File No. 33-33110 CIK #859684
Securities and Exchange CommissionWashington, D. C. 20549
Post-Effective
Amendment No. 6
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
Kemper Tax-Exempt Insured Income Trust Multi-State, Series 23
Name and executive office address of Depositor:
EVEREN Unit Investment Trusts
(a division of EVEREN Securities, Inc.)
77 West Wacker - 29th Floor
Chicago, Illinois 60601
Name and complete address of agent for service:
Robert K. Burke
77 West Wacker - 29th Floor
Chicago, Illinois 60601
( X ) Check box if it is proposed that this filing will
become effective at 2:00 p.m. on April 29, 1996 pursuant to
paragraph (b) of Rule 485.
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST SERIES 11-22
KEMPER DEFINED FUNDS (TAX-EXEMPT PORTFOLIO)
PART ONE
The date of this Part One is that date
which is set forth in Part Two of the Prospectus
Each State Trust of the Kemper Tax-Exempt Insured Income Trust, Multi-
State Series, Series 11-22 of the Ohio Tax-Exempt Bond Trust and Kemper
Defined Funds (Tax-Exempt Portfolio) was formed for the purpose of gaining
interest income free from Federal, State and, where applicable, local income
taxes and/or property taxes, while conserving capital and diversifying risks
by investing in an insured, fixed portfolio of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for which such
Trust is named or counties, municipalities, authorities or political
subdivisions thereof.
Insurance guaranteeing the scheduled payment of principal and interest on
all of the Municipal Bonds in the portfolio of each State Trust has been
obtained by the Trust from Financial Guaranty Insurance Company ("Financial
Guaranty") or other insurers or directly by the issuer or the Sponsor from
Financial Guaranty, MBIA Insurance Corporation or other insurers. See
"Insurance on the Portfolios" herein and the "Schedule of Investments" in
Part Two. Insurance obtained by the Trust remains in effect only while the
insured Municipal Bonds are retained in such State Trust, while insurance
obtained by a Municipal Bond issuer or the Sponsor is effective so long as
such Bonds are outstanding. Pursuant to an irrevocable commitment of
Financial Guaranty or such other insurers, in the event of a sale of any Bond
covered under the Trust's insurance policy, the Trustee has the right to
obtain permanent insurance for such Bond upon the payment of a single
predetermined insurance premium from the proceeds of the sale of such Bond.
The insurance, in either case, does not relate to the Units offered hereby or
to their market value. As a result of such insurance, the Units of each
State Trust received on the original date of deposit a rating of either "AAA"
by Standard & Poor's. a Division of The McGraw Hill Companies ("Standard &
Poor's") or "Aaa" by Moody's Investors Service, Inc. and, while held in a
State Trust, the Municipal Bonds are rated either "Aaa" by Moody's Investors
Service, Inc. or "AAA" by Standard & Poor's. See "Insurance on the
Portfolios" and "Description of Securities Ratings." No representation is
made as to Financial Guaranty's, MBIA Insurance Corporation's or any other
insurer's ability to meet its commitments.
Units of the Trust are not deposits or obligations of, or guaranteed by,
any bank, and Units are not federally insured or otherwise protected by the
Federal Deposit Insurance Corporation and involve investment risk including
loss of principal.
This Prospectus is in two parts. Read and retain both parts for
future reference.
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SPONSOR: KEMPER UNIT INVESTMENT TRUSTS,
a service of Kemper Securities, Inc.
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THE 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.
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TABLE OF CONTENTS
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SUMMARY................................................... 3
The Trust............................................ 3
Insurance............................................ 3
Public Offering Price................................ 4
Interest and Principal Distributions................. 4
Reinvestment......................................... 4
Estimated Current Return and
Estimated Long-Term Return.......................... 4
Market for Units..................................... 4
Risk Factors......................................... 4
THE TRUST................................................. 5
PORTFOLIOS................................................ 5
Risk Factors......................................... 6
INSURANCE ON THE PORTFOLIOS............................... 11
Financial Guaranty Insurance
Company............................................. 13
AMBAC Indemnity Corporation.......................... 14
MBIA Insurance....................................... 14
Financial Security Assurance......................... 14
Capital Guaranty Insurance
Company............................................. 15
DISTRIBUTION REINVESTMENT................................. 16
INTEREST, ESTIMATED CURRENT RETURN
AND LONG-TERM RETURN................................. 17
FEDERAL TAX STATUS OF THE STATE
TRUSTS............................................... 17
DESCRIPTION AND STATE TAX STATUS
OF THE STATE TRUSTS.................................. 20
Alabama Trusts....................................... 20
Arizona Trusts....................................... 22
California Trusts.................................... 25
Colorado Trust....................................... 31
Florida Trusts....................................... 34
Louisiana Trusts..................................... 39
Massachusetts Trusts................................. 42
Michigan Trusts...................................... 44
Minnesota Trusts..................................... 46
Missouri Trusts...................................... 48
New Jersey Trusts.................................... 51
New York Trusts...................................... 54
North Carolina Trusts................................ 63
Ohio Trusts.......................................... 68
Pennsylvania Trusts.................................. 72
Texas Trusts......................................... 77
PUBLIC OFFERING OF UNITS.................................. 80
Public Offering Price................................ 80
Public Distribution of Units......................... 83
Profits of Sponsor................................... 84
MARKET FOR UNITS.......................................... 84
REDEMPTION................................................ 84
Computation of Redemption Price...................... 86
UNITHOLDERS............................................... 86
Ownership of Units................................... 86
Distributions to Unitholders......................... 86
Statements to Unitholders............................ 88
Rights of Unitholders................................ 89
INVESTMENT SUPERVISION.................................... 89
ADMINISTRATION OF THE TRUST............................... 90
The Trustee.......................................... 90
The Evaluator........................................ 91
Amendment and Termination............................ 91
Limitations on Liability............................. 91
EXPENSES OF THE TRUST..................................... 92
THE SPONSOR............................................... 93
LEGAL OPINIONS............................................ 93
AUDITORS.................................................. 93
DESCRIPTION OF SECURITIES RATINGS......................... 94
Standard & Poor's.................................... 94
Moody's Investors Service, Inc....................... 95
</TABLE>
Essential Information*
Report of Certified Public Accountants*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
*INFORMATION ON THESE ITEMS APPEARS
IN PART TWO FOR THE APPROPRIATE
STATE TRUST
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KEMPER TAX-EXEMPT INSURED INCOME TRUST
MULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST
SERIES 11-22
KEMPER DEFINED FUNDS
(TAX-EXEMPT PORTFOLIO)
SUMMARY
THE TRUST. Kemper Tax-Exempt Insured Income Trust, Multi-State Series,
Ohio Tax-Exempt Bond Trust, Series 11-22 and Kemper Defined Funds (Tax-Exempt
Portfolio) (collectively, the "Trust") are unit investment trusts consisting
of a number of diversified portfolios designated as the State Trusts. Each
State Trust consists of obligations ("Municipal Bonds", "Bonds" or
"Securities") issued primarily by or on behalf of the State for which such
State Trust is named or counties, municipalities, authorities or political
subdivisions thereof.
Each State Trust's investment objective is interest income which is exempt
from Federal, State and, where applicable, local income taxes and/or property
taxes, while conserving capital and diversifying risks by investing in an
insured, fixed portfolio of Municipal Bonds consisting of obligations issued
primarily by or on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions thereof.
There is, of course, no guarantee that the State Trusts' objective will be
achieved.
All of the Municipal Bonds in the State Trust portfolios were rated in the
category "BBB" or better by either Standard & Poor's ("Standard & Poor's") or
"Baa" by Moody's Investors Service, Inc. ("Moody's") on the date such State
Trust was established (the "Date of Deposit"). Ratings of the Municipal
Bonds may have changed since the Date of Deposit. See "Description of
Securities Ratings" herein and the "Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the Trustee
for redemption or by purchase in the open market. No offering is being made
on behalf of the State Trust and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units.
INSURANCE. Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio of each State Trust
has been obtained by the Trust from Financial Guaranty Insurance Company
("Financial Guaranty"), MBIA Insurance Corporation ("MBIA Corporation" or
"MBIA") or other insurers, or directly by the issuer or the Sponsor from
Financial Guaranty, MBIA or other insurers. See "Insurance on the
Portfolios" herein and the "Schedule of Investments" in Part Two. Insurance
obtained by the Trust remains in effect only while the insured Municipal
Bonds are retained in such State Trust, while insurance obtained by a
Municipal Bond issuer or the Sponsor is effective so long as such Bonds are
outstanding. Pursuant to an irrevocable commitment of Financial Guaranty,
MBIA or such other insurers, in the event of a sale of any bond covered under
the Trust's insurance policy, the Trustee has the right to obtain permanent
insurance for such Municipal Bonds upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Municipal Bond. The
insurance, in either case, does not relate to the Units offered hereby or to
their market value. As a result of such insurance, the Units of each State
Trust received on the original Date of Deposit a rating of "AAA" from
Standard & Poor's and, while held in a State Trust, the Municipal Bonds are
rated "Aaa" by Moody's. See "Insurance on the Portfolios." No
representation is made as to Financial Guaranty's or any other insurer's
ability to meet its commitments.
PUBLIC OFFERING PRICE. The Public Offering Price per Unit of each State
Trust is equal to a pro rata share of the aggregate bid prices of the
Municipal Bonds in such State Trust plus or minus a pro rata share of cash,
if any, in the Principal Account, held or owned by the State Trust plus, in
the case of Kemper Defined Funds,
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Purchased Interest, plus a sales charge shown under "Public Offering of
Units." In addition, there will be added to each transaction in a State
Trust an amount equal to the accrued interest ("Daily Accrued Interest" in
the case of Kemper Defined Funds) from the last Record Date of such State
Trust to the date of settlement (five business days after order). The sales
charge is reduced on a graduated scale for sales as indicated under "Public
Offering of Units."
INTEREST AND PRINCIPAL DISTRIBUTIONS. Distributions of the estimated
annual interest income to be received by each State Trust, after deduction of
estimated expenses, will be made monthly unless the Unitholder elects to
receive such distributions quarterly or semi-annually. Distributions will be
paid on the Distribution Dates to holders of record of such State Trust on
the Record Dates set forth for the applicable option. See "Essential
Information" in Part Two. Only monthly distributions of estimated annual
interest income will be available for Kemper Defined Funds Unitholders.
The distribution of funds, if any, in the Principal Account of each State
Trust, will be made as provided in "Unitholders - Distributions to
Unitholders."
REINVESTMENT. Each Unitholder of a State Trust offered herein may elect
to have distributions of principal or interest or both automatically invested
without charge in shares of certain mutual funds sponsored by Kemper
Financial Services, Inc. See "Distribution Reinvestment."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return is calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price of the applicable State Trust.
The estimated net annual interest income per Unit will vary with changes in
fees and expenses of the Trusts and with the principal prepayment,
redemption, maturity, exchange or sale of Bonds while the Public Offering
Price will vary with changes in the bid price of the underlying Bonds and
with changes in Purchased Interest for Kemper Defined Funds; therefore, there
is no assurance that the present Estimated Current Returns will be realized
in the future. Estimated Long-Term Return is calculated using a formula
which (1) takes into consideration, and determines and factors in the
relative weightings of, the market values, yields (which takes into account
the amortization of premiums and the accretion of discounts) and estimated
retirement dates of all of the Bonds in the State Trust and (2) takes into
account the expenses and sales charge associated with each State Trust Unit.
Since the market values and estimated retirement dates of the Bonds and the
expenses of the State Trust will change, there is no assurance that the
present Estimated Long-Term Return will be realized in the future. Estimated
Current Return and Estimated Long-Term Return are expected to differ because
the calculation of Estimated Long-Term Return reflects the estimated date and
amount of principal returned while Estimated Current Return calculations
include only net annual interest income and Public Offering Price.
MARKET FOR UNITS. While under no obligation to do so and subject to
change at any time, the Sponsor intends to and certain Underwriters may,
maintain a market for the Units of each State Trust and continuously offer to
repurchase such Units at prices which are based on the aggregate bid side
evaluation of the Municipal Bonds in each State Trust plus accrued interest
to the date of settlement (which, in the case of Kemper Defined Funds,
consists of Purchased Interest and Daily Accrued Interest).
RISK FACTORS. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other
factors, the inability of the issuer or an insurer to pay the principal of or
interest on a bond when due, volatile interest rates, early call provisions,
and changes to the tax status of the Securities. See "Portfolios - Risk
Factors."
THE TRUST
Each State Trust Fund is one of a series of unit investment trusts created
by the Sponsor under the name Kemper Tax-Exempt Insured Income Trust, Multi-
State Series, Series 11-22 of Ohio Tax-Exempt Bond Trust or Kemper Defined
Funds (Tax-Exempt Portfolio), all of which are similar, and each of which was
created
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under the laws of the State of Missouri pursuant to a Trust Agreement/1/ (the
"Agreement") (such "State Trusts" being collectively referred to herein as
the "Trust"). Kemper Unit Investment Trusts, a service of Kemper Securities,
Inc., acts as Sponsor and Evaluator and Investors Fiduciary Trust Company
acts as Trustee.
A State Trust may be an appropriate investment vehicle for investors who
desire to participate in a portfolio of insured, tax-exempt, fixed income
securities with greater diversification than they might be able to acquire
individually. In addition, Municipal Bonds of the type deposited in the
State Trusts are often not available in small amounts.
Each State Trust was formed for the purpose of gaining interest income
free from Federal, State and, where applicable, local income and/or property
taxes, while conserving capital and diversifying risks by investing in an
insured, fixed portfolio of Municipal Bonds consisting of obligations issued
primarily by or on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions thereof.
There is, of course, no guarantee that the State Trusts' objective will be
achieved.
All of the Municipal Bonds in the State Trusts' portfolios are rated "BBB"
or better by Standard & Poor's or "Baa" or better by Moody's. See
"Description of Securities Ratings" herein and the "Schedule of Investments"
in Part Two.
Each State Trust consists of an insured portfolio of interest bearing
obligations issued by or on behalf of states of the United States or
counties, municipalities, authorities or political subdivisions thereof the
interest on which is, in the opinion of bond counsel to the issuing
authorities, exempt from all Federal income taxes under existing law, but may
not be subject to State and local taxes. Proceeds of the maturity,
redemption or sale of the Municipal Bonds in a State Trust, unless used to
pay for Units tendered for redemption, will be distributed to Unitholders
thereof and will not be utilized to purchase replacement or additional
Municipal Bonds for the State Trust.
The Units, each of which represents a pro rata undivided fractional
interest in the principal amount of Municipal Bonds deposited in the
appropriate State Trust, are issued and outstanding Units which have been
reacquired by the Sponsor either by purchase of Units tendered to the Trustee
for redemption or by purchase in the open market. No offering is being made
on behalf of the State Trusts and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such Units. To
the extent that Units of any State Trust are redeemed, the principal amount
of Municipal Bonds in such State Trust will be reduced and the undivided
fractional interest represented by each outstanding Unit of such State Trust
will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based largely
upon the experience and judgment of the Sponsor. In making such selections
the Sponsor considered the following factors: (a) a minimum rating in the
category "BBB" by Standard & Poor's or "Baa" by Moody's Investors Service,
Inc. (see "Description of Securities Ratings") except that the Sponsor may,
from time to time, in specifically designated State Trusts, have deemed it to
be acceptable to acquire unrated municipal bonds which had, in the opinion of
the Sponsor, credit characteristics at least equal to municipal bonds so
rated; (b) the price of the Municipal Bonds relative to other issues of
similar quality and maturity; (c) the diversification of the Municipal Bonds
as to purpose of issue; (d) the income to the Unitholders of the State Trust;
(e) whether such Municipal Bonds were insured, or the cost and availability
of insurance for the scheduled payment of principal and interest, when due,
on the Municipal Bonds; and (f) the dates of maturity of the Municipal Bonds.
----------
/1/Reference is hereby made to said Trust Agreement, and any statements
contained herein are qualified in ther entirety by the provisions of said
Trust Agreement.
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Subsequent to the Date of Deposit, a Municipal Bond may cease to be rated
or its rating may be reduced below the minimum required as of the Date of
Deposit. Neither event requires the elimination of such investment from a
State Trust, but may be considered in the Sponsor's determination to direct
the Trustee to dispose of the investment. See "Investment Supervision"
herein and the "Schedule of Investments" in Part Two.
The Sponsor may not alter the portfolio of a State Trust except that
certain of the Municipal Bonds may be sold upon the happening of certain
extraordinary circumstances. See "Investment Supervision."
Certain of the Municipal Bonds in the State Trusts may be subject to
redemption prior to their stated maturity date pursuant to sinking fund
provisions, call provisions or extraordinary optional or mandatory redemption
provisions or otherwise. A sinking fund is a reserve fund accumulated over a
period of time for retirement of debt. A callable debt obligation is one
which is subject to redemption or refunding prior to maturity at the option
of the issuer. A refunding is a method by which a debt obligation is
redeemed, at or before maturity, by the proceeds of a new debt obligation.
In general, call provisions are more likely to be exercised when the offering
side valuation is at a premium over par than when it is at a discount from
par. Accordingly, any such call, redemption, sale or maturity will reduce
the size and diversity of such State Trust, and the net annual interest
income of the State Trust and may reduce the Estimated Current and Long-Term
Returns. See "Interest and Estimated Current and Long-Term Returns." Each
State Trust portfolio contains a listing of the sinking fund and call,
provisions if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions result from the
happening of certain events. Generally, events that may permit the
extraordinary optional redemption of Municipal Bonds or may require the
mandatory redemption of Municipal Bonds include, among others: a final
determination that the interest on the Municipal Bonds is taxable; the
substantial damage or destruction by fire or other casualty of the project
for which the proceeds of the Municipal Bonds were used; an exercise by a
local, State or Federal governmental unit of its power of eminent domain to
take all or substantially all of the project for which the proceeds of the
Municipal Bonds were used; changes in the economic availability of raw
materials, operating supplies or facilities or technological or other changes
which render the operation of the project for which the proceeds of the
Municipal Bonds were used uneconomic; changes in law or an administrative or
judicial decree which renders the performance of the agreement under which
the proceeds of the Municipal Bonds were made available to finance the
project impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the Municipal
Bonds are issued on the issuer of the Municipal Bonds or the user of the
proceeds of the Municipal Bonds; an administrative or judicial decree which
requires the cessation of a substantial part of the operations of the project
financed with the proceeds of the Municipal Bonds; an overestimate of the
costs of the project to be financed with the proceeds of the Municipal Bonds
resulting in excess proceeds of the Municipal Bonds which may be applied to
redeem Municipal Bonds; or an underestimate of a source of funds securing the
Municipal Bonds resulting in excess funds which may be applied to redeem
Municipal Bonds. The Sponsor is unable to predict all of the circumstances
which may result in such redemption of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for any
default, failure or defect in any Municipal Bond.
RISK FACTORS. An investment in the Units of a State Trust should be made
with an understanding of the risks which an investment in fixed rate debt
obligations may entail, including the risk that the value of the portfolio
and hence of the State Trusts will decline with increases in interest rates.
The value of the underlying Municipal Bonds will fluctuate inversely with
changes in interest rates. The uncertain economic conditions of recent
years, together with the fiscal measures adopted to attempt to deal with
them, have resulted in wide fluctuations in interest rates and, thus, in the
value of fixed rate debt obligations generally and long term obligations in
particular. The Sponsor cannot predict whether such fluctuations will
continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general
obligations of a governmental entity that are backed by the taxing power of
such entity. All other Municipal Bonds in the State Trusts are revenue
bonds payable from the income of a specific project or authority and are not
supported by the issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power
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for the payment of principal and interest. Revenue bonds, on the other hand,
are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise
or other specific revenue source. There are, of course, variations in the
security of the different Municipal Bonds in the State Trusts, both within a
particular classification and between classifications, depending on numerous
factors.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are derived from services provided by hospitals and
other health care facilities, including nursing homes. Ratings of bonds
issued for health care facilities are often based on feasibility studies that
contain projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service will be affected by
future events and conditions including, among other things, demand for
services and the ability of the facility to provide the services required,
physicians' confidence in the facility, management's capabilities, economic
developments in the service area, competition, efforts by insurers and
governmental agencies to limit rates, legislation establishing state rate-
setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar
third party payor programs, and government regulation. Federal legislation
has been enacted which implement a system of prospective Medicare
reimbursement which may restrict the flow of revenues to hospitals and other
facilities which are reimbursed for services provided under the Medicare
program. Future legislation or changes in the areas noted above, among other
things, would affect all hospitals to varying degrees and, accordingly, any
adverse changes in these areas may adversely affect the ability of such
issuers to make payment of principal and interest on Municipal Bonds held in
the State Trusts. Such adverse changes also may adversely affect the ratings
of the Municipal Bonds held in the State Trusts.
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. 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 or in other
circumstances. For example, certain hospitals may have the right to call
bonds at par if the hospital may legally be required because of the bonds to
perform procedures against specified religious principles. Certain FHA-
insured bonds may provide that all or a portion of those 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 reduce severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single family
mortgage revenue bonds, which are issued for the purpose of acquiring from
originating financial institutions notes secured by mortgages on residences
located within the issuer's boundaries and owned by persons of low or
moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgaged premises, default, condemnation or casualty loss. Because
these Municipal Bonds are subject to extraordinary mandatory redemption in
whole or in part from such prepayments of mortgage loans, a substantial
portion of such Municipal Bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates. The
redemption price of such issues may be more or less than the offering price
of such Municipal Bonds. Extraordinary mandatory redemption without premium
could also result from the failure of the originating financial institutions
to make mortgage loans in sufficient amounts within a specified time period
or, in some cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make mortgage
loans would be due principally to the interest rates on mortgage loans funded
from other sources becoming competitive with the interest rates on the
mortgage loans funded with the proceeds of the single family mortgage revenue
bonds. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of principal of
or interest on such mortgage revenue bonds. Single family mortgage revenue
bonds issued after December 31, 1980 were issued under Section 103A of the
Internal Revenue Code of 1954, which Section contains certain ongoing
requirements relating to the use of the proceeds of such Municipal Bonds in
order for
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the interest on such Municipal Bonds to retain its tax-exempt status. In
each case, the issuer of the Municipal Bonds has covenanted to comply with
applicable ongoing requirements and bond counsel to such issuer has issued an
opinion that the interest on the Municipal Bonds is exempt from Federal
income tax under existing laws and regulations There can be no assurances
that the ongoing requirements will be met. The failure to meet these
requirements could cause the interest on the Municipal Bonds to become
taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. The ability of such issuers
to make debt service payments will be affected by events and conditions
affecting financed projects, including, among other things, the achievement
and maintenance of sufficient occupancy levels and adequate rental income,
increases in taxes, employment and income conditions prevailing in local
labor markets, utility costs and other operating expenses, the managerial
ability of project managers, changes in laws and governmental regulations,
the appropriation of subsidies and social and economic trends affecting the
localities in which the projects are located. The occupancy of housing
projects may be adversely affected by high rent levels and income limitations
imposed under Federal and State programs. Like single family mortgage
revenue bonds, multi-family mortgage revenue bonds are subject to redemption
and call features, including extraordinary mandatory redemption features,
upon prepayment, sale or non-origination of mortgage loans as well as upon
the occurrence of other events. Certain issuers of single or multi-family
housing bonds have considered various ways to redeem bonds they have issued
prior to the stated first redemption dates for such bonds. In connection
with the housing Municipal Bonds held by the State Trusts, the Sponsor has
not had any direct communications with any of the issuers thereof, but at
the Initial Date of Deposit it was not aware that any of the respective
issuers of such Municipal Bonds were actively considering the redemption of
such Municipal Bonds prior to their respective stated initial call dates.
However, there can be no assurance that an issuer of a Municipal Bond in the
State Trusts will not attempt to so redeem a Municipal Bond in the State
Trusts.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or sewerage
services. Water and sewerage bonds are generally payable from user fees.
Problems faced by such issuers include the ability to obtain timely and
adequate rate increases, a decline in population resulting in decreased user
fees, the difficulty of financing large construction programs, the
limitations on operations and increased costs and delays attributable to
environmental considerations, the increasing difficulty of obtaining or
discovering new supplies of fresh water, the effect of conservation programs
and the impact of "no-growth" zoning ordinances. Issuers may have
experienced these problems in varying degrees.
Because of the relatively short history of solid waste disposal bond
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 the cost of
disposing of the waste residue that remains after the disposal process in an
environmentally safe manner. In addition, waste disposal facilities
frequently face substantial opposition by environmental groups and officials
to their location and operation, to the possible adverse effects upon the
public health and the environment that may be caused by wastes disposed of at
the facilities and to alleged improper operating procedures. Waste disposal
facilities benefit from laws which require waste to be disposed of in a
certain manner but any relaxation of these laws could cause a decline in
demand for the facilities' services. Finally, waste disposal 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.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers whose revenues are primarily derived from the sale of electric energy
or natural gas. Utilities are generally subject to extensive regulation by
state utility commissions which, among other things, establish the rates
which may be charged
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and the appropriate rate of return on an approved asset base. The problems
faced by such issuers include the difficulty in obtaining approval for timely
and adequate rate increases from the governing public utility commission, the
difficulty in financing large construction programs, the limitations on
operations and increased costs and delays attributable to environmental
considerations, increased competition, recent reductions in estimates of
future demand for electricity in certain areas of the country, the difficulty
of the capital market in absorbing utility debt, the difficulty in obtaining
fuel at reasonable prices and the effect of energy conservation. Issuers may
have experienced these problems in varying degrees. In addition, Federal,
state and municipal governmental authorities may from time to time review
existing and impose additional regulations governing the licensing,
construction and operation of nuclear power plants, which may adversely
affect the ability of the issuers of such Municipal Bonds to make payments of
principal and/or interest on such Municipal Bonds.
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 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 action 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.
Certain of the Municipal Bonds in the State Trusts may be industrial
revenue bonds ("IRBs"), including pollution control revenue bonds, which are
tax-exempt securities issued by states, municipalities, public authorities or
similar entities to finance the cost of acquiring, constructing or improving
various industrial projects. These projects are usually operated by
corporate entities. Issuers are obligated only to pay amounts due on the
IRBs to the extent that funds are available from the unexpended proceeds of
the IRBs or receipts or revenues of the issuer under an arrangement between
the issuer and the corporate operator of a project. The arrangement 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 IRBs.
Regardless of the structure, payment of IRBs is solely dependent upon the
creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors may be affected by many factors
which may have an adverse impact on the credit quality of the particular
company or industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting from
accidents or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from leveraged buy-outs or takeovers. The
IRBs in the State Trusts may be subject to special or extraordinary
redemption provisions which may provide for redemption at par or, with
respect to original issue discount bonds, at issue price plus the amount of
original issue discount accreted to the redemption date plus, if applicable,
a premium. The Sponsor cannot predict the causes or likelihood of the
redemption of IRBs or other Municipal Bonds in the State Trusts prior to the
stated maturity of such Municipal Bonds.
Certain of the Municipal Bonds in the State Trusts may be obligations
which are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port
authorities, convention centers and arenas. The major portion of an
airport's gross operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of annual
payments for leases, occupancy of certain terminal space and service fees.
Airport operating income may therefore by affected by the ability of the
airlines to meet their obligations under the use agreements. The air
transport industry is experiencing significant variations in earnings and
traffic, due to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several airlines are
experiencing severe financial difficulties. The Sponsor cannot predict what
effect these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and their
usage of the particular airport facility. Similarly, payment on Municipal
Bonds related to other facilities is dependent on revenues from the projects,
such as user fees from ports, tolls on turnpikes and bridges and rents from
buildings. Therefore, payment may be adversely affected by reduction in
revenues due to such factors
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as increased cost of maintenance, decreased use of a facility, lower cost of
alternative modes of transportation, scarcity of fuel and reduction or loss
of rents.
Certain of the Municipal Bonds in the State Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes, or
for higher education systems, from tuition, dormitory revenues, grants and
endowments. General problems relating to school bonds include litigation
contesting the state constitutionality of financing public education in part
from ad valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation
or legislation on this issue may affect the sources of funds available for
the payment of school bonds in the Trust. General problems relating to
college and university obligations would include the prospect of a declining
percentage of the population consisting of "college" age individuals,
possible inability to raise tuition and fees sufficiently to cover increased
operating costs, the uncertainty of continued receipt of Federal grants and
state funding and new government legislation or regulations which may
adversely affect the revenues or costs of such issuers. All of such issuers
have been experiencing certain of these problems in varying degrees.
In addition, the ability of universities and colleges to meet their
obligations is dependent upon various factors, including the size and
diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and
other funds, the quality and maintenance costs of campus facilities, and, in
the case of public institutions, the financial condition of the relevant
state or other governmental entity and its policies with respect to
education. The institution's ability to maintain enrollment levels will
depend on such factors as tuition costs, geographic location, geographic
diversity and quality of student body, quality of the faculty and the
diversity of program offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project
may have been granted as security for the URBs. Regardless of the
structure, payment of the URBs is solely dependent upon the creditworthiness
of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease revenue
bonds whose revenues are derived from lease payments made by a municipality
or other political subdivision which is leasing equipment or property for use
in its operation. The risks associated with owning Municipal Bonds of this
nature include the possibility that appropriation of funds for a particular
project or equipment may be discontinued. The Sponsor cannot predict the
likelihood of nonappropriation of funds for these types of lease revenue
Municipal Bonds.
Certain of the Bonds in the Trust Funds may be sales and/or use tax
revenue bonds whose revenues are derived from the proceeds of a special sales
or use tax. Such taxes are generally subject to continuing Legislature
approval. Payments may be adversely affected by reduction of revenues due to
decreased use of a facility or decreased sales.
Certain of the Municipal Bonds in the State Trusts may be "zero coupon"
bonds, i.e., an original issue discount bond that does not provide for the
payment of current interest. Zero coupon bonds are purchased at a deep
discount because the buyer receives a final payment at the maturity of the
bond and does not receive any periodic interest payments. The effect of
owning deep discount bonds which do not make current interest payments (such
as the zero coupon bonds) is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount earned during the
life of such obligation. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to reinvest the income on such
obligation at a rate as high as the implicit yield on the discount
obligation, but at the same time eliminates the holder's ability to reinvest
at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of
changing market interest rates than are securities of comparable quality
which pay interest currently. For the Federal tax consequences of original
issue discount bonds such as the zero coupon bonds, see "Federal Tax Status
of the State Trusts."
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Investors should be aware that many of the Municipal Bonds in the State
Trusts are subject to continuing requirements such as the actual use of
Municipal Bond proceeds or manner of operation of the project financed from
Municipal Bond proceeds that may affect the exemption of interest on such
Municipal Bonds from Federal income taxation. Although at the time of
issuance of each of the Municipal Bonds in the State Trusts an opinion of
bond counsel was rendered as to the exemption of interest on such obligations
from Federal income taxation, there can be no assurance that the respective
issuers or other obligers on such obligations will fulfill the various
continuing requirements established upon issuance of the Municipal Bonds. A
failure to comply with such requirements may cause a determination that
interest on such obligations is subject to Federal income taxation, perhaps
even retroactively from the date of issuance of such Municipal Bonds, thereby
reducing the value of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Certain issues of the Municipal Bonds in the State Trusts represent "moral
obligations" of another governmental entity. In the event that the issuer of
the Municipal Bond defaults in the repayment thereof, such other governmental
entity lawfully may, but is not obligated to, discharge the obligation of the
issuer to repay such Municipal Bond.
If an issuer of moral obligation bonds is unable to meet its obligations,
the repayment of such Municipal 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.
To the best of the Sponsor's knowledge, as of the date of this Prospectus,
there is no litigation pending with respect to any Municipal Bond which might
reasonably be expected to have a material adverse effect on the Trust or any
State Trust. Although the Sponsor is unable to predict whether any
litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the Trust, the Trust received copies of the
opinions of bond counsel given to the issuing authorities at the time of
original delivery of each of the Municipal Bonds to the effect that the
Municipal Bonds had been validly issued and that the interest thereon is
exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolio of the State Trusts are insured as to
the scheduled payment of interest and principal, when due, by policies
obtained directly by the Trust from Financial Guaranty Insurance Company
("Financial Guaranty") or by the Sponsor or by the issuer from Financial
Guaranty, MBIA or other insurers. The insurance policies obtained by the
Trust for a Series are non-cancelable and will continue in force so long as
such State Trust is in existence, Financial Guaranty remains in business and
the Municipal Bonds described in the policy continue to be held in such State
Trusts. The premium for any insurance policy or policies obtained by an
issuer of Municipal Bonds or the Sponsor has been paid in advance by such
issuer or the Sponsor and any such policy or policies are non-cancelable and
will remain in force so long as the Municipal Bonds so insured are
outstanding and the insurer and/or insurers referred to below remain in
business. A monthly premium is paid by each State Trust for the insurance
obtained by the Trust, which is payable from the interest received by such
State Trust. In those instances where Municipal Bond insurance is obtained
by the issuer or the Sponsor directly from an insurer, no premiums for
insurance are paid by the State Trust and such bonds are not covered by the
State Trust's policy. Nonpayment of premiums on the policy obtained by the
State Trust will not result in the cancellation of such insurance but will
force the insurer to take action against the Trustee to recover premium
payments due it. Premium rates for each issue of
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Municipal Bonds protected by the policy obtained by the Trust are fixed for
the life of the appropriate State Trusts. If the provider of an original
issuance insurance policy is unable to meet its obligations under such policy
or if the rating assigned to the claims paying ability of any such insurer
deteriorates, no other insurer has an obligation to insure any issue
adversely affected by either of the above describe events.
The aforementioned insurance guarantees the scheduled payment of principal
and interest on the Municipal Bonds of each State Trust. It does not
guarantee the market value of the Municipal Bonds or the value of the Units
of a State Trust. The insurance obtained by the Trust is only effective as
to Municipal Bonds owned by and held in a State Trust and the price which an
individual pays on acquisition of Units, or receives on redemption or resale
of Units, does not, except as indicated below, include any element of value
for the insurance obtained by the Trust. Unitholders should recognize that
in order to receive any benefit from the portfolio insurance obtained by the
State Trust, they must be owners of the Units of a State Trust at the time
the Trustee becomes entitled to receive any payment from the insurer for such
State Trust. Insurance obtained by the issuer or the Sponsor of a Municipal
Bond is effective so long as the Municipal Bond is outstanding, whether or
not held by the State Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, the Trustee,
upon the sale of a Municipal Bond under the Trust's insurance policy, has the
right to obtain permanent insurance with respect to such Municipal Bond
(i.e., insurance to the maturity of the Municipal Bond regardless of the
identity of the holder thereof) (the "Permanent Insurance") upon the payment
of a single predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in the Trust is
eligible to be sold on an insured basis. It is expected that the Trustee
will exercise the right to obtain Permanent Insurance with respect to
Municipal Bonds in the State Trust only if upon such exercise the Trust would
receive net proceeds (i.e., the value of such Municipal Bond if sold as an
insured Municipal Bond less the insurance premium attributable to the
Permanent Insurance) from such sale in excess of the sale proceeds if such
Municipal Bond was sold on an uninsured basis. The insurance premium with
respect to each Municipal Bond is determined based upon the insurability of
each Municipal Bond as of the Date of Deposit and will not be increased or
decreased for any change in the creditworthiness of such Municipal Bond's
issuer.
Insurance obtained for a State Trust, under normal circumstances, has no
effect on the price or redemption value of Units. It is the present
intention of the Evaluator to attribute a value to such insurance for the
purpose of computing the price or redemption value of Units only in
circumstances where the credit quality of an underlying Municipal Bond has
significantly deteriorated. Insurance obtained by the issuer of a Municipal
Bond is effective so long as such Municipal Bond is outstanding. Therefore,
any such insurance may be considered to represent an element of market value
in regard to the Municipal Bonds thus insured, but the exact effect, if any,
of this insurance on such market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an amount equal to
the excess, if any, by which the net proceeds realizable from the sale of the
Municipal Bond on an insured basis exceeds the sum of (i) the net proceeds
receivable from the sale of the Municipal Bonds on an uninsured basis plus
(ii) the insurance premium attributable to the Permanent Insurance.
Insurance obtained by the issuer of a Municipal Bond is effective so long as
such Municipal Bond is outstanding. Therefore, any such insurance may be
considered to represent an element of market value in regard to the
Municipal Bonds thus insured, but the exact effect, if any, of this insurance
on such market value cannot be predicted.
Under the provisions of the aforementioned insurance, Financial Guaranty
unconditionally and irrevocably agrees to pay to Citibank, N.A., or its
successor, as its agent (the "Fiscal Agent"), that portion of the principal
of and interest on the covered Municipal Bonds which shall become due for
payment but shall be unpaid by reason of nonpayment by the issuer of the
Municipal Bonds. The term "due for payment" means, when referring to the
principal of a Municipal Bond, its stated maturity date or the date on which
it shall have been called for mandatory sinking fund redemption and does not
refer to any earlier date on which payment is due by reason of call for
redemption (other than by mandatory sinking fund redemption), acceleration or
other advancement of maturity and means, when referring to interest on a
Municipal Bond, the stated date for payment of interest. When the interest
on a Municipal Bond shall have been determined, as provided in the underlying
documentation relating to such Municipal Bond, to be subject to Federal
income taxation, "due for
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payment" also means, when referring to the principal of such Municipal Bond,
the date on which such Municipal Bond has been called for mandatory
redemption as a result of such determination of taxability, and when
referring to interest on such Municipal Bond, the accrued interest at the
rate provided in such documentation to the date on which such Municipal Bond
has been called for such mandatory redemption, together with any applicable
redemption premium.
Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business day
next following the day on which Financial Guaranty shall have received notice
of nonpayment, whichever is later. The Fiscal Agent will disburse to the
Trustee the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment and interest which is then due
for payment but is unpaid by reason of nonpayment by the issuer but only
upon receipt by the Fiscal Agent of (i) evidence of the Trustee's right to
receive payment of the principal or interest due for payment and (ii)
evidence, including any appropriate instruments of assignment, that all of
the rights to payment of such principal or interest due for payment shall
thereupon vest in Financial Guaranty. Upon such disbursement, Financial
Guaranty shall become the owner of the Municipal Bond, appurtenant coupon or
right to payment of principal or interest on such Municipal Bond and shall be
fully subrogated to all the Trustee's rights thereunder, including the right
to payment thereof.
FINANCIAL GUARANTY INSURANCE COMPANY. The policy obtained by the Trust
was issued by Financial Guaranty, a New York stock insurance company.
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company (the "Corporation"). The Corporation is a wholly
owned subsidiary of General Electric Capital Corporation ("GECC"). Neither
the Corporation nor GECC is obligated to pay the debts of or the claims
against Financial Guaranty. Financial Guaranty is domiciled in the State of
New York and is subject to regulation by the State of New York Insurance
Department. As of September 30, 1994 the total capital and surplus of
Financial Guaranty was approximately $871,000,000. Copies of Financial
Guaranty's financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial statements, prepared
on the basis of generally accepted accounting principles, may be obtained by
writing to Financial Guaranty at 115 Broadway, New York, New York 10006,
Attention: Communications Department (telephone number is (212) 312-3000) or
to the New York State Insurance Department at 160 West Broadway, 18th Floor,
New York 10013, Attention: Property Companies Bureau (telephone number
(212) 621-0389).
In addition, Financial Guaranty is currently authorized to write with
insurance in all 50 states and the District of Columbia.
The information relating to Financial Guaranty contained above has been
furnished by such corporation. The financial information contained herein
with respect to such corporation is unaudited but appears in reports or other
materials filed with state insurance regulatory authorities and is subject to
audit and review by such authorities. No representation is made herein as to
the accuracy or adequacy of such information or as to the absence of material
adverse changes in such information subsequent to the date thereof but the
Sponsor is not aware that the information herein is inaccurate or incomplete.
In determining whether to insure bonds, Financial Guaranty has applied its
own standards, which are not necessarily the same as the criteria used in
regard to the selection of bonds by the Sponsor. This decision is made prior
to the Date of Deposit, as bonds not covered by such insurance are generally
not deposited in the Trust. The insurance obtained by the Trust covers
Municipal Bonds deposited in each State Trust and physically delivered to the
Trustee in the case of bearer bonds or registered in the name of the Trustee
or its nominee for Municipal Bonds held in book-entry form. Contracts to
purchase Municipal Bonds are not covered by the insurance obtained by the
Trust, although Municipal Bonds underlying such contracts are covered by
insurance upon physical delivery to the Trustee.
