schools and $241 million to community colleges, to be
repaid from future Proposition 98 entitlements. The 1993-94 Budget
also provided new loans of $609 million to K-12 schools and $178
million to community colleges to maintain ADA funding. These
loans have been combined with the 1992-93
fiscal year loans into one loan of $1.760 billion, to be repaid
from future years' Proposition 98 entitlements, and conditioned
upon maintaining current funding
levels per pupil at K-12 schools. A Sacramento County Superior
Court in California Teachers' Association, et al. v. Gould, et
al., has ruled that the 1992-93 loans to K-12 schools and
community colleges violate Proposition 98.
The impact of the court's ruling on the State budget and funding
for schools is unclear and will remain unclear until the Court's
written ruling, which is currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4
billion of Proposition 98 funds for K-14 schools, exceeding the
minimum Proposition 98 guaranty by $8 million to maintain K-12
funds per pupil at $4,217. Based upon
State revenues, growth rates and inflation factors, the 1994-95
Budget Act appropriations an additional $286 million within
Proposition 908 for the 1993-94 fiscal year to reflect a need in
appropriations for school district and county
officers of education, as well as an anticipated deficiency in
special education funding.
Because of the complexities of Article XIIIB, the
ambiguities and possible inconsistencies in its terms, the
applicability of its exceptions and
exemptions and the impossibility of predicting future
appropriations, the Sponsor
cannot predict the impact of this or related legislation on the
Bonds in the California Trust Portfolio. Other Constitutional
amendments affecting state and
local taxes and appropriations have been proposed from time to
time. If any such initiatives are adopted, the State could be
pressured to provide additional
financial assistance to local governments or appropriate revenues
as mandated by such initiatives. Propositions such as Proposition
98 and others that may be adopted in the future, may place
increasing pressure on the State's budget over
future years, potentially reducing resources available for other
State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other
programs by raising taxes.
<PAGE>
As of July 1, 1994, the State had over $18.34
billion aggregate amount of its general obligation bonds
outstanding. General obligation bond
authorizations in the aggregate amount of approximately $5.16
billion remained unissued as of July 1, 1994. The State also builds
and acquires capital facilities
through the use of lease purchase borrowing. As of June 30, 1994,
the State had approximately $5.09 billion of outstanding
Lease-Purchase Debt.
In addition to the general obligation bonds, State
agencies and authorities had approximately $21.87 billion aggregate
principal amount of
revenue bonds and notes outstanding as of March 31, 1993. Revenue
bonds represent both obligations payable from State
revenue-producing enterprises and
projects, which are not payable from the General Fund, and conduit
obligations payable only from revenues paid by private users of
facilities financed by such
revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition
projects, education facilities (including the
California State University and University of California systems),
housing health facilities and pollution control facilities.
The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. In
addition, the State is involved
in certain other legal proceedings that, if decided against the
State, might require
the State to make significant future expenditures or impair future
revenue sources. Examples of such cases include challenges to the
State's method of taxation of certain businesses, challenges to
certain vehicle license fees, and challenges to the State's use of
Public Employee Retirement System funds to
offset future State and local pension contributions. Other cases
which could significantly impact revenue or expenditures involve
reimbursement to school
districts for voluntary school desegregation and state mandated
costs, challenges to Medi-Cal eligibility, recovery for flood
damages, and liability for toxic waste
cleanup. Because of the prospective nature of these proceedings,
it is not presently possible to predict the outcome of such
litigation or estimate the potential impact on the ability of the
State to pay debt service on its obligations.
On June 20, 1994, the United States Supreme Court,
in two companion cases, upheld the validity of California's prior
method of taxing multinational corporations under a "unitary"
method of accounting for their
worldwide earnings, thus avoiding tax refunds of approximately
$1.55 billion by the State, and enabling the State to collect $620
million in previous assessments. Barclays Bank PLC v. Franchise
<PAGE>
Tax Board concerning foreign corporations, and Colgate-Palmmolive
v. Franchise Tax Board concerned domestic corporations.
Ratings
On July 15, 1994, Standard Poor's Corporation
("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"),and Fitch Investors
Service, Inc. ("Fitch") all downgraded their ratings of
California's general obligation bonds. These bonds are usually
sold in 20- to 30-year increments
and used to finance the construction of schools, prisons, water
systems and other projects. The ratings were reduced by Standard
& Poor's from "A+" to
"A", by Moody's from "Aa" to "A1", and by Fitch from "AA" to "A".
Since 1991, when it had a "AAA" rating, the State's rating has
been downgraded three times by all three ratings agencies. All
three agencies cite the 1994-95
Budget Act's dependence on a "questionable" federal bailout to
pay for the cost of illegal immigrants, the Propositions 98
guaranty of a minimum portion of
State revenues for kindergarten through community college, and the
persistent deficit requiring more borrowing as reasons for the
reduced rating. Another
concern was the State's reliance on a standby mechanism which could
trigger across-the-board reductions in all State programs, and
which could disrupt State
operations, particularly in fiscal year 1995-96. However, a
Standard & Poor's spokesman stated that, although the lowered
ratings means California is aa
riskier borrower, Standard & Poor's anticipates that the State will
pay off its debts and not default. There can be no assurance that
such ratings will continue for any given period of time or that
they will not in the future be further revised.
As a result of Orange County's Chapter 9 bankruptcy
filing on December 6, 1994, Moody's has suspended the County's bond
ratings, and Standard & Poor's has cut its rating of all Orange
County debt from "AA-" to
"CCC", a level below investment grade and an indication of high
risk and uncertainty. Fitch does not rate Orange County bonds. It
is anticipated that as
Orange County's credit and bond ratings fall, it will have
difficulty in getting loans or selling its bonds to raise money.
Additionally, the County's bankruptcy
filing could affect about 180 municipalities, school districts and
other municipal entities which entrusted billions of dollars to
Orange County to invest. Standard & Poor's has informed such
entities that they have been placed on negative
credit watch, the usual step prior to a downgrade of credit rating.
The Sponsor believes the information summarized
above describes some of the more significant aspects relating to
<PAGE>
the California Trust. The sources of such information are
Preliminary Official Statements and Official
Statements relating to the State's general obligation bonds and the
State's revenue anticipation notes, or obligations of other issuers
located in the State of California, or other publicly available
documents. Although the Sponsor has not
independently verified this information, it has no reason to
believe that such information is not correct in all material
respects.
Connecticut Trust
The Sponsor believe the information summarized
below describes some of the more significant aspects of the
Connecticut Trust. The sources of
such information are the official statements of issuers as well as
other publicly available documents. While the Sponsor have not
independently verified this
information, they no reason to believe that such information is not
correct in all material respects.
Potential purchasers of the Units of the
Connecticut Trust should consider the fact that the Trust's
Portfolio consists primarily of Bonds issued by
the State of Connecticut (the "State") or its municipalities or
authorities, and realize the substantial risks associated with an
investment in such Bonds.
Connecticut's manufacturing industry has
historically been of prime
economic importance to Connecticut. The manufacturing industry is
diversified, with transportation equipment (primarily aircraft
engines, helicopters and
submarines) dominant followed by fabricated metal products,
non-electrical machinery and electrical machinery. From 1970 to
1992, however, there was
a rise in employment in service-related industries. During this
period, manufacturing employment declined 30.8%, while employment
in non-agricultural establishments (including government) increased
60.8%, particularly in the service, trade and finance categories.
In 1992, manufacturing accounted
for only 20.1% of total non-agricultural employment in Connecticut.
Defense- related business plays an important role in the
Connecticut economy. On a per capita basis, defense awards to
Connecticut have traditionally been among the
highest in the nation. Reductions in defense spending have had a
substantial adverse impact on Connecticut's economy. Moreover,
the State's largest defense contractors have announced substantial
labor force reductions scheduled to occur over the next four years.
The annual average unemployment rate (seasonally
adjusted) in Connecticut decreased from 6.9% in 1982 to a low of
3.0% in 1988 but rose to 7.2% in 1992. While these rates were
<PAGE>
lower than those recorded for the U.S.
as a whole for the same periods, as of May, 1993, the estimated
rate of unemployment in Connecticut in connection on a seasonally
adjusted basis was
7.4%, compared to only 6.9 % for the United States as a whole, and
pockets of significant unemployment and poverty exist in some of
Connecticut's cities and towns. Moreover, Connecticut is now in a
recession the depth and duration of which is uncertain.
The State derives over seventy percent of its
revenues from taxes imposed by the State. The two major taxes have
been the sales and use taxes
and the corporation business tax, each of which is sensitive to
changes in the level of economic activity in the State, but the
Connecticut income tax on individuals, trusts and estates enacted
in 1991 is expected to supersede each of them in importance.
The State's General Fund budget for fiscal year
1986-87 (ending June 30) anticipated appropriations and revenues of
approximately $4,300,000,000. The General Fund ended fiscal year
1986-87 with a surplus
of $365,200,000. The General Fund budget for fiscal year 1987-88
anticipated appropriations and revenues of approximately
$4,915,800,000. However, the
General Fund ended fiscal year 1987-88 with a deficit of
approximately $115.6 million. The General Fund budget for fiscal
year 1988-89 anticipated that
General Fund expenditures of $5,551,000,000 and certain educational
expenses of $206,700,000 not previously paid through the General
Fund would be financed in part from surpluses of prior years and in
part from higher tax
revenues projected to result from tax laws in effect for fiscal
year 1987-88 and stricter enforcement thereof; a substantial
deficit was projected during the third
quarter of fiscal year 1988-89, but, largely because of tax law
changes that took effect before the end of the fiscal year, the
deficit was kept to $28,000,000.
The General Fund budget for fiscal year 1989-90 anticipated
appropriations of approximately $6,224,500,000 and, by virtue of
tax increases enacted to take
effect generally at the beginning of the fiscal year, revenues
slightly exceeded such amount. However, largely because of tax
revenue shortfalls, the General
Fund ended fiscal year 1989-90 with a deficit for the year of
$259,000,000, wiping out reserves for such events built up in prior
years. The General Fund ended fiscal year 1990-91 with a deficit
of $809,000,000, primarily because of significant declines in tax
revenues and unanticipated expenditures reflective of
economic adversity.
A General Fund budget was not enacted for fiscal
year 1991-92 until August 22, 1991. This budget anticipated
<PAGE>
General Fund expenditures of $ 7,007,861,328 and revenues of $
7,426,390,000. Anticipated decreases in
revenues resulting from a 25% reduction in the sales tax rate
effective October 1, 1991, the repeal of the taxes on the capital
gains and interest and dividend
income of resident individuals for years starting after 1991, and
the phase-out of the corporation business tax surcharge over two
years commencing with years
starting after 1991 were expected to be more than offset by a new
general income tax imposed at effective rates not to exceed 4.5% on
the Connecticut taxable income of resident and non-resident
individuals, trusts and estates. The
Comptroller's annual report for fiscal year 1991-92 reflected a
General Fund operating surplus of $110,000,000. A General Fund
budget for fiscal year
1992-93 anticipated General Fund expenditures of $7,372,062,859 and
revenues of $7,372,210,000 and the General Fund ended fiscal year
1992-93 with an operating surplus of $113,500,000. Balanced
General Fund budgets for the biennium ending June 30, 1995, have
been adopted appropriating expenditures
of $7,828,900,000 for fiscal year 1993-94 and $8,266,000,000 for
fiscal year 1994-95.
The primary method for financing capital projects
by the State is through the sale of the general obligation bonds of
the State. These bonds are backe and guaranteed by the full faith
and credit of the State. As of October 1, 1993, there was a total
legislatively authorized bond indebtedness of $9,140,275,363, of
which $7,384,654,455 had been approved for issuance by the State
Bond Commission and $6,355,937,037 had been issued.
To fund operating cash requirements, prior to
fiscal year 1991-92
the State borrowed up to $750,000,000 pursuant to authorization to
issue commercial paper, and on July 29, 1991, it issued
$200,000,000 General
Obligation Temporary Notes, none of which temporary borrowing were
outstanding as of July 1, 1993. To fund the cumulative General Fund
deficit for fiscal years 1989-90 and 1990-91, the legislation
enacted August 22, 1991,
authorized the State Treasurer to issue Economic Recovery Notes up
to the aggregate amount of such deficit, which must be payable no
later than June 30, 1996; at least $50,000,000 of such Notes, but
no more than a cap amount, is to
be retired each fiscal year commencing with fiscal year 1991-92,
and any unappropriated surplus up to $205,000,000 in the General
Fund at the end of each of the three fiscal years commencing with
fiscal year 1991-92 must be
applied to retire such Notes as may remain outstanding at those
times. On September 25, 1991 and October 24, 1991, the State
issued $640,710,000 and $325,002,000, respectively, of such
Economic Recovery Notes, of which
$705,610,000 were outstanding as of October 1, 1993, and are shown
<PAGE>
in the outstanding state general obligation bond indebtedness shown
above.
To meet the need for reconstructing, repairing,
rehabilitating, and improving the State transportation system
(except Bridle International Airport),
the State adopted legislation which provides for, among other
things, the issuance of special tax obligation ("STO") bonds the
proceeds of which will be
used to pay for improvements to the State's transportation system.
The STO bonds are special tax obligations of the State payable
solely from specified motor
fuel taxes, motor vehicle receipts and licenses, permit and fee
revenues pledged therefor and deposited in the special
transportation fund. The twelve-year cost
of the infrastructure program which began in 1984, to be met from
federal, state and local funds, is currently estimated at $9.5
billion. To finance a portion of
the State's share of such cost, the State expects to issue $3.7
billion of STO bonds over the twelve-year period.
As of March 2, 1994, the General Assembly has
authorized STO bonds for the program in the aggregate amount of
$3,604,363,104, of which $2,944,650,752 had been issued. It is
anticipated that additional STO bonds will
be authorized by the General Assembly annually in an amount
necessary to finance and to complete the infrastructure program.
Such additional bonds may
have equal rank with the outstanding bonds provided certain pledged
coverage requirements of the STO indenture controlling the issuance
of such bonds are met. The State expects to continue to offer
bonds for this program.
The State, its officers and employees are
defendants in numerous lawsuits. According to the Attorney
General's Office, an adverse decision in
any of the cases which are summarized herein could materially
affect the State's financial position: (i) an action in which eight
retarded persons claim denial of
equal protection rights on behalf of all retarded persons between
ages 19 and 61 who require daily care but are ineligible for
admission to a group home; (ii)
litigation on behalf of black and hispanic school children in the
City of Hartford seeking "integrated education" within the greater
Hartford metropolitan area;
(iii) litigation involving claims by Indian tribes to less than
1/10 of 1% of the State's land area; (iv) litigation challenging
the State's method of financing elementary and secondary public
schools on the ground that it denies equal
access to education; (v) an action in which two retarded persons
seek placement outside a State hospital, new programs and damages
on behalf of themselves and
all mentally retarded patients at the hospital; (vi) litigation
<PAGE>
involving claims for refunds of taxes by several cable television
companies; (vii) an action on behalf
of all persons with retardation or traumatic brain injury, claiming
that their constitutional rights are violated by placement in State
hospitals alleged not to
provide adequate treatment and training, and seeking placement in
community residential settings with appropriate support services;
(viii) an action by the
Connecticut Hospital Association and 33 hospitals seeking to
require the State
to reimburse hospitals for in-patient medical services on a basis
more favorable
to them; (ix) a class action by the Connecticut Criminal Defense
Lawyers Association claiming a campaign of illegal surveillance
activity and seeking
damages and injunctive relief; (x) two actions for monetary damages
brought by a former patient at a state mental hospital stemming
from an attempted suicide
that left her brain-damaged; (xi) an action challenging the
validity of the State's
imposition of surcharges on hospital charges to finance certain
uncompensated care costs incurred by hospitals and (xii) an action
to enforce the spending cap
provision of the State's constitution by seeking to require that
the General Assembly define certain terms used therein and to
enjoin certain increases in "general budget expenditures" until
this is done.
As a result of the State's budget problems, the
ratings of its general
obligation bonds were reduced by Standard & Poor's from AA+ to AA
on March 29, 1990, and by Moody's from Aa1 to Aa on April 9, 1990.
Moreover, because of these problems, on February 5, 1991, Standard
& Poor's placed the State's general obligation bonds and certain
other obligations that
depend in part on the creditworthiness of the State on CreditWatch
with negative implications. On March 7, 1991, Moody's downgraded
its ratings of the
revenue bonds of four Connecticut hospitals because of the effects
of the State's restrictive controlled reimbursement environment
under which they have been
operating. On September 13, 1991 the ratings of the State's
general obligation
bonds and certain other obligations were lowered by Standard &
Poor's from AA to AA- and removed from CreditWatch.
General obligation bonds issued by Connecticut
municipalities are payable primarily only from ad valorem taxes on
property subject to taxation by
the municipality. Certain Connecticut municipalities have
experienced severe fiscal difficulties and have reported operating
and accumulated deficits in recent
years. The most notable of these is the City of Bridgeport, which
<PAGE>
filed a bankruptcy petition on June 7, 1991; the State opposed the
petition. The United
States Bankruptcy Court for the District of Connecticut has held
that Bridgeport
had authority to file such a petition but that its petition should
be dismissed on
the grounds that Bridgeport was not insolvent when the petition was
filed. Regional economic difficulties, reductions in revenues, and
increased expenses
could lead to further fiscal problems for the State and its
political subdivisions,
authorities, and agencies. This could result in declines in the
value of their outstanding obligations, increases in their future
borrowing costs, and impairment of their ability to pay debt
service on their obligations.
Florida Trust
In 1980, Florida was the seventh most populous
state in the U.S. The State has grown dramatically since then an as
of April 1, 1993, ranks fourth
with an estimated population of 13.5 million. Florida's attraction,
as both a growth and retirement state, has kept net migration
fairly steady with an average
of 292,988 new residents a year from 1983 through 1993. The U.S.
average population increase since 1982 is about 1% annually, while
Florida's average annual rate of increase is about 2.5%. Florida
continues to be the fastest growing of the ten laargest states.
This strong population growth is one reason
the State's economy is performing better than the nation as a
whole. In addition to attracting senior citizens to Florida as a
place for retirement, the State is also
recognized as attracting a significant number of working age
individuals. Since 1983, the prime working age population (18-44)
has grown at an average annual
rate of 2.6%. The share of Florida's total working age population
(18-59) to total State population is approximately 54%. This share
is not expected to change appreciably into the twenty-first
century.
The State's personal income has been growing
strongly the last several years and has generally out performed
both the U.S. as a whole and the
southeast in paarticular, according to the U.S. Department of
Commerce and the Florida Consensus Economic Estimating Conference.
This is due to the fact that
Florida's population has been growing at a very strong pace and,
since the early 70's the State's economy has diversified so as to
provide greater insulation from
national economic downturns. As a result, Florida's real per capita
personal income has tracked closely with the national average and
has tracked above the
southeast. From 1984 through 1993, the State's real per capita
income rose an aaverage 5.4% a year, while the national real per
capita income increased at an average 5.5%.
Because Florida has a proportionately greater
retirement age population, property income (dividends, interest and
rent) and transfer payments
(Social Security and pension benefits among other sources of
income) are relatively more important sources of income. For
example, Florida's total wages
and salaries and other labor income in 1993 was 62% of total
personal income, while a similar figure for the nation for 1990 was
72%. Transfer payments are
typically less sensitive to the business cycle than employment
income and, therefore, act as stabilizing forces in weak economic
periods.
The State's per capita personal income in 1992 of
$19,711 was slightly below the national average of $20,105 and
significantly ahead of that for
the southeast United States, which was $17,296. Real personal incme
in the State is estimated to increase 5.5% in 1993-94 and 4.7% in
1994-95. By the end of 1994-95, real personal income per capita in
the State is projected to average 6.7% higher than its 1992-93
level.
Since 1980, the State's job creation rate is well
over twice the rate for the nation as a whole, and its growth rate
in new non-agricultural jobs is the
fastest of the 11 most populous states and second only to
California in the absolute number of new jobs created.
Contributing to the State's rapid rate of
growth in employment and income is international trade. In
addition, since 1980, the State's unemployment rate has generally
tracked below that of the
Nation's unemployment rate. However, as the State's economic
growth has slowed from its previous highs, the State's unemployment
rate has tracked above
the national average. The average rate in Florida since 1980 has
been 6.5% while the national average is 7.1%. According to the
U.S. Department of
Commerce, the Florida Department of Labor and Employment Security,
and the Florida Consensus Economic Estimating Conference (together
the "Organization") the State's unemployment rate was 8.2% during
1992. As of January 1994, the Organization estimates that the
unemployment rate will be 6.7% for 1993-94 and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing
sector has exceeded that of the U.S. From the beginning of 1980
through 1993, the state
added over 50,100 new manufacturing jobs, an 11.7% increase. During
the same period, national manufacturing employment declined ten out
of the fourteen years, for a loss of 2,977,000 jobs.
<PAGE>
Total non-farm employment in Florida is expected to
increase 2.7% in 1993-94 and rise 3.8% in 1994-95. Trade and
services, the two largest,
account for more than half of the total non-farm employment.
Employment in the service sectors should experience an increase of
3.9% in 1993-94, while
growing 4.9% in 1994-95. Trade is expected to expand 2.2% in 1994
and 3.4% in 1995. The service sector is now the State's largest
employment category.
Construction
The State's economy has in the past been highly
dependent on the
construction industry and construction related manufacturing. This
dependency has declined in recent years and continues to do so as
a result of continued
diversification of the State's economy. The State is still somewhat
at the mercy of the construction and construction related
manufacturing industries. For
example, in 1980, total contract construction employment as a share
of total non-farm employment was just over 7%, and in 1993, the
share had edged downward to 5%. This trend is expected to continue
as the State's economy continues to diversify. Florida,
nevertheless, has a dynamic construction industry, with single and
multi-family housing starts accounting for 8.5% of total U.S.
housing starts in 1993 while the State's population is 5.3% of the
U.S. total population. Florida's housing starts since 1980 have
represented an average of 11.0% of the U.S.'s total annual starts,
and since 1980, total housing starts have averaged 156,450 a year.
A driving force behind the State's construction
industry has been the State's rapid rate of population growth.
Although the State currently is the
fourth most populous state, its annual population growth is now
projected to decline as the number of people moving into the State
is expected to hover near
the mid 250,000 range annually throughout the 1990s. This
population trend should provide fuel for business and home builders
to keep construction activity
lively in Florida for some time to come. However, other factors do
influence the level of construction in the State. For example,
federal tax reform in 1986 and
other changes to the federal income tax code have eliminated tax
deductions for owners of more than two residential real estate
properties and have lengthened
depreciation schedules on investment and commercial properties.
Economic growth and existing supplies of homes also contribute to
the level of construction
in the State. Also, while interest rates remain low currently, an
increase in interest rates could significantly adversely impact the
financing of new construction with the State, thereby adversely
impacting unemployment and other economic factors within the State.
<PAGE>
In addition, available commercial office
space has tended to remain high over the past few years. So long as
this glut of commercial rental space continues, construction of
this be of space will likely continue to remain slow.
Hurricane Andrew left some parts of south Florida
devastated. Post-Andrew clean up and rebuilding have changed the
outlook for the State's
economy. Single and multi-family housing starts in 1993-94 are
projected to reach a combined level of 18,000, increasing to
134,300 next year. Lingering
recessionary effects on consumers and tight credit are some of the
reasons for relatively slow core construction activity, as well as
lingering effects from the 1986 tax reform legislation discussed
above. However, construction is one of the
sectors most severely affected by Andrew. Low interest rates and
pent up demand combined with improved consumer confidence should
lead to improved housing starts. The construction figures above
include additional housing starts
as a result of destruction by Andrew. Total construction
expenditures are forecasted to increase 15.6% this year and
increase 13.3% next year.
The State has continuously been dependent on the
highly cyclical construction and construction related manufacturing
industries. While that
dependency has decreased, the State is still somewhat at the mercy
of the construction related manufacturing industries. The
construction industry is driven
to a great extent by the State's rapid growth in population. There
can be no assurance that population growth will continue
throughout the 1990's in which
case there could be an adverse impact on the State's economy
through the loss of construction and construction related
manfacturing jobs. Also, while interest
rates remain low currently, an increase in interest rates could
significantly adversely impact the financing of new construction
within the State, thereby
adversely impacting unemployment and other economic factors within
the State. In addition, available commercial office space has
tended to remain high over
the past few years. So long as this glut of commercial rental space
continues, construction of this type of space will likely continue
to remain slow.
Tourism
Tourism is one of State's most important
industries. Approximately 41.1 million tourists visited the State
in 1993, as reported by the Florida
Department of Commerce. In terms of business activities and state
tax revenues,
tourists in Florida in 1993 represented an estimated 4.5 million
<PAGE>
additional residents. Visitors to the State tend to arrive equally
by air and car. The State's
tourist industry over the years has become more sophisticated,
attracting visitors year-round and, to a degree, reducing its
seasonality. The dollar's depreciation
has enhanced the State's tourism industry. Tourist arrivals are
expected to decline by almost two percent this year, but are
expected to recover next year
with 5.0% growth. Tourist arrivals to Florida by air and car are
expected to diverge from each other, air decreasing 5.6% and auto
increasing 1.6%. By the end of the State's current fiscal year,
41.0 million domestic and international
tourists are expected to have visited the State. In 1994-95,
tourist arrivals should approximate 43.0 million.
Revenues and Expenses
Estimated fiscal year 1993-94 General Revenue plus
Working Capital funds available to the State total $13,582.7
million, an 8.4% increase over 1992-93. This reflects a transfer of
$190 million, out of an estimated $220.0 million in non-recurring
revenue due to Andrew, to a hurricane relief
trust fund. Of the total General Revenue plus Working Capital funds
available to the State, $12,943.5 million of that is Estimated
Revenues (excluding the Andrew impact) which represents an increase
of 7.3% over the previous year's
Estimated Revenues. With effective General Revenues plus Working
Capital Fund appropriations at $13,276.9 million, unencumbered
reserves at the end of 1993-94 are estimated at $302.8 million.
Estimated, fiscal year 1994-95 General
Revenue plus Working Capital and Budget Stabilization funds
available total $14,573.7 million. a 7.3% increase over 1993-94.
This amount reflects a transfer of $159.0 million in non-recurring
revenue due to Hurricane Andrew,
to a hurricane relief trust fund. The $13,860.8 million in
Estimated Revenues (excluding the Hurricane Andrew Impact)
represent an increase of 7.1% over
the previous year's Estimated Revenues. The massive effort to
rebuild and replace destroyed or damaged property in the wake of
Andrew is responsible for
the substantial positive revenue impacts shown here. Most of the
impact is in the increase in the State's sales tax.
In fiscal year 1992-93, approximately 62% of the
State's total direct revenue to its three operating funds were
derived from State taxes,with
Federal grants and other special revenue accounting for the
balance. State sales
and use tax, corporate income tax, intangible personal property
tax, and beverage tax amounted to 68%, 7%, 4% and 4%,
respectively, of total General Revenue Funds available during
fiscal 1992-93. In that same year,
expenditures for education, health and welfare, and public safety
<PAGE>
amounted to approximately 49%, 30%, and 11%, respectively, of
total expenditures from the General Revenue Fund.
The State's sales and use tax (6%) currently
accounts for the State's single largest source of tax receipts.
Slightly less than 10% of the State's sales
and use tax is designated for local governments and is
distributed to the respective counties in which collected for use
by the counties, and the
municipalities therein. In addition to this distribution, local
governments may (by referendum) assess a 0.5% or a 1.0%
discretionary sales surtax within
their county. Proceeds from this local option sales tax are
earmarked for funding local infrastructure programs and acquiring
land for public recreation or conservation or protection of natural
resources as provided under applicable
Florida law. Certain charter counties have other taxing powers.
In addition, and non-consolidated counties with a population in
excess of 800,000 may levy
a local option sales tax to fund indigent health care. It alone
cannot exceed 0.5% and when combined with the infrastructure surtax
cannot exceed 1.0%.
For the fiscal year ended June 30, 1993, sales and use tax
receipts (exclusive of the tax on gasoline and special fuels)
totalled $9,426.0 million, an increase of 12.5% over fiscal year
1991-1992.
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 $442.2 million in fiscal year ending June
30, 1993. Alcoholic beverage tax receipts increased 1.6% 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, 1993, receipts
from this source were $846.6 million, and increase of 5.6% from
fiscal year 1991-92.
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 $639.0 million during fiscal year
1992-93, a 27.0% increase from the previous fiscal year.
Beginning in fiscal year 1992-93,71.29% of these taxes are to be
<PAGE>
deposited to the General Revenue Fund.
The State imposes an intangible personal property
tax on stocks,
bonds, including bonds secured by liens in Florida real property,
notes, governmental leaseholds, and certain other intangibles, not
secured by alien on
Florida real property. The annual rate of tax is 2 mils. Second,
the State imposes a non-recurring 2 mil tax on mortgages and other
obligations secured
by liens on Florida real property. In fiscal year 1992-93, total
intangible personal property tax collections were $783.4 million,
a 33% increase over the prior year. Of the tax proceeds, 66.5% are
distributed to the General Revenue Fund.
The State's severance tax taxes, oil, gas and
sulphur production, as well as the severance of phosphate rock and
other solid minerals. Total
collections from severance taxes total $64.5 million during fiscal
year 1992-93, down 4.0% from the previous year. Currently, 60% of
this amount is transferred to the General Revenue Fund.
The State began its own lottery in 1988. State law
requires that lottery revenues be distributed 50% to the public in
prizes, 38.0% for use in
enhancing education, and the balance, 12.0% for costs of
administering the lottery. Fiscal year 1992-93 lottery ticket
sales totalled $2.13 billion, providing
education with approximately $810.4 million.
Debt-Balanced Budget Requirement
At the end of fiscal 1993, approximately $5.61
billion in principal amount of debt secured by the full faith and
credit of the State was outstanding.
In addition, since July 1, 1993, the State issued about $1.13
billion in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that
the State budget, as a whole, and each separate fund within the
State budget, be kept in balance
form currently available revenues each fiscal year. If the
Governor or Comptroller believes a deficit will occur in any State
fund, by statute, he must certify his opinion to the Administrative
Commission, which then is authorized
to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund. Additionally, the State
Constitution prohibits issuance of State obligations to fund
State operations.
Litigation
Currently under litigation are several issues
<PAGE>
relating to State actions or State taxes that put at risk
substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such
matters, individually or in the aggregate, will not have a
immaterial adverse affect on the State's financial position.
Florida law provides preferential tax treatment to
insurers who maintain a home office in the State. Certain insurers
challenged the constitutionality of this tax preference and sought
a refund of taxes paid. Recently, the Florida Supreme Court ruled
in favor of the State. This case and
others, along with pending refund claims, total about $150
million.
The State imposes a $295 fee on the issuance of
certificates of title for a motor vehicles previously titled
outside the State. The State has been sued
by plaintiffs alleging that this fee violates the Commerce Clause
of the U.S. Constitution. The Circuit Court in which the case was
filed has granted summary judgment for the plaintiffs and has
enjoined further collection of the
impact fee and has ordered refunds to all those who have paid the
fee since the collection of the fee went into effect. The State
has appealed the lower Court's decision and an automatic stay has
been granted to the State allowing it to
continue to collect the fee. The potential refund exposure to the
State if it should lose the case may be in excess off $100
million.
The State maintains a rating of Aa and AA from
Moody's Investors Service and Standard & Poors Corporation,
respectively, on the majority of its
general obligation bonds, although the rating of a particular
series of revenue bonds relates primarily to the project,
facility,or other revenues source from
which such series derives funds for repayment. While these ratings
and some of the information presented above indicate that the State
is in satisfactory economic health, there can be no assurance that
there will not be a decline in economic conditions or that
particular conditions or that particular Bonds
purchased by the Trust will not be adversely affected by any such
changes.
The sources for the information presented above
include official statements and financial statements of the State
of Florida. While the Sponsor has not independently verified this
information, the Sponsor has no reason to believe that the
information is not correct in all material respects.