The contract of insurance relating to the State Trusts and the
negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Trust. Otherwise, neither Financial Guaranty nor
its parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, direct or indirect, with the Trust or the Sponsor, except that
Kemper Reinsurance Co., an affiliate of the Sponsor, has participated to a
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very limited extent, pursuant to an exemptive order obtained from the
Securities and Exchange Commission, in the reinsurance program of Financial
Guaranty. Neither the State Trusts, the related Units nor the portfolios of
such State Trusts are otherwise insured directly or indirectly by FGIC
Corporation.
AMBAC INDEMNITY CORPORATION. AMBAC Indemnity Corporation ("AMBAC") is a
Wisconsin-domiciled stock insurance company, regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin, and licensed to do
business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets (unaudited) of approximately $1,988,000,000
and statutory capital (unaudited) of approximately $1,148,000,000 as of
September 30, 1993. Statutory capital consists of AMBAC policyholders'
surplus and statutory contingency reserve. AMBAC is a wholly owned
subsidiary of AMBAC Inc., a 100% publicly-held company. Moody's Investors
Service, Inc. and Standard & Poor's have both assigned a AAA claims-paying
ability rating to AMBAC. Copies of AMBAC's financial statements prepared in
accordance with statutory accounting standards are available from AMBAC. The
address of AMBAC's administrative offices and its telephone number at One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
AMBAC has entered into quota share reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bonds
insurance programs of AMBAC has been and will be assumed by a number of
foreign and domestic unaffiliated reinsurers.
MBIA INSURANCE CORPORATION. MBIA Insurance Corporation ("MBIA
Corporation") is the principal operating subsidiary of MBIA, Inc., a New York
Stock Exchange listed company. MBIA, Inc. is not obligated to pay the debts
of or claims against MBIA Corporation. MBIA Corporation, which commenced
municipal bond insurance operations on January 5, 1987, is a limited
liability corporation rather than a several liability association. MBIA
Corporation is domiciled in the State of New York and licensed to do business
in all 50 states, the District of Columbia and the Commonwealth of Puerto
Rico.
As of September 30, 1994 MBIA Corporation had admitted assets of $3.3
billion (unaudited), total liabilities of $2.2 billion (unaudited), and total
capital and surplus of $1.1 billion (unaudited) prepared in accordance with
statutory accounting practices prescribed or permitted by insurance
regulatory authorities. Standard & Poor's has rated the claims paying
ability of MBIA "AAA." Copies of MBIA Corporation's financial statements
prepared in accordance with statutory accounting practices are available form
MBIA Corporation. The address of MBIA Corporation is 113 King Street,
Armonk, New York 10504.
Effective December 31, 1989 MBIA Inc. acquired Bond Investors Group, Inc.
On January 5,1990, the Insurer acquired all of the outstanding stock of Bond
Investors Group, Inc., The parent of BIG, now known as MBIA Insurance Corp.
of Illinois. Though a reinsurance agreement, BIG has ceded all of its net
insured risks, as well as its unearned premium and contingency reserves, to
the Insurer and the Insurer has reinsured BIG's net outstanding exposure.
Moody's Investors Service rates all bonds issues insured by MBIA "Aaa" and
short-term loans "MIG1," both designated to be of the highest quality.
Standard & Poor's rates all new issues insured by MBIA "AAA."
FINANCIAL SECURITY ASSURANCE. Financial Security Assurance ("Financial
Security" or "FSA") is monoline insurance company incorporated on March 16,
1984 under the laws of the State of New York. The operations of Financial
Security commenced on July 25, 1985, and Financial Security received its New
York State insurance license on September 23, 1985. Financial Security and
its two wholly owned subsidiaries are licensed to engage in financial
guaranty insurance business in 49 states, the District of Columbia and Puerto
Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
asset-backed and other collateralized securities offered in domestic and
foreign markets. Financial Security and its subsidiaries also write
financial guaranty insurance in respect of municipal and other obligations
and reinsure financial guaranty insurance policies written by other leadings
insurance companies. In general, financial guaranty insurance consists of
the issuance of a guaranty of scheduled payments of an issuer's securities,
thereby enhancing the credit rating of these securities, in consideration for
payment of a premium to the insurer.
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Financial Security is 91.6% owned by U S West, Inc., and 8.4% owned by
The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). Neither U S
WEST, Inc. nor Tokio Marine is obligated to pay the debts of or the claims
against Financial Security. Financial Security is domiciled in the State of
New York and is subject to regulation by the State of New York Insurance
Department.
As of March 31, 1993, the total policyholders' surplus and contingency
reserves and the total unearned premium reserve, respectively, of Financial
Security and its consolidated subsidiaries were, in accordance with statutory
accounting principles, approximately $479,110,000 (unaudited) and
$220,078,000 (unaudited), and the total shareholder's equity and the
unearned premium reserve, respectively of Financial Security and its
consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $628,119,000 (unaudited) and
$202,493,000 (unaudited).
Copies of Financial Security's financial statements may be obtained by
writing to Financial Security at 350 Park Avenue, New York, New York 10022,
Attention: Communications Department. Financial Security's Telephone number
is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written by Financial Security or either of its subsidiaries are
insured among such companies at an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsurers a portion of its liabilities under certain of its financial
guaranty insurance policies with unaffiliated reinsurers under various quota
share treaties and on a transaction-by-transaction basis. Such reinsurance
is utilized by Financial Security as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter or
limit Financial Security's obligations under any financial guaranty insurance
policy.
Financial Security's claims-paying ability is rated "Aaa" by Moody's
Investors Service, Inc., and "AAA" by Standard & Poor's, Nippon Investors
Service Inc., Duff & Phelps Inc. and Australian Ratings Pty. Ltd. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies.
CAPITAL GUARANTY INSURANCE COMPANY. Capital Guaranty Insurance Company
("Capital Guaranty") was incorporated in Maryland on June 25, 1986, and is
wholly owned subsidiary of Capital Guaranty Corporation, a Maryland insurance
holding company. Capital Guaranty Corporation is a publicly owned company
whose shares are traded on the New York Stock Exchange.
Capital Guaranty Insurance Company is authorized to provide insurance in
all 50 states, the District of Columbia and three U.S. territories. Capital
Guaranty focuses on insuring municipal securities and provides policies which
guaranty the timely payment of principal and interest when due for payment on
new issue and secondary market issue municipal bond transactions. Capital
Guaranty's claims-paying ability is rated "Triple-A" by both Moody's and
Standard & Poor's.
As of September 30, 1994, Capital Guaranty had $14.6 billion in net
exposure outstanding (excluding defeased issues). The total policyholders'
surplus and contingency reserve of Capital Guaranty was $293,036,690
(unaudited), and the total admitted assets were $193,194,000 (unaudited) as
reported to the Insurance Department of the State of Maryland. Financial
statements for Capital Guaranty Insurance Company, that have been prepared in
accordance with statutory insurance accounting standards, are available upon
request. The address of Capital Guaranty's headquarters is Steuart Tower,
22nd Floor, One Market Plaza, San Francisco, CA 94105-1413 and the telephone
number is (415) 995-8000.
Because the Municipal Bonds are insured as to the scheduled payment of
principal and interest and on the basis of the financial condition and the
method of operation of the insurance companies referred to above, either
Standard & Poor's or Moody's has assigned to the State Trusts' Units its
"AAA" or "Aaa" investment rating, respectively, and, in addition, Moody's has
assigned its "Aaa" investment rating to each of the Municipal Bonds covered
by the Financial Guaranty policy while held in the Trust. These are the
highest ratings assigned to securities by such rating agencies. See
"Description of Securities Ratings" herein. These
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ratings should not be construed as an approval of the offering of the Units
by Standard & Poor's or Moody's or as a guarantee of the market value of the
State Trusts or the Units. There is no guarantee that the "AAA" or "Aaa"
investment ratings will be maintained.
On the date shown under "Essential Information" in Part Two, the Estimated
Long-Term and Current Returns per Unit for the Trust, after payment of the
insurance premium, if any, were as indicated. The Estimated Long-Term and
Current Returns per Unit for a trust with an identical portfolio without the
insurance obtained by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is to obtain
a higher yield on the portfolio of the Series of the Trust than would be
available if all the Municipal Bonds in such portfolios had Standard &
Poor's "AAA" rating and/or Moody's "Aaa" rating, and at the same time to have
the protection of insurance of prompt payment of interest and principal, when
due, on the Municipal Bonds. There is, of course, no certainty that this
result will be achieved. Municipal Bonds in a Series of the Trust which have
been insured by the issuer (all of which are rated "AAA" by Standard & Poor's
and/or "Aaa" by Moody's) may or may not have a higher yield than uninsured
bonds rated "AAA" by Standard & Poor's or "Aaa" by Moody's. In selecting
such Municipal Bonds for the portfolio, the Sponsor has applied the criteria
described above.
In the event of nonpayment of interest or principal, when due, in respect
of a Municipal Bond, the appropriate insurer shall make such payment not
later than 30 days after it has been notified that such nonpayment has
occurred or is threatened (but not earlier than the date such payment is
due). The insurer, as regards any payment it may make, will succeed to the
rights of the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which holds, in
effect, that insurance proceeds representing maturing interest on defaulted
municipal obligations paid to municipal bond funds substantially similar to
the Trust, under policy provisions substantially identical to the policies
described herein, will be excludable from Federal gross income under Section
103(a)(1) of the Internal Revenue Code. Holders of Units in the State Trust
should discuss with their tax advisers the degree of reliance which they may
place on this letter ruling. Furthermore, Chapman and Cutler, counsel for
the Sponsor, has given an opinion to the effect that such payment of proceeds
would be excludable from Federal gross income to the same extent that such
interest would have been so excludable if paid by the issuer of the defaulted
obligations. See "Federal Tax Status of the State Trusts."
DISTRIBUTION REINVESTMENT
Each Unitholder of a State Trust may elect to have distributions of
principal (including capital gains, if any) or interest or both automatically
invested without charge in shares of any mutual fund underwritten or advised
by Kemper Financial Services, Inc., an affiliate of the sponsor (the "Kemper
Funds") which are registered in the Unitholder's State of Residence, other
than those Kemper Funds sold with a contingent deferred sales charge. Since
the portfolio securities and investment objectives of such Kemper Funds may
differ significantly from that of the Trust, Unitholders should carefully
consider the consequences, including the fact that distributions from such
Kemper Funds may be taxable, before selecting such Kemper Funds for
reinvestment. Detailed information with respect to the investment objectives
and the management of the Funds is contained in their respective
prospectuses, which can be obtained from the Sponsor, and many investment
firms, upon request. An investor should read the appropriate prospectus
prior to making the election to reinvest.
A Unitholder who desires to have such distributions automatically
reinvested without charge should file a written notice of election with the
Program Agent referred to below. Such election must be received by the
Program Agent at least ten days prior to the Record Date applicable to any
distribution in order to be in effect for such Record Date. Any such
election shall remain in effect until a subsequent notice is received by the
Program Agent. See "Unitholders - Distributions to Unitholders."
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The Program Agent is Investors Fiduciary Trust Company. All inquiries
concerning participation in distribution reinvestment should be directed to
the Kemper Service Company, service agent for the Program Agent at P.O. Box
419430, Kansas City, Missouri 64173-0216, telephone (800) 422-2848.
INTEREST, ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
As of the opening of business on the date indicated therein, the Estimated
Current Returns and the Estimated Long-Term Returns for each State Trust were
as set forth under "Essential Information" for the applicable State Trust in
Part Two of this Prospectus. Estimated Current Returns are calculated by
dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will vary
with changes in fees and expenses of the Trustee, the Sponsor and the
Evaluator and with the principal prepayment, redemption, maturity, exchange
or sale of Securities while the Public Offering Price will vary with changes
in the offering price of the underlying Securities and with changes in
Purchased Interest in the case of Kemper Defined Funds; therefore, there is
no assurance that the present Estimated Current Returns will be realized in
the future. Estimated Long-Term Returns are calculated using a formula
which (1) takes into consideration, and determines and factors in the
relative weightings of, the market values, yields (which takes into account
the amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the State Trust and (2) takes into
account the expenses and sales charge associated with each State Trust Unit.
Since the market values and estimated retirements of the Securities and the
expenses of the State Trust will change, there is no assurance that the
present Estimated Long-Term Returns will be realized in the future.
Estimated Current Returns and Estimated Long-Term Returns are expected to
differ because the calculation of Estimated Long-Term Returns reflects the
estimated date and amount of principal returned while Estimated Current
Returns calculations include only net annual interest income and Public
Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in the State Trusts were accompanied by
copies of opinions of bond counsel given to the issuers thereof at the time
of original delivery of the Municipal Bonds to the effect that the interest
thereon is excludable from gross income for Federal income taxes. In
addition, bond counsel to the issuing authorities rendered opinions as to the
exemption of interest on such Municipal Bonds, when held by residents of the
state in which the issuers of such Municipal Bonds are located, from State
income taxes and, where applicable, local income taxes. Gain realized on the
sale or redemption of the Municipal Bonds by the Trustee or of a Unit by a
Unitholder is, however, includable in gross income for Federal income tax
purposes. Such gain does not include any amounts received in respect of
accrued interest or earned original issue discount. It should be noted that
under recently enacted legislation described below that subjects accretion of
market discount on tax-exempt bonds to taxation as ordinary income, gain
realized on the sale or redemption of Municipal Bonds by the Trustee or of
Units by a Unitholder that would have been treated as capital gain under
prior law is treated as ordinary income to the extent it is attributable to
accretion of market discount. Market discount can arise based on the price a
Trust Fund pays for Municipal Bonds or the price a Unitholder pays for his or
her Units.
In connection with the offering of Units of the State Trusts, neither the
Sponsor, the Trustee, the Auditors nor their respective counsel have made any
review of the proceedings relating to the issuance of the Municipal Bonds or
the bases for such opinions.
In the opinion of Chapman and Cutler, counsel for the Sponsor:
Each State Trust is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the Internal
Revenue Code of 1986 (the "Code") will retain its status when distributed
to Unitholders, except to the extent such interest is subject to the
alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as noted
below.
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Exemption of interest and accrued original issue discount on any
Municipal Bonds for Federal income tax purposes does not necessarily
result in tax-exemption under the laws of the several states as such laws
vary with respect to the taxation of such securities and in many states
all or part of such interest and accrued issue discount may be subject to
tax.
Each Unitholder is considered to be the owner of a pro rata portion of
each asset of the respective State Trust in the proportion that the number
of Units of such Trust held by him bears to the total number of Units
outstanding of such State Trust under subpart E, subchapter J of chapter 1
of the Code and will have a taxable event when such State Trust disposes
of a Bond, or when the Unitholder redeems or sells his Units. Unitholders
must reduce the tax basis of their Units for their share of accrued
interest received by a State Trust, if any, on Bonds delivered after the
Unitholders pay for their Units to the extent that such interest accrued
on such Bonds during the period from the Unitholder's settlement date to
the date such Bonds are delivered to a State Trust and, consequently, such
Unitholders may have an increase in taxable gain or reduction in capital
loss upon the disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of such sale or
redemption with the adjusted basis of the Units. If the Trustee disposes
of Bonds (whether by sale, payment on maturity, redemption or otherwise),
gain or loss is recognized to the Unitholder. The amount of any such
gain or loss is measured by comparing the Unitholder's pro rata share of
the total proceeds from such disposition with the Unitholder's basis for
his or her fractional interest in the asset disposed of. In the case of a
Unitholder who purchases Units, such basis (before adjustment for earned
original issue discount and amortized bond premium, if any) is determined
by apportioning the cost of the Units among each of the State Trust's
assets ratably according to the value as of the date of acquisition of the
Units. The basis of each Unit and of each Municipal Bond which was issued
with original issue discount must be increased by the amount of the
accrued original issue discount and the basis of each Unit and of the
Unitholder's interest in each Municipal Bond which was acquired by such
Unitholder at a premium must be reduced by the annual amortization of
Municipal Bond premium. The tax cost reduction requirements of the Code
relating to amortization of bond premium may, under some circumstances,
result in the Unitholder realizing a taxable gain when his Units are sold
or redeemed for an amount equal to his original cost.
Any proceeds paid under individual policies obtained by issuers of
Bonds which represent maturing interest on defaulted obligations held by
the Trustee will be excludable from Federal gross income if, and to the
same extent as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations provided that, at
the time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable expectation
that the issuer of the obligations, rather than the insurer, will pay debt
service on the obligations.
Sections 1288 and 1272 of the Internal Revenue Code of 1986 (the "Code")
provide a complex set of rules governing the accrual of original issue
discount. These rules provide that original issue discount accrues either on
the basis of a constant compound interest rate or ratably over the term of
the Municipal Bond, depending on the date the Municipal Bond was issued. In
addition, special rules apply if the purchase price of a Municipal Bond
exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "adjusted
issue price"). The application of these rules will also vary depending on
the value of the Municipal Bond on the date a Unitholder acquires his Units,
and the price the Unitholder pays for his Units. Investors with questions
regarding these Code sections should consult with their tax advisers.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects tax-
exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount
(if any) by which the stated redemption price at maturity exceeds an
investor's purchase price (except to the extent that such difference, if any,
is attributable to original issue discount not yet accrued) subject to a
statutory "de minimis" rule. Market discount can arise based on the price a
Trust pays for Municipal Bonds or the price a Unitholder pays for his or her
Units. Under the Tax Act, accretion of market discount is taxable as
ordinary income; under prior law the accretion had been treated as capital
gain. Market
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discount that accretes while a Trust Fund holds a Municipal Bond would be
recognized as ordinary income by the Unitholders when principal payments are
received on the Municipal Bond, upon sale or at redemption (including early
redemption), or upon the sale or redemption of his or her Units, unless a
Unitholder elects to include market discount in taxable income as it
accrues. The market discount rules are complex and Unitholders should
consult their tax advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and the
Superfund Tax depend upon the corporation's alternative minimum taxable
income, which is the corporation's taxable income with certain adjustments.
One of the adjustment items used in computing the alternative minimum taxable
income and the Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or REMIC) is an
amount equal to 75% of the excess of such corporation's "adjusted current
earnings" over an amount equal to its alternative minimum taxable income
(before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all the Bonds in a State Trust. Unitholders are urged
to consult their tax advisers with respect to the particular tax consequences
to them including the corporate alternative minimum tax, the Superfund Tax
and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or carry
Units of a State Trust is not deductible for Federal income tax purposes.
The Internal Revenue Service has taken the position that such indebtedness
need not be directly traceable to the purchase or carrying of Units (however,
these rules generally do not apply to interest paid on indebtedness incurred
to purchase or improve a personal residence or to purchase goods or services
for personal consumption). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to
deduct any of the interest expense attributable to ownership of such Units.
Investors with questions regarding these issues should consult with their tax
advisers.
In the case of certain Municipal Bonds in the State Trusts, the opinions
of bond counsel indicate that interest on such securities received by a
"substantial user" of the facilities being financed with the proceeds of
these securities or persons related thereto, for periods while such
securities are held by such a user or related person, will not be excludable
from Federal gross income, although interest on such securities received by
others would be excludable from Federal gross income. "Substantial user" and
"related person" are defined under U.S. Treasury Regulations. Any person who
believes that he or she may be a "substantial user" or a "related person" as
so defined should contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable to long-
term capital gains is 35% effective for long-term capital gains realized in
taxable years beginning on or after January 1, 1993. For taxpayers other
than corporations, net capital gains are subject to a maximum marginal stated
tax rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year.
Under existing law, the State Trusts are not associations taxable as a
corporation and the income of the Trust Funds will be treated as the income
of the Unitholders under the income tax laws of the State of Missouri.
All statements of law in the Prospectus concerning exclusion from gross
income for Federal, State or other tax purposes are the opinions of counsel
and are to be so construed.
At the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for
the State Trusts of the proceedings relating to the issuance of the Bonds or
of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent of Social
Security benefits are includible in gross income to the extent that the sum
of "modified adjusted gross income" plus fifty percent of the Social
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Security benefits received exceeds a "base amount." The base amount is
$25,000 for unmarried taxpayers, $32,000 for married taxpayers filing a joint
return and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified adjusted
gross income is adjusted gross income determined without regard to certain
otherwise allowable deductions and exclusions from gross income and by
including tax exempt interest. To the extent that Social Security benefits
are includible in gross income, they will be treated as any other item of
gross income.
In addition, under the Tax Act, for taxable years beginning after December
31, 1993, up to 85 percent of Social Security benefits are includible in
gross income to the extent that the sum of "modified adjusted gross income"
plus fifty percent of Social Security benefits received exceeds an "adjusted
base amount." The adjusted base amount is $34,000 for married taxpayers,
$44,000 for married taxpayers filing a joint return and zero for married
taxpayers who do not live apart at all times during the taxable year and who
file separate returns.
Although tax-exempt interest is included in modified adjusted gross income
solely for the purpose of determining what portion, if any, of Social
Security benefits will be included in gross income, no tax-exempt interest,
including that received from the Trust Fund, will be subject to tax. A
taxpayer whose adjusted gross income already exceeds the base amount or the
adjusted base amount must include fifty percent or eighty-five percent of his
Social Security benefits in gross income whether or not he receives any tax-
exempt interest. A taxpayer whose modified adjusted gross income (after
inclusion of tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
For a discussion of the State tax status of income earned on Units of a
State Trust, see the discussion of tax status for the applicable trust.
Except as noted therein, the exemption of interest on State and local
obligations for Federal income tax purposes discussed above does not
necessarily result in exemption under the income or other tax laws of any
State or city. The laws of the several States vary with respect to the
taxation of such obligations.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
ALABAMA TRUSTS. Alabama's economy has experienced a major trend toward
industrialization over the past two decades. By 1990, manufacturing
accounted for 26.7% of Alabama's Real Gross State Product (the total value of
goods and services produced in Alabama). During the 1960s and 1970s the
State's industrial base became more diversified and balanced, moving away
from primary metals into pulp and paper, lumber, furniture, electrical
machinery, transportation equipment, textiles (including apparel), chemicals,
rubber and plastics. Since the early 1980s, modernization of existing
facilities and an increase in direct foreign investments in the State has
made the manufacturing sector more competitive in domestic and international
markets.
Among several leading manufacturing industries have been pulp and papers
and chemicals. In recent years Alabama has ranked as the fifth largest
producer of timber in the nation. The State's growing chemical industry has
been the natural complement of production of wood pulp and paper. Mining,
oil and gas production and service industries are also important to Alabama's
economy. Coal mining is by far the most important mining activity.
Major service industries that are deemed to have significant growth
potential include the research and medical training and general health care
industries, most notably represented by the University of Alabama medical
complex in Birmingham and the high technology research and development
industries concentrated in the Huntsville area.
Real Gross State Product. Real Gross State Product (RGSP) is a
comprehensive measure of economic performance for the State of Alabama.
Alabama's RGSP is defined as the total value of all final goods and services
produced in the State in constant dollar terms. Hence, changes in RGSP
reflect changes in final output. From 1984 to 1990 RGSP originating in
manufacturing increased by 22.99% whereas RGSP originating in all the non-
manufacturing sectors grew by 17.88%.
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Those non-manufacturing sectors exhibiting large percentage increases in
RGSP originating between 1984 and 1990 were 1) Services; 2) Trade; 3)
Farming; and 4) Finance, Insurance and Real Estate. From 1984 to 1990 RGSP
originating in Services increased by 35.07%; Trade grew by 21.53%; Farming
increased by 19.78%; and the gain in Finance, Insurance and Real Estate was
19.19%. The present movement toward diversification of the State's
manufacturing base and a similar present trend toward enlargement and
diversification of the service industries in the State are expected to lead
to increased economic stability.
Employment. The recent national economic recession was felt severely in
Alabama. The manufacturing growth described above reached a peak in 1979,
and was followed by a decrease in activity. The national economic recession
was principally responsible for this decline. The State's industrial
structure is particularly sensitive to high interest rates and monetary
policy, and the resulting unemployment during 1981-1984 was acute.
Unemployment rates have improved as the impact of the national economic
recovery has benefited the State. The economic recovery experienced on the
national level since 1982 has been experienced in Alabama as well, but to a
different degree and with a time lag.
Among other risks, the State of Alabama's economy depends upon cyclical
industries such as iron and steel, natural resources, and timber and forest
products. As a result, economic activity may be more cyclical than in
certain other Southeastern states. The national economic recession in the
early 1980s caused a decline in manufacturing activity and natural resource
consumption, and Alabama's unemployment rate was 14.4% in 1982, significantly
higher than the national average. Unemployment remains high in some rural
areas of the State. A trend towards diversification of the State's economic
base and an expansion of service industries may lead to improved economic
stability in the future, although there is no assurance of this.
Political subdivisions of the State of Alabama have limited taxing
authority. In addition, the Alabama Supreme Court has held that a
governmental unit may first use its taxes and other revenues to pay the
expenses of providing governmental service before paying debt service on its
bonds, warrants or other indebtedness. The State has statutory budget
provisions which result in a proration procedure in the event estimated
budget resources in a fiscal year are insufficient to pay in full all
appropriations for that year. Proration has a materially adverse effect on
public entities that are dependent upon State funds subject to proration.
Deterioration of economic conditions could adversely affect both tax and
other governmental revenues, as well as revenues to be used to service
various revenue obligations, such as industrial development obligations.
Such difficulties could affect the market value of the bonds held by the
Alabama Trust and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Alabama Trust are subject. Additionally, many
factors including national economic social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Alabama Trust to pay interest on or principal of the
Bonds.
At the time of the closing for each Alabama Trust, Special Counsel to the
Fund for Alabama tax matters rendered an opinion under then existing Alabama
income tax law applicable to taxpayers whose income is subject to Alabama
income taxation substantially to the effect that:
(1) The Alabama Trust is not taxable as a corporation for purposes of
the Alabama income tax.
(2) Income of the Alabama Trust, to the extent it is taxable, will be
taxable to the Unitholders, not the Alabama Trust.
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(3) Each Unitholder's distributive share of the Alabama Trust's net
income will be treated as the income of the Unitholder for purposes
of the Alabama income tax.
(4) Interest on obligations held by the Alabama Trust which is exempt
from the Alabama income tax will retain its tax-exempt character
when the distributive share thereof is distributed or deemed
distributed to each Unitholder.
(5) Any proceeds paid to the Alabama Trust under insurance policies
issued to the Sponsor or under individual policies obtained by the
Sponsor, the issuer or underwriter of the respective obligations
which represent maturing interest on defaulted obligations held by
the Trustee will be exempt from Alabama income tax if and to the
same extent as such interest would be exempt from such taxes if
paid directly by the issuer of such obligations.
(6) Each Unitholder will, for purposes of the Alabama income tax, treat
his distributive share of gains realized upon the sale or other
disposition of the Bonds held by the Alabama Trust as though the
Bonds were sold or disposed of directly by the Unitholders.
(7) Gains realized on the sale or redemption of Units by Unitholders,
who are subject to the Alabama income tax will be includable in the
Alabama income of such Unitholders.
ARIZONA TRUSTS. The following brief summary regarding the economy of
Arizona is based upon information drawn from publicly available sources and
is included for the purpose of providing the information about general
economic conditions that may or may not affect issuers of the Arizona Bonds.
The Sponsor has not independently verified any of the information contained
in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's
main economic sectors include services, tourism and manufacturing. Mining
and agriculture are also significant, although they tend to be more capital
than labor intensive. Services is the single largest economic sector. Many
of these jobs are directly related to tourism.
The unemployment rate in Arizona for 1993 was 6.2% and for 1992 was 7.4%
compared to a national rate of 6.8% in 1993 and 7.4% in 1992. Job growth may
be adversely affected by the closing of a major air force base near Phoenix
and the bankruptcy of several major employers, including America West
Airlines.
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous decade with a
resulting surplus of completed inventory. This decline adversely affected
both the construction industry and those Arizona financial institutions which
had aggressively pursued many facets of real estate lending. In the near
future, Arizona's financial institutions are likely to continue to experience
problems until the excess inventories of commercial and residential
properties are absorbed. The problems of the financial institutions have
adversely affected employment and economic activity. Longer prospects are
brighter. Arizona has been, and is projected to continue to be, one of the
fastest growing areas in the United States. Over the last several decades
the State has outpaced most other regions of the country in virtually every
major category of growth, including population, personal income, gross state
product and job creation.
The state operates on a fiscal year beginning July 1 and ending June 30.
Fiscal year 1995 refers to the year ending June 30, 1995.
Total General Fund revenues of $4.3 billion are expected during fiscal
year 1995. Approximately 44.5% of this budgeted revenue comes from sales and
use taxes, 44.4% from income taxes (both individual and corporate) and 4.4%
from property taxes. All taxes total approximately $4.0 billion, or 93% of
General Funds revenues. Non-tax revenue includes items such as income from
the state lottery, licenses, fees and permits, and interest.
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For fiscal year 1994 the budget called for expenditures of approximately
$4.1 billion. These expenditures fell into the following major categories:
education (47.4%), health and welfare (26.3%), protection and safety (4.0%),
general government (15.5%) and inspection and regulation, natural resources
and transportation (6.8%). The States's general fund expenditures for fiscal
year 1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of the
State of Arizona, and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Bonds is detailed
in the instruments themselves and in related offering materials. There can
be no assurances, however, with respect to whether the market value of
marketability of any of the Bonds issued by an entity other than the State of
Arizona will be affected by the financial or other condition of the State or
of any entity located within the State. In addition, it should be noted that
the State of Arizona, as well as counties, municipalities, political
subdivisions and other public authorities of the state, are subject to
limitations imposed by Arizona's constitution with respect to ad valorem
taxation, bonded indebtedness and other matters. For example, the
legislature cannot appropriate revenues in excess of 7% of the total personal
income of the state in any fiscal year. These limitations may affect the
ability of the issuers to generate revenues to satisfy their debt
obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
Roosevelt Elementary School District Number 66, et al. v. Dianne Bishop, et
al. (the "Roosevelt Opinion"). In this opinion, the Arizona Supreme Court
held that the present statutory financing scheme for public education in the
State of Arizona does not comply with the Arizona constitution.
Subsequently, the Arizona School Boards Association, with the approval of the
appellants and the appellees to the Roosevelt Opinion, and certain Arizona
school districts, filed with the Arizona Supreme Court motions for
clarification of the Roosevelt Opinion, specifically with respect to seeking
prospective application of the Roosevelt Opinion. On July 29, 1994, the
Arizona Supreme Court clarified the Roosevelt Opinion to hold that such
opinion will have prospective effect only.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue bonds in
the Arizona Trust. The Arizona Legislature has in the past sought to enact
health care cost control legislation. Certain other health care regulatory
laws have expired. It is expected that the Arizona legislature will at
future sessions continue to attempt to adopt legislation concerning health
care cost control and related regulatory matters. The effect of any such
legislation or of the continued absence of any legislation restricting
hospital bed increased and limiting new hospital construction on the ability
of Arizona hospitals and other health care providers to pay debt service on
their revenue bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the state administers an alternative program, Arizona
Health Care Cost Containment System ("AHCCCS"), which provides health care to
indigent persons meeting certain financial eligibility requirements, through
managed care programs. In fiscal year 1994, AHCCCS was financed
approximately 60% by federal funds, 29% by state funds, and 11% by county
funds.
Under state law, hospitals retain the authority to raise with notification
and review by, but not approval from, the Department of Health Services.
Hospitals in Arizona have experienced profitability problems along with those
in other states. At least two Phoenix based hospitals have defaulted on or
reported difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue
bonds are concerned, the issuance of such bonds and the periodic rate
increases needed to cover operating costs and debt service are subject to
regulation by the Arizona Corporation Commission, the only significant
exception being the Salt River Project Agricultural Improvement and Power
District which, as a Federal instrumentality, is exempt from rate regulation.
On July 15, 1991, several creditors of Tucson Electric Power Company ("Tucson
Electric") filed involuntary petitions under Chapter 11 of the U.S.
Bankruptcy Code to force Tucson Power to reorganize under the supervision of
the bankruptcy court. On December 31, 1991, the Bankruptcy Court approved
the utility's motion to dismiss the July petition after five months of
negotiations between Tucson Electric and its
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creditors to restructure the utility's debts and other obligations. In
December 1992, Tucson Electric announced that it had completed its financial
restructuring. In January 1993, Tucson Electric asked the Arizona
Corporation Commission for a 9.3% average rate. Tucson Electric serves
approximately 270,000 customers, primarily in the Tucson area. Inability of
any regulated public utility to secure necessary rate increases could
adversely affect, to an indeterminable extent, its ability to pay debt
service on its pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined to
refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment
will be made over a four-year period beginning with approximately $14.6
million in tax refunds in fiscal year 1994. A combination of tax refunds and
tax credits will be used to satisfy this liability.
At the time of the closing for each Arizona Trust, Special Counsel to the
Fund for Arizona tax matters rendered an opinion under then existing Arizona
income tax law applicable to taxpayers whose income is subject to Arizona
income taxation substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated as the
owner of a pro rata portion of the Arizona Trust, and the income of the Trust
therefore will be treated as the income of the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which is excludable
from Federal gross income and which is exempt from Arizona income taxes when
received by the Arizona Trust, and which would be excludable from Federal
gross income and exempt from Arizona income taxes if received directly by a
Unitholder, will retain its status as tax-exempt interest when received by
the Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a Unitholder
with respect to the Bonds is excludable from Federal gross income, such
interest will not be subject to Arizona income taxes.
Each Unitholder will receive taxable gain or loss for Arizona income tax
purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed
or paid at maturity, or when the Unitholder redeems or sells Units, at a
price that differs from original cost as adjusted for amortization of Bond
discount or premium and other basis adjustments, including any basis
reduction that may be required to reflect a Unitholder's share of interest,
if any, accruing on Bonds during the interval between the Unitholders
settlement date and the date such Bonds are delivered to the Arizona Trust,
if later.
Amounts paid by the Insurer under an insurance policy or policies issued
to the Trust, if any, with respect to the Bonds in the Trust with represent
maturing interest on defaulted obligations held by the Trustee will be exempt
from State income taxes if, and to the same extent as, such interest would
have been so exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather that the insurer, will
pay debt service on the obligations.
Arizona law does not permit a deduction for interest paid or incurred on
indebtedness incurred or continued to purchase or carry Units in the Arizona
Trust, the interest on which is exempt from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona property taxes,
sales tax or use tax.
CALIFORNIA TRUSTS. The Trust will invest substantially all of its assets
in California Municipal Obligations. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations. These include the possible adverse effects of certain
California constitutional amendments, legislative measures, voter initiatives
and other matters that are described below. The following information
provides only a brief summary of the complex factors affecting the financial
situation in California (the"State") and is derived from sources that are
generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any
of the following
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information. It is based in part on information obtained from various State
and local agencies in California or contained in official statements for
various California Municipal Obligations.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of California
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating
to) those obligations.
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 30 million represents
12% of the total United States population and grew by 27% in the 1980s.
Total personal income in the State, at an estimated $662 billion in 1991,
accounts for 13% of all personal income in the nation. Total employment is
almost 14 million, the majority of which is in the service, trade and
manufacturing sectors.
Reports issued by the State Department of Finance and other sources
indicate that the States economy is suffering its worst recession since the
1930s, with prospects for recovery slower than for the nation as a whole.
The State has lost over 800,000 jobs since the start of the recession in mid
1990 and additional job losses are expected before an upturn begins. The
largest job losses have been in Southern California, led by declines in the
aerospace and construction industries. Weaknesses statewide occurred in
manufacturing, construction, services and trade and will be hurt in the next
few years by continued cuts in federal defense spending and base closures.
Unemployment is expected to remain well above the national average in 1994.
The States economy is only expected to pull out of the recession slowly,
following the national recovery which has begun. Delay in recovery will
exacerbate shortfalls in State revenues.
Certain California Municipal Obligations may be obligations of issuers
which rely in whole or in part, directly or indirectly, on ad valorem
property taxes as a source of revenue. The taxing powers of California local
governments and districts are limited by Article XIIIA of the California
Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts
the reassessment of property to 2% per year, except upon new construction or
change of ownership (subject to a number of exemptions). Taxing entities
may, however, raise ad valorem taxes above the 1% limit to pay debt service
on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as
of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-
based assessment system of Proposition 13, and on June 18, 1992 the U.S.
Supreme Court announced a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax"
However, court decisions allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions,
the voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval.
Significant elements of this initiative, "Proposition 62", have been
overturned in recent court cases. An initiative proposed to reenact the
provisions of Proposition 62 as a constitutional amendment was defeated by
the voters in November 1990, but such a proposal may be renewed in the
future.
California and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consists of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to
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the extent that such proceeds exceed the cost of providing the product or
service, but "proceeds of taxes" excludes most State subventions to local
governments. No limit is imposed on appropriations or funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post-
1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such
adjustments were liberalized in 1990 by Proposition 111 to follow more
closely growth in California's economy.
"Excess revenues are measured over a two-year cycle. Local governments
must return any excess to taxpayers by rate reduction. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed
revenues since 1990 because of the recession, few governments are currently
operating near their spending limits, but this condition may change over
time. Local governments may by voter approval exceed their spending limits
for up to four years.
During fiscal year 1986-87, State receipts from proceeds of taxes exceeded
its appropriations limit by $1.1 billion, which was returned to taxpayers.
Since that year, appropriations subject to limitation have been under the
State limit. State appropriations are expected to be $3.7 billion under the
limit for Fiscal Year 1993-94.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact
of Article XIIIA or Article XIIIB on California Municipal Obligations or on
the ability of the State or local governments to pay debt service on such
California Municipal Obligations. It is not presently possible to predict
the outcome of any pending litigation with respect to the ultimate scope,
impact or constitutionality of either Article XIIIA or Article XIIIB, or the
impact of any such determinations upon State agencies or local governments,
or upon their ability to pay debt service on their obligations. Future
initiative or legislative changes in laws or the California Constitution may
also affect the ability of the State or local issuers to repay their
obligations.
As of April 1, 1994, California had approximately $18.1 billion of general
obligation bonds outstanding, and $5.6 billion remained authorized but
unissued. In addition, at June 30, 1993, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $4.0
billion. Of the States's outstanding general obligation debt, approximately
28% os presently self-liquidating (for which program revenues are anticipated
to be sufficient to reimburse the General Fund for debt service payments).
Four general obligation bond propositions, totalling $5.9 billion, will be on
the June, 1994 ballot. In Fiscal Year 1992-93, debt service on general
obligation bonds and lease-purchase debt was approximately 4.1% of General
Fund revenues. The State has paid the principal of and interest on its
general obligation bonds, lease-purchase debt and short-term obligations when
due.
The principal sources of General Fund revenues in 1992-93 were the
California personal income tax (44% of total revenues), the sales tax (38%),
bank and corporation taxes (12%), and the gross premium tax on insurance
(3%). California maintains a Special Fund for Economic Uncertainties (the
"Economic Uncertainties Fund"), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is required to be
replenished as soon as sufficient revenues are available. Year-end balances
in the Economic Uncertainties Fund are included for financial reporting
purposes in the General Fund balance. In recent years, California has
budgeted to maintain the Economic Uncertainties Fund at around 3% of General
Fund
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expenditures but essentially no reserve is budgeted in 1992-93 or 1993-94
because reserves have been reduced by the recession.
Throughout the 1980s, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to
local public school districts. In 1988, an initiative (Proposition 98) was
enacted which (subject to suspension by a two-thirds vote of the Legislature
and the Governor) guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about
34%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for
health and welfare programs. The State is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund (K-14
education, 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 budget imbalance, with
expenditures exceeding revenues for four of the last five fiscal years
through 1991-92.
As the State fell into a deep recession in the summer of 1990, the State
budget fell sharply out of balance in the 1990-91 and 1991-92 fiscal years,
despite significant expenditure cuts and tax increases. The State has
accumulated a $2.8 billion budget deficit by June 30, 1992. This deficit
also severely reduced the State's cash resources, so that it had to rely on
external borrowing in the short-term markets to meet its cash needs.
With the failure to enact a budget by July 1, 1992, the State had no legal
authority to pay many of its vendors until the budget was passed;
nevertheless, certain obligations (such as debt service, school
apportionments, welfare payments and employee salaries) were payable because
of continuing or special appropriations or court orders. However, the State
Controller did not have enough cash to pay all of these ongoing obligations
as they came due, as well as valid obligations incurred in the prior fiscal
year.