Maryland Trust
Risk Factors. The Public indebtedness of the State of Maryland and
<PAGE>
its instrumentalities is divided into three general types. The
State issues general
obligation bonds for capital improvements and for various State
projects, to the
payment of which the State ad valorem property tax is exclusively
pledged. In
addition, the Maryland Department of Transportation issues for
transportation
purposes its limited, special obligation bonds payable primarily
from specific,
fixed-rate excise taxes and other revenues related mainly to
highway use.
Certain authorities issue obligations payable solely from specific
non-tax,
enterprise fund revenues and for which the State has no liability
and has given
no moral obligation assurance.
General obligation bonds of the State are authorized and issued
primarily to
provide funds for State-owned capital improvements, including
institutions of
higher learning, and the construction of locally owned public
schools. Bonds
have also been issued for local government improvements, including
grants and
loans for water quality improvement projects and correctional
facilities, to
provide funds for repayable loans or outright grants to private,
non-profit
cultural or educational institutions, and to fund certain loan and
grant programs.
The Maryland Constitution prohibits the contracting of State debt
unless it is
authorized by a law levying an annual tax or taxes sufficient to
pay the debt
service within 15 years and prohibiting the repeal of the tax or
taxes or their use
for another purpose until the debt is paid. As a uniform practice,
each separate
enabling act which authorizes the issuance of general obligation
bonds for a
given object or purpose has specifically levied and directed the
collection of an
ad valorem property tax on all taxable property in the State. The
Board of
Public Works is directed by law to fix by May 1 of each year the
precise rate
of such tax necessary to produce revenue sufficient for debt
service requirements
of the next fiscal year, which begins July 1. However, the taxes
levied need not
<PAGE>
be collected if or to the extent that funds sufficient for debt
service requirements
in the next fiscal year have been appropriated in the annual State
budget.
Accordingly, the Board, in annually fixing the rate of property tax
after the end
of the regular legislative session in April, takes account of
appropriations of
general funds for debt service.
In the opinion of counsel, the courts of Maryland have jurisdiction
to entertain
proceedings and power to grant mandatory injunctive relief to (i)
require the
Governor to include in the annual budget a sufficient appropriation
to pay all
general obligation bond debt service for the ensuing fiscal year;
(ii) prohibit the
General Assembly from taking action to reduce any such
appropriation below
the level required for that debt service; (iii) require the Board
of Public Works
to fix and collect a tax on all property in the State subject to
assessment for
State tax purposes at a rate and in an amount sufficient to make
such payments
to the extent that adequate funds are not provided in the annual
budget; and (iv)
provide such other relief as might be necessary to enforce the
collection of such
taxes and payment of the proceeds of the tax collection to the
holders of general
obligation bonds, pari passu, subject to the inherent
constitutional limitations
referred to below.
It is also the opinion of counsel that, while the mandatory
injunctive remedies
would be available and while the general obligation bonds of the
State are
entitled to constitutional protection against the impairment of the
obligation of
contracts, such constitutional protection and the enforcement of
such remedies
would not be absolute. Enforcement of a claim for payment of the
principal of
or interest on the bonds could be subject to the provisions of any
statutes that
may be constitutionally enacted by the United States Congress or
the Maryland
General Assembly extending the time for payment or imposing other
constraints
upon enforcement.
<PAGE>
There is no general debt limit imposed by the Maryland Constitution
or public
general laws, but a special committee created by statute annually
submits to the
Governor an estimate of the maximum amount of new general
obligation debt
that prudently may be authorized. Although the committee's
responsibilities are
advisory only, the Governor is required to give due consideration
to the
committee's findings in preparing a preliminary allocation of new
general debt
authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations issued by
the
Maryland Department of Transportation, the principal of which must
be paid
within 15 years from the date of issue, for highway, port, transit,
rail or
aviation facilities or any combination of such facilities. Debt
service on
Consolidated Transportation Bonds is payable from those portions of
the excise
tax on each gallon of motor vehicle fuel and the motor vehicle
titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and
the corporate
income tax as are credited to the Maryland Department of
Transportation, plus
all departmental operating revenues and receipts. Holders of such
bonds are not
entitled to look to other sources for payment.
The Maryland Department of Transportation also
issues its bonds
to provide financing of local road construction and various other
county
transportation projects and facilities. Debt service on these
bonds is payable
from the subdivisions' share of highway user revenues held to their
credit in a
special State fund.
The Maryland Transportation Authority operates
certain highway,
bridge and tunnel toll facilities in the State. The tolls and
other revenues
received from these facilities are pledged as security for revenue
bonds of the
Authority issued under and secured by a trust agreement between the
Authority
and a corporate trustee.
<PAGE>
Certain other instrumentalities of the State
government are
authorized to borrow money under legislation which expressly
provides that the
loan obligations shall not be deemed to constitute a debt or a
pledge of the faith
and credit of the State. The Community Development Administration
of the
Department of Housing and Community Development, the Board of
Trustees of
St. Mary's College of Maryland, the Maryland Environmental Service,
the
Board of Regents of the University of Maryland System, the Board of
Regents
of Morgan State University, and the Maryland Food Center Authority
have
issued and have outstanding bonds of this type. The principal of
and interest on
bonds issued by these bodies are payable solely from various
sources, principally
fees generated from use of the facilities or enterprises financed
by the bonds.
Under a Comprehensive Plan of Financing, as
amended, of the
Maryland Stadium Authority, the Authority is authorized to finance
the
acquisition and construction of sports facilities at a site within
the City of
Baltimore. Under the Plan of Financing, the Authority proposes to
engage in
a series of borrowing, together with certain equity contributions,
to finance
acquisitions of the site, construction of a baseball stadium and
ancillary facilities,
and if a lease agreement is executed between the Authority and a
professional
football franchise, a football stadium.
The Authority's financings as well as any future
financings for a
football stadium are leased-backed revenue obligations, payment of
which is
secured by among other things, an assignment of revenues to be
received under
a lease of the sports facilities from the Authority to the State of
Maryland; rental
payments due from the State under that lease will be subject to
annual
appropriation by the Maryland General Assembly. The State
anticipates that
revenues to fund the lease payments will be generated from a
variety of sources,
<PAGE>
including in each year sports lottery revenues, the net operating
revenues of the
Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is
administered by the
Water Quality Financing Administration in the Department of the
Environment.
The Fund may be used to provide loans, subsidies and other forms of
financial
assistance to local government units for wastewater treatment
projects as
contemplated by the 1987 amendments to the Federal Water Pollution
Control
Act. The Administration is authorized to issue bonds secured by
revenues of the
Fund, including loan repayments, federal capitalization grants, and
matching
State grants.
The University of Maryland System, Morgan State
University, and
St. Mary's College of Maryland are authorized to issue revenue
bonds for the
purpose of financing academic and auxiliary facilities. Auxiliary
facilities are
any facilities that furnish a service to students, faculty, or
staff, and that
generate income. Auxiliary facilities include housing, eating,
recreational,
campus, infirmary, parking, athletic, student union or activity,
research
laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive
Order
assigning to the Department of Budget and Fiscal Planning
responsibility to
review certain proposed issuances of revenue and enterprise debt
other than
private activity bonds. The Executive Order also provides that the
Governor
may establish a ceiling of such debt to be issued during the fiscal
year, which
ceiling may be amended by the Governor.
Although the State has authority to make short-term
borrowing in
anticipation of taxes and other receipts up to a maximum of $100
million, in the
past it has not issued short-term tax anticipation and bond
anticipation notes or
made any other similar short-term borrowing. However, the State
<PAGE>
has recently
issued certain obligations in the nature of bond anticipation notes
for the purpose
of assisting several savings and loan associations in qualifying
for Federal
insurance and in connection with the assumption by a bank of the
deposit
liabilities of an insolvent savings and loan association.
The State has financed the construction and
acquisition of various
facilities through unconditional purchase, sale-leaseback, and
similar
transactions. By statute, all of the lease payments under these
arrangements are
subject to an annual appropriation by the Maryland General
Assembly. In the
event that appropriations are not made, the State may not be held
contractually
liable for the payments.
Savings and Loan matters. During the first half of
calendar year
1985, several State-chartered savings and loans associations, the
savings
accounts of which were privately insured, experienced unusually
heavy
withdrawals of funds by depositors. The resulting decline in the
associations'
liquid assets led to the appointment of receivers for the assets of
six associations
and the creation of an agency of the State to succeed, by statutory
merger, the
private insurer. The savings accounts of all savings and loan
associations op-
erating in the State of Maryland must be insured by either the
State agency or
the Federal Savings and Loan Insurance Corporation. The State
agency assumed
the insurance liabilities of the private insurance agency with
respect to deposits
made prior to May 18, 1985, and insures amounts deposited after
that date up
to the amount insured by the Federal Savings and Loan Insurance
Corporation.
The legislation establishing the insurance agency provides that "It
is the policy
of this State that funds will be appropriated to the (insurance
agency) to the
extent necessary to protect holders of savings accounts in member
associations".
As of December 31, 1989, depositors of all insured accounts at
associations in
<PAGE>
receivership have been paid in full. Because the amount of the
losses incurred
by the State Insurance Agency are estimated and because numerous
lawsuits
involving the Agency are pending, the ultimate outcome of the
savings and loan
situation is uncertain.
Local Subdivision Debt. The counties and
incorporated
municipalities in Maryland issue general obligation debt for
general
governmental purposes. The general obligation debt of the counties
and
incorporated municipalities is generally supported by ad valorem
taxes on real
estate, tangible personal property and intangible personal property
subject to
taxation. The issuer typically pledges its full faith and credit
and unlimited
taxing power to the prompt payment of the maturing principal and
interest on
the general obligation debt and to the levy and collection of the
ad valorem taxes
as and when such taxes become necessary in order to provide
sufficient funds
to meet the debt service requirements. The amount of debt which
may be
authorized may in some cases be limited by the requirement that it
not exceed
a stated percentage of the assessable base upon which such taxes
are levied.
In the opinion of counsel, the issuer may be sued
in the event that
it fails to perform its obligations under the general obligation
debt to the holders
of the debt, and any judgments resulting from such suits would be
enforceable
against the issuer. Nevertheless, a holder of the debt who has
obtained any such
judgment may be required to seek additional relief to compel the
issuer to levy
and collect such taxes as may be necessary to provide the funds
from which a
judgment may be paid. Although there is no Maryland law on this
point, it is
the opinion of counsel that the appropriate courts of Maryland have
jurisdiction
to entertain proceedings and power to grant additional relief, such
as mandatory
injunction, if necessary, to enforce the levy and collection of
such taxes and
<PAGE>
payment of the proceeds of the collection of the taxes to the
holders of general
obligation debt, pari passu, subject to the same constitutional
limitations on
enforcement, as described above, as apply to the enforcement of
judgments
against the State.
Local subdivisions, including counties and
municipal corporations,
are also authorized by law to issue special and limited obligation
debt for certain
purposes other than general governmental purposes. The source of
payment of
that debt is limited to certain revenues of the issuer derived from
commercial
activities operated by the issuer, payments made with respect to
certain facilities
or loans, and any funds pledged for the benefit of the holders of
the debt. That
special and limited obligation debt does not constitute a debt of
the State, the
issuer or any other political subdivision of either within the
meaning of any
constitutional or statutory limitation. Neither the State nor the
issuer or any
other political subdivision of either is obligated to pay the debt
or interest on the
debt except from the revenues of the issuer specifically pledged to
the payment
of the debt. Neither the faith and credit nor the taxing power of
the State, the
issuer or any other political subdivision of either is pledged to
the payment of
the debt. The issuance of the debt is not directly or indirectly
or contingently
an obligation, moral or other, of the State, the issuer or any
other political
subdivision of either to levy any tax for its payment.
Washington Suburban Sanitary District Debt. The
Washington
Suburban Sanitary District operates as a public corporation of the
State to
provide, as authorized, water, sewerage and drainage systems,
including water
supply, sewage disposal, and storm water drainage facilities for
Montgomery
County, Maryland and Prince George's County, Maryland. For the
purpose of
paying the principal of and interest on bonds of the District,
Maryland law
provides for the levy, annually, against all the assessable
<PAGE>
property within the
District by the County Council of Montgomery County and the County
Council
of Prince Georges County of ad valorem taxes sufficient to pay such
principal
and interest when due and payable.
Storm water drainage bonds for specific projects
are payable from
ad valorem tax upon all of the property assessed for county tax
purposes within
the portion of the District situated in the county in which the
storm water project
was, or is to be, constructed. Storm water drainage bonds of the
District are
also guaranteed by such county, which guaranty operates as a pledge
of the full
faith and credit of the county to the payment of the bonds and
obligates the
county council to the extent that the tax revenues referred to
above and any
other money available or to become available are inadequate to
provide the
funds necessary to pay the principal of and the interest on the
bonds, to levy
upon all property subject to taxation within the county ad valorem
taxes in rate
and in amount sufficient to make up any such deficiency.
Substantially all of the debt service on the bonds,
except storm
water drainage bonds, is being paid from revenues derived by the
District from
water consumption charges, from foot benefit charges, and sewage
usage
charges. Notwithstanding the payment of principal of and interest
on those
bonds from those charges, the underlying security of all bonds of
the District is
the levy of ad valorem taxes on the assessable property as stated
above.
Special Authority Debt. The State and local
governments have
created several special authorities with the power to issue debt on
behalf or the
State of local government for specific purposes, such as providing
facilities for
non-profit health care and higher educational institutions,
facilities for the
disposal of solid waste, funds to finance single family and
low-to-moderate
income housing, and similar purposes. The Maryland Health and
<PAGE>
Higher Educational Facilities Authority, the Northeast Maryland
Waste Disposal
Authority, the Housing Opportunities Commission of Montgomery
County, and
the Housing Authority of Prince Georges County are some of the
special
authorities which have issued and have outstanding debt of this
type.
The debts of the authorities issuing debt on behalf
of the State and
the local governments are limited obligations of the authorities
payable solely
from and secured by a pledge of the revenues derived from the
facilities or loans
financed with the proceeds of the debt and from any other funds and
receipts
pledged under an indenture with a corporate trustee. The debt does
not
constitute a debt, liability or pledge of the faith and credit of
the State or of any
political subdivision or of the authorities. Neither the State nor
any political
subdivision thereof nor the authorities shall be obligated to pay
the debt or the
interest on the debt except from such revenues, funds and receipts.
Neither the
faith and credit nor the taxing power of the State or of any
political subdivision
of the State or the authorities is pledged to the payment of the
principal of or the
interest on such debt. The issuance of the debt is not directly or
indirectly an
obligation, moral or other, of the State or of any political
subdivision of the
State or of the authority to levy or to pledge any form of taxation
whatsoever,
or to make any appropriation, for their payment. The authorities
have no taxing
power.
Hospital Bonds. The rates charged by
non-governmental Maryland
hospitals are subject to review and approval by the Maryland Health
Services
Cost Review Commission. Maryland hospitals subject to regulation
by the
Commission are not permitted to charge for services at rates other
than those
established by the Commission. In addition, the Commission is
required to
permit any nonprofit institution subject to its jurisdiction to
charge reasonable
<PAGE>
rates which will permit the institution to provide, on a solvent
basis, effective
and efficient service in the public interest.
Under an agreement between Medicare and the
Commission,
Medicare agrees to pay Maryland hospitals on the basis of
Commission-
approved rates, less a 6% differential. Under this so-called
"Medicare Waiver",
Maryland hospitals are exempt from the Medicare Prospective Payment
System
which pays hospitals fixed amounts for specific services based upon
patient
diagnosis. No assurance can be given that Maryland will continue
to meet any
current or future tests for the continuation of the Medicare
Waiver.
In setting hospital rates, the Commission takes
into account each
hospital's budgeted volume of services and cash financial
requirements for the
succeeding year. It then establishes the rates of the hospital for
the succeeding
year based upon the projected volume and those financial
requirements of the
institution which the Commission has deemed to be reasonable.
Financial
requirements allowable for inclusion in rates generally include
budgeted
operating costs, a "capital facilities allowance", other financial
considerations
(such as charity care and bad debts) and discounts allowed certain
payers for
prompt payment. Variations from projected volumes of services are
reflected
in the rates for the succeeding year. The Commission, on a
selective basis by
the application of established review criteria, grants Maryland
hospitals increases
in rates to compensate for inflation experienced by hospitals and
for other
factors beyond the hospitals' control.
Regulations of the Commission provide that
overcharges will in
certain circumstances be deducted from prospective rates.
Similarly,
undercharges will in certain circumstances not be recoverable
through
prospective rates.
<PAGE>
The Commission has entered into agreements with
certain hospitals
to adjust rates in accordance with a prospectively approved,
guaranteed inpatient
revenue per admission program. Those agreements are in addition to
the rate
adjustment methodology discussed above. Under the program, a
hospital's
revenue per admission is compared to the revenue per admission, as
adjusted,
for a base year. Variations from the adjusted base year revenues
per admission
are added or deducted, as the case may be, from the hospital's
gross revenue
and rates for the following year.
There can be no assurance that the Commission will
continue to
utilize its present rate-setting methodology or approve rates which
will be
sufficient to ensure payment on an individual hospital's
obligations. Future
actions by the Commissions or the loss of the Medicare Waiver may
adversely
affect the operations of individual hospitals.
Changes in economic conditions in or governmental
policies of the
state of Maryland could have a significant impact on the
performance of the
Maryland Trust. For example, services (including mining),
wholesale and retail
trade, government, and manufacturing (primarily printing and
publishing, food
and kindred products, instruments and related products, electronic
equipment,
industrial machinery and transportation equipment), are the leading
areas of
employment in the State of Maryland. In contrast to the nation as
a whole,
more people in Maryland are employed in government than in
manufacturing.
The relatively high concentration of governmental employment in
Maryland
makes the state potentially vulnerable spending. Recent Maryland
executive
branch projections show a budgetary deficit for the fiscal year
ending June 30,
1991. The Governor of Maryland has recently acted to curtail
spending in
response to the projected deficit for that fiscal year.
In recent years, finance, insurance, and real
<PAGE>
estate were large contributors to the gross state product. The
continued strength in those sectors
is subject to question given recent disclosures indicating
financial weakness in
major banking and insurance companies having their corporate
headquarters in
Maryland and the general regional decline in real estate activity
and values.
The State is the subject of numerous legal
proceedings relating to
normally recurring governmental operations in which the State is a
defendant
and where monetary damages sought are substantial. These
proceedings could
adversely affect the financial condition of the State for the
present or any future
fiscal year.
Massachusetts Trust
Risk Factors. The Commonwealth of Massachusetts and
certain
of its cities and towns have at certain times in the recent past
undergone serious
financial difficulties which have adversely affected and, to some
degree,
continue to adversely affect their credit standing. These
financial difficulties
could adversely affect the market values and marketability of, or
result in default
in payment on, outstanding bonds issued by the Commonwealth or its
public
authorities or municipalities, including the Bonds deposited in the
Trust. The
following description highlights some of the more significant
financial problems
of the Commonwealth and the steps taken to strengthen its financial
condition.
The effect of the factors discussed below upon the
ability of
Massachusetts issuers to pay interest and principal on their
obligations remains
unclear and in any event may depend on whether the obligation is a
general or
revenue obligation bond (revenue obligation bonds being payable
from specific
sources and therefore generally less affected by such factors) and
on what type
of security is provided for the bond. In order to constrain future
debt service
<PAGE>
costs, the Executive Office for Administration and Finance
established in
November, 1988 an annual fiscal year limit on capital spending of
$925 million,
effective fiscal 1990. In January, 1990, legislation was enacted
to impose a
limit on debt service in Commonwealth budgets beginning in fiscal
1991. The
law provides that no more than 10% of the total appropriations in
any fiscal year
may be expended for payment of interest and principal on general
obligation
debt of the Commonwealth (excluding the Fiscal Recovery Bonds
discussed
below). It should also be noted that Chapter 62F of the
Massachusetts General
Laws establishes a state tax revenue growth limit and does not
exclude principal
and interest due on Massachusetts debt obligations from the scope
of the limit.
It is possible that other measures affecting the taxing or spending
authority of
Massachusetts or its political subdivisions may be approved or
enacted in the
future.
The Commonwealth has waived its sovereign immunity
and
consented to be sued under contractual obligations including bonds
and notes
issued by it. However, the property of the Commonwealth is not
subject to
attachment or levy to pay a judgment, and the satisfaction of any
judgment
generally requires legislative appropriation. Enforcement of a
claim for payment
of principal of or interest on bonds and notes of the Commonwealth
may also
be subject to provisions of federal or Commonwealth statutes, if
any, hereafter
enacted extending the time for payment or imposing other
constraints upon
enforcement, insofar as the same may be constitutionally applied.
The United
States Bankruptcy Code is not applicable to states.
Cities and Towns. During recent years limitations
were placed on
the taxing authority of certain Massachusetts governmental entities
that may
impair the ability of the issuers of some of the Bonds in the
Massachusetts Trust
to maintain debt service on their obligations. Proposition 2.5,
<PAGE>
passed by the
voters in 1980, led to large reductions in property taxes, the
major source of
income for cities and towns. As a result, between fiscal 1981 and
fiscal 1989,
the aggregate property tax levy declined in real terms by 15.6%.
Since Proposition 2.5 did not provide for any new
state or local
taxes to replace the lost revenues, in lieu of substantial cuts in
local services, the
Commonwealth began to increase local aid expenditures. In 1981
constant
dollars, total direct local aid expenditures increased by 58.5%
between fiscal
years 1981 and 1989, or 5.9% per year. During the same period, the
total of
all other local revenue sources declined by 5.87% or 0.75% per
year. Despite
the substantial increases in local aid from fiscal 1981 to fiscal
1989, local
spending increased at an average rate of 1% per year in real terms.
Direct local
aid for fiscal 1987, 1988, and 1989 was $2.601 billion, $2.769
billion, and
$2.961 billion, respectively. Direct local aid declined in the
three subsequent
years to $2.937 billion in fiscal 1990, $2.608 billion in 1991 and
$2.328 billion
in 1992 and increased to $2.547 billion in 1993. It is estimated
that fiscal 1994
expenditures for direct local aid will be $2.737 billion, which is
an increase of
approximately 7.5% above the fiscal 1993 level. The additional
amount of
indirect local aid provided over and above the direct local aid is
estimated to
have been $1.313 billion in fiscal 1991, $1.265 billion in fiscal
1992 and $1.717
billion in fiscal 1993 and is estimated to be approximately $1.717
billion in
fiscal 1994.
Many communities have responded to the limitations
imposed by
Proposition 2.5 through statutorily permitted overrides and
exclusions. Override
activity peaked in fiscal 1991, when 182 communities attempted
votes on one
of the three types of referenda questions (override of levy limit,
exclusion of
debt service, or exclusion of capital expenditures) and 100 passed
at least one
<PAGE>
question, adding $58.5 million of their levy limits. In fiscal
1992, 67 of 143 communities had successful votes totalling $31.0
million. In fiscal 1993, 83
communities attempted a vote; two-thirds of them (56) passed
questions aggregating $16.4 million.
A statewide voter initiative petition which would
effectively mandate that, commencing with fiscal 1992, no less than
40% of receipts from
personal income taxes, sales and use taxes, corporate excise taxes
and lottery fund proceeds be distributed to certain cities and
towns in local aid was
approved in the general election held November 6, 1990. Pursuant
to this petition, the local aid distribution to each city or town
was to equal no less than
100% of the total local aid received for fiscal 1989.
Distributions in excess of
fiscal 1989 levels were to be based on new formulas that would
replace the current local aide distribution formulas. If
implemented in accordance with its
terms (including appropriation of the necessary funds), the
petition as approved
would shift several hundred million dollars to direct local aid.
However, local aid payments explicitly remain subject to annual
appropriation, and fiscal 1992
and fiscal 1993 appropriations for local aid did not meet, and
fiscal 1994 appropriations for local aid do not meet, the levels
set forth in the initiative law.
Pension Liabilities. The Commonwealth had funded
its two pension systems on essentially a pay-as-you-go basis. The
funding schedule is based on
actuarial valuations of the two pension systems as of January 1.
1990, at which time the unfunded accrued liability for such systems
operated by the
Commonwealth (and including provision for Boston teachers) totalled
$8.865 billion. The unfunded liability for the Commonwealth
related to cost of living
increases for local retirement systems was estimated to be an
additional $2.004
billion as of January 1, 1990. An actuarial valuation as of
January 1, 1992
shows that, as of such date, the total unfunded actuarial liability
for such systems, including cost-of-living allowances, was
approximately $8.485 billion
representing a reduction of approximately $2.383 billion from
January 1, 1990.
The amount in the Commonwealth's pension reserve,
established to address the unfunded liabilities of the two state
systems, has increased
significantly in recent years due to substantial appropriations and
changes in law relating to investment of retirement system assets.
Total appropriations and transfers to the reserve in fiscal years
1985, 1986, 1987 and 1988 amounted to
approximately $680 million. Comprehensive pension legislation
approved in January 1988 committed the Commonwealth, beginning in
fiscal 1989, to normal cost funding of its pension obligations and
to a 40-year amortization schedule for
its unfunded pension liabilities. Total pension costs increased
from $659.7 million in fiscal 1989 to $868.2 million in fiscal
1993. Pension funding is
estimated to be $951.0 million in fiscal year 1994. As of June 30,
1993, the Commonwealth's pension reserves had grown to
approximately $3.877 billion.
State Budget and Revenues. The Commonwealth's
Constitution requires, in effect, that its budget be balanced each
year. The Commonwealth's
fiscal year ends June 30. The General Fund is the Commonwealth's
primary operating fund; it also functions as a residuary fund to
receive otherwise
unallocated revenues and to provide monies for transfers to other
funds as required. The condition of the General Fund is generally
regarded as the
principal indication of whether the Commonwealth's operating
revenues and expenses are in balance; the other principal operating
funds (the Local Aid Fund and the Highway Fund) are customarily
funded to at least a zero balance.
Limitations on Commonwealth tax revenues have been
established by enacted legislation and by public approval of an
initiative petition which has
become law. The two measures are inconsistent in several respects,
including the methods of calculating the limits and the exclusions
from the limits. The
initiative petition does not exclude debt service on the
Commonwealth's notes and bonds from the limits. State tax revenues
in fiscal 1988 through fiscal 1993
were lower than the limits. The Executive Office for
Administration and Finance currently estimates that state tax
revenues will not reach the limit
imposed by either the initiative petition or the legislative
enactment in fiscal 1994.
Budgeted expenditures for fiscal 1989 totalled
approximately $12.643 billion. Budgeted revenues totalled
approximately $11.970 billion,
approximately $672.5 million less than total expenditures. Under
the budgetary basis of accounting, after taking account of certain
fund balances, fiscal 1989
ended with a deficit of $319.3 million. Under the GAAP basis of
accounting, excluding fiduciary accounts and enterprise funds, the
Commonwealth ended fiscal 1989 with a deficit of $946.2 million.
This deficit reflected an operating
gain in the capital projects funds due to the additional borrowing
to reduce prior year deficits. If the capital project funds are
<PAGE>
excluded, the Comptroller calculated a GAAP deficit of $1.002
billion in fiscal 1989.
Fiscal 1989 tax revenues were adversely affected by
the economic slowdown that began in mid-1988. In June, 1988, the
fiscal 1989 tax revenue
estimate was for 10.9% growth over fiscal 1988. Fiscal 1989 ended
with actual tax revenue growth of 6.5%.
The fiscal 1989 budgetary deficit caused a cash
deficit in the Commonwealth operating accounts on June 30, 1989 in
the amount of approximately $450 million. The State Treasurer was
forced to defer until early
July certain fiscal 1989 expenditures including the payment of
approximately $305 million in local aid due June 30, and with
legislative authorization, issued
temporary notes in July in the amount of $1.1 billion to pay fiscal
1989 and fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of
approximately $13.260 billion. Budgeted revenues and other
services for fiscal 1990 were
approximately $12.008 billion. Tax revenues for fiscal 1990 were
approximately $8.517 billion, a decrease of approximately $314
million or 3.6% from fiscal 1989. The Commonwealth suffered an
operating loss of approximately $1.25 billion and ended fiscal 1990
with a budgetary deficit of
$1.104 billion. The Commonwealth had a cash surplus of $99.2
million on June 30, 1990 as a result of deferring until fiscal 1991
the payment of approximately $1.26 billion of local aid due June
30, 1990.
On July 28, 1990, the legislature enacted Chapter
151 which provides, among other matters, for the Commonwealth
Fiscal Recovery Loan
Act of 1990 and grants authorization for the Commonwealth to issue
bonds in an aggregate amount up to $1.42 billion for purposes of
funding the Commonwealth's fiscal 1990 deficit and certain prior
year Medicaid reimbursement payments. Chapter 151 also provides
for the establishment of
the Commonwealth Fiscal Recovery Fund, deposits for which are
derived from a portion of the Commonwealth's personal income tax
receipts, are dedicated for
this purpose and are to be deposited in trust and pledged to pay
the debt service on these bonds. Under Chapter 151, the
Commonwealth issued $1.363 billion
of Dedicated Income Tax Bonds to cover the anticipated fiscal 1990
deficit.
Total expenditures for fiscal 1991 are estimated to
have been $13.659 billion. Total revenues for fiscal 1991 are
estimated to have been $13.634 billion, resulting in an estimated
$21.2 million operating loss.
<PAGE>
Application of the adjusted fiscal 1990 fund balances of $258.3
million resulted
in a final fiscal 1991 budgetary surplus of $237.1 million. State
finance law required that approximately $59.2 million of the fiscal
year surplus be placed in
the Stabilization Fund described above. Amounts credited to the
Stabilization Fund are not generally available to defray current
year expenses without subsequent specific legislative
authorization.
After payment in full of the local aid distribution
of $1.018 billion due on June 28, 1991, retirement of all of the
Commonwealth's outstanding
commercial paper and repayment of certain other short-term
borrowing, as of the period of fiscal 1991, the Commonwealth had a
cash balance of $182.3
million. The fiscal 1991 year-end cash position compared favorably
to the Commonwealth's cash position at the end of the prior fiscal
year, June 30, 1990, when the Commonwealth's cash shortfall would
have exceeded $1.1 billion had payment of local aid not been
postponed.
Upon taking office in January 1991, the new
Governor undertook
a comprehensive review of the Commonwealth's budget. Based on
projected spending of $14.105 billion, it was then estimated that
$850 million in budget balancing measures would be needed prior to
the close of fiscal 1991. At that
time, estimated tax revenues were revised to $8.845 billion, $903
million less than was estimated at the time the fiscal 1991 budget
was adopted. The Governor proposed a series of legislative and
administrative actions, designed
to eliminate the projected deficit. The legislature adopted a
number of the Governor's recommendations and the Governor took
certain other administrative
actions, not requiring legislative approval, including $65 million
in savings from the adoption of a state employee furlough program.
It is estimated that spending
reductions achieved through savings incentives and withholding of
allotments totalled $484.3 million in the aggregate for fiscal
1991.
In addition to recommending spending reductions to
close the projected budget deficit, the administration, in May
1991, filed an amendment
to its Medicaid state plan that enabled it to claim 50% Federal
reimbursement on uncompensated care payments provided to certain
hospitals in the Commonwealth.
In fiscal 1992, Medicaid accounted for more than
half of the Commonwealth's appropriations for health care. It is
the largest item in the Commonwealth's budget. It has also been
one of the fastest growing budget
<PAGE>
items. During fiscal years 1989, 1990 and 1991, Medicaid
expenditures were
$1.83 billion, $2.12 billion and $2.77 billion, respectively. A
substantial
amount of expenditures in recent years was provided through
supplemental
appropriations, repeating the experience that Medicaid expenditures
have exceeded initial appropriation amounts. These annual amounts,
however, do not
take account of the practice of retroactive settlement of many
provider payments after audit review and certification by the Rate
Setting Commission. In fiscal
1990, payments of approximately $488 million were made to hospitals
and nursing homes for rate settlements dating back as far as 1980,
through the Medical Assistance Liability Fund established to fund
certain Medicaid liabilities
incurred, but not certified for payment, in prior years. This
amount is not factored into the annual totals for Medicaid
expenditures listed above. Including
retroactive provider settlements, Medicaid expenditures for fiscal
1992 were $2.818 billion and for fiscal 1993 were $3.151 billion.