Starting on July 1, 1992, the Controller was required to issue "registered
warrants" in lieu of normal warrants backed by cash to pay many State
obligations. Available cash was used to pay constitutionally mandated and
priority obligations. Between July 1 and September 3, 1992, the Controller
issued an aggregate of approximately $3.8 billion of registered warrants, all
of which were called for redemption by September 4, 1992 following enactment
of the 1992-93 Budget Act and issuance by the State of $3.3 billion of
Interim Notes.
The 1992-93 Budget Act, when finally adopted, was projected to eliminate
the State's accumulation deficit, with additional expenditure cuts and a $1.3
billion transfer of State education funding costs to local governments by
shifting local property taxes to school districts. However, as the recession
continued longer and deeper than expected, revenues once again were far below
projections, and only reached a level just equal to the amount of
expenditures. Thus, the State continued to carry its $2.8 billion budget
deficit at June 30, 1993.
The 1993-94 Budget Act was similar to the prior year in reliance on
expenditure cuts and an additional $2.6 billion transfer of costs to local
government, particularly counties. A major feature of the budget was a two-
year plan to eliminate the accumulated deficit by borrowing into the 1994-95
fiscal year. With the recession still continuing longer than expected, the
1994-95 Governor's Budget now projects that in the 1993-94 Fiscal Year, the
General Fund will have $900 million less revenue and $800 million higher
expenditures than budgeted. As a result revenues will only exceed
expenditures by about $400 million. If this projection is met, it will be
the first operating surplus in four years; however, some budget analysts
outside the Department of Finance project revenues in the balance of 1993-94
will not even meet the revised, lower projection. In addition, the General
Fund may have some unplanned costs for relief related to the January 17, 1994
Northward earthquake.
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The State has implemented its short-term borrowing as part of the deficit
elimination plan, and has also borrowed additional sums to cover cash flow
shortfalls in the spring of 1994, for a total of $3.2 billion, coming due in
July and December, 1994. Repayment of these short-term notes will require
additional borrowing, as the State's cash position continues to be adversely
affected.
The Governor's 1994-95 Budget proposal recognizes the need to bridge a gap
of around $5 billion by June 30, 1995. Over $3.1 billion of this amount is
being requested from the federal government as increased aid, particularly
for costs associated with incarcerating, educating and providing health and
welfare services to undocumented immigrants. However, President Clinton has
not included these costs in his proposed Fiscal 1995 Budget. The rest of the
budget gap is proposed to be closed with expenditure cuts and projected $600
million of new revenue assuming the State wins a tax case presently pending
in the U.S. Supreme Court. Thus the State will once again face significant
uncertainties and very difficult choices in the 1994-95 budget, as tax
increases are unlikely and many cuts and budget adjustments have been made in
the past three years.
The State's severe financial difficulties for the current and upcoming
budget years will result in continued pressure upon various local
governments, particularly school districts and counties which depend on State
aid. Despite efforts in recent years to increase taxes and reduce
governmental expenditures, there can be no assurance that the State will not
face budget gaps in the future.
State general obligation bonds are currently rated "A1" by Moody's and "A"
by S&P. Both of these ratings were recently reduced from "Aa" and "A+"
levels, respectively. There can be no assurance that such ratings will be
maintained in the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may
substantially impair revenues.
On December 7, 1994, Orange County, California (the "County"), together
with its pooled investment fund (the "Fund") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Fund had
suffered significant market losses in its investments which caused a
liquidity crisis for the Fund and the County. Approximately 180 other
public entities, most but not all located in the County, were also depositors
in the Fund. As of December 13, 1994, the County indicated that the Fund had
lost about 27% of its initial deposits of approximately $7.4 billion. The
County may suffer further losses as it sells investments to restructure the
Fund. Many of the entities which kept moneys in the Fund, including the
County, are facing cash flow difficulties because of the bankruptcy filing
and may be required to reduce programs or capital projects.
The State of California has no obligations with respect to any bonds or
other securities of the County or any of the other participating entities,
although under existing legal precedents, the State may be obligated to
ensure that school districts have sufficient funds to operate.
Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13. Subsequently, the California
Legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State
revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately
75% of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General
Fund support school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility
to operate health and welfare programs. To the extent the State should be
constrained by its Article XIIIB appropriations limit, or its obligation to
conform to Proposition 98, or other fiscal considerations,
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the absolute level, or the rate of growth, of State assistance to local
governments may be reduced. Any such reductions in State aid could compound
the serious fiscal constraints already experienced by many local governments,
particularly counties. The Richmond United School District (Contra Costa
County) entered bankruptcy proceedings in May 1991, but the proceedings have
been dismissed.
California Municipal Obligations which are assessment bonds may be
adversely affected by a general decline in real estate values or a slowdown
in real estate sales activity. In many cases, such bonds are secured by land
which is undeveloped at the time of issuance but anticipated to be developed
within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby
increasing the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal liability of
the owners of the property assessed, the lien on the property is the only
security for the bonds. Moreover, in most cases the issuer of these bonds is
not required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve
fund established for the bonds.
Certain California long-term lease obligations, though typically payable
from the general fund of the municipality, are subject to "abatement" in the
event the facility being leased is unavailable for beneficial use and
occupancy by the municipality during the term of the lease. Abatement is not
a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs.
The most common causes of abatement are failure to complete construction of
the facility before the end of the period during which lease payments have
been capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid
when due.
Several years ago the Richmond United School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover
operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a State receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State was a named defendant (on the
grounds that it controlled the District's finances). One of the defenses
raised in answer to this lawsuit was the invalidity of the original lease
transaction. The trial court has upheld the validity of the District's
lease, and the case has been settled. Any judgment in any future case
against the position asserted by the Trustee in the Richmond case may have
adverse implications for lease transactions of a similar nature by other
California entities.
The repayment of Industrial Development Securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to
health care providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds
are secured solely by the increase in assessed valuation of a redevelopment
project area after the start of redevelopment activity. In the event that
assessed values in the redevelopment project decline (e.g., because of a
major natural disaster such as an earthquake), the tax increment revenue may
be insufficient to make principal and interest payments on these bonds. Both
Moody's and S&P suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
Issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
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The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been
or may be introduced which would modify existing taxes or other revenue-
raising measures or which either would further limit or, alternatively, would
increase the abilities of state and local governments to impose new taxes or
increase existing taxes. It is not presently possible to determine the
impact of any such legislation on California Municipal Obligations in which
the Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California Municipal
Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Any California Municipal Obligation in
the Portfolio could be affected by an interruption of revenues because of
damaged facilities, or, consequently, income tax deductions for casualty
losses or property tax assessment reductions. Compensatory financial
assistance could be constrained by the inability of (i) an issuer to have
obtained earthquake insurance coverage at reasonable rates; (ii) an insurer
to perform on its contracts of insurance in the event of widespread losses;
or (iii) the Federal or State government to appropriate sufficient funds
within their respective budget limitations.
At the time of the closing for each California Trust, Special Counsel to
each California Trust for California tax matters, rendered an opinion under
then existing California income tax law applicable to taxpayers whose income
is subject to California income taxation substantially to the effect that:
(1) the California Trust is not an association taxable as a corporation
and the income of the California Trust will be treated as the
income of the Unitholders under the income tax laws of California;
(2) amounts treated as interest on the underlying Securities in the
California Trust which are exempt from tax under California
personal income tax and property tax laws when received by the
California Trust will, under such laws, retain their status as tax-
exempt interest when distributed to Unitholders. However, interest
on the underlying Securities attributed to a Unitholder which is a
corporation subject to the California franchise tax laws may be
includable in its gross income for purposes of determining its
California franchise tax. Further, certain interest which is
attributable to a Unitholder subject to the California personal
income tax and which is treated as an item of tax preference for
purposes of the federal alternative minimum tax pursuant to Section
57(a)(5) of the Internal Revenue Code of 1986 may also be treated
as an item of tax preference that must be taken into account in
computing such Unitholder's alternative minimum taxable income for
purposes of the California alternative minimum tax enacted by 1987
California Statutes, chapter 1138. However, because of the
provisions of the California Constitution exempting the interest on
bonds issued by the State of California, or by local governments
within the state, from taxes levied on income, the application of
the new California alternative minimum tax to interest otherwise
exempt from the California personal income tax in some cases may be
unclear;
(3) under California income tax law, each Unitholder in the California
Trust will have a taxable event when the California Trust disposes
of a Security (whether by sale, exchange, redemption, or payment at
maturity) or when the Unitholder redeems or sells Units. Because of
the requirement that tax cost basis be reduced to reflect
amortization of bond premium, under some circumstances a Unitholder
may realize taxable gains when Units are sold or redeemed for an
amount equal to, or less than, their original cost. The total cost
of each Unit in the California Trust to a Unitholder is allocated
among each of the Bond issues held in the California Trust (in
accordance with the proportion of the California Trust comprised by
each Bond issue) in order to determine his per Unit tax cost for
each Bond issue; and the tax cost reduction requirements relating
to amortization of bond premium will apply separately to the per
Unit tax cost of each Bond issue. Unitholders' bases in their
units, and the bases for their fractional interest in each Trust
asset, may have to be adjusted for their pro rata share of accrued
interest received, if any, on Securities delivered after the
Unitholders' respective settlement dates;
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(4) under the California personal property tax laws, bonds (including
the Securities in the California Trust) or any interest therein is
exempt from such tax;
(5) any proceeds paid under the insurance policy issued to the
California Trust with respect to the Securities which represent
maturing interest on defaulted obligations held by the Trustee will
be exempt from California personal income tax if, and to the same
extent as, such interest would have been so exempt if paid by the
issuer of the defaulted obligations; and
(6) under Section 17280(b)(2) of the California Revenue and Taxation
Code, interest on indebtedness incurred or continued to purchase or
carry Units of the California Trust is not deductible for the
purposes of the California personal income tax. While there
presently is no California authority interpreting this provision,
Section 17280(b)(2) directs the California Franchise Tax Board to
prescribe regulations determining the proper allocation and
apportionment of interest costs for this purpose. The Franchise Tax
Board has not yet proposed or prescribed such regulations. In
interpreting the generally similar Federal provision, the Internal
Revenue Service has taken the position that such indebtedness need
not be directly traceable to the purchase or carrying of Units
(although the Service has not contended that a deduction for
interest on indebtedness incurred to purchase or improve a personal
residence or to purchase goods or services for personal consumption
will be disallowed). In the absence of conflicting regulations or
other California authority, the California Franchise Tax Board
generally has interpreted California statutory tax provisions in
accord with Internal Revenue Service interpretations of similar
Federal provisions.
At the respective times of issuance of the Securities, opinions relating
to the validity thereof and to the exemption of interest thereon from Federal
income tax and California personal income tax are rendered by bond counsel to
the respective issuing authorities. Except in certain instances in which
Special Counsel acted as bond counsel to issuers of Securities, and as such
made a review of proceedings relating to the issuance of certain Securities
at the time of their issuance, Special Counsel has not made any special
review for the California Trust of the proceedings relating to the issuance
of the Securities or of the basis for such opinions.
COLORADO TRUST. The State Constitution requires that expenditures for any
fiscal year not exceed revenues for such fiscal year. By statute, the amount
of General Fund revenues available for appropriation is based upon revenue
estimates which, together with other available resources, must exceed annual
appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve requirement for
fiscal years 1991, 1992 and 1993 was set at 3% of total appropriations from
the General Fund. For fiscal years 1994 and thereafter, the Unappropriated
Reserve requirement is set at 4%. In addition to the Unappropriated Reserve,
a constitutional amendment approved by Colorado voters in 1992 requires the
State and each local government to reserve a certain percentage of its fiscal
year spending (excluding bonded debt service) for emergency use (the
"Emergency Reserve"). The minimum Emergency Reserve is set at 2% for 1994
and 3% for 1995 and later years. For fiscal year 1992 and thereafter,
General Fund appropriations are also limited to an amount equal to the cost
of performing certain required reappraisals of taxable property plus an
amount equal to the lesser of (i) five percent of Colorado personal income or
(ii) 106% of the total General Fund appropriations for the previous fiscal
year. This restriction does not apply to any General Fund appropriations
which are required as a result of a new federal law, a final state or federal
court order or moneys derived from the increase in the rate or amount of any
tax or fee approved by a majority of the registered electors of the State
voting at any general election. In addition, the statutory limit on the
level of General Fund appropriations may be exceeded for a given fiscal year
upon the declaration of a State fiscal emergency by the State General
Assembly.
The 1992 General Fund balance was $133.3 million, which was $49.1 million
below the Unappropriated Reserve requirement. The 1993 fiscal year ending
General Fund balance was $326.6 million, or $196.7 million over the required
Unappropriated Reserve and Emergency Reserve. Based on June 20, 1994
estimates, the 1994 fiscal year ending General Fund balance is expected to be
$337.7 million, or $224.3 million over the required Unappropriated Reserve
and Emergency Reserve.
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On November 3, 1992 voters in Colorado approved a constitutional amendment
(the "Amendment") which, in general, became effective December 31, 1992, and
which could restrict the ability of the State and local governments to
increase revenues and impose taxes. The Amendment applies to the State and
all local governments, including home rule entities ("Districts").
Enterprises, defend as government-owned businesses authorized to issue
revenue bonds and receiving under 10% of annual revenue in grants from all
Colorado state and local governments combined, are excluded from the
provisions of the Amendment.
The provisions of the Amendment are unclear and will probably require
judicial interpretation. Among other provisions, beginning November 4, 1992,
the Amendment requires voter approval prior to tax increases, creation of
debt, or mill levy or valuation for assessment ratio increases. The
Amendment also limits increases in government spending and property tax
revenues to specified percentages. The Amendment requires that District
property tax revenues yield no more than the prior year's revenues adjusted
for inflation, voter approved changes and (except with regard to school
districts) local growth in property values according to a formula set forth
in the Amendment. School districts are allowed to adjust tax levies for
changes in student enrollment. Pursuant to the Amendment, local government
spending is to be limited by the same formula as the limitation for property
tax revenues. The Amendment limits increases in expenditures from the State
General Fund and program revenues (cash funds) to the growth in inflation
plus the percentage change in State population in the prior calendar year.
The bases for initial spending and revenue limits are fiscal year 1992
spending and 1991 property taxes collected in 1992. The bases for spending
and revenue limits for fiscal year 1994 and later years will be the prior
fiscal year's spending and property taxes collected in the prior calendar
year. Debt service changes, reductions and voter-approved revenue changes are
excluded from the calculation bases. The Amendment also prohibits new or
increased real property transfer tax rates, new State real property taxes and
local District income taxes.
Litigation concerning several issues relating to the Amendment is pending
in the Colorado courts. The litigation deals with three principal issues:
(i) whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease purchase agreement subject to annual appropriations is an obligation
which requires voter approval prior to execution of the agreement; and(iii)
what constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September, 1994, the Colorado Supreme Court held that
Districts can increase mill levies to pay levies to pay debt service on
general obligation bonds issued after the effective date of the Amendment;
litigation regarding mill levy increases to pay general obligation bonds
issued prior to the Amendment is still pending. Various cases addressing the
remaining issues are at different stages in the trial and appellate process.
The outcome of such litigation cannot be predicted at this time.
According to the Colorado Economic Perspective, Fourth Quarter, FY 1993-
94, June 20, 1994 (the "Economic Report"), inflation for 1992 was 3.8% and
population grew at the rate of 2.8% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1994 fiscal year will
be limited to 6.6% over expenditures during the 1993 fiscal year. The 1993
fiscal year is the base year for calculating the limitation for the 1994
fiscal year. The limitation for the 1995 fiscal year is projected to be
7.1%, based on projected inflation of 4.2% for 1993 and projected population
growth of 2.9% during 1993. For the 1993 fiscal year, the General Fund
revenues totalled $3,443.3 million and program revenues (cash funds) totalled
$1,617.6 million, resulting in total estimated base revenues of $5,060.9
million. Expenditures for the 1994 fiscal year, therefore, cannot exceed
$5,394.9 million. However, the 1994 fiscal year General Fund and program
revenues (cash funds) are projected to be only $5,242.8 million, or $152.1
million less than expenditures allowed under the spending limitation.
There is also a statutory restriction on the amount of annual increases in
taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it adopted
various measures, including impoundment of funds by the Governor, reduction
of appropriations by the General Assembly, a temporary increase in the sales
tax, deferral of certain tax reductions and inter-fund borrowings. On a GAAP
basis, the State had unrestricted General Fund balances at June 30 of
approximately $100.3 million in fiscal year 1988,
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$134.8 million in fiscal year 1989 $116.6 million in fiscal year 1990, $16.3
million in fiscal year 1991 and $133.3 million in fiscal year 1992 and
$326.6 million in fiscal year 1993. The fiscal year 1994 unrestricted
General Fund is currently projected to be $337.7 million.
For fiscal year 1993, the following tax categories generated the following
respective revenue percentages of the States's $3,443.3 million total gross
receipts: individual taxes represented 51.1% of gross fiscal year 1993
receipts; sales, use and excise taxes represented 31.3% of gross fiscal year
1993 receipts; and corporate income taxes represented 4.0% of gross fiscal
year 1993 receipts. The final budget for fiscal year 1994 projects general
fund revenues of approximately $3,570.8 million and appropriations of
approximately $3,556.8 million. The percentages of general fund revenue
generated by type of tax for fiscal year 1994 are not expected to be
significantly different from fiscal year 1993 percentages.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized
to issue bonds secured by revenues from specific projects and activities.
The State enters into certain lease transactions which are subject to annual
renewal at the option of the State. In addition, the State is authorized to
issue short-term revenue anticipation notes. Local governmental units in the
State are also authorized to incur indebtedness. The major source of
financing for such local government indebtedness is an ad valorem property
tax. In addition, in order to finance public projects, local governments in
the State can issue revenue bonds payable from the revenues of a utility or
enterprise or from the proceeds of an excise tax, or assessment bonds payable
from special assessments. Colorado local governments can also finance public
projects through leases which are subject to annual appropriation at the
option of the local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval for the
creation of any multiple fiscal year debt or other financial obligation
whatsoever, except for refundings at a lower rate or obligations of an
enterprise.
Based on data published by the State of Colorado, Office of State Planning
and Budgeting as presented in the Economic Report, over 50% of non-
agricultural employment in Colorado in 1993 was concentrated in the retail
and wholesale trade and service sectors, reflecting the importance of tourism
to the State's economy and of Denver as a regional economic and
transportation hub. The government and manufacturing sectors followed as the
fourth and fifth largest employment sectors in the State, representing
approximately 17.8% and 11.3%, respectively, of non-agricultural employment
in the State in 1993.
According to the Economic Report, the unemployment rate improved slightly
from an average of 5.9% during 1992 to 5.2% during 1993. Total retail sales
increased by 9.7% during 1993. Colorado continued to surpass the job growth
rate of the U.S. with a 3.4% rate of growth projected for Colorado in 1994,
as compared with 2.2% for the nation as a whole. However, the rate o job
growth in Colorado is expected to decline in 1995, primarily due to the
completion in 1994 of large public works projects such as Denver
International Airport, Coors Baseball Field, and the Denver public Library
renovation project.
Personal income rose 6.6% in Colorado during 1992 and 5.5% in 1991. In
1992, Colorado was the twelfth fastest growing state in terms of personal
income growth. However, because of heavy migration into the state and a
large increase in low-paying retail sector jobs, per capita personal income
in Colorado increased by only 3.8% in 1992, 0.1% below the increase in per
capita personal income for the nation as a whole.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
At the time of the closing for each Colorado Trust, Special Counsel to the
Fund for Colorado tax matters rendered an opinion under then existing
Colorado income tax law applicable to taxpayers whose income is subject to
Colorado income taxation substantially to the effect that:
Because Colorado income tax law is based upon the Federal law, the
Colorado Trust is not an association taxable as a corporation for purposes of
Colorado income taxation.
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With respect to Colorado Unitholders, in view of the relationship between
Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a pro rata share
of each asset of the Colorado Trust for Colorado income tax
purposes in the proportion that the number of Units of such Trust
held by the Unitholder bears to the total number of outstanding
Units of the Colorado Trust, and the income of the Colorado Trust
will therefore be treated as the income of each Colorado Unitholder
under Colorado law in the proportion described;
(2) Interest on Bonds that would not be includable in income for income
tax purposes when paid directly to a Colorado Unitholder will be
exempt from Colorado income taxation when received by the Colorado
Trust and attributed to such Colorado Unitholder and when
distributed to such Colorado Unitholder;
(3) Any proceeds paid under an insurance policy or policies issued to
the Colorado Trust with respect to the Bonds in the Colorado Trust
which represent maturing interest on defaulted obligations held by
the Trustee will be excludable from Colorado adjusted gross income
if, and to the same extent as, such interest would have been so
excludable if paid in the normal cause by the issuer of the
defaulted obligations;
(4) Any proceeds paid under individual policies obtained by issuers of
Bonds in the Colorado Trust which represent maturing interest on
defaulted obligations held by the Trustee will not be includable
in income for Colorado income tax purposes if, and to the same
extent as, such interest would have been so excludable if paid in
the normal course by the issuer of the defaulted obligations;
(5) Each Colorado Unitholder will realize taxable gain or loss when the
Colorado Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Colorado Unitholder
redeems or sells Units at a price that differs from original cost
as adjusted for amortization of bond discount or premium and other
basis adjustments (including any basis reduction that may be
required to reflect a Colorado Unitholders share of interest, if
any, accuring on Bonds during the interval between the Colorado
Unitholders settlement date and the date such Bonds are delivered
to the Colorado Trust, if later);
(6) Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Colorado
Unitholders realizing taxable gain when their Units are sold or
redeemed for an amount equal to or less than their original cost;
and
(7) If interest on indebtedness incurred or continued by a Colorado
Unitholder to purchase Units in the Colorado Trust is not
deductible for federal income tax purposes, it also will be non-
deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest, including their
share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
FLORIDA TRUSTS. Florida's economy has in the past been highly dependent
on the construction industry and construction related manufacturing. This
dependency has declined in recent years and continues to do so as a result of
continued diversification of the State's economy. For example, in 1980 total
contract construction employment as a share of total non-farm employment was
just over seven percent and in 1993 the share had edged downward to five
percent. This trend is expected to continue as Florida's economy continues
to diversify. Florida, nevertheless, has a dynamic construction industry
with single and multi-family housing starts accounting for 8.5% of total U.S.
housing starts in 1993 while the State's population is 5.3% of the U.S.
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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 Florida currently is the
fourth most populous state (with an estimated population of 13.4 million),
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 two or more residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties. Economic
growth and existing supplies of homes also contribute to the level of
construction activity in the State.
Since 1980, the State's job creation rate is almost twice the rate for the
nation as a whole, and its growth rate in new non-agricultural jobs is the
fastest of the 11 most populous states and second only to California in the
total number of new jobs created. Contributing to the State's rapid rate of
growth in employment and income is international trade. Since 1980, the
State's unemployment rate has generally been below that of the U.S. In
recent years, however, as the State's economic growth has slowed from its
previous highs, the State's unemployment rate has tracked above the national
average. The average in Florida since 1980 has been 6.5% while the national
average is 7.1%. According to the U.S. Department of Commerce, the Florida
Department of Labor and Employment Security, and the Florida Consensus
Economic Estimating Conference (together, the "Organization"), the State's
unemployment rate was 8.2% during 1992. As of January, 1994, the
Organization estimates that the unemployment rate will be 6.7% for 1993-94
and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector has exceeded
that of the U.S. From the beginning of 1980 through 1993, the State added
over 50,100 new manufacturing jobs, an 11.7% increase. During the same
period, national manufacturing employment declined ten out of the fourteen
years, for a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 2.7% in 1993-
94 and rise 3.8% in 1994-95. Trade and services, the two largest figures,
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.
Tourism is one of Florida's most important industries. Approximately 41.1
million tourists visited the State in 1993, as reported by the Florida
Department of Commerce. In terms of business activities and state tax
revenues, tourists in Florida in 1993 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air
and car. The State's tourism industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals are expected to decline by almost two percent
this year, but are expected to recover next year with 5.0% growth. 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.
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 income 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.
Compared to other states, Florida has a proportionately greater retirement
age population which comprises 18.3% (as of April 1, 1991) of the State's
population and is forecast to grow at an average annual rate of over 1.96%
through the 1990s. Thus, property income (dividends, interest, and rent) and
transfer payments (Social Security and pension benefits, among other sources
of income) are relatively more important source of income. For example,
Florida's total wages and salaries and other labor income in 1993 was 62.0%
of total income,
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while a similar figure for the nation for 1992 was 72.0%. Transfer payments
are typically less sensitive to the business cycle than employment income
and, therefore, act as stabilizing forces in weak economic periods. While
many of the U.S.'s senior citizens choose the State as their place of
retirement, the State is also recognized as attracting a significant number
of working age people. Since 1982, the prime working age population (18-44)
has grown at an average annual rate of 3.3%.
In fiscal year 1991-92, approximately 64% of the State's total direct
revenue to its three operating funds will be derived from State taxes, with
federal grants and other special revenue accounting for the balance. State
sales and use tax, corporate income tax, and beverage tax amounted to 68%, 7%
and 5%, respectively, of total receipts by the General Revenue Fund during
fiscal year 1991-92. In that same year, expenditures for education, health
and welfare, and public safety amounted to 53%, 30% and 13.3%, respectively,
of total expenditures from the General Revenue Fund.
Hurricane Andrew left some parts of south Florida devastated. Post-
Hurricane 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 118,000, increasing to 134,300 next
year. Lingering recessionary effects on consumers and tight credit are two
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
Hurricane 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 Hurricane Andrew. Total construction expenditures are
forecasted to increase 15.6% this year and increase 13.3% next year.
The State Constitution and statutes mandate that the State budget, as a
whole, and each separate fund within the State budget, be kept in balance
from currently available revenues each fiscal year. If the Governor or
Comptroller believes a deficit will occur in any State fund, by statute, he
must certify his opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund. Additionally, the State
Constitution prohibits issuance of State obligations to fund State
operations.
Estimated fiscal year 1993-94 General Revenue plus Working Capital funds
available 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 $159.00 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief trust fund. The 13,860.8 million is 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 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%, 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 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 such use by such counties and
the municipalities therein. In
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addition to this distribution, local governments may (by referendum) assess a
0.5% or a 1.0% discretionary sales tax within their county. Proceeds from
this local option sales tax are earmarked for funding local infrastructure
programs and acquiring land for public recreation or conservation or
protection of natural resources as provided under Florida law. Certain
charter counties have other taxing powers in addition, 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 1991-92.
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 the fiscal year ending June 30,
1993. Alcoholic beverage tax receipts declined 1.6% over the previous year.
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, a
decrease of 5.6% from fiscal year 1991-92.
The State also 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 totaled $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 deposited to the General
Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas, and
telecommunications services. All gross receipts utilities tax collections
are credited to the State's Public Education Capital Outlay and Debt Service
Trust Fund. In fiscal year 1992-93, this amounted to $447.9 million.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes,
governmental leaseholds, and certain other intangibles not secured by a lien
on Florida real property. The annual rate of tax is 2 mils. 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
tangible 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 began its own lottery in 1988. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38% 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 $810.4 million.
The State's severance tax applies to 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, 60.0% of this amount is
transferred to the General Revenue Fund.
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 and 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 in fact
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 manufacturing jobs. Also, while interest rates remain
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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 commercia rental space
continues, construction of this type of space will likely continue to remain
slow.
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
from currently available revenues each fiscal year. If the Governor or
Comptroller believe a deficit will occur in any State fund, by statute, he
must certify his opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund. Additionally, the State
Constitution prohibits issuance of State obligations to fund State
operations.
Currently under litigation are several issues relating to State actions or
State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse affect on
Florida's financial position.
Florida law provides preferential tax treatment to insurers who maintain a
home office in the State. Certain insurers challenged the constitutionality
of this tax preference and sought a refund of taxes paid. Recently, the
State Supreme Court ruled in favor of the State. This case and others, along
with pending refund claims, total about $150 million.
The State imposes a $295 fee on the issuance of certificates of title for
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 judgement 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 of $100 million.
Florida maintains a bond rating of Aa and AA from Moody's Investors
Service and Standard & Poor's, respectively, on the majority of its general
obligation bonds, although the rating of a particular series of revenue bonds
relates primarily to the project, facility, or other revenue sources from
which such series derives funds for repayment. While these ratings and some
of the information presented above indicate that Florida is in satisfactory
economic health, there can be no assurance that there will not be a decline
in economic conditions or that particular Municipal Obligations purchased by
the Fund will not be adversely affected by any such changes.
The sources for the information above include official statements and
financial statements of the State of Florida. While the Sponsor has not
independently verified this information, the Sponsor has no reason to believe
that the information is not correct in all material respects.
At the time of the closing for each Florida Trust, Counsel to each Florida
Trust for Florida tax matters, rendered an opinion under then existing
Florida income tax law applicable to taxpayers whose income is subject to
Florida income taxation substantially to the effect that:
(1) For Florida state income tax purposes, the Florida Trust will not
be subject to the Florida income tax imposed by Chapter 220,
Florida Statutes. In addition, Florida does not impose any income
taxes at the local level.
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(2) Because Florida does not impose an income tax on individuals, non-
corporate Unitholders residing in Florida will not be subject to
any Florida income taxation on income realized by the Florida
Trust. Any amounts paid to the Florida Trust or to non-corporate
Unitholders residing in Florida under an insurance policy issued to
the Florida Trust or the Sponsor which represent maturing interest
on defaulted obligations held by the Trustee will not be subject to
the Florida income tax imposed by Chapter 220, Florida Statutes to
the extent not included in gross income for Federal income tax
purposes.
(3) Corporate Unitholders with commercial domiciles in Florida will be
subject to Florida income or franchise taxation on income realized
by the Florida Trust and on payments of interest pursuant to any
insurance policy. Other corporate Unitholders will be subject to
Florida income or franchise taxation on income realized by the
Florida Trust (or on payments of interest pursuant to any
insurance policy) only to the extent that the income realized does
not constitute "non-business income" as defined by Chapter 220.
(4) Units will be subject to Florida estate tax only if held by Florida
residents. However, the Florida estate tax is limited to the amount
of the credit for state death taxes provided for in Section 2011
of the Internal Revenue Code.
(5) Neither the Bonds nor the Units will be subject to the Florida ad
valorem property tax, the Florida intangibles personal property tax
or Florida sales or use tax.
LOUISIANA TRUSTS. The following discussion regarding the financial
condition of the state government may not be relevant to general obligation
or revenue bonds issued by political subdivisions of and other issuers in the
State of Louisiana (the "State"). Such information, and the following
discussion regarding the economy of the State, is based upon information
about general economic conditions that may or may not affect issuers of the
Louisiana obligations. The Sponsor has not independently verified any of the
information contained in such publicly available documents, but is not aware
of any facts which would render such information inaccurate. On December 19,
1990 the State received a rating upgrade on its general obligation bonds to
the current Standard & Poor's rating of A from BBB-plus and was placed on
Standard & Poor's Corporation's positive credit watch. Standard & Poor's
cited improvements in the State's cash flow and fiscal reforms approved by
voters in the fall of 1990. The current Moody's rating on the State's
general obligation bonds remains unchanged at BBB-plus. There can be no
assurance that the economic conditions on which these ratings were based will
continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions.
The Revenue Estimating Conference (the "Conference") was established by
Act No. 814 of the 1987 Regular Session of the State Legislature. The
Conference was established by the Legislature to provide an official estimate
of anticipated State revenues upon which the executive budget shall be based,
to provide for a more stable and accurate method of financial planning and
budgeting and to facilitate the adoption of a balanced budget as is required
by Article VII, Section 10(B) of the State Constitution. Act No. 814
provides that the Governor shall cause to be prepared an executive budget
presenting a complete financial and programmatic plan for the ensuing fiscal
year based only upon the official estimate of anticipated State revenues as
determined by the Revenue Estimating Conference. Act No. 814 further
provides that at no time shall appropriations or expenditures for any fiscal
year exceed the official estimate of anticipated State revenues for that
fiscal year. During the 1990 Regular Session of the Louisiana Legislature a
constitutional amendment was approved (Act No. 1096), which was approved by
the State electorate, granting constitutional status to the existence of the
Revenue Estimating Conference without altering its structure, powers, duties
and responsibilities which are currently provided by statute.
The State General Fund is the principal operating fund of the State, and
was established administratively to provide for the distribution of funds
appropriated by the State Legislature for the ordinary expenses of the State
government. Revenue is provided from the direct deposit of federal grants
and the transfer of State revenues from the Bond Security and Redemption Fund
after general obligation debt requirements are met.
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The Revenue Estimating Conference met in February of 1991 and reported a
projected $437.5 million State General Fund surplus for the fiscal year
ending June 30, 1991. This surplus will be available for expenditures during
the Fiscal Year 1991-92. The beginning State General Fund surplus for fiscal
year 1990-1991 was $702.3 million. The official recurring State General Fund
estimate for Fiscal Year 1990-91 (Revenue Estimating Conference February 1991
as revised April 1991) is $4,173.5 million.
The Transportation Trust Fund was established pursuant to (i) Section 27
of Article VII of the State Constitution and (ii) Act No. 16 of the First
Extraordinary Session of the Louisiana Legislature for the year 1989
(collectively the "Act") for the purpose of funding construction and
maintenance of state and federal roads and bridges, the statewide flood-
control program, ports, airports, transit and state police traffic control
projects and to fund the Parish Transportation Fund. The Transportation
Trust Fund is funded by a levy of $0.20 per gallon on gasoline and motor
fuels and on special fuels (diesel, propane, butane and compressed natural
gas) used, sold or consumed in the state (the "Gasoline and Motor Fuels Taxes
and Special Fuels Taxes"). This levy was increased from $0.16 per gallon
(the "Existing Taxes") to the current $0.20 per gallon pursuant to Act No. 16
of the First Extraordinary Session of the Louisiana Legislature for the year
1989, as amended. The additional tax of $0.04 per gallon (the "Act 16
Taxes") became effective January 1, 1990 and will expire on the earlier of
January 1, 2005 or the date on which obligations secured by the Act No. 16
taxes are no longer outstanding. The Transportation Infrastructure Model for
Economic Development Account (the "TIME Account") was established in the
Transportation Trust Fund. Moneys in the TIME Account will be expended for
certain projects identified in the Act aggregating $1.4 billion and to fund
not exceeding $160 million of additional capital transportation projects.
The State issued $263,902,639.95 of Gasoline and Fuels Tax Revenue Bonds,
1990 Series A, dated April 15, 1990 payable from the (i) Act No. 16 Taxes,
(ii) any Act No. 16 Taxes and Existing Taxes deposited in the Transportation
Trust Fund, and (iii) any additional taxes on gasoline and motor fuels and
special fuels pledged for the payment of said Bonds.
The Louisiana Recovery District (the "Recovery District") was created
pursuant to Act No. 15 of the First Extraordinary Session of the Legislature
of Louisiana of 1988 to assist the State in the reduction and elimination of
a deficit existing at the time and the delivery of essential services to its
citizens and to assist parishes, cities and other units of local government
experiencing cash flow difficulties. The Recovery District is a special
taxing district the boundaries of which are coterminous with the State and is
a body politic and corporate and a political subdivision of the State. The
Recovery District issued $979,125,000 of Louisiana Recovery District Sales
Tax Bonds, Series 1988, dated July 1, 1988, secured by (i) the revenues
derived from the District's 1% statewide sales and use tax remaining after
the costs of collection and (ii) all funds and accounts held under the
Recovery District's General Bond Resolution and all investment earnings on
such funds and accounts. As of June 30, 1990, the principal amount
outstanding was $851,880,000. The Legislature passed tax measures which are
projected to raise approximately $418 million in additional revenues for
Fiscal Year 1990-91, the most important of which include the following: sales
tax $328.3 million; hazardous waste tax $41.3 million; severance tax $39.2
million; income tax $14.9 million; and tobacco tax $14.0 million. The
Legislature also passed several constitutional amendments which were approved
by the state electorate, resulting in comprehensive budgetary reforms
mandating that: both proposed and adopted budgets be balanced in accordance
with the official forecast of the Revenue Estimating Conference; any new tax
proposal be tied to specific expenditures; all mineral revenues earned by the
State in excess of $750 million be placed in the Revenue Stabilization
Mineral Trust Fund, to be used as a "rainy day fund"; and the regular
legislative session must end prior to the completion of the fiscal year in
order to streamline budgetary reporting and planning. The Legislature also
adopted a proposed constitutional amendment which was approved by the State
electorate permitting the creation of a Louisiana lottery. The lottery is
projected to generate approximately $111 million per year in net revenues for
the State. Only local governmental units levy ad valorem taxes at present.
Under the 1921 State Constitution a 5.75 mills ad valorem tax was being
levied by the State until January 1, 1973 at which time a constitutional
amendment to the 1921 Constitution abolished the ad valorem tax. Under the
1974 State Constitution a State ad valorem tax of up to 5.75 mills was
provided for but is not presently being levied. The property tax is
underutilized at the parish level due to a constitutional homestead exemption
from the property tax applicable to the first $75,000 of the full market
value of single family residences. Homestead exemptions do not apply to ad
valorem property taxes levied by municipalities, with the exception of the
City of New Orleans. Since local governments are also prohibited from
levying an individual income tax by the constitution, their reliance on State
government is increased under the existing tax structure.
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The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of the Louisiana Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors may
affect the issuers of Bonds, the market value or marketability of the Bonds
or the ability of the respective issuers of the Bonds acquired by the
Louisiana Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust, Special Counsel to
each Louisiana Trust for Louisiana tax matters rendered an opinion under then
existing Louisiana income tax law applicable to taxpayers whose income is
subject to Louisiana income taxation substantially to the effect that:
(1) The Louisiana Trust will be treated as a trust for Louisiana income
tax purposes and not as an association taxable as a corporation.
(2) The Louisiana income tax on resident individuals is imposed upon
the "tax table income" of resident individuals. The calculation of
the "tax table income" of a resident individual begins with federal
adjusted gross income. Certain modifications are specified, but no
such modification requires the addition of interest on obligations
of the State of Louisiana and its political subdivisions, public
corporations created by them and constitutional authorities thereof
authorized to issue obligations on their behalf. Accordingly,
amounts representing interest excludable from gross income for
federal income tax purposes received by the Louisiana Trust with
respect to such obligations will not be taxed to the Louisiana
Trust or, except as provided below, to the resident individual
Unitholder, for Louisiana income tax purposes. In addition to the
foregoing, interest on the respective Securities may also be exempt
from Louisiana income taxes pursuant to the statutes authorizing
their issuance.
(3) To the extent that gain from the sale, exchange or other
disposition of obligations held by the Louisiana Trust (whether as
a result of a sale or exchange of such obligations by the
Louisiana Trust or as a result of a sale or exchange of a Unit by
a Unitholder) is includable in the federal adjusted gross income
of a resident individual, such gain will be included in the
calculation of the Unitholders Louisiana taxable income; and
(4) Gain or loss on the Unit or as to underlying bonds for Louisiana
income tax purposes would be determined by taking into account the
basis adjustments for federal income tax purposes described in this
Prospectus.
As no opinion is expressed regarding the Louisiana tax consequences of
Unitholders other than individuals who are Louisiana residents, tax counsel
should be consulted by other prospective Unitholders. The Internal Revenue
Code of 1986, as amended (the "1986 Code"), contains provisions relating to
investing in tax-exempt obligations (including, for example, corporate
minimum tax provisions which treat certain tax-exempt interest and corporate
book income which may include tax-exempt interest, as tax preference items,
provisions reducing the deductibility of interest expense by financial
institutions) which could have a corresponding effect on the Louisiana tax
liability of the Unitholders.
In rendering the opinions expressed above, counsel has relied upon the
opinion of Chapman and Cutler that the Louisiana Trust is not an association
taxable as a corporation for federal income tax purposes, that each
Unitholder of the Louisiana Trust will be treated as the owner of a pro rata
portion of such Louisiana Trust under the 1986 Code and that the income of
the Louisiana Trust will be treated as income of the Unitholders under the
1986 Code.
Tax counsel should be consulted as to the other Louisiana tax consequences
not specifically considered herein, and as to the Louisiana tax status of
taxpayers other than resident individuals who are Unitholders in
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the Louisiana Trust. In addition, no opinion is being rendered as to
Louisiana tax consequences resulting from any proposed or future federal or
state tax legislation.
MASSACHUSETTS TRUSTS. As described above, the Massachusetts Trust will
invest substantially all of its net assets in obligations issued by or on
behalf of the Commonwealth of Massachusetts, political subdivisions thereof,
or agencies or instrumentalities of the Commonwealth or its political
subdivisions (the "Bonds"). The Massachusetts Trust is therefore susceptible
to general or particular political, economic, or regulatory factors that may
affect issuers of such Massachusetts Investments. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information may not be applicable to "conduit"
obligations on which the public issuer itself has no financial
responsibility. This information is derived from official statements of the
Commonwealth and certain of its agencies or instrumentalities in connection
with the issuance of securities, and from other publicly available documents,
and is believed to be accurate. No independent verification has been made of
any of the following information.
The Massachusetts Economy. After declining since 1987, Massachusetts
employment in 1993 has shown positive annual growth. While Massachusetts has
benefitted from an annual job growth rate of approximately 2% since the early
1980s, by 1989, employment had started to decline. Nonagricultural
employment declined 0.7% in fiscal 1989, 4.0% in fiscal 1990, 5.5% in fiscal
1991, 1.5% in fiscal 1992, and 0.8% in fiscal 1993. A comparison of total,
nonagricultural employment in November 1992 with that in November 1993
indicates an increase of 0.4%.
From 1980 to 1989, Massachusetts' unemployment rate was significantly
lower than the national average. By 1990, however, unemployment reached
6.0%, exceeding the national average for the first time since 1977. The
Massachusetts unemployment peaked in 1991 at 9.0% and dropped to 6.9% in
1993.
In recent years, per capita personal income growth in Massachusetts has
slowed, after several years during which it was among the highest in the
nation. Between the second quarter of fiscal 1992 and the second quarter of
fiscal 1993, aggregate personal income in Massachusetts increased 4.0% as
compared to 5.5% for the nation as a whole.
The Commonwealth, while the third most densely populated state according
to the 1990 census, has experienced only a modest increase in population from
1980 to 1990 at a rate equal to approximately one-half the rate of increase
in the United States population as a whole.
Massachusetts possesses a diversified economic base which includes
traditional manufacturing, high technology and service industries, served by
an extensive transportation system and related facilities. The Massachusetts
service sector, at approximately 34.2% of the state work force in May of
1994, is the largest sector in the Massachusetts economy. Government
employment is below the national average, representing less than 14% of the
Massachusetts work force. In recent years, the construction, manufacturing
and trade sectors have experienced the greatest decreases in employment in
Massachusetts, with more modest declines taking place in the government,
finance, insurance and real estate, and service sectors. From 1990 to
November of 1994, manufacturing employment in Massachusetts declined by some
15.5%. At the same time, there has occurred a reversal of the dramatic
growth which occurred during the 1980s in the finance, insurance and real
estate sector and in the construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public construction
agenda which is expected not only to improve mobility, but to provide a
substantial number of construction and related employment opportunities,
including the six billion dollar Central Artery/Tunnel project involving the
construction of a third tunnel under Boston Harbor linking the MassPike and
downtown Boston with Logan International Airport, and the depression into
tunnels of the Central Artery that traverses the City of Boston. Federal
funds are expected to cover approximately 90% of the cost of this project.
The Central Artery/Tunnel project is expected to employ approximately 5,000
on-site workers and 10,000 auxiliary workers during the peak years of
construction in the mid-1990s.
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State Finances. In fiscal years 1987 through 1991, Commonwealth spending
exceeded revenues. Spending in five major expenditure categories-Medicaid,
debt service, public assistance, group health insurance and transit
subsidies-grew at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's tax revenues
repeatedly failed to meet official forecasts. That revenue shortfall
combined with steadily escalating costs contributed to serious budgetary and
financial difficulties which have affected the credit standing and borrowing
abilities of Massachusetts and certain of its public bodies and
municipalities, and which may have contributed to higher interest rates on
debt obligations issued by them.
More conservative revenue forecasting for fiscal 1992 together with
significant efforts to restrain spending during fiscal 1991 and reductions in
budgeted program expenditures for fiscal 1992 and fiscal year 1993 and fiscal
1994 have moderated these difficulties, and the Commonwealth has shown
significant surpluses of revenues and other sources over expenditures and
other uses in the Commonwealth's budgeted operating funds for those years.
Notwithstanding these actions, a worsening of the present and its effect on
the financial condition of the Commonwealth and its public authorities and
municipalities could result in a decline in the market values of, or default
on existing obligations including the Bonds deposited in the Massachusetts
Trust.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of obligations held by the Massachusetts Trust are
subject. Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of
the issuers of Bonds, could affect or could have an adverse impact on the
financial condition of the Commonwealth and various agencies and political
subdivisions located in the Commonwealth. The Sponsor is unable to predict
whether or to what extent such factors or other factors may affect the
issuers of the Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the Massachusetts
Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Massachusetts Trust Special Counsel to
each Massachusetts Trust for Massachusetts tax matters rendered an opinion
under then existing Massachusetts income tax law applicable to taxpayers
whose income is subject to Massachusetts income taxation substantially to the
effect that:
(1) For Massachusetts income tax purposes, the Massachusetts Trust will
be treated as a corporate trust under Section 8 of Chapter 62 of
the Massachusetts General Laws and not as a grantor trust under
Section 10(e) of Chapter 62 of the Massachusetts General Laws.
(2) The Massachusetts Trust will not be held to be engaging in business
in Massachusetts within the meaning of said Section 8 and will,
therefore, not be subject to Massachusetts income tax.
(3) Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of Massachusetts General Laws will not be
required to include their respective shares of the earnings of or
distributions from the Massachusetts Trust in their Massachusetts
gross income to the extent that such earnings or distributions
represent tax-exempt interest for federal income tax purposes
received by Massachusetts Trust on obligations issued by
Massachusetts, its counties, municipalities, authorities, political
subdivisions or instrumentalities, or issued by United States
territories or possessions.
(4) Any proceeds of insurance obtained by the Trustee of the Trust or
by the issuer of a Bond held by the Massachusetts Trust which are
paid to Massachusetts Unitholders and which represent maturing
interest on defaulted obligations held by the Trustee will be
excludable from Massachusetts gross income of a Massachusetts
Unitholder if, and to the same extent as, such interest would have
been so excludable if paid by the issuer of the defaulted Bond.
(5) The Massachusetts Trust's capital gains and/or capital losses
realized upon disposition of Bonds held by it will be includable
pro rata in the federal gross income of Massachusetts Unitholders
who are subject to Massachusetts income taxation under Chapter 62
of the Massachusetts General Laws, and such gains and/or losses
will be included as capital gains and/or losses in the
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Massachusetts Unitholders' Massachusetts gross income, except where
capital gain is specifically exempted from income taxation under
acts authorizing issuance of said Bonds.
(6) Gains or losses realized upon sale or redemption of Units by
Massachusetts Unitholders who are subject to Massachusetts income
taxation under Chapter 62 of the Massachusetts General Laws will be
includable in their Massachusetts gross income.
(7) In determining such gain or loss Massachusetts Unitholders will, to
the same extent required for federal tax purposes, have to adjust
their tax bases for their Units for accrued interest received, if
any, on Bonds delivered to the Trustee after the Unitholders pay
for their Units and for amortization of premiums, if any, on
obligations held by the Massachusetts Trust.
(8) The Units of the Massachusetts Trust are not subject to any
property tax levied by Massachusetts or any political subdivision
thereof, nor to any income tax levied by any such political
subdivision. They are includable in the gross estate of a deceased
Massachusetts Unitholder who is a resident of Massachusetts for
purposes of the Massachusetts Estate Tax.
MICHIGAN TRUSTS. Investors should be aware that the economy of the State
of Michigan has, in the past, proven to be cyclical, due primarily to the
fact that the leading sector of the State's economy is the manufacturing of
durable goods. While the State's efforts to diversify its economy have
proven successful, as reflected by the fact that the share of employment in
the State in the durable goods sector has fallen from 33.1 percent in 1960 to
17.9 percent in 1990, durable goods manufacturing still represents a sizable
portion of the State's economy. As a result, any substantial national
economic downturn is likely to have an adverse effect on the economy of the
State and on the revenues of the State and some of its local governmental
units.
In May 1986, Moody's Investors Service raised the State's general
obligation bond rating to "Al". In October 1989, Standard & Poor's Ratings
Group raised its rating on the State's general obligation bonds to "AA".
The State's economy could continue to be affected by changes in the auto
industry, notably consolidation and plant closings resulting from competitive
pressures and over-capacity. Such actions could adversely affect State
revenues and the financial impact on the local units of government in the
areas in which plants are closed could be more severe.
General Motors Corporation has announced the scheduled closing of several
of its plants in Michigan in 1993 and 1994. Some of these closings have
occurred and some have been deferred. The ultimate impact these closures may
have on the State's revenues and expenditures is not currently known. The
impact on the financial condition of the municipalities in which the plants
are located may be more severe than the impact on the State itself.
In recent years, the State has reported its financial results in
accordance with generally accepted accounting principles. For each of the
five fiscal years ending with the fiscal year ended September 30, 1989, the
State reported positive year-end General Fund balances and positive cash
balances in the combined General Fund/School Aid Fund. For the fiscal years
ending September 30, 1990 and 1991, the State reported negative year-end
General Fund Balances of $310.4 million and $169.4 million, respectively, but
ended the 1992 fiscal year with its general fund in balance and ended the
1993 fiscal year with a small general fund surplus. A positive cash balance
in the combined General Fund/School Aid Fund was recorded at September 30,
1990. In the 1991 through 1993 fiscal years the State experienced
deteriorating cash balances which necessitated short term borrowing and the
deferral of certain scheduled cash payments. The State borrowed $900 million
for cash flow purposes in the 1993 fiscal year, which was repaid on September
30, 1993. The State's Budget Stabilization Fund received a $283 million
transfer from the General Fund in the 1993 State fiscal year, bringing the
fund balance to $303 million at September 30, 1993.
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The Michigan Constitution of 1963 limits the amount of total revenues of
the State raised from taxes and certain other sources to a level for each
fiscal year equal to a percentage of the State's personal income for the
prior calendar year. In the event that the State's total revenues exceeds
the limit by 1 percent or more, the Michigan Constitution of 1963 requires
that the excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance reform
amendment to the State's Constitution which, among other things, increased
the State sales ax rate from 4% to 6% and placed a cap on property assessment
increases for all property taxes. Concurrent legislation cut the State's
income tax rate from 4.6% to 4.4.%, reduced some property taxes and altered
local school funding sources to a combination of property taxes and state
revenues, some of which is provided from other new or increased State taxes.
The legislation also contained other provisions that alter (and, in some
cases, may reduce) the revenues of local units of government, and tax
increment bonds could be particularly affected. While the ultimate impact of
the constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such measures
upon the operations and revenues of Michigan local units of government.
Although all or most of the Bonds in the Michigan Trust are revenue
obligations or general obligations of local governments or authorities rather
than general obligations of the State of Michigan itself, there can be no
assurance that any financial difficulties the State may experience will not
adversely affect the market value or marketability of the Bonds or the
ability of the respective obligors to pay interest on or principal of the
Bonds, particularly in view of the dependency of local governments and other
authorities upon State aid and reimbursement programs and, in the case of
bonds issued by the State Building Authority, the dependency of the State
Building Authority on the receipt of rental payments from the State to meet
debt service requirements upon such bonds. In the 1991 fiscal year, the
State deferred certain scheduled cash payments to municipalities, school
districts, universities and community colleges. While such deferrals were
made up at specified later dates, similar future deferrals could have an
adverse impact on the cash position of some local governmental units.
Additionally, the State reduced revenue sharing payments to municipalities
below that level provided under formulas by $10.9 million in the 1991 fiscal
year, up $34.4 million in the 1992 fiscal year, $45.5 million in the 1993
fiscal year and $64.6 million (budgeted) in the 1994 fiscal year.
The Michigan Trust may contain general obligation bonds of local units of
government pledging the full faith and credit of the local unit which are
payable from the levy of ad valorem taxes on taxable property within the
jurisdiction of the local unit. Such bonds issued prior to December 22,
1978, or issued after December 22, 1978 with the approval of the electors of
the local unit, are payable from property taxes levied without limitation as
to rate or amount. With respect to bonds issued after December 22, 1978, and
which were not approved by the electors of the local unit, the tax levy of
the local unit for debt service purposes is subject to constitutional,
statutory and charter tax rate limitations. In addition, several major
industrial corporations have instituted challenges of their ad valorem
property tax assessments in a number of local municipal units in the State.
If successful, such challenges could have an adverse impact on the ad valorem
tax bases of such units which could adversely affect their ability to raise
funds for operating and debt service requirements.
At the time of the closing for each Michigan Trust, Special Counsel to
each Michigan Trust for Michigan tax matters rendered an opinion under then
existing Michigan income tax law applicable to taxpayers whose income is
subject to Michigan income taxation substantially to the effect that:
The Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business Tax in
substantially the same manner as they are for purposes of the Federal
income tax laws, as currently enacted. Accordingly, we have relied
upon the opinion of Messrs. Chapman and Cutler as to the applicability
of Federal income tax under the Internal Revenue Code of 1986 to the
Michigan Trust and the Holders of Units.
Under the income tax laws of the State of Michigan, the Michigan
Trust is not an association taxable as a corporation; the income of
the Michigan Trust will be treated as the income of the Unitholders and
be deemed to have been received by them when received by the Michigan
Trust.
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Interest on the underlying Bonds which is exempt from tax under these
laws when received by the Michigan Trust will retain its status as tax
exempt interest to the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder will
be considered to have received his pro rata share of Bond interest when
it is received by the Michigan Trust, and each Unitholder will have a
taxable event when the Michigan Trust disposes of a Bond (whether by
sale, exchange, redemption or payment at maturity) or when the
Unitholder redeems or sells his Certificate to the extent the
transaction constitutes a taxable event for Federal income tax
purposes. The tax cost of each unit to a Unitholder will be
established and allocated for purposes of these Michigan tax laws in
the same manner as such cost is established and allocated for Federal
income tax purposes;
Under the Michigan Intangibles Tax, the Michigan Trust is not taxable
and the pro rata ownership of the underlying Bonds, as well as the
interest thereon, will be exempt to the Unitholders to the extent the
Michigan Trust consists of obligations of the State of Michigan or its
political subdivisions or municipalities, or of obligations of
possessions of the United States
The Michigan Single Business Tax replaced the tax on corporate and
financial institution income under the Michigan Income Tax, and the
Intangible Tax with respect to those intangibles of persons subject to
the Single Business Tax the income from which would be considered in
computing the Single Business Tax. Persons are subject to the Single
Business Tax only if they are engaged in "business activity", as
defined in the Act. Under the Single Business Tax, both interest
received by a Michigan Trust on the underlying Bonds and any amount
distributed from the Michigan Trust to a Unitholder, if not included in
determining taxable income for Federal income tax purposes, is also not
included in the adjusted tax base upon which the Single Business Tax is
computed, of either the Michigan Trust or the Unitholders. If the
Michigan Trust or the Unitholders have a taxable event for Federal
income tax purposes when the Michigan Trust disposes of a Bond (whether
by sale, exchange, redemption or payment at maturity) or the Unitholder
redeems or sells his Certificate, an amount equal to any gain realized
from such taxable event which was included in the computation of
taxable income for Federal income tax purposes (plus an amount equal to
any capital gain of an individual realized in connection with such
event but excluded in computing that individual's Federal taxable
income) will be included in the tax base against which, after
allocation, apportionment and other adjustments, the Single Business
Tax is computed. The tax base will be reduced by an amount equal to
any capital loss realized from such a taxable event, whether or not the
capital loss was deducted in computing Federal taxable income in the
year the loss occurred. Unitholders should consult their tax advisor
as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee of
the Trust, or paid under individual policies obtained by issuers of
Bonds, which, when received by the Unitholders, represent maturing
interest on defaulted obligations held by the Trustee, will be
excludable from the Michigan income tax laws and the Single Business
Tax if, and to the same extent as, such interest would have been so
excludable if paid by the issuer of the defaulted obligations. While
treatment under the Michigan Intangibles Tax is not premised upon the
characterization of such proceeds under the Internal Revenue Code, the
Michigan Department of Treasury should adopt the same approach as under
the Michigan income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain deduction for
tax years beginning after December 31, 1986, the federal adjusted gross
income, the computation base for the Michigan Income Tax, of a Unitholder
will be increased accordingly to the extent such capital gains are realized
when the Michigan Trust disposes of a Bond or when the Unitholder redeems or
sells a Unit, to the extent such transaction constitutes a taxable event for
Federal income tax purposes.
MINNESOTA TRUSTS. In the early 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.
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In response to revenue shortfalls, the legislature broadened and increased
the State sales tax, increased income taxes (by increasing rates and
eliminating deductions) and reduced appropriations and deferred payment of
State aid, including appropriations for and aids to local governmental units.
The State's fiscal problems affected other governmental units within the
State, such as local government, school districts and state agencies, which,
in varying degrees, also faced cash flow difficulties. In certain cases,
revenues of local governmental units and agencies were reduced by the
recession.
Because of the State's fiscal problems, Standard & Poor's Corporation
reduced its rating on the State's outstanding general obligation bonds from
AAA to AA+ in August 1981 and to AA in March 1982. Moody's Investors
Service, Inc. lowered its rating on the State's outstanding general
obligation bonds from Aaa to Aa in April 1982. The State's economy recovered
in the July 1, 1983 to June 30, 1985 biennium, and substantial reductions in
the individual income tax were enacted in 1984 and 1985. Standard & Poor's
raised its rating on the State's outstanding general obligation bonds to AA+
in January 1985. In 1986, 1987, 1991, 1992, and 1993, legislation was
required to eliminate projected budget deficits by raising additional
revenue, reducing expenditures, including aids to political subdivisions and
higher education, reducing the State's budget reserve (cash flow account),
imposing a sales tax on purchases by local governmental units, and making
other budgetary adjustments. A budget forecast released by the Minnesota
Department of Finance on March 1, 1994 projects a balanced General Fund at
the end of the current biennium, June 30, 1995, plus an increase in the
State's cash flow account from $360 million to $500 million. Total projected
expenditures and transfers for the biennium are $17.0 billion. The forecast
also projects, however, a shortage of $29.5 million in the Local Government
Trust Fund at June 30, 1995, against total projected expenditures from the
Fund of $1.8 billion for the biennium.
State grants and aids represent a large percentage of the total revenues
of cities, towns, counties and school districts in Minnesota. Even with
respect to bonds that are revenue obligations of the issuer and not general
obligations of the State, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability
of the bonds or the ability of the respective obligors to pay interest on and
principal of the bonds.
At the time of the closing for each Minnesota Trust, Special Counsel to
each Minnesota Trust for Minnesota tax matters rendered an opinion under
then existing Minnesota income tax law applicable to taxpayers whose income
is subject to Minnesota income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income consisting
of (i) interest from bonds issued by the State of Minnesota and its
political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities and bonds issued by
possessions of the United States which would be exempt from federal and
Minnesota income taxation when paid directly to an individual, trust or
estate (the "Bonds"), (ii) gain on the disposition of such Bonds, and
(iii) proceeds paid under certain insurance policies issued to the
Trustee or to the issuers of the Bonds which represent maturing
interest or principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor not its counsel have independently examined the Bonds
to be deposited in and held in the Trust. However, although no opinion
expressed herein regarding such matters, it is assumed that: (i) the Bonds
were validly issued, (ii) the interest thereon is excludible from gross
income for federal income tax purposes and (iii) the interest thereon is
exempt from income tax imposed by Minnesota that is applicable to
individuals, trusts and estates (the "Minnesota Income Tax"). It should be
noted that interest on the Bonds is subject to tax in the case of
corporations subject to the Minnesota Corporate Franchise Tax or the
Corporate Alternative Minimum Tax and is a factor in the computation of the
Minimum Fee applicable to financial institutions. The opinion set forth
below does not address the taxation of persons other than full time residents
of Minnesota.
(1) Minnesota Trust will be treated as the owner of a pro rata portion
of the Minnesota Trust, and the
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income of such portion of the Minnesota Trust will therefore be
treated as the income of the Unitholder for Minnesota Income Tax
purposes;
(2) Income on the Bonds which is exempt from the Minnesota Income Tax
when received by a Unitholder of the Minnesota Trust and which
would be exempt from the Minnesota Income Tax if received directly
by a Unitholder, will retain its status as exempt from such tax
when received by the Minnesota Trust and distributed to such
Unitholder;
(3) To the extent that interest on the Bonds, if any, which is
includible in the computation of "alternative minimum taxable
income" for federal income tax purposes, such interest will also be
includible in the computation of "alternative minimum taxable
income" for purposes of the Minnesota Alternative Minimum Tax
imposed on individuals, estates and trusts and on corporations;
(4) Each Unitholder of the Minnesota Trust will recognize gain or loss
for Minnesota Income Tax purposes if the Trustee disposes of a Bond
(whether by redemption, sale or otherwise) or if the Unitholder
redeems or sells Units of the Minnesota Trust to the extent that
such a transaction results in a recognized gain or loss to such
Unitholder for federal income tax purposes;
(5) Tax cost reduction requirements relating to amortization of bond
premium may, under some circumstances, result in Unitholders
realizing taxable gain for Minnesota Income Tax purposes when their
Units are sold or redeemed for an amount equal to or less than
their original cost;
(6) Proceeds, if any, paid under individual insurance policies obtained
by issuers of Bonds or the Trustee which represent maturing
interest on defaulted obligations held by the Trustee will be
excludible from Minnesota net income if, and to the same extent as,
such interest would have been so excludible from Minnesota net
income if, and to the same extent as, such interest would have been
so excludible if paid in the normal course by the issuer of the
defaulted obligation provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the
issuer of the Bonds, rather than the insurer, will pay debt service
on the Bonds; and
(7) To the extent that interest derived from the Minnesota Trust by a
Unitholder with respect to any Possession Bonds is
excludible from gross income for federal income tax purposes
pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48
U.S.C. Section 1403, such interest will not be subject to either
the Minnesota Income Tax or the Minnesota alternative minimum tax
imposed on individuals, estates and trusts. It should be noted that
interest relating to Possession Bonds is subject to tax in the case
of corporations subject to the Minnesota Corporate Franchise Tax or
the Alternative Tax.
We have not examined any of the Bonds to be deposited and held in the
Minnesota Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinions to
the exemption from State income taxes of interest on the Bonds if received
directly by a Unitholder.
MISSOURI TRUSTS. The following discussion regarding constitutional
limitations and the economy of the State of Missouri is included for the
purpose of providing general information that may or may not affect issuers
of the Bonds in Missouri.
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
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citizens of Missouri. The limitation may be exceeded if the General Assembly
declares an emergency by a two-thirds vote.
Although the June 1993 revenue estimate has been revised downward by $27.5
million, the State budget for Fiscal Year 1993 remained balanced due
primarily to delayed spending for desegregation capital projects. The
downward revision in revenues was considered necessary because of weak
economic performance, and more importantly an economic outlook for the second
half of Fiscal Year 1993 which projected slower growth than was anticipated
in June 1992.
For Fiscal Year 1994, the majority of revenues for the State of Missouri
will be obtained from individual income taxes (53.1%), sales and use taxes
(30.0%), corporate income taxes (5.9%), and county foreign insurance taxes
(3.0%). Major expenditures for Fiscal Year 1994 include elementary and
secondary education (30.6%), human services (25.4%), higher education (14.8%)
and desegregation (8.9%).
The Fiscal Year 1994 budget balances resources and obligations based on
the consensus revenue and refund estimate and an opening balance resulting
from continued withholdings and delayed spending for desegregation capital
projects. The total general revenue operating budget for Fiscal Year 1994
exclusive of desegregation is $3,844.6 million. The court-ordered
desegregation estimate is $377.7 million, an increase of $30.7 million over
the revised Fiscal Year 1993 estimate.
The economy of Missouri is diverse and includes manufacturing, retail and
wholesale trade, services, agriculture, tourism and mining. In recent years,
growth in the wholesale and retail trade has offset the more slowly growing
manufacturing and agricultural sectors of the economy. According to the
United States Bureau of Labor Statistics, the 1992 unemployment rate in
Missouri was 5.7% and the 1993 rate was 6.4%. Although not strictly
comparable, the preliminary seasonally adjusted rate for May of 1994 was
5.0%. 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 Ratings Group rates Missouri general
obligation bonds "AAA". Although these ratings indicate that the State of
Missouri is in relatively good economic health, there can be, of course, no
assurance that this will continue or that particular bond issues may not be
adversely affected by changes in the State or local economic or political
conditions.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of Bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of obligations held by the Missouri Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of
the issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the State and various agencies and political
subdivisions located in the State. The Sponsor is unable to predict whether
or to what extent such factors or other factors may affect the issuers of the
Bonds, the market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Missouri Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel for
Missouri tax matters rendered an opinion under then existing Missouri income
tax law applicable to taxpayers whose income is subject to Missouri income
taxation substantially to the effect that:
The assets of the Missouri Trust will consist of debt obligations issued
by or on behalf of the State of Missouri (the "State") or counties,
municipalities, authorities or political subdivisions thereof (the "Missouri
Bonds") or by the Commonwealth of Puerto Rico, Guam and the United States
Virgin Islands (the "Possession Bonds") (collectively, the "Bonds").
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Neither the Sponsor nor its counsel have independently examined the Bonds
to be deposited in and held in the Missouri Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i)
the Bonds were validly issued, (ii) the interest thereon is excludable from
gross income for Federal income tax purposes and (iii) interest on the
Missouri Bonds, if received directly by a Unitholder, would be exempt from
the Missouri income tax applicable to individuals and corporations ("Missouri
state income tax"). The opinion set forth below does not address the
taxation of persons other than full time residents of Missouri.
(1) The Missouri Trust is not an association taxable as a corporation
for Missouri income tax purposes, and each Unitholder of the
Missouri Trust will be treated as the owner of a pro rata portion
of the Missouri Trust and the income of such portion of the
Missouri Trust will be treated as the income of the Unitholder for
Missouri state income tax purposes.
(2) Interest paid and original issue discount, if any, on the Bonds
which would be exempt from the Missouri state income tax if
received directly by a Unitholder will be exempt from the Missouri
state income tax when received by the Missouri Trust and
distributed to such Unitholder; however, no opinion is expressed
herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and
distributed to Unitholders under any other tax imposed pursuant to
Missouri law, including but not limited to the franchise tax
imposed on financial institutions pursuant to Chapter 148 of the
Missouri Statutes.
(3) To the extent that interest paid and original issue discount, if
any, derived from the Missouri Trust by a Unitholder with respect
to Possession Bonds is excludable from gross income for Federal
income tax purposes pursuant to 48 U.S.C. Section 745, 48 U.S.C.
Section 1423a, and 48 U.S.C. Section 1403, such interest paid and
original issue discount, if any, will not be subject to the
Missouri state income tax; however, no opinion is expressed herein
regarding taxation of interest paid and original issue discount, if
any, on the Bonds received by the Missouri Trust and distributed to
Unitholders under any other tax imposed pursuant to Missouri law,
including but not limited to the franchise tax imposed on financial
institutions pursuant to Chapter 148 of the Missouri Statutes.
(4) Each Unitholder of the Missouri Trust will recognize gain or loss
for Missouri state income tax purposes if the Trustee disposes of a
bond (whether by redemption, sale, or otherwise) or if the
Unitholder redeems or sells Units of the Missouri Trust to the
extent that such a transaction results in a recognized gain or loss
to such Unitholder for Federal income tax purposes. Due to the
amortization of bond premium and other basis adjustments required
by the Internal Revenue Code, a Unitholder under some
circumstances, may realize taxable gain when his or her Units are
sold or redeemed for an amount equal to their original cost.
(5) Any insurance proceeds paid under policies which represent maturing
interest on defaulted obligations which are excludable from gross
income for Federal income tax purposes will be excludable from
Missouri state income tax to the same extent as such interest would
have been paid by the issuer of such Bonds held by the Missouri
Trust; however, no opinion is expressed herein regarding taxation
of interest paid and original issue discount, if any, on the Bonds
received by the Missouri Trust and distributed to Unitholders under
any other tax imposed pursuant to Missouri law, including but not
limited to the franchise tax imposed on financial institutions
pursuant to Chapter 148 of the Missouri Statutes.
(6) The Missouri state income tax does not permit a deduction of
interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Trust, the interest on which is
exempt from such Tax.
(7) The Missouri Trust will not be subject to the Kansas City, Missouri
Earnings and Profits Tax and each Unitholder's share of income of
the Bonds held by the Missouri Trust will not generally be
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subject to the Kansas City, Missouri Earnings and Profits Tax or
the City of St Louis Earnings Tax (except in the case of certain
Unitholders, including corporations, otherwise subject to the St.
Louis City Earnings Tax).
NEW JERSEY TRUSTS. As described above, the New Jersey Trust consists of
a portfolio of Bonds. The Trust is therefore susceptible to political,
economic or regulatory factors affecting issuers of the Bonds. The following
information provides only a brief summary of some of the complex factors
affecting the financial situation in New Jersey (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in New Jersey. No independent verification has been made of
any of the following information.
New Jersey is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,062 people per square mile, it is the
most densely populated of all the states. The State's economic base is
diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita income has been
well above the national average, and in 1993 the State ranked second among
states in per capita personal income ($26,967).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and
1989 employment in New Jersey's manufacturing sector failed to benefit from
the export boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost momentum.
In the meantime, the prolonged fast growth in the State in the mid 1980s
resulted in a tight labor market situation, which has led to relatively high
wages and housing prices. This means that, while the incomes of New Jersey
residents are relatively high, the State's business sector has become more
vulnerable to competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration
of New Jersey's job losses in construction and manufacturing. In addition,
the national recession caused an employment downturn in such previously
growing sectors as wholesale trade, retail trade, finance, utilities and
trucking and warehousing. Reflecting the downturn, the rate of unemployment
in the State rose from a low of 3.6% during the first quarter of 1989 to an
estimated 6.6% in November 1994, which is higher than the national average of
5.6% in November 1994. Economic recovery is likely to be slow and uneven in
New Jersey, with unemployment receding at a correspondingly slow pace, due to
the fact that some sectors may lag due to continued excess capacity. In
addition, employers even in rebounding sectors can be expected to remain
cautious about hiring until they become convinced that improved business will
be sustained. Also, certain firms will continue to merge or downsize to
increase profitability.
Debt Service. The primary method for State financing of capital projects
is through the sale of the general obligation bonds of the State. These
bonds are backed by the full faith and credit of the State tax revenues and
certain other fees are pledged to meet the principal and interest payments
and if provided, redemption premium payments, if any, required to repay the
bonds. As of June 30, 1993, there was a total authorized bond indebtedness
of approximately $8.98 billion, of which $3.6 billion was issued and
outstanding, $4.0 billion was retired (including bonds for which provision
for payment has been made through the sale and issuance of refunding bonds)
and $1.38 billion was unissued. The appropriation for the debt service
obligation on such outstanding indebtedness was $103.5 million for fiscal
year 1994.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of fiscal year
1989, there was a surplus in the State's general fund (the fund into which
all State revenues not otherwise restricted by statute are deposited and from
which appropriations are made) of $411.2 million. At the end of fiscal year
1990, there was a surplus in the general fund of $1 million. At the end of
fiscal year 1991, there was a surplus in the general fund of $1.4 million.
New Jersey closed
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its fiscal year 1992 with a surplus of $760.8 million. It is estimated that
New Jersey closed its fiscal year 1993 with a surplus of $937.4 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting
of $1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that
receipts and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6% to 7% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, paper products (which has since
been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional revenue.
Projections and estimates of receipts from sales and use taxes, however, have
been subject to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the
form of an increased state income tax on individuals. At the time of
enactment, it was projected that this increase would raise approximately $1.3
billion in additional income taxes to fund a new school aid formula, a new
homestead rebate program and state assumption of welfare and social services
costs. Projections and estimates of receipts from income taxes, however,
have also been subject to variance in recent fiscal years. Under the
legislation, income tax rates increased from their previous range of 2% to
3.5% to a new range of 2% to 7%, with the higher rates applying to married
couples with incomes exceeding $70,000 who file joint returns, and to
individuals filing single returns with incomes of more than $35,000.
The Florio administration had contended that the income tax package will
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State will assume
approximately $289 million in social services costs that previously were paid
by counties and municipalities and funded by property taxes. In addition,
under the new formula for funding school aid, an extra $1.1 billion was
proposed to be sent by the State to school districts beginning in 1991, thus
reducing the need for property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995 further reductions
ranging from 1% up to 10% in income tax rates will take effect.
On June 30, 1994, Governor Whitman signed the New Jersey Legislature's
$15.7 billion budget for Fiscal Year 1995. The balanced budget which
includes $455 million in surplus, is $141 million less than the 1994 budget.
Whether the State can achieve a balanced budget depends on its ability to
enact and implement expenditure reductions and to collect the estimated tax
revenues.
Litigation. The State is a party in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are cases challenging the following:
the formula relating to State aid to public schools, the method by which the
State shares with its counties maintenance recoveries and costs for residents
in State institutions, unreasonably low Medicaid payment rates for long-term
facilities in New Jersey, the obligation of counties to maintain Medicaid or
Medicare eligible residents of institutions and facilities for the
developmentally disabled, taxes paid into the Spill Compensation Fund (a fund
established to provide money for use by the State to remediate hazardous
waste sites and to compensate other persons for damages incurred as a result
of hazardous waste discharge) based on Federal preemption, various
provisions, and the constitutionality of the Fair Automobile Insurance Reform
Act of 1990, the State's role in a consent order concerning the construction
of a resource facility in Passaic County, actions taken by the New Jersey
Bureau of Securities against an individual, the State's actions regarding
alleged chromium contamination of State-owned property in Hudson County, the
issuance of
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emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, the adequacy of Medicaid reimbursement
for services rendered by doctors and dentists to Medicaid eligible children,
the Commissioner of Health's calculation of the hospital assessment required
by the Health Care Cost Reduction Act of 1991, refusal of the State to share
with Camden County federal funding the State recently received for
disproportionate share hospital payments made to county psychiatric
facilities, and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection and Energy. Adverse judgments in these and other matters could
have the potential for either a significant loss of revenue or a significant
unanticipated expenditure by the State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate its exposure
for these claims.
Debt Ratings. For many years, both Moody's Investors Service, Inc. and
Standard and Poor's Corporation rated New Jersey general obligation bonds
"Aaa" and "AAA", respectively. On July 3, 1991, however, Standard and Poor's
Corporation downgraded New Jersey general obligation bonds to "AA+." On June
4, 1992, Standard and Poor's Corporation placed New Jersey general obligation
bonds on Credit Watch with negative implications, citing as its principal
reason for its caution the unexpected denial by the federal government of New
Jersey's request for $450 million in retroactive Medicaid payments for
psychiatric hospitals. These funds were critical to closing a $1 billion gap
in the State's $15 billion budget for fiscal year 1992 which ended on June
30, 1992. Under New Jersey state law, the gap in the budget was required to
be closed before the new budget year began on July 1, 1992. Standard and
Poor's suggested the State could close fiscal 1992's budget gap and help fill
fiscal 1993's hole by a reversion of $700 million of pension contributions to
its general fund under a proposal to change the way the State calculates its
pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its "AA+"
rating for New Jersey general obligation bonds and removed the debt from its
CreditWatch list, although it stated that New Jersey's long-term financial
outlook was negative. Standard and Poor's Corporation was concerned that the
State was entering fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly enough to
meet lawmakers' revenue projections. It also remained concerned about the
recent federal ruling leaving in doubt how much the State was due in
retroactive Medicaid reimbursements and a ruling by a federal judge, now on
appeal, of the State's method for paying for uninsured hospital patients.
However, on July 27, 1994, Standard and Poor's announced that it was changing
the State's outlook from negative to stable due to a brightening of the
State's prospects as a result of Governor Whitman's effort to trim spending
and cut taxes, coupled with an improving economy. Standard and Poor's
reaffirmed its "AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded New Jersey
general obligation bonds to "Aal" stating that the reduction reflects a
developing pattern of reliance on nonrecurring measures to achieve budgetary
balance, four years of financial operations marked by revenue shortfalls and
operating deficits, and the likelihood that serious financial pressures will
persist. On August 5, 1994, Moody's reaffirmed its "Aa1" rating, citing on
the positive side New Jersey's broad-based economy, high income levels,
history of maintaining a positive financial position and moderate (albeit
rising) debt ratios, and on the negative side, a continued reliance on one-
time revenue and dependence on pension-related savings to achieve budgetary
balance.
At the time of the closing for each New Jersey Trust Special Counsel to
each New Jersey Trust for New Jersey tax matters rendered an opinion under
then existing New Jersey income tax law applicable to taxpayers whose income
is subject to New Jersey income taxation substantially to the effect that:
(1) Each New Jersey Trust will be recognized as a trust and not an
association taxable as a corporation. Each New Jersey Trust will
not be subject to the New Jersey Corporation Business Tax or the
New Jersey Corporation Income Tax.
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(2) With respect to the non-corporate Unitholders who are residents of
New Jersey, the income of the New Jersey Trust which is allocated
to each such Unitholder will be treated as the income of such
Unitholder under the New Jersey Gross Income Tax. Interest on the
underlying Bonds which would be exempt from tax under the New
Jersey Gross Income Tax if directly received by such Unitholder
will retain its status as tax-exempt interest when received by the
New Jersey Trust and distributed to such Unitholder. Any proceeds
paid under the insurance policy issued to the Trustee of the New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest on
defaulted obligations held by the Trustee will be exempt from New
Jersey Gross Income Tax if, and to the same extent as, such
interest would have been so exempt if paid by the issuer of the
defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the New Jersey
Gross Income Tax on any gain realized either when a New Jersey
Trust disposes of a Bond (whether by sale, exchange, redemption, or
payment at maturity), when the Unitholder redeems or sells his
Units or upon payment of any proceeds under the insurance policy
issued to the Trustee of a New Jersey Trust with respect to the
Bonds or under individual policies obtained by issuers of Bonds
which represent maturing principal on defaulted obligations held by
the Trustee. Any loss realized on such disposition may not be
utilized to offset gains realized by such Unitholder on the
disposition of assets the gain on which is subject to the New
Jersey Gross Income Tax.
(4) Units of a New Jersey Trust may be taxable on the death of a
Unitholder under the New Jersey Transfer Inheritance Tax Law or the
New Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax,
interest from the Bonds in a New Jersey Trust which is allocable to
such corporation will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey
Corporation Income Tax, less any interest expense incurred to carry
such investment to the extent such interest expense has not been
deducted in computing Federal taxable income. Net gains derived by
such corporation on the disposition of the Bonds by a New Jersey
Trust or on the disposition of its Units will be included in its
entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax. Any proceeds
paid under the insurance policy issued to the Trustee of a New
Jersey Trust with respect to the Bonds or under individual policies
obtained by issuers of Bonds which represent maturing interest or
maturing principal on defaulted obligations held by the Trustee
will be included in its entire net income for purposes of the New
Jersey Corporation Business Tax or New Jersey Corporation Income
Tax if, and to the same extent as, such interest or proceeds would
have been so included if paid by the issuer of the defaulted
obligations.
NEW YORK TRUSTS. A resident of New York State (or New York City) will be
subject to New York State (or New York City) personal income tax with respect
to gains realized when New York Obligations held in the New York Trust are
sold, redeemed or paid at maturity or when his Units are sold or redeemed,
such gain will equal the proceeds of sale, redemption or payment less the tax
basis of the New York Obligation or Unit (adjusted to reflect (a) the
amortization of premium or discount, if any, on New York Obligations held in
the Trust, (b) accrued original issue discount, with respect to each New York
Obligation which, at the time New York Obligation was issued had original
issue discount, and (c) the deposit of New York Obligations with accrued
interest in the Trust after the Unitholder's settlement date).
Interest or gain from the New York Trust derived by a Unitholder who is
not a resident of New York State (or New York City) will not be subject to
New York State (or New York City) personal income tax, unless the Units are
property employed in a business, trade, profession or occupation carried on
in New York State (or New York City).
Amount paid on defaulted New York Obligations held by the Trustee under
policies of insurance issued with respect to such New York Obligations will
be excludable from income for New York State and New York
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City income tax purposes, if and to the same extent as, such interest would
have been excludable if paid by the respective issuer.