The Executive Office
for Administration and Finance estimates that fiscal 1994 Medicaid
expenditures will be approximately $3.252 billion, an increase of
3.9% over fiscal 1993
expenditures. For fiscal 1994, no supplemental Medicaid
appropriations are currently expected to be necessary. The
Governor had proposed a managed care
program to be implemented commencing in January, 1992 in order to
address the considerable annual cost increases in the Medicaid
program. Medicaid is presently 50% funded by federal
reimbursements.
In fiscal 1992, total revenues and other sources of
the budgeted operating funds totalled $13.728 billion, an increase
over fiscal 1991 revenues of .7%. (Actual fiscal 1992 tax revenues
exceeded original estimates and
totalled $9.484 billion, an increase over fiscal 1991 collections
of 5.4%). Fiscal 1992 expenditures and other uses of budgeted
operating funds totalled
approximately $13.420 billion, a decrease from fiscal 1991
expenditures by 1.7%. Fiscal year 1992 revenues and expenditures
resulted in an operating gain of $312.3 million. Through the use
of the prior year ending fund balances of
$312.3 million, fiscal 1992 budgetary fund balances totalled $549.4
million. Total fiscal 1992 spending authority continued into
fiscal 1993 is $231.0 million.
After payment in full of the quarterly local aid
distribution of $514 million due on June 30, 1992, retirement of
the Commonwealth's outstanding
commercial paper (except for approximately $50 million of bond
anticipation notes) and certain other short-term borrowings, as of
June 30, 1992, the Commonwealth showed a year-end cash position of
approximately $731 million
for fiscal year 1992. The ending balance compares favorably with
the cash balance of $182.3 million at the end of fiscal 1991. As
of June 1993, the Commonwealth showed a year-end cash position of
$622.2 million for fiscal year 1993. As of January 19, 1994, the
Commonwealth estimates a 1994 year-end cash position of
approximately $725.4 million.
The budgeted operating funds of the Commonwealth
ended fiscal 1993 with a surplus of revenues and other sources over
expenditures and other uses of $13.1 million and aggregate ending
fund balances in the budgeted
operating funds of the Commonwealth of approximately $562.5
million. Budgeted revenues and other sources for fiscal 1993
totalled approximately $14.710 billion, including tax revenues of
$9.930 billion. Total revenues and
other sources increased by approximately 6.9% from fiscal 1992 to
fiscal 1993, while tax revenues increased by 4.7% for the same
period. In July 1992, tax revenues had been estimated to be
approximately $9.685 billion for fiscal 1993.
This amount was subsequently revised during fiscal 1993 to $9.940
billion.
Commonwealth budgeted expenditures and other used
in fiscal 1993 totalled approximately $14.696 billion, which is
$1.280 billion or approximately
9.6% higher than fiscal 1992 expenditures and other uses. Fiscal
1993 budgeted expenditures were $23 million lower than the initial
July 1992 estimates of fiscal 1993 budget expenditures.
On July 19, 1993, the Governor signed into law the
budget for fiscal 1994, totalling $15.463 billion. This
represented a $694 million increase
over the then estimated budgeted expenditures of $14.976 billion
for fiscal 1993.
On January 14, 1994, the Governor signed into law supplemental
appropriations totalling approximately $157.9 million. Including
an additional $8.1 million in
fiscal 1994 supplemental appropriation recommendations that the
Governor plans to file, and an approximate $100 million contingency
reserve in fiscal 1994 for
possible additional spending, fiscal 1994 budgeted expenditures are
currently estimated to be approximately $15.716 billion. Budgeted
revenues and other sources to be collected in fiscal 1994 are
estimated to be approximately $15.535
billion, which includes tax revenues of approximately $10.694
billion (as compared to $9.930 billion in fiscal 1993). This
budget includes $175 million
as part of an education reform bill passed by the legislature. The
fiscal 1994 budget is based on numerous spending and revenue
estimates, the achievement
of which cannot be assured. As of January 10, 1994, the
Legislature had overridden $21.0 million of the Governor's vetoes
<PAGE>
relating to the fiscal 1994
budget. Commonwealth expenditures and other uses in fiscal 1994
are currently estimated to be approximately $15.500 billion, which
is $788 million or
approximately 5.36% higher than those of fiscal 1993. Based on
currently estimated revenues and expenditures, the Executive Office
for Administration
and Finance projects a fiscal 1994 ending balance of approximately
$382.0 million, of which approximately $315.5 million will be in
the Stabilization Fund.
On July 19, 1993, a 60-day hiring freeze on all
executive branch agencies was instituted to help ensure that agency
expenditures remain within
their fiscal 1994 budget authorizations. On August 16, 1993, the
Commonwealth announced that approximately 1,280 state employees
would be laid off in the near future, in addition to approximately
350 employees already laid off in fiscal 1994.
On January 21, 1994, the Governor presented his
Budget Submission for fiscal year 1995 providing for expenditures
of $16.14 billion, a $424 million, or 2.7%, increase over current
fiscal year 1994 projections.
These proposed expenditures for fiscal year 1995 include direct
local aid of $2.997 billion. This budget is based on total
anticipated revenues of $16.144
billion, which represents a $609 million, or 3.9%, increase over
fiscal year 1994 estimates. The Governor's budget recommendation
is based on a tax revenue
estimate of $11.226 billion, an increase of approximately 5.0%, as
compared to currently estimated fiscal 1994 tax revenues of $10.694
billion.
The liabilities of the Commonwealth with respect to
outstanding bonds and notes payable as of January 1, 1994 totalled
$12.555 billion. These
liabilities consisted of $8.430 billion of general obligation debt,
$1.036 billion of dedicated income tax debt (the Fiscal Recovery
Bonds), $104 million of
special obligation debt, $2.742 billion of supported debt, and $243
million of guaranteed debt.
Capital spending by the Commonwealth was
approximately $595 million in fiscal 1987, $632 million in fiscal
1988 and $971 million in fiscal
1989. In November 1988, the Executive Office for Administration
and Finance established an administrative limit on state financed
capital spending in the
Capital Projects Funds of $925.0 million per fiscal year. Capital
expenditures decreased to $936 million, $847 million, $694.1
million and $575.9 million in
fiscal 1990, 1991, 1992 and 1993, respectively. Capital
expenditures are projected to increase to $886.0 million in fiscal
<PAGE>
1994. The growth in capital spending accounts for a significant
rise in debt service during the period.
Payments for the debt service on Commonwealth general obligation
bonds and notes have risen at an average annual rate of 20.4% from
$649.8 million in fiscal 1989 to $942.3 million in fiscal 1991.
Debt Service payments in fiscal
1992 were $898.3 million, representing a 4.7% decrease from fiscal
1991. This decrease resulted from a $261 million one-time
reduction achieved through the
issuance of refunding bonds in September and October of 1991. Debt
service expenditures were $1.139 billion for fiscal 1993 and are
projected to be $1.220
billion for fiscal 1994. These amounts represent debt service
payments on direct Commonwealth debt and do not include debt
service on notes issued to finance
the fiscal 1989 deficit and certain Medicaid-related liabilities,
which were paid
in full from non-budgeted funds. Also excluded are debt service
contract assistance to certain state agencies and the municipal
school building assistance
program projected to total of $359.7 million in the aggregate in
fiscal 1994. In addition to debt service on bonds issued for
capital purposes, the
Commonwealth is obligated to pay the principal of and interest on
the Fiscal Recovery Bonds described above. The estimated debt
service on such bonds currently outstanding (a portion of which
were issued as variable rate bonds) ranges from approximately $279
million (interest only) in fiscal 1994 through
fiscal 1997 and approximately $130 million in fiscal 1998, at which
time the entire amount of the Fiscal Recovery Bonds will be
retired.
In January 1990 legislation was enacted to impose
a limit on debt service in Commonwealth budgets beginning in fiscal
1991. The law provides
that no more than 10% of the total appropriations in any fiscal
year may be expended for payment of interest and principal on
general obligation debt (excluding the Fiscal Recovery Bonds) of
the Commonwealth. This law may be
amended or appealed by the legislature or may be superseded in the
General Appropriation Act for any year. From fiscal year 1987
through fiscal year 1994 estimated this percentage has been
substantially below the limited established by
this law.
Legislation enacted in December 1989 imposes a
limit on the amount of outstanding direct bonds of the
Commonwealth. The limit for fiscal
1994 is $7.872 billion. The law provides that the limit for each
subsequent fiscal year shall be 105% of the previous fiscal year's
limit. The Fiscal Recovery Bonds will not be included in computing
the amount of bonds subject to this limit.
<PAGE>
In August 1991, the Governor announced a five-year
capital spending plan. The plan, which represents the
Commonwealth's first centralized
multi-year capital plan, sets forth, by agency, specific projects
to receive capital spending allocations over the next five fiscal
years and annual capital spending
limits. Capital spending by the Commonwealth, which exceeded $900
million annually in fiscal 1989, 1990 and 1991, declined to $694.1
million in fiscal 1992
and $575.9 in fiscal 1993. For fiscal 1994 through 1998, the plan
forecasts annual capital spending for the Commonwealth of between
$813 million and $886 million per year, exclusive of spending by
the Massachusetts Bay Transit
Authority. Total expenditures are forecast at $4.25 billion, an
amount less than the total amount of agency capital spending
requests for the same period.
Planned spending is also significantly below legislatively
authorized spending levels.
Unemployment. From 1980 to 1989, the Massachusetts
unemployment rate was significantly lower than the national
average. The Massachusetts unemployment rate averaged 9.0%, 8.5%
and 6.9% in calendar
1991, 1992 and 1993, respectively. The Massachusetts unemployment
rate in December, 1993 was 6.3% as compared to 6.6% for November,
1993 and 8.6% for December of 1992, although the rate has been
volatile throughout this
period. The Massachusetts unemployment rate in January and
February, 1994 was 7.2% and 6.4%, respectively; these rates are not
comparable to prior rates due to a new rate computation which
became effective in 1994.
The balance in the Massachusetts Unemployment
Compensation Trust Fund had been exhausted as of September 1991 due
to the continued high levels of unemployment. As of December 31,
1992, the Massachusetts Unemployment Compensation Trust Fund
balance was in deficit by $377 million. As of November 30, 1993,
the Fund was in deficit by $163 million.
The deficit is now expected to be approximately $120 million by the
end of calendar 1993. Benefit payments in excess of contributions
are being financed by use of repayable advances from the federal
unemployment loan account.
Legislation enacted in May 1992 increased employer contributions in
order to reduce advances from the federal loan account. The
additional increases in contributions provided by the new
legislation should result in a positive balance
in the Unemployment Compensation Trust Fund by the end of December
1994 and rebuild reserves in the system to over $1 billion by the
end of 1996.
Litigation. The Attorney General of the
Commonwealth is not aware of any cases involving the Commonwealth
which in his opinion would affect materially its financial
<PAGE>
condition. However, certain cases exist containing
substantial claims, among which are the following:
The United States has brought an action on behalf
of the U.S. Environmental Protection Agency alleging violations of
the Clean Water Act and seeking to enforce the clean-up of Boston
Harbor. The Massachusetts Water
Resources Authority (the "MWRA") has assumed primary responsibility
for developing and implementing a court approved plan and time
table for the construction of the treatment facilities necessary to
achieve compliance with the
federal requirements. The MWRA currently projects that total cost
of construction of the waste water facilities required under the
court's order as
approximately $3.5 billion in current dollars. Under the Clean
Water Act, the Commonwealth may be liable for any costs of
complying with any judgment in this case to the extent that the
MWRA or a municipality is prevented by state law from raising
revenues necessary to comply with such a judgment.
In a recent suit filed against the Department of
Public Welfare, plaintiffs allege that the Department has
unlawfully denied personal care
attendant services to severely disabled Medicaid recipients. The
Court has denied plaintiffs' motion for a preliminary injunction
and has not yet acted on plaintiffs' motion for reconsideration of
that decision. If plaintiffs prevail on
their claims, the suit could cost the Commonwealth as much as $200
million.
In a suit filed against the Commissioner of
Revenue, plaintiffs challenge the inclusion of income from tax
exempt obligations in the measure
of the bank excise tax. The Appellate Tax Board issued a finding
of fact and report in favor of the Commissioner of Revenue on
September 30, 1993. An appeal has been filed. Approximately $400
million is at issue.
There are also several tax matters in litigation
which may result in an aggregate liability in excess of $195
million.
Ratings. Beginning on May 17, 1989, Standard &
Poor's downgraded its ratings on Massachusetts general obligation
bonds and certain agency issues from AA+ to AA. The ratings were
downgraded three additional
times to a low of BBB on December 31, 1989. On July 14, 1989,
Standard & Poor's also downgraded its rating on temporary general
obligation notes and various agency notes from SP-1 + to SP-1 and
on general obligation short-term
notes and on short-term agency debt from SP-1 to SP-2. Bonds rated
BBB may have speculative characteristics. The rating remained at
BBB until September 9, 1992 when Standard & Poor's raised its
<PAGE>
rating to A. At this same time, such bonds were removed from
CreditWatch. On October 14, 1993, Standard &
Poor's raised its rating from A to A+.
On June 21, 1989, Moody's Investors Service
downgraded its rating on Massachusetts general obligation bonds Aa
to A. The ratings were further reduced on two occasions to a low
on March 19, 1990 of Baa where it remained until September 10, 1992
when Moody's increased its rating to A.
Fitch Investors Service, Inc. lowered its rating on
the Commonwealth's bonds from AA to A on September 29, 1989. As of
December 5, 1991, its qualification of the bonds changed from
Uncertain Trends to Stabilizing Credit Trend. On October 13, 1993,
Fitch Investors raised its rating from A to A+.
Ratings may be changed at any time and no assurance
can be given that they will be not be revised or withdrawn by the
rating agencies, if in their respective judgments, circumstances
should warrant such action. Any downward revision or withdrawal of
a rating could have an adverse effect on market prices of the
bonds.
The Sponsor are unable to predict what effect, if
any, such factors may have on the Bonds in the Massachusetts Trust.
Nevertheless, investors should be aware that if there should be a
financial crisis relating to
Massachusetts, its public bodies or municipalities (including the
city of Boston), the market value and marketability of all
outstanding bonds issued by the Commonwealth and its public
authorities or municipalities, including the Bonds
in the Massachusetts Trust, could be adversely affected.
Minnesota Trust
The State of Minnesota (the "State") relies heavily
on a progressive individual income tax and a retail sales tax for
revenue, which results in a fiscal
system that is sensitive to economic conditions. In the early
1980s, the State of Minnesota experienced financial difficulties
due to a downturn in the State's
economy resulting from the national recession. As a consequence,
the State's revenues were significantly lower than anticipated in
the July 1, 1979 to June 30, 1981 biennium and the July 1, 1981 to
June 30, 1983 biennium. In response to revenue shortfalls, the
legislature broadened and increased the State
sales tax, increased income taxes (by increasing rates and
eliminating deductions) and reduced appropriations and deferred
payments of State aid,
including appropriations for and aids to local governmental units.
The State's fiscal problems affected other governmental units
<PAGE>
within the State, such as local
government, school districts and state agencies, which, in varying
degrees, also faced cash flow difficulties. In certain cases,
revenues of local governmental
units and agencies were reduced by the recession. Because of the
State's fiscal problems, Standard & Poor's Corporation reduced its
rating of the State's outstanding general obligation bonds from AAA
to AA+ in August 1981 and to AA in March 1982. Moody's Investors
Service, Inc. lowered its rating on
the State's outstanding general obligation bonds from Aaa to Aa in
April 1982.
The State's economy recovered in the July 1, 1983
to June 30, 1985 biennium, and substantial reductions in the
individual income tax were enacted
in 1984 and 1985. Standard & Poor's raised its rating on the
State's outstanding general obligation bonds to AA+ in January
1985. In 1986, 1987, 1991, 1992
and 1993 legislation was required to eliminate projected budget
deficits by raising additional revenue and reducing expenditures,
including aid to political
subdivisions and higher education reducing the State's budget
reserve (cash flow account), imposing a sales tax on purchases by
local governmental units and
making other budgetary adjustments. A budget analysis released by
the Department of Finance on May 27, 1994 projected a General Fund
balance of $130 million for the end of the current biennium at June
30, 1995, plus an increase in the State's cash flow account from
$360 million to $500 million. Total projected expenditures and
transfers for the biennium are $16.9 billion.
The Minnesota Supreme Court held on April 1, 1994
that numerous banks are entitled to refunds of Minnesota bank
excise taxes paid for tax years
1979 through 1983, on the grounds that interest on federal
obligations was unlawfully included in the computation of the tax
for such years. The trial court
has been directed to calculate the amounts to be refunded. The
taxes and interest are estimated to be in excess of $188 million.
The State will be permitted to pay
the refunds over a four-year period. the State of Minnesota also is
a party to a variety of other civil actions which could adversely
affect the State's General Fund.
State grants and aids represent a large percentage
of the total revenues of cities, towns, counties and school
districts in Minnesota. Even with respect to Bonds that are
revenue obligations of the issuer and not general
obligations of the State, there can be no assurance that the fiscal
problems referred to above will not adversely affect the market
value or marketability of the Bonds or the ability of the
respective obligors to pay interest on and principal of the Bonds.
<PAGE>
Missouri Trust
The following discussion regarding constitutional
limitations and the
economy of the State of Missouri is included for the purpose of
providing general information that may or may not affect issuers of
the Bonds in Missouri.
In November 1981, the voters of Missouri adopted a
tax limitation
amendment to the constitution of the State of Missouri (the
"Amendment"). The
Amendment prohibits increases in local taxes, licenses, or fees by
political subdivisions without approval of the voters of such
political subdivision. The
Amendment also limits the growth in revenues and expenditures of
the State to the rate of growth in the total personal income of the
citizens of Missouri. The
limitation may be exceeded if the General Assembly declares an
emergency by a two-thirds vote. The Amendment did not limit
revenue growth at the state
level in fiscal 1982 through 1991 with exception of fiscal 1984.
Management Report No. 85-20, which was issued on March 5, 1985 by
State Auditor Margaret Kelly, indicates that state revenues
exceeded the allowable increase by $30.52 million in fiscal 1984.
The economy of Missouri is diverse and includes
manufacturing, retail and wholesale trade, services, agriculture,
tourism, and mining. According to the Business and Public
Administration Research Center of the
College of Business and Public Administration, University of
Missouri at Columbia, real per capita personal income in Missouri,
adjusted for inflation,
is projected to increase 5.9% during 1993. As a result of the
State's weak economic outlook, Missouri General Fund Revenues are
currently projected to
increase by only 3.1% for the 1992-1993 fiscal year. According to
the Missouri Department of Labor and Industrial Relations, the
unemployment rate in Missouri for December 1992 was 5.3 percent,
compared to 6.0 percent in
December 1991, and 4.8 percent in November 1992. There can be no
assurance that the general economic conditions or the financial
circumstances of Missouri or its political subdivisions will not
adversely affect the market value of the
Bonds or the ability of the obligor to pay debt service on such
Bonds.
Currently, Moody's Investors Service rates Missouri
general obligation bonds "Aaa" and Standard & Poor's Corporation
rates Missouri general obligation bonds "AAA". Although these
ratings indicate that the State of Missouri is in relatively good
economic health, there can be, of course, no
assurance that this will continue or that particular bond issues
<PAGE>
may not be adversely affected by changes in the State or local
economic or political conditions.
The foregoing information constitutes only a brief
summary of some of the general factors which may impact certain
issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of obligations held by the Missouri
Trust are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which
are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact
on the financial condition of the State and various agencies and
political subdivisions located in the State. It is not possible to
predict whether or to what extent such
factors or other factors may affect the issuers of the Bonds, the
market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to
pay interest on or principal of the Bonds.
Nebraska Trust
Nebraska's Economy. Approximately 1.5 million
people live in Nebraska. About four-fifths of Nebraskans live in
Nebraskans live in the eastern
third of the state. The economy of western Nebraska continues to
revolve around crop and livestock production, although food
processing and other types of
manufacturing are becoming more prevalent. Eastern Nebraska, which
includes the cities of Omaha with about 335,00 people and Lincoln
with about 190,000
residents, has a more diversified economy. The economy of eastern
Nebraska includes foodprocessing, general manufacturing, insurance,
financial services, telemarketing, education, government and a
large military base outside of
Omaha. The economy of the state as a whole is vulnerable to
downturns in crop and livestock prices, reductions in government
farm subsidies, changes in
interest rates and decisions at the federal level, including
decisions regarding Offutt Air Force Base. Any one of these
factors, or other developments could adversely affect any, or all
issues of Nebraska tax-exempt securities.
According to the Federal Reserve Bank of Kansas
City, economic growth in Nebraska was flat in 1992. Nonagricultural
employment dipped slightly after a gain in 1991. the civilian
unemployment rate climbed to 3.2%
in the third quarter from 2.9% at the end of 1991. Still Nebraska's
unemployment rate remained below the national average of 7.6%. Real
nonfarm income grew twice as fast as in 1991, but not as fast as in
surrounding states.
Nebraska's manufacturing sector remained stable in 1992.
Manufacturing employment, dominated by nondurables such as food
<PAGE>
processing, fell slightly. Nondurable industries added jobs,
offsetting continuing job losses in durable
goods industries. Nebraska construction sector was strong in 1992,
with the value of construction contracts awarded in the first three
quarters up considerably from the year before. Permits for
single-family homes increased,
as did contract awards for nonresidential buildings and public
structures, such as roads and bridges. Nevertheless, the increase
in construction activity did not
translate into new jobs. In fact, construction employment fell 1.4%
after rising slightly in 1991. Nebraska's non-goods-producing
sectors slipped as in 1991.
Employment in retail and wholesale trade fell 4.6%. While service
employment held up better, there has been essentially no job growth
in this sector in the past two years.
Nebraska's utilities engaged in the production of
electric power are either publicly-owned or consumer-owned
cooperatives and are subject to limited regulation.
Nebraska Developments Relating to Property
Taxation. The validity of Nebraska's system of assessing and taxing
real and personal property for
support of local political subdivisions has been the subject of
numerous court challenges and a recent constitutional amendment. In
a series of decisions
beginning in 1989, the Nebraska Supreme Court (the"Court") held
that Nebraska's personal property tax scheme which exempted from
taxation approximately of 75% of Nebraska's commercial and
industrial personal property, but taxed railcars, gas pipelines and
other property, violated the
Uniformity Clause of the Nebraska Constitution. These decisions
arguably required either that all tangible personal and real
property be taxed or that all such property be removed from the tax
rolls.
On May 12, 1992, the people of Nebraska voted to
amend the Uniformity Clause of the Nebraska Constitution. The
amendment granted the
Nebraska Legislature (the "Legislature") greater authority to
administer the property tax in a nonuniform manner and allow real
and personal property to be treated as separate classes of tangible
property for taxation purposes. Pursuant
to the amendment, the Legislature enacted legislation, which
incorporated into the statutes the provisions of the amendment and
placed certain personal property, including business and
agricultural equipment and breeding livestock,
on the personal property tax rolls. These actions should have
placed the state's system of property taxation on a firm
constitutional footing.
The most serious threat to Nebraska's political
subdivisions as a result of the Court's Uniformity Clause decisions
<PAGE>
has been the prospect that subdivisions would be required to refund
large amounts of property taxes
received between the years 1989 and 1992. However, in 1993 the
Court held that taxpayers were not entitled to refunds of 100% of
taxes paid under the pre-
1993 tax structure. Rather, the Court affirmed an award to a
taxpayer of approximately 18% of the taxpayer's 1990 personal
property taxes, which reduced the taxpayer's effective tax rate for
1990 on the taxpayer's tangible
personal property to the level which the taxpayer would have paid
if all improperly exempted property had been taxed. This 1993
decision, which the United States Supreme Court refused to review,
is expected to significantly reduce the amount of taxes which
subdivisions must refund.
Recently, in a decision unrelated to its Uniformity
Clause decisions, the Court held that Nebraska's system of funding
public education, which relies
heavily on ad valorem taxes and results in wide disparities in
funding between rich and poor school districts, does not violate
the right to "free instruction"
enshrined in the Nebraska Constitution. In this case, the Court
rejected the plaintiff's argument that Nebraska should follow
decisions by the Courts of
Texas, Kentucky, New Jersey and other states which had held that
similar systems of funding education violated their respective
state constitutions.
Statutory Property Tax Receipts Limitations.
Legislation adopted
in 1991 imposes a 0% limit on the annual increase of anticipated
property tax receipts budgeted by local political subdivisions with
several exceptions, including (1) property taxes collected for the
retirement of bonded indebtedness
and (2) tax receipts collected with respect to property annexed by
the political subdivision or to revenue received as a result of
growth (including revenues due to the taxation of previously exempt
personal property). In addition, (i) upon an
affirmative vote of the majority of the governing body of a
political subdivision, the anticipated property tax receipts may be
increased by the percentage change
in the CPI- All Urban Consumers for the previous calendar year up
to a maximum of 5% over the anticipated property tax receipts for
the prior fiscal year; (ii) if the increase based on the CPI is
less than 5%, upon an affirmative
vote of 75% of the governing body, the anticipated tax receipts may
be increased up to a maximum of 5% over the previous fiscal year;
and (iii) upon an affirmative majority vote of those voting in a
special election called by the
governing body, the limitation may be exceeded by the amount
approved. This limitation provision terminates for fiscal years
beginning on or after July 1, 1995.
<PAGE>
New Jersey Trust
Risk Factors: Prospective investors should
consider the recent financial difficulties and pressures which the
State of New Jersey (the "State" ) and certain of its public
authorities have undergone.
The State's 1995 fiscal year budget became law on
June 30, 1994.
Reflecting the downturn, the rate of unemployment
in the State rose from a low of 3.6% during the first quarter of
1989 to a recessionary peak of
9.3% during 1992. Since then, the unemployment rate fell to 6.7%
during the fourth quarter of 1993. The jobless rate averaged 7.1%
during the first nine months of 1994, but this estimate is not
comparable to those prior to January because of major changes in
the federal survey from which these statistics are obtained.
In the first nine months of 1994, relative to the
same period a year ago, job growth took place in services (3.5%)
and construction (5.7%), more
moderate growth took place in trade (1.9%), transportation and
utilities (1.2%) and finance/insurance/real estate (1.4%), while
manufacturing and government
declined by 1.5% and 0.1%, respectively. The net result was a 1.6%
increase in average employment during the first nine months of 1994
compared to the first nine months of 1993.
The economic recovery is likely to be slow and
uneven in both New Jersey and the nation. Some sectors, like
commercial and industrial
construction, will undoubtedly lag because of continued excess
capacity. Also, employers in rebounding sectors can be expected to
remain cautious about hiring
until they become convinced that improved business will be
sustained. Other firms will continue to merge or downsize to
increase profitability. As a result,
job gains will probably come grudgingly and unemployment will
recede at a corresponding slow pace.
Pursuant to the State Constitution, no money may be
drawn from the State Treasury except for appropriations made by
law. In addition, all monies for the support of State purposes
must be provided for in one general
appropriation law covering one and the same fiscal year.
In addition to the Constitutional provisions, the
New Jersey statutes contain provisions concerning the budget and
appropriation system. Under these
provisions, each unit of the State requests an appropriation from
the Director of Division of Budget and Accounting, who reviews the
budget requests and forwards them with his recommendation to the
<PAGE>
Governor. The Governor then transmits his recommended expenditures
and sources of anticipated revenue to
the legislature, which reviews the Governor's Budget Message and
submits an appropriations bill to the Governor for his signing by
July 1 of each year. At the time of signing the bill, the Governor
may revise appropriations or
anticipated revenues. That action can be reversed by a two-thirds
vote of each House. No supplemental appropriation may be enacted
after adoption of the act,
except where there are sufficient revenues on hand or anticipated,
as certified by the Governor, to meet the appropriation. Finally,
the Governor may, during
the course of the year, prevent the expenditure of various
appropriations when revenues are below those anticipated or when he
determines that such expenditure is not in the best interest of the
State.
One of the major reasons for cautious optimism is
found in the construction industry. Total construction contracts
awarded in New Jersey have turned around, rising by 8.6% in 1993
compared with 1992. By far, the largest boost came from residential
construction awards which increased by 37.7% in 1993 compared with
1992. In addition, non residential building construction awards
have turned around, posting a 6.9% gain.
Nonbuilding construction awards increased
approximately 4% in the first eight months of 1994 compared with
the same period in 1993.
Finally, even in the labor market there are signs
of recovery. Thanks to a reduced layoff rate and the reappearance
of job opportunities in some parts of the economy, unemployment in
the State has been receding since
July 1992, when it peaked at 9.6% according to U.S. Bureau of Labor
Statistics estimates based on the federal government's monthly
household survey. The
same survey showed joblessness dropped to an average of 6.7% in the
fourth quaarter of 1993. The unemployment rate registered an
average of 7.8% in the first quarter of 1994, but this rate cannot
be compared with prior data due to the
changes in the U.S. Department of Labor procedures fir determining
the unemployment rate that went into effect in January 1994.
State Aid to Local Governments is the largest
portion of fiscal year
1995 appropriations. In fiscal year 1995, $5,782.2 million of the
State's appropriations consisted of funds which are distributed to
municipalities, counties and school districts. The largest State
Aid appropriation, in the amount
of $3,900.1 million, was provided for local elementary and
secondary education programs. Of this amount, $2,431.6 million is
provided as foundation aid to school districts by formula based
upon the number of students and the ability of
<PAGE>
a school district to raise taxes from its own base. In addition,
the State provided $582.5 million for special education programs
for children with disabilities. A
$293 million program was also funded for pupils at risk of
educational failure, including basic skills improvement. The State
appropriated $474.8 million on
behalf of school districts as the employer share of the teachers'
pension and benefits programs, $263.8 million to pay for the cost
of pupil transportation and
$57.4 million for transition aid, which guaranteed school districts
a 6.5% increase over the aid received in fiscal year 1991 and is
being phased out over six years.
Appropriations to the Department of Community
Affairs total $635.1 million in State Aid monies for fiscal year
1995. The principal programs funded were the Supplemental
Municipal Property Tax Act ($314.1
million); the Municipal Revitalization Program ($165.0 million);
municipal aid to urban communities to maintain and upgrade
municipal services ($40.7 million); and the Safe and Clean
Neighborhoods Program ($58.9 million).
Appropriations to the State Department of the Treasury total $321.3
million in State Aid monies for fiscal year 1995. The principal
programs funded by these
appropriations were payments under the Business Personal Property
Tax Replacement Programs ($158.7 million); the cost of senior
citizens, disabled and veterans property tax deductions and
exemptions ($41.7 million); aid to densely
populated municipalities ($25.0 million); Municipal Purposes Tax
Assistance ($30.0 million); and payments to municipalities for
services to state owned property ($34.9 million).
Other appropriations of State aid in fiscal year
1995 include: welfare programs ($499.1 million); aid to county
colleges ($123.6 million); and aid to county mental hospitals
($79.4 million).
The second largest portion of appropriations in
fiscal 1995 is applied to Direct State Services: the operation of
State government's 17 departments, the Executive Office, several
commissions, the State Legislature and the Judiciary. In fiscal
1995, appropriations for Direct State Services aggregate $5,203.1
million. Some of the major appropriations for Direct State
Services during fiscal 1995 are detailed below.
$595.3 million was appropriated for programs
administered by the Department of Human Services. The Department
of Labor is appropriated $51.4 million for the administration of
programs for workers' compensation, unemployment and disability
insurance, manpower development, and health safety inspection.
The Department of Health was appropriated $32.3
million for the prevention and treatment of diseases, alcohol and
<PAGE>
drug abuse programs, regulation of health care facilities, and the
uncompensated care program.