For purposes of the New York State and New York City franchise tax on
corporations, Unitholders which are subject to such tax will be required to
include in their entie net income any interest or gains distributed to them
even though distributed in respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all (or part)
of the interest on such indebtedness will not be deductible for New York
State and New York City tax purposes. The purchase of Units may be
considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued by New
York State (the "State"), by its various public bodies (the "Agencies"),
and/or by other entities located within the State, including the City of New
York (the "City").
Some of the more significant events relating to the financial situation in
New York are summarized below. This section provides only a brief summary of
the complex factors affecting the financial situation in New York and is
based in part on Official Statements issued by, and on other information
reported by the State, the City and the Agencies in connection with the
issuance of their respective securities.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of New York Municipal
Obligations held in the portfolio of the Trust or the ability of particular
obligors to make timely payments of debt service on (or relating to) those
obligations.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State economy has grown more slowly than
that of the nation as a whole, gradually eroding the State's relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx
of generally less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and
business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued
throughout the State's 1990-91 fiscal year and was followed by a period of
weak economic growth during the 1991 calendar year. For calendar year 1992,
the national economy continued to recover, although at a rate below all post-
war recoveries. For calendar year 1993, the economy is expected to grow
faster than 1992, but still at a very moderate rate as compared to other
recoveries. The national recession has been more severe in the State because
of factors such as a significant retrenchment in the financial services
industry, cutbacks in defense spending, and an overbuilt real estate market.
1993-94 Fiscal Year. On April 5, 1993, the State Legislature approval a
$32.08 billion budget. Following enactment of the budget the 1993-94 State
Financial Plan was formulated on April 16, 1993. This Plan projects General
Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. In comparison
to the Governor's recommended Executive Budget for the 1993-94 fiscal year,
as revised on February 18, 1993, the 1993-94 State Financial Plan reflects
increases in both receipts and disbursements in the General Fund of $811
million.
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While a portion of the increased receipts was the result of a $487 million
increase in the States's 1992-93 positive year-end margin at March 31, 1993
to $671 million, the balance of such increased receipts is based upon (i) a
projected $269 million increase in receipts resulting from improved 1992-93
results and the expectation of an improving economy, (ii) projected
additional payments of $200 million from the Federal government as
reimbursements for indigent medical care, (iii) the early payment of $50
million of personal tax returns in 1992-93 which otherwise would have been
paid in 1993-94; offset by (iv) the State Legislature's failure to enact $195
million of additional revenue-raising recommendations proposed by the
Governor. There can be no assurances that all of the projected receipts
referred to above will be received.
Despite the $811 million increase in disbursements included in the 1993-94
State Financial Plan, a reduction in aid to some local government units can
be expected. To offset a portion of such reductions, the 1993-94 State
Financial Plan contains a package of mandate relief, cost containment and
other proposals to reduce the costs of many programs for which local
governments provide funding. There can be no assurance, however, that
localities that suffer cuts will not be adversely affected, leading to
further requests for State financial assistance.
There can be no assurance that the State will not face substantial
potential budget gaps in the future resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address
any potential budgetary imbalance, the State may need to take significant
actions to align recurring receipts and disbursements.
1992-93 Fiscal Year. Before giving effect to a 1992-93 year-end deposit
to the refund reserve account of $671 million, General Fund receipts in 1992-
93 would have been $716 million higher than originally projected. This year-
end deposits effectively reduced 1992-93 receipts by $671 million and made
those receipts available for 1993-94.
The State's favorable performance primarily resulted from income tax
collections that were $700 million higher than projected which reflected both
stronger economic activity and tax-induced one-time acceleration of income
into 1992. In other areas larger than projected business tax collections and
unbudgeted receipts offset the loss of $200 million of anticipated Federal
reimbursement and losses of, or shortfalls in, other projected revenue
sources.
For 1992-93, disbursements and transfers to other funds (including the
deposit to the refund reserve account discussed above) totalled $30.829
billion, an increase of $45 million above projections in April 1992.
Fiscal year 1992-93 was the first time in four years that the State did
not incur a cash-basis operating deficit in the General Fund requiring the
issuance of deficit notes or other bonds, spending cuts or other revenue
raising measures.
Indebtedness. As of March 31, 1993, the total amount of long-term State
general obligation debt authorized but unissued stood at $2.4 billion. As of
the same date, the State had approximately $5.4 billion in general obligation
bonds. The State issued $850 million in tax and revenue anticipation notes
("TRANS") on April 28, 1993. The State does not project the need to issue
additional TRANS during the States's 1993-94 fiscal year.
The State projects that its borrowings for capital purposes during the
State's 1993-94 fiscal year will consist of $460 million in general
obligation bonds and $140 million in new commercial paper issuances. In
addition, the State expects to issue $140 million in bonds for the purpose of
redeeming outstanding bond anticipation notes. The Legislature has
authorized the issuance of up to $85 million in certificates of participation
during the State's 1993-94 fiscal year for personal and real property
acquisitions during the State's 1993-94 fiscal year. The projection or the
State regarding its borrowing for the 1993-94 fiscal year may change if
actual receipts fall short of State projections or if other circumstances
require.
In June, 1990, legislation was enacted creating the "New York Local
Government Assistance Corporation" ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to
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local governments traditionally funded through the State's annual seasonal
borrowing. To date, LGAC has issued its bonds to provide net proceeds of
$3.28 billion. LGAC has been authorized to issue additional bonds to provide
net proceeds of $703 million during the State's 1993-94 fiscal year.
Ratings. The $850 million in TRANS issued by the State in April 1993 were
rated SP-1-Plus by S&P on April 26, 1993, and MIG-1 by Moody's on April 23,
1993, which represents the highest ratings given by such agencies and the
first time the State's TRANS have received these ratings since its May 1989
TRANS issuance. Both agencies cited the State's improved fiscal position as
a significant factor in the upgrading of the April 1993 TRANS.
Moody's rating of the State's general obligation bonds stood at a A on
April 23, 1993, and S&P's rating stood at A- with a stable outlook on April
26, 1993, an improvement from S&P's negative outlook prior to April 1993.
Previously, Moody's lowered its rating to A on June 6, 1990, its rating
having been A1 since May 27, 1986. S&P lowered its rating from A to A- on
January 13, 1992. S&P's previous ratings were A from March 1990 to January
1992, AA- from August 1987 to March 1990 and A+ from November 1982 to August
1987.
Moody's, in confirming its rating of the State's general obligation bonds,
and S&P, in improving its outlook on such bonds from negative to stable,
noted the State's improved fiscal condition and reasonable revenue
assumptions contained in the 1993-94 State budget.
The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in
numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number
of steps to assist the City in returning to fiscal stability. Among other
actions, the State Legislature (i) created MAC to assist with long-term
financing for the City's short-term debt and other cash requirements and (ii)
created the State Financial Control Board (the "Control Board") to review and
approve the City's budgets and City four-year financial plans (the financial
plans also apply to certain City-related public agencies (the "Covered
Organizations").
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt, defaulted on
certain of its short-term notes. Shortly after the UDC default, the City
entered a period of financial crisis. Both the State Legislature and the
United States enacted legislation in response to this crisis. During 1975,
the State Legislature (i) created MAC to assist with long-term financing for
the City's short-term debt and other cash requirements and (ii) created the
State Financial Control Board (the "Control Board") to review and approve the
City's budgets and City four-year financial plans (the financial plans also
apply to certain City-related public agencies (the "Covered Organizations")).
Over the past three years, the rate of economic growth in the City has
slowed substantially, and the City's economy is currently in recession. The
City projects, and its current four-year financial plan assumes, a recovery
early in the 1993 calendar year. The Mayor is responsible for preparing the
City's four-year financial plan, including the City's current financial plan.
The City Comptroller has issued reports concluding that the recession of the
City's economy will be more severe and last longer than is assumed in the
financial plan.
Fiscal Year 1993 and 1993-1996 Financial Plan. The City's 1993 fiscal
year results are projected to be balanced in accordance with generally
accepted accounting principles ("GAAP"). The City was required to close
substantial budget gaps in its 1990, 1991 and 1992 fiscal years in order to
maintain balanced operating results.
The City's modified Financial Plan dated February 9, 1993 covering fiscal
years 1993-1996 projects budget gaps for 1994 through 1996. The Office of
the State Deputy Controller for the City of New York has estimated that under
the modified Financial Plan budget gaps will be $102 million for fiscal year
1994, $196 million for fiscal year 1995 and $354 million for fiscal year
1996, primarily due to anticipated higher spending on labor costs.
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However, the City's modified Plan is dependent upon a gap-closing program,
certain elements of which the staff of Control Board identified on March 25,
1993 to be at risk due to projected levels of State and Federal aid and
revenue and expenditures estimates which may not be achievable. The Control
Board indicated that the City's modified Financial Plan does not make
progress towards establishing a balanced budget process. The Control Board's
report identified budget gap risks of $1.0 billion, $1.9 billion, $2.3
billion and $2.6 billion in fiscal years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid for Fiscal
Year 1993-94 would be $280 million less than projected and that in order to
balance the City's budget $176 million of previously announced contingent
budget cuts would be imposed. The Mayor indicated that further savings would
entail serious reductions in services. The State Comptroller on June 14,
1993 criticized efforts by the Mayor and City Council to balance the City's
budget which rely primarily on one-shot revenues. The Comptroller added
that the City's budget should be based on "recurring revenues that fund
recurring expenditures." Given the foregoing factors, there can be no
assurance that City will continue to maintain a balanced budget, or that it
can maintain a balanced budget without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.
Pursuant to State law, the City prepares a four-year annual financial plan
which is reviewed and revised on a quarterly basis and which includes the
City's capital, revenue and expense projections. The City is required to
submit its financial plans to review bodies, including the Control Board. If
the City were to experience certain adverse financial circumstances,
including the occurrence or the substantial likelihood and imminence of the
occurrence of an annual operating deficit of more than $100 million or the
loss of access to the public credit markets to satisfy the City's capital and
seasonal financial requirements, the Control Board would be required by State
law to exercise certain powers, including prior approval of City financial
plans, proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. As a result of the
national and regional economic recession, the State's projections of tax
revenues for its 1991 and 1992 fiscal years were substantially reduced. For
its 1993 fiscal year, the State, before taking any remedial action reflected
in the State budget enacted by the State Legislature on April 2, 1992
reported a potential budget deficit of $4.8 billion. If the State
experiences revenue shortfalls or spending increases beyond its projections
during its 1993 fiscal year or subsequent years, such developments could also
result in reductions in projected State aid to the City. In addition, there
can be no assurance that State budgets in future fiscal years will be adopted
by the April 1 statutory deadline and that there will not be adverse effects
on the City's cash flow and additional City expenditures as a result of such
delays.
The City's projections set forth in the financial plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and
contingencies include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed in its
financial plan, employment growth, provision of State and Federal aid and
mandate relief, State legislative approval of future State budgets, levels of
education expenditures as may be required by State law, adoption of future
City budgets by the New York City Council, and approval by the Governor or
the State Legislature and the cooperation of MAC with respect to various
other actions proposed in such financial plan.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional
expenditure reductions and revenue sources to achieve balanced operating
budgets for fiscal years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size and the
substantial expenditure reductions already imposed on City operations in the
past two years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. The City's
financing program for fiscal years 1993 through 1996 contemplates issuance of
$15.7 billion of general obligation bonds primarily to reconstruct and
rehabilitate the City's
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infrastructure and physical assets and to make capital investments. A
significant portion of such bond financing is used to reimburse the City's
general fund for capital expenditures already incurred. In addition, the
City issues revenue and tax anticipation notes to finance its seasonal
working capital requirements. The terms and success of projected public
sales of City general obligation bonds and notes will be subject to
prevailing market conditions at the time of the sale, and no assurance can be
given that the credit markets will absorb the projected amounts of public
bond and note sales. In addition, future developments concerning the City
and public discussion of such developments, the City's future financial needs
and other issues may affect the market for outstanding City general
obligation bonds and notes. If the City were unable to sell its general
obligation bonds and notes, it would be prevented from meeting its planned
operating and capital expenditures.
The City Comptroller, the staff of the Control Board, the Office of the
State Deputy Comptroller for the City of New York (the "OSDC") and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and
future expenditures may be greater than those forecast in the financial plan.
In addition, the Control Board and other agencies have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet
the costs of its expenditure increases and to provide necessary services.
It is reasonable to expect that such reports and statements will continue to
be issued and to engender public comment.
Fiscal Years 1990, 1991 and 1992. The City achieved balanced operating
results as reported in accordance with GAAP for the 1992 fiscal year. During
the 1990 and 1991 fiscal years, the City implemented various actions to
offset a projected budget deficit of $3.2 billion for the 1991 fiscal year,
which resulted from declines in City revenue sources and increased public
assistance needs due to the recession. Such actions included $822 million of
tax increases and substantial expenditure reductions.
The quarterly modification to the City's financial plan submitted to the
Control Board on May 7, 1992 (the "1992 Modification") projected a balanced
budget in accordance with GAAP for the 1992 fiscal year after taking into
account a discretionary transfer of $455 million to the 1993 fiscal year as
the result of a 1992 fiscal year surplus. In order to achieve a balanced
budget for the 1992 fiscal year, during the 1991 fiscal year, the City
proposed various actions for the 1992 fiscal year to close a projected gap of
$3.3 billion in the 1992 fiscal year.
On November 19, 1992 the City submitted to the Control Board the Financial
Plan for the 1993 through 1996 fiscal years, which is a modification to a
financial plan submitted to the Control Board on June 11, 1992 (the "June
Financial Plan"), and which relates to the City, the Board of Education
("BOE") and the City University of New York ("CUNY"). The 1993-1996
Financial Plan projects revenues and expenditures of $29.9 billion each for
the 1993 fiscal year balanced in accordance with GAAP.
During the 1992 fiscal year, the City proposed various actions to close a
previously projected gap of approximately $1.2 billion for the 1993 fiscal
year. The gap-closing actions for the 1993 fiscal year proposed during the
1992 fiscal year and outlined in the City's June Financial Plan included $489
million of discretionary transfers from the 1992 fiscal year. The 1993-1996
City Financial Plan includes additional gap-closing actions to offset an
additional potential $81 million budget gap.
The 1993-1996 Financial Plan also sets forth projections and outlines a
proposed gap-closing program for the 1994 through 1996 fiscal years to close
projected budget gaps of $1.7 billion, $2.0 billion and $2.6 billion,
respectively, in the 1994 through 1996 fiscal years. On February 9, 1993,
the City issued a modification to the 1993-1996 Financial Plan (the "February
Modification"). The February Modification projects budget gaps for the
fiscal years 1994, 1995 and 1996 of $2.1 billion, $3.1 billion and $3.8
billion, respectively.
Various actions proposed in the 1993-1996 Financial Plan are subject to
approval by the Governor and approval by the State Legislature, and the
proposed increase in Federal aid is subject to approval by Congress and the
President. The State Legislature has in the past failed to approve certain
proposals similar to those that the 1993-1996 Financial Plan assumes will be
approved by the State Legislature during the 1993 fiscal year. If these
actions cannot be implemented, the City will be required to take other
actions to decrease expenditures or increase revenues to maintain a balanced
financial plan.
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On March 9, 1993, OSDC issued a report on the February Modification. The
report expressed concern that the budget gaps projected for fiscal years 1994
through 1996 are the largest the City has faced at this point in the
financial planning cycle in at least a decade, and concluded that the
February Modification represented a step backward in the City's efforts to
bring recurring revenues into line with recurring expenditures.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
torts, breaches of contracts, and other violations of law and condemnation
proceedings. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determinations
in certain of them might have a material adverse effect upon the City's
ability to carry out its financial plan. As of June 30, 1992, legal claims
in excess of $341 billion were outstanding against the City for which the
City estimated its potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's general
obligation bonds stood at Baal and S&P's rating stood at A-. On February 11,
1991, Moody's lowered its rating from A.
On March 30, 1993 in confirming the Baa1 rating, Moody's noted that:
The financial plan for fiscal year 1994 and beyond shows an ongoing
imbalance between the City's expenditures and revenues. The key indication
of this structural imbalance is not necessarily the presence of sizable out-
year budget gaps, but the recurring use of one-shot actions to close gaps.
One-shots constitute a significant share of the proposed gap-closing program
for fiscal year 1994, and they represent an even larger share of those
measures which the City seems reasonably certain to attain. Several major
elements of the program, including certain state actions, federal counter
cyclical aid and part of the city's tax package, remain uncertain. However,
the gap closing plan may be substantially altered when the executive budget
is offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative outlook,
stating that:
The City's key credit factors are marked by a high and growing debt
burden, and taxation levels that are relatively high, but stable. The City's
economy is broad-based and diverse, but currently is in prolonged recession,
with slow growth prospects for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal pressure
facing the City, driven by continued weakness in the local economy, rising
spending pressures for education and labor costs of city employees, and
increasing costs associated with rising debt for capital construction and
repair.
The current financial plan for the City assumes substantial increases in
aid from national and state governments. Maintenance of the current rating,
and stabilization of the rating outlook, will depend on the City's success in
realizing budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions under the City's
control. However, increased reliance on non-recurring budget balancing
measures that would support current spending, but defer budgetary gaps to
future years, would be viewed by S&P as detrimental to New YorkCity's single-
'A-' rating.
Previously, Moody's had raised its rating to A in May 1988, to Baal in
December 1985, to Baa in November 1983 and to Bal in November 1981. S&P had
raised its rating to A- in November 1987, to BBB+ in July 1985 and to BBB in
March 1981.
On May 9, 1990, Moody's revised downward its rating on outstanding City
revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
Notes then being sold MIG-2. On April 30, 1991 Moody's confirmed its MIG-2
rating for the outstanding revenue anticipation notes and for the $1.25
billion in notes then being sold. On April 29, 1991, S&P revised downward
its rating on City revenue anticipation notes from SP-1 to SP-2.
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As of December 31, 1992, the City and MAC had, respectively, $20.3 billion
and $4.7 billion of outstanding net long-term indebtedness.
Certain Agencies of the State have faced substantial financial
difficulties which could adversely affect the ability of such Agencies to
make payments of interest on, and principal amounts of, their respective
bonds. The difficulties have in certain instances caused the State (under
so-called "moral obligation" provisions which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue and will
require increasing amounts of State assistance in future years. Failure of
the State to appropriate necessary amounts or to take other action to permit
those Agencies having financial difficulties to meet their obligations could
result in a default by one or more of the Agencies. Such default, if it were
to occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the
defaulting Agencies. In addition, any default in payment on any general
obligation of any Agency whose bonds contain a moral obligation provision
could constitute a failure of certain conditions that must be satisfied in
connection with Federal guarantees of City and MAC obligations and could thus
jeopardize the City's long-term financing plans.
As of September 30, 1992, the State reported that there were eighteen
Agencies that each had outstanding debt of $100 million or more. These
eighteen Agencies had an aggregate of $62.2 billion of outstanding debt,
including refunding bonds, of which the State was obligated under lease-
purchase, contractual obligation or moral obligation provisions on $25.3
billion.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included
in the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of
significant social welfare programs primarily involving the State's mental
hygiene programs. Adverse judgments in these matters generally could result
in injunctive relief coupled with prospective changes in patient care which
could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations
claim that significant amounts of land were unconstitutionally taken from the
Indians in violation of various treaties and agreements during the eighteenth
and nineteenth centuries. The claimants seek recovery of approximately six
million acres of land as well as compensatory and punitive damages.
The U.S. Supreme Court on March 30, 1993 referred to a Special Master for
determination of damages on an action by the State of Delaware to recover
certain unclaimed dividends, interest and other distributions made by issuers
of securities held by New York-based brokers incorporated in Delaware.
(State of Delaware v. State of New York.) The State had taken such unclaimed
property under its Abandoned Property Law. The State expects that it may pay
a significant amount in damages during fiscal year 1993-94 but it has
indicated that it has sufficient funds on hand to pay any such award,
including funds held in contingency reserves. The State's 1993-94 Financial
Plan includes the establishment of a $100 million contingency reserve fund
which would be available to fund such an award which some reports have
estimated at $100-$800 million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz 1993"),
petitioners have challenged the constitutionality of mass transportation
bonding programs of the New York State Thruway Authority and the Metropolitan
Transportation Authority. On May 24, 1993, the Supreme Court, Albany County,
temporarily enjoined the State from implementing those bonding programs. In
previous actions Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development Corporation and the
New York Local Government Assistance Corporation. While there have been no
decisions on the merits in such previous actions, by an opinion dated May 11,
1993, the New York Court of Appeals held in a proceeding commenced on April
29, 1991 in the Supreme Court, Albany County (Schulz v. State of New York),
that petitioners had standing as voters under the State Constitution to bring
such action.
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Petitioners in Schulz 1993 have asserted that issuance of bonds by the two
Authorities is subject to approval by statewide referendum. At this time
there can be no forecast of the likelihood of success on the merits by the
petitioners, but a decision upholding this constitutional challenge could
restrict and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the temporary
injunction issued by the Supreme Court in this action will have any immediate
impact on its financial condition or interfere with projects requiring
immediate action.
Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in the future.
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance. Both the
Revised 1992-93 State Financial Plan and the recommended 1993-94 State
Financial Plan includes a significant reduction in State aid to localities in
such programs as revenue sharing and aid to education from projected base-
line growth in such programs. It is expected that such reductions will
result in the need for localities to reduce their spending or increase their
revenues. The potential impact on the State of such actions by localities is
not included in projections of State receipts and expenditures in the State's
1993-94 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the Governor or the State Legislature to assist Yonkers could result
in allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1991, the total indebtedness of all localities
in the State was approximately $31.6 billion, of which $16.8 billion was debt
of New York City (excluding $6.7 billion in MAC debt). State law requires
the Comptroller to review and make recommendations concerning the budgets of
those local government units other than New York City authorized by State law
to issue debt to finance deficits during the period that such deficit
financing is outstanding. Fifteen localities had outstanding indebtedness
for state financing at the close of their fiscal year ending in 1991. In
1992, an unusually large number of local government units requested
authorization for deficit financings. According to the Comptroller, ten
local government units have been authorized to issue deficit financing in the
aggregate amount of $131.1 million.
Certain proposed Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, New York City or any of the Agencies were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the New York Trust, could be
adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions, and long-range
economic trends. The longer-range potential problems of declining urban
population, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
At the time of the closing for each New York Trust, Special Counsel to
each New York Trust for New York tax matters rendered an opinion under then
existing New York income tax law applicable to taxpayers whose income is
subject to New York income taxation substantially to the effect that:
The New York Trust is not an association taxable as a corporation and the
income of the New York Trust will be treated as the income of the Unitholders
under the income tax laws of the State and City of New York. Individuals who
reside in New York State or City will not be subject to State and City tax on
interest income which is exempt from Federal income tax under section 103 of
the Internal Revenue Code of 1986 and derived from obligations of New York
State or a political subdivision thereof, although they will be subject to
New York State and City tax with respect to any gains realized when such
obligations are sold, redeemed or paid at maturity or when any such Units are
sold or redeemed.
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NORTH CAROLINA TRUSTS. General obligations of a city, town or county in
North Carolina are payable from the general revenues of the entity, including
ad valorem tax revenues on property within the jurisdiction. Revenue bonds
issued by North Carolina political subdivisions include (1) revenue bonds
payable exclusively from revenue-producing governmental enterprises and (2)
industrial revenue bonds, college and hospital revenue bonds and other
"private activity bonds" which are essentially non-governmental debt issues
and which are payable exclusively by private entities such as non-profit
organizations and business concerns of all sizes. State and local
governments have no obligation to provide for payment of such private
activity bonds and in many cases would be legally prohibited from doing so.
The value of such private activity bonds may be affected by a wide variety of
factors relevant to particular localities or industries, including economic
developments outside of North Carolina.
Section 23-48 of the North Carolina General Statutes appears to permit any
city, town, school district, county or other taxing district to avail itself
of the provisions of Chapter 9 of the United States Bankruptcy Code, but only
with the consent of the Local Government Commission of the State and of the
holders of such percentage or percentages of the indebtedness of the issuer
as may be required by the Bankruptcy Code (if any such consent is required).
Thus, although limitations apply, in certain circumstances political
subdivisions might be able to seek the protection of the Bankruptcy Code.
State Budget and Revenues. The North Carolina State Constitution requires
that the total expenditures of the State for the fiscal period covered by
each budget not exceed the total of receipts during the fiscal period and the
surplus remaining in the State Treasury at the beginning of the period. The
State's fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget projections.
Lower than anticipated revenues coupled with increases in State spending
requirements imposed by the federal government led to projected budget
deficits for fiscal 1989-1990 and fiscal 1990-91. Consequently, the Governor
ordered cuts in budgeted State expenditures for both fiscal years.
The State, like the nation, has experienced economic recovery since 1991.
Apparently due to both increased tax and fee revenue and the previously
enacted spending reductions, the State has a budget surplus of approximately
$887 million at the end of the fiscal 1993-94. After review of the 1994-95
continuation budget adopted in 1993, the General Assembly approved spending
expansion funds, in part to restore certain employee salaries to budgeted
levels, which amounts had been deferred to balance the budgets in 1989-1993,
and to authorize funding for new initiatives for economic development,
education, human services and environmental programs. (The cutback in
funding for infrastructure and social development projects had been cited by
agencies rating State obligations, following the 1991 reductions, as cause
for concern about the long-term consequences of those reductions on the
economy of the State and the State's fiscal prospects.)
Based on projected growth in State tax and fee revenues, the General Fund
balance forecast for the end of the 1994-95 fiscal year is approximately $310
million.
It is unclear what effect these developments at the State level may have
on the value of the Debt Obligations in the North Carolina Trust.
The State is subject to claims by classes of plaintiffs asserting a right
to refund of taxes paid under State statutes that allegedly discriminated
against federal retirees and armed services personnel in a manner that was
unconstitutional based on the decision by the United States Supreme court in
a 1989 Michigan case involving a similar law, Davis v. Michigan Department of
Treasury ("Davis"). At the time of that decision, State income tax law
exempted retirement income paid by North Carolina State and local governments
but did not exempt retirement income paid by the federal government to its
former employees. Also, State tax law at the time provided a deduction for
certain income earned by members of the North Carolina National Guard, but
did not provide a similar deduction for members of the federal armed
services.
Following the Davis decision the North Carolina legislature amended the
tax law to provide identical retirement income exclusions for former stat and
federal employees (effective for 1989), and repealed the
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deduction given to members of the State National Guard. In addition, the
amendments authorized a special tax credit for federal retirees equal to the
taxes paid on their nonexcluded federal pensions in 1988(to be taken over a
three year period beginning with returns for 1990).
Subsequent to Davis, the North Carolina plaintiffs brought an action in
federal court against the North Carolina Department of Revenue and certain
officials of the State alleging that the collection of the taxes under the
prior North Carolina tax statues was prohibited by the state and federal
constitutions, and also violated civil rights protections under 42 U.S.C.
Section 1983, a federal statute prohibiting discriminatory taxation of the
compensation of certain federal employees (4 U.S.C. Section 111), and the
principle of intergovernmental tax immunity. The plaintiffs sought
injunctive relief requiring the State to provide refunds of the illegally
collected taxes paid on federal retirement or military pay for the years
1985-88 (covering the asserted 3 year limitations period), plus interest.
Swanson, et al. v. Powers, et al. (United States District Court for the
Eastern District of North Carolina, No. 89-282-CIV-5-H) ("Swanson Federal").
The individual plaintiffs in Swanson Federal also brought an action in North
Carolina state court seeking refunds of the illegal taxes. Swanson, et al.
v. State of North Carolina, et al. (Wake County, North Carolina Superior
Court, No. 90 CVS 3127) ("Swanson State").
The amounts claimed by federal retirees in the Swanson actions have not
been precisely calculated. Plaintiffs have asserted that the plaintiff class
contains about 100,000 taxpayers; the State estimated that as of June 30,
1994, the claims (including interest) would then aggregate approximately $280
million.
In 1991, the North Carolina Supreme Court in Swanson State affirmed a
decision in favor of the State, holding that the U.S. Supreme Court decision
in Davis was not to have retroactive effect. Review was granted by the
United States Supreme Court and the case subsequently was remanded to the
North Carolina Supreme Court for reconsideration in light of the U.S. Supreme
Court's 1993 holding in Harper v. Virginia Dept. of Taxation ("Harper"). In
Harper, which also involved the disparate income tax treatment of retired
state and federal employees and the question of retroactive application of
Davis, the U.S. Supreme Court held that the Commonwealth of Virginia must
provide "meaningful backward-looking relief" to the plaintiffs if the
Commonwealth did not have a predeprivation process adequate to satisfy due
process requirements. Harper was remanded to the Supreme Court of Virginia
to determine whether a remedy was required and, if so, what form it would
take.
Similarly, Swanson State was remanded for reconsideration of whether the
North Carolina tax laws satisfied the due process requirements of the federal
constitution and, if not, what remedy was to be provided by the State.
On remand, the North Carolina Supreme Court held in early 1994 that the
plaintiffs in Swanson State was procedurally barred from recovering refunds
because they did not comply with the State's statutory postpayment refund
demand procedure. The plaintiffs contended unsuccessfully that the
postpayment demand requirement did not meet the requirements of the federal
constitution, in light of the Harper decision, for "meaningful backward-
looking relief." Plaintiffs in Swanson State have petitioned the U.S.
Supreme Court for review of the most recent North Carolina Supreme Court
decision. In December 1994, the Court denied certiorari to the Swanson State
plaintiffs. At the same time the Court issued a decision in Reich v.
Collins, a Georgia case involving similar claims, finding for the plaintiff
taxpayers, but the effect of the Reich decision on the claims of Swanson
State plaintiffs is uncertain. It is yet undetermined whether North Carolina
offers pre-deprivation procedures (payment and protest within a specified
time period) or post-deprivation remedies (tax credits especially tailored to
these claims) adequate to satisfy constitutional requirements, and
plaintiffs in Swanson State have petitioned the North Carolina Supreme Court
for a rehearing of its last decision in the case.
Following Harper, the plaintiffs in Swanson Federal again requested an
injunction requiring refunds. (Although the federal and state cases are
independent, the refund claims apparently would lead to only a single
recovery of taxes deemed unlawfully collected.) In May 1994, the U.S.
District Court granted the State's motion to dismiss all but one claim made
by the plaintiffs, declaring that those claims were precluded by the 1994
North Carolina Supreme Court decision in Swanson State. Plaintiffs in
Swanson Federal asserted that
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relief should have been granted because of the effect of the federal District
Court's 1990 opinion in Swanson Federal denying the defendants' motion that
the federal Tax Injunction Act precluded the plaintiffs' claims, in which the
court found that the statutory post-payment remedy for refund of unlawful
taxes was not "plain, speedy and efficient", as required by the law, Swanson
Federal, 1990 WL 545, 761 (E.D.N.C.), rev,d, 937 F.2d 965 (1991), cert
denied, __ U.S. __ , 112 S. Ct. 871 (1992). In its May 1994 decision, the
federal court rejected that assertion and held that its finding regarding the
federal Tax Injunction Act was jurisdictional only and was not a
determination that the statutory remedy violated the due process clause.
The plaintiffs' claim that was not dismissed with prejudice in the recent
District Court order asserts that the State continued an unlawful
discrimination, contrary to the requirements of 4 U.S.C. (S) 111 and the
doctrine of intergovernmental tax immunity, by increasing benefits to State
retirees (in order to offset the effect of the deletion of the preferential
State retirement income exemption) as part of the bill that equalized the
income exclusion of State and federal retirement payments. The claim is
based on a holding of similar effect in Sheehy v. Public Employees Retirement
Div., 864 P. 2d 762 (Mont. 1993). In its May 1994 order, the District Court
allowed the plaintiffs to dismiss the Sheedy claim without prejudice.
Therefore, plaintiffs could assert those claims in another action;
apparently, the relief would require providing federal retirees with tax
refunds or other payments equal to allegedly discriminatory payments made to
State retirees since 1989. The court noted that those claims will be subject
to the statutory post-deprivation procedural requirements, and that a
challenge to the legality of the remedial statute would be precluded under
the scope of the court's order dismissing the other claims. However, the
court granted plaintiffs' motion to dismiss the Sheedy claims without
prejudice because the record did not show whether the plaintiffs had complied
with statutory requirements. The plaintiffs in Swanson State have appealed
the District Court decision to the United States Court of Appeals and a
hearing is scheduled for March 1995.
Several states involved in similar suits have reached settlements.
Expressions of interest in settlement of the claims in Swanson by both the
plaintiffs and State officials have been reported in the press, but no
prediction can be made of the likelihood or amount of settlement. Although
the recent improvements in the economy and fiscal condition of the State
might better enable the State to satisfy an adverse decision without
significant consequences to the State's fiscal condition or governmental
functions, because the amount of the potential liability has not been fixed
and because of the potential that adverse fiscal or economic developments
could cause a more negative result on the State if a large amount must be
paid, no assurance can be given that the impact of the Swanson cases, if the
plaintiffs ultimately succeed, will not have an adverse impact on the Debt
Obligations.
State and local government retirees also filed a class action suit in 1990
as a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the
North Carolina Supreme court ruled in 1991 that the plaintiffs had failed to
comply with state law requirements for challenging unconstitutional taxes and
the United States Supreme Court denied review. In 1992, many of the same
plaintiffs filed a new lawsuit alleging essentially the same claims,
including breach of contract, unconstitutional impairment of contract rights
by the State in taxing benefits that were allegedly promised to be tax-exempt
and violation of several state constitutional provisions. The North Carolina
Attorney General's office estimates that the amount in controversy is
approximately $40-45 million annually for the tax years 1989 through 1992.
The case is now pending in state court.
Other litigation against the State include the following. None of the
cases, in the reported opinion of the Department of the Treasurer, would have
a material adverse affect on the State's ability ot meet its obligations.
Leandro et al. v. State of North Carolina and State Board of Education -
In May, 1994 students and boards of education in five counties in the State
filed suit in state court requesting a declaration that the public education
system of North Carolina, including its system of funding, violated the State
constitution by failing to provide adequate or substantially equal
educational opportunities and denying due process of law and violates various
statutes relating to public education. The suit is similar to a number of
suits in other states, some of which resulted in holdings that the respective
systems of public education funding were unconstitutional under the
applicable state law. The defendants in such suit have filed a motion to
dismiss, but no answer to the complaint, and no pretrial discovery has taken
place.
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Francisco Case - In August, 1994 a class action lawsuit was filed in state
court against the Superintendent of Public Instruction and the State Board of
Education on behalf of a class of parents and their children who are
characterized as limited English proficient. The complaint alleges that the
State has failed to provide funding for the education of these students and
has failed to supervise local school systems in administering programs for
them. The complaint does not allege an amount in controversy, but asks the
Court to order the defendants to fund a comprehensive program to ensure equal
educational opportunities for children with limited English proficiency.
Faulkenburg v. Teachers' and State Employees' Retirement System, Peeve v.
Teachers' and State Employees' Retirement System, and Woodard v. Local
Governmental Employees' Retirement System - Plaintiffs are disability
retirees who brought class actions in state court challenging changes in the
formulas for payment of disability retirement benefits and claiming
impairment of contract rights, breach of fiduciary duty, violation of other
federal constitutional rights, and violation of state constitutional and
statutory rights. The State estimates that the cost in damages and higher
prospective benefit payments to plaintiffs and class members would probably
amount to $50 million or more in Faulkenburg, $50 million or more in Peele,
and $15 million or more in Woodward, all ultimately payable, at least
initially, from the retirement system funds. Upon review in Faulkenburg, the
North Carolina Court of Appeals and Supreme Court have held that claims made
in constitutional rights brought under the federal Civil Rights Act eight do
not state a cause of action or are otherwise barred by the statute of
limitations. In 1994 plaintiffs took voluntary dismissals of their claims
for impairment of contract rights in violation of the United States
Constitution and filed new actions in federal court asserting the same claims
along with claims for violation of constitutional rights in the taxation of
retirement benefits. The remaining state court claims in all cases are
scheduled to be heard in North Carolina in October, 1994.
Fulton Case - The State's intangible personal property tax levied on
certain shares of stock has been challenged by the plaintiff on grounds that
it violates the Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all or part of
their business outside the State. The plaintiff in the action is a North
Carolina corporation that does all or part of its business outside the State.
The plaintiff seeks to invalidate the tax in its entirety and to recover tax
paid on the value of its shares in other corporations. The North Carolina
Court of Appeals invalidated the taxable percentage deduction and excised it
from the statute beginning with the 1994 tax year. The effect of this ruling
is to increase collections by rendering all stock taxable on 100% of its
value. The State and the plaintiff have sought further appellate review, and
the case is pending before the North Carolina Supreme Court. Net collections
from the tax for fiscal year ended June 30, 1993 amounted to $120.6 million.
General. The population of the State has increased 13% from 1980, from
5,880,095 to 6,647,351 as reported by the 1990 federal census and the State
rose from twelfth to tenth in population. The State's estimate of population
as of June 30, 1994 is 7,023,663. Notwithstanding its rank in population
size, North Carolina is primarily a rural state, having only five
municipalities with populations in excess of 100,000.
The labor force has undergone significant change during recent years as
the state has moved from as agricultural to a service and goods producing
economy. Those persons displaced by farm mechanization and farm
consolidations have, in large measure, sought and found employment in other
pursuits. Due to wide dispersion of non-agricultural employment, the people
have been able to maintain, to a large extent, their rural habitation
practices. During the period 1980 to 1994, the State labor force grew about
25% (from 2,855,200 to 3,560,000), and per capita income during the period
1980 to 1993 grew from $7,999 to $18,702, an increase of 133.8%.
The current economic profile of the State consists of a combination of
industry, agriculture and tourism. As of June 1994, the State was reported
to rank tenth among the states in non-agricultural employment and eighth in
manufacturing employment, Employment indicators have fluctuated somewhat in
the annual periods since June of 1990 but have demonstrated an upward trend
since 1991. The following table reflects the fluctuation in certain key
employment categories.
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<TABLE>
<CAPTION>
CATEGORY (ALL SEASONALLY ADJUSTED) JUNE 1990 JUNE 1991 JUNE 1992 JUNE 1993 JUNE 1994
<S> <C> <C> <C> <C> <C>
CIVILIAN LABOR FORCE 3,312,000 3,228,000 3,495,000 3,504,000 3,560,000
NONAGRICULTURAL EMPLOYMENT 3,129,000 3,059,000 3,135,000 3,203,400 3,359,700
GOODS PRODUCING OCCUPATIONS (MIN- 1,023,100 973,600 980,800 993,600 1,021,500
ING, CONSTRUCTION AND MANUFACTURING)
SERVICE OCCUPATIONS 2,106,300 2,085,400 2,154,200 2,209,800 2,337,200
WHOLESALE/RETAIL OCCUPATIONS 732,500 704,100 715,100 723,200 749,000
GOVERNMENT EMPLOYEES 496,400 496,700 513,400 515,400 554,600
MISCELLANEOUS SERVICES 587,300 596,300 638,300 676,900 731,900
AGRICULTURAL EMPLOYMENT 58,900 88,700 102,800 88,400 53,000
</TABLE>
The seasonally adjusted unemployment rate in January 1995 was estimated to
be 3.8% of the labor force (down from 4.0% in January 1994), as compared with
5.7% nationwide (down from 6.7% in January 1994).
As of 1993, the State was tenth in the nation in gross agricultural income
of which nearly the entire amount (approximately $5.3 billion) was from
commodities. According to the State Commissioner of Agriculture, in 1993,
the State ranked first in the nation in the production of flue-cured tobacco,
turkeys and sweet potatoes; second in the value of poultry and eggs, hog
production, trout and the production of cucumbers for pickles; fourth in
commercial broilers, blueberries and peanuts; sixth in burley tobacco and net
farm income.
The diversity of agriculture in North Carolina and a continuing push in
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina is the third most diversified agricultural state in the nation.
Tobacco production is the leading source of agricultural income in the
State, accounting for 20% of gross agricultural income. Tobacco farming in
North Carolina has been and is expected to continue to be affected by major
Federal legislation and regulatory measures regarding tobacco production and
marketing and by international competition. Measures adverse to tobacco
farming could have negative effects on farm income and the North Carolina
economy generally. The poultry industry provides nearly 34% of gross
agricultural income. The pork industry has been expanding and accounted for
17% of gross agricultural income in 1993.