$689.3 million was appropriated to the Department
of Higher Education for the support of eight State colleges,
Rutgers University, the New
Jersey Institute of Technology, and the University of Medicine and
Dentistry of
New Jersey.
$932.6 million was appropriated to the Department
of Law and
Public Safety and the Department of Corrections.
$92.3 million was appropriated to the Department of
Transportation
for the various programs it administers, such as the maintenance
and
improvement of the State highway systems and subsidies for
railroads and bus
companies.
$176.6 million was appropriated to the Department
of
Environmental Protection for the protection of air, land, water,
forest, wildlife
and shellfish resources and for the provision of outdoor
recreational facilities.
The primary method for State financing of capital
projects is
through the sale of the general obligation bonds of the State.
These bonds are
backed by the full faith and credit of the State. State tax
revenues and certain
other fees are pledged to meet the principal and interest payments
required to
pay the debt fully. No general obligation debt can be issued by
the State without
prior voter approval, except that no voter approval is required for
any law
authorizing the creation of a debt for the purpose of refinancing
all or a portion
of outstanding debt of the State, so long as such law requires that
the refinancing
provide a debt service savings.
All appropriations for capital projects and all
proposals for State
bond authorizations are subject to the review and recommendation of
the New
Jersey Commission on Capital Budgeting and Planning. This
permanent
<PAGE>
commission was established in November, 1975, and is charged with
the preparation of the State Capital Improvement Plan, which
contains proposals for State spending for capital projects.
The aggregate outstanding general obligation bonded
indebtedness of the State as of June 30, 1993 was $3.549.7 billion.
The debt service obligation for outstanding indebtedness is $119.9
million for fiscal year 1994.
Aside from its general obligation bonds, the
State's "moral obligation" backs certain obligations issued by the
New Jersey Housing and
Mortgage Finance Agency, the South Jersey Port Corporation (the
"Corporation") and the Higher Education Assistance Authority. As
of June 30, 1992, there was outstanding in excess of $1 billion of
moral obligation bonded
indebtedness issued by such entities, for which the maximum annual
debt service was over $101 million as of such date. The State
provides the Corporation with
funds to cover debt service and property tax requirements when
earned revenues are anticipated to be insufficient to cover these
obligations. For the calendar
years 1986 through 1992, the State has appropriated $12,237,565.00
to cover
property tax shortfalls of the Corporation.
At any given time, there are various numbers of
claims and cases pending against the State, State Agencies and
employees, seeking recovery of
monetary damages that are primarily paid out of the fund created
pursuant to the Tort Claims Act, N.J.S.A. 59:1-1 et seq. In
addition, at any given time there
are various contract claims against the State and State agencies
seeking recovery of monetary damages. The State is unable to
estimate its exposure for these
claims and cases. An independent study estimated an aggregate
potential exposure of $50 million for claims pending, as of January
1, 1982. It is estimated that were a similar study made of claims
currently pending, the
amount of such estimated exposure would be somewhat higher. New
Jersey is involved in a number of lawsuits in which adverse
decisions could materially
affect revenues or expenditures. Such cases include challenges to
its system of educational funding, the methods by which the State
Department of Human
Services shares with county governments the maintenance recoveries
and costs for residents in State psychiatric hospitals and
residential facilities for the developmentally disabled.
Other lawsuits that could materially affect revenue
or expenditures include a suit by a number of taxpayers seeking
refunds of taxes paid to the Spill
<PAGE>
Compensation Fund pursuant to N.J.S.A. 58:10-23.11; a suit alleging
that unreasonably low Medicaid payment rates have been implemented
for long-term
care facilities in New Jersey; a suit alleging unfair taxation on
interstate
commerce; a suit by Essex County seeking to invalidate the State's
method of funding the medical system and a suit seeking return of
moneys paid by various counties for maintenance of Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, and a suit challenging
the imposition of premium tax surcharges on insurers doing business
in New Jersey, and assessments upon property and casualty
liability insurers pursuant to the Fair Automobile Insurance Reform
Act.
Legislation approved June 30, 1992, effective
immediately, called for revaluation of several public employee
pension funds, authorized an adjustment to the assumed rate of
return on investment and refunds $773 million
in public employer contributions to the State from various pension
funds, to be reflected as a revenue source for Fiscal Year 1992 and
$226 million in Fiscal Year 1993 and each fiscal year thereafter.
Several labor unions filed suit seeking a judgment directing the
State Treasurer to refund all monies transferred
from the pension funds and paid into the General Fund. An adverse
determination would have a significant impact on Fiscal Years 1992
and 1993 revenue estimates.
Bond Ratings: Citing a developing pattern of
reliance on non-recurring measures to achieve budgetary balance,
four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that financial pressures
will persist, on August 24, 1992 Moody's lowered from Aaa to Aa1
the rating assigned to New Jersey general obligation bonds.
Currently, Standard & Poor's rates New Jersey general obligation
bonds AA+. On July 6, 1992, Standard & Poor's affirmed its AA+
ratings on New Jersey's general obligation and various lease and
appropriation backed debt, but its ratings outlook was revised to
negative for the longer term horizon (beyond four months) for
resolution of two items: (i) the Federal Health Care Facilities
Administration ruling concerning retroactive Medicaid hospital
reimbursements and (ii) the State's uncompensated health care
funding system, which is under review in the U.S. Supreme Court.
New York Trust
New York State
The State's current fiscal year commenced on April
1, 1994, and ends in March 31, 1995, and is referred to herein as
the State's 1994-95 fiscal year. The State's budget for the
1994-95 fiscal year was enacted by the Legislature on June 7, 1994,
<PAGE>
more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted
appropriations for
disbursements considered to be necessary for State operations and
other purposes, including all necessary appropriations for debt
service. The State Financial Plan for the 1994-95 fiscal year was
formulated on June 16, 1994 and is based on the State's budget as
enacted by the Legislature and signed into law by the Governor.
The economic and financial condition of the State
may be affected by various financial, social, economic and
political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and
its agencies and instrumentalities, but also by entities, such as
the Federal government, that are not under the control of the
State.
The State Financial Plan is based upon forecasts of
national and State economic activity. Economic forecasts have
frequently failed to predict
accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both
the national and State economies, including consumer attitudes
toward spending, Federal financial and
monetary policies, the availability of credit, and the condition of
the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not
experience results in the current fiscal
year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and
disbursements.
The State Division of the Budget ("DOB") believes
that its projections of receipts and disbursements relating to the
current State Financial
Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from
the projections set
forth below, and those projections may be changed materially and
adversely from time to time.
As noted above, the financial condition of the
State is affected by several factors, including the strength of the
State and regional economy and
actions of the Federal government, as well as State actions
affecting the level of
receipts and disbursements. Owing to these and other factors, the
State may, in future years, face substantial potential budget gaps
resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the future costs
of maintaining State programs at current levels. Any such
recurring imbalance would be exacerbated if the State were to use
<PAGE>
a significant amount of nonrecurring resources to balance the
budget in a particular fiscal
year. To address a potential imbalance for a given fiscal year,
the State would be required to take actions to increase receipts
and/or reduce disbursements as
it enacts the budget for that year, and under the State
Constitution the Governor
is required to propose a balanced budget each year. To correct
recurring budgetary imbalances, the State would need to take
significant actions to align
recurring receipts and disbursements in future fiscal years. There
can be no assurance, however, that the State's actions will be
sufficient to preserve budgetary balance in a given fiscal year or
to align recurring receipts and
disbursements in future fiscal years.
The 1994-95 State Financial Plan contains actions
that provide
nonrecurring resources or savings, as well as actions that impose
nonrecurring
losses of receipts or costs. It is believed that the net positive
effect of
nonrecurring actions represents considerably less than one-half of
one percent
of the State's General Fund, an amount significantly lower than the
amount
included in the State Financial Plans in recent years; it is
believed that those
actions do not materially affect the financial condition of the
State. In addition
to those nonrecurring actions, the 1994-95 State Financial Plan
reflects the use
of $1.026 billion in the positive cash margin carried over from the
prior fiscal
year, resources that are not expected to be available in the
State's 1995-96 fiscal
year.
The General Fund is the general operating fund of
the State and is
used to account for all financial transactions, except those
required to be
accounted for in another fund. It is the State's largest fund and
receives almost
all State taxes and other resources not dedicated to particular
purposes. In the
State's 1994-95 fiscal year, the General Fund is expected to
account for
approximately 52 percent of total governmental-fund receipts and 51
percent of
total governmental-fund disbursements. General Fund moneys are
also
transferred to other funds, primarily to support certain capital
<PAGE>
projects and debt service payments in other fund types.
New York State's financial operations have improved
during recent fiscal years. During the period 1989-90 through
1991-92, the State incurred
General Fund operating deficits that were closed with receipts from
the issuance of tax and revenue anticipation notes ("TRANs").
First, the national recession,
and then the lingering economic slowdown in the New York and
regional economy, resulted in repeated shortfalls in receipts and
three budget deficits.
For its 1992-93 and 1993-94 fiscal years, the State recorded
balanced budgetson a cash basis, with substantial fund balances in
each year as described below.
The State ended its 1993-94 fiscal year with a
balance of $1.140 billion in the tax refund reserve account, $265
million in its Contingency
Reserve Fund ("CRF") and $134 million in its Tax Stabilization
Reserve Fund. These fund balances were primarily the result of an
improving national economy, State employment growth, tax
collections that exceeded earlier
projections and disbursements that were below expectations.
Deposits to the personal income tax refund reserve have the effect
of reducing reported personal income tax receipts in the fiscal
year when made and withdrawals from such
reserve increase receipts in the fiscal year when made. The
balance in the tax refund service account will be used to pay
taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund
reserve account, $1.026 billion was available for budgetary
planning purposes in the 1994-95
fiscal year. The remaining $114 million will be redeposited in the
tax refund reserve account at the end of the State's 1994-95 fiscal
year to continue the
process of restructuring the State's cash flow as part of the Local
Government Assistance Corporation ("LGAC") program. The balance in
the CRF will be used to meet the cost of litigation facing the
State. The Tax Stabilization Reserve Fund may be used only in the
event of an unanticipated General Fund cash-basis deficit during
the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax
refund service account, General Fund receipts in 1993-94 exceeded
those originally projected
when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the
personal income tax, the bank tax, the corporation franchise tax
and the estate tax accounted for most
of this variance, and more than offset weaker-than-projected
collections from the sales and use tax and miscellaneous receipts.
Collections from individual
taxes were affected by various factors including changes in Federal
business laws, sustained profitability of banks, strong performance
of securities firms, and higher-than-expected consumption of
tobacco products following price cuts.
Disbursements and transfers from the General Fund
were $303 million below the level projected in April 1993, an
amount that would have been
$423 million had the State not accelerated the payment of Medicaid
billings, which in the April 1993 State Financial Plan were planned
to be deferred into the 1994-95 fiscal year. Compared to the
estimates included in the State
Financial Plan formulated in April 1993, lower disbursements
resulted from lower spending for Medicaid, capital projects, and
debt service (due to
refundings) and $114 million used to restructure the State's cash
flow as part of the LGAC program. Disbursements were
higher-than-expected for general
support for public schools, the State share of income maintenance,
overtime for prison guards, and highway snow and ice removal.
In certain prior fiscal years, the State has failed
to enact a budget prior to the beginning of the State's fiscal
year. A delay in the adoption of the
State's budget beyond the statutory April 1 deadline and the
resultant delay in the State's Spring borrowing has in certain
prior years delayed the projected
receipt by the City of State aid, and there can be no assurance
that State budgets in the future fiscal years will be adopted by
the April 1 statutory deadline.
The State has noted that its forecasts of tax
receipts have been subject to variance in recent fiscal years. As
a result of these uncertainties and
other factors, actual results could differ materially and adversely
from the State's current projections and the State's projections
could be materially and
adversely changed from time to time. There can be no assurance that
the State will not face substantial potential budget gaps in future
years resulting from a
significant disparity between tax revenues projected from a lower
recurring receipts base and the spending required to maintain State
programs at current levels. To address any potential budgetary
imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal
years.
Ratings on general obligation bonds of the State of
New York were lowered by Standard & Poor's Corporation and Moody's
Investors Service during 1990 from AA- to A and Aa to A,
respectively. On January 6, 1992,
Moody's Investors Service lowered its rating on certain
appropriations-backed debt of New York State to Baa1 from A. The
agency cited the failure of Governor Mario M. Cuomo and New York
<PAGE>
State lawmakers to close New York's current year budget gap.
Moody's Investors Services also placed the
general obligation, State guaranteed and New York local Municipal
Assistance Corporation Bonds under review for possible downgrade in
coming months. In
addition, on January 13, 1992, Standard & Poor's Corporation
lowered its rating on general obligation debt and guaranteed debt
to A- from A. Standard & Poor's Corporation also downgraded its
rating on variously rated debt, State moral obligations,
contractual obligations, lease purchase obligations and other State
guarantees. Additional reductions in ratings could result in a
loss to Unit holders.
As of March 31, 1994, the State had approximately
$5.370 billion in general obligation bonds, excluding refunding
bonds and $294 million in bond
anticipation notes outstanding. On May 24, 1993, the State issued
$850 million in tax and revenue anticipation notes, all of which
matured on December 31,
1993. Principal and interest due on general obligation bonds and
interest due on bond anticipation notes and on tax and revenue
anticipation notes were
$782.5 million for the 1993-94 fiscal year, and are estimated to be
$786.3 million for the 1994-95 fiscal year. These figures do not
include interest on refunding bonds issued in July 1992, to the
extent that such interest is to be paid from escrowed funds.
State Authorities
The fiscal stability of the State is related to the
fiscal stability of its authorities, which generally have
responsibility for financing, constructing, and
operating revenue-producing benefit facilities. Certain
authorities of the State, including the State Housing Finance
Agency ("HFA"), the Urban Development
Corporation ("UDC") and the Metropolitan Transportation Authority
("MTA") have faced and continue to experience substantial financial
difficulties which could adversely affect the ability of such
authorities to make payments of interest
on, and principal amounts of, their respective bonds. Should any
of its authorities default on their respective obligations, the
State's access to public
credit markets could be impaired. The difficulties have in certain
instances caused the State (under its so-called "moral obligation")
to appropriate funds on
behalf of the authorities. Moreover, it is expected that the
problems faced by these authorities will continue and will require
increasing amounts of State
assistance in future years. Failure of the State to appropriate
necessary amounts or to take other action to permit those
authorities having financial difficulties to
meet their obligations (including HFA, UDC and MTA) could result in
<PAGE>
a default by one or more of the authorities. Such default, if it
were to occur, would be
likely to have a significant adverse effect on investor confidence
in, and therefore the market price of, obligations of the
defaulting authority. In
addition, any default in payment of any general obligation of any
authority whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied
in connection with Federal guarantees
of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
The fiscal stability of the State is related to the
fiscal stability of its authorities, which generally have
responsibility for financing, constructing and operating
revenue-producing public benefit facilities. The authorities are
not subject to the constitutional restrictions on the incurrence of
debt which apply to the State itself and may issue bonds and notes
within the amounts of, and as
otherwise restricted by, their legislative authorization. As of
September 30, 1992, there were 18 authorities that had outstanding
debt of $100 million or
more. The aggregate outstanding debt, including bonds, of these 18
authorities was 63.5 billion as of September 30, 1993. As of March
31, 1994, aggregate public authority debt outstanding as State
supported debt was $21.1 billion as
State-related debt was $29.4 billion.
The authorities are generally supported by revenues
generated by the projects financed or operated, such as fares, user
fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years,
however, the State has provided financial assistance through
appropriations, in some cases of
a recurring nature, to certain of the 18 authorities for operating
and other expenses and, in fulfillment of its commitments on moral
obligation indebtedness or otherwise for debt service. This
assistance is expected to continue to be required in future years.
The MTA oversees the operation of New York City's
subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit operating
(collectively, the "Transit
Authority" or the "TA"). Through MTA's subsidiaries, the Long
Island Railroad Company, the Metro-North Commuter Railroad Company
and the Metropolitan Suburban Bus Authority, the MTA operates
certain commuter rail and bus lines in the New York metropolitan
area. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on
Staten Island. Through its affiliated agency, the Triborough
Bridge and Tunnel Authority (the "TBTA"), the MTA operates certain
intrastate toll bridges and tunnels. Because fare revenues are not
sufficient to finance the mass transit
<PAGE>
portion of these operations, the MTA has depended and will continue
to depend for operating support upon a system of Federal, State,
local government and TBTA support, including loans, grants and
operating subsidies. Over the past
several years, the State has enacted several taxes, including a
surcharge on the profits of banks, insurance corporations and
general business corporations doing
business in the 12-county region served by the MTA
(the"Metropolitan Transportation Region") and a special one-quarter
of 1% regional sales and use
tax, that provide additional revenues for mass transit purposes
including assistance to the MTA, the surcharge, which expires in
November 1995, yielded $507 million in calendar year 1992, of which
the MTA was entitled to receive approximately 90 percent, or
approximately $456 million. For the 1994-95 State fiscal year,
total State assistance to the MTA is estimated at approximately
$1.3 billion.
In 1993, State legislation authorized the refunding
of a five-year $9.56 billion MTA capital plan for the five-year
period, 1992 through 1996 (the "1992-96 Capital Program"). The MTA
has received approval of the 1992-96
Capital Program based on this legislation from the 1992-96 Capital
Program Review Board, as State law requires. This is the third
five-year plan since the
Legislature authorized procedures for the adoption, approval and
amendment of a five-year plan in 1981 for a capital program
designed to upgrade the
performance of the MTA's transportation systems and to supplement,
replace and rehabilitate facilities and equipment. The MTA, the
TBTA and the TA are collectively authorized to issue an aggregate
of $3.1 billion of bonds (net of
certain statutory exclusions) to finance a portion of the 1992-96
Capital Program. The 1992-96 Capital Program is expected to be
financed in significant part through the dedication of State
petroleum business taxes.
There can be no assurance that all the necessary
governmental actions for the Capital Program will be taken, that
funding sources currently identified will not be decreased or
eliminated, or that the 1992-96 Capital
Program, or parts thereof, will not be delayed or reduced.
Furthermore, the power of the MTA to issue certain bonds expected
to be supported by the
appropriation of State petroleum business taxes is currently the
subject of a court
challenge. If the Capital Program is delayed or reduced, ridership
and fare revenues may decline, which could, among other things,
impair the MTA's ability to meet its operating expenses without
additional State assistance.
The State's experience has been that if an
Authority suffers serious financial difficulties, both the ability
<PAGE>
of the State and the Authorities to obtain
financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The
Housing Finance
Agency ("HFA") and the Urban Development Corporation ("UDC") have
in the past required substantial amounts of assistance from the
State to meet debt
service costs or to pay operating expenses. Further assistance,
possibly in increasing amounts, may be required for these, or
other, Authorities in the
future. In addition, certain statutory arrangements provide for
State local assistance payments otherwise payable to localities
whose local assistance payments otherwise payable to localities to
be made under certain circumstances
to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments
have been paid to Authorities under these arrangements. However,
in the event that such local
assistance payments are so diverted, the affected localities could
seek additional State funds.
New York City and Other Localities
The City, with a population of approximately 7.3
million, is an international center of business and culture. Its
non-manufacturing economy is broadly based, with the banking and
securities, life insurance, communications,
publishing, fashion design, retailing and construction industries
accounting for a significant portion of the City's total employment
earnings. Additionally, the City is the nation's leading tourist
destination. The City's manufacturing activity
is conducted primarily in apparel and publishing.
The national economic recession which began in July
1990 has adversely impacted the City harder than almost any other
political jurisdiction
in the nation. As a result, the City, with approximately 3 percent
of national employment, has lost approximately 20 percent of all
U.S. jobs during the
recent economic downturn and, consequently, has suffered erosion of
its local tax base. In total, the City private sector employment
has plummeted by approximately 360,000 jobs since 1987. But, after
nearly five years of decline,
the City appears to be on the verge of a broad-based recovery which
will lift many sectors of the local economy. Most of the nascent
local recovery can be
attributed to the continued improvement in the U.S. economy, but a
great deal of the strength expected in the City economy will be due
to local factors, such as the heavy concentration of the securities
and banking industries in the City.
The current forecast calls for modest employment growth of about
20,000 a year (0.6 percent) on average through 1998 with some
<PAGE>
slowing but still positive
growth in employment in 1995-96 as U.S. growth slows (local job
gains slow from 25,000 to around 10,000 per year).
During the most recent economic downturn, the City
has faced recurring extraordinary budget gaps that have been
addressed by undertaking
one-time, one-shot budgetary initiatives to close then projected
gaps in order to achieve a balanced budget as required by the laws
of the State. For example,
in order to achieve a balanced budget for the 1992 fiscal year, the
City increased taxes and reduced services during the 1991 fiscal
year to close a then projected
gap of $3.3 billion in the 1992 fiscal year which resulted from,
among other things, lower than expected tax revenue of
approximately $1.4 billion, reduced
State aid for the City of approximately $564 million and greater
than projected increases in legally mandated expenditures of
approximately $400 million,
including public assistance and Medicare expenditures. The
gap-closing measures for fiscal year 1992 included receipt of $605
million from tax increases, approximately $1.5 billion of proposed
service reductions and proposed productivity savings of $545
million.
Notwithstanding its recurring projected budget
gaps, for fiscal years 1981 through 1993 the City achieved balanced
operating results (the City's General Fund revenues and transfers
reduced by expenditures and transfers), as reported in accordance
with Generally Accepted Accounting Principles ("GAAP"), and the
City's 1994 fiscal year results are projected to be balanced in
accordance with GAAP.
The City's ability to maintain balanced budgets in
the future is subject to numerous contingencies; therefore, even
though the City has managed
to close substantial budget gaps in recent years in order to
maintain balanced operating results, there can be no assurance that
the City will continue to
maintain a balanced budget as required by State law without
additional tax or other revenue increases or reduction in City
services, which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City
prepares an annual four-year financial plan, which is reviewed and
revised on a quarterly basis and
which includes the City's capital, revenue and expense projections.
The City is required to submit its financial plans to review
bodies, including the New
York State Financial Control Board ("Control Board"). If the City
were to experience certain adverse financial circumstances,
including the occurrence or
the substantial likelihood and imminence of the occurrence of an
<PAGE>
annual operating deficit of more than $100 million or the loss of
access to the public
credit markets to satisfy the City's capital and seasonal financing
requirements, the Control Board would be required by State law to
exercise powers, among others, of prior approval of City financial
plans, proposed borrowings and certain contracts.
1995-1998 Financial Plan. On July 8, 1994, the City
submitted to the Control Board the Financial Plan for the 1995-1998
fiscal years (the "1995-1998 Financial Plan or "Financial Plan"),
which relates to the City, the Board of Education ("BOE") and the
City Universiuty of New York ("CUNY"). The Financial Plan is based
on the City's expense and capital budgets for the City's 1995
fiscal year, which were adopted on June 23, 1994.
The 1995-1998 Financial Plan projects revenues and
expenditures for the 1995 fiscal year balanced in accordance with
GAAP. The projections for
the 1995 fiscal year reflect proposed actions to close a previously
projected gap of approximately $2.3 billion for the 1995 fiscal
year, which include City
actions aggregating $1.9 billion, a $288 million increase in State
actions over the 1994 and 1995 fiscal years, and a $200 million
increase in Federal assistance.
The City actions include proposed agency actions aggregating $1.1
billion, including productivity savings; tax and fee enforcement
initiatives; service reductions; and savings from the restucturing
of City services. City actions also
include savings of $45 million resulting from proposed tort reform,
the projected transfer to the 1995 fiscal year of $171 million of
the projected 1994 fiscal year
surplus, savings of $200 million for employee health care costs,
$51 million in reduced pension costs, savings of $225 million from
refinancing City bonds and $65 million from the proposed sale of
certain City assets. The proposed savings for employee health care
ocsts are subject to collective bargaining negotiation with the
City's unions; the proposed savings from tort reform will require
the approval of the State Legislature; and the $200 million
increase in Federal assistance is subject to approval by Congress
and the President.
The Financial Plan also set forth projections for
the 1996 through 1998 fiscal years and outlines a proposed
gap-closing program to close projected gaps of $1.5 billion, $2.0
billion and a $2.4 billion for the 1996 through 1998 fiscal years,
respectively, after successful implementation of the $2.3 billion
gap-closing program for the 1995 fiscal year.
The projections for the 1996 through 1998 fiscal
years assume the extension by the State Legislature of the 14%
personal income tax surcharge beyond calendar year 1995 and
extension of the 12.5% personal income tax
surcharge beyond calendar year 1996, resulting in combined revenues
<PAGE>
of $159 million, $633 million and $920 million in the 1996, 1997
and 1998 fiscal years,
respectively. However, as part of the tax reduction program
refected in the
Financial Plan, the City is proposing the elimination of the 12.5%
personal income tax surcharge when it expires at a cost of $184
million in fiscal year
1997 and$455 million in fiscal year 1998. The proposed gap-closing
actions include City actions aggregating $1.2 billion, $1.5 billion
and $1.7 billion in the
1996 through 1998 fiscal years, respectively; $275 million, $375
million and $525 million in proposed additional State actions in
the 1996 through 1998 fiscal
years, repectively, primarily from the proposed State assumption of
certain Medicaid costs; and$100 million and $200 million in
proposed additional Federal
assistance in the 1997 and 1998 fiscal years, respectively. The
proposed additional City actions, a substantial number of which are
unspecified, include additional spending reductions, the reduction
of City personnel through attrition,
government efficiency initiatives, procurement initiatives, labor
productivity initiatives, and the proposed privatization of City
sewage treatment plants. Certain of these initiatives may be
subject to negotiation with the City's municipal unions. Various
actions proposed in the Financial Plan for the 1996-
1998 fiscal years, including the proposed state actions, are
subject to approval by Congress and the President. The State
Legislature has in previous legislative
sessions failed to approve certain of the City's proposals for the
State assumption of certain Medicaid costs and mandate relief,
thereby increasing the uncertainty as to the receipt of the State
assistance included in the Financial
Plan. In addition, the Financial Plan assumes the continuation of
the current assumption with respect to wages for City employees and
the assumed 9% earnings on pension fund assets for the 1994 fiscal
year are expected to be
substantially below the 9% assumed rate, which will increase the
City's future pension contributions. In addition, a review of the
pension fund earnings
assumptions is currently being conducted which could firther
increase the City's future pension contributions. In addition, a
review of the pension fund earnings
assumptions is currently being conducted which could further
increse the City's future pension contributions by a substantial
amount.
The City expects that tax revenue for the 1994
fiscal year will be approximaately $65 million less than forecast
in the 1994 Modification,
primarily due to shortfalls in the personal income tax and sales
tax,and that expenditures will be approximately $25 million greater
than forecast. Accordingly, the $171 million of the projected
surplus for the 1994 fiscal year,
<PAGE>
which is currently projected in the 1994 Modification and the
Financial Plan to be transferred to the 1995 fiscal year will
decrease to 81 million. As a result,
the City will reduce expenditures for the 1995 fiscal year to
offset this decrease, which is expected to be reflected in the
first quarter modification to the Financial
Plan. In addition, the Financial Plan assumes that a special
session of the State Legislature, which may take place in the near
future, will enact, and the
Governor will sign, State legislation relating to the proposed tort
reform, which would save the City $45 million in payments for tort
liability in fiscal year 1995,
and certain anticipated improvements in fine and fee collections
forecast to earn $25 million in City revenue in fiscal year 1995,
and that the State Legislature
will not enact proposed legislation mandataing additional pension
benefits for City retirees costing the City approximately $200
million annually. To address
these and other possible contingencies, on July 11, 1994, the Mayor
stated that he will reserve $100 million from authorized spending
by City agencies in fiscal
year 1995 in addition to the existing general reserrves of $150
million. In addition, the City has identified a $360 million
contingency program for the
1995 fiscal year, primarily consisting of layoffs and service
reductions.
Actions to Closse the Gaps. The 1995-1998 Financial
Plan reflects a program of proposed actions by the City, State and
Federal governments to close the gaps between projected revenues
and expenditures of $1.5 billion, $2.0 billion and $2.4 billion for
the 1996, 1997 and 1998 fiscal years, respectively.
City gap-closing actions total $1.2 billion in the
1996 fiscal year, $1.5 billion in the 1997 fiscal year and $1.7
billion in the 1998 fiscal year.
These actions, a substantial number of which are unspecified,
include additional spending reductions, aggregate $501 million,
$598 million and $532 million in
the 1996 through 1998 fiscal years, respectively; government
efficiency initiatives aggregating $50 million, $100 million and
$150 million in the 1996
through 1998 fiscal years, respectively; labor productivity
initiatives, aggregating $250 million in each of the 1996 through
1998 fiscal years; and a
proposed privatiztion of City seewage treatment plants which would
result in revenues of $200 million in each of the 1996 through 1998
fiscal years. Certain of these initiatives may besubject to
negotiation with the City's municipal unions.
State actions proposed in the gap-closing program
total $275 million, $375 million and $525 million in each of the
1996, 1997 and 1998 fiscal years, respectively. These actions
<PAGE>
include savings primarily from the proposed State assumption of
certain Medicaid costs.
The Federal actions proposed in the gap-closing
program are $100 million and $200 million in increased Federal
assistance in fiscal years 1997 and 1998, respectively.
Various actions proposed in the Financial Plan,
including the proposed increse in State aid, are subject to
approval by the Governor and the
State Legislature, and the proposed increase in Federal aid is
subject to approval by Congress and the President. State and
Federal actions are uncertain and no
assurance can be given that such actions will in fact be taken or
that the savings that the City projects will ersult from these
actions will be realized. The State
Legislature failed to approve a substantial portion of the proposed
State assumption of Medicaid costs in the last session. The
Financial Plan assumes
that these proposals will be approved by the State Legislature
during the 1995 fiscal year and that the Federal government will
increase its share of funding for
the Medicaid program. If these measures cannot be implemented, the
City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial
plan.
Although the City has maintained balanced budgets
in each of its last thirteen years, and is projected to achieve
balanced operating results for the
1993 fiscal year, there can be no assurance that the gap-closing
actions proposed in the Financial Plan can be successfully
implemented or that the City will maintain a balanced budget in
future years without additional State aid, revenue increases or
expenditure reductions. Additional tax increases and reductions in
essential City services could adversely affect the City's economic
base.
Assumptions. The 1995-1998 Financial Plan is based
on numerous assumptions, including the continuing improvement in
the City's and the region's
economy and a modest employment recvery during calendar year 1994
and the concomitant receipt of economically sensitive tax revenues
in the amounts projected. The 1995-1998 Financial Plan is subject
to various other uncertainties
and contingencies relating to, among other factors, the extent, if
any, to which wage increses for City employees exceed the annual
increases assumed for the
1995 through 1998 fiscal years; continuation of the 9% interest
earnings assumptions for pension fund assets and current
assumptions with respect to
wages for City employees affecting the City's required pension fund
contributions; the willingness and ability of the State, in the
<PAGE>
context, of the State's current financial condition, to provide the
aid contemplated by the Financial Plan and to take various other
actions to assist the City, including the proposed State takeover
of certain Mdeicaid costs and State mandate relief; the
ability of HHC, BOE and other such agencies to maintain balanced
budgets; the willingness of the Federal government to provide
Federal aid; approval of the
proposed continuation of the personal income tax surcharge;
adoption of the City's budgets by the City Council in substantially
the forms submitted by the
MAyor; the ability of the City to implement proposed reductions in
City personnel and other cost reduction initiatives, which may
require in certain cases the cooperation of the City's municipal
unions, and teh success with which the
City controls expenditures; savings for health care costs for City
employees in the amounts projected in the Financial Plan;
additional expenditures that may be
incurred due to the requirements of certain legislation requiring
minimum levels of funding for education; the impact on real estate
tax revenues of the current
weakness in the real estate market; the City's ability to market
its securities successfully in the public credit markets; the level
of funding required to comply with the Americans with Disabilities
Act od 1990; and additional expenditures
that may be incurred as a result of deterioration in the condition
of the City's ifrastructure.
The projections and assumptions contained in the
1995-1998 Financial Plan are subject to revision which may involve
substantial change, and no assurance can be given that these
estimates and projections, which include
actions which the City expects will be taken but which are not
within the City's control, will be realized.
Certain Reports. From time to time, the Control
Board staff, the City Comptroller and others issue reports and make
public statements regarding the City's financial condition,
commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by
the City to eliminate projected operating deficits. Some of these
reports and statements have warned that the City may have
underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may
not have adequately provided for future contingencies. Certain of
these reports have analyzed the City's Future economic and social
conditions and have questioned
whether the City has the capacity to generate sufficient revenues
in the future to meet the costs of its expenditure increases and to
provide necessary services.
On March 1, 1994, the City Comptroller issued a
report on the state of the City's economy. The report concluded
that, while the City's long recession is over, moderate growth is
<PAGE>
the best the City can expect, with the local
economy being held back by continuing weakness in important
international economies.
On July 11, 1994, the City Comptroller issued a
report on the City's adopted budget for the 1995 fiscal year. The
City Comptroller stated that
if none of the uncertain proposals are implemented, the total risk
could be as much as $763 million to $1.02 billion. risks which were
identified as substantial
risks include a possible $208 million to $268 million increase in
overtime costs;
approval by the State Legislature of a tort reform program to limit
damage claims against the City, which would result in savings of
$45 million; the $65
million proceeds from a proposed asset sale; additional
expenditures at Health
and Hospitals Corporation totaling $60 million; and $60 million of
increased pension contributions resulting from lower than assumed
pension fund earnings. Additional possible risks include obtaining
the agreement of municipal unions
to the proposed reduction in City expenditures for health care
costs by $200 million; uncertainties concerning the assumed
improvement in the collection of
taxes, fines and fees totaling $75 million; and uncertainty
concerning the receipt
of the $200 million of increased Federal aid projected for the 1995
fiscal year. The City Comptroller noted that there are a number of
additional issues, including possible larger than projected
expenditures for foster care and public
assistance and the receipt of $100 million from assumed FICA
refunds. The City Comptroller has also stated in a report issued on
June 8, 1994 that certain of the
reductions in personnel and services proposed in the City's
financial plan submitted to the Control Board on May 10, 1994 (the
"May Financial Plan") will have long-term and, in some cases,
severe consequences for City residents.
In addition, on July 11, 1994, the private members
of the Control Board, Robert R. Kiley, Heather L. Ruth and Stanley
S. Shuman, issued a statement which concluded that the 1995 fiscal
year is not reasonalbly balanced and that further budget cuts are
unavoidable in the next six months. In addition, the private
members stated that the Financial Plan does not set forth a path to
structural balance. The private members stated that, in order ot
achieve this goal, City managers must be given fiscal targets they
can be expected to meet; solid new proposals must be developed that
back up the savings the City has
committed to achieve to balance future budgets; and the deferral of
expenses to future years, through actions such as the sale of
property tax receivables, stretching out pension contributions and
<PAGE>
delaying debt service payments through
refundings, must stop. On July 11, 1994, the Control Board staff
stated that the City faces risks of greater than $1 billion and $2
billion for the 1995 and 1996
fiscal years, respectively, and risks of approximately $3 billion
for each of the
1997 and 1998 fiscal years.
Substantially all of the City's full-time employees
are members of labor unions. The Financial Emergency Act requires
that all collective bargaining agreements entered into by the City
and the Covered Organizations
be consistent with the City's current financial plan, except under
certain circumstances, such as awards arrived at through impasse
procedures.
On January 11, 1993, the City announced a
settlement with a coalition of municipal unions, including Local
237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District
Council 37") and other unions covering approximately 44% of the
City's workforce. The settlement,
which has been ratified by the unions, includes a total net
expenditure increase of 8.25% over a 39-month period, ending March
31, 1995 for most of these employees. On April 9, 1993 the City
announced an agreement with the Uniformed Fire Officers Association
(the"UFOA") which is consistent with the coalition agreement. The
agreement has been ratified. The Financial Plan reflects the costs
associated with these settlements and provides for similar
increases for all other City-funded employees.
The Financial Plan provides no additional wage
increases for City employees after their contracts expire in the
1995 and 1996 fiscal years. Each 1% wage increase for all
employees commencing in the 1995 and 1996 fiscal years would cost
the City an additional $130 million for the 1995 fiscal year and
$140 million for the 1996 fiscal year and $150 million each year
thereafter above the amounts provided for in the Financial Plan.
The terms of eventual wage settlements could be
determined through the impasse procedure in the New York City
Collective Bargaining Law, which can impose a binding settlement.
New York City Indebtedness. Outstanding
indebtedness having an initial maturity greater than one year from
the date of issuance of the City as of March 31, 1994 was
$21,290,000 compared to $19,624,000 as of March 31,
1993.
A substantial portion of the capital improvement in
the City are financed by indebtedness issued by the Municipal
Assistance Corporation of the City of New York ("MAC"). MAC was
<PAGE>
organized in 1975 to provide financing assistance for the City and
also to exercise certain review functions with respect
to the City's finances. MAC bonds are payable out of certain State
sales and compensating use taxes imposed within the City, State
stock transfer taxes and
per capita State aid to the City. Any balance from these sources
after meeting MAC debt service and reserve fund requirements and
paying MAC's operating expenses is remitted to the City or, in the
case of stock transfer taxes, rebated
to the taxpayers. The State is not, however, obligated to continue
the imposition of such taxes or to continue appropriation of the
revenues therefrom to MAC, nor is the State obligated to continue
to appropriate the State per capita aid to
the City which would be required to pay the debt service on certain
MAC obligations. MAC has not taxing power and MAC bonds do not
create an enforceable obligation of either the State or the City.
As of March 31, 1994, MAC had outstanding an aggregate of
approximately $4.071 billion of its bonds
compared to $4.470 billion as of March 31, 1993.
On February 11, 1991, Moody's Investors Service
lowered its rating on the City's general obligation bonds from A to
Baa1. On July 2, 1993, Standard & Poor's reconfirmed its A- rating
of City bonds, continued its
negative rating outlook assessment and stated that maintenance of
such ratings depended upon the City's making further progress
towards reducing budget gaps in the outlying years. In January
1995, Standard & Poor's reconfirmed its negative outlook and placed
it on CreditWatch because of the City's accounting methods.
Litigation
The State is the subject of numerous legal
proceedings relating to State finances, State programs and
miscellaneous tort, real property and contract
claims in which the State is a defendant and where monetary damages
sought are substantial. These proceedings could adversely affect
the financial condition of the State in the 1994-95 fiscal years or
thereafter.
In addition to the proceedings noted below, the
State is party to other claims and litigation which its legal
counsel has advised are not probable
of adverse court decisions. Although the amounts of potential
losses, if any are not presently determinable, it is the State's
opinion that its ultimate liability in
htese cases is not expected to have a material adverse effect on
the State's financial position in the 1994-95 fiscal year or
thereafter.
Among the more significant of these litigations,
which are at various procedural stages, are those that challenge:
(i) the validity of agreements and treaties by which various Indian
<PAGE>
tribes transferred title to the State of certain
land in central New York; (ii) certain aspects of the State's
Medicaid rates and regulations, including reimbursements to
providers of mandatory and optional Medicaid services; (iii)
contamination in the Love Canal area of Niagara Falls;
(iv) an action against State and New York City officials alleging
that the present level of shelter allowance for public assistance
recipients is inadequate under
statutory standards to maintain proper housing; (v) challenges to
the practice of reimbursing certain Office of Mental Health patient
care expenses from the client's Social Security benefits; (vi) a
challenge to the methods by which the
State reimburses localities for the administrative costs of food
stamp programs; (vii) a challenge to the State's possession of
certain funds taken pursuant to the
State's Abandoned Property Law; (viii) alleged responsibility of
State officials to assist in remedying racial segregation in the
City of Yonkers; (ix) an action
in which the State is a third party defendant, for injunctive or
other appropriate relief concerning liability for the maintenance
of stone groins constructed along
certain areas of Long Island's shoreline; (x) actions challenging
the constitutionality of legislation enacted during the 1990
legislative session which
changed the actuarial funding methods for determining contributions
to State employee retirement systems; (xi) challenges to the
constitutionality of financial
programs of the Thruway Authority authorized by Chapters 166 and
410 of the Laws of 1991, and to the sufficiency of the fiscal year
1991-92 judiciary budget;
(xii) challenges to the delay by the State Department of Social
Services in making two one-week Medicaid payments to the service
providers; (xiii) challenges to provisions of Section 2808-C of the
Public Health Law, which imposes a 13% surcharge on inpatient
hospital bills paid by commercial insurers
and employee welfare benefit plans and to portions of Chapter 55 of
the laws of 1992 requiring hospitals to impose and remit to the
State an 11% surcharge on hospital bills paid by commercial
insurers; (xiv) challenges promulgated by the
State Department of Social Services of a home assessment resource
review instrument used to determine eligibility for and nature of
home care services for Medicaid recipients; and (xv) challenges to
programs implemented under Section 62 of Chapter 41 of the Laws of
1992 to reduce Medicaid benefits to certain home-relief Medicaid
recipients.
Economy
A national recession commenced in mid-1990. The
State has suffered a more severe economic downturn. The national
recession has been exacerbated in the State by a significant
retrenchment in the financial services industry, cutbacks in
<PAGE>
defense spending, and an overbuilt real estate market.
Over the long term, serious potential economic
problems may continue to aggravate State and local financial
conditions. For decades, the State
economy has grown more slowly than the nation as a whole, resulting
in the gradual erosion of the State's relative economic affluence
and tax base, and the relocation of certain manufacturing
operations and executive offices outside the
State. The causes of this relative decline are varied and complex,
in many cases involving national and international developments
beyond the State's control.
Part of the reason for the long-term relative decline in the State
economy has been attributed to the combined state and local tax
burden, which is among the
highest in the nation. The existence of this tax burden limits the
State's ability to impose higher taxes in the event of future
financial difficulties.
If during the existence of the New York Trust, the
City of New York, the State, or any of its agencies or
municipalities, because of its or
their own financial difficulties, become unable to meet regular
commitments or if there should be a default, moratorium or other
interruption of payments of interest or principal on any obligation
issued by New York
City, the State, or a municipality or other authority in the State,
the market value and marketability of Bonds in the New York Trust,
the asset value of Units of the New York Trust, and the interest
income to the New York Trust, could be adversely affected.
North Carolina Trust
The Sponsor believe the information summarized
below describes some of the more significant developments relating
to Securities of (i) municipalities or other political subdivisions
or instrumentalities of the State of
North Carolina (the "State") which rely, in whole or in part, on ad
valorem real property taxes and other general funds of such
municipalities or political
subdivisions or (ii) the State of North Carolina, which are general
obligations of the State payable from appropriations from the
State's General Fund. The
sources of such information include official reports from the
Department of the Treasurer, as well as other publicly available
documents. The Sponsor have not independently verified any of the
information contained in such official reports, but are not aware
of any facts which would render such information inaccurate.
State Economic Profile. North Carolina is
basically a rural state, having only five municipalities with
populations in excess of 100,000. The
<PAGE>
economic profile of North Carolina consists of a combination of
industry, agriculture, and tourism. Nonagricultural wage and
salary employment
accounted for approximately 3,258,300 jobs as of January 1994. The
largest nonagricultural segment of jobs was the approximately
729,200 persons employed in trade, with textiles as the largest
manufacturing segment employing
approximately 203,600 people. The United States Department of
Labor estimates that as of August, 1993, North Carolina ranked
tenth among the states
in nonagricultural employment, eighth in manufacturing employment,
and eleventh in trade. During the period 1980 through 1992, per
capita income in North Carolina grew from $7,999 to $17,667, an
increase of approximately
121%. The North Carolina Employment Security Commission estimated
the unadjusted unemployment rate in February 1994, to be 5.5% of
the labor force, as compared with an unemployment rate of 7.1%
nationwide. Gross agricultural
income (excluding farm forest products) in 1992 was $5.182 billion.
This places North Carolina tenth in the nation in gross
agricultural income. Tobacco
production is the leading source of agricultural crop income in the
State, accounting for approximately 20.3% of gross agricultural
income in 1992.
State Financial Condition. The State's two
principal operating accounts are the General Fund and the Highway
Fund. The principal sources
of General Fund tax revenues are the income tax and the sales and
use tax. The State Constitution limits the income tax to a rate of
10% of total net income; the State actually imposed a maximum rate
of 7.75% during the 1992 calendar year.
The State had (audited) General Fund balances at
the June 30th year-end of approximately $254 million, $124 million,
$112 million (deficit balance), $235 million and $681 million for,
respectively, the 1989, 1990, 1991,
1992 and 1993 fiscal years. For the year ended June 30, 1993, the
State had total budgeted appropriations from the General Fund of
approximately $10.163 billion.
The State Highway Fund had an ending credit balance
of approximately $308 million as of June 30, 1993, with total
expenditures of approximately $1.410 billion.
State Debt. As of June 30, 1993, approximately
$494 million aggregate principal amount of the State's general
obligation bonds and $87 million of its highway fund general
obligation bonds were outstanding. The
highway fund bonds are payable from the Highway Fund.
In addition, 16 constituent institutions of the
University of North Carolina and 9 agencies or public authorities
<PAGE>
of the State had approximately $9.539 billion principal amount of
revenue bonds outstanding as of June 30,
1993. There are no bonds of the State outstanding, and no State
statutes which
would authorize the issuance of any bonds, which contemplate the
appropriation by the General Assembly of such amount as would be
necessary to make up any deficiency in a debt service reserve fund.
Local governmental units in the State had
approximately $4.543 billion principal amount of general obligation
bonds and $2.054 billion of
revenue bonds (excluding industrial revenue bonds of county
authorities) outstanding as of June 30, 1993. The State has no
financial responsibility with respect to this debt.
Ohio Trust
The Ohio Trust will invest substantially all of its
net assets in Ohio Obligations. The Ohio Trust is therefore
susceptible to political, economic and
regulatory factors that may affect issuers of Ohio Obligations.
The following information constitutes only a brief summary of some
of the complex factors that
may affect the financial situation of issuers in Ohio, and is not
applicable to "conduit" obligations on which the public issue
itself has no financial responsibility.
The creditworthiness of obligations issued by local
Ohio issuers may be unrelated to the creditworthiness of
obligations issued by the State, and
generally there is no responsibility on the part of the State to
make payments on those local obligations. There may be specific
factors that are applicable in
connection with investment in particular Ohio Obligations or in the
obligations of particular Ohio issuers, and it is possible the
investment will be in Ohio Obligations or in obligations of
particular issuers as to which such specific
factors are applicable. However, the information set forth below
is intended only as a general summary and not a discussion of any
such specific factors that may affect any particular issuer or
issue of Ohio Obligations.
Ohio is the seventh most populous state, with a
1990 Census Count of 10,847,000 indicating a 0.5% population
increase from 1980.
The economy of Ohio, while diversifying more into
the service and other non-manufacturing areas, continues to rely in
part on durable goods manufacturing, which is largely concentrated
in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic
activity in Ohio, as in many other industrially-developed states,
<PAGE>
tends to be more cyclical than in some other states and in the
nation as a whole. Agriculture also
is an important segment of the economy in the State, and the State
has instituted several programs to provide financial assistance to
farmers. The State's economy, has had varying effects on different
geographic areas of the State and the political subdivisions
located within those geographic areas.
In prior years, the State's overall unemployment
rate is commonly somewhat higher than the national average. In
January 1993 and February 1993,
the unemployment rate was 8.2 and 7.8, respectively, compared to
the national rates 7.9 and 7.7 respectively. However, for both
1991 and 1992 the State rate
was below the national rate; the State rates were 6.4% and 7.2%,
and the national rates 6.7% and 7.4% respectively. The
unemployment rate, and its effects, vary among particular
geographic areas of the State.
There can be no assurance that future state-wide or
regional economic difficulties, and the resulting impact on State
or local government
finances generally, will not adversely affect the market value of
Ohio Obligations held in the portfolio of the Ohio Trust or the
ability of the particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
The State operates on the basis of a fiscal
biennium for its appropriations and expenditures, and is precluded
by law from ending a fiscal year or biennium in a deficit position.
Most operations are financed through the
General Reserve Fund (GRF), with personal income and sales-use
taxes being the major GRF sources.
Growth and depletion of GRF ending fund balances
show a consistent pattern related to national economic conditions,
with the June 30 (end of fiscal year) balance reduced during less
favorable national economic periods and increased during more
favorable economic times.
Key end of biennium fund balances at June 30, 1991
were $135,365,000 (unaudited) (GRF) and approximately $300,000,000
(Budget Stabilization Fund (BSF), a cash and budgetary management
fund). Necessary corrective steps were taken in fiscal year 1991
to respond to lower than estimated receipts and higher expenditures
in certain categories. Those steps
included the transfer of $64,000,000 from the BSF to the GRF. The
State reported biennium ending fund balances of $135.3 million
(GRF) and $300 million (BSF).
The State has established procedures for, and has
timely taken, necessary actions to ensure a resource/expenditures
balance during less favorable
<PAGE>
economic periods. These include general and selected reductions in
appropriations spending; none have been applied to appropriations
needed for debt service or lease rentals on any State obligations.
To allow time to complete the resolution of certain
Senate and House differences in the budget and appropriations for
the current biennium (beginning July 1, 1991), an interim
appropriations act was enacted, effective
July 1; it included debt service and lease rental appropriations
for the entire 1992-93 biennium, while continuing most other
appropriations for 31 days at
97% of fiscal year 1991 monthly levels. The general appropriations
act for the entire biennium was passed on July 11, 1991 and signed
by the Governor. It
authorized the transfer, which has been made, of $200 million from
the BSF to the GRF and provided for transfers in fiscal year 1993
back to the BSF if revenues are sufficient for the purpose (which
the State Office of Budget and Management, OBM, at present thinks
unlikely).
Based on updated fiscal year financial results and
economic forecast for the State, in light of the continuing
uncertain nationwide economic situation,
OBM projected, and was timely addressed, a fiscal year 1992
imbalance in GRF resources and expenditures. GRF receipts were
significantly below original
forecasts, a shortfall resulting primarily from lower collections
of certain taxes, particularly sales and use taxes. Higher than
earlier projected expenditure levels
totalling approximately $143,000,000 resulted from higher spending
in certain areas, particularly human services, including Medicaid.
As an initial action, the Governor ordered most State agencies to
reduce GRF appropriations spending
in the final six months of fiscal year 1992 by a total of
approximately $184 million (debt service and lease rental
obligations were not affected). The
General Assembly authorized,and OBM made in June 1992, the transfer
to the GRF of the $100.4 million BSF balance and additional amounts
from certain other funds. Other administrative revenue and
spending actions resolved the
remaining GRF imbalance, resulting in positive GRF fiscal year 1992
ending fund and cash balances.
A significant GRF shortfall, approximately $520
million, was then projected for fiscal year 1993. It had been
addressed by appropriate legislative
and administrative actions. As a first step the Governor ordered,
effectively July 1, 1992, $300 million in selected GRF spending
reductions. Executive and
legislative action in December 1992 (a combination of tax revisions
and additional appropriations spending reductions) is projected by
OBM to balance GRF resources and expenditures in this biennium and
provide a better base for the appropriations for the next biennium.
<PAGE>
Those actions included tax revisions
estimated to produce an additional $194,500,000 this fiscal year,
and additional appropriations spending reductions totalling
approximately $50,000,000 are provided for in that legislation and
subsequent action by the Governor.
Litigation filed on February 1, 1993 seeks to have
a new tax on soft drinks, included in those tax revisions, declared
invalid and its collection
enjoined. The trial court's preliminary injunction has been stayed
by the Ohio Supreme Court on procedural grounds, and that tax is
for now being collected.
OBM had estimated approximately $18,500,000 being collected from
that tax this fiscal year, representing less than 10% of the
projected additional tax revenues. Several bases for invalidity
were asserted, including a claim that the
bill in which this and other elements of the tax package ( as well
as certain capital appropriations and financing authorizations )
were included did not comply with a constitutional "one-subject"
procedural requirement.
Supplementing the general authorization for the
Governor's spending reduction orders described above and exercised
several times in this
biennium, the biennial appropriations act authorizes the OBM
Director to implement up to 1% fiscal year reduction in GRF amounts
appropriated if on March 1 of either fiscal year of the biennium
receipts for that fiscal year are for any reason more than
$150,000,000 under estimates and the then estimated GRF ending fund
balance is less than $50,000,000. Expressly, excerpted from this
cutback authorization are debt service and lease rental
appropriations. In light
of the other corrective actions described above, this supplemental
spending reduction authorization was not implemented in fiscal year
1992 and is not expected to be implemented in fiscal year 1993.
The general appropriations process for the next biennium (beginning
July 1, 1993) has commenced with the Governor's presentation of a
proposed GRF budget to the General Assembly. That budget document
and the related appropriations bill as introduced and passed by the
House include all necessary GRF appropriations for biennial State
debt service and lease rental payments.
The incurrence or assumption of debt by the State
without a popular vote is, with limited exceptions, prohibited by
current provisions of the State
Constitution. The State may incur debt to cover casual deficits or
failures in revenues or to meet expenses not otherwise provided
for, but limited in amount to $750,000. The State is expressly
precluded from assuming the debts of any
local government or corporation. (An exception in both cases is
made for any debt incurred to repel invasion, suppress
insurrection, or defend the State in war.)
<PAGE>
By thirteen constitutional amendments (the last
adopted in 1993), Ohio voters have authorized the incurrence of
State debt to which taxes or excesses were pledged for payment. At
January 31, 1994, $712.6 million
(excluding certain highway bonds payable primarily from highway use
charges) of this debt was outstanding or awaiting delivery. The
only such State debt then
still authorized to be incurred are portions of the highway bonds
and the following: (a) up to $100 million of obligations for coal
research and development may be outstanding at any one time ($43.1
million outstanding); (b) $1.2 billion of obligations authorized
for local infrastructure improvements, no more than $120 million
may be issued in any calendar year ($645.2 million outstanding or
awaiting delivery, $480 million remaining to be issued); and (c)
up to $200 million in general obligation bonds for parks and
recreation purposes may be outstanding at any one time ( no more
than $50 million to be issued in any one year, and none have yet
been issued).
The Constitution also authorized the issuance, for
certain purposes, of State obligations, the owners of which are not
given the right to have excises
or taxes levied to pay debt service. Those special obligations
include bonds and notes issued by, among others, the Ohio Public
Facilities Commission and the Ohio Building Authority. A total of
$4.28 billion of those obligations were outstanding at January 31,
1994.
A 1990 constitutional amendment authorized greater
State and political subdivision participation in the provision of
individual and family
housing, including borrowing for this purpose. The General
Assembly may authorize the issuance of State obligations secured by
a pledge of all or such
portion as it authorizes of State revenues or receipts, although
the obligations may not be supported by the State's full faith and
credit.
State and local agencies issue revenue obligations
that are payable from revenues of revenue-producing facilities or
categories of facilities, which
obligations are not "debt" within constitutional provisions or
payable from taxes. In general, lease payment obligations under
lease-purchase agreements of Ohio
issuers (in connection with which certificates of participation may
be issued) are limited in duration to the issuer's fiscal period,
and are renewable only upon appropriations being made available for
the subsequent fiscal periods.
Local school districts in Ohio receive a major
portion (on a statewide basis, historically approximately 46%) of
their operating moneys from
State subsidies ( known as the Foundation Program ), but are
<PAGE>
dependent on local ad valorem property taxes and in, 88 districts,
income taxes for significant
portions of their budgets. Litigation has recently been filed,
similar to that in
other states, questioning the constitutionality of Ohio's system of
school funding.
A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits.
A current program (
Emergency School Advancement Fund ) provides for school district
cash-need borrowing directly from commercial lenders, with State
diversion of subsidy distributions to repayment if needed; 26
districts borrowed a total of $41.8 million in fiscal year 1991
under this program, in fiscal year 1992, borrowings totalled $68.6
million (including over $46.6 million by one district);in fiscal
year 1993, 43 districts borrowed approximately $94.5 million
(including $75 million for one district) and in fiscal year 1994
loan approvals totalled at January 31, 1994, $9.90 million for 16
districts.
Ohio's 943 incorporated cities and villages rely
primarily on property and municipal income taxes for their
operations, and, with other local
governments, receive local government support and property tax
relief monies distributed by the State. Procedures have been
established for those few
municipalities that have on occasion faced significant financial
problems, which include establishment of a joint State/local
commission to monitor the
municipality's fiscal affairs, with a financial plan developed to
eliminate deficits and cure any defaults. Since inception in 1979,
these procedures have been
applied to 23 cities and villages, in 18 of which the fiscal
situation has been resolved and the procedures terminated.
At present the State itself does not levy any ad
valorem taxes on real or tangible personal property. Those taxes
are levied by political
subdivisions and other local taxing districts. The Constitution
has since 1934 limited the amount of the aggregate levy of ad
valorem property taxes, without
a vote of the electors or municipal charter provision, to 1% of
true value in money, and statutes limit the amount of the aggregate
levy without a vote or
charter provision to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general
obligations of subdivisions are
payable from property taxes unlimited as to amount or rate.
Although revenue obligations of the State or its
political subdivisions may be payable from a specific project or
source, including lease rentals, there can be no assurance that
future economic difficulties and the
resulting impact on State and local government finances will not
adversely affect the market value of Ohio obligations held in the
portfolio of the Trust or the ability of the respective obligors to
make timely payments of principal and interest on such obligations.
The outstanding Bonds issued by the Sinking Fund
are rated Aa by Moody's Investors Service ("Moody's") and AAA by
Standard & Poor's Corporation ("S&P"). In January 1982, S&P
adjusted its rating on certain of
the State's general obligation bonds from AA+ to AA. Previously,
in November 1979, the ratings on general obligation debt of the
State were changed by Moody's and S&P from Aaa and AAA to Aa and
AA+, respectively. S&P did not at either time change its AAA
ratings on the Bonds. The outstanding State Bonds issued by the
Ohio Public Facilities Commission and the Ohio Building Authority
are rated A+ by S&P and A by Moody's.
Pennsylvania Trust
Potential purchasers of Units of the Trust should
consider the fact that the Trust's portfolio consists primarily of
securities issued by the
Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial
risks associated with an investment
in such securities. Although the General Fund of the Commonwealth
(the principal operating fund of the Commonwealth) experienced
deficits in fiscal 1990 and 1991, tax increases and spending
decreases helped return the General
Fund balance to a surplus at June 30, 1992 of $87.5 million and at
June 30, 1993 of $698.9. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to
a surplus of $64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been
dependent upon heavy industry, but has diversified recently into
various services, particularly into
medical and health services, education and financial services.
Agricultural industries continue to be an important part of the
economy, including not only
the production of diversified food and livestock products, but
substantial economic activity in agribusiness and food-related
industries. Service industries
currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future
economic difficulties in any of these industries could have an
adverse impact on the finances of the Commonwealth or its
municipalities, and could adversely affect the market value of the
Bonds in the Pennsylvania Trust or the ability of the respective
obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the
<PAGE>
Commonwealth that could adversely affect the ability of the
Commonwealth to pay debt service on its
obligations, including suits relating to the following matters:
(i) the ACLU has filed suit in federal court demanding additional
funding for child welfare
services; the Commonwealth settled a similar suit in the
Commonwealth Court of Pennsylvania and is seeking the dismissal of
the federal suit, inter alia,
because of that settlement. The district court has denied class
certification to the ACLU, and the parties have stipulated to a
judgment against the plaintiffs to
allow plaintiffs to appeal teh denial of a class certification to
the Third Circuit; (ii) in 1987, the Supreme Court of Pennsylvania
held that the statutory scheme
for county funding of the judicial system to be in conflict with
the Constitution of the Commonwealth but stayed judgment pending
enactment by the legislature
of funding consistent with the opinion and the legislature has yet
to consider legislation implementing the judgment; (iii) several
banks have filed suit against
the Commonwealth contesting the constitutionality of a law enacted
in 1989 imposing a bank shares tax; in July 1994, the Commonwealth
Court en banc upheld the constitutionality of the 1989 bank shares
tax law but struck down a
companion law to provide credits againsst the bank shares tax for
new banks; cross appeals from that decision to the Pennsylvania
Supreme Court have been
filed; (iv) litigation has been filed in both state and federal
court by an association of rural and small schools and several
individual school districts and
parents challenging the constitutionality of the Commonwealth's
system for funding local school districts--the federal case has
been stayed pending resolution
of the state case and the state case is in the pre-trial state (no
available estimate
of potential liability); (v) the ACLU has brought a class action on
behalf of inmates challenging the conditions of confinement in
thirteen of the
Commonwealth's correctional institutions; a proposed settlement
agreement has been submitted to the court and members of the class,
but the court has not yet
set a date for hearing on the terms of the agreement (no available
estimate of potential cost of complying with the injunction sought
but capital and personnel
costs might cost millions of dollars) and (vi) a consortium of
public interest law firms has filed a class action suit alleging
that the Commonwealth has not
complied with a federal mandate to provide screening, diagnostic
and treatment services for all Medicaid-eligible children under 21;
the district court denied class certification and has scheduled the
case for trial (potentially liability
estimated at between $9 million and $55 million); and (vii)
litigation has been filed in federal court by the Pennsylvania
Medical Society seeking payment of the full co-pay and deductible
in excess of the maximum fees set under the
Commonwealth's medical assistance program for outpatient services
provided to medical assistance patients who were also eligible for
Medicare; the Commonwealth received a favorable decision in the
federal district court, but the Pennsylvania Medical Society won a
reversal in the federal circuit court (potential liability
estimated at $50 million per year).
The Commonwealth's general obligation bonds have
been rated AA-by Standard & Poor's and A1 by Moody's for more than
the last five years.
The City of Philadelphia (the "City") has been
experiencing severe financial difficulties which has impaired its
access to public credit markets and a long-term solution to the
City's financial crisis is still being sought. The City
experienced a series of General Fund deficits for fiscal years 1988
through 1992.
The City has no legal authority to issue deficit
reduction bonds on its own behalf, but state legislation has been
enacted to create an Intergovernmental Cooperation Authority to
provide fiscal oversight for Pennsylvania cities (primarily
Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities
in avoiding defaults and eliminating deficits by encouraging the
adoption of sound budgetary practices and issuing bonds. In order
for the Authority to issue bonds on behalf
of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority
with certain oversight powers with respect to the fiscal affairs of
the City, and the Authority approved a five-
year financial plan prepared by the City. On June 16, 1992, the
Authority issued a $474,555,000 bond issue on behalf of the City.
The Authority approved the latest update of the five-year financial
plan on May 2, 1994. The City has reported a surplus of
approximately $15 million for fiscal year ending June 30, 1994. In
July 1993, the Authority issued $643,430,000 of bonds to refund
certain general obligation bonds of the City and to fund additional
capital projects. In September 1993, the Authority issued
$178,675,000 of bonds to advance refund certain of the bonds of the
City and to fund additional capital projects.
Texas Trust
Potential purchasers of the Units of the Texas
Trust should consider the fact that the Texas Trust's Portfolio
consists of securities issued by the State
of Texas, or its municipalities or authorities (the "Texas
Securities") and realize the substantial risks associated with an
investment in such Texas Securities. The
following information is a brief summary and does not purport to be
a complete description of conditions, developments and risk factors
<PAGE>
that may adversely
affect the Texas Securities and hence the value of the Units. The
information is drawn principally from publicly available documents.
While the Sponsor have not independently verified such information,
they have no reason to believe that such information is inaccurate.
Economic Factors. Geographic, cultural, climatic
and geological differences within the State of Texas have produced
six generally distinct
geographic regions in which economic developments, such as changes
in oil prices, the value of the Mexican peso, and defense spending
can be expected to have varying effects.