The number of farms has been decreasing; in 1994 there were approximately
58,000 farms in the State (down from approximately 72,000 in 1987, a decrease
of about 19% in seven years). However, a strong agribusiness sector also
supports farmers with inputs (fertilizer, insecticide, pesticide and farm
machinery) and processing of commodities produced by farmers (vegetable
canning and cigarette manufacturing).
The State Department of Commerce, Travel and Tourism Division reports that
in 1993 more than $803 billion was spent on tourism in the State. The
Department estimates that two-thirds of total expenditures came from out-of-
state travelers, and that approximately 250,000 people were employed in
tourism-related jobs.
Bond Ratings. Currently, Moody's rates North Carolina general obligation
bonds as Aaa and Standard & Poor's rates such bonds as AAA. Standard &
Poor's also reaffirmed its stable outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects the
State's strong economic characteristics, sound financial performance, and low
debt levels.
The Sponsor believes the information summarized above describes some of
the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers located in
North Carolina, State agencies, publicly available documents, publications of
rating agencies and statements by, or news reports of statements by State
officials and employees and by rating agencies. The Sponsor and its counsel
have not independently verified any of the information contained in the
official statements and other sources and counsel have not expressed any
opinion regarding the completeness or
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materiality of any matters contained in this Prospectus other than the tax
opinions set forth below under North Carolina Taxes.
The Sponsor believes the information summarized above describes some of
the more significant events relating to the North Carolina Trust. The
sources of this information are the official statements of issuers located in
North Carolina, State agencies, publicly available documents, publications of
ratings agencies and news reports of statements by State officials and
employees and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the official
statements and other sources and counsel have not expressed any opinion
regarding the completeness or materiality of any contained in this Prospectus
other than the tax opinions set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special Counsel
to the fund for North Carolina tax matters rendered an opinion under then
existing North Carolina income tax law applicable to taxpayers whose income
is subject to North Carolina income taxation substantially to the effect
that:
Upon the establishing of the North Carolina Trust and the Units
thereunder:
(1) The North Carolina Trust is not an "association" taxable as a
corporation under North Carolina law with the result that income
of the North Carolina Trust will be deemed to be income of the
Unitholders.
(2) Interest on the Bonds that is exempt from North Carolina income
tax when received by the North Carolina Trust will retain its tax-
exempt status when received by the Unitholders.
(3) Unitholders will realize a taxable event when the North Carolina
Trust disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when a Unitholder redeems or sells his
Units (or any of them), and taxable gains for Federal income tax
purposes may result in gain taxable as ordinary income for North
Carolina income tax purposes. However, when a Bond had been issued
under an act of the North Carolina General Assembly that provides
that all income from such Bond, including any profit made from the
sale thereof, shall be free from all taxation by the State of North
Carolina, any such profit received by the North Carolina Trust will
retain its tax-exempt status in the hands of the Unitholders.
(4) Unitholders must authorize their proportionate share of any premium
on a Bond. Amortization for each taxable year is accomplished by
lowering the Unitholder's basis (as adjusted) in his Units with no
deduction against gross income for the year.
(5) The Units are exempt from the North Carolina tax on intangible
personal property so long as the corpus of the North Carolina Trust
remains composed entirely of Bonds or, pending distribution,
amounts received on the sale, redemption or maturity of the Bonds
and the Trustee periodically supplies to the North Carolina
Department of Revenue at such times required by the Department of
Revenue a complete description of the North Carolina Trust and also
the name, description and value of the obligations held in the
corpus of the North Carolina Trust.
OHIO TRUSTS. As described above, the Ohio Trust will invest substantially
all of its net assets in securities issued by or on behalf of (or in
certificates of participation in lease purchase obligations of) the State of
Ohio, political subdivisions of the State or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Ohio Trust
is therefore susceptible to general or particular political, economic or
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 have an effect. This information does not apply to "conduit"
obligations on which the public issuer itself has no financial
responsibility. This information is derived from official statements
published in connection with their issuance of securities of certain Ohio
issuers and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.
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Generally, creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations. There may be
specific factors that at particular times apply in connection with investment
in particular Ohio Obligations or in those obligations of particular Ohio
issuers. It is possible that the investment may be in particular Ohio
Obligations, or in those of particular issuers as to which those factors
apply. However, the information below is intended only as a general summary
and is not intended as a discussion of any specific factors that may affect
any particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has
been guaranteed by the bond insurance purchased by the issuers, the Ohio or
other parties. Ohio Obligations may not be subject to the factors referred
to in this section of the Prospectus.
Ohio is the seventh most populous state; The 1990 Census count of
10,847,000 indicates a 0.5% population increase from 1980. The Census
estimate for 1993 is 11.091.000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture
also is an important segment of the economy, with over half the State's area
devoted to farming and approximately 15% of total employment is in
agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last four years the State rates were below the national
rates (6.5% versus 6.8% in 1993). The unemployment rate and its effects vary
among geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July
1 to June 30 fiscal year ("FY") or fiscal biennium in a deficit position.
Most State operations are financed through the General Revenue Fund ("GRF"),
for which personal income and sales-use taxes are the major sources. Growth
and depletion of GRF ending fund balances show a consistent pattern related
to national economic conditions, with the ending FY balance reduced during
less favorable and increased during more favorable economic periods. The
State has well-established procedures for, and has timely taken, necessary
actions to ensure resource/expenditure balances during less favorable
economic periods. Those procedures included general and selected reductions
in appropriations spending.
Key biennium ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund ("BSF", a cash and
budgetary management fund). In the next two fiscal years, necessary
corrective steps were taken to respond to lower receipts and higher
expenditures in certain categories than earlier estimated. Those steps
included selected reductions in appropriations spending and the transfer of
$64 million from the BSF to the GRF. Reported June 30, 1991 ending fund
balances were 35.3 million (GRF) and $300 million (BSF).
To allow time to resolve certain budget differences for the latest
complete biennium, an interim appropriations act was enacted effective July
1, 1991; it included GRF debt service and lease rental appropriations for the
entire 1992-93 biennium, while continuing most other appropriations for a
month. Pursuant to the general appropriations act for the entire biennium
passed on July 11, 1991, $200 million was transferred from the BSF to the
GRF in FY 1992.
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Based on updated results and forecasts in the course of FY 1992, both in
light of the continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. GRF receipts significantly below original forecasts resulted
primarily from lower collections of certain taxes, particularly sales, use
and personal income taxes. Higher expenditure levels came in certain areas,
particularly human services including Medicaid. The Governor ordered most
State agencies to reduce GRF spending in the last six months of the FY 1992
by a total of approximately $184 million. As authorized by the General
Assembly the $100.4 million BSF balance, and additional amounts from certain
other funds were transferred late in the FY to the GRF, and adjustments made
in the timing of certain tax payments. Other administrative revenue and
spending actions resolved the remaining imbalance.
A significant GRF shortfall (approximately $520 million) was then
projected for the next year, FY 1993. It was addressed by appropriate
legislative and administrative actions. The Governor ordered, effective July
1, 1992, $300 million in selected GRF spending reductions. Subsequent
executive and legislative action in December 1992 -- a combination of tax
revisions and additional spending reductions -- resulted in a balance of GRF
resources and expenditures in the 1992-93 biennium. The June 30, 1993 ending
GRF fund balance was approximately $111 million, of which, as a first step to
BSF replenishment, $21 million was deposited in the BSF. (Based on June 30,
1994 balances, an additional $260 million has been deposited in the BSF,
which has a current balance of $281 million.)
No spending reductions were applied to appropriations needed for debt
service on or lease rentals relating to any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed and
signed by the Governor on July 1, 1993. It includes all necessary GRF
appropriations for State debt services and lease rental payments then
projected for the biennium.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State Constitution
provisions. The State may incur debt, limited in amount to $750,000, to
cover casual deficits or failures in revenues or to meet expenses not
otherwise provided for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. (An exception is
made in both cases for any debt incurred to repel invasion, suppress
insurrection or defend the State in war.)
By 13 constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt and the pledge to taxes or
excises to its payment. At January 25, 1995, $794.4 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 ($38.9 million outstanding);
(b) $360 million of obligations authorized for local infrastructure
improvements, no more than $120 million may be issued in any calendar year
($728 million outstanding or awaiting delivery); and (c) up to $200 million
in general obligation bonds for parks, recreation and natural resources which
may be outstanding at any one time (no more than $50 million to be issued in
any one year).
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises
or taxes levied to pay debt service. Those special obligations include
obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority, and certain obligations issued by the State Treasurer,
over $4.5 billion of which were outstanding or awaiting delivery at January
25, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
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A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchases of tuition credits, for
the benefit of State residents, guaranteed to cover a specified amount when
applied to the cost of higher education tuition. (A 1965 constitutional
provision that authorized student loan guarantees payable from available
State moneys has never been implemented, apart from a "guarantee fund"
approach funded especially from program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitution
provisions. In general, payment obligations under lease-purchase agreements
of Ohio public agencies (in which certificates of participation may be
issued) are limited in duration to the agency's fiscal period, and are
renewable only upon appropriations being made available for the subsequent
fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate in the range of 46% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 107
districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, is pending
questioning the constitutionality of Ohio's system of school funding. The
trial court recently concluded that aspects of the system (including basic
operating assistance) are unconstitutional and ordered the State to provide
for and fund a system complying with the Ohio Constitution. The State has
appealed. A small number of the State's 612 local school districts have in
any year required special assistance to avoid year-end deficits. A current
program provides for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to
repayment if needed. Borrowings under this program totalled $68.6 million
for 44 districts (including $46.6 million for one district) in FY 1992, $94.5
million for 27 districts (including $75 million for one) in FY 1993, and
$15.6 million for 28 districts in FY 1994.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cities and villages; for 18 of them the fiscal situation was 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 to
1% of true value in money the amount of the aggregate levy (including a levy
for unvoted general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal charter
provision, and statutes limit the amount of that aggregate levy to 10 mills
per $1 of assessed valuation (commonly referred to as the "ten-mill
limitation"). Voted general obligations of subdivisions are payable from
property taxes that are unlimited as to amount or rate.
Commencing in 1985 Ohio municipalities may be permitted under Ohio law to
subject interest on certain of the obligations held by the Ohio Trust to
income taxes imposed on their residents and entities doing business therein.
At the time of the closing for each Ohio Trust, Special Counsel to each
Ohio Trust for Ohio tax matters rendered an opinion under then existing Ohio
income tax law applicable to taxpayers whose income is subject to Ohio income
taxation substantially to the effect that:
(1) The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, the school district
income taxes in Ohio, the Ohio corporation franchise tax, or the
Ohio dealers in intangibles tax.
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(2) Distributions with respect to Units of the Ohio Trust
("Distributions") will be treated as the income of the Unitholders
for purposes of the Ohio personal income tax, and school district
and municipal income taxes in Ohio, and the Ohio corporation
franchise tax in proportion to the respective interest therein of
each Unitholder.
(3) Distributions properly attributable to interest on obligations
issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities thereof ("Ohio
Obligations"), or by the governments of Puerto Rico, the Virgin
Islands or Guam ("Territorial Obligations") held by the Trust are
exempt from the Ohio personal income tax, school district and
municipal income taxes, and are excluded from the net income base
of the Ohio corporation franchise tax when distributed or deemed
distributed to Unitholders.
(4) Distributions properly attributable to proceeds of insurance paid
to the Ohio Trust that represent maturing or matured interest on
defaulted obligations held by the Ohio Trust and that are excluded
from gross income for federal income tax purposes will be exempt
from Ohio personal income tax, and school district municipal income
taxes in Ohio and the net income base of the Ohio corporation
franchise tax.
(5) Distributions of profit made on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations including
Distributions of "capital gain dividends" as defined in Section 852
(b) (3) (C) of the Code, properly attributable to the sale,
exchange or other disposition of Ohio Obligations are exempt from
Ohio personal income tax, and school district and municipal income
taxes in Ohio, and are excluded from the net income base of the
Ohio corporation franchise tax.
PENNSYLVANIA TRUSTS. Investors should be aware of certain factors that
might affect the financial conditions of the Commonwealth of Pennsylvania.
Pennsylvania historically has been identified as a heavy industry state
although that reputation has changed recently as the industrial composition
of the Commonwealth diversified when the coal, steel and railroad industries
began to decline. A more diversified economy was necessary as the
traditionally strong industries in the Commonwealth declined due to a long-
term shift in jobs, investment and workers away from the northeast part of
the nation. The major sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for
more than $3.6 billion in crop and livestock products annually, while
agribusiness and food related industries support $38 billion in economic
activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1 percent
during the recessionary period from 1980 to 1983. In 1984, the declining
trend was reversed as employment grew by 2.9 percent over 1983 levels. From
1983 to 1990, Commonwealth employment continued to grow each year, increasing
an additional 14.3 percent. For the last three years, unemployment in the
Commonwealth has declined 1.2 percent. The growth in employment experienced
in Pennsylvania is comparable to the growth in employment in the Middle
Atlantic Region which has occurred during this period.
Back to back recessions in the early 1980s reduced the manufacturing
sector's employment levels moderately during 1980 and 1981, sharply during
1982, and even further in 1983. Non-manufacturing employment has increased
steadily since 1980 to its 1993 level of 81.6 percent of total Commonwealth
employment. Consequently, manufacturing employment constitutes a diminished
share of total employment within the Commonwealth. Manufacturing,
contributing 18.4 percent of 1993 non-agricultural employment, has fallen
behind both the services sector and the trade sector as the largest single
source of employment within the Commonwealth. In 1993 the services sector
accounted for 29.9 percent of all non-agricultural employment while the trade
sector accounted for 22.4 percent.
From 1983 to 1989, Pennsylvania's annual average unemployment rate dropped
from 11.8 percent to 4.5 percent, falling below the national rate in 1986 for
the first time in over a decade. Pennsylvania's annual average unemployment
rate remained below the national average from 1986 until 1990. Slower
economic
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growth caused the unemployment rate in the Commonwealth to rise to 6.9
percent in 1991 and 7.5 percent in 1992. The resumption of faster economic
growth resulted in a decrease in the Commonwealth's unemployment rate to 7.1
percent in 1993. As of July 1994, the seasonally adjusted unemployment rate
for the Commonwealth was 6.5 percent compared to 6.1 percent for the United
States.
The five year period from fiscal 1989 through fiscal 1993 was marked by
public health and welfare costs growing at a rate double the growth rate for
all the state expenditures. Rising caseloads, increased utilization of
services and rising prices joined to produce the rapid rise of public health
and welfare costs at a time when a national recession caused tax revenues to
stagnate and even decline. During the period from fiscal 1989 through fiscal
1993, public health and welfare costs rose by an average annual rate of 10.9
percent while tax revenues were growing at an average annual rate of 5.5
percent. Consequently, spending on other budget programs was restrained to a
growth rate below 5.0 percent and sources of revenues other than taxes became
larger components of fund revenues. Among those sources are transfers from
other funds and hospital and nursing home pooling of contributions to use as
federal matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase enacted for fiscal 1992 brought
financial stability to the General Fund. That tax increase included several
taxes with retroactive effective dates which generated some one-time revenues
during fiscal 1992. The absence of those revenues in fiscal 1993 contributed
to the decline in tax revenues shown for fiscal 1993.
It should be noted that the creditworthiness of obligations issued by
local Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local
obligations in the event of default.
Financial information for the General Fund is maintained on a budgetary
basis of accounting. A budgetary basis of accounting is used for the purpose
of ensuring compliance with the enacted operating budget and is governed by
applicable statutes of the Commonwealth and by administrative procedures.
The Commonwealth also prepares annual financial statements in accordance with
generally accepted accounting principles ("GAAP"). The budgetary basis
financial information maintained by the Commonwealth to monitor and enforce
budgetary control is adjusted at fiscal year-end to reflect appropriate
accruals for financial reporting in conformity with GAAP.
Fiscal 1991 Financial Results. GAAP Basis: During fiscal 1991 the General
Fund experienced an $861.2 million operating deficit resulting in a fund
balance deficit of $980.9 million at June 30, 1991. The operating deficit
was a consequence of the effect of a national recession that restrained
budget revenues and pushed expenditures above budgeted levels. At June 30,
1991, a negative unreserved-undesignated balance of $1,146.2 million was
reported. During fiscal 1991 the balance in the Tax Stabilization Reserve
Fund was used to maintain vital state spending and only a minimal balance
remains in that fund.
Budgetary Basis: A deficit of $453.6 million was recorded by the General
Fund at June 30, 1991. The deficit was a consequence of higher-than-budgeted
expenditures and lower-than-estimated revenues during the fiscal year brought
about by the national economic recession that began during the fiscal year.
The budgetary basis deficit at June 30, 1991 was carried into the 1992 fiscal
year and funded in the 1992 budget. A number of actions were taken
throughout the fiscal year by the Commonwealth to mitigate the effects of the
recession on budget revenues and expenditures. Actions taken, together with
normal appropriation lapses, produced $871 million in expenditure reductions
and increases in revenues and other transfers for the fiscal year. The most
significant of these actions were a $214 million transfer from the
Pennsylvania Industrial Development Authority, a $134 million transfer from
the Tax Stabilization Reserve Fund, and a pooled financing program to match
federal Medicaid funds replacing $145 million of state funds.
Fiscal 1992 Financial Results. GAAP Basis: During fiscal 1992 the General
Fund reported a $1.1 billion operating surplus. This operating surplus was
achieved through legislated tax rate increases and tax base broadening
measures enacted in August 1991 and by controlling expenditures through
numerous cost reduction measures implemented throughout the fiscal year. As
a result of the fiscal 1992 operating surplus, the fund
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balance has increased to $87.5 million and the unreserved-undesignated
deficit has dropped to $138.6 million from its fiscal 1991 level of $1,146.2
million.
Budgetary Basis: Eliminating the budget deficit carried into fiscal 1992
from fiscal 1991 and providing revenues for fiscal 1992 budgeted expenditures
required tax revisions that are estimated to have increased receipts for the
1992 fiscal year by over $2.7 billion. Total revenues for the fiscal year
were $14,516.8 million, a $2,654.5 million increase over cash revenues during
fiscal 1991. Originally based on forecasts for an economic recovery, the
budget revenue estimates were revised downward during the fiscal year to
reflect continued recessionary economic activity. Largely due to the tax
revisions enacted for the budget, corporate tax receipts totalled $3,761.2
million, up from $2,656.3 million in fiscal 1991, sales tax receipts
increased by $302 million to $4,499.7 million, and personal income tax
receipts totalled $4,807.4 million, an increase of $1,443.8 million over
receipts in fiscal 1991.
As a result of the lowered revenue estimate during the fiscal year,
increased emphasis was placed on restraining expenditure growth and reducing
expenditure levels. A number of cost reductions were implemented during the
fiscal year and contributed to $296.8 million of appropriation lapses. These
appropriation lapses were responsible for the $8.8 million surplus at fiscal
year-end, after accounting for the required ten percent transfer of the
surplus to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely accounted for by
increases for education, social services and corrections programs.
Commonwealth funds for the support of public schools were increased by 9.8
percent to provide a $438 million increase to $4.9 billion for fiscal 1992.
The fiscal 1992 budget provided additional funds for basic and special
education and included provisions designed to help restrain the annual
increase of special education costs, an area of recent rapid cost increases.
Child welfare appropriations supporting county operated child welfare
programs were increased $67 million, more than 31.5 percent over fiscal 1991.
Other social service areas such as medical and cash assistance also received
significant funding increases as costs rose quickly as a result of the
economic recession and high inflation rates of medical care costs. The costs
of corrections programs, reflecting the marked increase in the prisoner
population, increased by 12 percent. Economic development efforts, largely
funded from bond proceeds in fiscal 1991, were continued with General Fund
appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing
transactions. These pooling transactions replaced $135 million of
Commonwealth funds, allowing total spending under the budget to increase by
an equal amount.
Fiscal 1993 Financial Results. GAAP Basis: The fund balance of the
General Fund increased by $611.4 million during the fiscal year, led by an
increase in the unreserved balance of $576.8 million over the prior fiscal
year balance. At June 30, 1993, the fund balance totalled $698.9 and the
unreserved/undesignated balance totalled $64.4 million. A continuing
recovery of the Commonwealth's financial condition from the effects of the
national economic recession of 1990 and 1991 is demonstrated by this increase
in the balance was recorded in the budgetary basis unappropriated surplus
during the fiscal year.
Budgetary Basis: The 1993 fiscal year closed with revenues higher than
anticipated and expenditures about as projected, resulting in an ending
unappropriated balance surplus (prior to the ten percent transfer to the Tax
Stabilization Reserve Fund) of $242.3 million, slightly higher than estimated
in May 1993. Cash revenues were $41.5 million above the budget estimate and
totalled $14.633 billion represented less than a one percent increase over
revenues for the 1992 fiscal year. A reduction in the personal income tax
rate in July 1992 and the one-time receipt of revenues from retroactive
corporate tax increases in fiscal 1992 were responsible, in part, for the low
revenue growth in fiscal 1993.
Appropriations less lapses totalled $13.870 billion representing a 1.1
percent increase over expenditures during fiscal 1992. The low growth in
spending is a consequence of a low rate of revenue growth, significant one-
time expenses during fiscal 1992, increased tax refund reserves to cushion
against adverse decisions on pending litigations, and the receipt of federal
funds for expenditures previously paid out of Commonwealth funds.
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By the statue, ten percent of the budgetary basis unappropriated surplus
at the end of a fiscal year is to be transferred to the Tax Stabilization
Reserve Fund. The transfer for the fiscal 1993 balance was $24.2 million.
The remaining unappropriated surplus of $218.0 million was carried forward
into the 1994 fiscal year.
Fiscal 1994 Financial Results (Budgetary Basis). Commonwealth revenues
during the fiscal year totalled $15,210.7 million, $38.6 million above the
fiscal year estimate, and 3.9 percent over Commonwealth revenues during the
previous fiscal year. The sales tax was an important contributor to the
higher than estimated revenues. Collections from the sales tax were $5.124
billion, a 6.1 percent increase from the prior fiscal year and $81.3 million
above estimate. The strength of collections from the sales tax offset the
lower than budgeted performance of the personal income tax which ended the
fiscal year $74.4 million below estimate. The shortfall in the personal
income tax was largely substantially below the $530 million amount provided
in fiscal 1993. The higher fiscal 1993 amount and the reduced fiscal 1994
amount occurred because reserves of approximately $160 million were added to
fiscal 1993 tax refunds to cover potential payments if the Commonwealth lost
litigation known as Philadelphia Suburban Corp. v. Commonwealth. Those
reserves were carried into fiscal 1994 until the litigation was decided in
the Commonwealth's favor in December 1993 and $147.3 million of reserves for
tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of all
fiscal 1994 appropriation lapses, totalled $14,934.4 million representing a
7.2 percent increase over fiscal 1993 expenditures. Medical assistance and
corrections spending contributed to the rate of spending growth for the
fiscal year.
The Commonwealth maintained an operating balance on a budgetary basis for
fiscal 1994 producing a fiscal year ending unappropriated surplus of $335.8
million. By state statute, ten percent ($33.6 million) of that surplus will
be transferred to the Tax Stabilization Reserve Fund and the remaining
balance will be carried over into the fiscal 1995 fiscal year.
Fiscal 1995 Budget. The fiscal 1995 budget was approved by the Governor
on June 16, 1994 and provided for $15,652.9 million of appropriations from
the Commonwealth funds, an increase of 3.9 percent over appropriations,
including supplemental appropriations, for fiscal 1994. Medical assistance
expenditures represent the largest single increase in the budget ($221
million) representing a nine percent increase over the prior fiscal year.
The budget includes a reform of the state-funded public assistance program
that added certain categories of eligibility to the program but also limited
the availability of such assistance to other eligible persons. Education
subsidies to local school districts were increased by $132.2 million to
continue the increased funding for the poorest school districts in the state.
The budget also includes tax reductions totalling an $166.4 million. Low
income working families will benefit from an increase of the dependent
exemption to $3,000 from $1,500 for the first dependent and from $1000 for
all additional dependents. A reduction to the corporate net income tax rate
from 12.25 percent to be phased in over a period of four years was enacted.
A net operating loss provision has been added to the corporate net income tax
and will be phased in over three years with a $500,000 per firm annual cap on
losses used to offset profits. Several other tax changes to the sales tax,
the inheritance tax and the capital stock and franchise tax were also
enacted.
The fiscal 1995 budget projects a $4 million fiscal year-end
unappropriated surplus. No assumption as to appropriation lapses in fiscal
1995 has been made.
All outstanding general obligation bonds of the Commonwealth are rated AA-
by S&P and A1 by Moody.
Any explanation concerning the significance of such ratings must be
obtained from the rating agencies. There is no assurance that any ratings
will continue for any period of time or that they will not be revised or
withdrawn.
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The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Philadelphia
functions both as a city of the first-class county for the purpose of
administering various governmental programs.
For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. The audit
findings for the fiscal year ending June 30, 1992, place the Cumulative
General fund balance deficit at $224.9.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities
in remedying fiscal emergencies was enacted by the General Assembly and
approved by the Governor in June, 1991. PICA is designed to provide
assistance through the issuance of funding debt to liquidate budget deficits
and to make factual findings and recommendations to the assisted city
concerning its budgetary and fiscal affairs. An intergovernmental
cooperation agreement between Philadelphia and PICA was approved by City
Counsel on January 3, 1992, and approved by the PICA Board and signed by the
Mayor on January 8, 1992. At this time, Philadelphia is operating under a
five year fiscal plan approved by PICA on April 6, 1992. Full
implementation of the five year plan was delayed due to labor negotiations
that were not completed until October 1992, three months after the expiration
of the old labor contracts. The terms of the new labor contracts are
estimated to cost approximately $144.0 million more than what was budgeted in
the original five year plan. An amended five year plan was approved by PICA
in May 1993. The audit findings show a surplus of approximately $3 million
for the fiscal year ending June 30, 1993. The fiscal 1994 budget projects no
deficit and a balanced budget for the year ending June 30, 1994. The Mayor's
latest update of the five year financial plan was approved by PICA on May 2,
1994.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue Bonds to
provide financial assistance to Philadelphia and to liquidate the cumulative
General Fund balance deficit. PICA issued $643,430,000 in July 1993 and
$178,675,000 in August 1993 of Special Tax Revenue Bonds to refund certain
general obligation bonds of the city and to fund additional capital projects.
As of the date hereof, the ratings on the City's long-term obligations
supported by payments from the City's General Fund are rated Ba by Moody's
and BB by S&P. Any explanation concerning the significance of such ratings
must be obtained from the rating agencies. There is no assurance that any
ratings will continue for any period of time or that they will not be revised
or withdrawn.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of bonds and does not
purport to be a complete or exhaustive description of all adverse conditions
to which the issuers of the Bonds in the Pennsylvania Trust are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of
the issuers of Bonds, could have an adverse impact on the financial condition
of the State and various agencies and political subdivisions located in the
State. The Sponsor is unable to predict whether or to what extent such
factors or other factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Pennsylvania Trust to pay interest on or principal of
the Bonds.
At the time of the closing for each Pennsylvania Trust, Special Counsel to
each Pennsylvania Trust for Pennsylvania tax matters rendered an opinion
under then existing Pennsylvania income tax law applicable to taxpayers whose
income is subject to Pennsylvania income taxation substantially to the effect
that:
(1) Units evidencing fractional undivided interest in a Pennsylvania
Trust, which are represented by obligations issued by the
Commonwealth of Pennsylvania, any public authority, commission,
board or other agency created by the Commonwealth of Pennsylvania,
any political subdivision of the Commonwealth of Pennsylvania or
any public authority created by any such political subdivision are
not taxable under any of the personal property taxes presently in
effect in Pennsylvania;
(2) distributions of interest income to Unitholders that would not be
taxable if received directly by a Pennsylvania resident are not
subject to personal income tax under the Pennsylvania Tax Reform
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Code of 1971; nor will such interest be taxable under the
Philadelphia School District Investment Income Tax imposed on
Philadelphia resident individuals;
(3) a Unitholder may have a taxable event under the Pennsylvania state
and local income taxes referred to in the preceding paragraph upon
the redemption or sale of his Units; Units will be taxable under
the Pennsylvania inheritance and estate taxes;
(4) a Unitholder which is a corporation may have a taxable event under
the Pennsylvania Corporate Net Income Tax when it redeems or sells
its Units. Interest income distributed to Unitholders which are
corporations is not subject to Pennsylvania Corporate Net Income
Tax or Mutual Thrift Institutions Tax. However, banks, title
insurance companies and trust companies may be required to take the
value of the Units into account in determining the taxable value of
their shares subject to the Shares Tax;
(5) under Act No. 68 of December 3, 1993, gains derived by the Fund
from the sale, exchange or other disposition of Bonds may be
subject to Pennsylvania personal or corporate income taxes. Those
gains which are distributed by the Fund to Unitholders who are
individuals may be subject to Pennsylvania Personal Income Tax.
For Unitholders which are corporations, the disputed gains may be
subject to Corporate Net Income Tax or Mutual Thrift Institutions
Tax. Gains which are not distributed by the Fund may nevertheless
be taxable to Unitholders if derived by the Fund from the sale,
exchange or other disposition of Bonds issued on or after
February 1, 1994. Gains which are not distributed by the Fund will
remain nontaxable to Unitholders if derived by the Fund from the
sale, exchange or other disposition of Bond issued prior to
February 1, 1994;
(6) any proceeds paid under insurance policies issued to the Trustee or
obtained by issuers of the Bonds with respect to the Bonds which
represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Pennsylvania gross income if, and
to the same extent as, such interest would have been so excludable
if paid by the issuer of the defaulted obligations; and;
(7) the Fund is not taxable as a corporation under Pennsylvania tax
laws applicable to corporations.
On December 3, 1993, changes to Pennsylvania laws affecting taxation of
income and gains from the sale of Commonwealth of Pennsylvania and local
obligations were enacted. Among these changes was the repeal of the
exemption from tax of gains realized upon the sale or other disposition of
such obligations. The Pennsylvania Department of Revenue has issued proposed
regulations concerning these changes. The opinions expressed above are based
on our analysis of the law and proposed regulations but are subject to
modification upon review of final regulations or other guidance that may be
issued by the Department of Revenue or future court decisions.
In rendering its opinion, Special Counsel has not, for timing reasons,
made an independent review of proceedings related to the issuance of the
Bonds. It has relied on the Sponsor for assurance that the Bonds have been
issued by the Commonwealth of Pennsylvania or by or on behalf of
municipalities or other governmental agencies within the Commonwealth.
TEXAS TRUSTS. Historically, the primary sources of the State's revenues
have been sales taxes, mineral severance taxes and federal grants. Due to
the collapse of oil and gas prices in 1986 and a resulting enactment by
recent legislatures of new tax measures, including those increasing the rates
of existing taxes and expanding the tax base for certain taxes, there has
been a reordering in the relative importance of the State's taxes in terms of
their contribution to the State's revenue in any year. Due to the State's
expansion in Medicaid spending and other Health and Human Services programs
requiring federal matching revenues, federal receipts became the State's
number one source of income in fiscal 1993. Sales tax, which had been the
main source of revenue for the previous 12 years, dropped to second,
accounting for 27% of total revenues in fiscal 1993. Interest and investment
income is now the third largest revenue source contributing 6.4% of total
revenues in
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fiscal 1993. The motor fuels tax is now the State's fourth largest revenue
source and the second largest tax, accounting for approximately 6.2% of total
revenue in fiscal year 1993. Licenses, fees and permits, the State's fifth
largest revenue source, accounted for 6.3% of the total revenue in fiscal
year 1993. The remainder of the State's revenues are derived primarily from
other excess taxes. The State currently has no personal or corporate income
tax. The State does, however, impose a corporate franchise tax based in
certain circumstances in part on a corporation's profits.
Heavy reliance on the energy and agricultural sectors for jobs and income
resulted in a general downturn in the Texas economy beginning in 1982 as
those industries suffered significantly. The effects of this downturn
continue to adversely affect the State's real estate industry and its
financial institutions for several years. As a result of these problems, the
general revenue fund had a $231 million cash deficit at the beginning of the
1987 fiscal year and ended the 1987 fiscal year with a $745 million cash
deficit. In 1987, the Texas economy began to move toward a period of
recovery. The expansion continued in 1988 and 1989. In fiscal year 1993,
the State ended the year with a general revenue fund cash surplus of $1,163
million. This was the sixth consecutive year that Texas ended a fiscal with
a positive balance.
The 73rd Legislature meeting in 1993 passed the 1994-1995 biennial all
funds budget of $71.2 billion without increasing state taxes. This was
accomplished by cutting spending in certain areas and increasing federal
funding. The state Comptroller has estimated that total state revenues from
all sources would total $65.3 billion for the 1994-1995 biennium.
The Texas Constitution prohibits the State from levying ad valorem taxes
on property for general revenue purposes and limits the rate of such taxes
for other purposes to $.35 per $100 of valuation. The Constitution also
permits counties to levy, in addition to all other ad valorem taxes permitted
by the Constitution, ad valorem taxes on property within the county for flood
control and road purposes in an amount not to exceed $.30 per $100 of
valuation. The Constitution prohibits counties, cities and towns from
levying a tax rate exceeding $.80 per $100 of valuation for general fund and
other specified purposes.
With certain specific exceptions, the Texas Constitution generally
prohibits the creation of debt by or on behalf of the State unless the voters
of the State, by constitutional amendment, authorize the issuance of debt
(including general obligation indebtedness backed by the State's taxing power
and full faith and credit). In excess of $8.49 billion of general obligation
bonds have been authorized in Texas and almost $4.18 billion of such bonds
are currently outstanding. Of these, approximately 76% were issued by the
Veterans' Land Board and the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged for the payment
of all general obligations issued by the State, much of that indebtedness is
designed to be eventually self-supporting from fees, payments, and other
sources of revenues; in some instances, the receipt of such revenues by
certain issuing agencies has been in sufficient amounts to pay the principal
of and interest on the issuer's outstanding bonds without requiring the use
of appropriated funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as presently
amended, the net effective interest rate for any issue or series of Bonds in
the Texas Trust is limited to 15%.
From the time Standard & Poor's Corporation began rating Texas general
obligation bonds in 1956 until early 1986, that firm gave such bonds its
highest rating, "AAA." In April 1986, in response to the State economic
problems, Standard & Poor's downgraded its rating of Texas general obligation
bonds to "AA+." Such rating was further downgraded in July 1987 to "AA."
Moody's Investors Service, Inc. has rated Texas bonds since prior to the
Great Depression. Moody's upgraded its rating of Texas general obligation
bonds in 1962 from "Aa" to "Aaa", its highest rating, following the
imposition of a statewide sales tax by the Legislature. Moody's downgraded
such rating to "Aa" in March 1987. No prediction can be made concerning
future changes in ratings by national rating agencies of Texas general
obligation bonds or concerning the effect of such ratings changes on the
market for such issues.
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<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.
On April 15, 1991, the Governor signed into law Senate Bill 351, the
School Finance Reform Bill. This bill sets a minimum local property tax rate
which guarantees the local school districts a basic state allotment of a
specified amount per pupil. The funding mechanism is based on tax base
consolidation and creates 188 new taxing units, drawn largely along county
lines. Within each taxing unit, school districts will share the revenue
raised by the minimum local property tax. Local school districts are allowed
to "enrich" programs and provide for facilities construction by levying an
additional tax. In January 1992 the Texas Supreme Court declared the School
Finance Reform Bill unconstitutional because the community education
districts are in essence a state property tax. The legislature was given
until September 1, 1993 to pass a new school finance reform bill. The
Supreme Court said that, in the meantime, the county education districts
could continue to levy and collect property taxes. Several taxpayers have
filed suit challenging the right of such districts to collect a tax that has
been declared unconstitutional by the Supreme Court. In March 1993, the
Legislature passed a proposed constitutional amendment which would allow a
limited amount of money to be "recaptured" from wealthy school districts and
redistributed to property-poor school districts. However, the amendment was
rejected by the voters on May 1, 1993, requiring the Legislature to develop a
new school finance plan. At the end of May 1993, the legislature passed a
new school finance bill that provides school districts with certain choices
to achieve funding equalization. Although a number of both poor and wealthy
school districts have challenged the new funding law, the trial judge has
stated that the new law shall be implemented for at least the 1993-1994
school year before considering any constitutional challenges.
The Comptroller has estimated that total revenues for fiscal 1994 will be
$33.59 billion, compared to actual revenues of $33.79 billion for fiscal
1993. The revenue estimate for fiscal 1994 is based on an assumption that
the Texas economy will show a gradual but steady growth.
A wide variety of Texas laws, rules and regulations affect, directly, or
indirectly, the payment of interest on, or the repayment of the principal of,
Bonds in the Texas Trust. The impact of such laws and regulations on
particular Bonds may vary depending upon numerous factors including, among
others, the particular type of Bonds involved, the public purpose funded by
the Bonds and the nature and extent of insurance or other security for
payment of principal and interest on the Bonds. For example, Bonds in the
Texas Trust which are payable only from the revenues derived from a
particular facility may be adversely affected by Texas laws or regulations
which make it more difficult for the particular facility to generate revenues
sufficient to pay such interest and principal, including, among others, laws
and regulations which limit the amount of fees, rates or other charges which
may be imposed for use of the facility or which increase competition among
facilities of that type or which limit or otherwise have the effect of
reducing the use of such facilities generally, thereby reducing the revenues
generated by the particular facility. Bonds in the Texas Trust, the payment
of interest and principal on which is payable from annual appropriations, may
be adversely affected by local laws or regulations that restrict the
availability of monies with which to make such appropriations. Similarly,
Bonds in the Texas Trust, the payment of interest and principal on which is
secured, in whole or in part, by an interest in real property may be
adversely affected by declines in real estate values and by Texas laws that
limit the availability of remedies or the scope of remedies available in the
event of a default on such Bonds. Because of the diverse nature of such laws
and regulations and the impossibility of predicting the nature or extent of
future changes in existing laws or regulations or the future enactment or
adoption of additional laws or regulations, it is not presently possible to
determine the impact of such laws and regulations on the Bonds in the Texas
Trust and, therefore, on the Units.
The foregoing information constitutes only a brief summary of some of the
financial difficulties which may impact certain issuers of Bonds in the Texas
Trust and does not purport to be a complete or exhaustive description of all
adverse conditions to which the issuers in the Texas Trust are subject.
Additionally, many
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<PAGE>
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the
State and various agencies and political subdivisions located in the State.
The Sponsor is unable to predict whether or to what extent such factors or
other factors may affect the issuers of the Bond, the market value or
marketability of the Bonds or the ability of the respective issuers of the
Bonds acquired by the Texas Trust to pay interest on or principal of the
Bonds.
For a discussion of the Federal tax status of income earned on Texas Trust
Units, see "Other Matters--Federal Tax Status."
At the time of closing for each Texas Trust, Special Counsel to the Fund
for Texas tax matters rendered an opinion under then existing Texas law
substantially to the effect that:
(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).
The opinion set forth in clause (2) above, is limited to the extent that
Units of the Trust may be subject to property taxes levied in the State if
held on the relevant date: (i) by a transportation business described in
V.T.C.A., Tax Code, Subchapter A, Chapter 24; (ii) by a savings and loan
association formed under the laws of the State (but only to the extent
described in section 11.09 of the Texas Savings and Loan Act, Vernon's Ann.
Civ. St. art. 852a); or (iii), by an insurance company incorporated under the
laws of the State (but only to the extent described in V.A.T.S., Insurance
Code, Art. 4.01). Each Unitholder described in the preceding sentence should
consult its own tax advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware that in
its first called 1991 session, the Texas Legislature adopted, and the
Governor has signed into law, certain substantial amendments to the State
corporate franchise tax, the effect of which may be to subject to taxation
all or a portion of any gains realized by such a corporate Unitholder upon
the sale, exchange or other disposition of a Unit. The amendments are
applicable to taxable periods commencing January 1991, and to each taxable
period thereafter. Because no authoritative judicial, legislative or
administrative interpretation of these amendments has issued, and there
remain many unresolved questions regarding its potential effect on corporate
franchise taxpayers, each corporation which is subject to the State franchise
tax and which is considering the purchase of Units should consult its tax
advisor regarding the effect of these amendments.