Texas experienced a severe economic recession in
the 1980's commencing with a decline of the energy industry which
in turn led to a depression of the real estate industry, financial
institution failures and declines
in most sectors of the Texas economy. As the Texas economy began
to level off in the late 1980's, its dependence on certain industry
segments began to
shift. The energy industry currently comprises approximately 15%
of the State's total economic output compared to a peak of 27% in
1981, while the service
industry currently comprises approximately 15% of the State's total
economic output compared to a peak of 27% in 1981, while the
service industry (including health and business services) comprises
approximately 17% of the State's local economic output compared to
11.9% in 1982.
Economic growth and activity in Texas are likely to
be inhibited by many factors including over-capacity in commercial
and residential real estate markets, asset sales by the Resolution
Trust Corporation, conservative lending
practices owing to stricter risk-based capital guidelines imposed
on financial institutions, the national recession, and the unstable
international economic and
political environment. Continued low levels of economic growth and
activity in Texas' major industries, budgeting difficulties,
constitutional limitations on
taxes, and other matters could adversely affect the Texas
Securities and hence the value of the Units in the Texas Trust.
The Sponsor cannot predict the course of economic trends in Texas.
State Finances. The State operates on a fiscal
year beginning September 1, and ending August 31. The State's
accounting period is a biennium covering two fiscal years. The
State is required by law to maintain
its accounting and reporting functions on a cash basis.
The economic troubles of the 1980's caused numerous
budgeting difficulties for the State and its political subdivisions
due principally to a shrinking and changing tax base.
Historically, the primary sources of the State's revenue have been
<PAGE>
sales taxes, mineral severance taxes and federal grants. Due
to the State's economic recession and the consequent enactment of
new tax measures, including those increasing the rates of existing
taxes and expanding
the tax base for certain taxes, there has been a reordering in the
relative importance of the State's taxes in terms of their
contribution to the State's total
revenue. Key revenue sources in the State of Texas for the fiscal
year ended August 31, 1992 included sales taxes (28.8% of total
revenue), federal grants (28.4% of total revenue), licenses and
fees (6.3% of total revenue), interest and
investment income (6.3% of total revenue) and motor fuels taxes.
The State imposes a corporate franchise tax based on a
corporation's taxable capital apportionable to Texas. While the
State currently has no income tax, an income
tax has been and continues to be considered and may be enacted.
For the biennium ended August 31, 1989, the State
of Texas had a budget surplus of approximately $297 million
(attributable, in large part, to
increased sales tax revenue), compared to a budget deficit of
approximately $745 million for the biennium ended August 31, 1987
(attributable primarily to the
decline of the energy industry which was principally a result of
lower oil and gas prices). The above biennium end balances include
approximately $300 million in oil overcharge funds which amounts
are restricted to energy conservation projects. The 72nd
Legislature meeting in special session, in the summer of 1991,
approved for the Governor's signature an approximately $9.4
billion budget increase for the fiscal 1992-93 biennium to be
financed in part by approximately $3.4 billion in new revenue
measures.
The $3.4 billion in new revenues to finance the new
budget came from several new sources. A tax and fee bill raised a
total of $2.1 billion in
new revenues for the state. A fiscal management bill added another
$779 million. Legislative approval of a lottery is expected to add
another $462 million. Finally, another $50 million was added
through a change in the Permanent School Fund investment strategy,
which will make additional short-term earnings available to help
fund public schools during the biennium.
The most important component of the tax bill was a
major overhaul of the State's franchise tax, which includes a new
measure of business activity
referred to as "earned surplus." A part of the change was a
lowering of the tax rate on capital from $5.25 to $2.50 per $1,000.
An additional surtax on "earned surplus," which includes federal
net corporate income and officers' and directors' compensation of
4.5%, was added. Essentially, corporations pay a
tax on capital or a tax on "earned surplus," whichever is higher.
The revised franchise tax is expected to raise an additional $789.3
<PAGE>
million over currently projected franchise tax collections during
the 1992-93 biennium.
The Texas Constitution prohibits the State from
levying ad valorem taxes on property for general revenue purposes
and limits the rate of such taxes
for other purposes to $.35 per $100 of valuation. The Constitution
also permits counties to levy, in addition to all other ad valorem
taxes permitted by the
Constitution, ad valorem taxes on property within the county for
flood control and road purposes in an amount not to exceed $.30 per
$100 of valuation. The Constitution prohibits counties, cities and
towns from levying a tax rate exceeding $.80 per $100 of valuation
for general fund and other specified purposes.
With certain specific exceptions, the Texas
Constitution generally prohibits the creation of debt by or on
behalf of the State unless the voters of the
State, by constitutional amendment, authorize the issuance of debt
(including general obligation indebtedness backed by the State's
taxing power and full faith and credit). In excess of $7.3 billion
of general obligation bonds have been authorized in Texas and
almost $2.81 billion of such bonds are currently outstanding. Of
these, over 37% were issued by the Veterans' Land Board.
Though the full faith and credit of the State are
pledged for the payment of all general obligations issued by the
State, much of that indebtedness
is designed to be eventually self-supporting from fees, payments,
and other sources of revenues; in some instances, the receipt of
such revenues by certain issuing agencies has been in sufficient
amounts to pay the principal of and
interest on the issuer's outstanding bonds without requiring the
use of appropriated funds.
From the time Standard & Poor's Corporation began
rating Texas general obligation bonds in 1956 until early 1986, the
firm gave such bonds its
highest rating, "AAA." In April 1986, in response to the State
economic problems, Standard & Poor's downgraded its rating of Texas
general obligation
bonds to "AA+." Such rating was further downgraded in July 1987 to
"AA." Moody's Investors Service, Inc. has rated Texas bonds since
prior to the Great Depression. Moody's upgraded its rating of
Texas general obligation bonds in
1962 from "Aa" to "Aaa", its highest rating, following the
imposition of a statewide sales tax by the Legislature. Moody's
downgraded such rating to "Aa" in March 1987. No prediction can be
made concerning future changes in ratings by national rating
agencies of Texas general obligation bonds or
concerning the effect of such ratings changes on the market for
such issues.
<PAGE>
The same economic and other factors affecting the
State of Texas and its agencies also have affected cities,
counties, school districts and other
issuers of bonds located throughout the State. Declining revenues
caused by the downturn in the Texas economy in the mid-1980s forced
these various other issuers to raise taxes and cut services to
achieve the balanced budget mandated by their respective charters
or applicable State law requirements. Standard & Poor's
Corporation and Moody's Investors Service, Inc. assign separate
ratings to each issue of bonds sold by these other issuers. Such
ratings may be significantly lower than the ratings assigned by
such rating agencies to Texas general obligation bonds.
Litigation. In October 1989, the Texas Supreme
Court in Edgewood v. Kirby unanimously held that the State public
school finance system
violated provisions of the Texas Constitution. The Supreme Court
reinstated an injunction issued by the District Court (enjoining
the State from funding the
public school finance system) but postponed its effect. New
legislation intended
to resolve the problem was passed, however, the District Court
subsequently held the new finance system unconstitutional. The
Texas Supreme Court was asked to review the matter, and in January
1991, held that the new finance
system violated the Texas Constitution. The Texas Supreme Court
stayed the effect of the injunction until April 1, 1991.
On April 15, 1991, the Governor signed into law
Senate Bill 351, the School Finance Reform Bill. This bill sets a
minimum local property tax
rate which guarantees the local school districts a basic state
allotment of a specified amount per pupil. The funding mechanism
is based on tax base
consolidation and creates 188 new taxing units, drawn largely along
county lines. Within each taxing unit, school districts will share
the revenue raised by
the minimum local property tax. Local school districts are allowed
to "enrich" programs and provide for facilities construction by
levying an additional tax.
In January 1992, the Texas Supreme Court declared the School
Finance Reform Bill unconstitutional because the community
education districts are in essence a
state property tax. The legislature was given until September 1,
1993 to pass a new school finance reform bill. The Supreme Court
said that, in the meantime, the county education districts could
continue to levy and collect property taxes. Several taxpayers
have filed suit challenging the right of such districts to collect
a tax that has been declared unconstitutional by the Supreme
Court. In connection with formulating a new school finance bill
the legislature is expected to consider several proposals, some of
which could fundamentally change the State's tax structure
<PAGE>
including a state income tax.
It is not possible to predict whether the new
public school finance
system will be held constitutional and, if it is, how the State
will appropriate the
additional funding, and what the impact of such appropriation will
be upon the State. If the new public school system is held
unconstitutional, it is not possible
to predict the legislative solution to the problems or to assess
the impact of such solution upon the financial condition of the
State.
The Sponsor believes the information summarized
above describes some of the more significant aspects relating to
the State Trust and Umbrella
Series. The sources of such information are the official
statements of issuers located in each of the respective States as
well as other publicly available
documents. While the Sponsor has not independently verified this
information, they have no reason to believe that such information
is not correct in all material
respects.
<PAGE>
<PAGE>
The Units
On the date of this Prospectus, each Unit in a
State Trust and Umbrella Series represented a fractional undivided
interest in the principal and
net income of such State Trust and Umbrella Series as is set forth
in the "Summary of Essential Information" of Part A. If any Units
are redeemed after the date of this Prospectus by the Trustee, the
principal amount of the Bonds in
the affected State Trust and Umbrella Series will be reduced by an
amount allocable to redeemed Units and the fractional undivided
interest in the affected
State Trust and Umbrella Series represented by each unredeemed Unit
will be increased. Units will remain outstanding until redeemed
upon tender to the
Trustee by any Unit holder, which may include the Sponsor, or until
the termination of the Trust Agreement. (See "Amendment and
Termination of the
Trust Agreement--Termination".) References in this Prospectus to
"Units" are to Units which represented the fractional undivided
interest indicated in the "Summary of Essential Information" of
Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are
customarily offered to investors on a "yield price" basis (as
contrasted to a "dollar price"
basis) at the lesser of the yield as computed to maturity of the
bonds or to an earlier redemption date and which takes into account
not only the interest
payable on the bonds but also the amortization or accretion to a
specified date of any premium over or discount from the par
(maturity) value in the bond's
purchase price. Since Units of each State Trust and Umbrella
Series are offered on a dollar price basis, the rate of return on
an investment in Units of a State
Trust and Umbrella Series is stated in terms of "Estimated Current
Return", computed by dividing the Net Annual Income per Unit by the
Public Offering Price per Unit. Any change in either the Net
Annual Income per Unit or the
Public Offering Price per Unit will result in a change in the
Estimated Current Return. The Net Annual Income per Unit of a
State Trust and Umbrella Series
is determined by dividing the total annual interest income to such
State Trust and Umbrella Series, less estimated annual fees and
expenses of the Trustee, the
Sponsor, and the Evaluator, by the number of Units of such State
Trust and Umbrella Series outstanding. The Net Annual Income per
Unit of a State Trust and Umbrella Series will change as the income
or expenses of such State Trust
and Umbrella Series changes and as Bonds are redeemed, paid, sold
<PAGE>
or exchanged. For a statement of the Net Annual Income per Unit
and the Estimated Current Return based on the Public Offering
Price, see Part A under "Summary of Essential Information".
The Estimated Long-Term Return for a State Trust
and Umbrella Series is a measure of the return to the investor over
the estimated life of a State
Trust and Umbrella Series. The Estimated Long-Term Return
represents an average of the yields to maturity (or call) of the
Bonds in a State Trust and Umbrella Series's portfolio calculated
in accordance with accepted bond practice and adjusted to reflect
expenses and sales charges. In calculating Estimated Long-Term
Return, the average yield for a State Trust and Umbrella Series's
portfolio is derived by weighing each Bond's yield by the market
value of the Bond and by the amount of time remaining to the date
to which the Bond is priced. Once the average portfolio yield is
computed, this figure is then reduced
to reflect estimated expenses and the effect of the maximum sales
charge paid by investors.
A State Trust and Umbrella Series may experience
expenses and portfolio charges different from those assumed in the
calculation of Estimated
Long-Term Return. There thus can be no assurance that the
Estimated Current Returns or Estimated Long-Term Returns quoted for
a State Trust and Umbrella Series will be realized in the future.
Since both Estimated Current Return and Estimated Long-Term Return
quoted on a given business day are based on the
market value of the underlying Bonds on that day, subsequent
calculations of these performance measures will reflect the
then-current market value of the
underlying Bonds and may be higher or lower.
Taxes
The following discussion addresses only the tax
consequences of Units held as capital assets and does not address
the tax consequences of Units
held by dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special
counsel for the Sponsor, under existing law:
The Trust is not an association taxable as a
corporation for Federal income tax purposes, and income received by
the Trust will be treated as the income of the Unit holders
("Holders") in the manner set forth below.
Each Holder will be considered the owner of a pro
rata portion of each Bond in the State Trust and Umbrella Series
under the grantor trust rules of Sections 671-679 of the Internal
Revenue Code of 1986, as amended (the
<PAGE>
"Code"). In order to determine the face amount of a Holder's pro
rata portion of each Bond on the Date of Deposit, see "Aggregate
Principal" under "Portfolio
of Securities". The total cost to a Holder of his Units, including
sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market
values thereof on the date the Holder purchases his Units, in order
to determine his tax basis for his pro rata portion of each Bond.
In order for a Holder who
purchases his Units on the Date of Deposit to determine the fair
market value of his pro rata portion of each Bond on such date, see
"Cost of Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received the
interest on his pro rata portion of each Bond when interest on the
Bond is received by the State
Trust and Umbrella Series. In the opinion of bond counsel
(delivered on the date
of issuance of each Bond), such interest will be excludable from
gross income for regular Federal income tax purposes (except in
certain limited circumstances
referred to below). Amounts received by the State Trust and
Umbrella Series pursuant to a bank letter of credit, guarantee or
insurance policy with respect to
payments of principal, premium or interest on a Bond in the State
Trust and Umbrella Series will be treated for Federal income tax
purposes in the same manner as if such amounts were paid by the
issuer of the Bond.
The State Trust and Umbrella Series may contain
Bonds which were originally issued at a discount ("original issue
discount"). The following
principles will apply to each Holder's pro rata portion of any Bond
originally issued at a discount. In general, original issue
discount is defined as the
difference between the price at which a debt obligation was issued
and its stated redemption price at maturity. Original issue
discount on a tax-exempt obligation
issued after September 3, 1982, is deemed to accrue as tax-exempt
interest over the life of the obligation under a formula based on
the compounding of interest.
Original issue discount on a tax-exempt obligation issued before
July 2, 1982 is deemed to accrue as tax-exempt interest ratably
over the life of the obligation.
Original issue discount on any tax-exempt obligation issued during
the period beginning July 2, 1982 and ending September 3, 1982 is
also deemed to accrue
as tax-exempt interest over the life of the obligation, although it
is not clear whether such accrual is ratable or is determined under
a formula based on the
compounding of interest. If a Holder's tax basis for his pro rata
portion of a Bond issued with original issue discount is greater
than its "adjusted issue price"
<PAGE>
but less than its stated redemption price at maturity (as may be
adjusted for certain payments), the Holder will be considered to
have purchased his pro rata
portion of the Bond at an "acquisition premium." A Holder's
adjusted tax basis for his pro rata portion of a Bond issued with
original issue discount will include
original issue discount accrued during the period such Holder held
his Units. Such increases to the Holder's tax basis in his pro rata
portion of the Bond resulting from the accrual of original issue
discount, however, will be reduced by the amortization of any such
acquisition premium.
If a Holder's tax basis for his pro rata portion of
a Bond exceeds the redemption price at maturity thereof (subject to
certain adjustments), the
Holder will be considered to have purchased his pro rata portion of
the Bond with "amortizable bond premium". The Holder is required to
amortize such bond premium over the term of the Bond. Such
amortization is only a reduction of basis for his pro rata portion
of the Bond and does not result in any deduction
against the Holder's income. Therefore, under some circumstances,
a Holder may recognize taxable gain when his pro rata portion of a
Bond is disposed of for an amount equal to or less than his
original tax basis therefor.
A Holder will recognize taxable gain or loss when
all or part of his pro rata portion of a Bond is disposed of by the
State Trust and Umbrella Series
for an amount greater or less than his adjusted tax basis. Any such
taxable gain or loss will be capital gain or loss, except that any
gain from the disposition of
a Holder's pro rata portion of a Bond acquired by the Holder at a
"market discount" (i.e., where the Holder's original tax basis for
his pro rata portion of the Bond (plus any original issue discount
which will accrue thereon until its maturity) is less than its
stated redemption price at maturity) would be treated
as ordinary income to the extent the gain does not exceed the
accrued market discount. Capital gains are generally taxed at the
same rate as ordinary income.
However, the excess of net long-term capital gains over net
short-term capital losses may be taxed at a lower rate than
ordinary income for certain
noncorporate taxpayers. A capital gain or loss is long-term if the
asset is held for more than one year and short-term if held for one
year or less. The deduction of capital losses is subject to
limitations. A Holder will also be considered to have disposed of
all or part of his pro rata portion of each Bond when he sells or
redeems all or some of his Units.
Under Section 265 of the Code, a Holder (except a
corporate Holder) is not entitled to a deduction for his pro rata
share of fees and expenses of the State Trust and Umbrella Series
because the fees and expenses are
<PAGE>
incurred in connection with the production of tax-exempt income.
Further, if borrowed funds are used by a Holder to purchase or
carry Units of the State Trust and Umbrella Series, interest on
such indebtedness will not be deductible for Federal income tax
purposes. In addition, under rules used by the Internal Revenue
Service, the purchase of Units may be considered to have been made
with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of Units. Similar rules may be applicable
for state tax purposes.
From time to time proposals are introduced in
Congress and state
legislatures which, if enacted into law, could have an adverse
impact on the
tax-exempt status of the Bonds. It is impossible to predict whether
any legislation in respect of the tax status of interest on such
obligations may be
proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal
and certain aspects of New York State and City income taxes.
Depending on their state of residence, Holders may be subject to
state and local taxation and should consult their own tax advisers
in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after
August 7, 1986 will be a preference item for purposes of the
alternative minimum tax ("AMT").
The Sponsor believe that interest (including any original issue
discount) on the Bonds should not be subject to the AMT for
individuals or corporations under
this rule. A corporate Holder should be aware, however, that the
accrual or receipt of tax-exempt interest not subject to the AMT
may give rise to an
alternative minimum tax liability (or increase an existing
liability) because the
interest income will be included in the corporation's "adjusted
current earnings" for purposes of the adjustment to alternative
minimum taxable income required
by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A
of the Code, which is based on an alternative minimum taxable
income.
In addition, interest on the Bonds must be taken
into consideration in computing the portion, if any, of social
security benefits that will be included
in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an
investment in Units.
At the time of issuance of each Bond, an opinion
<PAGE>
relating to the validity of the Bond and to the exemption of
interest thereon from regular
Federal income taxes was or will be rendered by bond counsel.
Neither the Sponsor nor Davis Polk & Wardwell nor any of the
special counsel for state tax
matters have made or will make any review of the proceedings
relating to the issuance of the Bonds or the basis for these
opinions. The tax exemption is dependent upon the issuer's (and
other users') compliance with certain ongoing
requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no
assurance that the issuer (and
other users) will comply with these requirements, in which event
the interest on the Bond could be determined to be taxable
retroactively to the date of issuance.
In the case of certain of the Bonds, the opinions
of bond counsel indicate that interest on such Bonds received by
a "substantial user" of the
facilities being financed with the proceeds of such Bonds, or
persons related thereto, for periods while such Bonds are held by
such a user or related person,
will not be exempt from regular Federal income taxes, although
interest on such Bonds received by others would be exempt from
regular Federal income taxes.
"Substantial user" is defined under U.S. Treasury Regulations to
include only a person whose gross revenue derived with respect to
the facilities financed by
the issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities, or who occupies more than 5% of
the usable area of such
facilities or for whom such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related
persons" are defined to include
certain related natural persons, affiliated corporations, partners
and partnerships. Similar rules may be applicable for state tax
purposes.
After the end of each calendar year, the Trustee
will furnish to each
Holder an annual statement containing information relating to the
interest received by the State Trust and Umbrella Series on the
Bonds, the gross
proceeds received by the Trust from the disposition of any Bond
(resulting from redemption or payment at maturity of any Bond or
the sale by the State Trust
and Umbrella Series of any Bond), and the fees and expenses paid by
the State Trust and Umbrella Series. The Trustee will also furnish
annual information returns to each Holder and to the Internal
Revenue Service. Holders are required
to report to the Internal Revenue Service the amount of tax-exempt
interest received during the year.
<PAGE>
The description of Federal tax consequences applies
separately for each State Trust and Umbrella Series. Below,
arranged alphabetically by state,
is a description of certain state and local tax consequences for
residents of the state and locality for which such State Trust is
named.
California Trust
Messrs. Morgan, Lewis and Bockius acted as special
California counsel to California Trust 98 and all prior California
Trusts. Messrs. Adams,
Duque and Hazeltine acted as special California counsel to
California Trust 99
and all subsequent California Trusts. On the Date of Deposit for
each California Trust, the respective counsel to the Trusts
rendered an opinion under then existing law substantially to the
effect that:
The California Trust is not an association taxable
as a corporation under the income tax laws of the State of
California;
The income, deductions and credits against tax of
the California Trust will be treated as the income, deductions and
credits against tax of the
holders of Units in the California Trust under the income tax laws
of the State of California;
Interest on the bonds held by the California Trust,
and any interest income received by the California Trust from its
investments in units of
previously formed California trusts included within a Multistate
Series or Umbrella Series of Tax Exempt Securities Trust (the
"Previously Formed
Trusts"), to the extent that such interest is exempt from taxation
under California law will not lose its character as tax-exempt
income merely because that income is passed through to the holders
of Units; however, a corporation
subject to the California franchise tax is required to include that
interest income in its gross income for purposes of determining its
franchise tax liability;
Each holder of a Unit in the California Trust will
have a taxable event when the California Trust disposes of a bond
(whether by sale, exchange,
redemption, or payment at maturity) or when the Unit holder redeems
or sells his Units. The total tax cost of each Unit to a holder of
a Unit in the California Trust is allocated among each of the bond
issues held in the California Trust (in
accordance with the proportion of the California Trust comprised by
each bond issue) in order to determine the holder's per Unit tax
<PAGE>
cost for each bond issue,
and the tax cost reduction requirements relating to amortization of
bond premium will apply separately to the per Unit tax cost of each
bond issue. Therefore, under some circumstances, a holder of a Unit
may realize taxable gain when the California Trust which issued
such Unit disposes of a bond or the holder's Units are sold or
redeemed for an amount equal to or less than his original cost of
the bond or Unit. Similarly, each Unit holder will have a taxable
event (i) when a Previously Formed Trust disposes of a bond, and
(ii) when the California Trust disposes of any of its ownership
interests in a Previously Formed Trust;
Each holder of a Unit in the California Trust is
deemed to be the owner of a pro rata portion of the California
Trust under the personal property tax laws of the State of
California; and
The pro rata ownership of the bonds held by the
California Trust, as well as the interest income therefrom, are
exempt from California personal property taxes.
Connecticut Trust
On the Date of Deposit for each Connecticut Trust,
Messrs. Day, Berry and Howard, special Connecticut counsel on
Connecticut tax matters, rendered an opinion which was based
explicitly on the opinion of Messrs. Cahill
Gordon & Reindel regarding Federal income tax matters, under then
existing Connecticut law substantially to the effect that:
The Connecticut Trust is not subject to the
Connecticut corporation
business tax or any other tax on or measured by net income imposed
by the State of Connecticut;
Interest income of the Connecticut Trust from
obligations issued by or on behalf of the State of Connecticut, any
political subdivision thereof, or any agency, instrumentality,
authority, or district of either (a "Connecticut Issuer"),
or from obligations of United States territories or possessions and
their public authorities the interest on which Federal law would
prohibit Connecticut from
taxing if received directly by a Unit holder from the issuer
thereof, is not taxable under the Connecticut income tax on the
Connecticut taxable income of
individuals, trusts and estates (the "Connecticut Income Tax"),
when received by the Connecticut Trust or when distributed by it to
such a Unit holder;
Gains and losses recognized by a Unit holder for
Federal income tax purposes upon the sale, redemption, or other
disposition of Units of the Connecticut Trust held by a Unit holder
<PAGE>
are taken into account as gains or
losses, respectively, for purposes of the Connecticut Income Tax,
except that, in the case of a unit holder holding a Unit of the
Connecticut Trust as a capital
asset, such gains and losses recognized upon the sale or exchange
of a Connecticut Bond held by the Connecticut Trust are excluded
from gains and losses taken into account for purposes of such tax
and no opinion is expressed
as to the treatment for purposes of such tax of gains and losses
recognized upon the maturity or redemption of a Connecticut Bond
held by the Connecticut Trust
or, to the extent attributable to Connecticut Bonds, of gains and
losses recognized upon the redemption, sale, or other disposition
by a Unit holder of a Unit of the Connecticut Trust held by him;
The portion of any interest or capital gain of the
Connecticut Trust that is allocable to a Unit holder that is
subject to the Connecticut corporation
business tax is includible in the gross income of such Unit holder
for purposes of such tax; and
An interest in a Unit of the Connecticut Trust that
is owned by or attributable to a Connecticut resident at the time
of his death is includible in his
gross estate for purposes of the Connecticut succession tax and the
Connecticut estate tax.
The Connecticut Income Tax was enacted in August
1991. Generally, under this tax as enacted, a Unit holder
recognizes gain or loss upon
the maturity, redemption, sale, or other disposition by the
Connecticut Trust of
an obligation held by it, or upon the redemption, sale, or other
disposition of a Unit of the Connecticut Trust held by the Unit
holder, to the same extent that
gain or loss is recognized by the Unit holder thereupon for Federal
income tax purposes. However, on June 19, 1992, Connecticut
legislation was adopted that provides that gains and losses from
the sale or exchange of Connecticut Bonds held as capital assets
will not be taken into account for purposes of the
Connecticut Income Tax for taxable years starting on or after
January 1, 1992. It is not clear whether this provision would
apply to gain or loss recognized by
a Unit holder upon the maturity or redemption of a Connecticut Bond
held by the Connecticut Trust or, to the extent attributable to
Connecticut Bonds held by the Connecticut Trust, to gain or loss
recognized by a Unit holder upon the redemption, sale, or other
disposition of a Unit of the Connecticut Trust held by the Unit
holder. Unit holders are urged to consult their own tax advisers
in this regard.
By legislation adopted May 19, 1993, as amended by
legislation adopted June 25, 1993, Connecticut enacted the net
<PAGE>
Connecticut minimum tax, retroactive to taxable years beginning on
or after January 1, 1993, which is
applicable to individuals, trusts, and estates that are subject to
the Federal alternative minimum tax. Income of the Connecticut
Trust that is subject to the Federal alternative minimum tax in the
case of such Unit holders may also be subject to the net
Connecticut minimum tax.
Florida Trust
On the Date of Deposit for each Florida Trust,
Messrs. Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A.,
special Florida counsel on Florida tax matters, rendered an
opinion, under then existing law substantially
to the effect that:
The Florida Trust will not be subject to the
Florida income tax imposed by Chapter 220 so long as the Florida
Trust transacts no business in
Florida or has no income subject to federal income taxation. In
addition, political subdivisions of Florida do not impose any
income taxes.
Non-Corporate Unit holders will not be subject to
any Florida income taxation on income realized by the Florida
Trust. Corporate Unit holders with commercial domiciles in Florida
will be subject to Florida income taxation on income realized by
the Trust. Other corporate Unit holders will be subject to Florida
income taxation on income realized by the Florida Trust only to the
extent that the income realized is other than "non-business income"
as defined by Chapter 220.
Florida Trust Units will be subject to Florida
estate tax if owned by Florida residents and may be subject to
Florida estate tax if owned by other
decedents at death. However, the Florida estate tax is limited to
the amount of the credit allowable under the applicable Federal
Revenue Act (currently Section 2011 [and in some cases Section
2102] of the Internal Revenue Code of 1986,
as amended) for death taxes actually paid to the several states.
Neither the Bonds nor the Units will be subject to
the Florida ad valorem property tax or the Florida sales or use
tax.
The Florida Trust will not be subject to Florida
intangible personal property tax. In addition, Units of the
Florida Trust will not be subject to Florida intangible personal
property tax.
The issuance and sale of the Units by the Florida
Trust will not subject either the Florida Trust or the Unit holders
<PAGE>
to the Florida documentary stamp tax.
The transfer of Units by a Unit holder will not be
subject to the Florida documentary stamp tax.
In the event Bonds issued by the government of
Puerto Rico, the government of Guam, or the government of the
United States Virgin Islands are included in the Florida Trust, the
opinions expressed above will be unchanged.
For the purposes of the foregoing opinion, the
following terms have the following meanings:
(a) "Non-Corporate Unit holder" -- a Unit holder
of the Florida Trust who is an individual not subject to the
Florida state income tax on corporations under Chapter 220, Florida
Statutes (1989 and Supp. 1990) as amended by Chapter 91-112, Laws
of Florida ("Chapter 220").
(b) "Corporate Unit holder" -- a Unit holder of
the Florida Trust that is a corporation subject to the Florida
state income tax on corporations under Chapter 220.
Maryland Trust
Messrs. Venable, Baetjer and Howard acted as
special Maryland counsel to Maryland Trust 75 and all prior
Maryland Trusts. Messrs. Weinberg & Green acted as special
Maryland counsel to Maryland Trust 76 and all
subsequent Maryland Trusts. On the Date of Deposit for each
Maryland Trust, the respective counsel to the Trusts rendered an
opinion for Maryland State and local income tax purposes and under
then existing law, substantially to the effect
that:
The Maryland Trust will not be treated as an
association taxable as a corporation, and the income of the
Maryland Trust will be treated as the income of the Holders. The
Maryland Trust is not a "financial institution"
subject to the Maryland Franchise Tax measured by net earnings.
The Maryland Trust is not subject to Maryland property taxes
imposed on the intangible personal property of certain
corporations.
Except as described below in the case of interest
paid on private activity bonds constituting a tax preference for
federal income tax purposes, a Holder will not be required to
include such Holder's pro-rata share of the
earnings of, or distributions from, the Maryland Trust in such
Holder's Maryland taxable income to the extent that such earnings
or distributions represent interest excludable from gross income
for federal income tax purposes
<PAGE>
received by the Maryland Trust on obligations of the State of
Maryland, the Government of Puerto Rico, or the Government of Guam
and their respective political subdivisions and authorities.
Interest on Debt Obligations is subject to
the Maryland Franchise Tax imposed on "financial institutions" and
measured by net earnings.
In the case of taxpayers who are individuals,
Maryland presently
imposes an income tax on items of tax preference with reference to
such items as defined in the Internal Revenue Code, as amended, for
purposes of calculating the federal alternative minimum tax.
Interest paid on certain private
activity bonds is a preference item for purposes of calculating the
federal alternative minimum tax. Accordingly, if the Maryland
Trust holds such bonds, 50% of the interest on such bonds in excess
of a threshold amount is taxable by Maryland.
A Holder will recognize taxable gain or loss,
except in the case of an individual Holder who is not a Maryland
resident, when the Holder disposes of all or part of such Holder's
pro-rata portion of the Debt Obligations in the
Maryland Trust. A Holder will be considered to have disposed of
all or part of such Holder's pro-rata portion of each Debt
Obligation when the Holder sells or redeems all or some of such
Holder's Units. A Holder will also be
considered to have disposed of all or part of such Holder's
pro-rata portion of a Debt Obligation when all or part of the Debt
Obligation is disposed of by the Maryland Trust or is redeemed or
paid at maturity. Gain included in the gross
income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the
extent that the gain is derived from the disposition of Debt
Obligations issued by the State of Maryland and its political
subdivisions. Profits realized on the sale or exchange of Debt
Obligations are subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to
Maryland inheritance and estate tax only if held by Maryland
residents.
Neither the Debt Obligations nor the Units will be
subject to Maryland personal property tax.
The sales of Units in Maryland or the holding of
Units in Maryland will not be subject to Maryland Sales or Use Tax.