PUBLIC OFFERING OF UNITS
PUBLIC OFFERING PRICE. Units of each State Trust are offered at the
Public Offering Price thereof. The Public Offering Price per Unit is equal
to the aggregate bid side evaluation of the Municipal Bonds in the State
Trust's portfolio (as determined pursuant to the terms of a contract with the
Evaluator, by Muller Data
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Corporation, a non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities), plus or minus cash,
if any, in the Principal Account, held or owned by the State Trust, plus
accrued interest to the settlement date (which in the case of Kemper Defined
Funds consists of Purchased Interest and Daily Accrued Interest) divided by
the number of outstanding Units of the State Trust, plus the sales charge
applicable to a Unit of such State Trust. Investors who purchase Units
through brokers or dealers pursuant to a current management agreement which
by contract or operation of law does not allow such broker or dealer to earn
an additional commission (other than any fee or commission paid for
maintenance of such investor's account under the management agreement) on
such transactions may purchase such Units at the current Public Offering
Price net of the applicable broker or dealer concession. See "Public
Distribution of Units" below. The sales charge is based upon the dollar
weighted average maturity of the State Trust and is determined in accordance
with the table set forth below. For purposes of this computation, Municipal
Bonds will be deemed to mature on their expressed maturity dates unless: (a)
the Municipal Bonds have been called for redemption or funds or securities
have been placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they mature; or
(b) such Municipal Bonds are subject to a "mandatory tender", in which case
such mandatory tender will be deemed to be the date upon which they mature.
The effect of this method of sales charge computation will be that different
sales charge rates will be applied to the State Trust based upon the dollar
weighted average maturity of such State Trust's portfolio, in accordance with
the following schedule:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF NET
DOLLAR WEIGHTED AVERAGE PUBLIC OFFERING AMOUNT
YEARS TO MATURITY PRICE INVESTED
----------------- --------------- -------------
<S> <C>
0 to .99 years...................... 0.00% 0.000%
1 to 3.99 years..................... 2.00 2.041
4 to 7.99 years..................... 3.50 3.627
8 to 14.99 years.................... 4.50 4.712
15 or more years.................... 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
--------------------------------------
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
- -------------------- -----------------------------------------
<S> <C> <C> <C>
$1 to $99,999...................... 3.50% 4.50% 5.50%
$100,000 to $499,999............... 3.25 4.25 5.00
$500,000 to $999,999............... 3.00 4.00 4.50
$1,000,000 or more................. 2.75 3.75 4.00
</TABLE>
----------
* If the dollar weighted average maturity of a State Trust is from 1 to 3.99
years, the sales charge is 2% and 1.5% of the Public Offering Price for
purchases of $1,000 to $249,999 and $250,000 or more, respectively.
The reduced sales charges as shown on the preceding charts will apply to
all purchases of Units on any one day by the same person from the same
Underwriter or dealer and for this purpose, purchases of Units of a State
Trust will be aggregated with concurrent purchases of Units as any other unit
investment trust that may be offered by the Sponsor. Additionally, Units
purchased in the name of a spouse or child (under 21) of such purchaser will
be deemed to be additional purchases by such purchaser. The reduced sales
charges will also be applicable to a trust or other fiduciary purchasing for
a single trust estate or single fiduciary account.
The Sponsor intends to permit officers, directors and employees of the
Sponsor and Evaluator, and at the discretion of the Sponsor, registered
representatives of selling firms to purchase Units of the Trust without a
sales charge, although a transaction processing fee may be imposed on such
trades.
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<PAGE>
The Public Offering Price per Unit of a State Trust on the date shown on
the cover page of Part Two of the Prospectus or on any subsequent date will
vary from the amounts stated under "Essential Information" in Part Two in
accordance with fluctuations in the prices of the underlying Municipal Bonds
and the amount of accrued interest on the Units. The aggregate bid side
evaluation of the Municipal Bonds shall be determined (a) on the basis of
current bid prices of the Municipal Bonds, (b) if bid prices are not
available for any particular Municipal Bonds, on the basis of current bid
prices for comparable bonds, (c) by determining the value of the Municipal
Bonds on the bid side of the market by appraisal, or (d) by any combination
of the above. Except as described in "Insurance on the Portfolios" above,
the Evaluator will not attribute any value to the insurance obtained by a
State Trust. On the other hand, the value of insurance obtained by an issuer
of Municipal Bonds is reflected and included in the market value of such
Municipal Bonds.
In any case, the Evaluator will consider the ability of an insurer to meet
its commitments under the Trust's insurance policy (if any). For example, if
a State Trust were to hold a municipality's Municipal Bonds which had
significantly deteriorated in credit quality, the Evaluator would first
consider in its evaluation the market price of the Municipal Bonds at their
lower credit rating. The Evaluator would also attribute a value to the
insurance feature of the Municipal Bonds which would be equal to the
difference between the market value of such Municipal Bonds and the market
value of bonds of a similar nature which were of investment grade rating. It
is the position of the Sponsor that this is a fair method of valuing insured
Municipal Bonds and reflects a proper valuation method in accordance with the
provisions of the Investment Company Act of 1940. For a description of the
circumstances under which a full or partial suspension of the right of
Unitholders to redeem their Units may occur, see "Redemption" below.
The foregoing evaluations and computations shall be made as of the
Evaluation Time stated under "Essential Information" in Part Two, on each
business day effective for all sales made during the preceding 24-hour
period.
The interest on the Municipal Bonds in each State Trust, less the related
estimated fees and expenses, is estimated to accrue in the annual amounts per
Unit set forth under "Essential Information" in Part Two. The amount of net
interest income which accrues per Unit may change as Municipal Bonds mature
or are redeemed, exchanged or sold, or as the expenses of a State Trust
change or as the number of outstanding Units of such State Trust changes.
Payment for Units must be made on or before the third business day
following the order for purchase (the "settlement date"). A purchaser
becomes the owner of Units on the settlement date. Cash, if any, made
available to the Sponsor prior to the date of settlement for the purchase of
Units may be used in the Sponsor's business and may be deemed to be a benefit
to the Sponsor, subject to the limitations of the Securities Exchange Act of
1934. If a Unitholder desires to have certificates representing Units
purchased, such certificates will be delivered as soon as possible following
a written request therefor, or shortly thereafter. For information with
respect to redemption of Units purchased, but as to which certificates
requested have not been received, see "Redemption" below.
The following section entitled "Accrued Interest" applies only to series
of Kemper Tax-Exempt Insured Income Trust, Multi-State Series and Ohio Tax-
Exempt Bond Trust Series 11-22.
ACCRUED INTEREST. Accrued interest consist of two elements. The first
element arises as a result of accrued interest which is the accumulation of
unpaid interest on a bond from the last day on which interest thereon was
paid. Interest on Bonds in the State Trusts is actually paid either monthly
or semi-annually to the State Trust. However, interest on the bonds in the
State Trusts is accounted for daily on an accrual basis. Because of this, a
State Trust always has an amount of interest earned but not yet collected by
the Trustee because of coupons that are not yet due. For this reason, the
Public Offering Price of Units will have added to it the proportionate share
of accrued and undistributed interest to the date of settlement.
The Trustee advanced the amount of accrued interest as of the First
Settlement Date (which is five business days following the Date of Deposit of
the applicable State Trust) and the same was distributed to the Sponsor.
Such advance was repaid to the Trustee through the first receipts of interest
received on the Municipal Bonds.
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<PAGE>
Consequently, the amount of accrued interest added to the Public Offering
Price of Units included only accrued interest arising after the First
Settlement Date of a State Trust, less any distributions from the Interest
Account subsequent to this First Settlement Date. Since the First Settlement
Date was the date of settlement for anyone who ordered Units on the Date of
Deposit, no accrued interest was added to the Public Offering Price of Units
ordered on the Date of Deposit.
The second element of accrued interest arises because of the structure of
the Interest Account. The Trustee has no cash for distribution to
Unitholders until it receives interest payments on the Bonds in a State
Trust. The Trustee is obligated to provide its own funds, at times, in order
to advance interest distributions. The Trustee will recover these
advancements when such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis for the
Trustee to advance its own funds in connection with such interest
distributions. The Interest Account balances are also structured so that
there will generally be positive cash balances and since the funds held by
the Trustee will be used by it to earn interest thereon, it benefits thereby
(see "Expenses of the Trust").
Accrued interest is computed as of the initial Record Date of the State
Trusts. On the date of the first distribution of interest to Unitholders
after the First Settlement Date, the interest collected by the Trustee will
be sufficient to repay its advances, to allow for accrued interest under the
monthly, quarterly and semi-annual plans of distribution and to generate
enough cash to commence distributions to Unitholders. If a Unitholder sells
or redeems all or a portion of his Units or if the Bonds in a State Trust are
sold or otherwise removed or if a State Trust is liquidated, he will receive
at that time his proportionate share of the accrued interest computed to the
settlement date in the case of sale or liquidation and to the date of tender
in the case of redemption in such State Trust.
The following section entitled "Purchased and Daily Accrued Interest"
applies only to series of Kemper Defined Funds.
PURCHASED AND DAILY ACCRUED INTEREST. In the case of a State Trust in any
series of Kemper Defined Funds, accrued interest consists of two elements.
The first element arises as a result of accrued interest which is the
accumulation of unpaid interest on a bond from the later of the last day on
which interest thereon was paid or the date of original issuance of the bond.
Interest on the coupon Bonds in a State Trust is paid semi-annually to the
State Trust. A portion of the aggregate amount of such accrued interest on
the Bonds in the Trust to the First Settlement Date (which is five business
days following the Date of Deposit of the applicable State Trust) of the
State Trust is referred to herein as "Purchased Interest." Included in the
Public Offering Price of the State Trust Units is the Purchased Interest. In
an effort to reduce the amount of Purchased Interest which would otherwise
have to be paid by Unitholders, the Trustee may have advanced a portion of
the accrued interest to the Sponsor as the Unitholder of record as of the
First Settlement Date. The second element of accrued interest arises because
the estimated net interest on the Units in the State Trust is accounted for
daily on an accrual basis (herein referred to as "Daily Accrued Interest").
Because of this, the Units always have an amount of interest earned but not
yet paid or reserved for payment. For this reason, the Public Offering Price
of Units in any series of Kemper Defined Funds will include the proportionate
share of Daily Accrued Interest to the date of settlement.
If a Unitholder in any series of Kemper Defined Funds sells or redeems all
or a portion of his Units or if the bonds are sold or otherwise removed or if
the State Trust is liquidated, he will receive at that time his proportionate
share of the Purchased Interest and Daily Accrued Interest computed to the
settlement date in the case of sale or liquidation and to the date of tender
in the case of redemption in the State Trust.
PUBLIC DISTRIBUTION OF UNITS. The Sponsor has qualified Units of each
State Trust for sale in the State for which such State Trust is named. Units
will be sold through the Underwriters, through dealers who are members of the
National Association of Securities Dealers, Inc. and through others. Sales
may be made to or through dealers at prices which represent discounts from
the Public Offering Price as set forth in the table below. Certain
commercial banks are making Units of the Trust available to their customers
on an agency basis. A portion of the sales charge paid by their customers is
retained by or remitted to the banks, in the amounts shown in the table
below. Under the Glass-Steagall Act, banks are prohibited from underwriting
Trust
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Units; however, the Glass-Steagall Act does permit certain agency
transactions and the banking regulators have indicated that these particular
agency transactions are permitted under such Act. In addition, state
securities laws on this issue may differ from the interpretations of federal
law expressed herein and banks and financial institutions may be required to
register as dealers pursuant to State law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
-------------------------------------------
DISCOUNT PER UNIT
AMOUNT OF INVESTMENT (% OF PUBLIC OFFERING PRICE)
- --------------------- -------------------------------
<S> <C> <C> <C>
$1 to $99,999.......... 2.00% 3.00% 4.00%
- -------------------------- ---- ---- ----
$100,000 to $499,999... 1.75 2.75 3.50
$500,000 to $999,999... 1.50 2.50 3.00
$1,000,000 or more..... 1.25 2.25 2.50
---- ---- ----
</TABLE>
----------
* If the dollar weighted average maturity of a Trust is from 1 to 3.99 years,
the concession or agency commission is 1.00% of the Public Offering Price.
In addition to such discounts, the Sponsor may, from time to time, pay or
allow an additional discount, in the form of cash or other compensation, to
dealers employing registered representatives who sell, during a specified
time period, a minimum dollar amount of Units of the Trust and other unit
investment trusts underwritten by the Sponsor. The Sponsor reserves the
right to change the levels of discounts at any time. The difference between
the discount allowed to firms and the sales charge will be retained by the
Sponsor. The Sponsor reserves the right to reject, in whole or in part, any
order for the purchase of Units.
PROFITS OF SPONSOR. The Sponsor will retain a portion of the sales charge
on each Unit sold representing the difference between the Public Offering
Price of the Units and the discounts allowed to firms selling such Units.
The Sponsor may realize additional profit or loss as a result of the possible
change in the daily evaluation of the Municipal Bonds in the State Trusts,
since the value of its inventory of Units may increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to change at
any time, maintain a market for Units of the State Trusts offered hereby and
to offer to purchase said Units at prices, as determined by the Evaluator,
based on the aggregate bid prices of the underlying Municipal Bonds of such
State Trusts, together with accrued interest to the expected date of
settlement (which, in the case of Kemper Defined Funds, consists of Purchased
Interest and Daily Accrued Interest). Accordingly, Unitholders who wish to
dispose of their Units should inquire of their broker or bank as to current
market prices of the Units in order to determine whether there is in
existence any price in excess of the redemption price and, if so, the amount
there of prior to making a tender for redemption to the Trustee.
The offering price of any Units resold by the Sponsor will be in accord
with that described in the currently effective Prospectus describing such
Units. Any profit or loss resulting from the resale of such Units will
belong to the Sponsor. The Sponsor may suspend or discontinue purchase of
Units of any State Trust if the supply of Units exceeds demand, or for other
business reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary market
described above may cause their Units to be redeemed by the Trustee by making
a written request to the Trustee, Investors Fiduciary Trust Company, P.O. Box
419430, Kansas City, Missouri 64173-0216 and, in the case of Units evidenced
by a certificate, by tendering such certificate to the Trustee, properly
endorsed or accompanied by a written
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<PAGE>
instrument or instruments of transfer in a form satisfactory to the Trustee.
Unitholders must sign such written request, and such certificate or transfer
instrument, exactly as their names appear on the records of the Trustee and
on any certificate representing the Units to be redeemed. If the amount of
the redemption is $25,000 or less and the proceeds are payable to the
Unitholder(s) of record at the address of record, no signature guarantee is
necessary for redemptions by individual account owners (including joint
owners). Additional documentation may be requested, and a signature
guarantee is always required, from corporation, executors, administrators,
trustees, guardians or associations. The signatures must be guaranteed by a
participant in the Securities Transfer Agents Medallion Program ("STAMP") or
such other guarantee program in addition to, or in substitution for, STAMP,
as may be acceptable to the Trustee. A certificate should only be sent by
registered or certified mail for the protection of the Unitholder. Since
tender of the certificate is required for redemption when one has been
issued, Units represented by a certificate cannot be redeemed until the
certificate representing the Units has been received by the purchaser.
Redemption shall be made by the Trustee on the third business calendar day
following the day on which a tender for redemption is received (the
"Redemption Date"), by payment of cash equivalent to the Redemption Price for
such State Trust, determined as set forth below under "Computation of
Redemption Price," as of the Evaluation Time stated under "Essential
Information" in Part Two, next following such tender, multiplied by the
number of Units being redeemed. The price received upon redemption might be
more or less than the amount paid by the Unitholder depending on the value of
the Municipal Bonds in the State Trust's portfolio at the time of redemption.
Any Units redeemed shall be cancelled and any undivided fractional interest
in the State Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the Trustee is
required to withhold a specified percentage of the principal amount of a Unit
redemption if the Trustee has not been furnishing the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any
amount so withheld is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a tax return. Under normal
circumstances the Trustee obtains the Unitholder's tax identification number
from the selling broker. However, any time a Unitholder elects to tender
Units for redemption, such Unitholder should make sure that the Trustee has
been provided a certified tax identification number in order to avoid this
possible "back-up withholding." In the event the Trustee has not been
previously provided such number, one must be provided at the time redemption
is requested.
Any amounts paid on redemption representing interest shall be withdrawn
from the Interest Account of such State Trust to the extent that funds are
available for such purpose. All other amounts paid on redemption shall be
withdrawn from the Principal Account for such State Trust. The Trustee is
empowered to sell Municipal Bonds from the portfolio of a State Trust in
order to make funds available for the redemption of Units of such State
Trust. Such sale may be required when Municipal Bonds would not otherwise be
sold and might result in lower prices than might otherwise be realized. To
the extent Municipal Bonds are sold, the size and diversity of such State
Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the Sponsor
does not elect to purchase any Units tendered for redemption, in lieu of
redeeming such Units, to sell such Units in over-the-counter market for the
account of tendering Unitholders at prices which will return to such
Unitholders amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price for such
Units. In the event of any such sale, the Trustee shall pay the net proceeds
thereof to the Unitholders on the day they would otherwise be entitled to
receive payment of the Redemption Price.
The right of redemption may be suspended and payment postponed (1) for any
period during which the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or during which (as determined by the
Securities and Exchange Commission) trading on the New York Stock Exchange is
restricted; (2) for any period during which an emergency exists as a result
of which disposal by the Trustee of Municipal Bonds is not reasonably
practicable or it is not reasonably practicable to fairly determine the value
of the underlying Municipal Bonds in accordance with the Agreement; or (3)
for such other period as the Securities and Exchange Commission may by order
permit. The Trustee is not liable to any person in any way for any loss or
damage which may result from any such suspension or postponement.
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COMPUTATION OF REDEMPTION PRICE. The Redemption Price for Units of each
State Trust is computed by the Evaluator as of the Evaluation Time stated
under "Essential Information" on Part Two next occurring after the tendering
of a Unit for redemption and on any other business day desired by it, by:
A. adding (1) the principal cash on hand held or owed by the State
Trust; (2) the aggregate value of the Municipal Bonds held in the State
Trust, as determined by the Evaluator on the basis of bid prices
therefor; (3) interest accrued and unpaid on the Municipal Bonds in the
State Trust as of the date of computation; and
B. deducting therefrom (1) amounts representing any applicable taxes
or governmental charges payable out of the State Trust and for which no
deductions have been previously made for the purpose of additions to
the Reserve Account described under "Expenses of the Trust"; (2)
amounts representing estimated accrued expenses of the State Trust
including, but not limited to, unpaid fees and expenses of the Trustee
(including legal and auditing fees and insurance costs), the Evaluator,
the Sponsor and bond counsel, if any; (3) cash held for distribution to
Unitholders of record as of the business day prior to the evaluation
being made; and (4) other liabilities incurred by the State Trust; and
C. finally, dividing the results of such computation by the number
of Units of the State Trust outstanding as of the date thereof.
UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any State Trust will not be
evidenced by a certificate unless a Unitholder or the Unitholder's registered
broker/dealer or the clearing agent for such broker/dealer makes a written
request to the Trustee. Certificates, if issued, will be so noted on the
confirmation statement sent to the Underwriter and broker. Non-receipt of
such certificate(s) must be reported to the Trustee within one year;
otherwise, a 2% surety bond fee will be required for replacement.
Units are transferable by making a written request to the Trustee and, in
the case of Units evidenced by a certificate, presenting and surrendering
such certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer. Unitholders must sign such written
request, and such certificate or transfer instrument, exactly as their names
appear on the records of the Trustee and on any certificate representing the
Units to be transferred. Such signatures must be guaranteed by a participant
in the Securities Transfer Agents Medallion Program ("STAMP") or such other
signature guarantee program in addition to, or in substitution for, STAMP, as
may be acceptable to the Trustee.
Units may be purchased and certificates, if requested, will be issued in
denominations of one Unit or any multiple thereof subject to any minimum
investment requirement established by the Sponsor from time to time. Any
certificate issued will be numbered serially for identification, issued in
fully registered form and will be transferable only on the books of the
Trustee. The Trustee may require a Unitholder to pay a fee for each
certificate reissued or transferred, and to pay any governmental charge that
may be imposed in connection with each such transfer or interchange. The
Trustee at the present time does not intend to charge for the normal transfer
or interchange of certificates. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity (generally amounting to not more than 3% of the market value of the
Units), affidavit of loss, evidence of ownership and payment of expenses
incurred.
DISTRIBUTIONS TO UNITHOLDERS. Interest Distributions: Interest received
by each State Trust, including any portion of the proceeds (including
insurance proceeds) from a disposition of Municipal Bonds which represents
accrued interest, is credited by the Trustee to the Interest Account for such
State Trust. All other receipts are credited by the Trustee to a separate
Principal Account for the State Trust. The Trustee normally has no cash for
distribution to Unitholders until it receives interest payments on the Bonds
in the State Trust. Since municipal interest usually is paid semi-annually,
during the initial months of the Trust, the Interest Account of each State
Trust, consisting of accrued but uncollected interest and collected interest
(cash), will be predominantly the uncollected accrued interest that is not
available for distribution. On the dates set forth
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under "Essential Information" for each State Trust in Part Two the Trustee
will commence distributions, in part from funds advanced by the Trustee.
Thereafter, assuming the State Trust retains its original size and
composition, after deduction of the fees and expenses of the Trustee, the
Sponsor and Evaluator and reimbursements (without interest) to the Trustee
for any amount advanced to a State Trust, the Trustee will normally
distribute on each Interest Distribution Date (the fifteenth of the month) or
shortly thereafter to Unitholders of record of such State Trust on the
preceding Record Date. Unitholders of the State Trusts will receive an
amount substantially equal to one-twelfth, one-fourth or one-half (depending
on the distribution option selected except in series of Kemper Defined Funds
in which case only monthly distributions are available) of such Unitholders'
pro rata share of the estimated net annual interest income to the Interest
Account of such State Trust. However, interest earned at any point in time
will be greater than the amount actually received by the Trustee and
distributed to the Unitholders. Therefore, there will always remain an item
of accrued interest that is added to the daily value of the Units. If
Unitholders of a State Trust sell or redeem all or a portion of their Units,
they will be paid their proportionate share of the accrued interest of such
State Trust to, but not including, the fifth business day after the date of a
sale or to the date of tender in the case of a redemption.
In order to equalize distributions and keep the undistributed interest
income of the Trusts at a low level, all Unitholders of record in such State
Trust on the first Record Date received and interest distribution on the
first Interest Distribution Date. Because the period of time between the
first Interest Distribution Date and the regular distribution dates may not
have been a full period, the first regular distributions may have been
partial distributions.
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. Since interest on Municipal Bonds in the
State Trusts is payable at varying intervals, usually in semi-annual
installments, and distributions of income are made to Unitholders at
different intervals from receipt of interest, the interest accruing to a
State Trust may not be equal to the amount of money received and available
for distribution from the Interest Account. Therefore, on each Distribution
Date the amount of interest actually deposited in the Interest Account of a
State Trust and available for distribution may be slightly more or less than
the interest distribution made. In order to eliminate fluctuations in
interest distributions resulting from variances, the Trustee is authorized by
the Trust Agreements to advance such amounts as may be necessary to provide
interest distributions of approximately equal amounts. The Trustee will be
reimbursed, without interest, for any such advances from funds available in
the Interest Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust, Multi-State
Series or Ohio Tax-Exempt Bond Trust, Series 11-22 who desire to receive
distributions on a quarterly or semi-annual basis may elect to do so,
however, only monthly distributions are available for series of Kemper
Defined Funds. Record Dates for monthly distributions will be the first day
of each month; Record Dates for quarterly distributions will be the first day
of January, April, July and October; and Record Dates for semi-annual
distributions will be the first day of January and July. The distribution
option selected by a Unitholder of any series of Kemper Tax-Exempt Income
Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 1-10 will
remain in effect until changed by written notice to the Trustee.
Unitholders of any series of Kemper Tax-Exempt Insured Income Trust,
Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 11-22 purchasing
Units of the State Trusts in the secondary market will initially receive
distributions in accordance with the election of the prior owner.
Unitholders of such Trusts desiring to change their distribution option may
do so by sending written notice to the Trustee, together with their
certificate (if one was issued). Certificates should only be sent by
registered or certified mail to minimize the possibility of loss. If written
notice and any certificate are received by the Trustee not later than January
1 or July 1 of a year, the change will become effective for distributions
commencing with February 15 or August 15, respectively, of that year. If
notice is not received by the Trustee, the Unitholder will be deemed to have
elected to continue with the same option.
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Principal Distributions. The Trustee will distribute on each semi-annual
Distribution Date (or, in the case of Kemper Defined Funds, on each
Distribution Date) or shortly thereafter, to each Unitholder of record of the
State Trust of the preceding Record Date, an amount substantially equal to
such Unitholder's pro rata share of the cash balance, if any, in the
Principal Account of such State Trust computed as of the close of business on
the preceding Record Date. However, no distribution will be required if the
balance in the Principal Account is less than $1.00 per Unit (or $.001 per
Unit for certain Series). Except for Series of Kemper Defined Funds, if such
balance is between $5.00 and $10.00 per Unit, distributions will be made on
each quarterly Distribution Date; and if such balance exceeds $10.00 per
Unit, such amounts will be distributed on the next monthly Distribution Date.
STATEMENTS TO UNITHOLDERS. With each distribution, the Trustee will
furnish each Unitholder a statement of the amount of interest and the amount
of other receipts, if any, which are being distributed, expressed in each
case as a dollar amount per Unit.
The accounts of each State Trust are required to be audited annually by
independent certified public accountants designated by the Sponsor, unless
the Trustee determines that such an audit would not be in the best interest
of the Unitholders of such State Trust. The accountants' report will be
furnished by the Trustee to any Unitholder of such State Trust upon written
request.
Within a reasonable period of time after the end of each calendar year,
the Trustee shall furnish to each person who at any time during the calendar
year was a Unitholder of a State Trust a statement covering the calendar
year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds in such
State Trust, and the percentage of such amount by states and
territories in which the issuers of such Municipal Bonds are located;
2. The amount paid from the Interest Account of such State Trust
representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such State Trust for
applicable taxes, if any, fees and expenses (including insurance costs
and auditing fees) of the Trustee, the Evaluator, the Sponsor and of
bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve Account for such
State Trust described under "Expenses of the Trust"; and
5. The net amount remaining after such payments and deductions,
expressed both as a total dollar amount and a dollar amount per Unit
outstanding on the last business day of such calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of any of the
Municipal Bonds in such State Trust and the net proceeds received
therefrom excluding any portion credited to the Interest Account;
2. The amount paid from the Principal Account of such Series
representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such Series for
payment of applicable taxes, if any, fees and expenses (including
insurance costs and auditing expenses) of the Trustee, the Evaluator,
the Sponsor and of bond counsel, if any;
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4. Any amounts credited by the Trustee to a Reserve Account for such
Series described under "Expenses of the Trust"; and
5. The net amount remaining after distributions of principal and
deductions, expressed both as a dollar amount and as a dollar amount
per Unit outstanding on the last business day of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such State Trust as of the last
business day of such calendar year;
2. The number of Units of such State Trust outstanding on the last
business day of such calendar year;
3. The Redemption Price of such State Trust based on the last Trust
Fund Evaluation made during such calendar year; and
4. The amount actually distributed during such calendar year from the
Interest and Principal Accounts of such State Trust separately stated,
expressed both as total dollar amounts and as dollar amounts per Unit
of such State Trust outstanding on the Record Date for each such
distribution.
RIGHTS OF UNITHOLDERS. A Unitholder may at any time tender Units to the
Trustee for redemption. No Unitholder of a State Trust shall have the right
to control the operation and management of the Trust or such State Trust in
any manner, except to vote with respect to amendment of the Agreement or
termination of the Trust or such State Trust. The death or incapacity of any
Unitholder will not operate to terminate the Trust or any State Trust nor
entitle legal representatives or heirs to claim an accounting or to bring any
action or proceeding in any court for partition or winding up of the Trust or
any State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by the
purchase, sale or substitution of Municipal Bonds, except in the special
circumstances noted below. Thus, with the exception of the redemption or
maturity of Municipal Bonds in accordance with their terms, and/or the sale
of Municipal Bonds to meet redemption requests, the assets of the State
Trusts will remain unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds the value
of which has been affected by certain adverse events, including institution
of certain legal proceedings, a decline in their price or the occurrence of
other market factors, including advance refunding, so that in the opinion of
the Sponsor the retention of such Municipal Bonds in a State Trust would be
detrimental to the interest of its Unitholders. The proceeds from any such
sales, exclusive of any portion which represents accrued interest, will be
credited to the Principal Account of such Trust Fund for distribution to its
Unitholders.
The Trustee is permitted to utilize the option to obtain Permanent
Insurance only in circumstances where the value added to the Municipal Bonds
exceeds the costs of acquiring such Permanent Insurance. Unless such
Permanent Insurance may be obtained at an acceptable price, the Sponsor will
not direct the Trustee to dispose of Municipal Bonds which are in default or
imminent danger of default but to retain such Municipal Bonds in the
portfolio so that the Trust may realize the benefits of the insurance on the
portfolio.
The Sponsor is required to instruct the Trustee to reject any offer made
by an issuer of the Municipal Bonds to issue new obligations in exchange or
substitution for any of such Municipal Bonds pursuant to a refunding
financing plan except that the Sponsor may instruct the Trustee to accept or
reject such an offer or to take any other action with respect thereto as the
Sponsor may deem proper if (1) the issuer is in default with respect to such
Bonds or (2) in the written opinion of the Sponsor the issuer will probably
default with respect
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to such Bonds in the reasonably foreseeable future. Any obligation so
received in exchange or substitution will be held by the Trustee subject to
the terms and conditions of the Trust Agreement to the same extent as 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 Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the Sponsor, from a
State Trust for the purpose of redeeming Units of such State Trust tendered
for redemption and the payment of expenses. To the extent that Municipal
Bonds are sold which are current in payment of principal and interest by one
of the Insured Trust Funds in order to meet redemption requests and defaulted
Municipal Bonds are retained in the portfolio of an Insured Trust Fund in
order to preserve the related insurance protection applicable to said
Municipal Bonds, the overall quality of the Municipal Bonds remaining in such
Insured Trust Fund's portfolio will tend to diminish. Because of such
restrictions on the Trustee, under certain circumstances the Sponsor may seek
a full or partial suspension of the right of Unitholders to redeem their
Units. See "Redemption."
ADMINISTRATION OF THE TRUST
THE TRUSTEE. The Trustee, Investors Fiduciary Trust Company, is a trust
company specializing in investment related services, organized and existing
under the laws of Missouri, having its trust office at 127 West 10th Street,
Kansas City, Missouri 64105. The Trustee is subject to supervision and
examination by the Division of Finance of the State of Missouri and the
Federal Deposit Insurance Corporation. Investors Fiduciary Trust Company is
owned by State Street Boston Corporation.
The Trustee, whose duties are ministerial in nature, has not participated
in selecting the portfolio of any Trust Fund. For information relating to
the responsibilities of the Trustee under the Agreements, reference is made
to the material set forth under "Unitholders."
In accordance with the Agreements, the Trustee shall keep proper books of
record and account of all transactions at its office. Such records shall
include the name and address of, and the number of Units held by, every
Unitholder of each Trust Fund. Such books and records shall be open to
inspection by any Unitholder of such Trust Fund at all reasonable times
during usual business hours. The Trustee shall make such annual or other
reports as may from time to time be required under any applicable State or
Federal statute, rule or regulation. The Trustee shall keep a certified copy
or duplicate original of the Agreement on file in its office available for
inspection at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds held in the
State Trust. Pursuant to the Agreement, the Trustee may employ one or more
agents for the purpose of custody and safeguarding of Municipal Bonds
comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may resign and
be discharged of the trust created by the Agreement by executing an
instrument in writing and filing the same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice of
resignation to all Unitholders then of record, not less than sixty days
before the date specified in such notice when such resignation is to take
effect. The Sponsor upon receiving notice of such resignation is obligated
to appoint a successor trustee promptly. If, upon such resignation, no
successor trustee has been appointed and has accepted the appointment within
thirty days after notification, the retiring Trustee may apply to a court of
competent jurisdiction for the appointment of a successor. The Sponsor may
at any time remove the Trustee with or without cause and appoint a successor
trustee as provided in the Agreement. Notice of such removal and appointment
shall be mailed to each Unitholder by the Sponsor. Upon execution of a
written acceptance of such appointment by a successor trustee, all the
rights, powers, duties and obligations of the original Trustee shall vest in
the successor.
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The Trustee shall be a corporation organized under the laws of the United
States or any state thereof, which is authorized under such laws to exercise
trust powers. The Trustee shall have at all times an aggregate capital,
surplus and undivided profits of not less than $5,000,000.
THE EVALUATOR. Kemper Unit Investment Trusts, a service of Kemper
Securities, Inc., the Sponsor, also serves as Evaluator. The Evaluator may
resign or be removed by the Trustee, which is to use its best efforts to
appoint a satisfactory successor. Such resignation or removal shall become
effective upon acceptance of appointment by the 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. Notice
of such resignation or removal and appointment shall be mailed by the Trustee
to each Unitholder. At the present time, pursuant to a contract with the
Evaluator, Muller Data Corporation, a non-affiliated firm regularly engaged
in the business of evaluating, quoting or appraising comparable securities,
provides portfolio evaluations of the Municipal Bonds in the State Trusts
which are then reviewed by the Evaluator. In the event the Sponsor is unable
to obtain current evaluations from Muller Data Corporation, it may make its
own evaluations or it may utilize the services of any other non-affiliated
evaluator or evaluators it deems appropriate.
AMENDMENT AND TERMINATION. The Agreement may be amended by the Trustee
and the Sponsor without the consent of any of the Unitholders: (1) to cure
any ambiguity or to correct or supplement any provision which may be
defective or inconsistent; (2) to change any provision thereof as may be
required by the Securities and Exchange Commission or any successor
governmental agency; or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Agreement with respect to any
State Trust may also be amended in any respect by the Sponsor and the
Trustee, or any of the provisions thereof may be waived, with the written
consent of the holders of Units representing 66-2/3% of the Units then
outstanding of such State Trust, provided that no such amendment or waiver
will reduce the interest in the State Trust of any Unitholder thereof without
the consent of such Unitholder or reduce the percentage of Units required to
consent to any such amendment or waiver without the consent of all
Unitholders of such State Trust. In no event shall the Agreement be amended
to increase the number of Units of a State Trust issuable thereunder or to
permit, except in accordance with the provisions of the Agreement, the
acquisition of any Municipal Bonds in addition to or in substitution for
those in a State Trust. The Trustee shall promptly notify Unitholders of the
substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon the
maturity, redemption or other disposition, as the case may be, of the last of
the Municipal Bonds held in such State Trust. If the value of the State
Trust shall be less than the applicable minimum value stated under "Essential
Information" in Part Two the Trustee may, in its discretion, and shall, when
so directed by the Sponsor, terminate the State Trust. A State Trust may be
terminated at any time by the holders of Units representing 66-2/3% of the
Units thereof then outstanding. Notwithstanding the foregoing, in no event
shall any State Trust continue beyond the mandatory termination date shown
in Part Two under "Essential Information." In the event of termination of a
State Trust, written notice thereof will be sent by the Trustee to all
Unitholders of such State Trust. Within a reasonable period after
termination, the Trust will sell any Municipal Bonds remaining in the State
Trust and, after paying all expenses and charges incurred by the State Trust,
will distribute to Unitholders thereof (upon surrender for cancellation of
certificates for Units, if issued) their pro rata share of the balances
remaining in the Interest and Principal Accounts of such State Trust.
LIMITATIONS ON LIABILITY. The Sponsor: The Sponsor is liable for the
performance of its obligations arising from its responsibilities under the
Agreement, but will be under no liability to the Unitholders for taking any
action or refraining from any action in good faith pursuant to the Agreement
or for errors in judgment, except in cases of its own gross negligence, bad
faith or willful misconduct. The Sponsor shall not be liable or responsible
in any way for depreciation or loss incurred by reason of the sale of any
Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be under no
liability for any action taken in good faith in reliance upon prima facie
properly executed documents or for the disposition of monies, Municipal
Bonds, or Certificates except by reason of its own gross negligence, bad
faith or willful misconduct, nor shall the Trustee be liable or responsible
in any way for depreciation or loss incurred by reason of the sale
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by the Trustee of any Municipal Bonds. In the event that the Sponsor shall
fail to act, the Trustee may act and shall not be liable for any such action
taken by it in good faith. The Trustee shall not be personally liable for
any taxes or other governmental charges imposed upon or in respect of the
Municipal Bonds or upon the interest thereon. In addition, the Agreement
contains other customary provisions limiting the liability of the Trustee.
The Trustee, whose duties are ministerial, did not participate in the
selection of Municipal Bonds for the State Trusts.
The Evaluator: The Trustee and Unitholders may rely on any evaluation
furnished by the Evaluator and shall have no responsibility for the accuracy
thereof. The Agreement provides that the determinations made by the
Evaluator 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 or Unitholders for errors in judgment, but shall be
liable only for its gross negligence, lack of good faith or willful
misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next sentence, the
Sponsor will not charge the Trust an advisory fee and will receive no fee
from the Trust for services performed as Sponsor. The Sponsor will charge
Kemper Tax-Exempt Income Trust, Multi-State Series 45 and subsequent series
an annual surveillance fee for services performed for such Trust Funds in an
amount not to exceed the amount shown under "Essential Information" in Part
Two, but in no event will such compensation when combined with all
compensation received from other unit investment trusts for which the Sponsor
acts as sponsor and provides portfolio surveillance, exceed the aggregate
cost to the Sponsor for providing such services. Such fee shall be based on
the total number of Units of such State Trust Fund outstanding as of the
January Record Date for any annual period. The Sponsor and other
Underwriters paid all the expenses of creating and establishing the Trust,
including the cost of the initial preparation, printing and execution of the
Prospectus, Agreement and the certificates, legal and accounting expenses,
advertising and selling expenses, payment of closing fees, expenses of the
Trustee, initial evaluation fees during the initial public offering and other
out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the basis of the
annual rate set forth under "Essential Information" in Part Two per $1,000
principal amount of Municipal Bonds in each State Trust, based on the largest
aggregate principal amount of Municipal Bonds in the State Trust at any time
during the monthly, quarterly or semi-annual period, as appropriate. In no
event shall the Trustee receive less than $2000 annual compensation in any
single year for any Trust. The Trustee also receives indirect benefits to
the extent that it holds funds on deposit in the various non-interest bearing
accounts created pursuant to the Agreement; however, the Trustee is also
authorized by the Agreement to make from time to time certain non-interest
bearing advances to the State Trusts. See "Unitholders - Distributions to
Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the Evaluator
receives a fee, calculated on an annual rate as set forth under "Essential
Information" in Part Two, based upon the largest aggregate principal amount
of Municipal Bonds in such State Trust at any time during such monthly
period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the State
Trusts are payable monthly on or before each Distribution Date by deductions
from the Interest Accounts thereof to the extent funds are available and then
from the Principal Accounts. Such fees may be increased without approval of
the Unitholders by amounts not exceeding a proportionate increase in the
Consumer Price Index entitled "All Services Less Rent of Shelter," published
by the United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred by a State Trust:
(a) fees for the Trustee's extraordinary services; (b) expenses of the
Trustee (including legal and auditing expenses and insurance costs, but not
including any fees and expenses charged by any agent for custody and
safeguarding of Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by the
Trustee to protect the Trust or such State Trust, or the rights and interest
of the Unitholders; (e) indemnification of the Trustee for any loss,
liability or expense incurred by it in the administration of the
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Trust or such State Trust without gross negligence, bad faith or willful
misconduct on its part; (f) indemnification of the Sponsor for any loss,
liability or expense incurred in acting as Sponsor of the State Trust without
gross negligence, bad faith or willful misconduct; and (g) expenditures
incurred in contacting Unitholders upon termination of the State Trust. The
fees and expenses set forth herein are payable out of the appropriate State
Trust and, when owed to the Trustee, are secured by a lien on such State
Trust.
Fees and expenses of a State Trust shall be deducted from the Interest
Account thereof, or, to the extent funds are not available in such Account,
from the Principal Account. The Trustee may withdraw from the Principal
Account or the Interest Account of any State Trust such amounts, if any, as
it deems necessary to establish a reserve for any taxes or other governmental
charges or other extraordinary expenses payable out of the State Trust.
Amounts so withdrawn shall be credited to a separate account maintained for
the State Trust known as the Reserve Account and shall not be considered a
part of the State Trust when determining the value of the Units until such
time as the Trustee shall return all or any part of such amounts to the
appropriate account.