Massachusetts Trust
On the Date of Deposit for each Massachusetts
Trust, Messrs. Palmer and Dodge, special Massachusetts counsel on
<PAGE>
Massachusetts tax matters, rendered an opinion, which is based
explicitly on the opinion of Messrs. Cahill
Gordon & Reindel regarding Federal income tax matters, under then
existing Massachusetts law substantially to the effect that:
Tax-exempt interest for Federal income tax purposes
received by or through the Massachusetts Trust, or by or through a
Previous Trust in which the Massachusetts Trust owns an interest,
on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, by the government of Puerto Rico
or by its authority or by the
government of Guam or by its authority, will not result in a
Massachusetts income tax liability for the Massachusetts Trust or
for Unit holders who are subject to Massachusetts income taxation
under Massachusetts General Laws, Chapter 62.
Capital gain and capital loss realized by the
Massachusetts Trust and included in the Federal gross income of
Unit holders who are subject to
Massachusetts income taxation under General Laws, Chapter 62 will
be included as capital gains and losses in the Unit holder's
Massachusetts gross income, except where capital gain is
specifically exempted from income taxation under
the Massachusetts statute authorizing issuance of the obligations
held by the Massachusetts Trust or held by the Previous Trusts in
which the Massachusetts Trust owns an interest, and will not result
in a Massachusetts income tax liability for the Massachusetts
Trust.
Gains and losses realized on sale or redemption of
Units by Unit holders who are subject to Massachusetts income
taxation under Massachusetts General Laws, Chapter 62 will be
includible in their Massachusetts gross income.
Minnesota Trust
On the Date of Deposit for each Minnesota Trust,
Messrs. Dorsey & Whitney, a partnership including professional
corporations, special Minnesota counsel on Minnesota tax matters,
rendered an opinion under then existing law substantially to the
effect that:
The Minnesota Trust is not an association taxable
as a corporation for purposes of Minnesota income taxation.
Minnesota taxable net income is,
with certain modifications, determined with reference to federal
taxable income. Each Unit holder of the Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota Trust
(including the ownership interest of the Minnesota Trust in
property comprising previously issued Series) for purposes
of Minnesota income taxation, and the income of the Minnesota Trust
<PAGE>
will be treated as the income of the Unit holders under Minnesota
law. Interest on
Bonds that would be excluded from Minnesota taxable net income when
paid directly to an individual, estate or trust will be excluded
from Minnesota taxable
net income of Unit holders that are individuals, estates or trusts
when received by the Minnesota Trust (or by a previously issued
Series in which the Minnesota
Trust has an ownership interest) and when distributed to such Unit
holders. Interest on Bonds that would be included in Minnesota
"alternative minimum
taxable income" when paid directly to a noncorporate taxpayer will
be included in Minnesota "alternative minimum taxable income" of
Unit holders that are individuals, estates or trusts for purposes
of the Minnesota alternative minimum tax.
Any such Unit holder that is subject to Minnesota
income taxation will realize taxable gain or loss when the
Minnesota Trust (or a previously
issued Series in which the Minnesota Trust has an ownership
interest) disposes of a Bond or an ownership interest in a
previously issued Series (whether by
sale, exchange, redemption or payment at maturity) or when the Unit
holder redeems or sells Units at a price that differs from original
cost, as adjusted for amortization of bond premium and other basis
adjustments. The total tax cost
of each Unit to a Unit holder is allocated proportionately (by
value) among each of the Bonds held in the Minnesota Trust. Tax
cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in the realization of
taxable gain by Unit holders when their Units (or underlying
Bonds) are sold or redeemed for an amount equal to or less than
their original cost. Minnesota has repealed the favorable
treatment of capital gains, but preserved limitations on the
deductibility of capital losses.
Interest income attributable to Bonds that are
"industrial development bonds" or "private activity bonds," as such
terms are defined in the Internal Revenue Code, will be taxable
under Minnesota law to a Unit holder that is a "substantial user"
of the facilities financed by the proceeds of such Bonds (or a
"related person" to such a "substantial user") to the same extent
as if such Bonds were held directly by such Unit holder.
Minnesota law does not permit a deduction for
interest on indebtedness incurred or continued by individuals,
estates and trusts to purchase or carry Units. Minnesota law also
restricts the deductibility of other expenses allocable to Units.
With limited exceptions, interest on Bonds in the
Minnesota Trust will be included in taxable income for purposes of
the Minnesota franchise tax on corporations and financial
institutions. No opinion is expressed as to other
<PAGE>
Minnesota tax effects on Unit holders that are corporations or
financial institutions.
Missouri Trust
Messrs. Bryan, Cave, McPheeters & McRoberts acted
as special Missouri counsel to Missouri Trust 75 and all prior
Missouri Trusts. Messrs.
Blackwell Sanders Matheny Weary & Lombardi acted as special
Missouri counsel to Missouri Trust 76 and all subsequent Missouri
Trusts. On the Date of Deposit for each Missouri Trust, the
respective counsel to the Trusts rendered
an opinion under then existing law substantially to the effect
that:
For Missouri income tax purposes under Chapters 143
of the Missouri Revised Statutes, the Missouri Trust will be
treated as having the same
organizational characteristics as it is accorded for Federal Income
Tax purposes. In reliance upon the opinion of Cahill Gordon &
Reindel as described above, we
are therefore of the opinion that the Missouri Trust is not an
association taxable as a corporation under Missouri law, that each
Unit holder will be treated as the
owner of a proportionate, undivided interest in the Missouri Trust,
and the income of the Missouri Trust will be treated as the income
of such Unit holders.
Under Missouri law, interest income received by the
Missouri Trust from (i) obligations of the State of Missouri, its
political subdivisions and
authorities, or (ii) bonds issued by the Government of Puerto Rico,
or by its authority, and which is excluded from Federal gross
income by Federal law or on which Missouri is prohibited by Federal
law from imposing an income tax, will be excluded from the Missouri
taxable income of the Unit holders to the
extent that the interest is exempt from income tax under Missouri
law when received by the Missouri Trust.
Gains and losses from the Missouri Trust treated
for Federal Income Tax purposes as the gains and losses of the Unit
holders, to the extent included in Federal gross income, will be
included in the Missouri taxable income of Unit holders who are
individuals, except to the extent that (i) such
Unit holders are non-residents of Missouri and (ii) such gains and
losses of such non-resident Unit holders are derived from sources
wholly without Missouri.
Such gains or losses, to the extent included in determining the
Federal taxable income of a corporate Unit holder after Missouri
adjustments, are allocated or apportioned to Missouri in order to
determine Missouri taxable income.
Nebraska Taxes
In the opinion of Kutak,Rock, Omaha, Nebraska,
special counsel on Nebraska's tax matters, with respect to the
Nebraska Trust, under existing law appicable to individuals,
corporations, estates and trusts who are Nebraska residents:
1. Under Nebraska income tax law, each Unitholder
of the Nebraska Trust will be treated as the owner of a pro rata
portion of the
Nebraska Trust and income of the Nebraska Trust will be treated as
income of the respective Unitholders. Unterest on Securities in the
Nebraska Trust that is exempt from personal and corporate income
tax under the income tax law of the State of Nebraska when received
by such Nebraska Trust will retain its tax-exempt status when
distributed to the Unitholders.
2. Each Unitholder of the Nebraska Trust will have
a taxable event when the Nebraska Trust disposes of a security
(whether by sale, exchange, redemption or payment at maturity) or
when the Unitholder redeems or sells its certificates. For purposes
of determining gain or loss, the total tax cost of each Unit to a
Unitholder is allocated among the underlying
Securities(inaccordance with the proportion of
the Nebraska Trust's assets comprised by such Security), in order
to determine the Unitholder's per Unit tax cost for each Security.
3. Title 48 U.S.C. Section 745 provides that bonds
issued by the Government of Puerto Rico, or by its authority, shall
be exempt from taxation by any state or by any county, municipality
or other municipal subdivision of any state. Accordingly, the
interest on anysuch obligations held by the Nebraska Trust would be
exempt from the Nebraska corporate and individual income taxes
appicable to resident corporations, resident trusts, residents
estates and resident individuals.
4. Upon the death of a Unitholder, the value of the
Unit will be included in the estate of such deceased Unitholder and
will be subject ot Nebraska inheritance tax.
New Jersey Trust
On the Date of Deposit for each New Jersey Trust,
Messrs. Shanley & Fisher, P.C., special New Jersey counsel on New
Jersey tax matters, rendered an opinion under then existing law
substantially to the effect that:
The proposed activities of the New Jersey Trust
will not cause it to be subject to the New Jersey Corporation
Business Tax Act.
The income of the New Jersey Trust will be treated
<PAGE>
as the income of individuals, estates and trusts who are the
Holders of Units of the New Jersey
Trust for purposes of the New Jersey Gross Income Tax Act, and
interest which is exempt from tax under the New Jersey Gross Income
Tax Act when received
by the New Jersey Trust will retain its status as tax-exempt in the
hands of such Unit Holders. Gains arising from the sale or
redemption by a Holder of his
Units or from the sale, exchange, redemption or payment at maturity
of a Bond by the New Jersey Trust are exempt from taxation under
the New Jersey Gross Income Tax Act (P.L. 1976 C. 47), as enacted
and construed on the date hereof, to the extent such gains are
attributable to Bonds, the interest on which is exempt from tax
under the New Jersey Gross Income Tax Act. Any loss realized on
such disposition may not be utilized to offset gains realized by
such Unit Holder on the disposition of assets the gain on which is
subject to the New Jersey Gross Income Tax Act.
Units of the New Jersey Trust may be subject, in
the estates of New Jersey residents, to taxation under the Transfer
Inheritance Tax Law of the State of New Jersey.
North Carolina Trust
In the opinion of Messrs. Petree Stockton, special
North Carolina counsel on North Carolina tax matters, with respect
to the North Carolina Trust,
under then existing law applicable to persons who are North
Carolina residents:
The State of North Carolina imposes a tax
upon the taxable income of individuals, corporations, estates, and
trusts.
Nonresident individuals are generally taxed only on
income from North Carolina sources. Corporations doing business
within and throughout North Carolina are entitled to allocate and
apportion their income if they have income from business activity
which is taxable in another state. The mere ownership of Units
will not subject a nonresident Unit holder to the tax jurisdiction
of North Carolina.
Counsel has been advised that for Federal
income tax purposes the North Carolina Trust will be a grantor
trust and not an association taxable as a corporation. Upon this
assumption, counsel is of the opinion that the North Carolina Trust
will be treated as a grantor trust for North Carolina income tax
purposes and not as an association taxable as a corporation. Each
participant in the North Carolina Trust must report his share of
the taxable income of the North Carolina Trust.
The calculation of North Carolina taxable
income of an individual, corporation, estate or trust begins with
<PAGE>
Federal taxable income. Certain modifications are specified, but
no such modification requires the addition of interest on the
obligations of the State of North Carolina, its political
subdivisions, or nonprofit educational institutions organized or
chartered under the laws of North Carolina.
As a general rule, gain (or loss) from the
sale of obligations held by the North Carolina Trust (whether as a
result of the sale of such obligations by the North Carolina Trust
or as a result of the sale of a unit by a Unit holder) is
includible (or deductible) in the calculation of the Unit holder's
North Carolina taxable income. Under the language of certain
enabling legislation such as the North Carolina Hospital
Authorities Act, the North Carolina Health Care Facilities Finance
Act, the North Carolina Housing Finance Agency Act, the act
establishing the North Carolina State Ports Authority,
the North Carolina Joint Municipal Electric Power and Energy Act,
the act authorizing the organization of business development
corporations, the North Carolina Higher Education Facilities
Finance Act, the North Carolina Agricultural Finance Act, and the
act establishing the North Carolina Solid Waste Management Loan
Program, profits made on the sale of obligations issued by
authorities created thereunder are made expressly exempt from
North Carolina income taxation. The exemption of such profits
from North Carolina income taxation does not require a
disallowance of any loss incurred on the sale of such obligations
in the calculation of North Carolina income taxes.
For Federal income tax purposes, interest on
North Carolina obligations that would otherwise be exempt from
taxation may in certain circumstances be taxable to the recipient.
North Carolina law provides that the interest on North Carolina
obligations shall maintain its exemption from North Carolina income
taxation notwithstanding that such interest may be subject to
federal income taxation.
North Carolina imposes a tax on persons for
the privilege of ownership of items of intangible personal
property. The tax is
generally imposed at the rate of $.25 per $100 of the value of each
item of intangible personal property at December 31 of each year.
Bonds and other evidences of indebtedness of the State of North
Carolina, political subdivisions of the State, agencies of such
governmental units, or nonprofit educational institutions organized
or chartered under the laws of North Carolina are exempt from the
intangible personal property tax.
This exemption does not extend to units of
ownership of an
investment trust that owns obligations which would be exempt from
the intangible personal property tax if owned directly by the Unit
holders of the investment trust. However, the North Carolina
Department of Revenue by regulation has announced that the
<PAGE>
taxable value of units of ownership in an investment trust may be
reduced by a percentage equal to the ratio of direct obligations of
the United States Government and direct obligations of the State of
North Carolina and its political subdivisions held in the trust on
December 31. Thus, if the assets then held by the North Carolina
Trust consist entirely of direct obligations of the United States
Government and direct obligations of the State of North Carolina
and its political subdivisions, the entire value of the North
Carolina
Trust Units will not be subject to the intangible
personal property tax under this regulation.
North Carolina imposes a tax on transfers
which occur by reason of death or by gift.
Transfers of obligations of North
Carolina, its political subdivisions, agencies of such governmental
units, or nonprofit educational institutions organized or chartered
under the laws of North Carolina are not exempt from the North
Carolina inheritance and gift taxes.
48 U.S.C. Sec.745 provides that bonds issued
by
the Government of Puerto Rico, or by its authority, shall be exempt
from taxation by any State or by any county, municipality, or other
municipal subdivision of any State. Accordingly, interest on any
such obligations held by the North Carolina Trust would be exempt
from the North Carolina corporate and individual income taxes. The
North Carolina Department of Revenue takes the position that gains
from the sale or other disposition of such obligations are subject
to the North Carolina corporate and individual income taxes. Such
obligations would be treated as obligations of the United States
for purposes of the intangible personal property tax and the
application of such tax to units of ownership in an investment
trust.
Ohio Trust
On the Date of Deposit for each Ohio Trust, Squire,
Sanders & Dempsey, special Ohio counsel on Ohio tax matters,
rendered an opinion under then existing law substantially to the
effect that:
The Ohio Trust is not taxable as a corporation or
otherwise for purposes of the Ohio personal income tax, Ohio school
district income taxes, the Ohio corporation franchise tax, or the
Ohio dealers in intangibles tax.
Income of the Ohio Trust will be treated as the
income of the Unit holders for purposes of the Ohio personal income
tax, Ohio school district
income taxes, Ohio municipal income taxes and the Ohio corporation
franchise tax in proportion to the respective interest therein of
each Unit holder.
<PAGE>
Interest on Ohio Obligations held by the Ohio Trust
is exempt from the Ohio personal income tax and Ohio school
district income taxes, and is excluded from the net income base of
the Ohio corporation franchise tax when
distributed or deemed distributed to Unit holders.
Gains and losses realized on the sale, exchange or
other disposition by the Ohio Trust of Ohio Obligations are
excluded in determining adjusted
gross and taxable income for purposes of the Ohio personal income
tax and Ohio school district income taxes, and are excluded from
the net income base of the
Ohio corporation franchise tax when distributed or deemed
distributed to Unit holders.
Except as stated in the next sentence, Ohio
municipalities may not impose income taxes on interest on or profit
made on the sale of intangible
property, including Ohio Obligations. The municipalities of Indian
Hill, Wickliffe and Wyoming are authorized by state law to, and do,
impose a tax on
certain intangible income; however, it is not clear that such
municipalities may tax interest on or profit made on the sale,
exchange or other disposition of Ohio
Obligations. In addition, specific Ohio statutes authorizing the
issuance of certain Ohio Obligations generally provide that the
interest on and, in some
cases, gain or profit from the sale or other disposition of such
Ohio Obligations are exempt from all taxation in the State.
Interest on and gain or profit from the
sale or other disposition of obligations issued pursuant to such
statutes are exempt from all Ohio municipal income taxes.
Pennsylvania Trust
On the Date of Deposit for each Pennsylvania Trust,
Messrs. Drinker Biddle & Reath, special Pennsylvania counsel on
Pennsylvania tax matters, rendered an opinion under then existing
law substantially to the effect that:
Units evidencing fractional undivided interests in
the Pennsylvania Trust are not subject to any of the personal
property taxes presently in effect in
Pennsylvania to the extent that the Trust is comprised of bonds
issued by the Commonwealth of Pennsylvania, any public authority,
commission, board or other agency created by the Commonwealth of
Pennsylvania or any public authority created by any such political
subdivision ("Pennsylvania Bonds"). The taxes referred to include
the County Personal Property Tax imposed on residents of
Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended, and
the additional personal property taxes imposed on Pittsburgh
residents by the School District of Pittsburgh under the Act of
<PAGE>
June 20, 1947, P.L. 733, as amended, and by the City of Pittsburgh
under Ordinance No. 599 of December 28, 1967.
The portion, if any, representing Pennsylvania Bonds held by Units
in a Prior Trust are also not subject to such taxes. The portion,
if any, of such Units representing bonds or other obligations
issued by the Government of Guam or by its authority, bonds issued
by the Government of Puerto Rico or by its authority, and bonds
issued by the Government of the Virgin Islands or by a municipality
thereof (collectively, "Possession Bonds") is not expressly exempt
from taxation under the foregoing Pennsylvania Acts. However, such
bonds are expressly relieved from state taxation by United States
statutes. Therefore, Units in the Pennsylvania Trust are not
subject to Personal Property Tax to the
extent that the Trust is comprised of Possession Bonds.
Pennsylvania Trust Units may be subject to tax in the estate of a
resident decedent under the Pennsylvania inheritance and estate
taxes.
Income received by a Unit holder attributable to
interest realized by the Pennsylvania Trust from Pennsylvania
Bonds, Possession Bonds, and Prior
Trust Units is not taxable to individuals, estates or trusts under
the Personal Income Tax imposed by Article III of the Tax Reform
Code of 1971; to corporations under the Corporate Net Income tax
imposed by Article IV of the
Tax Reform Code of 1971; nor to individuals under the Philadelphia
School District Net Income Tax ("School District Tax") imposed on
Philadelphia resident individuals under the authority of the Act of
August 9, 1963, P.L. 640.
Income received by a Unit holder attributable to
gain on the sale or other disposition by the Pennsylvania Trust of
Pennsylvania Bonds, Possession Bonds and Prior Trust Units is not
taxable to individuals, estates or trusts under
the Personal Income Tax. Nor is such gain taxable under the
Corporate Net Income Tax or under the School District Tax, except
that gain on the sale or other disposition of Possession Bonds and
that portion of Prior Trust Units attributable to such investments
held for six months or less may be taxable under the School
District tax.
To the extent that gain on the disposition of a
Unit represents gain realized on Pennsylvania or Possession Bonds
held by the Pennsylvania Trust or held by Prior Trust Units, such
gain may be subject to the Personal Income Tax and Corporate Net
Income Tax. Such gain may also be subject to the School District
Tax, except that gain realized with respect to a Unit held for more
than six months is not subject to the school District Tax.
No opinion is expressed regarding the extent, if
any, to which Units, or interest and gain thereon, is subject to,
or included in the measure of, the special taxes imposed by the
Commonwealth of Pennsylvania on banks and
<PAGE>
other financial institutions or with respect to any privilege,
excise, franchise or other tax imposed on business entities not
discussed herein (including the Corporate Capital Stock/Foreign
Franchise Tax).
Texas Trust
The opinion of Akin, Gump, Strauss, Hauer & Feld,
special Texas counsel on Texas tax matters with respect to the
Texas Trust, given on the Date
of Deposit under then existing Texas law which is subject to change
includes the following:
(1) Neither the State nor any political
subdivision of the State
currently imposes an income tax on individuals. Therefore, no
portion of any distribution received by an individual Unitholder of
the Trust in respect of his
Units, including a distribution of the proceeds of insurance in
respect of such Units, is subject to income taxation by the State
or any political subdivision of the State;
(2) Except in the case of certain transportation
businesses, savings and loan associations and insurance companies,
no Unit of the Trust is taxable
under any property tax levied in the State;
(3) The "inheritance tax" of the State, imposed
upon certain transfers of property of a deceased resident
individual Unitholder, may be
measured in part upon the value of Units of the Trust included in
the estate of such Unitholder; and
(4) With respect to any Unitholder which is
subject to the State corporate franchise tax, Units in the Trust
held by such Unitholder, and distributions received thereon, will
be taken into account in computing the
"taxable capital" of the Unitholder allocated to the State, one of
the bases by which such franchise tax is currently measured (the
other being a corporation's "net capital earned surplus," which is,
generally, its net corporate income plus
officers and directors income).
Expenses and Charges
Initial Expenses
At no cost to the State Trust and Umbrella Series,
the Sponsor has borne all the expenses of creating and establishing
each Multistate Trust or Umbrella Series, including the cost of the
initial preparation and execution of the Trust Agreement, initial
<PAGE>
preparation and printing of the certificates for Units,
the fees of the Evaluator during the initial public offering, legal
expenses, advertising and selling expenses and other out-of-pocket
expenses. The costs of
maintaining the secondary market, such as printing, legal and
accounting, will be borne by the Sponsor except as otherwise
provided in the Trust Agreement.
Trustee's, Sponsor's and Evaluator's Fees--The
Trustee will receive for its ordinary recurring services to each
Multistate Trust or Umbrella
Series an annual fee in the amount set forth in the "Summary of
Essential Information" of Part A. For a discussion of the services
performed by the Trustee pursuant to its obligations under the
Trust Agreement, see "Rights of
Unit Holders". The Trustee will receive the benefit of any
reasonable cash balances in the Interest and Principal accounts.
The Portfolio supervision fee (the "Supervision
Fee"), which is earned for Portfolio supervisory services is based
upon the greatest face amount of Bonds in the Trust at any time
during the calendar year with respect to which the fee is being
computed. The Supervision Fee has been incurred by Portfolios
which have come into existence after August 14, 1991, beginning
with Series 345, initially, and each Series, in existence,
thereafter.
The Supervision Fee, which is not to exceed the
amount set forth in Part A--"Summary of Essential Information", may
exceed the actual costs of
providing Portfolio supervisory services for such Trust, but at no
time will the total amount the Sponsor receives for Portfolio
supervisory services rendered to
all series of Tax Exempt Securities Trust in any calendar year
exceed the aggregate cost to them of supplying such services in
such year. In addition, the Sponsor may also be reimbursed for
bookkeeping and other administrative services provided to the Trust
in amounts not exceeding their costs of providing these services.
The Evaluator determines the aggregate bid price of
the underlying securities on a daily basis at a fee in the amount
set forth under Part A,
"Summary of Essential Information," for each evaluation of the
Bonds in a State Trust and Umbrella Series. For a discussion of
the services performed by the Evaluator pursuant to its obligations
under the Trust Agreement, see "Evaluator-
- -Responsibility" and "Public Offering--Offering Price".
Any of such fees may be increased without approval
of the Unit holders by amounts not exceeding proportionate
increases in consumer prices for
services as measured by the United States Department of Labor's
Consumer Price Index entitled "All Services Less Rent" or, if such
<PAGE>
Index is no longer published, in a similar index to be determined
by the Trustee and the Sponsor.
In addition, at the time of any such increase, the Trustee shall
also be entitled to charge thereafter an additional fee at a rate
or amount to be determined by the
Trustee and the Sponsor based upon the face amount of Deposited
Units in a Trust, for the Trustee's services in maintaining such
Deposited Units. The approval of Unit holders shall not be
required for charging of such additional fee.
Other Charges--The following additional charges are
or may be incurred by a State Trust and Umbrella Series: all
expenses of the Trustee (including fees and expenses of counsel and
auditors) incurred in connection with its activities under the
Trust Agreement, including reports and
communications to Unit holders; expenses and costs of any action
undertaken by the Trustee to protect the Multistate Trust or
Umbrella Series and the rights and
interests of the Unit holders; fees of the Trustee for any
extraordinary services performed under the Trust Agreement;
indemnification of the Trustee for any
loss or liability accruing to it without gross negligence, bad
faith or willful misconduct on its part, arising out of or in
connection with its acceptance or
administration of a State Trust and Umbrella Series; in the case of
certain trusts, to the extent lawful, expenses (including legal,
accounting and printing expenses)
of maintaining registration or qualification of the Units and/or a
State Trust and Umbrella Series under Federal or state securities
laws subsequent to initial registration so long as the Sponsor are
maintaining a market for the Units; and all taxes and other
governmental charges imposed upon the Bonds or any part of a State
Trust and Umbrella Series (no such taxes or charges are being
levied or made or, to the knowledge of the Sponsor, contemplated).
The above expenses, including the Trustee's fee, when paid by or
owing to the Trustee, are secured by a lien on such State Trust and
Umbrella Series. In addition, the Trustee is empowered to sell
Bonds in order to make funds available to pay all expenses.
PUBLIC OFFERING
Offering Price
The Public Offering Price of the Units of the
respective State Trust and Umbrella Seriess is determined by adding
to the Evaluator's determination
of the aggregate bid price of the Bonds per Unit a sales charge
equal to the percentage of the Public Offering Price indicated for
the Trust in Part A, "Summary of Essential Information". The
aggregate bid price of the underlying Bonds may be expected to be
less than the aggregate offering price of the
Bonds. (See "Method of Evaluation".) A proportionate share of
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accrued and undistributed interest on the Bonds in a State Trust
and Umbrella Series at the
date of delivery of the Units of such State Trust and Umbrella
Series to the purchaser is also added to the Public Offering Price.
Units of a State Trust and Umbrella Series are
available to employees of certain of the Sponsor, pursuant to
employee benefit plans, at a
Public Offering Price equal to the Evaluator's determination of the
aggregate bid price of Bonds of a State Trust and Umbrella Series
per Unit plus a sales charge
of 1.25% of the Public Offering Price. Sales through such plans to
employees of the Sponsor require less selling effort and selling
expenses than sales to the general public.
Method of Evaluation
The aggregate bid price of the Bonds (which is used
to calculate the price at which the Sponsor repurchase and sell
Units in the secondary market
and the Redemption Price at which Units may be redeemed) will be
determined by the Evaluator (1) on the basis of the current bid
prices for the Bonds, (2)
if bid prices are not available for any Bonds, on the basis of
current bid prices of comparable securities, (3) by appraisal, or
(4) by any combination of the
above. Such determinations will be made each business day as of
the Evaluation Time set forth in the "Summary of Essential
Information" of Part A, effective
for all sales made subsequent to the last preceding determination.
The term "business day," as used herein, shall exclude Saturdays,
Sundays and any day on which the New York Stock Exchange is closed.
The difference between the bid and offering prices of the Bonds may
be expected to average approximately 1.5 % of principal amount.
In the case of actively traded securities, the
difference may be as little as 0.5 of 1%, and in the case of
inactively traded securities, such difference will usually not
exceed 3%. The price at which Units
may be repurchased by the Sponsor in the secondary market could be
less than the price paid by the Unit holder. For information
relating to the calculation of the Redemption Price per Unit, which
is also based on the aggregate bid price of the underlying Bonds
and which may be expected to be less than the Public Offering Price
per unit, see "Rights of Unit Holders--Redemption of Units".
Distribution of Units
Units acquired in the secondary market (see "Public
Offering-- Market for Units") may be offered by this Prospectus at
the Public Offering Price determined in the manner provided above
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(see "Public Offering--Offering Price"). The Sponsor will allow a
discount on Units sold to members of the
National Association of Securities Dealers, Inc. Such discount is
subject to change from time to time.
Sales will be made only with respect to whole
Units, and the Sponsor reserve the right to reject, in whole or in
part, any order for the purchase of Units. A purchaser does not
become a Unit holder (Certificate
holder) or become entitled to exercise the rights of a Unit holder
(including the right to redeem his Units) until he has paid for his
Units. Generally, such
payment must be made within five business days after an order for
the purchase of Units has been placed. The price paid by a Unit
holder is the Public Offering
Price in effect at the time his order is received, plus accrued
interest (see "Public Offering--Method of Evaluation"). This price
may be different from the Public Offering Price in effect on any
other day, including the day on which the Unit holder pays for the
Units.
Market for Units
Although not obligated to do so, the Sponsor
presently intend to maintain a market for the Units of the
respective State Trust and Umbrella
Seriess and to continuously offer to purchase such Units at prices
based upon the aggregate bid price of the underlying Bonds which
may be less than the price
paid by the Unit holder. For information relating to the method
and frequency of the Evaluator's determination of the aggregate bid
price of the underlying
Bonds, see "Public Offering--Method of Evaluation". The costs of
maintaining the secondary market, such as printing, legal and
accounting, will be borne by
the Sponsor except as otherwise provided in the Trust Agreement.
The Sponsor may cease to maintain such a market at any time and
from time to time without notice if the supply of Units of any of
the respective State Trusts of the Multistate Trust or Umbrella
Series exceeds demand, or for any other reason. In this event the
Sponsor may nonetheless purchase Units, as a service to Unit
holders, at prices based on the current Redemption Price of those
Units. In the event that a market is not maintained for the Units
of any of the State Trust and
Umbrella Seriess, a Unit holder of such State Trust and Umbrella
Series desiring to dispose of his Units may be able to do so only
by tendering such Units to the Trustee for redemption at the
Redemption Price, which is also based
upon the aggregate bid price of the underlying Bonds. (See "Rights
of Unit Holders --Redemption of Units".)
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Exchange Option
Unit holders may elect to exchange any or all of
their Units of this series for units of one or more of any series
of Tax Exempt Securities Trust (the
"Exchange Trust") available for sale in the state in which the Unit
holder resides at a Public Offering Price for the units of the
Exchange Trust to be acquired based on a fixed sales charge of $25
per unit. The Sponsor reserve the right to modify, suspend or
terminate this plan at any time without further notice to Unit
holders. Therefore, there is no assurance that a market for units
will in fact exist on any given date on which a Unit holder wishes
to sell his Units of this series and thus there is no assurance
that the Exchange Option will be available to a Unit holder.
Exchanges will be effected in whole units only. Any excess
proceeds from Unit holders' Units being surrendered will be
returned and Unit holders will not be permitted to advance any new
money in order to complete an exchange.
An exchange of Units pursuant to the Exchange
Option for units of an Exchange Trust will generally constitute a
"taxable event" under the Code, i.e., a Holder will recognize a
gain or loss at the time of exchange. However, an exchange of
Units of this Trust for units of any other similar series of the
Tax Exempt Securities Trust which are grantor trusts for U.S.
federal income tax purposes will not constitute a taxable event to
the extent that the underlying securities in each trust do not
differ materially either in kind or in extent. Unit holders are
urged to consult their own tax advisors as to the tax consequences
to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the
Exchange Option at the bid prices of the underlying securities in
the particular portfolio involved per unit plus a fixed charge of
$25 per unit. As an example, assume
that a Unit holder, who has three units of a trust with a current
price of $1,020 per unit based on the bid prices of the underlying
securities, desires to exchange his Units for units of a series of
an Exchange Trust with a current price of $880 per unit based on
the bid prices of the underlying securities. In this example, the
proceeds from the Unit holder's units will aggregate $3,060. Since
only whole units of an Exchange Trust may be purchased under the
Exchange Option, the Unit holder would be able to acquire three
units in the Exchange Trust for a total cost of $2,715 ($2,640 for
the units and $75 for the sales charge). The remaining $345 would
be returned to the Unit holder in cash.
Reinvestment Programs
Distributions of interest and principal, if any,
are made to Unit holders monthly. The Unit holder will have the
option of either receiving his monthly income check from the
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Trustee or participating in one of the
reinvestment programs offered by certain of the Sponsor provided
such unit holder meets the minimum qualifications of the
reinvestment program and such
program lawfully qualifies for sale in the jurisdiction in which
the Unit holder resides. Upon enrollment in a reinvestment
program, the Trustee will direct
monthly interest distributions and principal distributions, if any,
to the reinvestment program selected by the Unit holder. Since the
Sponsor has arranged for different reinvestment alternatives, Unit
holders should contact the
Sponsor for more complete information, including charges and
expenses. The appropriate prospectus will be sent to the Unit
holder. The Unit holder should
read the prospectus for a reinvestment program carefully before
deciding to participate. Participation in the reinvestment program
will apply to all Units of a State Trust and Umbrella Series owned
by a Unit holder and may be terminated at any time by the Unit
holder, or the program may be modified or
terminated by the Trustee or the program's Sponsor.
Sponsor's Profits
For their services the Sponsor receives a gross
commission equal to a percentage of the Public Offering Price of
the Units. In maintaining a
market for the Units of the respective State Trust and Umbrella
Seriess (see "Public Offering--Market for Units"), the Sponsor also
realizes profits or sustain
losses in the amount of any difference between the price at which
they buy such Units and the price at which they resell or redeem
such Units (see "Public Offering--Offering Price").
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the respective State Trust
and Umbrella Series is evidenced by registered certificates
executed by the Trustee and the Sponsor. A Certificate is
transferable by presentation and surrender of the
Certificate to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer. Certificates may be
issued in denominations of one Unit or any multiple thereof. A
Unit holder may be required to pay $2.00 per certificate reissued
or transferred, and to pay any
governmental charge that may be imposed in connection with each
such transfer or interchange. For new certificates issued to
replace destroyed, stolen or lost certificates, the Unit holder
must furnish indemnity satisfactory to the Trustee
and must pay such expenses as the Trustee may incur. Mutilated
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certificates must be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each State Trust
and Umbrella Series will be distributed on each Monthly
Distribution Date on a pro rata basis
to Unit holders in such State Trust and Umbrella Series of record
as of the preceding Record Date. All distributions will be net of
applicable expenses and funds required for the redemption of Units
and, if applicable, reimbursements to the Trustee for interest
payments advanced to Unit holders on previous Monthly Distribution
Dates. (See Part A, "Summary of Essential Information" and "Tax
Exempt Securities Trust--Expenses and Charges" and "Rights of Unit
Holders--Redemption of Units" in this Section.)
The Trustee will credit to the Interest Account of
each respective State Trust and Umbrella Series all interest
received by such State Trust and Umbrella Series, including that
part of the proceeds of any disposition of Bonds
of such State Trust and Umbrella Series which represents accrued
interest. Other receipts will be credited to the Principal Account
of the affected State
Trust and Umbrella Series. The pro rata share of the Interest
Account and the
pro rata share of cash in the Principal Account represented by each
Unit of a Trust will be computed by the Trustee each month as of
the Record Date. (See
Part A, "Summary of Essential Information".) Proceeds received
from the disposition of any of the Bonds subsequent to a Record
Date and prior to the
next succeeding Distribution Date will be held in the Principal
Account and will not be distributed until the following
Distribution Date. The distribution to Unit
holders as of each Record Date will be made on the following
Distribution Date or shortly thereafter, and shall consist of an
amount substantially equal to one-
twelfth of such holders' pro rata share of the estimated annual
income to the Interest Account after deducting estimated expenses
(the "Monthly Interest
Distribution") plus such holders' pro rata share of the cash
balance in the Principal Account computed as of the close of
business on the preceding Record
Date. Persons who purchase Units between a Record Date and a
Distribution Date will receive their first distribution on the
second Distribution Date following their purchase of Units. No
distribution need be made from the Principal Account if the balance
therein is less than an amount sufficient to distribute $1.00 per
Unit. The Monthly Interest Distribution per Unit as of the date
shown in the "Summary of Essential Information" in Part A for the
particular State Trust and Umbrella Series will change as the
income and expenses of the respective State Trust and Umbrella
<PAGE>
Series change and as Bonds are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of
each State Trust and Umbrella Series is paid on a semi-annual
basis. Because Bond interest is
not received by the State Trust and Umbrella Seriess at a constant
rate throughout the year, any Monthly Interest Distribution may be
more or less than
the amount credit to the Interest Account as of the Record Date.
In order to eliminate fluctuations in Monthly Interest
Distributions resulting from such
variances, the Trustee is required by the Trust Agreement to
advance such amounts as may be necessary to provide Monthly
Interest Distributions of
approximately equal amounts. The Trustee will be reimbursed,
without interest, for any such advances from funds available from
the Interest Account on the
next ensuing Record Date or Record Dates, as the case may be. If
all or a portion of the Bonds for which advances have been made
subsequently fail to pay interest when due, the Trustee may recoup
advances made by it in anticipation of receipt of interest payments
on such Bonds by reducing the amount distributed per Unit in one or
more Monthly Interest Distributions. If
units are redeemed subsequent to such advances by the Trustee, but
prior to receipt by the Trustee of actual notice of such failure to
pay interest, the amount
of which was so advanced by the Trustee, each remaining Unit holder
will be subject to a greater pro rate reduction in his Monthly
Interest Distribution than
would have occurred absent such redemptions. Funds which are
available for future distributions, payments of expenses and
redemptions are in accounts
which are non-interest bearing to Unit holders and are available
for use by United States Trust Company of New York, pursuant to
normal banking procedures. The Trustee is entitled to the benefit
of holding any reasonable cash
balances in the Interest and Principal Accounts. The Trustee
anticipates that the
average cash balance in the Interest Account will be approximately
2% in excess of the amounts anticipated to be required for Monthly
Distributions to Unit
holders. In addition, because of the varying interest payment
dates of the Bonds comprising each State Trust and Umbrella Series
portfolio, accrued interest at
any point in time will be greater than the amount of interest
actually received by a particular State Trust and Umbrella Series
and distributed to Unit holders.
The excess accrued but undistributed interest amount is known as
the accrued interest carryover. If a Unit holder sells or redeems
all or a portion of his Units, a portion of his sale proceeds will
be allocable to his proportionate share
of the accrued interest carryover. Similarly, if a Unit holder
redeems all or a portion of his Units, the Redemption Price per
<PAGE>
Unit which he is entitled to receive from the Trustee will include
his accrued interest carryover on the Bonds. It should be noted
that any Series formed ater Series 384 (including Series 384) that
accrued interest carryover no longer is implemented. (See
"Rights of Unit Holders--Redemption of Units--Computation of
Redemption Price Per Unit.")
As of the first day of each month the Trustee will
deduct from the Interest Account of each State Trust and Umbrella
Series and, to the extent
funds are not sufficient therein, from the Principal Account of
such State Trust and Umbrella Series, amounts necessary to pay the
expenses of such State Trust
and Umbrella Series. (See "Tax Exempt Securities Trust--Expenses
and Charges".) The Trustee also may withdraw from said accounts
such amounts, if any, as it deems necessary to establish a reserve
for any governmental charges
payable out of a State Trust and Umbrella Series. Amounts so
withdrawn shall not be considered a part of a State Trust and
Umbrella Series's assets until such
time as the Trustee shall return all or any part of such amounts to
the appropriate account. In addition, the Trustee may withdraw
from the Interest
Account and the Principal Account such amounts as may be necessary
to cover redemption of Units by the Trustee. (See "Rights of Unit
Holders--Redemption of Units".) The Trustee is also entitled to
withdraw from the Interest Account,
and, to the extent funds are not sufficient therein, from the
Principal Account, on one or more Record Dates as may be
appropriate, amounts sufficient to
recoup advances which the Trustee has made in anticipation of the
receipt by a Trust of interest in respect of Bonds which
subsequently fail to pay interest when due.
Reports and Records
The Trustee shall furnish Unit holders in
connection with each distribution a statement of the amount of
interest, if any, and the amount of
other receipts, if any, which are being distributed, expressed in
each case as a dollar amount per Unit. In the event that the
issuer of any of the Bonds fails to
make payment when due of any interest or principal and such failure
results in a change in the amount that would otherwise be
distributed as a monthly
distribution, the Trustee will, with the first such distribution
following such failure, set forth in an accompanying statement, the
issuer and the Bonds, the
amount of the reduction in the distribution per Unit resulting from
such failure, the percentage of the aggregate principal amount of
Bonds which such Bond represents and, to the extent then
determined, information regarding any
<PAGE>
disposition or legal action with respect to such Bond. Within a
reasonable time after the end of each calendar year, the Trustee
will furnish to each person who
at any time during the calendar year was a Unit holder of record,
a statement (1) as to the Interest Account: interest received
(including amounts representing
interest received upon any disposition of Bonds), deductions for
payment of applicable taxes and for fees and expenses of a State
Trust and Umbrella Series,
redemptions of Units and the balance remaining after such
distributions and deductions, expressed both as a total dollar
amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the
last business day of such calendar year; (2) as to the Principal
Account: the dates of disposition
of any Bonds and the net proceeds received therefrom (excluding any
portion representing interest), deductions for payments of
applicable taxes and for fees
and expenses of a State Trust and Umbrella Series, redemptions of
Units, and the balance remaining after such distributions and
deductions, expressed both as
a total dollar amount and as a dollar amount representing the pro
rata share of each Unit outstanding on the last business day of
such calendar year; (3) a list
of the Bonds held and the number of Units outstanding on the last
business day of such calendar year; (4) the Redemption Price per
Unit based upon the last
computation thereof made during such calendar year; and (5) amounts
actually distributed during such calendar year from the Interest
Account and from the
Principal Account, separately stated, expressed both as total
dollar amounts and as dollar amounts representing the pro rata
share of each Unit outstanding. The
accounts of such State Trust and Umbrella Series will be audited
not less frequently than annually by independent auditors
designated by the Sponsor, and
the report of such auditors shall be furnished by the Trustee to
Unit holders upon request.
The Trustee shall keep available for inspection by
Unit holders at all reasonable times during usual business hours,
books of record and account of its transactions as Trustee
including records of the names and addresses of Unit holders,
certificates issued or held, a current list of Bonds in the
Portfolio of a State Trust and Umbrella Series and a copy of the
Trust Agreement.
Redemption of Units
Units may be tendered to the Trustee for redemption
at its unit investment trust office at 770 Broadway, New York, New
York 10003, upon payment of any relevant tax. At the present time
<PAGE>
there are no specific taxes related to the redemption of the Units.
No redemption fee will be charged by the Sponsor or the Trustee.
Units redeemed by the Trustee will be canceled.
Certificates for Units to be redeemed must be
properly endorsed or
accompanied by a written instrument of transfer. Unit holders must
sign exactly as their name appears on the face of the certificate
with the signature guaranteed
by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain
instances the Trustee
may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or
administrator or certificates of corporate authority.
Within seven calendar days following such tender,
the Unit holder will be entitled to receive in cash an amount for
each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set
forth in the "Summary of Essential Information" in Part A on the
date of tender. (See "Redemption of Units--Computation of
Redemption Price per Unit".) The "date
of tender" is deemed to be the date on which Units are received by
the Trustee, except that as regards Units received after the close
of trading on the New York
Stock Exchange, the date of tender is the next day on which such
Exchange is open for trading, and such Units will be deemed to have
been tendered to the
Trustee on such day for redemption at the Redemption Price computed
on that day. For information relating to the purchase by the
Sponsor of Units tendered to the Trustee for redemption at prices
which may be, in certain circumstances
in excess of the Redemption Price, see "Redemption of
Units--Purchase by the Sponsor of Units Tendered for Redemption."
Accrued interest paid on redemption shall be
withdrawn from the Interest Account, or, if the balance therein is
insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn
from the Principal Account. The Trustee is empowered to sell Bonds
in order to make funds available for redemption. Such sales, if
required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold,
the size and diversity of a State Trust and Umbrella Series will be
reduced.
The Trustee reserves the right to suspend the right
of redemption and to postpone the date of payment of the Redemption
Price per Unit for any period during which the New York Stock
Exchange is closed, other than
weekend and holiday closings, or trading on that Exchange is
restricted or during which (as determined by the Securities and
<PAGE>
Exchange Commission) an emergency exists as a result of which
disposal or evaluation of the underlying
Bonds is not reasonably practicable, or for such other periods as
the Securities and Exchange Commission has by order permitted.
Computation of Redemption Price per Unit--The
Redemption Price per Unit of a State Trust and Umbrella Series is
determined by the Trustee on the basis of the bid prices of the
Bonds in such State Trust and Umbrella
Series as of the Evaluation Time on the date any such determination
is made. The Redemption Price per Unit of a State Trust and
Umbrella Series is each Unit's pro rata share, determined by the
Trustee, of: (1) the aggregate value of
the Bonds in such State Trust and Umbrella Series on the bid side
of the market (determined by the Evaluator as set forth under
"Public Offering--Method of
Evaluation"), (2) cash on hand in such State Trust and Umbrella
Series, and accrued and unpaid interest on the Bonds as of the date
of computation, less (a)
amounts representing taxes or governmental charges payable out of
such State Trust and Umbrella Series, (b) the accrued expenses of
such State Trust and Umbrella Series, and (c) cash held for
distribution to Unit holders of such State Trust and Umbrella
Series of record as of a date prior to the evaluation.
Purchase by the Sponsor of Units Tendered for
Redemption-- The Trust Agreement requires that the Trustee notify
the Sponsor of any tender of Units for redemption. So long as the
Sponsor are maintaining a bid in the
secondary market, the Sponsor, prior to the close of business on
the second succeeding business day, will purchase any Units
tendered to the Trustee for
redemption at the price so bid by making payment therefor to the
Unit holder in an amount not less than the Redemption Price not
later than the day on which
the Units would otherwise have been redeemed by the Trustee. (See
"Public Offering--Market for Units".) Units held by the Sponsor
may be tendered to the
Trustee for redemption as any other Units, provided that the
Sponsor shall not receive for Units purchased as set forth above a
higher price than they paid, plus accrued interest.
The offering price of any Units resold by the
Sponsor will be the Public Offering Price determined in the manner
provided in this Prospectus. (See "Public Offering--Offering
Price".) Any profit resulting from the resale
of such Units will belong to the Sponsor which likewise will bear
any loss resulting from a lower offering or redemption price
subsequent to their acquisition of such Units. (See "Public
Offering--Sponsor's Profits".)
<PAGE>
SPONSOR
Smith Barney Inc. 388 Greenwich Street, New York,
New York 10013 ("Smith Barney"), was incorporated in Delaware in
1960 and traces its history through predecessor partnerships to
1873. Smith Barney, an investment banking and securities
broker-dealer firm, is a member of the New
York Stock Exchange, Inc. and other major securities and
commodities exchanges, the National Association of Securities
Dealers, Inc. and the Securities Industry Association. Smith
Barney is an indirect wholly-owned subsidiary of The Travelers Inc.
(formerly, Primerica Corporation).
Smith Barney sponsors numerous open-end investment
companies and closed-end investment companies. Smith Barney also
sponsors all Series of Corporate Securities Trust, Government
Securities Trust and Harris, Upham
Tax-Exempt Fund and acts as co-sponsor of certain trusts of The
Equity Income Fund, Concept Series. The Sponsor has acted
previously as managing underwriter of other investment companies.
In addition to participating as a member of various underwriting
and selling groups or as agent of other investment companies, the
Sponsor also executes orders for the purchase and sale of
securities of investment companies and sell securities to such
companies in its capacities as broker or dealer in securities.
Limitations on Liability
The Sponsor is liable for the performance of its
obligations arising from their responsibilities under the Trust
Agreement, but will be under no
liability to Unit holders for taking any action or refraining from
any action in good faith or for errors in judgment or responsible
in any way for depreciation
or loss incurred by reason of the sale of any Bonds, except in
cases of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations
and duties. (See "Tax Exempt Securities Trust--Portfolio" and
"Sponsor-- Responsibility".)
Responsibility
The Sponsor is empowered to direct the Trustee to
dispose of Bonds or deposited Units of other trusts when certain
events occur that adversely affect
the value of the Bonds, including default in payment of interest or
principal, default in payment of interest or principal on other
obligations of the same issuer, institution of legal proceedings,
default under other documents adversely
affecting debt service, decline in price or the occurrence of other
market or credit factors, or decline in projected income pledged
for debt service on
<PAGE>
revenue bonds and advanced refunding that, in the opinion of the
Sponsor, may be detrimental to the interests of the Unit holders.
The Sponsor intends to provide portfolio services
for each State Trust and Umbrella Series in order to determine
whether the Trustee should be directed to dispose of any such
Bonds.
It is the responsibility of the Sponsor to instruct
the Trustee to reject any offer made by an issuer of any of the
Bonds to issue new obligations
in exchange and substitution for any Bonds pursuant to a refunding
or refinancing plan, except that the Sponsor may instruct the
Trustee to accept such an offer or to take any other action with
respect thereto as the Sponsor may
deem proper if the issuer is in default with respect to such Bonds
or in the judgment of the Sponsor the issuer will probably default
in respect to such Bonds in the foreseeable future. Any
obligations so received in exchange or
substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as Bonds
originally deposited thereunder.
Within five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to give
notice thereof to each Unit holder, identifying the Bonds
eliminated and the Bonds substituted therefor.
Except as stated in this paragraph, the acquisition by a Multistate
Trust or Umbrella Series of any securities other than the Bonds
initially deposited in that particular State Trust is prohibited.
Resignation
If Sponsor resigns or otherwise fails or becomes
unable to perform its duties under the Trust Agreement, and no
express provision is made for action by the Trustee in such event,
the Trustee may appoint a successor sponsor or terminate the Trust
Agreement and liquidate the affected State Trusts.
TRUSTEE
The Trustee is United States Trust Company of New
York, with its principal place of business at 114 West 47th Street,
New York, New York 10036. United States Trust Company of New York
has, since its establishment
in 1853, engaged primarily in the management of trust and agency
accounts for individuals and corporations. The Trustee is a member
of the New York Clearing House Association and is subject to
supervision and examination by the
Superintendent of Banks of the State of New York, the Federal
Deposit Insurance Corporation and the Board of Governors of the
Federal Reserve System. In connection with the storage and
handling of certain Bonds deposited in any of the State Trust and
<PAGE>
Umbrella Series, the Trustee may use the services of The Depository
Trust Company. These services may include safekeeping of
the Bonds and coupon-clipping, computer book-entry transfer and
institutional delivery services. The Depository Trust Company is
a limited purpose trust
company organized under the Banking Law of the State of New York,
a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in
any way for depreciation or loss incurred by reason of the
disposition of any moneys, securities or certificates or in respect
of any evaluation or for any action taken
in good faith reliance on prima facie properly executed documents
except in cases of willful misfeasance, bad faith, gross negligence
or reckless disregard for its obligations and duties. In addition,
the Trustee shall not be personally liable for any taxes or other
governmental charges imposed upon or in respect of any State Trust
and Umbrella Series which the Trustee may be required to
pay under current or future law of the United States or any other
taxing authority having jurisdiction. (See "Tax Exempt Securities
Trust--Portfolio".) For information relating to the
responsibilities and indemnification of the Trustee
under the Trust Agreement, reference is made to the material set
forth under "Rights of Unit Holders", "Sponsor--Resignation" and
"Other Charges".
Resignation
By executing an instrument in writing and filing
the same with the
Sponsor, the Trustee and any successor may resign. In such an
event the Sponsor is obligated to appoint a successor trustee as
soon as possible. If the
Trustee becomes incapable of acting or becomes bankrupt or its
affairs are taken over by public authorities, the Sponsor may
remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or
removal shall become effective upon the acceptance of appointment
by the successor trustee. If no successor has accepted the
appointment within thirty days after
notice of resignation, the retiring trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The
resignation or removal of
a trustee becomes effective only when the successor trustee accepts
its appointment as such or when a court of competent jurisdiction
appoints a successor trustee.
EVALUATOR
The Evaluator is Kenny Information Systems, Inc.,
a division of J.J. Kenny Co., Inc. with main offices located at 65
Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsor and Unit holders may rely on
any evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy
thereof. Determinations by the Evaluator under the Trust Agreement
shall be made in good faith upon the basis of the best information
available to it; provided, however, that the Evaluator shall be
under no liability to the Trustee, the Sponsor or Unit holders for
errors in judgment. But this provision shall not
protect the Evaluator in cases of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations and
duties.
Responsibility
The Trust Agreement requires the Evaluator to
evaluate the Bonds of a State Trust and Umbrella Series on the
basis of their bid prices on the last
business day of June and December in each year, on the day on which
any Unit of such State Trust and Umbrella Series is tendered for
redemption and on any other day such evaluation is desired by the
Trustee or is requested by the Sponsor. For information relating
to the responsibility of the Evaluator to evaluate the Bonds on the
basis of their bid prices see "Public Offering--Offering Price."
Resignation
The Evaluator may resign or may be removed by the
joint action of the Sponsor and the Trustee, and in such event, the
Sponsor and the Trustee are to use their best efforts to appoint a
satisfactory successor. Such resignation or removal shall become
effective upon the acceptance of appointment by a successor
evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of
resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
Amendment
The Sponsor and the Trustee have the power to amend
the Trust Agreement without the consent of any of the Unit holders
when such an amendment is (1) to cure any ambiguity or to correct
or supplement any provision of the Trust Agreement which may be
defective or inconsistent with any other provision contained
<PAGE>
therein, or (2) to make such other provisions as
shall not adversely affect the interests of the Unit holders;
provided, that the Trust Agreement is not amended to increase the
number of Units issuable
thereunder or to permit the deposit or acquisition of securities
either in addition to or in substitution for any of the Bonds
initially deposited in the respective
State Trust and Umbrella Seriess, except for the substitution of
certain refunding securities for such Bonds or to permit the
Trustee to engage in business or
investment activities not specifically authorized in the Trust
Agreement as originally adopted. In the event of any amendment,
the Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
Termination
The Trust Agreement provides that if the principal
amount of Bonds is less than 50% of the principal amount of the
Bonds originally deposited in
such State Trust and Umbrella Series, the Trustee may in its
discretion and will, when directed by the Sponsor, terminate such
State Trust and Umbrella Series.
Each State Trust and Umbrella Series may be terminated at any time
by 100% of the Unit holders. See Part A for additional optional
and mandatory termination provisions. However, in no event may any
State Trust and Umbrella Series continue beyond the Mandatory
Termination Date set forth
under Part A "Summary of Essential Information." In the event of
termination, written notice thereof will be sent by the Trustee to
all Unit holders. Within a reasonable period after termination,
the Trustee will sell any Bonds remaining
in the affected State Trust and Umbrella Series, and, after paying
all expenses and charges incurred by such State Trust and Umbrella
Series, will distribute to each Unit holder, upon surrender for
cancellation of his certificate for Units, his
pro rata share of the balances remaining in the Interest Account
and Principal Account of such State Trust and Umbrella Series.
LEGAL OPINIONS
Certain legal matters in connection with the Units
offered hereby have been passed upon by Messrs. Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017, as
special counsel for the Sponsor. Messrs. Carter, Ledyard & Milburn,
2 Wall Street, New York, New York 1005, act as counsel for the
Trustee.
AUDITORS
The Statements of Financial Condition and
Portfolios of Securities of each State Trust and/or Umbrella Series
included in this Prospectus have been audited by KPMG Peat Marwick
<PAGE>
LLP, independent auditors, as indicated in
their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting
and auditing.
BOND RATINGS
All ratings except those identified otherwise are
by Standard & Poor's.
Standard & Poor's
A Standard & Poor's corporate or municipal bond
rating is a current assessment of the creditworthiness of an
obligor with respect to a
specific debt obligation. This assessment of creditworthiness may
take into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to purchase
or sell a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information
furnished to Standard & Poor's by the issuer and obtained by
Standard & Poor's from other sources
it considers reliable. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information.
The ratings are based, in varying degrees, on the
following considerations:
I. Likelihood of default--capacity and
willingness of the
obligor as to the timely payment of
interest and repayment
of principal in accordance with the
terms of the
obligation;
II. Nature of and provisions of the
obligation; and
III. Protection afforded by, and relative
position of, the
obligation in the event of bankruptcy,
reorganization or
other arrangement under the laws of
bankruptcy and other
laws affecting creditors' rights.
<PAGE>
A summary of the meaning of the applicable ratings
symbols as published by Standard & Poor's follows:
AAA--This is the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and
repay principal.
AA--Bonds rated AA have a very strong capacity to
pay interest and repay principal, and in the majority of instances
they differ from AAA issues only in small degrees.
A--Bonds rated A have a strong capacity to pay
interest and repay principal, although they are somewhat more
susceptible to the adverse affects
of changes in circumstances and economic conditions than bonds in
higher-rated categories.
BBB--Bonds rated BBB are regarded as having an
adequate capacity to pay interest and repay principal. Whereas
they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances
are more likely to lead to weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in the
higher-rated categories.
BB, B, CCC, CC, C--Debt rated BB, B, CCC, CC, and
C is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed
indications of credit quality, the ratings from "AA" to "CCC" may
be modified by the addition
of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" following a
rating indicates the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by
the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project.
This rating, 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.
<PAGE>
Conditional rating(s), indicated by "con" are given
to bonds for which the continuance of the security rating is
contingent upon Standard & Poor's receipt of an executed copy of
escrow agreement or closing documentation confirming investments
and cash flows and/or the security rating
is conditional upon the issuance of insurance by the respective
insurance company.
Moody's Investors Service
A brief description of the applicable Moody's Investors
Service's rating symbols and their meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of
the best quality. They carry the smallest degree of investment
risk and are generally
referred to as "gilt edge". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective
elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa group they
comprise what are generally
known as high grade bonds. Aa bonds are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be
other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as
medium grade obligations; i.e., they are neither highly protected
nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate and thereby
<PAGE>
not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated B generally lack
characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa--Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca--Bonds which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C--Bonds which are rated C are the lowest rated
class of bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B
groups which Moody's believes possess the strongest investment
attributes are designated by the symbols Aa1, A1, Baa1, Ba1, and
B1, respectively. In addition, Moody's applies numerical
modifiers, 1, 2, and 3 in each generic rating classification
from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of
its generic rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category. Although
industrial Revenue Bonds and Environmental Control Revenue Bonds
are tax-exempt issues, they are included in the corporate bond
rating system.
Conditional ratings, indicated by "Con" are given to bonds for
which the security depends upon the completion of some act or the
fulfillment of some
condition. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in
operating experience, (c)
rentals which begin when facilities are completed, or (d) payments
to which some other limiting condition attaches. A parenthetical
rating denotes probable credit stature upon completion of
construction or elimination of basis of
condition.
Fitch Investors Service, Inc.
A brief description of the applicable Fitch
Investors Service, Inc. rating symbols and their meanings is as
<PAGE>
follows:
AAA--Bonds which are considered to be investment
grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA--Bonds which are considered to be investment
grade and of very high credit quality. The obligor's ability to
pay interest and repay principal is very strong although not quite
as strong as bonds rated AAA.
A--Bonds which are considered to be investment
grade and of high credit quality. The obligor's ability to pay
interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB-Bonds which are considered to be investment
grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that
these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus (+) Minus (-)--Plus and minus signs are used
with a rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are not
used in the 'AAA', 'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on
the successful completion of a project of the occurrence of a
specific event.
NOTE: NR indicates, among other things, that no rating has
been requested, that there is insufficient information on which to
base a rating, or that Standard & Poor's Corporation, Moody's
Investors Service and Fitch Investors
Service, Inc. do not rate a particular type of obligation as a
matter of policy. Subsequent to the Date of Deposit, the credit
characteristics of the Issuers of
Securities may have changed. Currently, certain of the Securities
in the Portfolio of a Trust may be unrated and have credit
characteristics comparable to securities rated below the minimum
requirements of such Trust for acquisition of a Security. See Part
A--"Portfolio of Securities" herein to ascertain the
ratings on the Securities, if any, on the date of the Portfolios of
Securities.
<PAGE>
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating
Co. rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are
negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA-High credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A-Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB-Below average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
NR- Not rated (credit characteristics comparable to
A or better on the Date of Deposit).
<PAGE>
<TABLE>
Prospectus
This Prospectus contains information concerning the Trust and
the Sponsors, but does not contain all the information set forth
in the registration statements and exhibits relating thereto, which
the Trust has filed with the Securities and Exchange Commission,
Washington, D.C. under the Securities Act of 1933 and the
Investment Company Act of 1940, and to which reference is
hereby made.
<S>
<C>
Index:
Page
Summary of Essential Information . . . . . . . . . . . . . . . . . . . . . . . . . . A-
2 Series
292
Financial and Statistical Information. . . . . . . . . . . . . . . . . . . . . . . . A- 4
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- 5
Report of Independent Public Auditors. . . . . . . . . . . . . . . . . . . . . . . . A- 9
Portfolios of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-10
5,590 Units
Tax Exempt Securities Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PROSPECTUS
Additional Considerations Regarding the Trusts . . . . . . . . . . . . . . . . . . 2
Dated
February 20, 1995
State Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Estimated Current Return and Estimated Long-Term Return 56
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Expenses and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Public Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Method of Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Sponsors
Distribution of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Market for Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SMITH BARNEY INC.
Exchange Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Reinvestment Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
1345 Avenue of the Americas
Sponsor's Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
New York, New York 10105
Rights of Unit Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
(800) 298-UNIT
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Distribution of Interest and Principal . . . . . . . . . . . . . . . . . . . . . . 71
Reports and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Redemption of Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Evaluator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Limitations on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Amendment and Termination of the Trust Agreement . . . . . . . . . . . . . . . . . . 78
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Bond Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Standard & Poor's Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Moody's Investors Service, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Fitch Investors Service, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
</TABLE>
<PAGE> PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
CONTENTS OF REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement
on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The cross-reference sheet.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Signatures.
Written consents of the following persons:
KPMG Peat Marwick
Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc.
(included in Exhibit 4.6A)
The following exhibits:
*4.6A - Consent of Kenny S&P Evaluation Services, a division
of Kenny Information Systems, Inc. as Evaluator.
* Filed herewith.
II-1
<PAGE>
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York, 10006-2511
Telephone 212/770-4000
Smith Barney Incorporated
388 Greenwich Street
New York, NY 10013
RE:Tax Exempt Securities Trust
Series 292
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-25007 for the above-captioned
trust. We hereby acknowledge that Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. is currently acting
as the evaluator for the trust. We hereby consent to the use in
the Amendment of the reference to Kenny S&P Evaluation Services,
a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings
indicated in the above-referenced Amendment to the Registration
Statement for the respective bonds comprising the trust portfolio
are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter
with the Securities and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
tru:l-31
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to
the use of their name in the Prospectus included in this Post-
Effective Amendment to the Registration Statement ("Post-
Effective Amendment") is contained in their opinion filed as
Exhibit 3.1 to the Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of
our report dated February 3, 1995 included herein and to the
reference to our firm under the heading "AUDITORS" in the
prospectus.
KPMG PEAT MARWICK
New York, New York
February 15, 1995
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant, Tax Exempt Securities Trust, Series 292,
certifies that it meets all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York,
and State of New York on the 15th day of February, 1995.
Signatures appear on pages II-3.
A majority of the members of the Board of Directors of Smith
Barney Inc. have signed this Post-Effective Amendment
pursuant to Powers of Attorney authorizing the person signing
this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities
and Exchange Commission under the Securities Act of 1933 with the
Registration Statement of Tax Exempt Securities Trust,
Appreciation Series 7, Registration No. 2-78499 and with the
Registration Statement of Tax Exempt Securities Trust, Series
110, Intermediate Term Series 15 and Short-Intermediate Term
Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184,
respectively, with the Registration Statement of Tax Exempt
Securities Trust, Series 284, Amendment No. 2, Registration No.
33-22777, with the Registration Statement of Tax Exempt
Securities Trust, Series 295, Amendment No. 1, Registration No.
33-26376, and with the Registration Statement of Tax Exempt
Securities Trust, Series 335, Amendment No. 1, Registration No.
33-37952.
<PAGE>
TAX EXEMPT SECURITIES TRUST
BY SMITH BARNEY INC.
By
(George S. Michinard, Jr.)
By the following persons,* who constitute a majority of
the directors of Smith Barney Inc. :
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
John F. Lyness
Jack L. Rivkin
By
(George S. Michinard, Jr.
Attorney-in-Fact)
* Pursuant to Powers of Attorney previously filed.
II-3