THE SPONSOR
The Sponsor, Kemper Unit Investment Trusts, with an office at 77 W. Wacker
Drive, 29th Floor, Chicago, Illinois 60601, (800) 621-5024, is a service of
Kemper Securities, Inc., which is a wholly owned subsidiary of Kemper
Financial Companies, Inc., a financial services holding company which, in
turn, is a wholly owned subsidiary of Kemper Corporation. The Sponsor acts
as underwriter of a number of other Kemper unit investment trusts and will
act as underwriter of any other unit investment trust products created by the
Sponsor in the future. As of December 31, 1994, the total stockholders'
equity of Kemper Securities, Inc. was approximately $252,676,937 (unaudited).
If at any time the Sponsor shall fail to perform any of its duties under
the Agreement or shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or its affairs are taken over by public authorities,
then the Trustee may (a) appoint a successor sponsor at rates of
compensation deemed by the Trustee to be reasonable and not exceeding such
reasonable amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the Trust or any
State Trust as provided therein or (c) continue to act as Trustee without
terminating the Agreement.
The foregoing financial information with regard to the Sponsor relates to
the Sponsor only and not to this Trust or any State Trust. Such information
is included in this Prospectus only for the purpose of informing investors as
to the financial responsibility of the Sponsor and its ability to carry out
its contractual obligations with respect to the State Trusts. More
comprehensive financial information can be obtained upon request from the
Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters relating to
federal tax law were originally passed upon by Chapman and Cutler, 111 West
Monroe Street, Chicago, Illinois 60603, as counsel for the Sponsor.
AUDITORS
The statement of net assets, including the Schedule of Investments,
appearing in Part Two of this Prospectus and Registration Statement, with
information pertaining to the specific Series of the Trust to which such
statement relates, has been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing in Part Two and is included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
-93-
<PAGE>
DESCRIPTION OF SECURITIES RATINGS/2/
STANDARD & POOR'S. - A brief description of the applicable Standard &
Poor's rating symbols and their meanings follows:
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 may take into consideration obligors such
as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold 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 by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
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.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
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 a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" 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" indicates the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by 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 of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
----------
/2/ As published by the rating companies.
-94-
<PAGE>
MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Their safety is so absolute that with the occasional exception of oversupply
in a few specific instances, characteristically, their market value is
affected solely by money market fluctuations.
Aa - Bonds which are rated Aa are judged to be the high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuations of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities. Their market value is virtually immune to all
but money market influences, with the occasional exception of oversupply in a
few specific instances.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as 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. The market value of A-rated bonds may be influenced to some degree
by economic performance during a sustained period of depressed business
conditions, but, during periods of normalcy, A-rated bonds frequently move in
parallel with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
A1 - Bonds which are rated A1 offer the maximum in security within their
quality group, can be bought for possible upgrading in quality, and
additionally, afford the investor an opportunity to gauge more precisely the
relative attractiveness of offerings in the marketplace.
Baa - Bonds which are rated Baa are considered as lower 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. The market value of Baa-rated bonds is more sensitive to changes in
economic circumstances and, aside from occasional speculative factors
applying to some bonds of this class, Baa market valuations move in parallel
with Aaa, Aa and A obligations during periods of economic normalcy, expect in
instances of oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones 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 operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical ratings denote
probable credit stature upon completion of construction or elimination of
basis of condition.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in certain areas of its 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.
-95-
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Part Two
Dated April 29, 1996
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.
NOTE: Part Two of this Prospectus May Not Be Distributed unless Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Essential Information
As of December 31, 1995
Sponsor and Evaluator: EVEREN Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $3,600,000
Number of Units 4,701
Fractional Undivided Interest in the Trust per Unit 1/4,701
Principal Amount of Municipal Bonds per Unit $765.79
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $3,689,035
Aggregate Bid Price of Municipal Bonds per Unit $784.73
Cash per Unit (1) $-
Sales Charge 4.712% (4.5% of Public Offering Price) $36.98
Public Offering Price per Unit (exclusive of accrued
interest) (2) $821.71
Redemption Price per Unit (exclusive of accrued interest) $784.73
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $36.98
Minimum Value of the Trust under which Trust Agreement
may be terminated $879,000
</TABLE>
Date of Trust January 30, 1990
Mandatory Termination Date December 31, 2040
Annual Evaluation and Portfolio Surveillance Fees: Evaluation fee of $.30 per
$1,000 principal amount of Municipal Bonds. Evaluations for purpose of sale,
purchase or redemption of Units are made as of the close of business of the
Sponsor next following receipt of an order for a sale or purchase of Units or
receipt by Investors Fiduciary Trust Company of Units tendered for redemption.
Portfolio surveillance fee of $.20 per Unit.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to
the date of settlement (three business days after purchase). On December 31,
1995, there was added to the Public Offering Price of $821.71, accrued
interest to the settlement date of January 4, 1996 of $9.55, $9.61 and $9.67
for a total price of $831.26, $831.32 and $831.38 for the monthly, quarterly
and semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Essential Information (continued)
As of December 31, 1995
Sponsor and Evaluator: EVEREN Unit Investment Trusts(4)
Trustee: Investors Fiduciary Trust Company(5)
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
-------- -------- --------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $57.3250 $57.3250 $57.3250
Less: Estimated Annual Expense 1.9497 1.7331 1.4271
-------- -------- --------
Estimated Net Annual Interest Income $55.3753 $55.5919 $55.8979
======== ======== ========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $55.3753 $55.5919 $55.8979
Divided by 12, 4 and 2, respectively $4.6146 $13.8980 $27.9490
Estimated Daily Rate of Net Interest
Accrual per Unit $.1538 $.1544 $.1553
Estimated Current Return Based on Public
Offering Price (3) 6.74% 6.77% 6.80%
Estimated Long-Term Return (3) 4.29% 4.33% 4.37%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's and Portfolio
Surveillance Fees): $1.9497, $1.7331 and $1.4271 ($.8863, $.8863 and $.8363
of which represent expenses) per Unit under the monthly, quarterly and
semiannual distribution options, respectively.
Record and Computation Dates: First day of the month, as follows: monthly -
each month; quarterly - January, April, July and October; semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary.
For detailed explanation, see Part One of this prospectus.
4. See Note 1 to the accompanying financial statements of the Trust regarding
a change in ownership of Kemper Unit Investment Trusts and Kemper Securities,
Inc.
5. See Note 6 to the accompanying financial statements of the Trust regarding
the change in Trustee.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23 Pennsylvania Trust
We have audited the accompanying statement of assets and liabilities of Kemper
Tax-Exempt Insured Income Trust Multi-State Series 23 Pennsylvania Trust,
including the schedule of investments, as of December 31, 1995, and the
related statements of operations and changes in net assets for each of the
three years in the period then ended. These financial statements are the
responsibility of the Trust's sponsor. 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 investments owned as of December 31, 1995,
by correspondence with the custodial bank. An audit also includes assessing
the accounting principles used and significant estimates made by the sponsor,
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 Kemper Tax-Exempt Insured
Income Trust Multi-State Series 23 Pennsylvania Trust at December 31, 1995,
and the results of its operations and the changes in its net assets for the
periods indicated above in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
April 15, 1996
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $3,620,308) $3,689,035
Interest receivable 99,754
Cash 15,097
----------
3,803,886
Liabilities and net assets
Accrued liabilities 1,325
Net assets, applicable to 4,701 Units outstanding:
Cost of Trust assets, exclusive of interest $3,620,308
Unrealized appreciation 68,727
Distributable funds 113,526
---------- ----------
Net assets $3,802,561
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
-------- ---------- --------
Investment income - interest $316,360 $342,201 $343,038
Expenses:
Trustee's fees and related expenses 7,056 6,491 6,467
Evaluator's and portfolio surveillance
fees 2,189 2,263 2,270
-------- ---------- --------
Total expenses 9,245 8,754 8,737
-------- ---------- --------
Net investment income 307,115 333,447 334,301
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) (87,218) 2,975 -
Unrealized appreciation
(depreciation) during the year 220,150 (525,799) 82,249
-------- ---------- --------
Net gain (loss) on investments 132,932 (522,824) 82,249
-------- ---------- --------
Net increase (decrease) in net assets
resulting from operations $440,047 $(189,377) $416,550
======== ========== ========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
---------- ---------- ----------
Operations:
Net investment income $307,115 $333,447 $334,301
Realized gain (loss) on investments (87,218) 2,975 -
Unrealized appreciation (depreciation)
on investments during the year 220,150 (525,799) 82,249
---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations 440,047 (189,377) 416,550
Distributions to Unitholders:
Net investment income (319,463) (335,039) (334,832)
Principal from investment
transactions (764,853) - -
Capital transaction:
Redemption of Units - (47,839) -
---------- ---------- ----------
Total increase (decrease) in net assets (644,269) (572,255) 81,718
Net assets:
At the beginning of the year 4,446,830 5,019,085 4,937,367
---------- ---------- ----------
At the end of the year (including
distributable funds applicable to
Trust Units of $113,526, $125,727
and $127,458 at December 31, 1995,
1994 and 1993, respectively) $3,802,561 $4,446,830 $5,019,085
========== ========== ==========
Trust Units outstanding at the end
of the year 4,701 4,701 4,750
========== ========== ==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Schedule of Investments
December 31, 1995
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond(5)(7) Rate Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C> <C> <C> <C> <C>
------- ---------- -------------- -------- ---------- ----------
+Allegheny County Sanitary Authority, Allegheny 7.50% 12/01/2016 1999 @ 100 AAA $500,000 $530,560
County, Pennsylvania, Sewer Revenue Bonds,
Series B of 1986. Insured by Financial Guaranty
Insurance Company (FGIC).
+Delaware County Authority (Commonwealth of 7.20 8/15/2019 1999 @ 102 AAA 355,000 381,206
Pennsylvania), Hospital Revenue Bonds, Series
1989B (Keystone Health System). Insured by
Municipal Bond Investors Assurance
Corporation (MBIA).
Emmaus General Authority (Pennsylvania), Local 7.90 5/15/2018 1999 @ 100 AAA 1,000,000 1,046,770
Government Revenue Bonds (Bond Pool Program),
Series 1988F. Insured by Bond Investors Guaranty
Insurance Company.
+North Pocono School District, Lackawanna and 0.00 1/15/2010 AAA 145,000 67,718
Wayne Counties, Pennsylvania, General Obligation
Capital Appreciation Bonds, Series 1989. Insured
by FGIC. (6)
+Northeastern Pennsylvania Hospital Authority 8.375 7/01/2006 1997 @ 102 AAA 700,000 726,796
(Luzerne County, Pennsylvania), Hospital Revenue
Bonds (Wilkes-Barre General Hospital), Series
1987B. Insured by MBIA.
Pennsylvania Higher Educational Facilities 7.20 7/01/2019 2010 @ 100 S.F. AAA 400,000 419,160
Authority, University Revenue Bonds Series of 1999 @ 102
1989 (Hahnemann University Project). Insured
by MBIA.
+The Hospitals and Higher Education Facilities 8.00 7/01/2013 1997 @ 102 AAA 500,000 516,825
Authority of Philadelphia, Hospital Revenue ---------- ----------
Refunding Bonds, Series 1987 (Presbyterian- $3,600,000 $3,689,035
University of Pennsylvania Medical Center). ========== ==========
Insured by AMBAC Indemnity Corporation.
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices
thereafter, but not below par value. In addition, certain Bonds in the
Portfolio 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. "S.F." indicates a sinking fund is
established with respect to an issue of Bonds. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund provisions
may, occur at times when the redeemed Bonds have a valuation which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of
capital when compared with the original Public Offering Price of the Units.
To the extent that the Bonds were acquired at a price lower than the
redemption price, this may represent an increase in capital when compared with
the original Public Offering Price of the Units. Distributions of net income
will generally be reduced by the amount of the income which would otherwise
have been paid with respect to redeemed Bonds and, unless utilized to pay for
Units tendered for redemption, there will be distributed to Unitholders the
principal amount and any premium received on such redemption. In this event
the estimated current return and estimated long-term return may be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Schedule of Investments (continued)
4. At December 31, 1995, the Portfolio of the Trust consists of 7 obligations
issued by entities located in Pennsylvania. Six issues, representing
$3,455,000 of the aggregate principal amount, are payable from the income of a
specific project or authority and are not supported by an issuer's power to
levy taxes. One issue, representing $145,000 of the aggregate principal
amount, is a general obligation of a governmental entity and is backed by the
taxing power of such entity. The sources of payment for the revenue bonds are
divided as follows: Hospital and Health Care, 2; Education, 2; Sewer, 1;
Miscellaneous, 1. Approximately 29% of the aggregate principal amount of
Bonds in the Trust are hospital and health care bonds. Approximately 25% of
the aggregate principal amount of Bonds in the Trust are education bonds.
Approximately 96% of the aggregate principal amount of Bonds in the Trust are
subject to call by the issuers within five years after December 31, 1995.
5. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
6. This Bond has been purchased at a discount from the par value because
there is no stated interest income thereon. Such Bond is normally described
as a "zero coupon" Bond. Over the life of the Bond the value increases, so
that upon maturity, the holders of the Bond will receive 100% of the principal
amount thereof.
7. Those securities preceded by (+) are secured by, and payable from,
escrowed U.S. Government securities.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
From the Trust's date of deposit through September 14, 1995, the Trust's
sponsor and evaluator was Kemper Unit Investment Trusts, a division of Kemper
Securities, Inc. At that date, the members of certain Kemper Corporation
operating units acquired ownership of certain Kemper units, which included
Kemper Securities, Inc. In connection with the acquisition, Kemper
Securities, Inc. changed its name to EVEREN Securities, Inc., and Kemper Unit
Investment Trusts became EVEREN Unit Investment Trusts, which now serves as
the "Evaluator" and sponsor of the Trust. Subsequent to the date of
acquisition, neither EVEREN Securities, Inc. nor EVEREN Unit Investment Trusts
is affiliated with Kemper Financial Services, Inc. or Kemper Corporation.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by EVEREN Unit
Investment Trusts. The aggregate bid prices of the Bonds are determined by
the Evaluator based on (a) current bid prices of the Bonds, (b) current bid
prices for comparable bonds, (c) appraisal, or (d) any combination of the
above. (See Note 5 - Insurance.)
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
January 30, 1990 (Date of Deposit). The premium or discount (including any
original issue discount) existing at January 30, 1990, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized depreciation $(40,332)
Gross unrealized appreciation 109,059
---------
Net unrealized appreciation $68,727
=========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Financial Statements (continued)
3. Transactions with Affiliates
Investors Fiduciary Trust Company (IFTC), who served as Trustee through
February 29, 1996, was 50% owned by Kemper Financial Services, Inc., an
affiliate of Kemper Unit Investment Trusts until January 31, 1995, at which
time State Street Boston Corporation acquired IFTC. The Trustee's fee (not
including the reimbursement of out-of-pocket expenses) is calculated monthly
under the monthly, quarterly and semiannual distribution options, per $1,000
principal amount of Bonds in the Trust, based on the largest aggregate
principal amount of Bonds in the Trust at any time during such monthly,
quarterly or semiannual periods. The annual Trustee's fee rate in effect at
the end of each of the last three periods is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994 1993
<S> <C> <C> <C>
------- ----- -----
Monthly $1.3887 $1.81 $1.81
Quarterly 1.1058 .86 .86
Semiannual .7715 .60 .60
</TABLE>
The Evaluator received an evaluation fee, payable monthly, at an annual rate
of $.30 per $1,000 principal amount of Bonds, based on the largest aggregate
principal amount of Bonds in the Trust at any time during such monthly period
and a portfolio surveillance fee, payable monthly, at an annual rate of $.20
per Unit based on the total number of Units of the Trust outstanding as of the
January record date.
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income
tax purposes. Each Unitholder is considered to be the owner of a pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1 of the
Internal Revenue Code of 1986, as amended. Accordingly, no provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a
sales charge of 4.9% of the Public Offering Price (equivalent to 5.152% of the
net amount invested). The Public Offering Price for secondary market
transactions is based on the aggregate bid price of the Bonds plus or minus a
pro rata share of cash or overdraft in the Principal Account, if any, on the
date of an investor's purchase, plus a sales charge of 4.5% of the Public
Offering Price (equivalent to 4.712% of the net amount invested).
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds
in the portfolio has been obtained from independent companies by the
respective issuers of such Bonds. Insurance obtained by a Bond issuer is
effective as long as such Bonds are outstanding. As a result of such
insurance, the Units of the Trust have received a rating of "AAA" by Standard
& Poor's Corporation. No representation is made as to any insurer's ability
to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Such income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution December 31, 1995 December 31, 1994 December 31, 1993
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- --------
Monthly $66.53 $206,932 $70.20 $220,574 $70.19 $219,830
Quarterly 69.27 12,392 70.49 12,266 70.49 13,147
Semiannual 70.87 100,139 70.78 101,254 70.78 101,855
-------- -------- --------
$319,463 $334,094 $334,832
======== ======== ========
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1994
<S> <C>
-------
Principal portion $47,839
Net interest accrued 945
-------
$48,784
=======
Units 49
=======
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each year -
<CAPTION>
Monthly Quarterly Semiannual
Year ended December 31 Year ended December 31 Year ended December 31
1995 1994 1993 1995 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Investment income - interest $67.30 $72.27 $72.22 $67.30 $72.27 $72.22 $67.30 $72.27 $72.22
Expenses 2.16 2.04 2.03 1.91 1.74 1.73 1.56 1.45 1.44
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Net investment income 65.14 70.23 70.19 65.39 70.53 70.49 65.74 70.82 70.78
Distributions to Unitholders:
Net investment income (66.53) (70.20) (70.19) (69.27) (70.49) (70.49) (70.87) (70.78) (70.78)
Principal from investment
transactions (162.70) - - (162.70) - - (162.70) - -
Net gain (loss) on investments 28.28 (110.69) 17.32 28.28 (110.69) 17.32 28.28 (110.69) 17.32
-------- -------- --------- -------- -------- --------- -------- -------- ---------
Change in net asset value (135.81) (110.66) 17.32 (138.30) (110.65) 17.32 (139.55) (110.65) 17.32
Net asset value:
Beginning of the year 936.55 1,047.21 1,029.89 948.43 1,059.08 1,041.76 966.30 1,076.95 1,059.63
-------- -------- --------- -------- -------- --------- -------- -------- ---------
End of the year, including
distributable funds $800.74 $936.55 $1,047.21 $810.13 $948.43 $1,059.08 $826.75 $966.30 $1,076.95
======== ======== ========= ======== ======== ========= ======== ======== =========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Pennsylvania Trust
Notes to Financial Statements (continued)
6. Change of Trustee
On March 1, 1996, The Bank of New York assumed all trustee responsibilities
from IFTC.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated April 15, 1996, in this Post-
Effective Amendment to the Registration Statement (Form S-6) and related
Prospectus of Kemper Tax-Exempt Insured Income Trust Multi-State Series 23
Pennsylvania Trust dated April 29, 1996.
Ernst & Young LLP
Kansas City, Missouri
April 29, 1996
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Part Two
Dated April 29, 1996
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.
NOTE: Part Two of this Prospectus May Not Be Distributed unless Accompanied by
Part One.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Essential Information
As of December 31, 1995
Sponsor and Evaluator: EVEREN Unit Investment Trusts
Trustee: Investors Fiduciary Trust Company
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $3,820,000
Number of Units 3,820
Fractional Undivided Interest in the Trust per Unit 1/3,820
Principal Amount of Municipal Bonds per Unit $1,000.00
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $3,918,107
Aggregate Bid Price of Municipal Bonds per Unit $1,025.68
Cash per Unit (1) $-
Sales Charge 4.712% (4.5% of Public Offering Price) $48.33
Public Offering Price per Unit (exclusive of accrued
interest) (2) $1,074.01
Redemption Price per Unit (exclusive of accrued interest) $1,025.68
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $48.33
Minimum Value of the Trust under which Trust Agreement
may be terminated $799,000
</TABLE>
Date of Trust January 30, 1990
Mandatory Termination Date December 31, 2040
Annual Evaluation and Portfolio Surveillance Fees: Evaluation fee of $.30 per
$1,000 principal amount of Municipal Bonds. Evaluations for purpose of sale,
purchase or redemption of Units are made as of the close of business of the
Sponsor next following receipt of an order for a sale or purchase of Units or
receipt by Investors Fiduciary Trust Company of Units tendered for redemption.
Portfolio surveillance fee of $.20 per Unit.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price plus accrued interest to
the date of settlement (three business days after purchase). On December 31,
1995, there was added to the Public Offering Price of $1,074.01, accrued
interest to the settlement date of January 4, 1996 of $7.65, $7.70 and $7.75
for a total price of $1,081.66, $1,081.71 and $1,081.76 for the monthly,
quarterly and semiannual distribution options, respectively.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Essential Information (continued)
As of December 31, 1995
Sponsor and Evaluator: EVEREN Unit Investment Trusts(4)
Trustee: Investors Fiduciary Trust Company(5)
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly Quarterly Semiannual
<S> <C> <C> <C>
-------- -------- --------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $70.2984 $70.2984 $70.2984
Less: Estimated Annual Expense 2.4090 2.1261 1.7418
-------- -------- --------
Estimated Net Annual Interest Income $67.8894 $68.1723 $68.5566
======== ======== ========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $67.8894 $68.1723 $68.5566
Divided by 12, 4 and 2, respectively $5.6575 $17.0431 $34.2783
Estimated Daily Rate of Net Interest
Accrual per Unit $.1886 $.1894 $.1904
Estimated Current Return Based on Public
Offering Price (3) 6.32% 6.35% 6.38%
Estimated Long-Term Return (3) 4.59% 4.62% 4.66%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's and Portfolio
Surveillance Fees): $2.4090, $2.1261 and $1.7418 ($1.0203, $1.0203 and $.9703
of which represent expenses) per Unit under the monthly, quarterly and
semiannual distribution options, respectively.
Record and Computation Dates: First day of the month, as follows: monthly -
each month; quarterly - January, April, July and October; semiannual - January
and July.
Distribution Dates: Fifteenth day of the month, as follows: monthly - each
month; quarterly - January, April, July and October; semiannual - January and
July.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary.
For detailed explanation, see Part One of this prospectus.
4. See Note 1 to the accompanying financial statements of the Trust regarding
a change in ownership of Kemper Unit Investment Trusts and Kemper Securities,
Inc.
5. See Note 6 to the accompanying financial statements of the Trust regarding
the change in Trustee.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23 Colorado Trust
We have audited the accompanying statement of assets and liabilities of Kemper
Tax-Exempt Insured Income Trust Multi-State Series 23 Colorado Trust,
including the schedule of investments, as of December 31, 1995, and the
related statements of operations and changes in net assets for each of the
three years in the period then ended. These financial statements are the
responsibility of the Trust's sponsor. 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 investments owned as of December 31, 1995,
by correspondence with the custodial bank. An audit also includes assessing
the accounting principles used and significant estimates made by the sponsor,
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 Kemper Tax-Exempt Insured
Income Trust Multi-State Series 23 Colorado Trust at December 31, 1995, and
the results of its operations and the changes in its net assets for the
periods indicated above in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
April 15, 1996
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $3,747,818) $3,918,107
Interest receivable 39,956
Cash 30,012
----------
3,988,075
Liabilities and net assets
Accrued liabilities 1,325
Net assets, applicable to 3,820 Units outstanding:
Cost of Trust assets, exclusive of interest $3,747,818
Unrealized appreciation 170,289
Distributable funds 68,643
---------- ----------
Net assets $3,986,750
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
-------- ---------- --------
Investment income - interest $269,319 $273,802 $280,988
Expenses:
Trustee's fees and related expenses 6,910 6,268 6,366
Evaluator's and portfolio surveillance
fees 1,916 1,951 1,998
-------- ---------- --------
Total expenses 8,826 8,219 8,364
-------- ---------- --------
Net investment income 260,493 265,583 272,624
Realized and unrealized gain (loss)
on investments:
Realized gain 422 12,539 -
Unrealized appreciation
(depreciation) during the year 164,400 (495,543) 195,445
-------- ---------- --------
Net gain (loss) on investments 164,822 (483,004) 195,445
-------- ---------- --------
Net increase (decrease) in net assets
resulting from operations $425,315 $(217,421) $468,069
======== ========== ========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C>
---------- ---------- ----------
Operations:
Net investment income $260,493 $265,583 $272,624
Realized gain on investments 422 12,539 -
Unrealized appreciation (depreciation)
on investments during the year 164,400 (495,543) 195,445
---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations 425,315 (217,421) 468,069
Distributions to Unitholders:
Net investment income (262,262) (268,016) (272,396)
Capital transactions:
Redemption of Units (14,292) (169,402) -
---------- ---------- ----------
Total increase (decrease) in net assets 148,761 (654,839) 195,673
Net assets:
At the beginning of the year 3,837,989 4,492,828 4,297,155
---------- ---------- ----------
At the end of the year (including
distributable funds applicable to
Trust Units of $68,643, $69,183
and $68,479 at December 31, 1995,
1994 and 1993, respectively) $3,986,750 $3,837,989 $4,492,828
========== ========== ==========
Trust Units outstanding at the end
of the year 3,820 3,834 3,995
========== ========== ==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Schedule of Investments
December 31, 1995
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond(5)(7) Rate Date Provisions(2) Rating(1) Amount(4) Value(3)
<S> <C> <C> <C> <C> <C> <C>
------- ---------- -------------- -------- ---------- ----------
Beaver Creek Metropolitan District, Eagle County, 7.25% 12/01/2009 2005 @ 100 S.F. AAA $485,000 $488,148
Colorado, General Obligation Refunding Bonds, 1997 @ 101
Series 1989. Insured by Municipal Bond
Investors Assurance Corporation (MBIA).
+Pueblo School District No. 60, Project Fixed Rate 7.25 12/01/2009 1999 @ 101 AAA 500,000 536,410
Certificates of Participation (Colorado
Association of School Boards, Lease Purchase
Finance Program), Series 1989A. Insured by MBIA.
+Colorado Health Facilities Authority, Hospital 7.30 10/01/2014 1999 @ 102 AAA 350,000 377,723
Revenue Refunding Bonds (Boulder Community
Hospital Project), Series 1989 A. Insured
by MBIA.
+City and County of Denver, Colorado, Revenue 7.70 5/01/2007 1998 @ 102 AAA 700,000 750,960
Refunding Bonds (St. Anthony Hospital Systems),
Series 1988 A. Insured by MBIA.
City and County of Denver, Colorado, Excise Tax 7.15 9/01/2010 2006 @ 100 S.F. AAA 500,000 525,190
Refunding Bonds, Series 1989. Insured by MBIA. 1999 @ 101
+School District No. RE.1, Douglas and Elbert 7.10 12/15/2008 1999 @ 100 AAA 40,000 42,425
Counties, Colorado, General Obligation Bonds,
Series 1990 A. Insured by Financial Guaranty
Insurance Company (FGIC).
+Eagle County School District No. RE50J (Eagle, 7.10 12/01/2007 1998 @ 100 AAA 200,000 207,914
Garfield and Routt Counties, Colorado), General
Obligation Bonds, Series 1990. Insured by FGIC.
City of Louisville, Boulder County, Colorado, 7.20 12/01/2009 2005 @ 100 S.F. AAA 250,000 257,765
General Obligation Water Refunding and 1998 @ 101
Improvement Bonds, Series 1989. Insured by
FGIC.
Mesa County, Colorado, Sales Tax Revenue Refunding 7.75 12/01/2013 2008 @ 100 S.F. AAA 605,000 629,031
Bonds, Series 1988. Insured by MBIA. 1998 @ 100
Commonwealth of Puerto Rico, Public Improvement 0.00 7/01/2007 Non-Callable AAA 190,000 102,541
Refunding Bonds (General Obligation Bonds), ---------- ----------
Series 1988. Insured by MBIA. (6) $3,820,000 $3,918,107
========== ==========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc.
The symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices
thereafter, but not below par value. In addition, certain Bonds in the
Portfolio 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. "S.F." indicates a sinking fund is
established with respect to an issue of Bonds. Redemption pursuant to call
provisions generally will, and redemption pursuant to sinking fund provisions
may, occur at times when the redeemed Bonds have a valuation which represents
a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of
capital when compared with the original Public Offering Price of the Units.
To the extent that the Bonds were acquired at a price lower than the
redemption price, this may represent an increase in capital when compared with
the original Public Offering Price of the Units. Distributions of net income
will generally be reduced by the amount of the income which would otherwise
have been paid with respect to redeemed Bonds and, unless utilized to pay for
Units tendered for redemption, there will be distributed to Unitholders the
principal amount and any premium received on such redemption. In this event
the estimated current return and estimated long-term return may be affected by
such redemptions.
3. See Note 1 to the accompanying financial statements for a description of
the method of determining cost and value.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Schedule of Investments (continued)
4. At December 31, 1995, the Portfolio of the Trust consists of 9 obligations
issued by entities located in Colorado and 1 obligation issued by the
Commonwealth of Puerto Rico. Five issues, representing $2,655,000 of the
aggregate principal amount, are payable from the income of a specific project
or authority and are not supported by an issuer's power to levy taxes. Five
issues, representing $1,165,000 of the aggregate principal amount, are general
obligations of governmental entities and are backed by the taxing powers of
such entities. The sources of payment for the revenue bonds are divided as
follows: Hospital and Health Care, 2; Miscellaneous, 3. Approximately 28% of
the aggregate principal amount of Bonds in the Trust are obligations of
issuers whose revenues are derived from services provided by hospitals and
health care facilities. Approximately 95% of the aggregate principal amount
of Bonds in the Trust are subject to call by the issuers within five years
after December 31, 1995.
5. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
6. This Bond has been purchased at a discount from the par value because
there is no stated interest income thereon. Such Bond is normally described
as a "zero coupon" Bond. Over the life of the Bond the value increases, so
that upon maturity, the holders of the Bond will receive 100% of the principal
amount thereof.
7. Those securities preceded by (+) are secured by, and payable from,
escrowed U.S. Government securities.
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
From the Trust's date of deposit through September 14, 1995, the Trust's
sponsor and evaluator was Kemper Unit Investment Trusts, a division of Kemper
Securities, Inc. At that date, the members of certain Kemper Corporation
operating units acquired ownership of certain Kemper units, which included
Kemper Securities, Inc. In connection with the acquisition, Kemper
Securities, Inc. changed its name to EVEREN Securities, Inc., and Kemper Unit
Investment Trusts became EVEREN Unit Investment Trusts, which now serves as
the "Evaluator" and sponsor of the Trust. Subsequent to the date of
acquisition, neither EVEREN Securities, Inc. nor EVEREN Unit Investment Trusts
is affiliated with Kemper Financial Services, Inc. or Kemper Corporation.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by EVEREN Unit
Investment Trusts. The aggregate bid prices of the Bonds are determined by
the Evaluator based on (a) current bid prices of the Bonds, (b) current bid
prices for comparable bonds, (c) appraisal, or (d) any combination of the
above. (See Note 5 - Insurance.)
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
January 30, 1990 (Date of Deposit). The premium or discount (including any
original issue discount) existing at January 30, 1990, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized appreciation at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized depreciation $(44)
Gross unrealized appreciation 170,333
--------
Net unrealized appreciation $170,289
========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Financial Statements (continued)
3. Transactions with Affiliates
Investors Fiduciary Trust Company (IFTC), who served as Trustee through
February 29, 1996, was 50% owned by Kemper Financial Services, Inc., an
affiliate of Kemper Unit Investment Trusts until January 31, 1995, at which
time State Street Boston Corporation acquired IFTC. The Trustee's fee (not
including the reimbursement of out-of-pocket expenses) is calculated monthly
under the monthly, quarterly and semiannual distribution options, per $1,000
principal amount of Bonds in the Trust, based on the largest aggregate
principal amount of Bonds in the Trust at any time during such monthly,
quarterly or semiannual periods. The annual Trustee's fee rate in effect at
the end of each of the last three periods is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994 1993
<S> <C> <C> <C>
------- ----- -----
Monthly $1.3887 $1.18 $1.18
Quarterly 1.1058 .86 .86
Semiannual .7715 .60 .60
</TABLE>
The Evaluator received an evaluation fee, payable monthly, at an annual rate
of $.30 per $1,000 principal amount of Bonds, based on the largest aggregate
principal amount of Bonds in the Trust at any time during such monthly period
and a portfolio surveillance fee, payable monthly, at an annual rate of $.20
per Unit based on the total number of Units of the Trust outstanding as of the
January record date.
4. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income
tax purposes. Each Unitholder is considered to be the owner of a pro rata
portion of the Trust under Subpart E, Subchapter J of Chapter 1 of the
Internal Revenue Code of 1986, as amended. Accordingly, no provision has been
made for federal income taxes.
5. Other Information
Cost to Investors
The cost to initial investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a
sales charge of 4.9% of the Public Offering Price (equivalent to 5.152% of the
net amount invested). The Public Offering Price for secondary market
transactions is based on the aggregate bid price of the Bonds plus or minus a
pro rata share of cash or overdraft in the Principal Account, if any, on the
date of an investor's purchase, plus a sales charge of 4.5% of the Public
Offering Price (equivalent to 4.712% of the net amount invested).
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds
in the portfolio has been obtained from independent companies by the
respective issuers of such Bonds. Insurance obtained by a Bond issuer is
effective as long as such Bonds are outstanding. As a result of such
insurance, the Units of the Trust have received a rating of "AAA" by Standard
& Poor's Corporation. No representation is made as to any insurer's ability
to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid in
accordance with the option (monthly, quarterly or semiannual) selected by the
investor. Such income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Distribution December 31, 1995 December 31, 1994 December 31, 1993
Plan Per Unit Total Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- --------
Monthly $68.27 $217,182 $68.13 $220,625 $68.15 $226,574
Quarterly 68.59 11,027 68.45 11,877 68.47 11,845
Semiannual 68.99 33,906 68.77 33,801 68.78 33,977
-------- -------- --------
$262,115 $266,303 $272,396
======== ======== ========
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994
<S> <C> <C>
------- --------
Principal portion $14,292 $169,402
Net interest accrued 147 1,713
------- --------
$14,439 $171,115
======= ========
Units 14 161
======= ========
</TABLE>
<PAGE>
<TABLE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Financial Statements (continued)
5. Other Information (continued)
Selected data for a Unit of the Trust outstanding throughout each year -
<CAPTION>
Monthly Quarterly Semiannual
Year ended December 31 Year ended December 31 Year ended December 31
1995 1994 1993 1995 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------- -------- --------- --------- --------- --------- --------- --------- ---------
Investment income - interest $70.32 $70.28 $70.33 $70.32 $70.28 $70.33 $70.32 $70.28 $70.33
Expenses 2.42 2.20 2.18 2.13 1.89 1.86 1.75 1.57 1.55
--------- -------- --------- --------- --------- --------- --------- --------- ---------
Net investment income 67.90 68.08 68.15 68.19 68.39 68.47 68.57 68.71 68.78
Distributions to Unitholders:
Net investment income (68.27) (68.13) (68.15) (68.59) (68.45) (68.47) (68.99) (68.77) (68.78)
Net gain (loss) on investments 43.02 (123.61) 48.92 43.02 (123.61) 48.92 43.02 (123.61) 48.92
--------- -------- --------- --------- --------- --------- --------- --------- ---------
Change in net asset value 42.65 (123.66) 48.92 42.62 (123.67) 48.92 42.60 (123.67) 48.92
Net asset value:
Beginning of the year 996.87 1,120.53 1,071.61 1,008.37 1,132.04 1,083.12 1,025.72 1,149.39 1,100.47
--------- -------- --------- --------- --------- --------- --------- --------- ---------
End of the year, including
distributable funds $1,039.52 $996.87 $1,120.53 $1,050.99 $1,008.37 $1,132.04 $1,068.32 $1,025.72 $1,149.39
========= ======== ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Kemper Tax-Exempt Insured Income Trust
Multi-State Series 23
Colorado Trust
Notes to Financial Statements (continued)
6. Change of Trustee
On March 1, 1996, The Bank of New York assumed all trustee responsibilities
from IFTC.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated April 15, 1996, in this Post-
Effective Amendment to the Registration Statement (Form S-6) and related
Prospectus of Kemper Tax-Exempt Insured Income Trust Multi-State Series 23
Colorado Trust dated April 29, 1996.
Ernst & Young LLP
Kansas City, Missouri
April 29, 1996
<PAGE>
Contents of Post-Effective AmendmentTo Registration Statement
This Post-Effective amendment to the Registration Statement
comprises the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, The
Registrant, Kemper Tax-Exempt Insured Income Trust Multi-State,
Series 23, certifies that it meets all of the requirements for
effectiveness of this registration statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this
Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of Chicago, and State of Illinois, on the 28th day of April,
1996.
Kemper Tax-Exempt Insured Income Trust Multi-State, Series 23
Registrant
By: EVEREN Unit Investment Trusts
(a division of EVEREN Securities, Inc.)
Depositor
By: Michael J. Thoms
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below on
April 28, 1996 by the following persons, who constitute a
majority of the Board of Directors of EVEREN Securities, Inc.
Signature Title
James R. Boris Chairman and Chief Executive Officer
James R. Boris
Daniel D. Williams Senior Executive Vice President, Chief
Daniel D. Williams Financial Officer and Treasurer
Frank V. Geremia Senior Executive Vice President
Frank V. Geremia
Stephen G. McConahey President and Chief Operating Officer
Stephen G. McConahey
Stanley R. Fallis Senior Executive Vice President and Chief
Stanley R. Fallis Administrative Officer
David M. Greene Senior Executive Vice President and
David M. Greene Director of Client Services
Thomas R. Reedy Senior Executive Vice President and
Thomas R. Reedy Director of Capital Markets
Janet L. Reali Executive Vice President, Corporate Counsel
Janet L. Reali and Corporate Secretary
Michael J. Thoms
Michael J. Thoms signs this document pursuant to a Power of
Attorney filed with the Securities and Exchange Commission with
Amendment No. 1 to the Registration Statement on Form S-6 for
Kemper Defined Funds Series 28 (Registration No. 33-56779).
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
Post-effective Amendment Number 7 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amdendment to Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 23
<NAME> KEMPER TAX EXEMPT INSURED MULTI STATE PENNSYLVANIA SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 3,620,308
<INVESTMENTS-AT-VALUE> 3,689,035
<RECEIVABLES> 99,754
<ASSETS-OTHER> 15,097
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,803,886
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,325
<TOTAL-LIABILITIES> 1,325
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,620,308
<SHARES-COMMON-STOCK> 4,701
<SHARES-COMMON-PRIOR> 4,701
<ACCUMULATED-NII-CURRENT> 113,526
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 68,727
<NET-ASSETS> 3,802,561
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 316,360
<OTHER-INCOME> 0
<EXPENSES-NET> 9,245
<NET-INVESTMENT-INCOME> 307,115
<REALIZED-GAINS-CURRENT> (87,218)
<APPREC-INCREASE-CURRENT> 220,150
<NET-CHANGE-FROM-OPS> 440,047
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (319,463)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (764,853)
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (644,269)
<ACCUMULATED-NII-PRIOR> 125,727
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
Post-effective Amendment Number 6 to Form S-6 and is qualified in
its entirety by reference to such Post-effective Amendment to Form S-6.
</LEGEND>
<SERIES>
<NUMBER> 23
<NAME> KEMPER TAX EXEMPT INSURED MULTI STATE COLORADO SERIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 3,747,818
<INVESTMENTS-AT-VALUE> 3,918,107
<RECEIVABLES> 39,956
<ASSETS-OTHER> 30,012
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,988,075
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,325
<TOTAL-LIABILITIES> 1,325
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,747,818
<SHARES-COMMON-STOCK> 3,820
<SHARES-COMMON-PRIOR> 3,834
<ACCUMULATED-NII-CURRENT> 68,643
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 170,289
<NET-ASSETS> 3,986,750
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 269,319
<OTHER-INCOME> 0
<EXPENSES-NET> 8,826
<NET-INVESTMENT-INCOME> 260,493
<REALIZED-GAINS-CURRENT> 422
<APPREC-INCREASE-CURRENT> 164,400
<NET-CHANGE-FROM-OPS> 425,315
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (262,262)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 14
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 148,761
<ACCUMULATED-NII-PRIOR> 69,183
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
